Thank you for joining Forward Air Corporation's Third Quarter 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.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 third quarter 2022 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 forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, which are based on expectations, intentions and projections regarding the company's future performance, anticipated events or trends, and other matters that are not historical facts, including 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, there may also be a discussion of financial metrics that do not conform to U.S. generally accepted accounting principles or GAAP.

Definitions and reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the press release issued, which is available in the Investors tab of our website. And now I'll turn the call over to 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 with a 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, was also our best third quarter ever. We expect the fourth quarter to continue that track record in that strain. In fact, we are shooting for earnings per share of $2 in the fourth quarter, which is a sequential step up from Q3, which we just released, finishing at 193.

That step-up is very much in line with what we had in the two years just before the pandemic broke out, 2018 and 2019. Those were $0.05 and $0.14 step-ups respectively, from Q3 to Q4. So this year is very much in line with that. We therefore expect that the year will be finishing up in record territory of 750 plus.

So, that also still means we intend to get better and better, and we don't want to be done here. So next year, from where we're sitting right now, we expect it's going to be better than this year. So 2023 will be a step-up from 2022. Now on that last statement, you might ask, How so? Everybody else is being very cautious.

So we are seeing the same things everybody else is seeing. We get fewer imports. We are ocean and there. Some of our customers, domestic forwarders, international forwarders, specifically with their imports, airlines with their imports that is down. We see that.

Even if you look at our tonnage in LTL, we saw tonnage for Q3, the quarter we just finished, slightly ahead of last year, 1.5% over the previous third quarter. That's a good thing. But September was slightly down, if you run the math from the mid-quarter update to the fourth 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 we're also in line with industry estimates. We also expect fuel to be down next year by about $0.70 or so 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 23. It's working. We have revenue and margin initiatives that we believe outweigh the fuel and volume headwinds for next year. It's our brand of what we call precision execution at work.

Let me just briefly reinforce those six key levers inside that FORWARD 23 program that make us very, very confident. The first one is we will have more live events. We all talked about this a lot. We brought live 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 orchestrators that do not use forwarders. So there could be more than just a bring back. Our numbers confirm that the live events are coming back. And frankly, just when we walk through the Atlanta terminal, which I just did earlier this week, you can see it. You see the containers.

You see the trade show containers, the concert setups. So we will have more live events next year than we had this year. Sometimes with the live events, you also have a beautiful trifecta. These are high-value freight shipments to begin with that are profitable are very profitable shipments for us.

Oftentimes, these trade shows or concert movements go to many stops. So we 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-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 forwarder 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 directly to those types of shippers who do not use forwarders.

And we said this is going to be early innings here this year, €20 million or so in LTL revenue from selling direct, and we're on track for that. Next year, we expect a ramp-up of that. So there's also untapped upside that we intend to go after for next year. Number four, we are having much fewer outside brokered miles.

Those are 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 when we're in 5% or so outside broker miles as a percentage of total miles territory, that's a sweet spot.

That's where we're at right now, which means the vast majority of what we move gets actually handled by those drivers who know us and our customers best. The fifth lever is the supporting businesses. Yes, the LTL is the main show. And the main show still is kind of an 80 OR territory for September, which is terrific.

And the supporting businesses that 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 the 15% OR margin territory or 85 OR territory for Q3, for instance.

And the sixth and final lever is those supporting businesses, they do make our LTL business better more and more. Truckload has become a very significant LTL customer. It uses LTL a lot, which helps balancing loads. Intermodal and LTL, we more and more co-sell our portfolio of those services to our customers.

And Final Mile actually started relying on over-the-road LTL for its product also. So a lot of helping each other out and making the main show, LTL, better.

So because of these six levers outweighing - in my mind and our estimates - the headwinds that we have from fuel and from softer volumes overall, we do believe that 2023 will be another record year, 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..

Certainly, thank you. [Operator Instructions] And we'll begin with the line of Bruce Chan with Stifel. Please go ahead..

Hey, everyone. Thanks, operator, 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 2023 can be a better year? Is that like a 5% down tonnage environment? And what going to happen? What abilities do you have to flex down if it gets worse than that?.

I think, Bruce, that's a good starting point. So when Rebecca and I work with our operating teams and our support teams, we obviously take the best estimates that we have from the outside world. I mentioned the fuel as an example. Fuel, this year, will end up somewhere between 4.97 and 503 as an average per gallon.

Next year, that number will be somewhere in the 420s. And so we use the best estimates available. Also very specifically to your point, 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 it's not then we 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, Bruce, we are putting the impact of those FORWARD 23 initiatives, which means we are going for more share of wallet.

We are going for new markets with existing customers and new customers. So that's why the end result is not minus 5%. But again, everything else being equal, the end result would be the same as what everybody else is seeing, which could be softer volumes or it could mean minus 5%..

Okay. Got it.

So just to be clear, you think that next year could be not just a revenue positive year, but both the tonnage and the 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, I'm just wondering if you can talk about some of the headwinds there and how you see them affecting the business as you move into next year? I know we've spoken a bit about AB5, so maybe just an update there.

And then also just on the durable goods front, are you seeing any material slowing there and you have an opportunity to offset that business?.

5%, 6% perhaps. And if and when these higher costs to us occur, we have only one choice. We have to share those costs with our customers. So it might be a bit of a tougher environment. But frankly, when we talk about our 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 their test might become harder. There may be a cost penalty of those enhanced tests and that cost penalty we would be passing on to our customers..

Hey, that's great color. Really appreciate it, and congrats on the results this quarter..

Thank you, Bruce.

We'll now go to the line of Todd Fowler with KeyBanc Capital Markets. Please go ahead..

Hi, great. Thanks. Good morning, Tom. Hi, Rebecca. I appreciate the confidence in the outlook to 2023, but I don't want to skip over the fourth quarter. I appreciate the view that we'll see a step-up in 4Q similar to what we've seen kind of pre-pandemic. I'm just curious, though, Tom, if you can maybe unpack a little bit.

We're hearing a lot of weakness and kind of low peak expectations. I think that you had the comment that October tonnage was negative, and it looks like September might have been as well.

So maybe if you could just walk through your expectation to see 4Q up sequentially versus 3Q, just given what we're hearing in the broader marketplace around the peak trends..

Yes. Good point. And yes, you did the math correctly, Todd. So September was a small step down after 3% and 5% positive in July and August, respectively. And as I said, it's just using the most recent data. The last week of October, we were down by about 5% or so.

So when we run our model for the fourth quarter, obviously, we have those numbers as part of it. The one thing that we should not underestimate is the robustness, the strength, and the quality of the business. All of our lines of business. We are much more effective. And again, Todd, join us for a walk-through of a 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 in the fourth quarter we also have the high-quality freight 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 have to.

In Q3, to give a specific example, fuel came in lower. There was a four to six week period where fuel had dropped quite a bit. It's been back up again, but it has dropped quite a bit. Fuel came in lower than what we had expected. And frankly, this is a highly agile team. We can do good things faster when called for.

So we made it up with the quality of the freight in Q3. So if you want a headline in Q4 in our minds, there will be a quarter that we will deliver because of the quality of the freight that we have in our network..

Okay. So 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. And so maybe to that point, Tom, when I look at revenue per hired weight ex fuel, it was down sequentially. It was up 5% year-over-year, and that's a deceleration.

So maybe you can help us think about what's going on with yields on an ex fuel basis and how the mix is impacting the reported numbers that we're seeing..

Yes. I mean, the first thing I would say is if you look at revenue per 100 weight 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 freight, getting compensated with a super strong disciplined pricing approach, is working.

So I would say if you look at revenue per shipment, that's a good metric, 10.7% up for the quarter. Revenue per hundred rate, 18.4% up for the quarter. Those are good, strong numbers. And again, I'm not sure Todd, what you're looking at. I like the quality of the freight and I like the way we price for that quality..

Got it, Tom. And yes, I might have pulled the wrong number there on the comp side. So we have to just check that, but it sounds like the pricing is holding in. So maybe just a last one for me on your bullet points for 2023 talking about use of outside miles and purchased transportation.

It sounds like that the network right now is really, I think you said kind of around 5%, which is one of the lower numbers that I can remember.

Do you feel that on the PT side, you're kind of at the -- I hate to say there's always room for improvement, but really the best level that you can be at? Or is there still some opportunity to improve the PT and the network balance piece, just given what we're seeing with capacity in the market?.

Yes. Todd, I would say that there are two halves to that point. The first point is the absolute number of outside brokered miles. The kind of -- when I talk with our COO, Chris Ruble and his team leader, Justin Lindsay, they would tell you that 5% is kind of that sweet spot that you want to be shooting for.

We had numbers in the past that were as low as 3%, but somewhere there mathematically, you're obviously maxing out.

Now what you always can do better is making sure the cost and service of those outside brokered miles gets optimized, and Justin Lindsay and his team are doing a phenomenal job of finding good service at a very, very competitive cost level. That's actually a lever where there's still untapped upside.

And then the load balancing that you also mentioned, that's the other half, I think that we talked about, Todd. That's important, too. I mean, making sure that when we need a backhaul, we get a backhaul. So it's not just the amount of math. It's also where we have it and where it actually comes into the system.

Does it actually make sure we have fully utilized runs and that backhaul is actually served with real shipments? So 5%, yes, 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 backhauls that actually make sense for us are still also untapped upside..

Got it. That sounds good. And yes, probably it's time to do a terminal walkthrough at some point. So we'll put that on the calendar. Thanks for the time this morning..

Thank you Todd..

Next, we'll go to the line of Jack Atkins with Stephens. Please go ahead..

Okay. Great. Good 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 that you made in your opening statements around how the complementary business lines that you have could be feeding and supporting expedited LTL in 2023, particularly expedited Truckload and then Final Mile.

Could you maybe talk a bit more about that, and give me an example or two of what you mean there? Because I think that's a lever that I don't think we've really been focused on before..

Yes, Jack, good point. And I think if we 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 2023.

And by the way, we just talked with our management team and our Board earlier this week about making sure that FORWARD 23 may have an expiration date as a 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 LTL are truly co-managed. There 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're looking at one fleet, they're looking at one network, and they're optimizing Truckload and LTL in a very, very, very complementary way. So we have seen from some one year period to a period later in terms of specific lanes where we use backhaul. So much, much more collaboration and team sport.

Certainly, the work silo is one that we, at this point, 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. As I said before, they're finding new customers.

They also are outbidding new markets with existing customers. But the beautiful thing is, obviously, these dishwashers and fridges, 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, frankly, something we didn't pay a hell of a lot of attention to.

That's no longer the case. We are paying attention to it now. And the number of conversations I've had with Jeff Potter, 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 Final Mile customers doing the line haul, having a Truckload and LTL conversation, that's tied to the actual Final Mile business. That's happening more and more. So this is why for our supporting businesses, we have two tests. One, they have to carry their own weight.

And two, they have to make the main show better. And our three businesses right now are passing both of those tests..

Okay. That's great. And I appreciate you walking us through that. Maybe shifting gears for a moment and thinking about service and reliability. And I think it's becoming increasingly important within the LTL community, the shipper community, in terms of being able to rely on their partner carriers.

And it's something that I think helps make market share gains accelerate, and makes pricing stickier through cycle. How are you all thinking about your service levels? The Mastio survey for the LTL industry just came out in the last couple of weeks.

But I'd be curious how you guys are thinking about that promoter score? Or just any sort of metrics internally to think about 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 we're working with SJ Consulting and Ship Matrix, one of their portfolio companies, on getting very similar to what you just referred to as Mastio. 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're getting studies in place right now, and we are obviously going to share the outcomes with our customers, both in customer-specific conversations but also possibly the broadcast communications with our first-class marketing team.

So we're looking in terms of claims and damages, how do we stack up against the top top tier of LTL providers? We're looking at on-time performance and how we're stacking up. We're looking at making sure when it comes to hitting very tight time windows, how we're stacking up.

So the one thing I can say is all the data -- we're in the sausage-making stage right now. All the data we've started seeing back is making us extremely bullish and confident about the way we stack up.

And our customers are telling us individually that when it comes to the most sensitive shipments and when it comes to making sure that everything possible is done for zero damages, 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 going to be very powerful, and we're going to be using it very similarly, Jack, to what you talked about. But it's going to be so helpful to our operators, to our business partner customers, and to our sales team to actually have a third party validate what we intrinsically kind of know and what some individual customers have told us.

And again, when 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..

Okay. All right. That's great. And I think that will be great to learn more about as we move forward. Last question before I hand it over would just be on the M&A environment. It's obviously becoming a much more challenging macro and freight backdrop.

Valuations are lower, but I would just be curious to know 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 that's fairly challenging?.

Yes. I mean, obviously, Jack, we announce acquisitions and people joining the company, joining our family, when they happen. So far this year, I think we had technically one acquisition, a beautiful Northwest acquisition in our intermodal drayage business Edmon, joining our family.

Going into this year, if you remember, we said typically in a given year, we'll have two or three beautiful complementary acquisitions. We said JMP Hall was a very tasty advertiser in the LTL business, but may not have been the main course yet. The year is not over yet. And conversations to your point, specifically, Jack.

Yes, they may have gotten a bit easier. I think people are more willing to say, in an environment that's a bit more challenging to graduate and make sure that their business ends up in a good professional home for the next long time. A decade plus.

But we have had a very, very fortunate approach with our M&A team - Michael Hans, Karl Richter, Eric Walls, that entire team having long conversations, oftentimes over years, with family-owned and run businesses that at some point, will be ready to say, Take our legacy and bring it into a great professional home and please make sure that these people that we've known, those companies have known for three decades, that for as long as they want to go have a great home Forward Air.

So we are certainly not insulated from ups and downs of the economy. But this is a long game you're playing here, oftentimes, again, with many, many years of exchanges with the same companies. And when the time is right for them, they come over. So yes, conversations have become slightly easier. Our approach, though, is one that's typically a long game.

And the third thing, just back to my perhaps first point, the year is not over yet..

Okay. That was great. Thanks again for the time, really appreciate it..

Okay. Thanks, Jack..

We'll now go to the line of Tyler Brown with Raymond James. Please go ahead..

Hey, good morning..

Good morning, Tyler..

Hey, Tom, I wanted to actually start with intermodal. I mean, this year, it's pretty clear that intermodal is let's call it, crushing it. I mean, yield and skyrocket EBIT’s probably going to be nearly double last year.

But can you talk about why those intermodal yields have shot up so much? How much of that rate increase is from accessorials? And if the railroads do make a hard turn on service, will those accessorials roll off? And what does that ultimately mean to that unit's profitability?.

Yes. So I'm going to start, and Rebecca, you might actually add a bit more flavor on the accessorials and the sustainability of that. The one thing Tyler and -- personally, I've spent a lot of time with Ron Wales, who's a first-class operations leader and his team over there.

I always had to believe that intermodal rates for us will be a solid double-double business unit, like double-digit growth. Some of it comes to acquisition, but also double-digit margins. The second point is the last year, this year 2022 we did have quite a bit of amplified accessorial storage.

I mean the whole notion of congestion in the ports means that somehow these shipments had to be held. We helped our customers holding those shipments, we got storage fees. So on the revenue side we do have an amplification of our revenue. Also some of that obviously has a margin positive consequence.

It tends to be that the storage fees, though, were actually less profitable in some cases than the core services that we 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 of the whole point that you're making - this business truly has become better and better. We do more turns than some of the competition do on a given day. We also look left and right between LTL and the intermodal drayage business, and we adopt operating practices that makes sense.

Chris Ruble, our COO, 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 retention fees normalizing over the next several months.

On the margin front, I think what you're seeing this year is real..

So do you feel EBIT dollars or up or down in that business next year? Sorry to put you on the spot, but I'm just kind of curious about what's in that 2023 outlook for intermodal..

Yes, Tyler. So, there is some normalization underpinning our assumptions for intermodal, but offsetting that would be our acquisitions, some of these tuck-in acquisitions that we've done. We continue to grow those from the time that we buy them. We grow them organically.

And those typically have some higher margins just based on some of the existing pricing that we have when we acquire them. So I think overall, yes, we will see some downgrade in those assessorials but I think that will be more than offset with some of those acquisitions that we continue to grow..

Okay. That's very helpful.

And then I may have missed it, but did you give what the Q3 LTL OR was specifically?.

We did not. And we tend to not do that because, again, there's a lot of interplay between Truckload, LTL and Final Mile, which is why we call this the expediated segment. The one thing I did say early on in the call, Tyler, is that for September specifically in LTL, we were in 80 OR territory again..

Yes. So I mean maybe to come back to this. I mean, if I look at Q1, Q2, Q3, I kind of think about Q4, it feels like the LTL. And maybe you don't look at it totally that way, but it feels that the LTL is probably low 80s, somewhere in that ballpark.

And if I go back and pull out an old model back in, call it, the heyday of the mid-2000s, you guys are actually running sub-80.

So do you think that is a possibility next year?.

I think that's well put. Being sub 80 can be a possibility for next year. Now the one thing I would want to say is that 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, particularly LTL.

Obviously to render 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 the typical year.

We expect, as I said earlier, a headwind on the fuel side for next year, which we still believe we're going to outweigh or now concentrate on with all the initiatives we've got going on. But to your very specific question, does our entire team feel that a sub 80 OR in LTL is possible and is coming our way because we're 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 were at 12%, and I don't know if you gave Q1 but you're probably higher than that.

So if you hang around this 5%, shouldn't there be at least the first half 2023 tailwind on the broker mile piece, at least?.

Yes. And so a couple of things just to make sure that we represent our facts correctly. 5% is kind of where the Justin Lindsay team have driven the outside broker miles to over the last few weeks. The Q3 average is higher than that. But right now, we're kind of in 5% territory, and we intend to stay that way. But you're absolutely correct.

I mean, there are two things going on. One is the strength of the management team and precision execution of what they do. This team is getting better and better and it's very good already. But 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 that makes it harder to get access to your own independent contractors enough. So, yes, we were probably in 20-ish territory in the first part of the year. We came down to the mid-teens, middle of the year, and we're now in 5% territory.

And we absolutely expect - and that goes back to what I said before - when we have fuel headwind next year compared to this year, when we have lower volumes apples-to-apples before our initiatives, then there are six things that I mentioned and some supporting FORWARD 23 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 brokered miles at highly cost-effective rates that our team is actually getting those outside miles for, is going to be a significant tailwind in the first part of next year..

Yes. Okay. That's excellent. And then my last one, Rebecca. I don't know if it's talked about enough, but free cash flow year-to-date has been really strong. It looks like you're on track to convert well over 100% of earnings.

So can you talk about, number one, is that outlook for conversion generally speaking, going to be over 100%? Is that a good number to use? Two, can you update us on 2022 CapEx? And three, any early looks on 2023 CapEx? Because I think Columbus has had its ribbon-cutting, if I'm not mistaken..

Yes, it has. That is correct. Yes. So let me start, Tyler, with just the CapEx for Q4. We did take it down slightly from where we were from last quarter. Last quarter, we projected that our CapEx this year would be $40 million.

We've taken that down to about $38 million, and that's purely driven by our equipment and just supply chains and delays of getting that equipment. So if you remember, we've got some vintage equipment, some trailers and forklifts.

Items that just need to get replaced that we didn't replace because of the pandemic in 2020 and then supply chain constraints in 2021. So I do think $38 million for this full year is what we will land from just a CapEx standpoint. And you're right, Tyler.

For this year, we thought about a third of our CapEx would go to IT, a third would go to that CMH building for which we have done a ribbon cutting, and then a third would go to our equipment So as we think ahead into next year, I do think that while we won't have the CMH building, we are going to replace that with probably some additional equipment that we'll need to have, as well as on IT.

I don't necessarily expect 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 had some 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 your time..

Thanks, Tyler..

Next, we have the line of Christopher Kuhn with the Benchmark Company. Please go ahead..

Good morning, Tom. Good morning, guys. Thanks for taking my question. Can you just talk about the events business in terms of where we are versus pre-pandemic? And I think you mentioned you might even be above that as we move along, just given some of the initiatives you had.

And then just following up on that, I mean, if the economy does really turn down, could that progress slow? Or is there enough sort of pent-up demand to be growing there? Thanks..

Yes. 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 what that business was for us before the pandemic it. We went into this year saying we'd probably be about 75% of what it was before.

That number seems to play out. We look at specific segments like trade shows and we go back a year and look at what it was in Q3 last year versus Q3 this year, and that 3:1 ratio seems to hold. So if it was 25% last year, it may be 75% this year. And next year, it should be at least 90%.

My sense is - 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 orchestrators - we have a tremendous sales support machine led by Keith Karchevki that actually knows how to tap into SIC code specifically.

And if there are events orchestrators who do not work with third parties or domestic or international forwarders, we will go to those directly. So we actually have an opportunity to not just to bring business back fully, but go beyond 100%.

To your specific point - so next year, perhaps 90 and then perhaps the year after 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. There a recession not just for a couple of quarters, but actually for a year, and it's steeper.

Does that have an impact? Yes, it does. Because I mean, obviously, with people's 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, and I've got no monopoly to wisdom here, but I think it's a fairly robust observation.

After two and a half years of everybody here living in a home-based economy, we want to be in an experience-based economy again. We want to experience events. So as and when you curtail your spending - and you already bought two fridges and three microwaves - you probably will spend the dollar on that concert and going, in some cases, on that trip.

Because, again, there's pent-up demand from two and a half years of being severely limited. We feel pretty strong about both accessing more sources for events business than what we had before. We feel very strong about working with our first-class partners. I mean, they've been sticking with us and versa.

We've been talking about bringing the events business back together for the entire two-plus years. And I feel, from an emotional perspective and a more sentimental perspective, very, very strongly about people allocating their dollars in experiences. And experiences certainly include the types of events that we support.

But the last thing I should say is between our pricing team and our sales support team, Stephan Bershenmeier's team and Keith Karczewski's team, we know exactly how profitable all these events have been. It is a business that goes for minimum damages and a precision execution of fitting time windows that we are the best in this country.

And we get compensated for it. So our fascination with the events business has a very good commercial reason..

Great, Tom. Thanks. I appreciate it..

Thank you, Chris..

Next, we'll go the line of Stephanie Moore with Jefferies. Please go ahead..

Hi, good morning, everybody..

Good morning, Stephanie..

I wanted to touch a little bit on your pricing actions. I think there have been a good amount of investments being made in personnel as well, I believe, some technology and processes.

So maybe if you could just give us an update on where you stand right now and kind of your thoughts through 2023 as you continue to drive what is very strong pricing?.

Yes. And Stephanie, I mean we've talked over the years about this. My strong belief is that - and some of it goes way back to my days at FedEx and certainly Purolater, DB Schenker - first-class companies in the transportation business have to be first-class in pricing and pricing discipline.

I think over the last several years, we joined those first-class companies in tools, processes, the people with strong expertise in LTL pricing specifically. And by the way, the same thing is true for other business lines, also. Intermodal pricing - we've become 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, there's a GRI, it's on the same date, the first part of February. We work with customers during late summer and fall about making sure that we have expectations on both sides. So next year, there will be a GRI.

It will be in a space. We are in a high inflation environment, where we're asking for a significant increase because it costs us more to tap into resources, drivers, equipment, as Rebecca just mentioned. Investing to the safety of everybody that's part of our company.

We are a top-tier safety company, and there's also investment in safety technology that we need to recoup. So we are very, very pricing disciplined. That GRI is something that's very predictable. But we are not done yet. And we just had a pricing review with our Board, and Stephan characterized, he may be a bit of a bullish optimist.

He said we're in early innings. I'd say we're perhaps in the middle innings. But there's more that we can be doing. Specifically, also dynamic pricing, day of week, origin and destination, lightness and heaviness by specific ZIP codes. Getting much more dynamic and real-time in pricing adjustments is something that's 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 rural versus urban, commercial versus residential, on the direct shipping side.

The same way we've over the last two or three years gotten better on the indirect side, selling to those intermediaries. So, a short way of saying that pricing has become a core discipline for us, as it had to be. And we're far from done with pricing actions. The team has a tremendous road map.

And again, you should expect the same pricing discipline accelerating that you would expect from any other first-class transportation company..

Got it. Now, that's really helpful. And then kind of sticking with the trends that you saw throughout the third quarter and kind of early into October, here.

Is there -- did you notice I know it can be really difficult maybe any specific categories of weakness that might have been driving? I know that you have a diverse but also some, I think, strong presence. Obviously, we talked a lot about events here, but I know you're in health care and machinery quite a bit.

But maybe you could talk to, as best as you can just any strengths or weaknesses on the category level..

Yes. Stephanie, I talked a bit to this earlier. So let me put a 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 from specifically international forwarders that import less via ocean and air, and from airlines directly.

We see quite a bit of strength here still with the domestic forwarders that we've been working with for a long, long time.

And when you look at the category specifically, the high value freight - and this is when I talked about in previous earnings calls - what we've done over the last couple of years has made us more essential, it has made us more resilient. Medical equipment looks strong, industrial goods look strong.

Some of the e-commerce retailing goods, some of the high end of which we still move, doesn't look so strong. And these are the things that Target, or Walmart, or Wayfair, and Amazon are saying publicly, Hey, we don't need that many shipments coming here because we already have all 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 no longer have the kayaks and the rugs, and we hardly have any wicker furniture. But we do have the high and heavy treadmills and that is moving less now than it used to move a quarter ago and certainly a year ago.

The industrial goods, the medical equipment, the high-value freight that we sought out much more over the last couple of years as part of go-forward, that is very resilient and it's holding up extremely well..

Great. That's really helpful. And then lastly for me, and kind of a follow-up to a prior question. You're clearly generating very strong free cash flow and it looks like that should continue into next year. So maybe talk a little bit about your capital allocation plan. I think you paid down some debt.

But at this point, what's your opportunity for share repurchases, M&A, asset type? Is there anything there?.

Yes. So Stephanie, good question. So we obviously have our dividend that we'll continue to pay into the fourth quarter and into next year. And then after our after our dividend payment, we look to reinvest back into our business. So we kind of talked about those equipment purchases with Tyler.

And so in some IT investments, 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. We would choose an M&A opportunity over a share repurchase.

And then certainly, just with the interest rates getting higher and higher on the debt, sometimes we find it advantageous for us to pay down some of the debt to reduce our interest costs. So that's how we think about our capital allocation just in general.

I think as we think about going into next year, like I said, I think the M&A opportunity will kind of drive some of the decisions after we reinvest back into our company..

the outside brokered miles came up several times. So yes, we do a tremendous job making sure we get good brokerage miles [Technical Difficulty] We also, on the HR and people side, have Kyle Mitchin and 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 miles.

So the reason why we have few brokered miles like even going into next year, the tailwind that we talked about is exactly because we do a tremendous job keeping the drivers that we actually have on our IC roster..

I’m sorry and then…That was exactly what I was looking for. And I just had one quick housekeeping.

Could you just remind us what is left in your current share repurchase authorization?.

I believe we've got about -- it's done in shares, Stephanie. And so I think we’ve got -- it's three million shares, about 3.5 million shares left on that share repurchase. But definitely, we've got a long way to go until we'll reach the end of that authorization from our Board..

Understood. Well, I really appreciate it, and congrats on such a good quarter..

Thank you, Stephanie..

We'll now go to the line of Scott Group with Wolfe Research. Please go ahead..

Hey, thanks. I just have a few really quick things. The tonnage in October is down mid-single.

Any color on shipment in and weight per shipment trends?.

First off, good morning, Scott. The shipments look fine. The weight is probably a bit lighter and there's a reason for that. It's actually intentional. Let me just walk you through that; it's a mix issue. Let me do that quickly. So the number of shipments will look strong. The weight per shipment will look soft.

Now you say like, should we be concerned that you're now getting back to wicker furniture? The answer is no, you should not be concerned. What's happening is what I mentioned before with international forwarders airlines 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 CCO, Nancy Ronning, Melissa Fizer and 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.

Now, the customers that know us best are domestic forwarders that tend to do airport to airport business, and move with us what otherwise would be airfreight. So, these tend to be pure units, smaller shipments and about high-value freight. They're not all commodities in six or eight units. They are much smaller.

So doing more high-value freight airport to airport with those customers that know us best to some extent, compensates for the weakness of imports from other customers.

It means we're doing more airport to airport, less door-to-door, and therefore, less bulky stuff that comes in smaller units because it typically would have been in airfreight otherwise. So, a long way of saying weights are going down, shipments are holding up very nicely, and the rates going down is not a return to wicker furniture.

It's actually the fact that it's airport-to-airport higher-value freight..

Okay.

The outside miles, can you just remind us what percentage of those are you paying in the spot market versus contract?.

So, the total is 5% of our total 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?.

Correct..

Okay. Thank you, guys..

Okay, thanks Scott..

And our final questioner will be Bascome 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, LTL 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're modeling 5% down with the market but hope to do better? Thank you..

In our model for next year, we -- by the way, we 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 we assume that in our models that end up showing next year in our expectation to be better than this year, we assume 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 LTL market, but your customer base and network are nontraditional in that sense.

If core LTL pricing gets more competitive in the down tonnage market, where might you feel the need to protect share? And where are you fairly insulated as far as your portfolio?.

Yes. My sense is, Bascome, that the more successful we are with true high-value freight. And again, think of industrial electronics, server racks, medical equipment. The more successful we are with that event business is a good example.

Where the margin for error either in a damage reshipment or a hitting tight time window situation is close to zero, we feel very strong about the pricing discipline that we can enforce. In higher-end retail, e-tail, and e-commerce fields - single heavyweight treadmills, as an example - I do believe you'll see a bit more competitive pressure.

But I think, overall, we feel very, very confident that next year will be the year of actually focusing on profitable growth organically. But next year will be another strong pricing year. 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 for me, 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 your operational goals.

Can you give us the glass half-empty approach? What is it that could be different than your assumptions that drive a worse bottom line outcome? I don't know if you want to cite one or two things that would keep you up most at night if you got those wrong.

And when you stress test the model to the downside, can you talk about what things might look like in the other scenario than the, call it, 750 plus that you're guiding to and managing to? Thank you..

Yes. That's a good question. And obviously, one that Rebecca, myself, and our entire team is focused on. We have game plans of what we intend to execute. We obviously also have game plans for how we defend ourselves when things get really, really rocky beyond expectations. So, we have a model.

We just did 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 4.21 to 4.28 expectation that the industry sources would imply. 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, FORWARD 23 is a robust program that makes that $6-plus scenario highly unlikely. I am 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 soft environment.

We're winning this year, we're winning next year. But like every first-class company does, we do have a worst-case scenario, and we have very specific cost containment actions and other actions in place that insulate us from direct consequences. But to be very, very clear, the game plan here is to win in a 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. It's encouraging to hear that in this “highly, highly unlikely scenario” that looks like your stock would still be trading below its long-term average, closer to 20. So thank you for the time..

Thanks, Bascome..

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.forwardaircorp.com shortly after this call. You may now disconnect.