Q1 2023 Forward Air Corp Earnings Call
Participants
Rebecca J. Garbrick; CFO & Treasurer; Forward Air Corporation
Thomas Schmitt; President, CEO & Executive Chairman; Forward Air Corporation
Christopher Glen Kuhn; Senior Equity Analyst; The Benchmark Company, LLC, Research Division
Jack Lawrence Atkins; MD & Analyst; Stephens Inc., Research Division
Jacob Gregory Lacks; Research Analyst; Wolfe Research, LLC
Joseph Lawrence Hafling; Equity Associate; Jefferies LLC, Research Division
Presentation
Operator
Thank you for joining Forward Air Corporation's First Quarter 2023 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 first quarter 2023 results, which was furnished to the SEC on Form 8-K and on the wire yesterday after the market close. 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 second quarter 2023 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 on the Investors tab of our website.
And now I'll turn the call over to Tom Schmitt, CEO of Forward Air.
Thomas Schmitt
Thank you, Alan, and good morning to all of you on the call. I want to take you back to 3 statements I made on the earnings call 3 months ago. The first statement was I said Q1 will be tough also, it was. Secondly, I did finish the call last time saying we still expect 2023 EPS to top 2022. At this point, I have to say this will not happen. Third statement was our drive to be the best in high-value freight hauls and that is very much still the case. Let me just unpeel all of those 3 statements a bit and let me start with the first 2, the quarter and the year. If you remember on the last call, we reviewed an earnings bridge, an EPS bridge where we had revenue initiatives and cost containment initiatives, Forward Force and Forward Game Shape, and we believe based on our own expectations and our modeling that the revenue and cost management initiatives would actually make up for the headwinds that we are facing both on a sluggish economy front and fuel coming down.
Three specific points. We had modeled a 5 percentage point year-over-year LTL tonnage decline. We actually are at minus 5% right now, but we have 4 months in the books that were actually worse than minus 5%. If you remember Q1, as you saw in our release, minus 12%. First part of April was minus 10%. We are at minus 5% now for the last couple of weeks and still going so better now, but not in the first 4 months. Secondly, there's a very, very important margin driver and that's pieces per shipment and that pieces per shipment remains suppressed. We are currently down 16% lower pieces per shipment today first quarter than we were a quarter a year-ago. That is the issue of fewer shipments coming in and the shipments that do come in are still lighter. And lastly, fuel has come down faster than what we expected and faster than the Washington Institute had predicted.
As a result of all those headwinds when we do the EPS bridge reconciliation, we had to revise our target of beating last year. We're now looking at a target of $6.20 to $6.60 EPS for the year. Let me go to the last part of my statement that I made on the last call. That statement was our drive to be the best in high-value LTL still holds and that is true. Our grow forward program is actually fundamentally working. This program, let me just remind you, is high-value freight, priced appropriately, operated with precision execution and made accessible to an increasing group of customers. Let me take those 4 points in turn. First, high-value freight. I did point out the growth of our higher value freight verticals including events, medical equipment on the last call. We went for the 4 top categories from 18% to 29% of our total freight mix. That continues. While slightly below for the quarter, in March of this year our weight per shipment was very much in line with last year's [Boom March].
And here's the good one. For the entire quarter, the weight per piece is actually up year-over-year by 12.7%. It's heavier, more nutritious, more valuable freight that we're moving. The second part of grow forward was pricing appropriately. Our revenue per ton mile, and that's excluding fuel, is up between 2.5% and 4% for the quarter; that's forward airport-to-airport and door-to-door respectively; compared to last year's Q1. Revenue per ton mile ex-fuel in my mind is pound for pound the best metric for what we get paid for for the same effort expended and that metric is up. We're getting paid more for the same work that we've done a year-ago. The third component of grow forward is operated with precision execution. Here the point that comes in is our customers have been telling us that on their scorecards, we are the best on time, we have the lowest damages, we're hitting the tightest time windows better than anybody else in the industry.
And there is about $13 billion to $15 billion of high-value LTL that should appreciate and will appreciate that type of differentiation. Thanks to the industry research work by SJ Consulting and ShipMatrix, we now know what those customers are telling us for a fact. We are the best in hitting tight time windows, we have the lowest damages in the industry. We also continue operating with precision execution in our day-to-day operations. We have record low outside miles ensuring that our independent contractors who know us and our customers best are the ones that are getting most of the miles available. The fourth piece of growth forward after high-value freight, priced appropriately, operated with precision execution is making it accessible to a larger customer base. I said recently that our direct shipper LTL customer count topped 200 customers. That count keeps growing. Q1 2023 is up from Q4 of 2022. So grow forward is actually fundamentally working.
Now I do realize, before we open it up for questions, it's hard to fully appreciate a grow forward strategy that is working when we have a de facto miss for the quarter and we're guiding down for the year. And still everything our remarkable teammates and independent contractors are doing tells me that when shipment count and size starts normalizing, we can expect to deeply benefit from it, some this year and way more beyond.
And with that, back to you, Alan, and we're going to open it up for questions.
Question and Answer Session
Operator
(Operator Instructions) Our first question will be from the line of Jack Atkins from Stephens.
Jack Lawrence Atkins
So I guess, Tom, if we could maybe start with April. It feels like there's an improvement in the second half of the month certainly on a year-over-year basis. Is there anything that you can maybe walk us through in terms of helping us to understand what's driving that? Are you seeing is it a comp issue or are you seeing improvement in the number of pieces per shipment? Just kind of help us maybe get a better handle on why the second half of April was better than the first half.
Thomas Schmitt
Yes, Jack. Everything you just said obviously at face value is correct. So it's been about 2.5 weeks when there was a kind of several percentage points improvement in our LTL tonnage. As I said if you look at the first couple of months of the year, frankly actually even including into March, it was the same very, very sluggish volume environment that we had seen in November and December. First part of April was a tiny step-up and then the last 2.5 weeks was actually a significant step-up. So what happened here? We are working with our best customers and tremendously closely. Our sales team has never been more engaged in getting more slice of the pie. Some of those customers are seeing a slight improvement in the traffic coming in from Asia and frankly, some of them we are working with harder to make sure that their customers are appreciating the type of high-value freight movements that benefit from 0 damages.
One thing, Jack, I mean they're doing a better job, our larger customers that know us extremely well, to take the sales leaders with them to their customers. I personally have been on sales calls where the customer has come with us and go to the end customer. This is $10,000 of high-tech equipment, they have 0 propensity for damages. And that type of I think energy is starting to play out more and more. 2 weeks, Jack, don't make a trend yet. I do believe from everything we're seeing on a daily basis, it's fairly consistent. So that's why, frankly, we have probably been somewhat conservative. We have not always been conservative in the past about Q2. But what we're seeing is real is impact from us working with our best customers that know us extremely well, making a more compelling case for winning more high-value freight together with us.
And then we also have a sales leader that joined us 6, 9 months ago, Erika Tolar, who helps us building the small medium-sized businesses that actually are not using our value-added intermediaries and that's starting to kind of take off too. We're now into the 200s of customers. They're active in shipping. Earlier this week I looked at the shipment count and there were accounts that had 0 shipments a few months ago, they're all new. So collectively that energy of convincing some of our best customers who know us well to win more high-value freight with us together with also ramping up those smaller companies that do not use intermediaries is starting to work. So I think that's what we're seeing, Jack. 2.5 weeks is more than a few days, it's not a trend yet; but what we're seeing is real.
Jack Lawrence Atkins
Okay. Got it. So I guess just if I can follow up on the 2Q guide commentary, Tom. It sounds like the idea was to maybe expect some improvement from a seasonal perspective, but relatively muted versus what you would normally expect to see from the first quarter to the second quarter. I guess could you maybe expand on the idea that you guys are being a little bit conservative with the outlook?
Thomas Schmitt
Yes. So when you say somewhat muted, I mean you and I and Rebecca, we might be looking at the exact same thing. So Q1 to Q2 we're showing a small step-up, it's about 15% or so EPS step-up between the actual Q1 once you take the reversal of that benefit accrual out. That's on the lower end of what we had seen. Last year Q2, just to remind you, may not be the best comparative measurement. Last year Q2 had 2 crazy things going on. It was the most pronounced amplification of the freight boom. April last year was crazy, June last year was crazy, certainly something I had never seen here before. Secondly, fuel was at pretty much all-time high levels last second quarter. So the $2.04 we had last year is probably not the typical benchmark.
So I would not look at the guidance we just put out at around $1.30 to compare to $2.04. It's up 15% from Q1 and I would say personally I believe this is on the conservative side. I don't want to overestimate and then disappoint. I do see real improvements. I see what we're putting out here working. I expect the odds of us beating what we put out to be better than missing it. But at the same time, this freight recession now has probably been going on for about 6 months, a typical recession lasts about 9 months. So you would somehow think, which is also what's built into our model, that the second half will see some of that benefit, but I would be somewhat cautious for the second quarter still.
Jack Lawrence Atkins
Okay. Got it. And then I guess for my last question just kind of focused on that second half ramp. I mean if I look at the bottom end of the range and I take out that $0.24 accrual reversal, it looks like you're assuming over 50% improvement in earnings in the second half versus what the first half including in the guidance would assume. I guess what gives you the confidence to say that you're going to see that type of step-up? Is that much more significant than normal second half versus first half improvement? Is it the macro getting better? Is it your internal initiatives really kicking in? What's driving that, Tom?
Thomas Schmitt
Yes. So let me do a little bit of math here, Jack, and you're pretty good with that too so we can go do a bit of mental ping pong here.
Jack Lawrence Atkins
I'm a history major so I'll defer you on the math.
Thomas Schmitt
Okay. I think you're giving yourself not enough credit, but no, seriously. So if you look at the first quarter, a pound-for-pound the first quarter as you just correctly pointed out is $1.13. Typically our first quarter you multiply it by 5 to get for the year because the first quarter is the 1 quarter that doesn't get on the medal podium from a typical sequential perspective. So if you take $1.13 times 5, that gives you $5.65. Now what I do believe is that we should be fairly confident in saying what we saw in the first quarter is the absolute bottom of the freight recession. April second half is better, even April first half was slightly better. And November, December were edging to go bad, but they were not as bad as the first quarter collectively was. So if you get to $5.65 by doing the typical multiplication by 5 of a first quarter, which would be a completely normal thing to do, I would sure expect that when you multiply the absolute bottom of the freight recession, you should be able to multiply it by slightly more than by 5. So the $6.20 to me is not a stretch because again multiplying this quarter by 5 should be less than what we ultimately [will] pay out.
Jack Lawrence Atkins
Okay. Well, I hope this is the bottom of the freight recession. I know that, to your point, certainly you would hope that things would get better in the second half. But I'll turn it over to others, but thanks for the time, Tom.
Operator
Ms. Moore, your line is open. Please check your mute feature.
Joseph Lawrence Hafling
Sorry about that. I didn't hear that my line was open yet. This is Joe Hafling on for Stephanie. I just kind of wanted to quickly follow up on that sort of second half recovery thesis. I'm wondering sort of what are you hearing from your customers at this point about how they're thinking about the second half? And is this kind of how you're framing a second half recovery is what you're hearing from your customers or is it kind of based on your thought that timing-wise the 9 months versus already being sort of 12 months in? Is this kind of how you're thinking about the freight environment (inaudible)?
Thomas Schmitt
In contrast to our previous conversation partner Jack, I'm not a history major so I wouldn't go just by the 9 months. No, in all fairness, every single customer interaction and every single business partner interactions that we have, we always go into the pipeline of our customers. We talk with them about it. What we're hearing is that the deliveries from Asia to our customers are expected to get closer to a normal size and normal frequency by the end of this quarter. That's not what every single one of them is saying. But if you had to get a kind of a mean or expected midpoint, that's what we're hearing from the vast majority of them. We see a little bit of that already happening.
Some of our customers actually just yesterday had a differentiation between for instance imports from the Middle East versus imports from Asia. But the mean expectation that we are hearing is that by the end of this quarter, the shipment sizes and the shipment frequency should start normalizing with some of the inventory rundowns getting closer to conclusion. I know you guys, Joe, you actually put out a piece of research earlier this year that said some of that may go into the second half of the year. The inventory kind of depletion may not be complete by the end of the second quarter, which is also why we assumed some sluggishness still in the second half, but significantly more activity than in the first half. So we were looking to get that midpoint between seeing the recovery, but not overestimating it.
Joseph Lawrence Hafling
Appreciate that. And then is there anything you would call out from an end customer perspective, areas that are seeing kind of particular strength or weakness that's surprising you right now?
Thomas Schmitt
The 1 thing on the strength side is the 1 thing that we really really should be benefiting from. Remember when we talk about focus on high-value freight and where we came from over the last 2 or 3 years; kind of patio wicker furniture out, medical equipment in. Medical equipment and some of those higher-end industrial goods are less discretionary and more resilient than more discretionary consumer goods. So that's what we're seeing. We're seeing some more firmness on the medical equipment side, on the high tech side and on the kind of less consumer goods side. The second thing that I always like pointing out, events. Events are going very, very strong. Our trade shows, our concert business is exactly where we expected it to be significantly up. So I think in some pockets of life experiences, even consumer experiences and goods, are picking up. Overall in the less discretionary space, medical equipment is the best example we see very, very good trends. So I do believe that again people are spending their discretionary income not on the third refrigerator and second dishwasher, more on life events. And on the industrial side, we do see good improvement and I would put medical equipment into that nondiscretionary bucket also.
Joseph Lawrence Hafling
Perfect. And then I hate to squeeze a third one in. But Rebecca, you could walk us through the share repurchase activity in the quarter, tell us where the authorization stands right now? And maybe, Tom, if you could tell us what you're thinking about capital allocation and M&A what looks interesting to you?
Rebecca J. Garbrick
Sure. So we did repurchase during the quarter, it was 475,000 shares is what we repurchased. That leaves us with -- we were authorized the number of shares so we're left with 1.8 million of shares still outstanding under that repurchase program, which using the share price as of last night about over $186 million left that we have available to repurchase. I'll let Tom kind of talk through where we stand from an M&A standpoint, which will drive our share repurchases for the rest of the year.
Thomas Schmitt
Yes. And the one thing and I think one of the reports that came out last night or this morning and, Joe, it may have been yours; I have to admit I didn't track statements by analyst; did point out that our share repurchases was an all-time record for a quarter. We bought about $50 million worth, which is the equivalent of the 475,000 shares that you just mentioned, Rebecca. So we clearly made a choice putting more of our capital into that repurchasing bucket in the first quarter. We will continue doing that and at the same time we are very very fortunate that even in a depressed freight cycle, we are very, very cash flow strong. We will be using that cash flow for continued enhanced share repurchases. We also will continue using that cash flow for tuck-in acquisitions that make perfect sense for us.
The 2 primary areas continue to be expedited LTL; Land Air Express was a great addition to our team, J&P Hall 2 years ago was a great addition to our team. We also organically did open several LTL stations and terminals, we'll continue doing that. We just opened a significant size one in Chicago area. That's the third one that we have in Chicago land now. So if you look at it this way, share repurchase is enhanced, but still following organic growth, LTL terminal expansion and very, very specific tuck-in acquisitions. We did a phenomenal job I think within the modal moral drayage team to really fill out some of our geographies in the Pacific Northwest; Edgemont, in Mobile, Alabama, in Memphis, Chickasaw. So again if you put on the podium, clearly you'd have organic growth, think of LTL terminal expansion like Chicago; tuck-in acquisitions think Chickasaw Edgemont in the modal drayage as well as Land Air Express; and third would be share repurchases. That's the gold, silver, bronze.
Operator
We'll go next to the line of Scott Group with Wolfe Research.
Jacob Gregory Lacks
This is Jake on for Scott. So revenue per hundredweight ex-fuel declined slightly year-on-year in the first quarter. What's causing that and do you expect that to continue just looking forward into 2Q?
Thomas Schmitt
Jake, the answer is yes. This might continue slightly not a hell of a lot what's going on here. This is the issue why we report like everybody else, that's revenue per hundred weight and it's still not the best metric. Our length of haul has been getting shorter and that's intentional. When we do shorter lengths of haul, we actually have an opportunity to use solo drivers not only team drivers. Team drivers are terrific because they enable 1 load and then a baton handoff basically only at the end of the trip and in between, the drivers take turns driving and sleeping. But sometimes when we have shorter distances, we can afford to use solo drivers which are more economical and frankly easier to recruit. We love both equally solo drivers and team drivers, but solos are easy to recruit and we can use them on shorter distances more than we can on longer distances.
So we actually have a very active tactic in place to go more after shorter lengths of haul. I don't have it in front of me, but if my memory serves me correctly, we went down in length of haul by 6.7% year-over-year. So when you look at the revenue per hundredweight ex-fuel, that does not reflect that. It's basically if you look at what I called out before revenue per ton mile ex-fuel, that's actually the less used, but a much more powerful metric because it takes the shorter distance out of the equation. Revenue per hundredweight is agnostic to distances so when we go shorter distances, it shows a smaller number because we charge less for it, but that's an imperfect metric. The quality of that revenue actually continues going up and revenue per ton mile is actually a metric I think we should be using much more.
Jacob Gregory Lacks
That's all helpful. And just a quick one. Could you give us monthly tonnage in the quarter? And then I'm not sure if you gave a consolidated April number, but if you could give that as well, that would be helpful.
Rebecca J. Garbrick
Yes. So for January, our daily tonnage was down about 16%; for February, we saw some improvement, it was down only 9%; and for March, it was down to 11%. And then for April we have not given a consolidated number, but the blended between the 12% that we talked about and the 5% gets us roughly in about 8% decline year-over-year.
Operator
(Operator Instructions) We'll go next to the line of Chris Kuhn with Benchmark.
Christopher Glen Kuhn
Tom, Rebecca, last quarter you guys went through the headwinds and then some of the efficiency measures to offset some of that headwind. Are those efficiencies basically the same, it's just the headwinds are a bit more? Maybe you could just kind of touch on that briefly.
Thomas Schmitt
Yes. So what we did and I think, Chris, if I remember correctly, you did a really good job of recapping that in your follow-up write-up. So yes, we are talking about that exact EPS bridge and just to remind those of you who actually have not been familiar with that conversation. What we did do over the last 5, 6 months, we looked at last year and where we ended up on an adjusted $7.18 EPS. Then we looked at 2023, we were at least foresightful enough to say the sluggish economy and fuel coming down, which was the expectation by the Washington Institute, will cost us somewhere in the neighborhood of $1.50 EPS. And then we came up, as you know Chris, with those revenue initiatives which we called Forward Force. We came up with these cost management initiatives, which we called Forward Game Shape. And we said like how much do we expect those to be worth for this year.
Roughly speaking, Forward Force and Game Shape were kind of equal halves so each one of them made up about between $0.70 and $0.85, respectively. And so we thought that between all of those initiatives on the revenue side and cost management side, we would have enough counter activity to make up for the headwinds of fuel and sluggish economy. What we saw, and this is what we just talked about at the beginning of this call, we're updating obviously these EPS bridges on a monthly basis. [Stefan Bressemier] who runs our pricing and analytics takes the whole commercial team, the operations team through this exercise. And what we saw is the fuel headwind and the sluggish economy headwind was heavier than what we expected and therefore, also some of the revenue initiatives, specifically the ones doing more with our core customers both airport to airport as well as door-to-door were negatively impacted.
So if you think about these initiatives, some of the ones on the revenue side because of the sluggish economy are kind of in red territory. Most of the ones on the Forward Game Shape side; cost management, efficiency management; are actually green and working. If you take the actual volume component out, which is obviously a huge component right now temporarily, the quality of everything that's underlying that EPS bridge is working and that's what my third point this morning was in my remarks. Grow forward is in essence actually working. However, the deep suppression of the volumes that we see right now is pulling the impact of it down. Is that getting to your point? I mean we can actually -- and I think we have a follow-up call with you. We can walk you through the individual components. But think about the revenue initiatives Forward Force.
Every single one of them is actually impacted by the sluggish economy, LTL more with the core customers, domestic forwarders and airlines; LTL more with door-to-door customers, 3PLs, international forwarders. That's deeply red. Then we have even on the brokerage more truckload brokerage, that's also deeply red. So the ones that are impacted by the sluggish economy, they show red. The ones that actually are less impacted by that, more trade shows, they don't show red. And then all the ones that are in the lower half of those initiatives, they show actually bright green because we do do our cost management, we do do our efficiency management. Outside miles being at record low levels stands out as one that's super green. So this is where I feel very, very proud of our team like they're managing grow forward the way we intend to. We just pulled down more than we had expected and that's our bad. We perhaps should have been more conservative on that. But the execution of grow forward is alive and kicking.
Operator
And we have no further questions in queue at this time. You may proceed.
Thomas Schmitt
Okay. Well, Alan, thank you so much. And also thank you to those of you who listened in and who have been partnering with us not just as thought partners, but also as action partners making this remarkable company work the way it does. We are in a freight recession. We are not out of it yet. And I look forward to having calls when we actually see all of the grow forward; high-quality freight, priced appropriately, operated in a very, very clean precision execution environment and made accessible to more customers and working even better with our existing partners; happen at full throttle. We'll get there together. Thank you for your support and for the business partnership. And I think with that, Alan, we are concluding this call.
Operator
Thank you. That concludes Forward Air's first quarter 2023 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.
