Earnings Call Transcript - FWRD Q4 2020

Operator, Operator

Thank you for joining Forward Air Corporation's Fourth Quarter 2020 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, Mike Morris. By now, you should have received a press release announcing our fourth quarter 2020 results, which was furnished to the SEC on Form 8-K and on the wire yesterday after market closed. Please be aware that during this conference call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others about the effects of our business efforts on each of our businesses; the future plan of our Pool business; steps to expand our operations organically and inorganically; the company's outlook for first quarter and fiscal year of 2021, including expectations for revenues, tonnage, net income per diluted share, free cash flows and operating margins; the expected impact of growth and strategic initiatives; and those other forward-looking statements identified in the presentation. These statements are based on current information and our current expectations. As such, they are subject to risks and other factors that may cause actual operations and results to differ materially from the results discussed in the forward-looking statements. For additional information concerning these risks and factors, please refer to our filings with the Securities and Exchange Commission and to 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. And now I'll turn the call over to Tom Schmitt, CEO of Forward Air.

Tom Schmitt, CEO

Thank you, Grace, and good morning to all of you on the call with us. I want to start by expressing a heartfelt thank you to all of our teammates, drivers, customers, and other business partners. You all celebrated the holidays this year a little differently than normal. In fact, you brought all of our business back from an invasive cyber-attack and ensured that we still kept all of our customer commitments. So thank you for that and for the customers and team Forward going side-by-side, making for a clean entry ramp into 2021. Before I discuss our entry ramp into 2021, let’s briefly look back. The last time we were on this call in October, I made six commitments and talked about how we are keeping those commitments around density and more essential freight. In December, 20% of our new closed business in LTL was medical supplies; pricing actions included both temporary and permanent ones; organic expansion; no pause in accretive M&A; and maintaining precision in execution with record service levels during a very tight holiday period. Let me take these commitments and discuss our entry ramp into 2021 by sharing five observations that make me very confident in our journey towards our double-double; double-digit annual growth rate and double-digit margins. The first observation is a strong off-ramp. To achieve a strong on-ramp into 2021, you need a strong off-ramp from 2020. If you look at our fourth quarter, the first 10 weeks of that quarter were clean, representing an operational beat. That clean operational performance leads into 2021. Secondly, we have early momentum. January has been very strong. In our core LTL business, daily tonnage was up 10.9% year-over-year in January; LTL shipments were up 14.4% over 2020. Third, we had a robust general rate increase. There are three certainties every year: Christmas, Easter, and a rate increase. This year, we had a 6% rate increase in LTL and the strongest capture rate that I've ever seen. Fourth, our continued organic momentum extends beyond the volumes I mentioned. We added six new terminals last year and will continue investing in our LTL core footprint, with more added this year to provide more access points for our customers. Final Mile continues to thrive, and we have strong truckload and intermodal momentum. Lastly, the fifth observation is our inorganic precision execution. We secured another strong intermodal tuck-in that enhances our geography across the Midwest. Proficient is a great company, known for first-class service—exactly what we want on our team. Inorganic also means sometimes a graduation; we closed the sale of our Pool business, which did not fit our asset-light portfolio despite fitting our narrative. We found a suitable buyer in Ten Oaks. I'm confident the team will continue to excel in retail distribution and other verticals. Our Forward team and I will laser-focus on keeping the main thing—the main thing—precision execution of a clear roadmap for maximum shareholder value. Now, let’s open the lines for Q&A.

Operator, Operator

Thank you. The floor is now open for questions and comments. Our first question is from Bruce Chan with Stifel. Please go ahead.

Bruce Chan, Analyst

Tom, Mike, good morning, and I really appreciate the format here. I want to start off with Pool. It's great to see the sale there. But when I think back to the acquisition of that business, and I think some of the motivations and outlook for diversification and growth were the same as maybe it is now for the Final Mile business. And I know it wasn't during your tenure, but when you think back to USA Carriers and Pool, and TQI, what were the differences with those businesses versus what you're doing now with some of your other growth strategies in Final Mile? I know Tom, you already addressed some of the asset-heavy nature of Pool. But is there anything that you learned from those acquisitions that you can apply to lessons now in Final Mile?

Tom Schmitt, CEO

I think, Bruce, first of all, good morning, and it’s good to have you with us. Fundamentally, if you look at Final Mile, it's inherently a high growth business. Gartner actually says it’s going to grow in the high-single-digits for many years. We are participating in that growth. We have a special sauce with Final Mile, where on the revenue capture side we work with some of the best retailers. We ensure that when you order a fridge, the kitchen floor won’t be scratched. Our aim is to maintain and enhance the customer relationship with our world-class retailers who pay us a premium for that service. If we can achieve that, while leveraging synergies with our local LTL team and Final Mile, we have a secret sauce that yields good margins. The same applies to our Truckload operations, which benefit from similar over-the-road synergies with LTL. Additionally, Intermodal provides a strong second leg with synergies in SG&A and customer sharing across services. When analyzing based on customer pressure and the future of brick-and-mortar retail, we see growth opportunities. Although Pool fit our overall narrative, it did not align financially with our asset-light strategy.

Bruce Chan, Analyst

Okay, great. That's good color. Just to be very clear, you are keeping the Truckload business. That's getting integrated, and you're finding synergies there on the linehaul side. Are there other levers that you can pull to right-size and improve that business outside of the integration of the linehaul networks?

Tom Schmitt, CEO

Yes, Bruce, to clarify, the Expedited Freight business benefits from a wonderful interplay between Final Mile and LTL locally, and Truckload and LTL on the road. The recruiting side and selling side of Truckload and LTL support each other. We're also expanding into Truckload brokerage, which is asset-light with tremendous margin potential.

Bruce Chan, Analyst

Great. Just one last one here before I turn it back to the queue. Tom, since you started at Forward Air, you've made it your mission to increase pricing. You mentioned to expect GRIs like you expect Christmas and Easter. But for a premium product, Forward Air might be able to extract even more pricing. Can you speak to the new technology tools you're implementing and whether there's an opportunity to get even more aggressive in that regard?

Tom Schmitt, CEO

To use Nike's terms, being excellent in pricing will be a race without a finish line. We’ve improved by incorporating better tools and hiring significant expertise in the LTL space. Over the last year, we became more sophisticated about where special handling is needed and which congested geographies demand a premium to invest in drivers. Additionally, we’re focusing on specific customer segments and optimizing pricing across various lengths of haul things to ensure we competitively price all moves. Ongoing pricing discipline is critical, and we’re ramping up efforts in this area. There’s untapped upside, and we’re committed to capturing it.

Bruce Chan, Analyst

Okay, great. Thank you for the time. I’ll hop back in queue.

Tom Schmitt, CEO

Thanks, Bruce, and thanks for the conference this week.

Operator, Operator

Thank you. Next, we’ll go to the line of Jack Atkins with Stephens Incorporated. Please go ahead.

Wade Schaller, Analyst

Good morning, Tom and Mike. You’ve got Wade Schaller on for Jack this morning. Thanks for taking our question.

Tom Schmitt, CEO

That’s what I call an upgrade, Wade.

Wade Schaller, Analyst

On the LTL network, I believe you mentioned at least six terminals this year. How many of those are new markets? How many of those are additions to bolster density in existing or underserved markets? And what do you expect the impact of those additions to be this year?

Tom Schmitt, CEO

This is more of a math exercise. The answer, Wade, is it’s going to be a combination of new locations and agency conversions. Our current customers have indicated to us where they need service and we’re addressing those demands. We’re also using freight data to identify shortfalls in our current network compared to demand. We’ll implement agency conversions and co-locations with Final Mile locations as we expand our presence. So, it will be a combination of these factors.

Wade Schaller, Analyst

Okay, great. That's very helpful. I'd like to switch gears to Intermodal if I could and dig into Proficient and more broadly the work that you've been doing over the last year on the Intermodal piece of the business. Could you speak to the strategic importance or value of a national intermodal drayage network and what sorts of scale benefits you derive from that?

Tom Schmitt, CEO

Intermodal is primarily a regional and multi-regional business. Some of our customers request a more national presence. A national presence enhances decision-making for us. Good intermodal drayage is critical for meeting our precision execution standards, ensuring fast transit times and low damage ratios for premium products. That's our goal.

Wade Schaller, Analyst

Awesome. That’s it from me. Thanks so much.

Tom Schmitt, CEO

Okay. Thanks, Wade.

Operator, Operator

Thank you. Next, we'll go to the line of Scott Group with Wolfe Research. Please go ahead.

Scott Group, Analyst

Hey, thanks. Good morning.

Tom Schmitt, CEO

Good morning, Scott.

Scott Group, Analyst

I want to ask about the margins on the expedited business. You're at I guess a 7% last year and you're saying you can go to 10%. There are mentions out there that it should be closer to 20%. What do you think is possible here in terms of margins? How has the mix changed for LTL versus non-LTL margins?

Tom Schmitt, CEO

Yes, Scott. You summarized it well. Historically, our business was primarily Airport-to-Airport, yielding higher margins. However, the market has contracted and key customers have developed their lanes. We’re augmenting this by expanding into door-to-door business, aiming for double-digit margins.

Mike Morris, CFO

The historical average for LTL margins has been in the mid-double digits. Our goal is to reach a 15% margin, especially given the challenges of 2020 due to COVID and the cyber incident. We believe with the right strategies, we can achieve and exceed our margin goals.

Scott Group, Analyst

Okay. That's helpful. I'd like to stay on this because it's important right now. Where do you think LTL is today? Truckload was mentioned at 5%, where do you think that is today? And what about Final Mile?

Mike Morris, CFO

We don’t disclose individual segments, but we aim to reach historical levels for LTL at around 15% while projecting truckload to reach over 5%. Final Mile has been stable in the 7-10% range. We have the tools and strategies in place to improve our margins across the board.

Scott Group, Analyst

On the LTL side, can you explain why we discuss 14% or 15% for margins and not the historical 20%?

Mike Morris, CFO

That's the goal we need to attain to reach the next level. We aim for a mid-15% margin, and from there, we can aim higher, but precision in execution is necessary to reach that goal.

Tom Schmitt, CEO

Achieving that 10% for Expedited Freight is a step, not the destination. Additionally, we need execution focus on customer segments and pricing strategy.

Scott Group, Analyst

Pricing will help, but what about on purchase transportation? What if anything are you doing differently there?

Tom Schmitt, CEO

Those are two areas to consider. Purchase transportation is critical. We have been operating in single digits for PT and must ensure compensation for congestion and our driver retention measures.

Scott Group, Analyst

Thank you for the time, guys. I appreciate it.

Tom Schmitt, CEO

Thank you, Scott.

Operator, Operator

Thank you. Next, we'll go to the line of Tyler Brown with Raymond James. Please go ahead.

Tyler Brown, Analyst

Hey. Good morning, guys.

Tom Schmitt, CEO

Good morning, Tyler.

Tyler Brown, Analyst

Margins are key here. If we're trying to bridge to the mid-teens, is it driver management through PT, robust pricing, or are there other drivers to consider?

Mike Morris, CFO

Costs are driven by multiple factors, but not by utilities. Operating safely, technology investments, and our integrations contribute to recruiting, retention, and operational efficiency, driving margin improvement.

Tom Schmitt, CEO

Safety is paramount, and we must capture the value we create for our customers. This is an ongoing effort to improve operations and maintain strong efficiencies.

Tyler Brown, Analyst

Is Towne adequately integrated?

Mike Morris, CFO

Yes, Towne has been fully integrated into Forward Air operations.

Tyler Brown, Analyst

Okay, that’s helpful. Just briefly on cohabitation, how do you feel about door pressure as you trend back over four million shipments a year?

Mike Morris, CFO

Cohabitation is done in areas where there is sufficient capacity. We can modulate as needed based on market conditions and driver capabilities.

Tyler Brown, Analyst

Okay, thanks for the time.

Tom Schmitt, CEO

Thank you, Tyler.

Operator, Operator

Thank you. I have no further questions in queue. That concludes Forward Air's Fourth Quarter 2020 Earnings 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.