Forward’s new plan may not include Omni
Forward Air said Tuesday it will focus on two key components of its less-than-truckload business “full steam” and that it plans to review all strategic options for its noncore operations. The update was part of its third-quarter earnings release and follows a planned merger announcement, which has garnered public criticism from shareholders.
The company plans to further grow its core business, which provides linehaul service to freight forwarders in an airport-to-airport configuration, as well as ramp a newer, direct-selling initiative to shippers that don’t work through forwarders.
Some of Forward’s longtime freight forwarder customers voiced concerns following an announced merger with Omni Logistics, which is a customer of Forward and a competitor to Forward’s customers. Those customers believed Forward was attempting to cut the intermediary, the forwarder, out of the market by aligning with Omni.
Forward (NASDAQ: FWRD) Chairman, President and CEO Tom Schmitt said on a Tuesday call with analysts that wasn’t the intention and that Forward will only work directly with those shippers that do not engage with forwarders. He said doing this will preserve the relationships Forward’s freight forwarder customers have with their shipper clients. It will also allow Forward to solicit the other half of the $15 billion-plus high-value LTL freight market that doesn’t work through intermediaries.
He said recent engagement with forwarders, explaining the change, has resulted in a 14% increase in daily volumes from the group since the transaction was announced on Aug. 10. During the quarter, Forward grew the customer count in its direct-selling channel by more than 33% year over year (y/y).
“Now it’s full force, fair game,” Schmitt said. “That’s the benefit of the Aug. 10 announcement that we became very clear about making sure that we are accessing that other half of the high-value LTL market.”
The company will soon provide details on near- and long-term targets. It will also begin to disclose greater detail on its LTL business, which reports up through its expedited segment currently.
Forward isn’t making large investments to facilitate the changes and said it will cut costs elsewhere to accomplish the plan. That includes a full “strategic portfolio review” of all non-LTL operations, which could be sold.
“Supporting business lines have to be essential to making LTL the main show and when that’s no longer the case and they have served their purpose, then graduation is coming,” Schmitt said.
There’s still a major hurdle for the company — exiting the Omni merger.
A Tennessee court recently lifted a restraining order that was temporarily blocking the deal. The injunctive relief was requested by shareholders, who claimed their rights had been violated when they weren’t given a vote on the transaction. The plaintiffs have asked the court to reconsider its decision.
If the court doesn’t get involved, the deal can proceed. However, Forward believes it has the right to terminate the transaction as it alleges Omni hasn’t met pre-closing requirements, including access to information in a timely manner.
“We feel very strongly that we are not under an obligation to close,” Schmitt said. “I’m a big fan of when things get longer, they don’t get better, so we should be getting out of the circus and into our business 100% full time as quickly as possible.”
Omni’s CEO has disputed those claims.
Omni contends it has “fully complied with all obligations of the merger agreement” and said it intends “to enforce that binding agreement to ensure the successful completion of the transaction,” a Thursday letter from its CEO to customers read.
“We were exploring different tactics, getting to a larger customer and revenue base,” Schmitt explained. “[It] caused a lot of emotional upheaval on multiple fronts. I realize that, I’m sorry for that and I apologize for that because that’s obviously not what we intended to do.”
Q3 result, Q4 guidance light of expectations
Forward reported adjusted earnings per share of 99 cents for the third quarter, 12 cents below the consensus estimate and 94 cents lower y/y. The result excluded 63 cents per share in due diligence and transaction costs.
The expedited segment reported an 11% y/y revenue decline to $351 million. Tonnage was flat but yield excluding fuel surcharges was down 7%. However, an 8% increase in weight per shipment likely meant the pricing metric was roughly flat.
Tonnage was down 3% y/y in the July-August period before turning positive in September. October tonnage per day is 6% higher y/y.
Compared to the second quarter, tonnage was up 3% and yield increased 1% excluding fuel surcharges. The company said it saw a positive demand inflection following Yellow’s exit but the impact was minimal compared to the sequential changes other carriers reported. Forward more closely serves the time-definite markets than Yellow did. Forward did capture some long-haul and events business through its intermediary relationships, which it expects to be sticky.
The expedited unit posted an 89.7% operating ratio, which was 390 basis points worse y/y. All expense lines increased as a percentage of revenue except for purchased transportation, which benefited from insourcing linehaul miles as well as lower truckload rates. The adjusted OR was 110 bps better sequentially.
The LTL portion of the unit reported an 85% OR in August and September.
Forward’s 2024 general rate increase (GRI) will be announced in November and is expected to be in line with past GRIs, which have ranged from 5.9% to 7.9%. The company’s annual GRI is effective on the first Monday of February.
Forward’s fourth-quarter guidance was also worse than expected.
The company forecast revenue to decline 7% to 17% y/y, implying $423 million at the midpoint of the range. That was below the consensus estimate of $468 million at the time of the print. Adjusted EPS was forecast to a range of 98 cents to $1.02, which was below a $1.13 consensus estimate.
Shares of FWRD were down 8.4% Tuesday at 3:28 p.m. EDT compared to the S&P 500, which was up 0.6%.
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