Q3 2022 Forward Air Corp Earnings Call
Yeah.
Yeah.
Thank you for joining forward air corporations third quarter, two 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 Dot forward Air Corp Dot.
Com.
With us this morning are CEO , Tom Schmitt and CFO Rebecca Garverick.
By now you should have received the press release announcing our third quarter 2022 results, which was furnished to the SEC on form 8-K and on the wire yesterday after the market close.
Be aware that certain statements in the company's earnings press release announcements and on this conference call are forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 <unk>.
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 fourth quarter 2022 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 that May also be a discussion of the financial metrics that do not conform to U S. Generally accepted accounting principles or GAAP Def.
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 rich and good morning to all of you on the call joining us.
I started our last earnings call, but the statement, we keep getting better.
That statement actually never gets old so I'll say, it again, we keep getting better and better.
Q1, and Q2 were first and second quarter Records and Q3 the quarter. We just finished also loves our best third quarter ever.
We expect the fourth quarter to continue that track record and that strength in.
In fact, they're shooting for our earnings per share of $2 in the fourth quarter.
For a sequential step up from Q3, which we just released a finishing at 193.
Bob is very much in line with what we had in.
The two years just before the pandemic broke out 2018 in 2019 that was about <unk> 14 cents a step up.
Respectively from Q3 to Q4 this year is very much in line with that.
We therefore expect that the year will be finishing up in record territory of $750 750, plus.
So that also still means are we in.
We intend to get better and better and we don't want to be done here. So about next year from where we're sitting right. Now we expect is going to be better than this year. So 2023 will be a step up from 2022 now.
Now on that last statement you might ask how so everybody else is.
Being very cautious so are we we are seeing the same thing everybody else is seeing.
We get fewer imports.
Ocean and air some of our <unk>.
Customers are domestic forwarders International Florida, specifically.
With their imports airlines with the imports that is style and we see that even if you look at our tonnage and L. T. L. We saw tonnage for Q3 the quarter. We just finished slightly ahead of last year, one 5% over the previous third quarter. That's a good thing, but that September was slight.
Italy down if you run the math from the mid quarter update to the full quarter and even in October .
For instance, last week, we were mid single digits tonnage down from last year. So we do see the same thing everybody else sees.
And that would be also in line with industry estimates, we also expect fuel to be down next year.
By about 70 <unk> per gallon and that's as you know is a headwind in our industry.
So why are we still saying that.
We expect 2023 to be a better year than 2022, it's because of our performance program called forward 'twenty three it's working we have revenue and margin initiatives that we believe outweighed the fuel and volume headwinds for next year, It's our brand of what we call <unk>.
<unk> execution at work, let me just briefly reinforce those six key levers inside that fall between three program that make us very very confident the first one is we will have more live events. We all talked about is allowed to be brought to life events back together with our core customers. This year and we're going to bring back.
More next year, we're also going to tap into some smaller events orchestrator that do not use forwarder. So there could be more than just to bring back.
Our numbers.
Firmed at the live events are coming back and frankly, just maybe walk through the Atlantic terminal, which suggested earlier. This week you can see it you see the containers you see the tradeshow containers. The concept setups. So we will have more life. You mentioned next year then than we had this year.
Sometimes with a life events you also have a beautiful trifecta. These are high value freight shipments to begin with that are profitable very profitable shipments for us oftentimes. These tradeshows, though concert movements go too. Many stops. So you have one sale event, but multiple revenue events coming from it and then.
Oftentimes, there's a guaranteed service associated with it where our customers want to make extra certain that we have all the handling principles in place last in first out that maximize the odds of a smooth 100% guaranteed and delivered on.
On time performance.
Secondly, we also are looking to get more share of wallet with our existing core business partners. We have had tremendous domestic international forward of customers for a long time, those that know us best They tag team with us. They go for high value freight with US together and we are winning more together with them.
Even in a softer environment, we're growing with some of those core business partners that we know best and that know us best.
Third we are selling more direct to those types of shippers, who do not use forwarders.
And we said this is going to be at the early innings here this year $20 million or so in a L. T. L revenue from selling direct and be on track for that next year, we expect a ramp up of that so there's also untapped upsides that we intend to go after for next year number four we are having much fewer.
Outside brokerage miles those out miles that typically are more expensive than using our core independent contractors and also some of those carriers do not know us or our customers as well as our independent contractors do so NBA and 5% or so outside brokerage miles as a percentage of tow.
The first lever is.
The supporting businesses, Yes, L T. Alex the main show and the main show still has kind of been 80 allow our territory for September which is terrific and the supporting businesses are doing their part certainly too if you check out our release and you're looking at our intermodal drayage business, that's a rock star performance in there.
15% or so margin territory or 85 territory for Q3 for instance.
And the sixth and final lever is those supporting businesses. They do make our <unk> business better more and more truckload has become a very significant L. T. L customer uses L. T. L. A lot, which helps balancing loads intermodal and L. T I'll be more and more co sell our portfolio of those services to our cause.
Customers.
And final mile started relying actually on open the road L T.
He wishes for its product also so a lot of helping each other out and making the main show L. T O better.
So because of these six levers outweighing in my mind, and how estimates the headwinds that we have from fuel and from softer volumes. Overall, we do believe that our 2023, there will be another record year of better than 2022.
I spend a ton of time unintended with our teammates they are focused laser sharp on making us all we can be.
We are far from done and we keep getting better and better.
And with that we're going to go straight into questions. So rich back to you.
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And well begin with the line of Bruce Chan with Stifel. Please go ahead.
Hey, everyone. Thanks, operator, I appreciate the time Tom.
Great to hear about your forward 23 program I think that's good news given all the concerns out there about the environment.
But maybe you can just share some color with us about what sort of macro assumptions underpin your expectation that.
Twenty-three can be a better year or is that sort of like a.
5% down tonnage environment, and what kind of happens and what ability do you have to flex down if it gets worse than that.
I think that Bruce.
Good starting point, So then Rebecca and I had worked with our operating teams and our support teams. We obviously take the best estimates that we have from the outside world. So we I had mentioned a fuel as an example, our fuel this year, we'll end up somewhere between 497 and five or three as an average per gallon next year that number.
It'll be somewhere in the four twenty's and so we use the best estimates available. We also just very specifically to your point if.
If we do everything kind of business as usual, meaning same amount of customers same business. We go after together.
And no new markets no new customers if that were the case, which is not then you probably would be down somewhere in the 5% or so range, that's probably a very good assumption and that's what we put in there now on top of that boost we are putting the impact of those fall with 23 initiatives, which means we are going for more share of wallet.
Going forward, new markets with existing customers and new customers. So that's why the end result is not minus five but again everything else being equal. The end result would be the same as everybody else is seeing which would be a softer volumes could mean minus five.
Okay got it so just to be clear you think that next year could be not just a revenue positive year, but.
Both are both a ton agenda at a yield positive year as well.
Absolutely yes.
Okay, Great. That's Super helpful. And then maybe just one more before I turn it over on the final mile side. Just wondering if you can talk about some of the headwinds there and how you see them affecting the business and to move into next year I know we've spoken a bit about 85, maybe just an update there and then also just on the durable goods fronts are you seeing any material slowing there and do you have.
Opportunities to offset that business.
Bruce Let me, there's probably at least two two points that a trigger here. So let me start with the first one our final mile business. The way we define in final mile is the delivery.
Delivery and installation of high value appliances in local markets are about 100 markets across the U S.
That business, obviously, when you talk about installing dishwashers are all fridges that business would be down with a consumer goods shipments being down and frankly with you and me and everybody else on this call having bought about as many appliances that you can possibly by in the last two and a half years. However.
Our team does a phenomenal job of not just selling existing markets existing customers. We are adding new markets. I mean, there is something to be said about being at the top of the podium with a world class retailers like the home depot, where they called us out of the home appliance.
Carrier of the year and that gets us the chance to actually compete and win more markets with them. So that's what's driving volume positively and frankly also the team has done a phenomenal job even their lives 12 months getting to huge global brands to become new customers of ours and and again between those things.
<unk>, we are growing in this business that otherwise would be very much challenged that it gets to your point about durable and consumer goods.
If again, if all we did was selling existing business to existing customers and existing markets, we'd be down we're not because of what I've just described.
A b five for those of you on the call who are not as close as Oh, some of us have to be.
This is a kind.
Kind of a set of rules that make it up I think the tests to beat to be your own business owner harder and so what we expect is with California, being first and possibly other states following that.
Some of the independent contractors that are drive on our behalf.
We'll have to go through more rigor to basically show that they run their own businesses. They all have their own entrepreneurs and the operators and there's probably some additional cost to that.
We have models like be the weapon without forward screens, we revenue and our margin initiative models, we have malls that show what that additional cost could be five 6%, perhaps and if and when these higher costs are to us to occur.
We have only one choice we have to share those costs with our customers so that it might be a bit of a tougher environment.
But frankly, when we talk about independent contractors those are people, who run their own business and it's very clear that they run their own business and by the way they can take it anywhere tomorrow, if they choose to.
But that estimate might become harder than maybe a cost penalty of those enhanced tests and that cost penalty would be passing them on to our customers.
Okay. That's great color really appreciate it and congrats on the result this quarter.
Thank you Bruce.
Well now go to the line of Todd Fowler with Keybanc capital markets. Please go ahead.
Hi, great. Thanks, Good morning, Tom Hi, Rebecca.
Good morning, Todd.
Good morning.
I appreciate the confidence and the outlook for 'twenty, three but I don't want to skip over the fourth quarter.
You know I.
<unk>.
That we will see a step up in <unk> similar to what we've seen you know kind of pre pandemic I'm just curious Tom if you could maybe unpack a little bit we're hearing a lot of weakness in kind of low peak expectations. I think that you had the comment that October tonnage was negative and it looks like September might've been as well. So maybe if you could just walk through kind of your expectations.
For Q up sequentially versus <unk>.
Given what we're hearing in the broader marketplace around the peak trends.
Yeah, So good point.
Yes, you did the math correctly, Todd So September was a small step down.
After over three and 5% positive in July and August respectively, and as I said.
The most recent data that last week of October we were down by about 5% or so.
With me right now our model for the fourth quarter, obviously, we have those numbers up as part of it. The one thing that we should not underestimate is the the robustness and the strength and the quality of the business in all of our lines of business. We are much more effective and again.
<unk> join US again for a walk through of terminal.
It looks very different from what it looked like a year or two ago in terms of the quality of the freight. So we have in the fourth quarter, a lower fuel forecast assumption compared to the previous quarters, we have in the fourth quarter realistic volume adjustments and be in the fourth quarter also have the high quality are afraid.
Business assumptions that frankly, so far have panned out and I think they will be playing out also in the fourth quarter. So it's a math exercise and.
I think the team also over the last several quarters certainly Q3 was a good example, we know how to adjust when we when we have to in Q3 to give a specific example.
Fuel came in lower their voice at a four six week period of fuel had dropped quite a bit it's been back up again, but it had dropped quite a bit fuel came in lower than what we had expected and frankly this isn't a high highly agile team we can do good things faster.
I mean that.
You've been called for them. So we made it up with the quality of the freight in Q3. So if you want a headline in Q4 in all mines will be a quarter that would be built to deliver because of the quality of the afraid that we have in our networks.
Okay.
Just purely looking at the tonnage comps and the tonnage numbers that doesn't tell the whole story. It's to your point, we've got to think about the mix in <unk>.
So maybe to that point in time, when I look at revenue per hundredweight X fuel it was down sequentially.
It was up 5% year over year, and Thats a bit of a deceleration. So maybe you can help us think about what's going on with yields on an ex fuel basis, and and how mix is impacting the reported numbers that we're seeing.
Yeah. So the first I mean first thing I would say is if you look at revenue per hundredweight for the third quarter.
It's up 18, 4%.
So that's pretty strong actually.
The quality of our freight in terms of.
Moving high value afraid getting compensated for those super strong disciplined pricing approach.
He's working so.
I would say if you look at revenue per shipment. That's a good a good metric 10, 7% up for the quarter revenue per hundredweight to 18, 4% up for the quarter. Those are good strong numbers.
And again I'm not sure what you're looking at I like the quality of the the.
Right and I like the way, we price for that quality.
Got you got it Tom and Yeah, I might've pulled the wrong number there on the comm side, so I'll be just check that but it sounds like that the pricing is holding and so maybe just the last one for me on your your bullet points for 'twenty, three kind of talking about use of outside miles and purchase transportation. It sounds like that the network right now is really I.
Thank you said kind of around 5%, which is one of the lower numbers that I can remember do you feel like that on the PT side Youre.
You are kind of at the you know.
<unk>.
Hate to say that there's always room for improvement, but really kind of the best level that you can be at or is there still some opportunity to improve the PT in the network balanced piece, just given what we're seeing with capacity in the market.
Yeah, Todd I would say that there is two halves to that point. The first point is the absolute number of outside brokerage miles yeah, the kind of the brand.
I talked with our CEO , Chris ruble and his team leaders testing Lindsay. They would tell you 5% is kind of in that sweet spot that you wanted to be shooting for.
We had numbers in the past that for as low as three but somewhere there mathematically you're obviously maxing out now.
Now what you always can do better is making sure the cost in service of those outside brokerage mouse gets optimized and testing Lindsay and his team are doing a phenomenal job of finding good service at very very competitive cost levels. So that's actually elaborate that's the way they're still untapped upside.
And then the load balancing that you also mentioned at the other half I think that you talk to Todd that's important too I mean, making.
Making sure that when we need a backhaul backhaul. So it's not just the amount of miles is also where we have it and where it actually comes into the system that would actually make sure we have fully utilized.
Rents and at our backhaul is actually.
With that with real shipments so 5%, yeah, that's pretty close to where it's going to be however, the service and the cost levels untapped upside and making sure that in the system. They truly are backhaul that actually makes sense for us still also untapped upside.
Got it that sounds good and yeah. It probably the time you do a terminal walk through at some point. So we'll put that on the calendar. Thanks for the time this morning.
Todd Yep Yep.
Next we'll go to the line of Jack Atkins with Stephens. Please go ahead, okay great.
Morning, Tom Good morning, Rebecca Thanks for the time and congrats on a great quarter.
Thanks, Jack So I guess, Tom I'd Love to go back to some of your comments.
Comments that you made in your opening statements around sort of how.
The.
Complementary business lines that you have could could be feeding it supporting expedited LCL in 2023, particularly expedited truckload and final mile could you maybe talk a bit more about that and give some.
Example, or two of what you mean, there because I think that that's a lever that you know I don't think we've really been kind of focused on before.
Yes, it's a good point and I think if you go back over the last two or three years. When we put the forward 23 program together, which is in essence, a performance program that gets us to spectacular performance in 2022, and 2020, we and by the way, we just talked with our with our management team and our board earlier this week.
About making sure that forward 23 may have an expiration date of the program, but it will be followed by the next logical step change enhancement. So.
We are not done with performance enhancement on December 31, 2023.
But so specifically, Chris ruble COO and his team they've done a very very focused job, making sure that truckload and L. T. L are truly called managed they used to be actually two silos about two or three years ago.
They were very separate and they no longer are so when you talk to our leaders in those teams. They are looking at one fleet, they're looking at once at one network and optimizing truckload and <unk> in a very very very complimentary way. So we have seen 10 x's and from from some one year periods.
Two O period later in terms of specific lanes, where we use backhaul so much much more collaboration team sport.
Suddenly the word silo is one that we at this point I have a hard time spelling.
And then with final mile. The beautiful thing is that team not only as I said before is getting better and better as a number one provider of high value appliances in those markets.
I've said before they're finding new customers. They also all leading new markets with existing customers, but the beautiful thing is.
Obviously these are <unk>.
Washers and french's they need to get to these local markets, where they get delivered and installed in the past the line haul of how these goods got there was something a frankly, something we didn't pay a hell of a lot of attention to that is no longer. The case, we are paying attention to it now and the number of conversations I've got there Jeff.
Part of the sales leader on that team about line haul, bringing those goods to these local markets has gone way up. So a specific example would be for some of those larger a final mile customers doing the line haul, having a truckload and L. T L conversation.
It's tied to the actual final mile business, that's happening more and more. So this is why four hour supporting businesses. We have two tests wanted to have to carry their own weight and two to have to make the main show better.
All three businesses right now are pathing, passing both of those tests.
Okay, that's great and I appreciate you walking us through that maybe shifting gears for a moment then.
Thinking about <unk>.
Service and reliability and and you know I think it's becoming increasingly important within the L. T L community the shipper community.
In terms of.
Being able to rely on their their partner carriers and it's something that I think helps makes make market share gains accelerate and makes pricing stickier through cycle.
I guess how are you all thinking about you know your service levels.
<unk> serve survey for the <unk> industry, just came out in the last couple of couple of weeks, but I'd be curious how you guys are thinking about net promoter score or just any sort of metrics internally to think about service.
Service, and if that's improving and maybe where you'd like to take that over the next year or two.
So Jack very topical so they're working with etch sequence outing and ship matrix one of their portfolio companies on getting.
Very similar to what you just referred to mass deal getting external third party data to make sure that we know apples to apples how good we are and how we stand up and compete against other first class companies. So we are getting studies in place right now it would be obviously quota share the outcomes with our customers both in customer spending.
Is it the conversations but also possibly be broadcast communications with our first class marketing team.
So we're looking at.
In terms of claims and damages.
How do we stack up against the top two.
Top tier of our L. T L providers.
We're looking at on time performance, how it's stacking up we're looking at.
Making sure that when it comes to.
Hitting very tight time windows, how we're stacking up.
The one thing I can say is all the data we are kind of it's.
It's been the sausage, making stage right now all the data we started seeing bag is making us extremely bullish and confident about the way we stack up when our customers are telling us individually that when it comes to most sensitive shipments and when it comes to making sure that everything possible. He's done four zero damaged.
As they choose us the data that we start getting back tells us why they should do that and why they are doing that.
So this is a very going to be very powerful and we're going to be.
Going to be using it very similar to Jack to what you talked about but it's going to be so helpful.
Two our operators to our business park and customers and to our sales team to actually have a third party validate.
To be intrinsically kind of know and let some individual customers have told us and again over the next few months, we share some of that data.
I think it's going to be very powerful and compelling based on everything we've seen so far.
Alright, Thats, great and I say I think that'll be that'll be great to learn more about as we move forward well last question before I before I hand, it over would just be on the M&A environment.
Obviously, it's becoming a much more challenging macro and freight backdrop.
Valuations are lower but I would just be curious to know how are how are conversations going with potential targets on the M&A front are you seeing folks being more willing to.
Kind of come to the table now or is that still something thats.
Fairly challenging.
Yeah, and then obviously the announced acquisitions and our.
People, joining our companies joining our family when they happen.
So far this year I think we had technically one acquisition with a beautiful northwest acquisition in our intermodal drayage business <unk>, joining our family.
Going into this year. If you remember we said typically in a given year, we will have two or three kind of a beautiful complementary acquisitions.
We said JMP Hall was a very tasty appetizer, India LDL business, but may not have been the main course yet.
The year is not over yet so.
Conversations to your point specifically check.
They may have gotten a bit easier I think people are more willing to say.
In an environment, that's a bit more.
<unk> to graduate and make sure that they are.
Business ends up in a good professional home for for the next longtime decade plus.
But oh we.
We have had a very very fortunate to approach with our M&A team Michael Hance, Kyle Ricketts, Eric what was that entire team having long conversations oftentimes over years with family owned and run businesses that at some point, we'll be ready to say take our legacy.
Bringing it into a great professional home and please make sure that these are people that we've known those companies have known for three decades that date for as long as they want to go.
Have a great home with a forward air. So we are certainly not insulated from ups and downs of the economy, but we are in this is.
<unk> get you play you oftentimes again with many many years of our exchanges with the same companies and when the time is right for them they come over so yes.
Yes conversations have become slightly easier our approached always one that's typically a long game.
The third thing of just back to my first point.
The year is not over yet.
Okay, Okay, well it sounds great. Thanks again for the time really appreciate it okay. Thanks Jack.
Well now go to the line of Tyler Brown with Raymond James. Please go ahead.
Hey, good morning.
Morning, Tyler.
Hey, Tom I, just wanted to actually start with intermodal I mean this year its pretty clear intermodal is let's call. It maybe crushing it I mean yield since skyrocketing EBIT is probably going to be nearly double last year, but can you talk about why those intermodal yields had shot up so much how much of that rate increases from accessorial and if the railroads do make.
A hard turn on service.
Well those accessorial roll off and what does that ultimately moved to that unit's profitability.
Yeah.
And then a stogner Becca you might actually add a bit more flavor on the <unk> and the sustainability of that the one thing titled It and do that and personally I've spent a lot of time with our raw unveils, who is a first class operations leader and his team over there.
I always had the belief that our intermodal drayage for us will be a solid double double card business units like double digit growth. Some of it comes through acquisition and but all in double digit margins are the.
Second point is the last year. This year 2022, we did have quite a bit of amplified necessary old.
Storage in the home.
Notion of congestion in the ports means that somehow these shipments had to be helped we helped our customers holding those shipments we get storage fees. So you have on the revenue side you do have an amplification of our revenue you also have some of that obviously has a margin positive consequence it tends.
To be that the storage fees, though.
The less profitable or in some cases than the core services that'd be provide so the margin has actually not been.
Artificially enhanced by storage fees revenue has.
But I do believe and I think this is the basis the basis of the whole point that you're making this business truly.
Has it become better and better we do more turns in some of the competition do on a given day.
We also look left and right between L T L and and the intermodal drayage business and we adopt operating practices that make sense.
This rule of law Cielo is responsible for operational excellence in all of our business units, including intermodal drayage. So I do believe that this unit is a permanent double digit margin company.
You might see a falloff in the revenue growth with the storage and detention fees normalizing over the next several months on the margin front I think what you are seeing this year Israel.
So do you think EBIT dollars are up or down in that business next year sorry to.
John it's small, but I'm just kind of curious about whats in that 'twenty three outlook for intermodal.
Yes, Tyler so there is some normalization you know kind of underpinning our assumptions for intermodal, but offsetting that would be you know acquisitions tuck in acquisitions that we've done.
We continued to grow.
From the time that we've either migrate inorganically and those typically have some higher margins just based on some of the existing pricing that that we have when we.
<unk> acquired and so I think.
I think overall, yes, we will see some some downgrade in his answer somewhere else, but I think that'll be more than offset with someone says acquisitions that we continue to ground.
Okay. That's very helpful. And then I may have missed it but did you give what the Q3 L. P. L O War was specifically.
We did not and we tend to not do that because again, there's a lot of interplay between truckload L. T L and final mile which is why we call. This the expedited freight segment. The one thing I did say Tyler is that.
Just early on the call that for September specifically in L. T. L. P. We're in 80 Lar territory again.
Yeah. So I mean, maybe to kind of come back to this I mean, if I look at Q1, Q2, Q3, I kind of think about Q4. It it feels like the LPL, maybe you don't look at it totally that way, but it feels that the <unk> is probably low eighty's somewhere in that in that ballpark and if I go back in my pull out an old model back in call. It the hay.
They have the mid 2000, you guys were actually running sub 80. So do you think that is a possibility next year.
I think that's well well put.
Being south a D can be a possibility for next year and not the one thing I would want to phase I for the performance enhancement, we had this year and for the performance next year.
It is helpful for us when we look at how good are we actually in each of our lines of business subsidiary L. T. L to obviously run the math with fuel because that's the way we run our business, but also put fuel aside so we got a little bit of a tailwind on fuel this year that is probably not.
A typical year, we expect as I said earlier, a headwind on the fuel side for next year.
Still we believe you're going to out weigh on our concentrate with all the initiatives you've got going on.
Are you a very specific question, that's our entire team.
Is that a sub 80 or an L. T L as possible and is coming our way because we were earning it absolutely.
Okay, and then back on the outside broker miles. So I think you said you're at 5% in Q3, you're probably similar in Q4, but if you look back those numbers were a lot higher in the first half if I'm not mistaken I think in Q3, you're at 12 and I don't know if you gave Q1, but you are probably higher than that so if you hang around this 5%.
Shouldn't there be at least the first half 'twenty three tailwind on the broker model piece at least.
Yeah, and this is still a couple of things that just to make sure that we represent all facts correctly.
5% is kind of where the test Lindsey and team have been driving driven the outright broker mouse too over the last few weeks. The Q3 average is higher than that but right now we're kind of 5% territory.
And we intend to stay that way.
But you're absolutely correct I mean the idea.
There is a there's two things going on one is the strength of their management team and precision execution of what they do this team is getting better and better and its a very good already.
The market either helps you or hurts you.
First half of this year, we had a crazy freight market as we did in the last part of last year.
It makes it harder to get access to your own independent contractors enough. So yeah. We've we're probably 20 ish territory in the first part of the year, we came down to the mid sing.
Mid teens.
Middle of the year and been down 5% territory and we absolutely expect that goes back to what I said before when we have fuel headwind next year compared to this year when you have lower volumes.
Apples to apples, but before our initiatives.
And then the six things that I mentioned and some supporting forward 'twenty three programs kick in and one of them. The fourth one I mentioned earlier on this call is exactly that Tyler I do expect that the 5% level of outside broker miles at highly cost effective rates that our team is actually getting those ray.
Are those outside miles for is going to be a significant tailwind in the first part of next year.
Yeah. Okay. That's that's excellent and then my last one Rebecca I don't know if its talked about enough, but free cash flow year to date has been really strong it looks like youre on track to convert well over 100% of earnings. So can you talk about number one is.
Is that outlook for conversion generally speaking going to be over 100% is that a good number to use to can you update us on 22, Capex and three any early looks on 'twenty three capex, because I think Columbus has had its ribbon cutting if I'm not mistaken.
Yes that is correct yeah. So let me start Tyler with just the Capex for key pillar. So we did take it down slightly from where we were for last quarter. So last quarter, we projected that our capex. This year would be $40 million, we've taken that down to about $38 million and thats purely driven by our equipment and the supply chains and delay.
And getting that equipment. So if you remember we've got some vendors equipment. So it's.
And forklifts.
Just need to get replaced but that we'd been replaced because of the pandemic in 2020, and then supply chain constraints in 'twenty one.
I do think I'm in a 38 million for this full year, but we will land from a capex standpoint, and you are right Tyler for this year, we thought about a third of our Capex would go to I see a third would go to that female Dell name, which we have done the ribbon cutting and then a third with our equipment.
We think ahead into next year I do think that while we won't have the same eight building we are going to replace that with probably some additional equipment that we need to have as well as in <unk>. So I don't necessarily expect you know just from an early preview for next year that Capex would significantly go down it might be right in line or slightly above.
And to your point I do think we've HIFU Super strong free cash flow conversion and I expect that to continue into next year.
Okay that is all extremely helpful. Thank you guys. So much for the time.
Thanks Tyler.
Tom Good morning, guys. Thanks for taking my question.
Can you just Tom can you just talk about the events business in terms of like where we are versus pre pandemic and I think you mentioned.
You might even be above that as we as we move along.
Given some of the initiatives you had and then just following up on that I mean, if the economy does really turn down could be you know could that progress slow or is there enough sort of pent up demand too.
And you're growing there thanks.
Yeah, Hey, Chris Thanks for dialing in thanks for the question and thanks for your interest in our.
Amazing company here.
So events business rough numbers I believe last year, we were probably at 25% of luck, but that business was for us before the pandemic hit.
We went into this year, saying, we would probably be about 75% of what it was before that number seems to play out.
We look at specific segments like Tradeshows and go.
Go back a year and look at what was in Q3 last year was in Q3 this year and at three to one ratio seems to hold.
So if it was 25% last year it maybe 75% this year.
And.
Next year it should be at least 90% my senses and don't forget this is working with our first class events divisions of our partners.
And we also are looking for small medium sized events orchestrator.
We have a tremendous kind of sales support machine led by Keith Karcher F ski that actually knows how to tap into as a C code, specifically and if they ask <unk> orchestrates, who do not work with third parties or to all domestic or international Forwarders. We will go to those directly so we actually have an opportunity not just bring business back fully but go beyond.
100% to your specific point, so next year, perhaps 90, and then perhaps do you have group more than just 100% bring back because there are additional businesses that we are going after.
Your point about.
If the economy is.
Super soft for a sustained period of time phased a recession not just for a couple of quarters, but actually for year end its steeper.
Have an impact yes, it does because I mean, obviously peoples disposable income you have only so many opportunities to spend fewer dollars, having said that after two and a half years and that's my observation that that's I've got no monopoly to list them here.
But it's I think a fairly robust observation.
After two and a half years of everybody who are living in a home based economy.
We want to be in an experience based economy again, you want to experience events, so as and when you curtail your spending and you already bought two french's since the microwaves you probably won't spend a dollar on that concert and and going in some cases on that trip.
And again, there's pent up demand for from two and a half years of being severely limited.
So we feel pretty strong about both accessing more sources for our events business than what we had before if feel very strong about working with our first class partners I mean, they've been sticking with us and vice versa.
We've been talking about bringing the event business back together for the entire two plus years.
And I feel permanent from an emotional perspective and a.
More like sentiment perspective, very very strong about people allocating their dollars in experiences and experienced certainly include the types of events that we support.
And the last thing I should say is between.
Between our pricing team and our sales support team that Stefan <unk> team and key car Jeff's team, we know exactly how profitable all these events business.
So I believe it's a business that goes for minimum damages and a precision execution of putting heightened tight time windows that we are the best that isn't as good in these countries. So that's and you get compensated for it so the our fascination with events business has been.
Very good commercial reason.
Great Tom Thanks, I appreciate it.
Thank you Chris.
Next we'll go to the line of Stephanie more with Jefferies. Please go ahead.
Hey, good morning, everybody.
Hi, Stephanie.
I wanted to touch a little bit on your pricing actions I think there has been a good amount of investments being made in on personality.
Ladies and technology and processes. So maybe if you could just give us the update on where where you stand right now and kind of your thoughts through 2023.
Turning to try it but what is very strong pricing.
Yeah, and Stephanie I mean, we've talked over the years about.
About this.
My strong belief is and some of it.
Way back to my days at Fedex, and certainly our Purolator DB Schenker first five companies in the transportation business that have to be first class and pricing and pricing discipline.
I think over last several years joined.
Those first class companies and then tools processes the people with strong extra expertise in LDL pricing spin.
Specifically and by the way the same things too far out of the business lines also intermodal pricing is we've.
It becomes so much better.
So we put a lot of specificity in place in terms of pricing discipline and predictability. So we work with our customers every year that <unk>. It's on the same date as the first the first part of February we worked with customers during late summer and fall about making sure that we get we have expectations on both side.
So next year, there will be at Cri.
It will be in a in a space we are in a high inflation environment, where we are asking for a significant increase because it costs us more to tap into resources drivers equipment as Rebecca I just mentioned.
<unk> to the safety of everybody that that's part of our company. We are a top tier safety company and there is also investment in safety technology that you need to recoup.
So.
We are very very pricing disciplined at G. Ally is something thats very predictable, but we are not done yet.
Since we just had a pricing review with our board.
Stefan.
Characterized.
He may be a bit bullish optimistic he said being early innings I would say we are perhaps in the middle innings, but.
It's more that we can be doing specifically also dynamic pricing.
Day of week.
Orange in destination, and origin and destination likeness and heaviness bi specific zip codes.
So getting the kind of much more dynamic and real time and pricing adjustments is something thats a high on our agenda and the second thing is as we just started selling directly to people, who make and ship goods.
We have to get equally surgical and specific by origin by destination by a rural versus urban commercial versus residential.
On the direct chipping side, the same way beef over the last two or three years gotten better on the indirect side selling to those intermediaries. So a short way of saying pricing has become a core discipline for us as it had to be and we are far from done with pricing actions. The team has a tremendous roadmap and again you should expect.
The same pricing discipline accelerating that you would expect from any other first fast transportation company.
Got it no that's really helpful. And then kind of sticking with the trends that you saw throughout the third quarter and kind of early early into October here is there did you notice I know, it's kind of it can be really difficult, but maybe any specific categories of weakness that might have been driving I know that you have.
Jumper, but also some I think strong presence Alison you talked a lot about that but I know you're in health care and machine machinery and quite a bit but maybe you can talk to you as best as you can definitely any strengths or weaknesses on the category level.
Yeah, So I said.
It's definitely I talked a bit to this earlier so let me.
Put the lens on it from two angles. The first one is the types of categories of customers.
So we see much more softness over the last several weeks film specifically international Forwarders.
That import less via Ocean and air and from Airlines directly.
We see quite a bit of strength, yet still with the domestic forwarders that we've been working with for a long long time.
Look at the category specifically the high value freight and this has been and I talked in previous earnings calls what we've done over the last couple of years has made us more essential has made us more resilient medical equipment looks strong industrial goods looks strong.
Some of the E Commerce E tailing retailing goods some of the high end of which we still move doesn't look that was drawn and these are the things that are <unk>.
The Walmart away fair and Amazon are saying publicly hey, we don't need that many shipments coming here because we already have all of those goods sitting in our warehouses here and for the high end retail E tail E Commerce goods, we see the consequences of that we don't we no longer have the kayaks and the rocks and be hardly.
Have any legal furniture, but we do have to high end heavy treadmills and that is moving less now than it used to move a quarter ago, and certainly a year ago a D.
D industrial goods to medical equipment to high value freight that we saw it out much more over the last couple of years and as part of go forward.
<unk> is very resilient and is holding up extremely well.
Great. That's really helpful. And then lastly for me.
It's kind of a follow up to prior question clearly generating very strong free cash flow at analyst day that should continue into.
Into next year, and then talk a little bit about your out year.
Our capital allocation plans, you paid down some debt, but yes at this point you know whats your opportunity for our share repurchases M&A appetite in anything there.
Yeah. So it's definitely a good question. So we obviously have our dividend and that will continue to pay you know into the fourth quarter and into next year and then after our after our dividend payment.
You to reinvest back into our business. So we've kind of talked about this equipment purchases, the Tyler and so and from IP investment we think those will continue.
Into next year, and then in terms of where it goes from there between M&A and share repurchases. It all depends on what's in front of us in terms of an M&A opportunity.
She is an M&A opportunity over a share repurchase and then certainly just with the interest rate is getting higher and higher and you know sometimes we find it advantageous for us to pay down some of the debt to reduce our interest cost. So that's how we think about our capital allocation yeah.
General I think as we think about going into next year like I said I think the M&A opportunity what kind of drives in a day.
Decisions after we reinvest back into our company let.
Let me, let me just add one thing that triggered that.
Tyler goes also back to your question.
Capex next year being roughly kind of in line with this year. Despite the fact that Columbus, the big hub investment happened this year and obviously won't repeat next year, we just launched.
And we talked about a project Eagle eye in operations, a year or two ago. This is basically us kicking the tires and making extra certain.
Tim Osborn Lindsay, Chris ruble all of that teams, making extra certain that the processes that we employ in our terminals and also across our network already routing correctly I'll be always using the first or second or third best drought, we put that in place with project Eagleye now we believe in the terminal.
And over the road processes are solid we were taking announced <unk> next level and we call that project Falcon.
It's a pool collaboration between our Jay Tomasello and his team and the business partners in operations also the commercial team, making sure that our business technology inside the terminals keeps going up more efficiency more accuracy. The way we track things the way we dispatch things.
First class kind of a next breakfast technology being implemented so.
While Eagle I cleaned up our processes now we have the opportunity to put first class business technology in a sound process environment and that's what's happening over the next year to two years project Falcon, you'll hear more about that but if you just step back think about it this way and opera.
<unk>, we did a tremendous job, making sure that we have processes that makes sense now where we're putting the systems and the support tools in place to actually make these processes that make that our sound processes now even more efficient and accurate long way of saying capital next year, but it'll be in line with this year, but because yes, we no longer have a Columbus <unk>.
However, we have a tremendous opportunity to upgrade our business technology.
Inside our terminals.
One last point before I did I did I think its worthwhile mentioning also.
The outside brokerage miles came up several times.
So, yes, we do a tremendous job, making sure we get good brokerage miles with.
Which I think.
We also on the HR and people side, Carl mentioned, Ryan Gilliam their entire team does a tremendous job attracting and keeping our drivers and keeping those drivers is obviously the number one thing we need to be doing to make sure. We don't have an enhanced need of brokered mouth. So.
The reason why we have few brokered mouth, Nick even going into next year. The tailwind that we talked about is exactly because we do a tremendous job keeping the drivers that would be actually a half an hour I see roster.
And then.
That was exactly what I was looking for and I just had one quick.
Keeping it could you just remind us what is left in your current share repurchase authorization.
I believe we've got about.
Its stunning Baird, Stephanie and so I think blue skies.
I think it's three 3 million shares are not three and a half million shares left on that share repurchase, but yeah. We've got a long way to go until we reach the end of that authorization from our board.
Understood well really appreciate it and congrats on such a good quarter.
Thank you Stephanie.
Well now go to line of Scott Group with Wolfe Research. Please go ahead.
Hey, Thanks, I just have a few really quick things.
The tonnage in October down mid single any any just color on shipment in weight per shipment trends.
First of all good morning, Scott.
Shipments look fine.
Delay is probably a bit lighter than that and there is no reason for that is actually intentional. Let me just walk you through it and it's a mix issue, let me do that quickly so.
The number of shipments will look strong the weight per shipment Bill look soft now you say like should we be concerned that you're now getting back to reconfirm into the answer is no you should not be concerned what's happening is dell.
I've mentioned this before with the international Forwarders.
All lines and some of the customers that actually use our door to door service being softer.
We have done a really really effective job the entire commercial team, our new CTO in ensign and empty running Melissa fees of her entire team have done a very good job working very very closely.
With those customers that know us best to do more high value freight for them and other customers that know us best Scott our domestic forwarders that tend to do.
Pork to airport business and move with us what otherwise would be airfreight. So these tend to be few.
Fewer units smaller shipments and violence high value freight theyre not bulk commodities in kind of six or eight units there they're much smaller so doing more high value afraid airport to airport with those customers that know us best to to some extent compensate for the weakness of imports from other customer.
<unk> means we're doing more airport to airport last door to door, and therefore less bulky stuff that actually that comes in smaller units because it typically would've been airfreight otherwise.
So long way of saying weights are going down shipments are holding up very nicely and the rates going down is not a return to become furniture. It's actually the fact that at the airport to airport higher value afraid.
Okay.
The outside miles can you just remind us what percentage of those are are you paying in the spot market versus contract.
It's probably so.
Cookie total is 5% of our total miles miles and I would say, it's roughly half half.
Okay, and then just really what's the right tax rate for Q4.
We said in our earnings release, Scott that our full year rate would be.
25, 6% for our effective tax rate.
Okay. So in that ballpark for Q4.
Bank.
Okay. Thank you guys.
Okay. Thanks, Scott.
And our final question will be Bascom majors with Susquehanna. Please go ahead.
Tom following up with the first question I just wanted to clarify you talked about expecting to be able to do better than a call. It L. T. L market mid single digit tonnage decline next year was that insinuating that your model to get to up earnings next year assumes better than a 5%.
Decline or is that just saying, we you know we're modeling 5% down with the market, but hope to do better. Thank you.
You know model for next year.
By the way we hope.
Hope is not a strategy, but we do actually have game plans.
We don't just keep our fingers crossed and hope.
But.
We do assume our.
Collective set of actions and do you assume that in our models that end up showing next year in our expectation to be better than this year, we assumed to be doing better than minus 5%.
Okay. Thank you for clarifying that.
Can you talk about.
Price competition, obviously, a concern in the more traditional L. T O market, but for your customer base and network are our non traditional in that sense.
If core L. T L pricing gets more competitive in a down tonnage market, where might you feel the need to protect share and where are you fairly insulated as far as your portfolio.
Yeah. My sense is bascom that are the more successful we are with two high value freight and again think of.
<unk> electronics silver racks.
Medical equipment. The more successful we are with that event business is a good example.
Where at the margin for error either in a damage free shipment or a heating tied time window situation is close to zero, we feel very strong about the pricing discipline that we can enforce.
In a.
Higher end retail E tail e-commerce.
Field think of heavyweight Treadmills as an example, I do believe you'll see a bit more.
Competitive pressure.
And so but I think overall, we feel very very confident that next year, yes next year will be a year of actually focus on.
Unprofitable growth organically, but next year will be another strong pricing year.
But to be very specific I think in the high end consumer space is where there will be a bit of a battlefield.
Thank you for that and lastly from me.
I mean, you've given a pretty compelling look at how things could go next year. If you execute on your strategy and continue to outperform the market and in your operational goals can you give us the glass half empty approach like what.
What is it that could be different than your assumptions that drive a worst bottomline outcome I don't know if you want a site.
One or two things that that would keep you up most at night. If if if you got those wrong and you know when you stress test the model to the downside can you talk about what things might look like you know and the other scenario than the call. It 750, plus debt that you're guiding to and managing too. Thank you.
Yes good.
Good question and obviously one that.
Rebecca myself our entire team.
It's focused on behalf game plans on what we intend to execute you. Obviously also have game plans.
We defend ourselves when things get really really rocky beyond expectations. So we have a model. We just did a review that trough model with our board earlier this week.
That assumes flat volumes in some cases, even negative volumes that assumes that fuel is going down so much way beyond.
The $4 20 to 424, 21% to 428 expectation that the industry.
Sources would imply.
And then B that gets so we have models that get us back into $6 plus territory.
We fully intend.
To execute on everything we talked about over the last hour 423 is a robust program that makes that seeks gala plus scenario a highly highly unlikely.
I'm very very confident that with everything we have we've got underway and again, we covered a good part of it over the last hour. We are winning in a softer environment. We are winning this year will be next year.
But we need to be like every first class company does we do have a kind.
Kind of worst case scenario and we have very specific cost containment actions and other actions in place.
But that insulate us from dire consequences, but to be very very clear the game plan here is.
As to when in the soft environment, that's what our game plan currently calls for for this year and for next year.
Thank you for that candid sharing of your downside model and it's encouraging to hear that.
And the quote highly highly unlikely scenario that it looks like your stock was still be trading kind of below its long term average closer to 20. So thank you for the time.
Thanks Pat.
Thank you that concludes forward Air's third 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 Dot forward Air Corp. Dot com. Shortly after this call you may now disconnect.
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