Thank you for joining Forward Air Corporation's Fourth 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 fourth quarter 2022 results, which was furnished to the SEC on Form 8-K and on the wire yesterday after the market close. 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, which 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, including statements regarding our expected first quarter 2023 and fiscal year 2023. These statements are not a guarantee of future performance and are subject to known and 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 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 Investors tab of our website. And now I'll turn the call over to Tom Schmitt, CEO of Forward Air.

Thank you, Brad, and good morning to all of you on the call. First things first, a big thank you to all of our teammates, our independent contractor drivers and our business partners. You kept our commitment to the best service in the industry with the most intact damage-free LTL shipments, and I thank you for that. You delivered a record year in all of our lines of business, top line and bottom line, with EPS year-over-year growth by almost 70%. So that's top of the class in our space. Now still, we did not finish the year the way we expected, and we need to address that. In contrast to many of our peers, we had guided for Q4 to be sequentially better than Q3, and our peak planning efforts with our customers actually supported that guidance. We always poll our top 25 customers or even more going into the fourth quarter, and we felt good about the guidance that we gave. Well, it turned out we have no monopoly on wisdom, and not even in concert with our customers as we planned together. We had modeled that the Forward 23 actions that we control would more than make up for the shortfall in demand, the overall sluggishness in the economy, and also for fuel coming down. Where we ended up, though, was with the LTL tonnage going down by 13% in the fourth quarter, way more than the single-digit decline that we and, frankly, we together with our customers had expected. December was the worst month, and January was equally sluggish. We're talking 15%, 16% down. Now the most recent weeks were a bit more promising. In the most recent week that has complete data, we showed a decline of 10%. Still, Q1 will be tough. And also, I want to say, despite Q1 being tough, our story and our drive towards high-value freight still holds. We are keeping all of our LTL customers. We're actually adding customers by adding direct shippers. We have more than 200 right now, and that's in the space of small, medium-sized businesses where they do not use forwarders. Even in Q4, the number of LTL shipments held stable. We were down by 0.4%, so it's pretty much the same as last year. The freight mix, as we showed in the release, is getting better. Evidence for that is also that, on a per-piece basis, the weight increased by 12% year-over-year. We looked at four high-value verticals, and they used to be 18% of our freight mix a year ago; now they're 29% of our freight mix. Trade shows in the last quarter of Q4 went up by 50% compared to the last quarter of 2021. Finally, it's also important to note that we get paid for that higher-value freight. Our revenue per hundred rate is up 13% in Q4 over prior year Q4. So a lot of the journey that we are on has been working out just as we intended. The challenge we currently face, which caused the year to end on a quarter that was significantly less than what we expected, is that our shipments still contain fewer pieces than they used to and than they will have, 20% to 25% fewer pieces. We expect that sometime in Q2, inventories will start normalizing, and shipment sizes should normalize as well. At the end of the day, we do not rely on that to happen. We do have our Forward 23 initiatives in place. We have half of them focused on growth. We talked about them many times before, from selling more direct to events coming back. We also have initiatives focused on cost containment, which we refer to as Forward Game Shape. For instance, this includes dimming and reweighing, which is a huge initiative, as well as cost reductions in travel and a reduction in force. We reduced our headcount by more than 100 people in the last 2 months alone, and we have a hiring freeze in place. Part of Game Shape also involves ensuring that we use our independent contractor drivers as much as possible, and we have minimum outside miles. We just updated our Forward 23, Forward Force Growth, and Forward Game Shape initiatives for impact. At this point, we still believe that we can target a 2023 that is ahead of 2022 in EPS. That's what the collective initiatives are indicating to us. We estimate about a $0.90 EPS headwind from a sluggish economy and about a $0.60 headwind from fuel prices coming down. But we believe, collectively, the initiatives we have in place will compensate for that. Also, please keep in mind, we did acquire a great company called Land Air Express, which is expected to contribute an additional $0.18 EPS. That's accretive to our model. As you know, if the economy continues to sluggish longer, we tend to have excellent tuck-in acquisitions, both in intermodal drayage and in LTL that would be added to those initiatives we are targeting. At this point, we still believe that with Forward 23 initiatives and updates for the economic slowdown, along with the land air express addition to our team and potential additional acquisitions, we can still target an EPS for 2023 above what we had in 2022. By the way, I'd rather aim to achieve that and have initiatives in place with first-class team members driving them than set a target of a 10% to 20% decline and start from that negative perspective. In our models, we aim for an EPS in 2023 that is actually above what we had in 2022. So with that, I'm going to turn it over back to you, Brad. Rebecca and I will take questions.

This is Grant on for Jack. Just curious about the significant reversal in weight per shipment. With the volatility we've seen over the last couple of years, how are you thinking about that going forward?

Yes. So this is the combination we just talked about, right? The weight per shipment for Q4 shows a decline of 13%. That by itself is not a good metric, and it's also not something we like to see. But when you unpeel it further to understand what's happening here, it's because our freight mix is getting better and better. The weight per piece inside the shipment, where most shipments have more than one piece, has been increasing. The number of pieces inside the shipments over the last several months has decreased by more than 20% because people still order two SKUs, but the third SKU is still in the warehouse, leading to fewer pieces ordered as part of the shipment. So despite the weight per piece increasing and the stable number of shipments, the fact that we have more than 20% fewer pieces in a given shipment results in a decreased weight per shipment. I understand this involves various math components, but in essence, the quality of the freight is where we want it to be. The total number of shipments is stable, and while what's inside the shipments is still high quality, it is simply less than what it was and what it will be. And we aren't relying on a rapid recovery in the economy. Instead, we are implementing all of these cost actions referred to as Forward Game Shape, and also all of the growth actions we have outlined. Collectively, between the Land Air Express acquisition and our organic growth initiatives, we have just opened a terminal in Midway, marking our third terminal in Chicago, and we have five new docks on the map with Land Air Express. Between these Game Shape initiatives and the Forward Force Growth initiatives, we have a solid chance of 2023 outperforming 2022, despite the headwinds posed by fuel prices normalizing. So while I don't like to see weight per shipment decline, we need to understand what drives it. The quality of the freight is where we want it.

Got it. That definitely makes sense. Just a follow-up. You talked about growing earnings this year in 2023. Could you quantify how you expect that to break down quarterly? Are you expecting more of a positive inflection in the second half of the year? Any color you could offer on the EPS breakdown by quarter would be helpful.

Yes, we did guide for the first quarter, and that is continuing the sluggishness we saw in Q4. But let me give a little bit of color commentary. You saw the $1.32 that we guided for Q1. If you multiply this by 4, that doesn't get you past $7, which we still target. We came in adjusted at $7.18 for 2022. Between our initiatives that we control, including the $0.18 EPS resulting from Land Air Express and the potential for wildcard acquisitions, which we often have in the form of highly accretive tuck-in acquisitions, we believe we can still surpass the $7.18 target. The growth will probably ramp up throughout the year. For example, Land Air Express is joining us, and we're collaborating closely with them to ensure that the quality of the freight in a controlled environment meets our expectations. This is a gradual process that we'll build on over the year. Most of the initiatives we discussed, whether they're focused on selling more directly, bringing events back, expanding into Canada and Mexico, or implementing cost-saving measures with dimming and reweighing equipment in all our terminals, will ramp up throughout the year. Therefore, we anticipate more significant impacts in Q3 and Q4 and somewhat more impact in Q2 than in Q1. Yes, Q1 is likely to be our most muted quarter as we expect continuous growth from each of the initiatives.

Thanks so much for the color on the guidance, but I want to make sure I've got it. You have about $1.50 in negative impacts from the economy and fuel, rounding up perhaps to $0.20 from Land Air and a few cents from Chickasaw. Can you help bridge that other $1 to $1.20 in savings you're expecting to achieve? What might be the key items driving that?

Yes, you got the math spot-on, Tyler. The $1.50 headwind is absolutely correct. Purely from a math perspective, we finished the year with $7.18, not quite reaching the $7.50 we targeted due to the steeper and quicker drop in Q4 than we had expected. We believe we can exceed $7.18 in 2023. With $1.50 weighing against us from the start, including approximately $0.90 from the sluggish economy and roughly $0.60 from declining fuel prices, we need to find at least $1.30 from other initiatives. The breakdown is roughly 50-50 between our Forward Force Growth initiatives and our Game Shape initiatives, which are more about efficiency and cost management. The largest growth initiatives include increasing high-value freight with some of our key domestic forwarder airline and 3PL customers, contributing roughly $0.17; expanding our direct sales to small and medium-sized businesses, which do not rely on forwarders, yielding about $0.07; ramping up trade shows which account for another $0.08; and enhancing our brokerage efforts through our new leader in that segment, yielding about $0.12. We're also growing our final mile integrated customers, amounting to about $0.04, and are focusing on intermodal growth with BCOs, contributing approximately $0.12. On the Game Shape side, the most significant initiative involves staying in single digits with outside brokered miles, which we expect to yield an $0.37 improvement. Moreover, technology enhancements, including dimming and reweighing benefits in our terminal system, result in an additional $0.37. Cost management efforts, including travel reductions and workforce adjustments, provided an initial $0.11, and we're still evaluating our options there. Additionally, we expect surgical pricing strategies to yield another $0.14. When you perform your math on these figures, you'll find our initiatives are well-grounded and genuinely focused on achieving growth and effective cost management, which collectively leads to a potential of exceeding our targets, even considering the various economic headwinds.

It sounds like you were ready for that question. Very helpful. On the fuel side, what estimate do you have for the $0.60? Is it based on fuel being around $4.50 or lower?

I'm providing this from memory, Patrick, but our fuel forecast for the year predicts an average rate of approximately $4.23 to $4.24. This figure compares to around $4.89 in 2022, suggesting a significant reduction. To simplify, we've projected a step down from roughly $4.90 to about $4.20, providing a $0.61 impact on our EPS when comparing 2022 to 2023.

That’s extremely helpful. Regarding shipment weight, I think we're around 730-ish pounds currently. Do you see that as a low mark? Can you talk about the current weight per shipment and where you envision the model in the long term?

Yes, I believe that the 730ish mark represents a potential low point. This ties back to substantially fewer pieces than we saw six months ago and what we will encounter moving forward. Should that recovery not occur as quickly as desired, we may need to pull additional levers, including pursuing more tuck-in acquisitions. I don't foresee us reaching the 1,200 to 1,500-pound range typically associated with bulk commodities. Rather, we focus more on specialized high-value freight, similar to air freight operations. Many top LTL companies are actually our customers. While 800 pounds seems like a reasonable target, outside the 850 to 900 range—where we were previously before shipments became less packed—is achievable.

You expect Land Air to be accretive in year one, calculating maybe around $6 million to $7 million in EBIT?

That’s fair. We're seeing accelerated growth while effectively consolidating operations. The integration of Land Air Express is key to enhancing our product offering and tapping into a broader customer base. This will enable us to achieve synergies through service upgrades and revenue generation from new origins and destinations in our network. Expect to see a gradual ramp-up in the synergies throughout the year, particularly with the revenue retention anticipated at around $85 million. In conservative terms, we're estimating a 15% margin, leading us towards a run-rate impact in the range of $13 million, compared to a more modest figure for this year.

Great. Similar to Tyler's question on fuel. Regarding the $0.90 headwind from the economy, can you break that down? How much of it is tonnage-related, and what would your assumptions be regarding the operating ratio for expedited freight?

Yes, we modeled this using some macroeconomic assumptions that were guided by certain reports. We concluded the year with 13% tonnage per day down year-over-year. We even anticipated a higher decline of 15% to 16% for the first few months, gradually improving through the rest of the year. This was based on a very steep double-digit year-over-year tonnage reduction. We then evaluated the impact of various initiatives and the Land Air Express acquisition on top of that. Our model accounts for a double-digit year-over-year decline in LTL tonnage, along with the expectation that we may need to improve profit margins to remain competitive in such a soft market. Pricing discipline remains intact, and we instituted a GRI. When all of this is accounted for, it consolidates into the $0.93 EPS impact I previously referred to.

Other than relying on our reports and peers, those seem like prudent assumptions. What do you project for the expedited freight operating ratio in 2023? Can we expect it to remain stable or regress by 100 basis points?

Yes, we do expect that it will likely remain stable. However, it's important to clarify that the expedited freight sector is experiencing challenges. The shipment slowdown we're seeing in LTL is also manifested in our final mile appliance business and truckload brokerage. Each of these segments is facing similar pressures. However, the final mile team has accomplished noteworthy achievements in customer acquisition and market presence, evidenced by being awarded Home Depot's Appliance Carrier of the Year. So, while the expedited freight segment may experience a slight headwind, I firmly believe that we are addressing these challenges effectively.

Can you provide the monthly tonnage statistics for Q4 and early Q1?

Sure, Scott. In October, our tonnage was down 11%. In November, it was down 12%. In December, it declined by 15%. As for January—through the end of the month—we are seeing approximately a 16% decline year-over-year.

Do you have the monthly figures for Q1 last year?

I do not actually have that information, Scott. I'm sorry.

We can find those figures later. Regarding the fuel headwind you mentioned, is any of that impacting Q1? Or is it primarily relevant to Q2?

Yes, that's correct, Scott. The fuel headwinds will become pronounced in Q2. In Q1, we anticipate a slight tailwind.

Understood. Lastly, the GRI for this year appears smaller than last year. Any comments on that and how it's been performing so far?

Yes, just to confirm, we implemented a GRI of 5.9% effective earlier this week. Last year's figure was 7.9%. Let me make it clear: we assess pricing as a holistic picture, which includes fuel surcharge adjustments. As you know, we adjusted the fuel surcharge table in late fall, worth about 2 percentage points. We considered both the surcharge and GRI to ensure mutual benefit for us and our customers. Thus far, we have more than 200 agreements in place that track and reward real growth, which we monitor monthly. Our take rate typically ranges from 70% to 90%. Given the proactive measures we took, I expect to maintain similar effectiveness this year as seen last year.

To clarify, the $0.60 fuel headwind includes the benefits of the new surcharge tables?

Yes, the figure is a net number. We observed the effects of the higher fuel surcharge last year in comparison. Therefore, when you analyze our step down, it is larger due to that adjustment. The difference is minor, just a few cents, going from $0.56 to $0.61.

Tom, not to revisit mix again but thinking back to last spring, you shared an investor deck that allowed us to visualize how the terminals looked before some of the changes you made compared to now. Some investor concerns relate to shipment weight and size potentially decreasing. Can you provide us with a visualization of the current state of your LTL terminals and how these changes haven't compromised the hard work you have accomplished?

Yes. Thanks, Bascome, for asking. For those who observed that investor relations deck we shared recently, the visual representation highlighting our unclaimed terminals before and after cleansing is essential to our ongoing efforts towards high-value freight in a controlled operating environment. It’s important to note that we are not regressing; we are committed to sustaining this standard. Our terminals maintain the cleanliness and organization established through that initiative. Unfortunately, what appears different is the number of shipments. For example, where a big shipment may have previously contained seven or eight high-value treadmills, it now has only four. While we value high-end consumer goods due to their quality, there are fewer items per shipment than before.

Lastly, could you walk us through your assumptions regarding the intermodal segment on an organic basis, excluding M&A activities? How does that trend align with seasonality? Also, could you remind us of your customer relationships among larger asset-using IMCs versus smaller asset-light IMCs and port shipping companies?

Yes, in terms of intermodal drayage, we categorize our customers into two segments. Approximately 60% of our customer base consists of shippers creating or sending goods on their behalf, while the other 40% consists of intermediaries serving an end customer. We value both customer types and operate effectively with each. Our growth initiatives include expanding partnerships, especially with BCOs. Expect steady top-line growth for intermodal year-over-year, although that sector is moderating similarly due to the normalizing effects of accessorials. Over the previous year, our margins profited significantly from storage fees, as we assisted customers through challenging logistics. We expect accessorials, particularly storage and detention fees, to normalize this year. Thus, while intermodal is fielding an overall growth trajectory, the accessorial revenues will display noticeable declines. With regards to the expedited freight segment, it seems to be experiencing more pressure in 2023 than intermodal. We are seeing tonnage slowdowns affecting LTL freight, and subsequently, the final mile appliance sector isn't intrinsically growing like before. The truckload brokerage segment continues to experience similar declines. However, our final mile team has excelled in capturing new logos, solidifying market presence, notably earning The Home Depot Appliance Carrier of the Year award. I want to extend my gratitude to all of you for joining us and participating today. I am open to following up regarding any models or inquiries. We are enthusiastic about the growth strategies our team is implementing on the growth front while ensuring efficiency and cost-effectiveness. Our goal is to close 2023 better than 2022. We are confident that the initiatives can guide us even amid headwinds. Additionally, we have a substantial acquisition in intermodal that is poised to be accretive, Chickasaw, along with Land Air Express which enriches our portfolio. I believe we have a strong opportunity for two additional tuck-in acquisitions as well. We feel positive about concluding 2023 as potentially another record year.

Thank you. That does conclude Forward Air's Fourth Quarter 2022 Earnings Conference Call. Please remember that this webcast will be available on the Investor Relations section of Forward Air's website at www.forwardaircorp.com shortly after this call. You may now disconnect.