Thank you for joining Forward Air Corporation’s Second Quarter 2022 Earnings Release Conference Call. Before we begin, I’d like to point out that both the press release and webcast presentation for this call are accessible on the Investor Relations section of Forward Air’s website at www.forwardaircorp.com. With us this morning are CEO, Tom Schmitt, and CFO, Rebecca Garbrick. By now you should have received the press release announcing our second quarter 2022 results, which was furnished to the SEC on Form 8-K and on the wire yesterday after the market closed. Please be aware that certain statements in the company’s earnings press release announcement and on this conference call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements that are based on expectations, intentions, and projections regarding the company’s future performance, anticipated events or trends, and other matters that are not historical facts. Forward-looking statements can be identified by the use of words such as anticipate, intend, believe, estimate, plan, seek, project, expect, may, will, would, could, or should, and the negative of these terms or other comparable terminology. This conference call and the company’s earnings press release contain forward-looking statements which include, but are not limited to, statements relating to future operations and results, any statements of plans, strategies, and objectives of management for future operations, and any statements about future financial or operational targets and the likelihood of achieving the same. These statements are not guarantees for future performance and are subject to known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For additional information concerning these risks and factors, please refer to our filings with the Securities and Exchange Commission and the press release and webcast presentation relating to this earnings call. The company undertakes no obligation to update any forward-looking statements whether as a result of new information, future events, or otherwise. During the call, there may also be a discussion of financial metrics that do not conform to U.S. generally accepted accounting principles or GAAP. Definitions and reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the press release issued, which is available in the investor tab on our website. And now I’ll turn the call over to Tom Schmitt, CEO of Forward Air.

Thank you so much, Connie, and good morning to all of you on the call. First, I want to just say we keep getting better. And when I say we, I mean our teammates and our business partners, and those business partners certainly include our drivers and our customers. It’s a true team sport. Remember on our last earnings call, we celebrated our first quarter of this year as our best quarter ever, finishing with a March that had a record 80.5 LTL OR. Well, in this call, we’re doing an encore. We are celebrating our best quarter ever ending with June with a record 80.3 LTL OR. We talked about the goodness behind those numbers on the last call too. That goodness is still here, only a bit more of it. The best example is visibly when you walk through our LTL terminals, basically more events business. We estimated about $200 million of our LTL revenue before COVID is events related and it’s ramping up to that again. It may not get to 100%. I previously estimated this year would be 70%, 75%, but it’s looking pretty impressive. And it is high-value freight. Oftentimes when we sell events business, it actually generates several revenue events. We sell to a house event company once and then we have up to 20 trips or 20 revenue events associated with it. National trade shows and concert tours are good examples. Sometimes these shipments come with a guaranteed blue ribbon around them, which means extra premium freight on top of the high-value freight to begin with. Our Grow Forward strategy, focusing on higher value freight, pricing correctly, and operating in a clean, efficient operating environment, which we started three years ago, is clearly working. On our last call a few months ago, we said that the $6.30 EPS we targeted for 2023, we would already achieve this year, in 2022. Remember, we said we don’t wait. Now with six months under our belt for 2022, we feel confident that shooting for at least $7 EPS this year is realistic. And while we have not reached that 2023 guidance yet, we expect to continue to improve. Now when you step back, what gives us that confidence? We see a slowdown in the economy, and fuel has started, very slightly, to come down, but as a company, we have become more resilient and better. A good example is when you look at our revenue per shipment this quarter versus the same quarter last year, it is up by 40%. Even when you strip fuel out of it, it is still up 26% this quarter versus the same quarter last year. So I would say if there is a recession, bring it on. Oftentimes, it feels like waiting for something is more scary than the event itself. So back to that confidence, we have a specific forward ‘23 initiative in place. Inside that forward ‘23, we manage our key revenue and margin initiatives very tightly. At this point, we still believe that this year and next year, the positives outweigh the negatives, specifically we mention six large positive factors. The first one I mentioned before is more events. The second one, and more events this year, probably even more next year, because we are selling not just to the domestic forwarders that have for events but now even to some small event companies directly. Secondly, selling more direct overall in all of our lines of business. Third, deeper penetration into our core traditional customers; we have done a great job, and my hat’s off to our customers—they have done a great job tag teaming with some of our legacy traditional customers that know us well. Fourth, there are fewer outside broker miles; I always said we love working with our independent contractors who know us and our customers well. Right now, about 12% of our total miles flown are with outside carriers that we don’t know so well. They do a great job, but that’s not our regular roster. That number of 12% is less than half of what it was in the first quarter, and I expect, thanks to our operations and HR teams, that number will decrease, not increase. So, that’s the fourth positive factor. Number five, our three supporting business lines, Intermodal, Truckload, and Final Mile, have become more effective, enhancing our LTL main show. For instance, in Final Mile, we have local synergies, which we’ve always had, and now we have the rail driving line haul business for our LTL business. Six, and finally, those supporting business lines are getting better and better pound for pound themselves. We published our quarterly results, just check out our intermodal division and their results for the quarter; it’s spectacular. So that’s why we believe in our Forward ‘23 model for this year and for next year—that $7 is the minimum for this year. There’s a cushion on top of that, and we expect to improve in FY ‘23 because we believe what we control—the positives—outweigh the negatives. I also mentioned that we have a ton of confidence, pun intended, in our company and business. So, our practice of returning capital to our shareholders continues in 2022; that includes significant buybacks and also dividends, which we recently raised. So we are as a team living our ten leadership imperatives. One of those is called 'we remove the ceiling.' We are removing the ceiling and getting better every single day. We strive to keep improving. So with that, back to you, Connie; we are going to open it up to questions right away.

Thank you. Our first question will come from the line of Bruce Chan with Stifel. Please go ahead.

Thanks, operator. Good morning, Tom. Good morning, Rebecca. Just going to follow-up on some of your comments there on Final Mile and, I guess, that six positive factors. Wondering if you can talk about some of the big initiatives you have going on to improve the Final Mile operation and maybe get your sense of how you think about that business in the context of a higher quality freight mandate at LTL? Because I guess it seems like fridges and telecoms and washer dryers aren’t really that consistent with that high-quality freight mandate, especially if you start to share line haul and share pick-up and delivery?

First of all, thank you, Bruce, and good morning. Thanks for the question. So I’ll answer that for the whole audience. It actually is the delivery and installation of high-value appliances for some of the best and most demanding retailers on earth. Bruce, we are ensuring that our Final Mile by itself stays in the high single-digit margin space and has visible and quantifiable synergies for our LTL business. We are focusing on high-value appliances. This is not dropping off wicker furniture on the patio. It’s because, frankly, that’s not in line with our high-value trade proposition. Specifically, we want to ensure we rank as one of the top one or two providers on our customers’ scorecards. You may remember we won the Home Depot Appliance Provider or Carrier of the Year Award this past year. What are we doing to improve? First, it has to be the same value proposition: almost zero damages, striving to be the best in the industry in Final Mile just as we are in LTL. We are cross-fertilizing some of those sensitive handling principles and policies that we’ve lived for 40 years in our LTL business. We are pursuing premium appliances and obtaining premiums for their delivery and installation. Secondly, we discussed expanding co-locations about two years ago. We have opened up eight terminals for LTL initially out of our Final Mile locations. Our installer is now picking up LTL pallets while achieving tremendous collaboration between our sales leaders, resulting in more examples where the line haul for delivering those appliances into specific cities actually goes with Forward Air's LTL or Truckload. In my mind, Final Mile is a perfect example of the same high-value freight DNA, full of synergies that enhance both I see this cross-fertilization occurring in a way that is distinctly Forward Air, consistent across those lines of businesses.

That’s really helpful color. And then just as a quick follow-up here, we’ve been hearing a lot about AB 5 and the Supreme Court denying cert. Any operational risk there, with regard to Final Mile or the LTL, IC footprint or drayage?

Yes, we know that AB 5 relates to the rule in California that makes it harder for independent contractors to prove and maintain their status as business owners. Bruce, we, along with the best players in our industry, have been prepared for this for the last two years. We understand what the independent contractors need to do to maintain their status as they are today, and we are helping them understand what they must do. What the outcome will be is uncertain; some independent contractors may choose to exit the business, which could complicate the driver situation even further. However, it is the responsibility of those business owners to do what they need to do to keep their status. We are doing everything possible to maintain the best roster of drivers for Forward Air in both Final Mile and LTL. Our recruiting team has been improving significantly, and we have robust practices in the recruitment space. However, the onus is on the independent contractors. If any additional costs arise for them to keep their status, we’ll have no choice but to forward those costs to our customers. This could make doing business in and out of California even more expensive from our perspective. I often say luck is when preparedness meets opportunity. I’m not sure if I can call AB 5 luck, but we certainly have been prepared.

Terrific. Well, thank you for that, and congrats again on the results this quarter.

Thank you, Bruce.

Thank you. Our next question will come from Jack Atkins with Stephens. Please go ahead.

Okay, great. Good morning, Tom. Good morning, Rebecca. Thank you for taking my questions.

Good morning, Jack.

So I guess maybe to start, would love to get an update on what you are seeing in July. If you could maybe kind of give us a sense for tonnage trends in the core LTL business and any sort of sense for revenue ex-fuel, that would be helpful?

Yes, we did mention in the release that we see continuous positive trends in our business in July.

Okay.

Very specifically, for the first 20 business days or so, actually now we are further along—first 25 business days—we have seen tonnage-wise versus the same number of days last year, we are up by 3% for July. From a revenue per tonnage perspective, we see similar types of events as we saw over the last several months. So if tonnage is positive, the revenue per shipment stats that we shared holds because our pricing discipline and surcharge discipline has been very consistent. So in July, we are actually in a strong position compared to June, and June was phenomenal with an OR of 80 points, which is a milestone, certainly not the final destination.

No, no. That’s great to hear. I’m glad to hear you’ve got some positive tonnage. As you think about backfilling some of the latent capacity you have in the LTL network that you’ve achieved through this cleansing process over the last 12 months, where do you think you are in that process from a sales perspective? I know the macro is getting a little more challenging, which probably makes that difficult. But could you update us on that? And it seems like as you go into 2023, your six buckets of opportunity must be near or at the top of the list of things to explore.

Definitely. And you asked a couple of things here, right? If I look at the six that I mentioned, the first three are all about more organic LTL business of super high quality. Remember, I said more events is the first. Every time Rebecca and I walk through a terminal with a shareholder or a customer and our operations leaders, we see the efficiencies that are being implemented, which are much more advanced than they were a few years ago. Also, I see the events business way up. Our guesstimate was that about 20% pre-COVID of our total shipments were events related, and I expect it to get back to that level again and more. The second strategy is selling more direct to smaller and medium-sized businesses that do not use forwarders. So there is an opportunity to be business partners with our legacy customers and to sell a lot of high-value freight directly to other customers as well. Finally, deeper penetration into our existing forwarder customers; our domestic forwarder customers have been tremendous over the last year. After cleansing all the unprioritized, inefficient freight out of our system, they are now working with us more effectively. They have done a great job getting us on their sales teams as we aim for higher-value freight together. I believe we have several levers to increase tonnage, and while we see a slowdown, this year we are committed to winning—not necessarily in expanding the overall 'pie,' but capitalizing on 'slices' of it. That 3% year-over-year growth we see in July is expected to increase as the quarters go on. The positives we control outweigh any negative factors that arise.

That’s great. I really appreciate that additional insight. I guess maybe shifting to the full year outlook and the longer-term outlook. Regarding the $7-plus EPS, when I look at that with the Q3 outlook, that implies if you are just looking at $7, something like $1.50 in earnings for the fourth quarter, which seems like a meaningful step down sequentially. I’m guessing that’s you guys erring on the conservative side there. Could you flush that out a bit? Additionally, when you say you expect to continue to get better in 2023, is that an indication of your expectations for further earnings growth in next year? Just looking for some clarification because we know this will come up during the call.

Absolutely correct, Jack. Let me be blunt: we’ve said at least $7. We don’t know how fast the figures may come down, or how much overall demand pullback will balance the positives we’ve discussed. To clarify, our model suggests we will comfortably exceed $7. The expectation for the fourth quarter earnings you mentioned would indicate significant economic headwinds to not surpass it easily. As for growth continuing in 2023, I expect from where we sit now—considering positives outweighing those negatives—that regardless of how we finish in 2022, I anticipate margin expansion beyond this year. The outlook is not just exclusive to 2022; we expect to carry momentum into 2023. We're aware of the economic slowdown and model fuel to decrease in line with forecasts available. Our model maintains the expectation that from an EPS perspective, we will continue to improve beyond whatever we conclude in 2022. In short, the math behind our projections supports optimism.

Well, you're talking to a History major here, so you're better positioned than I am! I will hand it back over to the queue. Thanks so much, Tom. We appreciate your insights.

Thanks, Jack.

Thank you. Our next question comes from Tyler Brown with Raymond James. Please go ahead.

Hey, good morning.

Good morning, Tyler.

Obviously fantastic results. I’ve got a few questions here. Just to start, can you provide an update on that direct selling effort, how that’s proceeding? Are you on pace? And I know you've mentioned this having a better margin profile, but you’ve got more freight in the system to sample from. Can you talk about how much better the margins appear?

Yes, Tyler, we are on pace, and we see this as a significant untapped upside. It is challenging to estimate off a $10 billion plot; it could reach $17 billion for what we call high-value freight. Several billion dollars of this is run by small and medium-sized businesses. We’ve identified this first year of our effort in that sector as a growth and learning year, expecting roughly $20 million in revenue. We are on track for that peak stack. If you recall, we expect significant growth, jumping from $20 million to $40 million, then up to $60 million. We anticipate aggressive growth to $50 million and eventually up to $100 million over the next couple of years. This year, we see about $20 million of revenue. Our sales team and Melissa Feeser are entirely on board; she may pursue more aggressive targets than I do, and I consider myself constructive and impatient. That addresses the top line. Regarding margin profile, we are still learning but there is potential for margins in that area to be similar to the best class freight companies reporting for this quarter. Given a lack of added intermediaries, we expect margins to reach that 70 OR territory versus the 80 OR territory we see currently. We are not consistently there yet, but better pricing with selected small and medium-sized businesses clearly targets margins in that 70 OR range.

That’s extremely helpful. I think gross margins and expedited, if I look at revenue less per ton, they were again solid this quarter. I know there are concerns about demand rolling over, but you have this asset-light model. You mentioned protection from both the rolling truckload market and the shift from external to internal miles. Can you elaborate on what that means for finances when you use internal versus external miles?

Certainly, Tyler. In essence, our 'internal miles'—which is not entirely accurate since they are mostly independent contractors that work on our behalf but still own their own businesses—are usually around two-thirds the cost of an 'external mile.' For estimate purposes, that could mean $3 per mile for internal compared with $2 per mile for external. If we need just 8%, which is very achievable, and perform only at that $3 level rather than as high as 28%, it leads to considerable overall cost savings. We’ve come down to approximately 12% recently due to efforts by our operations team. To clarify, 12% is a significant improvement, and there's potential for us to drop that figure into the mid-single-digit range.

Okay, that’s great. Just one last question, in the release, you noted higher fuel surcharges as a part of momentum driving EBIT. Can you provide insight into how changes in fuel either support or hinder EBITDA or EBIT dollars? Because there seems to be uncertainty surrounding how much of the $7 is purely from fuel changes versus other structural shifts.

Yes, Tyler, let me clarify. The $7-plus figure we established for 2022 does incorporate the notion that fuel prices will begin to come down over the next several months. We anticipated fuel to drop to around $4 to $4.25 range next year based on industry forecasts. I wish to emphasize that our expectation of maintaining EPS is attributed to several factors other than just fuel. For example, our ready-for-shipment increase versus the same quarter last year indicates 40% higher volume than last year. By excluding fuel from this quarter’s analysis versus the same quarter last season, we see a 26% increase. If you analyze some of the best LTL companies, it's clear that the enhancements we see ex-fuel drive higher quality tonnage, contributing to greater overall performance. To summarize, our $7-plus and higher projections for 2023 take into consideration that fuel is expected to drop back to levels that were common one or two years ago, alongside other positive drivers in our operations.

Excellent. That is very, very helpful. Thanks, Tom.

Thanks, Tyler.

Thank you. Our question will come from Todd Fowler with KeyBanc Capital Markets. Please go ahead.

Hey, great. Good morning, Tom. Good morning, Rebecca.

Good morning, Todd.

I want to start on pricing and yields. When I look at your revenue per 100 weight ex-fuel, it’s up nearly 10%, and that’s with the higher weight per shipment here in the quarter. Can you give us some thoughts on how base pricing and your contract renewals are trending? What are your expectations for pricing levels going into the back half of the year and even into the next year?

Certainly. I think it's worth noting that general rate increases (GRIs) happen annually. First, they occur on February 1 and remain consistent. We do factor in external elements to initiate genuine conversations with our business partners regarding the extent of the GRI. I suspect that given an economy where driver supply and demand issues are no longer as sharp as they were a year ago, the driver cost increase may be lower. Consequently, the fixed GRI of 49% implemented this year might adjust down to around 4.9%. However, I must emphasize that we are in discussions with a pricing team to determine what's appropriate for future years. While it may decrease next year, the GRIs remain a priority, reflecting reality. The best companies across all transportation sectors implement and adhere to strict pricing discipline.

Okay. That’s helpful. When considering the past couple of years, many factors affected your business approach. Moving beyond the macro and thinking about long-term expectations, do you have a view on what the tonnage growth rate should be? Given your current positioning within the market, should it grow faster than the overall market growth rate?

Yes. I will briefly lay out a framework for you, and then Rebecca can follow with specific details. Our Forward 23 initiative focuses on enhancing growth between 2022 and 2023 and follows up on our earlier model, Beyond 19, intended to boost profitability. We have a five-year outlook where we expect to see growth based on controlled factors and what’s achievable. I hope Rebecca can provide more detailed numeric reflections on this expectation.

Absolutely. As we move into next year, this year was a challenging one, not in a negative sense, but we stripped things down and cleansed operations. Thus, our focus in 2023 will be based more on apples-to-apples comparisons. We do anticipate our tonnage will grow and should grow faster than overall market projections as we move forward, which will enhance our revenue over time.

That’s quite helpful on the comparison grounds. The last question I had regards share repurchases in Q2. I do not think any were executed during that quarter, and the company is performing well. I want to know the reasoning behind it—opportunistic versus formulaic—and why there was a pause in the quarter?

Yes, you’re correct that we did not complete any share repurchases in Q2, which is primarily a formulaic measure in our capital allocation strategy. We allocated cash toward our acquisition of Edgmon this quarter. While we don’t provide guidance on share repurchases, we remain committed to returning capital to our shareholders. In our earnings release, we provided our weighted average diluted shares for the end of the year, which was 26,000,800. This suggests we will execute some share repurchases for the rest of the year.

Got it. Thank you for your insights this morning.

Sorry, Todd. Just to emphasize, we’ve allocated $376 million in share repurchases and dividends over the last five years. Encouragingly, dividing that $376 million by five provides context for our substantial confidence in the company’s growth.

Yes, understood. I wanted to clarify some details on buyback cadence and the stock's performance in the quarter. I certainly appreciate all the comments. Thanks for your time.

Thank you, Todd.

Thank you. Our question comes from Scott Group with Wolfe Research. Please go ahead.

This is Jake on for Scott. Thanks for the time.

Good morning.

On your Q3 guide, it looks like you have guided earnings lower sequentially despite flattish revenue. Could you provide insight into why that is?

Yes. Let me start, and then I’ll let Rebecca follow. Historically, Q2 and Q3 have demonstrated similar earnings for us. Our results for Q2 came in at $2.04; for Q3, we are guiding to $1.90. As you noted, that is a slight sequential step down, which reflects our concerns regarding fuel prices and overall demand decrease. However, I want to emphasize that $1.90 remains our highest Q3 earnings to date. As we observe market trends, tactically scaling back allows us some flexibility. Despite the anticipated pullback in fuel and overall demand, we expect tonnage growth in Q3. The aspects we can control are mostly operating as anticipated, so we remain positive about our outlook.

Got it. Thanks for that. If I examine revenue per shipment and weight per shipment for Q2, both declined approximately 5-6% sequentially. What drove those changes?

Yes. This reflects a consequence of customer success and shifting dynamics. Our data shows that the sequentially declining rate per shipment points to success selling with domestic forwarders, focusing on airport-to-airport shipments. While these lower rates may contribute to volume, they are typically less costly. Conversely, our more recent partnerships with 3PLs are focused on higher-margin shipments. Although rate reductions are connected to the aircraft shipments, the dynamic is a positive one as we focus on high-value freight handling together with domestic forwarder customers.

Got it. Thanks for your time.

Thank you.

Thank you. And our next question comes from Bascome Majors with Susquehanna. Please go ahead.

I am Bascome Majors from Susquehanna. Thanks for taking my questions. You have been confident in a $7-plus number on the EPS front. Could you speak to how that translates to free cash flow based on your modeling? Not too precise, but a comparison of that to your current market cap around $2.6 billion or $2.7 billion would be useful.

Absolutely. Rebecca, please chime in.

Certainly! We foresee our free cash flow remaining strong throughout the year. In Q2, our free cash flow was approximately double last year, even threefold. We expect this trend might slightly lessen for the remainder of the year, but continue positively.

Thank you. You've consistently conveyed your intention to at least hit the market and likely expand tonnage and earnings into next year, despite indications of slowing. Considering the new management team, freight mix, and strategy aligned with Forward Air, I wonder about your playbook if we observe mid-single-digit declines in overall LTL market tonnage. How do you safeguard the bottom line while serving your clients? How can you flex your strategy to bear implications for top and bottom lines?

Great question, Bascome. Traditional skills like cost control and flexibility are essential. Our asset-light model works efficiently as environments slow down. The first choice to flex costs is reducing miles sourced externally, which contributes a percentage of our miles reserved—a crucial area where we can adapt quickly. Historically, we have seen those external miles at 28%. Recently, they have decreased to approximately 12%. Thus, creating more flexibility. However, we believe we have established a strong, resilient platform. Businesses like automotive, industrial goods, and high-tech equipment are more essential than discretionary freight, which tends to retract first. People are eager for events and travel and will still seek those opportunities despite potential economic concerns. We control many variables that would outweigh negatives. We believe our strategy ensures our model thrives in both growing and contracting environments.

Thank you.

Thank you. That concludes Forward Air’s second quarter 2022 earnings conference call. Please remember that this webcast will be available on the Investor Relations section of Forward Air’s website shortly after the call. You may now disconnect.