Earnings Call
Forward Air Corp (FWRD)
Earnings Call Transcript - FWRD Q2 2023
Operator, Operator
Thank you for joining Forward Air Corporation’s Second Quarter 2023 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 Thomas Schmitt and CFO, Rebecca Garbrick. By now, you should have received the press release announcing our second quarter 2023 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 Legislation 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 regarding our expected third quarter 2023 and fiscal year 2023. These statements are not a guarantee of 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 Investors tab of our website. And now I’ll turn the call over to Thomas Schmitt, CEO of Forward Air.
Thomas Schmitt, CEO
Thank you, John, and good morning to all of you on the call. Let me lead off with five points before opening it up for questions and comments. The first point, we just finished the third disappointing quarter in a row. It’s been a very tricky freight recession for our team and our customers, and it came in phases. We have seen the worst in our main show the LTL business in the fourth quarter of last year and also in the first quarter of this year. Truckload and brokerage, as often in a freight recession, had a prolonged demand and pricing low. As we started coming out of the low for the LTL business in the second quarter, our Intermodal drayage business saw its bottom. For both its core revenue but also for its accessorial services, especially the storage fees. The second point I want to make upfront is Grow Forward is working. That’s our initiative that’s focusing us on high-value freight, priced appropriately in a very clean, best-in-industry operating environment and made accessible increasingly to our larger customer base. As I said on the last call, it’s working, and we won’t see the full results in 2023 yet. Our industry-leading best service, with best on-time performance at 99% and the lowest damages claim ratio of 0.1%, matters when you deal with shipments of consequence. As we saw in a freight recession, customers do trade down. We saw that in our year-over-year tonnage. If you go back all the way to the last quarter of last year and the very beginning of this year, our tonnage per day was down 15%. For the full first quarter, it was down by 12%. In the second quarter, we just finished 7% down. Most recently, we’ve seen a lot of close to flat and very positive trends this week. So far, we are seeing plus 7% year-over-year tonnage. The freight mix also keeps getting better as well with the weight per piece and the weight per shipment going up. The third point I want to make is that the Yellow impact will accelerate the momentum. I do have to start with just a personal note, as I know quite a few people who actually worked at this iconic company, Yellow. I feel for the thousands who gave their all for so many years, 99 years, I think, in total, at this iconic company. I truly hope and wish that many of those great professionals will find another great professional home soon. On a pure business front, capacity leaving the market will further cement pricing discipline in our industry. We will clearly be part of a very disciplined pricing group. We should see some volume benefits in the more dense lanes and for shipments that benefit from our industry-leading precision execution. This week’s plus 7% year-over-year tonnage is a good observation of that. Fourth point, I need to improve in forecasting during these dynamic and challenging times. We need to return to being more conservative and then beat expectations. In that spirit, we remain cautious when we guide towards Q3. Intermodal and truckload still have ways to go to get back into full swing. There is LTL momentum building, but we still want to be cautious about the size of that momentum, as import volumes for many of our business partners and customers are still very subdued. Finally, before we open it up, point number five, I wanted to give you a little perspective. Sometimes it’s important and right to be self-critical, but it’s also important to have some perspective. Let’s put this year, 2023, arguably the worst freight year in 15 years, into context. 2021, just 2 years ago, was the first of two unprecedented freight boom years. At that time, when we finished 2021, we had by far our best earnings per share in the history of our company at the time. That was 2 years ago. In an absolute freight past year, 2023, we still expect to beat that 2021 boom year EPS number. That means we’re not where we will be yet, but it means a bit of perspective sometimes helps too. With that, back over to you, John, and we’re going to open it up for thoughts, comments, and questions.
Operator, Operator
Next, we have Jack Atkins from Stephens Inc. Please go ahead.
Jack Atkins, Analyst
Okay. Good morning, Tom, good morning Rebecca, thank you for taking my questions.
Thomas Schmitt, CEO
Good morning, Jack.
Jack Atkins, Analyst
So I guess, you know Tom, I’d like to start with what you’ve been seeing over the last few weeks. It sounds like it’s obviously a pretty dynamic situation right now. So when you think about the tonnage trends you’re seeing, the shipment trends you’re seeing in the expedited LTL business, could you maybe give us a little bit more granularity on the last few weeks? What’s sort of going on there in terms of the progression? And where is that freight coming from? Is it coming from direct shippers? Is it coming from 3PLs? If you could provide some context around that?
Thomas Schmitt, CEO
Yes, Jack, absolutely. So, I’ll break it down starting from July and then we’ll include the first few days of August. First of all, regarding the numbers and a little bit of color behind them. The first week of July was an outlier due to July 4 being on a Tuesday, which effectively meant losing two business days that week. Moving into the second week of July, our second quarter finished at minus 7% year-over-year. The remainder after the first week of July averaged roughly minus 3%. That trend was already on an upward trajectory. The last several days showed a whole other increase that we haven’t fully built into our forecast, particularly with the plus 7% year-over-year tonnage, which is unusual. Additionally, we observed week-over-week sequential increases of around plus 4% to plus 5% over the past few weeks. There’s a lot of momentum building here. Regarding your second question, some of this is indeed our sales team doing a phenomenal job with our core business partners, helping them grow alongside us. Some of our long-standing business partners have been growing with us, even predating the Yellow impact, but over the last several days leading into the last week of July, we’ve seen our core business partners who were also long-term Yellow customers starting to switch their business over to us for sensitive freight lanes. Yes, Yellow's exit from the market accentuates pricing discipline, and while it may help some of the class rate companies more than it helps us, we have seen 3PLs and some domestic Forwarders growing with us as they shifted their business from Yellow to us. So we benefit directly in volume, less so than some of the class rate companies, but we do directly benefit. Pricing-wise, we expect, as I said, for pricing discipline to increase, with the tonnage increase noted previously.
Jack Atkins, Analyst
Okay. And then maybe just following up on July briefly. But I mean, for July in total, what was tonnage in July on a year-over-year basis?
Thomas Schmitt, CEO
I think it was down minus 5%. The first week, again, was the challenge, but the rest got better.
Jack Atkins, Analyst
Okay. July was minus 5, and then it’s obviously gotten better over the last few weeks.
Thomas Schmitt, CEO
Correct.
Jack Atkins, Analyst
And then I guess maybe shifting gears to the pricing side. If we look at revenue per hundredweight excluding fuel, there’s been some downward pressure on that over the last couple of quarters. How do you feel that is impacted by what we’re seeing from like the broader dislocation in the LTL market? Do you feel like you’ve got some pricing leverage back here? Would you expect to see some sequential improvement in revenue per hundredweight excluding fuel?
Thomas Schmitt, CEO
I believe the last quarter and the preceding two quarters faced significant challenges in terms of pricing environment, and I expect to see improvement in Q3.
Jack Atkins, Analyst
Do you think there’s the opportunity for GRI later this year?
Thomas Schmitt, CEO
We do GRIs once a year, typically in the first week of February. Customers should rely on that for predictability in their budgets and forecasts for the following year. However, during the challenging times of the last 6 to 9 months, we provided temporary GRI relief when customers initiated efforts to grow with us. Capture rates were lower this year, likely below our normal range of 70% or higher. I expect our teams to work with our customers to discuss capturing the mitigated GRI and returning it to a full level, maintaining reliability for our customers.
Jack Atkins, Analyst
That makes sense, Tom. So, I guess other opportunities will be discussed in the normal course of business in the back half of the year. Do you feel like when putting all that together, that this could have a positive impact on pricing sequentially in the third quarter?
Thomas Schmitt, CEO
Absolutely. I believe the point I made in my opening remarks about Q3 guidance is important. Some of the momentum we saw in recent days is not fully integrated into our forecasts. I want to align us back on a track where we are consistent in making forecasts and exceeding them. Thus, we remain cautious at this point, but we like what we see.
Jack Atkins, Analyst
Okay. Got it. Maybe the last question before I hand it over. Could you talk about peak season? What are your customers telling you about their plans for the back half of the year? Are you seeing any signs that there’s improvement in underlying demand, or is it too early to determine?
Thomas Schmitt, CEO
It's quite too early to make that call. Quite a few of our customers have indicated they’ve seen their order books getting filled. But some customers have frankly admitted they don’t see a peak this year, and there’s no indication of that coming. In my perspective, we need to focus on what we can control, which is working with our customers to earn more of their business. If there is an uplift in the third and fourth quarter, that will be an additional benefit on top of our existing guidance.
Jack Atkins, Analyst
Okay, thank you, Tom. I appreciate the time.
Thomas Schmitt, CEO
Thanks, Jack.
Operator, Operator
Next, we have Scott Group with Wolfe Research. Please go ahead.
Scott Group, Analyst
Hey, thanks. Good morning, guys.
Thomas Schmitt, CEO
Good morning, Scott.
Scott Group, Analyst
Can you share what tonnage you’re assuming in the third quarter guidance? You said a few times you’re not assuming everything you’ve gotten in the last week, so what is the actual tonnage you’re assuming in the guide?
Rebecca Garbrick, CFO
Yes, Scott. We are assuming that clean tonnage would be positive in the third quarter. We expect that to be year-over-year north of - somewhere north of 5% for Q3.
Scott Group, Analyst
Okay. It sounds like you are assuming that you keep it for the rest of the way because tonnage was downsize in July?
Rebecca Garbrick, CFO
Yes. We expect August and September to be a bit better as we look at it from a sequential standpoint.
Scott Group, Analyst
Okay. And then maybe just with all the mix changes. As tonnage has spiked, could you discuss what’s going on with wafer shipment? What's happening with length of haul? This has impacted some of the revenue numbers, any color you could provide would be helpful.
Thomas Schmitt, CEO
Yes. So Scott, weight per shipment has been increasing again. We always like it when that number starts with an 8. So approximately 800 pounds is what we have seen most recently, which typically aligns with traditional airfreight shipments that go from one airport to another. This tends to be lower than door-to-door shipments, yet we’ve had success over the past several months with our 3PL shippers focusing more on door-to-door shipments. So this uptick in door-to-door shipments has helped increase the weight per shipment. Additionally, as we are acquiring more high-value freight and moving away from lower-weight e-commerce, we see improvements in both the weight per piece and weight per shipment. To address your second point, length of haul is getting longer again, aligning well with our operational model, which utilizes team drivers on long distances. We're competitively strong in speed, and we experience low damages due to uninterrupted loading and unloading processes.
Scott Group, Analyst
Ultimately, what I’m trying to ascertain is the margin differential between legacy airport-to-airport business and traditional LTL freight.
Thomas Schmitt, CEO
Overall, profitability differs mainly by customer group. Airport-to-airport tends to be more profitable generally than door-to-door. However, we have customer groups, such as events or airlines, which benefit significantly from our services that cater to destination delivery, allowing us to benefit from those as well. In summary, airport-to-airport remains our most profitable segment despite our advancements in the door-to-door business.
Scott Group, Analyst
So you believe that, since you’re currently winning more door-to-door LTL freight, there could be a marginal mix headwind in the near term?
Thomas Schmitt, CEO
That’s a fair perspective. However, we remain focused on high-value freight priced appropriately, and we expect to see margin expansion within our LTL business regardless of the freight mix shifting. Thus, we anticipate improvements moving towards improving metrics on operational ratios and margins.
Scott Group, Analyst
Thank you for your time, guys. I appreciate it.
Thomas Schmitt, CEO
Okay. Thanks, Scott.
Operator, Operator
Next, we’ll go to Bascome Majors with Susquehanna. Please go ahead.
Bascome Majors, Analyst
Tom, you’re certainly not alone in having this year turn out in transportation differently than maybe expected in January or February. It's easier for us to understand some of those drivers with businesses that have a lot more public comps. Your business is unique with the mix and airport-to-airport focus. I’m curious if you could reflect on how you felt about the year in January or February versus now, and mention one or two meaningful drivers of that change in outlook. Also, how confident are you that these levers are nearing a bottom, or could any parts worsen or remain uncertain as we look ahead?
Thomas Schmitt, CEO
Yeah. Bascome, good morning. The initial planning for 2023 had us off the general expectation that inventory would be depleted by the end of Q2 to allow for normal shipment sizes and volumes to restart in H2 2023. This was the predominant belief entering 2023. Reflecting on Q2 and where we are today, it appears that view was too optimistic. Those cautious voices suggesting a more prolonged freight recession turned out to be more accurate. While we had initially anticipated some recovery, we are now shaping 2023 as a year where we need to win our segment gains with our customers rather than expecting growth in the overall market. On the LTL side, we certainly expected challenges as experienced in prior quarters, but were unexpectedly challenged more severely in our intermodal drayage business, which historically performed well. Specifically, April and May saw us hit unexpected lows. As we look forward, I believe we've surpassed the bottom, particularly in the LTL segment, buoyed by the Yellow impact along with building momentum. Although I believe other segments, such as truckload and brokerage, will remain sluggish, so this year will be challenging. To summarize, I sense that we’ve hit the bottom across all segments, with LTL experiencing the most pronounced positive momentum. I should note that Final Mile business remains solid, continuing to establish a presence in new markets and serving customers we hadn’t previously accommodated.
Bascome Majors, Analyst
I appreciate that comprehensive response, Tom, thank you.
Thomas Schmitt, CEO
Okay. Thanks, Bascome.
Operator, Operator
We have now Stephanie Moore from Jefferies. Please go ahead.
Stephanie Moore, Analyst
Hi, good morning, thank you.
Thomas Schmitt, CEO
Good morning, Stephanie.
Stephanie Moore, Analyst
As a follow-up to a previous question, I want to clarify the Q3 guidance. So does your guidance assume normal seasonality but not the uptick you’ve seen from Yellow diversion volumes?
Rebecca Garbrick, CFO
Yes, Stephanie. It does assume seasonality without necessarily incorporating the Yellow benefit. It focuses on what we can control from opportunities we have seen emerging in the pipeline.
Stephanie Moore, Analyst
Got it, that’s helpful. Can you discuss your customer mix or verticals where you're witnessing growth and where areas remain weak?
Thomas Schmitt, CEO
Certainly. Consumer goods import businesses are down significantly. We saw declines in January and February around 20-25%. When we talk to international forwarders today, they still cite sluggish imports, especially from Asia. Conversely, industrial goods space, including automotive and medical sectors, shows strong demand and recovery. Resiliency is apparent in those verticals versus the high-end consumer goods that remain under pressure.
Stephanie Moore, Analyst
That’s helpful. And on a housekeeping note, could you not provide the revenue per ton per mile excluding fuel for this quarter?
Thomas Schmitt, CEO
We did not disclose that this quarter, but it's a metric we closely monitor. Expect to see it in the mid-quarter update as we gain more insights into the quarter’s patterns.
Rebecca Garbrick, CFO
Yes. Stephanie, I don’t have the specifics by month, but revenue per ton per line haul mile excluding fuel for the quarter is up 1.5%.
Thomas Schmitt, CEO
That’s important for us, as it indicates whether freight mix and pricing strategies are moving in the right direction.
Stephanie Moore, Analyst
Lastly, I'm curious about your appetite for M&A. Given the environment, is there potential for opportunistic deals?
Thomas Schmitt, CEO
Yes, M&A is always a key aspect of our capital allocation strategy. We look to achieve double-digit growth through organic efforts and M&A. Our intermodal business, for instance, is focused on geographic expansion and strengthening our footprint. While we haven't pursued intermodal acquisitions yet this year, I would anticipate opportunities remaining as we progress through the year. Our earlier acquisition of Land Air Express exemplifies our strategy, and we constantly seek viable prospects to enhance our capabilities.
Stephanie Moore, Analyst
Thank you for providing all that insight.
Thomas Schmitt, CEO
Thanks, Stephanie.
Operator, Operator
We’ll go back to Jack Atkins with Stephens Inc. Please go ahead.
Jack Atkins, Analyst
From the call so far, Tom, I want to revisit your comment on the GRI capture rate this year being lower than in the past. Can you quantify that? What portion was captured this year, and what reasonable expectations might we have looking forward?
Thomas Schmitt, CEO
We normally expect GRI capture rates in the 70% or higher space. The mitigation usually only occurs during specific growth initiatives with customers. This year, we were below that 75% mark, while in the boom scenario of 2021 and 2022, we were higher. Moving forward, I expect our teams to engage with customers regarding mitigating GRI and running a catch-up strategy. Our aim is to restore closer to that 75% capture ratio while achieving mitigation for good reasons.
Jack Atkins, Analyst
Okay. Understood. I wanted to go back to the tonnage and revenue guidance. I find it confusing that with tonnage projected to be up 5%, revenue guidance seems down significantly. If ton is up, shouldn’t revenue reflect that more closely?
Thomas Schmitt, CEO
Certainly, let me clarify. We haven’t focused much on the impacts of fuel. In the third-quarter forecasts, we built in predictions from respected industry sources regarding fuel prices being low at around $3.50. However, current trends show forecasts rising. The revenue projections include this concern.
Jack Atkins, Analyst
Got it. On the margin impact of increased tonnage, given the heavier weight per shipment, that should lead to higher incremental margins compared to existing expedited LTL margins, correct?
Thomas Schmitt, CEO
Absolutely correct. Improved capacity utilization will benefit our margins.
Jack Atkins, Analyst
Thanks again for your time.
Thomas Schmitt, CEO
Okay. Thanks, Jack.
Operator, Operator
Next, we’ll go to Andrew Cox with Stifel. Go ahead, please.
Andrew Cox, Analyst
Hey, good morning, Tom, Rebecca. Andrew here for Bruce.
Thomas Schmitt, CEO
Good morning, Andrew.
Andrew Cox, Analyst
I wanted to check in on industry service levels. We're hearing increasing reports of missed pickups across the industry due to the surge in tonnage. Are you seeing this trend? If so, how are you balancing opportunity while ensuring network fluidity to maintain the positive progress achieved in recent years?
Thomas Schmitt, CEO
Yes, Andrew, that’s a topical question. This is something we emphasize in every quarterly business review with our customers. Firstly, I must commend our Operations Leadership and team. By any standard, we have the best service level within the LTL sector in North America. We confirmed a 99% on-time delivery rate and very few exceptions. These are real numbers. Though we aspire to improve further, we maintain solid operational principles. However, we’re aware of the coverage issues you're mentioning, and we leverage this as a topic with our customers. When they face challenges with other carriers, we take the opportunity to demonstrate that we are the best choice for sensitive freight.
Andrew Cox, Analyst
So you expect that some of this freight will eventually find a home with your services?
Thomas Schmitt, CEO
Indeed, that’s our aspiration, and we compete for that daily.
Andrew Cox, Analyst
Great. Following up, regarding your Final Mile business, we've heard that some larger peers have successfully implemented pricing actions over the last 6 to 9 months. Could you share your observations on pricing trends in the Final Mile sector?
Thomas Schmitt, CEO
Yes, competition will always be present, with many rebids in progress. We focus on service excellence across all Forward business units. Final Mile also exemplifies this principle, especially with the delivery and installation of high-value appliances. We aim to be competively priced, but service remains key. This focus reflects in our margins, where Final Mile expectations hover in the high single digits due to our service capabilities.
Andrew Cox, Analyst
Okay. Tom, Rebecca, thank you for your time.
Thomas Schmitt, CEO
Thanks, Andrew.
Operator, Operator
Next, we’ll go to Christopher Kuhn with the Benchmark Company. Go ahead, please.
Christopher Kuhn, Analyst
Yes. Hi, Tom, hi Rebecca, good morning.
Thomas Schmitt, CEO
Hi, Chris.
Christopher Kuhn, Analyst
I wanted to clarify Rebecca, does your volume guidance incorporate Yellow's volumes?
Rebecca Garbrick, CFO
Yes. Just to clarify, from the beginning of the year, we acquired Land Air, gaining new terminals and inaugurating our Chicago terminal in Q1, aiming to win new business through these channels. Thus, while maintaining focus on seasonality and growth, we've built projections around these established pipelines and opportunities.
Christopher Kuhn, Analyst
Great. You mentioned the intermodal sector earlier, and I believe you indicated that you've seen the bottom in Q2. Can you provide clarity on what’s contributing to this shift? Are you predicting an increase in import activities or a reduction of assessorial charges?
Thomas Schmitt, CEO
Correct. Despite sluggish imports, we see an increasing activity pipeline within the intermodal sector. The team is focused on winning larger slices of the pie rather than relying entirely on market size growth, which encourages me about our prospects in Q3 compared to Q2.
Christopher Kuhn, Analyst
Okay, perfect. Thank you, guys.
Thomas Schmitt, CEO
Thanks, Chris.
Operator, Operator
And we have no additional questions in the queue at this time.
Thomas Schmitt, CEO
Well, thank you, John, and thank you to all of you dialing in for the call.
Operator, Operator
Now that concludes Forward Air’s second quarter 2023 earnings conference call for today. Please remember 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.