Thank you for joining Forward Air Corporation’s Second Quarter 2021 Earnings Release Conference Call. Before we begin, I’d like to point out that both the press release and webcast presentation for this call are accessible on the Investor Relations section of Forward Air’s website at www.forwardaircorp.com.

With us this morning are CEO, Tom Schmitt; and CFO, Rebecca Garbrick. By now, you should have received the press release announcing our second quarter 2021 results, which was furnished to the SEC on Form 8-K and on the wire yesterday after the market closed.

Please be aware that certain statements in the Company’s earnings press release announcement and on this conference call are making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, 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.

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. And now, I’ll turn the call over to Tom Schmitt, CEO of Forward Air..

Thank you, Tawny, and good morning to all of you on the call. On our last call in May, I did reinforce 5 observations that I had made in February, observations that gave me confidence for our double-double.

And as I said in May, we are hitting our stride and if you go a bit further back all the way to March of last year, you could actually argue we were crawling last year in March, then 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 one was a beat.

We had a good beat in Q1. We have a stronger beat now in Q2. In fact, as one of our analysts pointed out, we did have a double-double, the first time since 2018, double-digit margin as a company and double-digit revenue growth. The second observation is momentum.

We actually finished the quarter with the month of June being the best month ever in the history of our company. Top line, bottom line, we never had more revenue, we never had more operating income. That’s a super strong entry ramp into our third quarter. The third observation is around disciplined pricing.

We 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, good for us ultimately. The fourth observation is around organic growth. We keep doing that.

In fact, last week we talked about opening up a new access point for our LTL business in Vancouver, Canada, the third location that we have up north, in addition to Toronto and Montreal. And it’s 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 [indiscernible] podium as 2 our top 3 trading partners. We will be doing more with them. And domestically, when you look at organic growth, we currently have record weight per shipment. We never had higher weight per shipment in LTL than we have right now.

And then the fifth observation that gives me confidence is around inorganic growth. Last time I talked about for the first time is 6 years we actually didn’t just buy tuck-in acquisitions in Intermodal or Final Mile. We actually bought an acquisition J&P Hall Express in our core LTL business. There will be more in the making here too. We are running.

And when you’re running you actually get kind of a runner’s high and I think that will show too going forward. Commercially, we are going to be even more surgical with our customers on ensuring that we move their freight on time without any damages.

We are super-focused on palletization, on safe stacking, dimensional focus and we’re working with our customers hand-in-hand that the freight that they give us will be in a shape that will be smoothly running through our system and will be delivered on time, without damage.

And as I had mentioned, we are still in mostly Q4 and 2022 bringing our events business back. We see some of that now.

In fact, on Sunday, just a couple days from now, I’m heading out to the National Home Delivery Association conference in San Diego, where I’m going to meet with some of our customers, some of our teammates and it’s an in-person event, so more of those coming back a little bit now in the third quarter, more in the fourth quarter and definitely going into 2022.

That will help us also. Operationally, as you saw in the release, we have an operational enhancement initiative underway where we fully expect to see profit improvement in our core LTL operations from having taken a fresh look.

We actually called the Project Eagle Eye, taking a very fresh look at how we actually route and what we do inside our 4 walls inside our terminals. M&A, I did 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.

In the last 12 months, we actually added 10 LTL terminals to our network, and we’re going to keep that pace going over the next several quarters, so running indeed. And obviously, as we keep running, we also need to make very thoughtful consideration how we actually allocate our capital.

And on that topic, our brand-new CFO, Rebecca Garbrick, my partner here, welcome 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 you, Rebecca..

Great. Thanks, Tom. I’m happy to be with all of you today, and I look forward to playing a bigger role in driving profitable growth at Forward Air. I know you’ve read our earnings release, so I’m not going to repeat our solid second quarter results. Instead, like Tom mentioned, let me offer you some comments on our capital allocation.

Our overall capital allocation philosophy remains unchanged. We will use our cash flow to cover our CapEx needs, which we expect will remain modest over the medium-term after we complete our Columbus investments.

Our free cash flow will continue to support our dividend, which we would look to increase over time, commensurate with the increase in our earnings. In the past 7 years, we have raised our dividend 4 times. When we see M&A opportunities, we will ensure that these can be realized as we recently did with our J&P Hall acquisition.

As a side note, for your modeling purposes, we expect J&P Hall’s run rate revenue contribution to be about $19 million per year and our run rate EBITDA contribution to be about $1.6 million per year. Any excess cash flow will be returned to shareholders. In the past 6 years, we’ve repurchased over $250 million of shares.

And year-to-date, we’ve repurchased roughly $34 million of shares. We expect to continue our repurchases in 2021 and beyond, since we believe in our growth prospects. And with that, I will turn it back to Tawny to open the line for Q&A..

[Operator Instructions] Our first question comes from the line of Tyler Brown with Raymond James..

Rebecca, congrats on the new position. I just want to come back and look at the guidance on a sequential basis. So this is on my math, so I may be wrong. But I think on the midpoint, you’re looking for revenues to maybe be up slightly, call it, $10 million, but you’re looking for maybe a slight decrease in EBIT, even excluding that $0.03 charge.

And again, I’m talking kind of sequentially Q2 to 3.

So A, would that be the case? And B, what is the incremental pressure there sequentially that would cause revenue to rise and maybe EBIT to slightly fall or is my math way off?.

Well, you’re pretty good with math, Tyler. So it’s not your math. Typically, when you look at Q2-Q3, if you go back 2018, 2019, let’s put aside last year because the math is a bit challenged 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. Q3 is a bit slower.

On average, we tend to have $0.08 to $0.10 EPS decline between Q2 and Q3. So that’s what historically, even when we kind of pound for pound run at the same level of pace and performance, what we typically see. We expect because we have good momentum going, we expect actually less of a decline than we typically see between Q2 and Q3.

So when you look at $1.11 for Q2, and we guide to $1.05, so that’s $0.06. That $0.06, frankly, would probably be even 0, if not for 2 things. One, we do have an operational enhancement initiative, which actually has short-term expense. Which is, roughly speaking, $1 million in Q3. We’re going to see a lot of payoff from that, I’m very, very confident.

It’s a fresh look inside our terminals, a fresh look at rerouting. But so you could, from a onetime perspective, you could add that back if you choose to do so. The second thing we actually are doing is many of our associates and teammates got wiped out last year when it came to any type of incentive. And that was fair.

That’s what, unfortunately, was the reality for many people across the country and the same was the case here at Forward Air. We are over-accruing right now for our profit-sharing short-term incentive for our teammates. Some of that, you also see in Q2 already and in Q3.

If that over-accrual did not take place, if the $0.03 of a very, very good kind of investment into our operational power did not take place, you would actually not even see the typical decline from a Q2 to a Q3, which, again, on average, is about $0.08 to $0.10 EPS. This year, you’re going to see actually on paper, $0.06.

And if not for the 2 things I just mentioned, you wouldn’t even see a decline. So the momentum is actually unusually high this time..

Okay. That’s very helpful..

Does that make sense?.

Yes, absolutely. Yes, it does. It sounds like there’s 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 bulletin out about ‘21 peak season.

And one 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 PT through peak?.

Yes. I mean, so what we’re doing, Tyler, and I think we actually even talked about this before. You see me use the word surgical lot. Job #1 for us is to keep our teammates safe on the road, lots of investments there. Job #2 is keep the commitments to our customers.

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 in the right places.

So a lot of what we’re doing in terms of destination pay for drivers, like making sure we pay them extra to go to places where we need more of them to be for outbound runs from those destinations. We do that. Right now, we talk about surcharges in specific locations higher than in other locations tied to basically the volumes that we see there.

There’s 2 reasons for doing that. One is for us to collaborate with many of our customers, can we somehow find a way to bypass these locations because it’s good for them, it’s good for us. Because we then can keep our commitments to them even more safely, and we also can keep it more economically.

The second thing is, if and when we cannot do that, last time I checked, we’re not a nonprofit. So we actually do need to make sure we recover the cost so that we can actually pay the extra cents and extra dollars to our drivers. So yes, our destination pay is very surgical by location. The peak surcharge is very surgical.

And if you look at it from a flip side perspective, if there are locations where there is no congestion, where there’s no reason for us actually to incur any incremental cost that we -- if we manage our business well, should not be incurring, then we also shouldn’t be charging an extra surcharge.

So that’s why we actually are a bit more precise, a bit more surgical with those surcharges than we were historically..

Okay, that’s helpful. And then just one last clarification. But on the event type revenue, so is there kind of -- is there an implied pickup in Q3? Or it sounded like maybe that was more of a Q4 and a ‘22 event. But I’m just kind of curious what’s implied in the guidance there from that perspective..

Yes. So -- and I know you probably will store that in your memory and hold it against me. So if we see some of that events business coming back in Q3, that would help for us to actually beat our guidance. We didn’t put anything in there really. I mentioned the conference I’m going to on Sunday. That’s real. It’s happening.

Some of that is happening around the country, but not at the levels that we’re going to be seeing in Q4 and in 2022. So we did not put any of that into Q3. Any that we get is going to be upside to the guidance..

Okay. Very, very helpful..

Our next question comes from the line of Todd Fowler with KeyBanc Capital Markets..

Great. Rebecca, congratulations. I wanted to ask on the margins within Expedited Freight. Obviously, a lot of good things going on. And I know that the mix with Truckload and Final Mile, and there’s a little bit difference than some of the pure-play LTLs, but the OR is still above 90.

And to Tyler’s math, I think that you’re probably still going to be above 90 maybe in the third quarter.

So as we think about the yield environment and the tonnage environment, Tom, what’s your expectation or what’s it take to move back into the 80s from an OR perspective in Expedited Freight?.

The main thing is, obviously, how we’re going to keep getting better with our core LTL business. Again, the way we look at Expedited Freight, there’s 3 business units collaborating very, very closely and tightly.

Truckload is kind of the sister unit where we recruit for one fleet between LTL and TL, we actually also route together so that there may be an LTL move-out and the truckload move-back. Final Mile, there’s a lot of co-sharing of locations with LTL.

So we do actually look at the margins from just making sure that they all make their contribution by each one of those parts of that Expedited Freight segment, but they really are one business unit.

And having said that, I did call out in March or April that in LTL, if we actually looked at it kind of separately and we allocated cost inside Expedited Freight properly, we have seen 14-15% margins or putting it in your language, Todd, that we have seen 85 ORs. So we know it’s possible. We also have seen it 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 in stating that we are seeing double-double right now in months, in 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, LTL clearly has to lead the way towards an 85 OR..

Okay, got it. Yes. Okay. That makes sense, Tom. And then just as a follow-up for me, very strong yields here in the quarter, with fuel up almost 9%, ex-fuel, close to 7%.

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 accessorials and the surcharges that are happening? Or how do we think about what’s happening with kind of core pricing in your business outside of what you’re doing to get compensated for the higher costs that you’re experiencing right now?.

Pricing has never been kind of -- overall, if I look at us and if I look at some of our best peers, pricing, I think, is being better executed and better designed in the first place than it ever has been.

And again, we talked about this in the past, some of the parcel companies, some of the rails have been leading the way over the last 2 or 3 decades. The LTL players, Old Dominion first, others after that, Saia and us included, are following in lockstep. And frankly, we are in a fast-follower catch-up game, and we’re getting better by the quarter.

We can still get better, and that’s why I do see upside. It’s very disciplined. I mentioned before, the GRI that we put in place in February, we never, as a company, had a take rate the way we had this time. I expect that to continue. So when we have our GRI next year in February, I expect the take rates to be what they were at this time.

And we had a 6% nominal GRI, and we got the vast majority of that implemented. There were very, very few customer exemptions and exceptions that were contractual. So if you’re asking, Todd, kind of a pricing environment, pricing levels; the best companies, including us in 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’re doing. And for that to happen, I expect pricing to be tight. I expect pricing actually to continue to be very disciplined.

And I expect the type of pricing environment that we saw in 2021 continue throughout the year and into 2022..

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 hundredweight. It sounds like maybe the best proxy for kind of core pricing right now is the level of the GRI that you put in.

And so if 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?.

That’s exactly right..

Our next question comes from the line of Bruce Chan with Stifel..

Tom, you mentioned that LTL weight per shipment is higher than it’s ever been before 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? Is that intentional freight selection there on the industrial side? What’s kind of happening with that weight-per-shipment number?.

as an example, industrial, spare parts automotive, medical equipment. And then what we do is in the call cycles and sales cycles, we overemphasize those. So if you look at today versus 2 years ago, how many medical equipment companies do we actually call on, that number is 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 of freight that fits premium requirements, no damage, high reliability, typically faster service, but also fits the density and weight requirements. So it’s typically heavier shipments. And then, again, certain SIC codes, think medical equipment.

When I walked through Chicago when I walked through Columbus last -- a couple of weeks ago, you can just -- and you can come along again, Bruce, I know you did in the past, it’s very obvious as you walk through what those SIC codes that are the perfect premium freight that we want, what they look like.

And then you look at the crated medical equipment MRI, and you know exactly that’s what we were more of. And that’s what we’re selecting..

That’s great color. And maybe just a follow-up. You talked about more of a dimensional focus in LTL. And 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 on the process side or on the investment side, whether that’s investing in dimensionalizers or doing more re-weighs at terminals. I think that would be really helpful..

Yes. So the more equipment to help do what you just described at the very end, we’re doing definitely that. And I also expect the outcome of our Project Eagle Eye to actually reinforce the importance of dimensionalizing, of re-weighing.

So that, in fact, what we actually and our customers are saying we’re moving, is what we are moving and from a weight-wise -- from a weight perspective, from a dimension perspective. So absolutely, that is happening. And from a freight overall perspective, we are getting super disciplined.

Some of the things that we’re 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 worked 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’s not a good thing either because it clogs up the system. So we’re actually helping them out with one small piece of freight quality that’s not good for them and got good for us and it’s clogging up the movements of everything else that they rely for us to move.

And so as of August and in September, there’s a little bit of a scaling time line. We actually are enforcing some of those rules. We will not accept kayaks. We will not accept rugs in our system. We enforce palletization, we enforce stacking.

When you have sensitive equipment stacked 7 high, I don’t like the odds of you getting the treadmill in perfectly secure undamaged shape, the way you actually expect to get it when you move your freight with Forward Air. So there’s a lot of sensitive collaboration with our customers. And this is a bit like medicine.

When we work with our customers on those things, it may not always taste good, but it does make them and us better, because they keep their customer commitments, we keep ours, by enforcing the rules we’re talking about.

So over the next 6 weeks, you will see us strictly enforce palletization, dimensions for most goods not longer than 8 foot, no kayaks, no rugs.

And what this will do is it make the entire flow throughout our system for our customers smoother, and they can rely on us to get their goods and their shipments to their destination undamaged and on-time at an elevated level to what they’re already seeing today, because of us making sure we are unclogging 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 your traditional LTL locations?.

It’s a great point. I mean, we do need more capacity. If we are the double-double company for many years to come that we intend to be and that we will be, there obviously is a need for additional capacity.

And especially, Bruce, 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 using up capacity and reinforces the need for us to find more capacity.

So when we did -- what we did with J&P Hall just a few months ago, basically getting additional capacity for our LTL business in the greater metro Atlanta area and in the Southeast Georgia market, that was an appetizer for what’s going to follow. We will be finding organic ways, opening more terminals.

I’m going next week to Fontana, our Inland Empire Terminal, which we opened up last year. It now is one of our top 15 terminals in our system. But we also are looking for creative ways to do more J&P Halls. And it could be bigger J&P Halls, where we actually find ICs, independent contractors, find terminal capacity, not only by keep opening terminals.

There will be 6 to 8 to 10 every single year. Last year, we had 6. This year it probably will be more than that. And next year, it might be even more than that. But in addition to that, what the J&P Hall great appetizer kind of caused is more appetite for that type of inorganic LTL expansion also..

Our next question comes from the line of Scott Group with Wolfe Research..

This is Jake on for Scott.. So there’s clearly been a lot of disruptions on the ocean supply chain.

What impact are you seeing from port and rail congestion on your Intermodal business?.

It’s creating choppiness. And this is, Jake, as you pointed out, I mean, this is a supply chain industry issue. And frankly, it’s actually not just the LTLs. It starts with rail. So we talked about this, I think, in the past, when we had like several hundred ships waiting outside the port of L.A. to even just dock.

A lot of what we talked 10 minutes ago about kind of congested places, destination pay so that more drivers go to these places, picking up things. All of that is very real. I fully expect that we see that choppiness for many more months to come.

So for our Intermodal business, this is difficult because we don’t know exactly when those ships will be unloaded. It could be a week’s delay. It could be two months’ delay. We don’t know kind of how about the capacities of the railroads in those congested ports.

So you could actually argue to some extent, there’s a small part of it that actually helps us.

Because by the time that premium drayage is actually off the ship, by the time it makes its way with a rail over the country into the Midwest as an example and it gets into the rail yard where we actually, Intermodal drayage business, take the freight and then get it into the warehouse, where, frankly, they were waiting for it for days, weeks, in some cases, months.

Our customers are more than willing to make very, very certain that we actually every -- all the slack is taken up that we reliably, safely at maximum plausible speed, get that freight to them. Because, again, they have waited for days, weeks and months in some cases.

So at the back end, it actually helps us a bit because there was so much stop-and-go in the system that there’s a premium to be paid for us to not add into 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 that.

A very tiny example, I’m sitting here with Rebecca in our support office here in Atlanta. We had to push back a slight upgrade. We’re building out the operations side of the building a little bit. And so there’s a renovation taking place. We pushed it back twice now. We’re 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 as part of the construction materials.

So this is literally -- and then any one of us, including you Jake, when you ordered your last dishwasher or refrigerator, the odds of you having to wait longer than you liked to are pretty high. So this is real. It’s going to stay with us for the rest of the year, probably even slipping over into 2022.

Parts of that 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 that same delivery of those commitments.

But overall, the choppiness is not something that any one of us appreciates, least of us, any one of us personally, when we wait for that fridge to come or that Peloton bike or whatever it ends up being, and it takes weeks and months longer.

My sense is that when we have this conversation a year from now, it probably will have cooled down and somewhat normalized. When we have this conversation 3 months from now, we’ll have the same conversation we’re having right now..

Got it. And then you’ve given some pretty helpful margin targets around your -- around the different segments of your Expedited business.

Could you speak a bit on where the events business would sort of fit into that, how we should think about the margins as that comes online?.

Yes.

So whatever range that you’re thinking of, so I talked about in March and April and said LTL, actually, when we kind of run our LTL business kind of pound for pound 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 in a year where they probably worked more than ever, which was last year and got paid less than ever.

So if you take -- strip all that out, we have seen 15% LTL margins. The events business that we’re talking about, to put it very bluntly because of the high need for liability, is amongst the most profitable LTL business we have. So if 15% is the average, I’d look north of that for the events business. And there’s a reason for that.

I mean, think about -- I use the proverbial Taylor Swift concert that moves across the country. There’s zero slack. That equipment has to be there by 7:00 a.m. on the day of. If it’s not there, there’s no concert and your daughter or your son will be very disappointed..

That concludes Forward Air’s Second Quarter 2021 Earnings Conference Call. Please remember that this webcast will be available on the Investor Relations section of Forward Air’s website at www.forwardaircorp.com, shortly after this call. You may now disconnect..