Q2 2021 Forward Air Corp Earnings Call
[music].
And.
Okay.
Thank you for joining forward air corporations second quarter 2021 earnings release conference call.
Before we begin I'd like to point out.
And 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 Dot forward Air Corp Dot com.
With us this morning are CEO, Tom Schmitt and CFO.
Rebecca Gardy break.
By now you should have received the press release announcing our second quarter 2021 results, which was furnished to the FCC on form 8-K and all.
On the wire yesterday after the market close.
Please be aware.
There that certain statements and the company's earnings press release announcements and on this conference call are making forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 include.
Including statements, which are based on expectation.
Intentions and projections regarding the company's future performance.
Anticipated events or trends and other matters that are not historical facts.
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.
<unk>.
For additional information concerning these risks and factors.
Please refer to our filings with the Sip.
And he's 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.
Are there as a result of new information future events or otherwise.
And now I'll turn the call over to Tom Schmidt.
E O of forward Air.
Thank you Tanya and good morning to all of you on the call on that.
Our last call in May and I did reinforced 5 observations that I had made in February.
<unk> debt gave me confidence for our doubtful.
It will double and.
And as I've said in May we are hitting our stride and that if you.
Go a bit further back all the way to March of last year, you could actually argue we were crawling last year and March and walking jogging.
Hitting our stride by May with our first quarter and now we are running.
And if I go back to those 5 observations the first 1 was.
Our beat we had a good beat in Q1, we had a a stronger beat now in Q2 in fact at 1 of our analysts pointed out we did have a double double the first time since 2018.
Double digit margin and as a company and double digit revenue growth.
The second observation is momentum.
We actually finished the quarter with the month of June.
And the best month ever in the history of our company topline and bottom line.
And more.
And revenue, we never had more operating income that's a super strong and to ramp into our third quarter.
The third observation is around disciplined pricing.
Keep being very very surgical in fine tuning by weight by distance accessorial, So that we actually can move our customers freight.
Very very smoothly and we can do it also economically good for them and good for us ultimately.
The false observation is around organic growth, we keep doing that in fact last week, we talked about opening up a new access point for our <unk> business and Vancouver, Canada.
Third location that we.
Up north.
In addition to Toronto, and Montreal, and worthwhile for Us to remember I always said, we're going to do more with our trading partners North and south both of them are on the Olympic spirit podium as 2 of our top 3 trading partners.
These will be doing more with them.
And values domestically when you look at organic growth.
Currently have record weight per shipment, we never had higher weight per shipments and <unk> and we have right now.
And then the fifth observation and gives me confidence is around inorganic growth.
Last time I talked about for the first time in 6 years, we actually didn't.
And just by tuck in acquisitions and intermodal a final mile and we actually bought.
And acquisition chain P. All express in our core <unk> business, there will be more in the making here too we are running and Avenue running we actually get kind of a run was high and I think that will show 2 going forward.
Forward commercially we are going to be even more surgical with our customers on ensuring that we move the air freight on time without any damages. We are super focused on Palletize nation on safe stacking dimensional focus and we are working with our customers hand in hand debt the freight that they give.
Give us will be in a shape debt will be smoothly running through our system and will be delivered on time without damage.
And as I had mentioned we are still in a.
Most of the Q4, and 2020, 2 bringing our events business back we see some of that now in fact on Sunday.
A couple of days.
And so now I'm heading out to the National Home Delivery Association conference in San Diego.
Im going to meet with some of our customers some of our teammates and it's.
In person event.
So more of those coming back a little bit now and the third quarter more and the fourth quarter and definitely going into 2020.2 debt will help us also.
Operationally.
You saw on the release, we have and operational enhancement initiatives underway, where we fully expect.
To see profit improvement in our core <unk> operations from having taken a fresh look we actually called the project Eagleye, taking a very fresh look how we.
Actually route and what we do inside our 4 walls inside of our terminals.
M&A.
I'd say, we have a proven machine in place here and we're going to definitely take advantage of that machine more going forward.
And again organically, let's not forget we keep expanding and the last 12.
And we actually added 10, LDL terminals to our network and we're going to keep that pace going over the next several quarters, so running indeed and Apis.
Obviously as we keep running we also need to make very thoughtful consideration, how we actually allocate our capital.
And on that topic.
Brand, new CFO, Rebecca to operate and my partner here.
And I'll come to the earnings call is actually going to take us through some of our thoughts around capital allocation before we open it up for questions and answers so with that over to Europe, Becca and great. Thanks, Tom and happy.
12 months all of you today, and I look forward to playing a bigger role and driving profitable growth for air and.
And now you've read our earnings release, so I'm not going to repeat our solid second quarter results. Instead like Tom mentioned, let me I'll freeze and comments on our capital allocation, our overall capital allocation philosophy remains unchanged.
And we'll use our cash flow to cover our capex needs, which we expect will remain modest over the medium term. After we complete our Columbus investment our free cash flow will continue to support our dividend.
Which we would look to increase over time and commensurate with the increase in our earnings and the past 7 years, we've raised our dividend.
We were tiny.
When we see M&A opportunities, we will ensure that these can be realized as we recently did with our <unk> acquisition and.
As a side note for your modeling purposes, we expect JMP haltzman rate revenue contribution to be about $19 million per year on a run rate EBITDA contribution to be about 1 point.
6 million per year and.
The excess cash flow will be returned to shareholders and the past 6 years, we've repurchased over a quarter of a $1 billion of shares and year to date, we've repurchased roughly $34 million of shares.
And that to containing our repurchases in 2021 and beyond since we believe and our growth.
And with that I will turn it back to Tony to open the line for Q&A.
Thank you the floor is now open for questions and comments if you wish to ask a question. Please press 1 then zero on your telephone keypad.
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Our first question comes from the line.
Tyler Brown with Raymond James Please go ahead.
Hey, good morning, guys.
Good morning, Tyler Hey, Rebecca Congrats on the new position and I just wanted to come back and look at the guidance on a sequential basis. So this is on my math and maybe wrong, but I think on the mid point.
Point, you're looking for revenues to maybe be up slightly call it $10 million, but youre looking for maybe a slight decrease and EBIT.
Even excluding that <unk> <unk> charge and again I'm talking kind of sequentially Q2 to 3 so a.
Would that be the case and do you what is the incremental pressure there sequentially that would cause revenue.
And to rise and maybe EBIT slightly slightly fall.
Yes, my math way off.
While we are pretty good with math Tyler So it's not your math and typically when you look at Q2 Q3. If you go back 2018.2019, let's put aside last year of course.
And the math is a bit challenged.
And just last year.
What you typically see with us and many of our other transports that we compete with.
Q2 tends to be the second strongest quarter Q.
Q3 is a bit.
Slower.
On average we tend to have 8.2 cents and sorry 8 to 10.
Yes.
Decline between Q2, and Q3, so thats, what historically, even and we kind of pound for pound run at the same level of patient and.
Performance, what we typically see.
We expect because we have good momentum going and we expect actually less of a decline and we typically see between Q.
2 and Q3, so when you look at what 11 and for Q2, and we guide to a 105. So that's <unk>. That's <unk> frankly would probably be zero if not for 2 things 1 we do have and operational enhancement initiatives, which actually has short term expense which is.
Roughly speaking of $1 million.
In Q3, and we're going to see a lot of payoff from that and I'm very very confident.
Fresh look inside our terminals a fresh look at rerouting.
But so he could.
And from a onetime perspective, you could add debt back if you choose to do so the second.
And we actually we are doing as.
Many of our associates and teammates got wiped out last year of and and came to any type of incentive.
And that was fair.
But unfortunately it was the reality for many people across the country and say most of the case here at forward Air.
We are over accruing.
And right now for our profit sharing and short term incentive for our teammates.
And if that you also see and Q2 already and in Q3.
If that over accrual did not take place.
<unk> of very very good kind of investment into our operational power did.
Not take place you would actually not even see the typical decline from Q2 to Q3, which again on average is about 8% to 10 cents EPS. This year, you're going to see actually on paper <unk> and if not for the 2 things I. Just mentioned you wouldn't even see a decline so the momentum is actually unusually.
Really.
At this time.
Okay. Okay. That's helpful. Yeah, Yeah, absolutely yeah. It does it sounds like there is just kind of some incremental things sequentially and I know it does fall sequentially normally so that's very helpful. But I do want to come back. So I think on the website, there was kind of a bullets and out.
'twenty, 1 peak season, and 1 thing that stood out to me was a change to your peak capacity surcharges. I think you guys are kind of tying those to the internet truckstop load to truck index. So can you just talk a little bit about this change and I surmise. This would help hedge your P T through peak.
Yeah, I mean for what they're doing Tyler and I think can be actually even talked about this before.
You you see me it used the word surgical robot.
Job number 1 for us and it seems to keep our.
Teammates safe on the road lots of investments there job number 2 is is keep the commitments to our customers.
About when we talk about keeping people safe and keeping our commitments.
To our customers that means we have to have top quality drivers and we have to have them and the right places. So a lot of what we're doing in terms of our destination pay for drivers like making sure we pay them extra to go to places, where we need more of them to be for.
And runs from those destinations we do that by now we talk about surcharges in specific locations higher than in other locations tied to basically the volumes that we see there. There is 2 reasons for doing that 1 is for us to collaborate with many of our customers can be somehow find a way to bypass.
Outbound locations because it's good for them. It's good for us because we can then can keep our commitments to them even more safely and we also can keep and more economically. The second thing is if and when we cannot do that.
Last time, I checked it and not a nonprofit so we actually do need to make sure. We recover the cost of it is we can actually pay.
The extra sense and extra dollars to our drivers so so yes.
Destination pays very surgical by location and the peak surcharge is very surgical.
And if you look at it from a flipside perspective, if there are locations, where there is no congestion where there is no reason.
And actually to incur any incremental costs that we.
If we manage our business balance should not be incurring and we also shouldnt be charging and extra surcharge. So thats why we actually are a bit more.
Precise a bit more surgical with those surcharges and <unk> historically.
Okay. Okay. That's helpful and then just 1 last.
Clarification, but on the event type revenue. So is there kind of is there and implied pickup in Q3 or it sounded like maybe that was more of a Q4 and in 'twenty 2 event, but I'm just kind of curious what's implied in the guidance there from that perspective.
Yes, and so.
And I.
And for Albany Medical store that and your memory and hold it against me.
And I, if we see some of that event business coming back in Q3 debt.
And would help.
For us to actually beat our guidance, we didn't put anything and therefore really.
I mentioned, the conference and I'm going to on Sunday, and that's real it's happening some of that.
And is happening around the country, but not at the levels that we're going to be seeing and Q4 and in 2022. So we did not put any of that into Q3 any debt, we get is going to be upside to the guidance.
Okay very very helpful. Thanks.
Thanks Tyler.
Thank.
Thank you. Our next question comes from the line of Todd Fowler with Keybanc capital markets. Please go ahead.
Hey, great Good morning, Tom and Rebecca Congratulations.
Alright.
Good morning, Tom I wanted to ask on the margins within expedited freight obviously, a lot of good things going on and I know that the mix.
And with.
Truckload and final mile and Theres, a little bit different than some of the pure play L Tls, but still.
Still above 90 and to Tyler's math, I think that you're probably still going to be above 90, maybe and the third quarter. So as we think about the yield environment and the tonnage environment.
What's your expectation on what's it take to move back into the Eighty's from.
And or perspective and expedited freight.
The main thing is obviously, how we're going to keep getting better with our core <unk> business again, the way we look at expedited freight is free.
Business units collaborating very very closely and tightly.
<unk> is kind.
Thesis to unit, where we recruit from 1 fleet between and <unk> actually also route together so that there may be a LDL and move out and the truckload move back final mile. There's a lot of co sharing off locations with LDL and so we do actually look at the margins from Mike just making sure that they all make.
Their contribution.
By each 1 of those parts of debt expedited freight segment, but they really are 1 business unit and <unk>.
<unk> said that I did call out.
In March April debt in <unk>, we actually looked at it kind of separately and be allocated cost inside of expedited freight properly we have seen and <unk>.
And 15% margins or putting it and your language Todd and we have seen 85 hours. So we know it's possible. We also have seen with this quarter a double double is possible.
I expect our business to get better not worse, so if you're looking at a 10% margin as a company right now.
And close to 10% expedited freight I expect that number to go north.
I was pretty clear and stating that.
We are seeing double double right now in months and quarters like the second quarter right now I expect to see that for the entire year.
Most likely next year already and for that to happen.
GAAP and <unk> clearly has to lead the way towards an 85 and <unk>.
Okay got it yes, okay that makes sense and then on.
Just as a follow up for me.
Very strong yields during the quarter.
With fuel up almost 9%.
Ex fuel close to <unk>.
Now can you give us a sense of kind of how you see core pricing.
And if you're able to strip out maybe some of the day accessorial and the surcharges that are happening or how do we think about what's happening with kind of core pricing and your business outside of what youre doing to get.
Compensated for the higher costs that you're experiencing right.
Now.
Pricing.
Has never been kind of.
Overall, I think if I look at us and if I look at some of our best peers.
Pricing I think is being better executed and that are designed into first place than it ever has been and.
Again, we talked about it and the past some of.
The parcel companies come off the rails have been leading the way over the last 2 or 3 decades.
<unk> players old Dominion first others after that <unk> and us included.
Following and lock step and frankly, we are in a fast follower catch up game and we're getting better by the quarter.
We can still get.
And that's why I do see upside, it's very disciplined I mentioned before the Cri debt, we put in place in February we never as a company had a take rate the way we had at this time I expect that to continue so and we have <unk> next year and February I expect the take rates to be worthy of what they were at this time and we had a 6% nominal.
Nominal Cri and we got the vast majority of that implemented they were very very few customer exemptions and exceptions.
Debt where contractual.
So if you're asking Todd kind of pricing environment.
<unk> levels.
On the best companies, including Us.
Get better on our space are focused on safety and on customer commitments, we keep those and whatever investments we need to make and whatever pricing we need to put in place to make sure that we keep our teammates safe and that we keep our customer commitments, we are doing and for that to happen I expect pricing to be tight I expect pricing actually.
And to continue to.
And to be very disciplined and I expect the type of pricing environment that we saw in 2020.1 continue throughout the year and into 2020.2.
Yes that makes sense, Tom So I guess, if I'm trying to strip out some of the mix impacts and the profile changes within the revenue per hundred weight. It sounds like maybe the best proxy for kind.
Pricing right now is the level of the <unk> that you put in and so we're trying to think about kind of a same store sales number kind of in that.
Mid to high single digits right now is that the right way to think about it.
And that's exactly right okay, great. Okay. Thanks for the time this morning heavily on weekend.
Thank you.
Our next question comes from the line of Bruce Chan with Stifel. Please go ahead.
Yes.
Tom and good morning, Rebecca and thanks for the thanks for the time here.
Tom.
Hey, Tom.
You mentioned that <unk> weight per shipment is higher than it's ever been.
Corp, right now and I'm wondering if you can kind of break that down a little bit for us is that due to TL overflow was that intentional freight selection there on the industrial side, what's kind of happening with that weight per shipment number.
Bruce it's mostly the second of the 2 pieces that you debt.
And we've kind of suggested to what we're doing and this goes.
And back to.
Sure.
US as a company.
Getting better with tools and processes. So on the commercial side, we put on.
Our version of a CRM, it's basically and adopted version of Salesforce Dot Com and place a couple of years ago, Scott share our commercial leader has.
<unk> has been working extremely surgically with the sales team on making sure that we actually look at the hundreds of thousands of potential shippers across the United States and Canada and then we go buy SAIC coat, we go by.
Specifics.
Fix our company size and then and then we see okay.
<unk> time, the density and the weight per shipment tends to be higher into following Z codes. As an example, industrial spare parts of automotive and medical equipment and then what we do is industry and to call cycles and sales cycles, we overemphasized.
And I suppose so if you would look at today versus 2 years ago, how many medical equipment companies do we actually call on debt numbers exponentially higher now than it used to be 2 or 3 years ago. So it literally is.
Picking and selecting the shippers that have the.
Profile.
Freight that fit premium requirements no damage.
Hi, reliability typically faster servers, but also fits the density and rate requirements. So it's typically heavier shipments and then again certain FSIC codes sink.
I think medical equipment and that walk through of Chicago.
When I walk through Columbus last a couple of weeks ago, you can just and you can come along and Bruce I know you did in the past, it's very obvious and as you walk through what those assets close it off.
Perfect premium freight and we want what they look like and then you look at the created medical equipment.
And exactly.
<unk>, that's what we were more off.
And thats, what kind of selecting.
That's great color and maybe just a follow up you talked about more of a dimensional focus and <unk> and <unk>.
You've spoken in the past about getting more disciplined about validating customer freight. So maybe if you could just give some comments around what you're doing either.
It's a side on.
And the investment side.
Whether thats investing and dimensionalize or doing more re weighted the terminals I think that'd be really helpful.
So the more equipment to help do what you just described that the very and we're doing definitely debt and I also expect the outcome of all.
Our project utilized 2 extra reinforced the importance of Dimensionalize Singh of re way and so.
And that in fact, what we actually hit our customers are saying, we're moving is what we are moving and from a rate wise from a rate perspective from a dimension perspective, so absolutely that is happening.
On the <unk> and.
From a freight overall perspective, we are getting super disciplined and some of the things that we actually enforcing now we actually put in place years ago.
Actually our operating guidelines say, we do not accept kayaks, except for over the last several years we.
And with our customers and we accepted kayaks.
At the end of the day. This is actually not a good thing for us to do and for our customers. It is not a good thing either because it clogs up the system. So we actually helping them out with 1 small piece of.
Freight quality, that's not good for them and got good for us and clogging.
And the movements of everything else that they rely for us to move and so we and as of August and then September there is a little bit of.
Of our scaling timeline.
We actually are enforcing some of those rules, we will not accept kayaks, we will not accept drugs and our system, we enforce palletize station we enforce.
Stacking when you have a sense supersensitive equipment stacked 7 high.
I don't like the odds of you getting the treadmill in perfectly.
Secure and damaged shaped the way you actually expect to get it when you move your free.
And with forward air so.
And there's a lot of sensitive collaboration with our customers and this is a bit like medicine.
And then we work with our customers on those things it may not always tastes, good and that's make them and us better because they keep their customer commitments, we keep hours by enforcing the rules were talking about so over the next 6 weeks.
And you'll see us strictly in force.
Palletize Asian dimension for most goods not longer than 8 vote.
No <unk> no rugs and what this will do is it both.
The entire flow throughout our system for our customers.
And smoother and they can rely on us to get their goods and air shipments to the destination and damaged and on time at an elevated level to what theyre already seeing today because of us, making sure and clogging the system.
Okay that makes a lot of sense and then maybe just a final follow up here.
When you think about what you just laid out and then you kind of lay that on top of your final mile growth strategy is there any conflict there, especially as you start to integrate those final mile locations with with your traditional <unk> locations.
And Thats, Great point, I mean, we do need more capacity. If we are if we are there.
<unk> doubled.
Total double company for many years to come that we intend to be and that we will be the apathy and need for additional capacity.
And especially Bruce and as you pointed out if we use.
A small fraction of our locations to hold those high value appliances for our final mile business, That's obviously, you're using up capacity and green.
What is the need for us to find more capacity. So when we did what we did with JMP Hall, just a few months ago basically getting additional capacity for our <unk> business in the greater Metro Atlanta area and in the southeast Georgia market that was an appetizer for whats going to follow we will.
Green finding organic ways.
Opening more terminals and.
Moving next week to.
And our inland Empire terminal, which we opened up last year, and obviously 1 of our top 15 terminals and our system.
But we also are looking for creative ways to do more chain be hawks, and it could be bigger JMP holds where we actually.
Find Ics independent contractors and find terminal capacity not only by keep opening terminals there will be 6 to 8 to 10 every single year last year, we had <unk>.
This year, it probably will be more than that and next year might be more than that but in addition to that what the <unk> haul great.
And will be for types of kind of cost is more appetite for that type of inorganic LDL and expansion also.
Okay terrific. Thank you.
Thanks Bruce.
Thank you. Our next question comes from the line of Scott Group with Wolfe Research. Please go ahead.
Hi, This is Jake on.
Right.
Thanks for taking my questions.
Jake clearly and upgrade.
Yes.
So there is.
Clearly been a lot of disruptions on the ocean and supply chain.
What impact are you seeing from port and rail congestion on your intermodal business.
And on for Scott.
It's creating choppiness and.
And this is.
Jake as you pointed out I mean, this is and supply chain industry issue and frankly, it's actually not just the <unk>.
Let's start with rail.
We talked about this I think in the past when we had like several.
100 ships waiting outside the port of La to even just dock.
A lot of what we talked about 10 minutes ago about.
Kind of congested places destination peso that more drivers go to these places picking up things all of that is very real and I fully expect that we see.
Choppiness for many more months to come so for our intermodal business is difficult because.
We don't know exactly when those ships will be and loaded it could be a weeks' delay could be 2 months delay.
We don't know.
And of how but the capacities of the railroads in.
Debt congested ports.
And so.
You could actually argue to some extent there is a small part of that actually helps us because by the time.
Debt premium drayage is actually off the ship by the time it makes its way with our rail over the country into the Midwest.
And those ample and it gets into the rail yard, where we actually and a more on branch business take the freight and then get it into the warehouse where free.
<unk> day, we're waiting for it for days weeks and in some cases months.
Our customers are more than willing to make very very certain that we actually have.
All the slack.
And the cleanup that we reliably and safely at maximum plausible speed and get that trade to them because again, they have weighted for days weeks and months and some cases, so at the back and it actually helps us a bit because there was so much stop and go in the system that there is a premium to be paid for.
Like is day to not adding to that stop and go but in the bigger scheme of things. The Choppiness is significant and in all fairness over the next several months.
We will continue seeing debt very tiny example.
And I'm sitting here on for BRCA, and our support office here in Atlanta.
We had to push back.
Right.
Upgrade we are building out the operation side of the building and a little bit and so theres a renovation taking place we pushed it back twice now starting next week actually we were supposed to start in March and then in June we had to push it back a couple of times because something in the supply chain was almost certain not to be here on time.
US for as part of the construction materials. So this is literally and in any 1 of us including <unk>.
You take when you order during the last debt dishwasher or a refrigerator and the odds of you having to wait longer than you.
Like the 2 are pretty high.
So this is real it's got its Dave.
For the rest of the year, probably even slipping over into 2020.2.
Part of debt.
Stop and go is actually helpful to our business because our customers appreciate us keeping the commitments in times like this even more because a lot of what happens around us does not show.
With us and delivery of those commitments.
But overall the choppiness is not something that anyone and bus appreciates.
At least of US any 1 of us personally, but and you wait for that fridge to come on that pellet and bike or whatever it ends up being and it takes weeks and months longer.
My sense is is that when we had this conversation a year from now it probably.
We will have cool down and somewhat normalized when we have this conversation 3 months from now Youll have the same conversation, we're having right now.
Got it thanks, and then you've given some pretty helpful.
Margin targets around your assets around the different segments of your expedited business.
Could you speak a bit on where the events business would sort of fit into that.
And we should think about the margins as that comes on line.
Yes, so, but whatever range that you're thinking obviously, what I talked about March and April and said <unk> actually when we kind of front of LCL business.
And have pound for pound.
And and.
And without any kind of distraction, whether it's operational improvement initiatives, which is a positive distraction or even like accruing for teammates variable compensation to make up for some of what they lost and the yields where they are probably work more than ever which was last year and got paid less than ever.
Ever.
And so if you take a strip all that out we have seen and 15% LTM margins day events business that we're talking about.
Put it very bluntly because of the high need for liability is amongst the most profitable <unk> business, we have sort of 15 and average.
I'd look north of that for.
And that business and as the reason for that and think about and I use the <unk>.
<unk> on Taylor Swift concert that moves across the country debt.
Zero slack that equipment has to be there by 7 am on the day off if it's not there there is no concert and your.
Your daughter argues that and we'll be very.
Disappointed.
Alright got it thanks for taking part.
Appreciate it thank you Jake.
That concludes forward Air's second quarter 2021 earnings conference call.
Please remember that this webcast will be available on the investor.
And the interventions section of forward Air's website at.
At Www Dot forward Air Corp, Dot com.
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