Forward Air Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2023

There are 8 speakers on the call.

Operator

Thank you for joining Forward Air Corporation's 3rd 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 dot forwardaircorp.com. With us this morning are CEO, Tom Schmidt and CFO, Rebecca Karbrik. By now you should have received the press release announcing our Q3 2023 results, which was furnished to the SEC on Form 8 ks 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 Q4 2023 fiscal year 2023.

Operator

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. Listeners are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date of this call. The company undertakes no obligation to update any forward looking statements whether as a result of new information, future events or otherwise, unless required by law. During the call, there may also be a discussion of financial metrics that do not conform to U.

Operator

S. Generally Accepted Accounting Principles or GAAP. Management uses non GAAP measures internally to understand, manage and evaluate our business and make operating decisions. Definitions and reconciliations of these non GAAP measures to their most directly and comparable GAAP measures are included in the press release issued, which is available in the Investors tab on our website. And now I'd like to turn the conference over to Tom Schmidt, CEO of Forward Air.

Speaker 1

Thank you, Rich, and good morning to all of you on the call. Let me start by addressing our performance and our trends first. On our last earnings call, I did say that this freight recession is tricky. And I did talk about intermodal and truckload were lagging the LTL recovery. That was still the case for our Q3.

Speaker 1

And also LTL itself, we had a weak July, and we were still showing negative year over year volume trends in July. That was in LTL turning towards flat in August, and we had positive volume trends in September. August and September both ended up in 85 OR territory and October is showing further volume improvements. Over the past couple of years and especially in the past few months, You gave us a lot of feedback around our LTL focus and around corporate clarity. We are listening and we are stepping up.

Speaker 1

And our Go Forward program is all about LTL. It's about rigorous focus on high value freight priced appropriately with industry leading service in a cleansed operating environment and accessing a larger customer and revenue base. That strategy of go forward remains unchanged, and first results can be seen in our OR trends. When we announced on August 10, the acquisition of Omni, that was all about going after more of that $15,000,000,000 high value freight LTL market, that 4th block of go forward, accessing a larger customer revenue base. We will execute that focus organically in 3 ways.

Speaker 1

1st and foremost, growing with the core, and that's the most important part. Our domestic borders have been our core partners since our beginning, and we're growing with them again. In fact, since we announced On August 10, the acquisition of Omni, we actually have grown with our domestic forwarder customers. We have given them our commitment that we will continue to give them the service in terms that will make them win more business and build scorecard track revenue with them, win rates for them and make sure that we do everything possible to make them win more business with us. We will not confuse efforts with results with them.

Speaker 1

Secondly, we will sell full steam direct to those customers who do not work with forwarders. With the August announcement, it should have been clear to everyone that we believe in our superior service, and we want to make it available to everyone, large, medium and small. Half the market uses forwarders, and we want to make them win more. The other half does not, and we're going now fully after that other half as well. And the press release, building out our direct sales force significantly over the next few months, and also we will be laser sharp on getting the volume and pricing sweet spot right for door to door service and for direct service.

Speaker 1

When you look at our numbers, you see we still have work to do on getting the volume pricing sweet spot right for direct and for door to door. The third point, we will live more corporate clarity. Starting in Q1 2024, LTL will be its own reporting segment. And over the next few weeks, we are finalizing clear short and midterm targets, action and dashboards, laying out very specifically are increased LTL revenue plans, margin plans and a percentage of LTL as a revenue of the overall company. Corporate clarity is something we will be living more.

Speaker 1

Portfolio review in an accelerated fashion is a big part of that. Forward focus is LTL and what's essential to make LTL stronger. With that, Rich, let's open it up for the lines for comments and for questions.

Operator

Thank you. The floor is now open for questions and comments. If you'd like to place yourself into the queue, you may press 1 then 0 on your telephone keypad. You may remove yourself from that queue by repeating the 10 commands. If you are using a speakerphone, we ask that you please pick up the handset before pressing the numbers.

Operator

Is time. We will begin with the line of Jack Atkins with Stephens. Please go ahead.

Speaker 2

Okay, great. Good morning and thanks for taking my questions. Good morning, Jack. So Tom, I guess maybe if we can start with and maybe double clicking a bit on the organic strategy related to your LTL business. I think part of that requires building out your commercial team and your commercial organization, could you talk a bit about the investments that you either have made or you might need to make there to really kind of be able to expand your direct to and direct to shipper strategy over the next couple of years.

Speaker 1

Yes, Jack. So, first of all, as you know, over the 1st 40 years, we exclusively dealt with our domestic forwarder and other intermediary partners. And then 2 years ago, we started in a small way Selling direct and we went to small, medium sized businesses that do not use third parties, that do not use forwarders. That, Jack, we have built out very, very slowly and consistently. It's grown over the last few months.

Speaker 1

It's a commercial team of 20 plus people. We have a very, very strong seasoned leader in place, actually leaders with Erika Toler and with Jennifer Johnson, hires that we've made in the last year and a half and more recently in one case, Nancy Ronning, our Chief Commercial Officer has developed with her team a very specific plan over the next few weeks to the next year to 2 years from now to tripling or quadrupling with the sales force with sales leaders that are proven in the space of selling direct. We also are very clear, Jack, that we have to Not make this an investment year, but in fact cut costs and redirect energy and resources from other places and invested in the direct sales force. But so what we slowly started 2 years ago with small, medium sized businesses only, now it's full force, Fair game. That's the benefit of the August 10th announcement that we had that we became very clear about are making sure that we are accessing that other half of the high value LTL market, small, medium and large.

Speaker 1

What you should be expecting is a roadmap with specific resources in that space over the next few weeks, this is going to be a doubling and tripling of that sales force within the next 18 months. And you should also expect us to go with revenue and margin numbers and percentage of overall company revenue that comes both from indirect sales with our partners and direct sales that we're building out. That road map should be extremely specific with milestones, targets and dates. But to be very clear, we're talking about a multi exiting of the effort that we started 2 years ago in a short timeframe.

Speaker 2

Okay. Okay. That's, that'll be encouraging to see, I think, as you guys Close that. And when you think about your network, both whether it's your terminal infrastructure or your First and Final Mile capabilities, do you need to make any investments there to execute on the direct to shipper strategy? Or do you feel like you have the infrastructure in place to be able to execute on that.

Speaker 1

Yes. We're going to continue doing terminal expansion. If you think about this year, We actually did in the 1st 10 months. We did 5 new locations with the Landair Express acquisition early in the year. And then we opened up our 3rd Chicago area LTL terminal.

Speaker 1

So we did 6 this year already. We said a couple of years ago, we expect at least 30 over the next 5 years, I. E. About 6 per year. With the strategy that we're now deploying and more aggressively than just going for SMB direct, that terminal expansion of game plan may have to be accelerated also.

Speaker 1

We are very clear that this is not only about recruiting and deploying world class sales leaders, this also obviously needs to have an operating environment, a customer service environment, the pricing environment that goes with it. So that is all part of that overall plan. Again, our strategy has been very consistent. It's accessing as much of the high value LTL freight market as possible, direct and indirect, the tactics that we're going to be pursuing much more aggressively are organic and that's I think what you're going to be seeing in this plan very, very specifically. This is Jack where I become very German analytical nerdy and you'll see some of that output.

Speaker 2

Okay. I think everyone will appreciate that, Tom. And I guess maybe last question, I'll turn it over. But it's the elephant in the room, which is Omni and the pending acquisition there. And I know you guys are probably pretty limited on what you can say, but I guess what are the next steps here?

Speaker 2

I mean what we'd be looking for from an investor perspective moving forward and at what point are we going to maybe see some resolution to this? Just what can you tell us about the next steps related to Omni?

Speaker 1

Yes. We feel very strongly that We are not under an obligation to close, that the conditions for closing have not been met. And that actually does put us into to consider options including termination. I'm a big fan of when things get longer, they don't get better. So we should be getting out of earnings call, I think, and I did certainly miss my objective.

Speaker 1

So that's all I can say on this, but we strongly feel that the obligations to Close have not been met and determination is an opportunity that we can seize if we choose to do so.

Speaker 2

Okay. Well, I'll turn it over to the next person, but thanks again for the time, Tom.

Speaker 1

Thank you, Jack.

Operator

Will now go to the line of Scott Group with Wolfe Research. Please go ahead.

Speaker 3

Hey, thanks. Good morning.

Speaker 4

Good morning, Scott.

Speaker 3

So maybe Tom, Can you any color you can share on any certain discussions you've had with Omni since your update a week ago? And and any degree of confidence of getting out of this transaction and why you feel confident you can. And then just separately, when you talk about portfolio review, maybe just give us a little bit more color of what's on the table of and stuff to be sold.

Speaker 1

Yes. Scott, on the first topic, I think I said what at this point I should say and can say. We feel very strongly that the obligation to close is not there and that termination is an option. Obviously, Omni has been a business partner and a good customer of and the press release, we're going to see looking for ways to make sure that that's getting preserved and enhanced. But there's not more I can say.

Speaker 1

I mean, I think I did say, Scott, I mean, I just talked with Jack that longer is not better. So we are looking for a resolution obviously quickly, but that's all we should be talking about this. It's much more, I think, full calories and useful calories spent on kind of what we do and what we can control, and that's what I just gave some highlights on with the building out of the direct sales force in addition to serving our world class intermediaries and make them win more. On portfolio review, it is what we always do. If you remember, every single supporting business line has to make and the LTL business better and has to be essential for it and also has to build has to live up to its own financial expectations.

Speaker 1

If you remember, 3 years ago, that was no longer the case for one of our supporting business lines. It had fulfilled its service to pool retail distribution business, and we sold it. And all I'm making sure that we are clear on is, we are accelerating that portfolio review looking at other supporting businesses. But obviously, we don't talk about M and A one direction or the other before it's done. But Just be rest assured, we hear loud and clear that supporting business lines have to be essential to making LTL the main show.

Speaker 1

And when that's no longer the case and they serve their purpose, then graduation is coming.

Speaker 3

Okay. And I guess I understand you're limited in how much more you can say, but can you at least share what conditions have not been met?

Speaker 1

Yes, it's Actually, in the in our release that we put out on Thursday last morning, Scott, we do speak to and access to material information, for instance, in a timely manner, but we actually, I think, are putting out there 2 specific and the merger agreement, so that's and the merger agreement is public record. So that's certainly something you can look up. Most important part is we control what we control. We are managing our business. We are we did say on August 10, we are going after all of the high value LTL market direct and indirect, and we are just doing more of that faster now organically.

Speaker 1

Okay.

Speaker 3

And then just shifting gears to the guidance, maybe either Tom or Rebecca, can you just share what's I know that we did some debt transactions in the quarter. Are we capturing higher interest expense in this guidance? What are the margin assumptions in here? I just and want to understand the moving pieces here with the guide.

Speaker 5

Yes. So Scott, happy to talk through some of that. So we gave an adjusted guidance and we put a footnote into our earnings release suggesting that we wouldn't be able to reconcile those adjustments, but we believe that that interest expense that we're accruing on those high yield notes and then other fees on our Term Loan B that those would be considered part of our non GAAP. So they wouldn't be part of the and EPS that we've provided. I think from a margin standpoint, Q4 is looking a bit like Q3.

Speaker 5

When we think about it, we think there's a bit of a muted peak for the LTL business. Intermodal gets a bit worse in Q4 just from a seasonality standpoint. So there was a little bit of a comparison, if you will, between Q3 and and Q4 is you're thinking about it from a guidance standpoint.

Speaker 1

The one thing Scott, sorry, go ahead. Specifically on the LTL volumes, right, the volumes are getting better, and we see that momentum continuing. What we, in all fairness, are fully focused on and still need to get better at is finding that volume pricing sweet spot for the door to door business and for the direct business. The airport to airport business, obviously, we have lived for 42 years, so we've got a very good understanding of how to price that for maximum profitability. We still need to be able to get that game up for the direct business and for the door to door business, that's what's reflected in some of the muted numbers that you're looking at for Q4 guidance.

Speaker 3

Okay. Thank you.

Speaker 1

Thank you, Scott.

Operator

Will now go to the line of Bruce Chan with Stifel Nicolaus. Please go ahead.

Speaker 4

Thanks, operator, and good morning, Tom. Good morning, Rebecca. And I just want to focus a little bit big picture here for a second. Obviously, there are some maybe questions or or concerns or uncertainties about the underlying business strategy. And I just want to get a sense of when you speak with your core legacy customers, What are they most worried about?

Speaker 4

And what are you doing to convince them that the fundamentals of your value proposition are still sound?

Speaker 1

Yes. I mean, the good news is, I mean, obviously, we've known, not just the companies, but most importantly, the players at those business partners and customers extremely well. I mean, our sales leadership and frontline people have worked with them for a long time. So There is a strong relationship and there's also a strong understanding of kind of what makes them win. I'm going to see actually one of them this afternoon and we have very open conversations.

Speaker 1

So what they obviously were concerned about with the acquisition announcement on August 10 is, is someone else getting preferential treatment, are we still going to support them and make them win more business. And what I think we are I'm very focused on and what we have been successful with is can you measure each other by our actions and by our results Much more so than by our words. At the end of the day, my test with our domestic forwarder business partners is when you use Forward Air, Are you winning more business than you did without Forward Air? Are you making more margin? And you can keep score of that, but we can keep score of the revenue.

Speaker 1

And then when you use us, what's the win rate when you use us? Is that going up or down? And Bruce, what we're doing is we have those very specific scorecards in place with those customers. And if at the end of the month and end of the quarter and we're actually keeping those scorecards up to date on a monthly basis, those business partners see they're actually winning more business and they're making more money when they use us. And every single time they go to bat, their percentage of winning actually looks better than it did 3 or 6 months ago.

Speaker 1

They say, okay, this still works for us. And in all fairness, since August It's now been more than 2.5 months. Our domestic forwarder customers are using us 14% more than they did before the announcement. So despite a lot of kind of, I guess, straight talk and somewhat emotional conversations, the strength and depth of those relationships is very, very, very profound. And I think we're living that and we're keeping score together.

Speaker 1

And as long as we are well intended competent and make them win more business and move heaven and earth to do so, they're going to keep going with us. And that's an and not an or to also accessing the direct sales the direct market. With a small SMB focus that we've had for the last 2 years, We got our kind of training gear in place to make sure that we actually ask all the questions upfront to to make sure that we are not stepping on our partners' toes, we're actually going after a market that's complementary and additional to our domestic forwarder business partner market. And so we tried that out with SMB. Now we're going to continue doing that and we're going to go medium sized and large and our customers also.

Speaker 1

So much more of that, but we are not rookies to that game. But we do still need to get better on finding the volume and pricing sweet spot, selecting the right freight, pricing it correctly. And again, some of the conservatism into our and Q4 numbers is reflecting the fact that we still have untapped upside on the pricing side for the business that's direct and that's door to door.

Speaker 4

Okay, great. That's really helpful. And maybe just a follow-up. You talked a lot about metrics and KPIs for your customers. Obviously, one of the important ones is service.

Speaker 4

Can you just talk about how things like damage claims on time metrics have trended through the quarter from last quarter? And when you think about some of the coming changes to your business and your network, what are the investments that you need to make in order to maintain those levels of service?

Speaker 1

Yes. Bruce, it's interesting. When we actually did a 3rd party study last year on looking having a 3rd party, this was SJ Consulting Ship Matrix, looking at the entire U. S. LTL market, million and 1,000,000 of data points and looking for speed, on time performance, claims ratios and we came out on top of each one of those metrics over world class companies.

Speaker 1

The others are hunting and chasing us. They're very good at what they do, and it always keeps us sharp when they're looking to get better too. But we have objectively the lowest claims ratio in the LTL market in the U. S. We have objectively the best on time performance once you actually eliminate or at least make parallel all the exemptions and exceptions.

Speaker 1

So that takes a lot of investment, which we are obviously making in our terminal work, our operations team led by Chris Ruble is world class, but we're not taking this for granted. We have absolutely top notch competitors that are chasing us, But we are the best at what we do. In terms of investments, anything from making sure that the flows in the terminals are efficient. There's technology we're deploying. We have a great kind of business partner with our CIO, Jay Tomasello and his team that's making sure that the flows are the most direct flows between inbound and outbound floors that we can actually always locate and the freight, we have obviously a guaranteed service on top, so that we have a last in first out rule in place.

Speaker 1

There's significant safety investments, there's significant operational investments that we are making, and we're going to continue making those. And technologies is a big one, both on the safety side as well as on the operational efficiency side.

Speaker 4

Okay, great. And then just directionally with the changes in the mix and the changes in the business, have those metrics been flat, up, down?

Speaker 1

So with the increased focus on door to door and also direct, especially going forward, The investment itself, I think, is still as a percentage of overall revenue going to be somewhat stable. What we do have to do, Bruce is we do have to get more into making sure that the customer service aspects, the pricing aspects are going to be equally sharp as they were in airport to airport. So there may be a small uptick there for a short period of time. But again, this is why I said before, we have to find and the money in other spaces, this cannot be an investment year coming up. But yes, we do have to build out that door to door and the direct service, not just on the sales side, as I said before, but also on the supporting team side.

Speaker 1

So you will see an investment there that has to come from other resources and expenses inside the company. Cost management is certainly going to be a top priority to make sure that we can funnel those types of energy and resources into the direct space.

Speaker 4

Okay. I'll turn it over. Thank you.

Speaker 1

Thanks, Bruce.

Operator

Thank you. We'll now move along to the line of Stephanie Moore with Jefferies Group. Please go ahead.

Speaker 6

Hi, good morning. Thank you.

Speaker 1

Good morning.

Speaker 6

I wanted to maybe follow-up on I'd like to follow-up on a kind of using more of your services in the last couple of months, it seems like the underlying freight environment is still pretty weak and the porting environment is still pretty weak. So what do you think is driving maybe the stepped up Engagement.

Speaker 1

Yes. So we all if you look at the entire industry and That's definitely true to a smaller extent for us also. We did have temporary dislocations. The first one was obviously yellow capacity that went temporarily out of the market, 9% of the doors, obviously, those shipments still have to be moved and they went to other providers. You saw some of the first class rate companies reporting, I would bet you that some of them like Assiah would have had quite a bit of what otherwise in the past would have been yellow business, we had some of that too, lesser than the others because the freight mix freight overlap between yellow and us is perhaps less fully developed as it was between Yellow and some of the other 1st class freight companies.

Speaker 1

So and then Estes, obviously had an unfortunate and we are very familiar with that because we lived through a cyber attack ourselves in 2020 incident on cybersecurity that also temporarily I think shifted some volumes. Having said all of that, if I look at specifically September and if I look at October, it seems like on the high value LTL freight side, this is less consumer discretionary, more industrial, there is actually a bit more momentum in the demand that we are seeing. When we talk with our business partners, yes, imports from Asia are still muted, but the LTL environment clearly is better than it was towards the end of Q4 last year, Q1 this year, Q2 this year. So there's a bit of a spring in the step for the industry from the yellow and the Esters temporary dislocation, but the trends overall are more sound right now. I still am not high fiving myself here for a huge peak, but this is a better LTL environment right now than it was 3 months ago or 6 months ago.

Speaker 6

So maybe just following up on that, is it would it be reasonable to say that with the dislocation from yellow that maybe some of this high value freight that 6 months ago, the likes of your public LTL player the likes of the other LTL players, the size and ODs, Maybe they would have moved some of this high value freight, but now given the tighter capacity environment, they kind of were giving some of that freight back to you guys. Is that A fair assessment or no?

Speaker 1

I wish they were that generous, but I think they know better than that. No. So that's why I said before, I do believe the yellow dislocation helped the industry on pricing discipline all up, but it also helped some of the players with gaining new volumes. We did get some volumes through our intermediaries for long haul yellow business and also some events business, But we were clearly, from a pure volume perspective, less of a beneficiary than some of the class freight companies were. And I do not have the impression that this is a ripple effect where yellow business went to Saia Old Dominion and their high end business went to us.

Speaker 1

I do believe domestic forwarders frankly are just gaining more business, getting more business. And when they compete with us as part of and the contest, their win rates are going up. So I do see a better LTL environment going into the 4th quarter. Again, the reason why the numbers look probably somewhat muted or conservative is us being very much aware that we need to figure out the pricing and volume sweet spot for door to door and direct the same way we have worked on that for many, many years on the airport to airport side.

Speaker 6

Okay, got it. And then just following up there, can you talk a little bit about your plans for a GRI or general rate increase you hear going into the Q4 or thoughts into 2024. I know some of the other LTL players and the announcement where they stand kind of looking out over the next 12 months. So any update on timing?

Speaker 1

Yes. We are very consistent when it comes to the process here. So Stefan and Katie Fox and their pricing team towards November, we announced for the following year. We work with our customers directly so that and there's predictability and they can actually build those increases into their budgets. They're driven obviously by investments.

Speaker 1

We talked about terminal investments. We talked about safety investments. And also obviously in some cases there's wage adjustments that we have to make sure we finance and fund. So there's always going to be a GRI. It's always the 1st Monday in February.

Speaker 1

So that gives predictability to our and business partners for their budgeting season themselves. And I think the ranges that you saw in the last couple of years, 2020 1 was the high end with 7.9. Some of the lower numbers you have seen is 5.9. Somewhere in between those two numbers is probably going to be the GRI for 2024.

Speaker 6

Perfect. And then lastly for me and just taking kind of a big picture of you, and appreciate your commentary about kind of building out that direct sales network and going after that incremental TAM in the premium LTL space. So as you're kind of building out organically, this direct sales team, what do you need to do to kind of make sure you're preserving your existing relationships with the domestic and forwarders, I think we talked about what you kind of had in place if the omni transaction went through. But if it is all kind of done internally or organically, and what would be the strategy to kind of preserve your existing relationships while also going after some of the Metroplex business?

Speaker 1

Yes. So it's Stephanie, obviously, a huge focus for all of us here to get that right. But again, I think as a reminder of that estimated net estimate is probably very conservative because it's about 6 years old data, dollars 15,000,000,000 high value LTL market that values no damages, high speed, hitting tight time windows, of that $15,000,000,000 roughly speaking, half of it gets transacted between shippers and companies like us directly, the other half goes through intermediaries. So if you take that, the one thing we have to absolutely nail is when we go after the half that's not being transacted through intermediaries, We have to be extremely explicit asking the questions upfront. Are you using forwarders?

Speaker 1

Have you worked with forwarders? Are you intending to use forwarders? And if they do, then obviously we're going to do everything possible to make that forward or keep and win that business because they probably have it for a reason. Those companies may not have a sophisticated large transportation or supply chain department because they use those forward as in essence to be that department for them. So but that's Again, the team did a great job, Melissa Fieser and her colleagues kind of over the last 2 years and now increasingly Jennifer and Erica, Making sure we ask those questions upfront and we don't and we go by the facts, obviously.

Speaker 1

In 2 years, there were a handful of instances where there was some noise, literally a handful in thousands of interactions. So we have our training wheels in place here. We know how to ask those probing questions. We know how to actually qualify for that. Stephanie, we will only win if we keep and re earn the trust of our domestic forwarders By making sure we get this very, very right that this is an and, not an or, and it's complementary, not overlapping.

Speaker 1

A gray zone here is The end, it's got to be something that's black or white and we have those probing questions to make very certain it's black and white. There is half of the market that gets transacted directly between the shipper and transportation providers and we need to make sure we identify that half of the market correctly.

Speaker 6

Great. Thank you so much.

Speaker 1

Thanks, Stephanie.

Operator

Will now go to the line of Bascome Majors with Susquehanna. Please go ahead.

Speaker 7

Rebecca, I think to help us reconcile the guidance without necessarily guiding non GAAP things that you can't guide. Is there any way that you could give us some bookings on what operating income for the expedited freight or intermodal segments are underlying that guide?

Speaker 5

Yes. I mean happy to give you a bit of some flavor there. I think when we think about Expedited Frame, we think about the margin. We are expecting a bit of some margin expansion as we look from Q3 to Q4, are not much, but I do think there is a little bit there when we move down a bit to intermodal. As I mentioned from a seasonality standpoint, just looking at the Intermodal business, Q3 is typically stronger than Q4 and that in fact it does hold true and as we think about the guide to Q4.

Speaker 5

So we will see a step down from Intermodal from Q3 to Q4.

Speaker 7

And are you talking specifically margins or operating profit on both of those signals?

Speaker 5

Operating margins.

Speaker 7

Thank you. On the and Tom, this is a legal question. I don't know if you have someone from inside or outside counsel available or if you can just comment loosely, but the shareholder plaintiffs did appeal the ruling in your favor late last week. Any update on how long that would take to have some resolution on whether or not that appeal will be heard would be helpful.

Speaker 1

Yes. So and I'll tell you obviously what I know. So there is a you're absolutely correct. And this I don't know whether everybody is following this. This had to be with the had to do with the temporary restraining order and that 3 plaintiffs, former employees and shareholders in Greenville had the chancery court actually received and that temporary restraining order was lifted, Which means there's no we actually frankly appreciated that outcome because it does mean and that's very important, We're doing things the right way.

Speaker 1

I always say we're not a hotdog stand. We need to make sure that we get things We get the right things done, but we also do them the right way. You're right, Bascome. There was a I'm not sure whether the term appeal is technically correct, but there was the plaintiffs asking the judge one more time to reconsider To getting a temporary restraining order in place and there is a hearing and or ruling this afternoon in Greenville about that. So there should be more news coming out of Greenville within the next 10 hours or less.

Speaker 1

I think it's a 4 o'clock meeting, so it's more like 6, 7 hours from now. So that's still undergoing. Again, our focus is and we have a very, very seasoned mature team here. Our focus is on controlling the things we can control. There's a very small group here, certainly Rebecca and me included, Michael Hance, our Chief Legal Officer included, that need to guide us through some of the ongoing kind of navigation of litigation issues, The other 99.99 percent of our team need to be fully focused on finishing this year strong.

Speaker 1

And and the guidance, I think, is conservative, but let's just be let it be what it is and let's just keep finishing the year strong. We have a very clear strategy. We have a lot of untapped upside. We told the world on August 10 that we're going after this untapped upside, Which is going after it organically because that's what we can control right now.

Speaker 7

Two big picture questions to close. The direct sales strategy was always part of your attempt to grow forward. In August, we found out that you thought doing that acquisitively might be a better path to achieving that in and Now we're pivoting back to really doubling down on the organic direct sales strategy. Can Can you talk a little bit about what drove the change of heart and what didn't work as fast as you hoped it would in the 1st year or 2 of that and why it can work now?

Speaker 1

Yes. So first of all, Bascome, I think you characterized this exactly the way we're looking at this. The strategy has been very clear. To your point, the tactics over the last several months looked like they were shifting back and forth between 2 alternative approaches. Good news is those approaches don't have to be alternatives.

Speaker 1

I mean, they can be complementary and additive. The reason why, Bascome, I fully believe that we can go full steam direct now is at least twofold. The first one is, we do have 2 years of experience basically doing the direct selling in a small way with going after small, medium sized businesses that do not use forwarders. So we kind of know how to ask the qualifying questions, what the right high value freight is. And we started Getting better with pricing for it.

Speaker 1

And again, there's still untapped upside, as I said before. So there's some experience that we can bring to bear. I think the second Reason is, now that we've on August 10 announced that we are going after that entire direct space, I think we have a license to do it. We, in the past, almost felt constrained, because as a company for 4 decades, all we did was working with great business partners, domestic followers and that's in essence all we did and we started getting our toes into the water with small, medium sized business. On August 10, we announced that we're going to go after the entire direct market that does not use forwarders.

Speaker 1

So I think just announcing it, having the tough customer conversations gives us a license to do now what we never felt we had a license to do. So I think that's a mindshare and mentality issue. The last thing I do want to mention, I mentioned before the somewhat and the company's ability to execute on the company's earnings call. We do have a very, very strong Chief Commercial Officer with Nancy Ronning, who has the type of analytical structured thinking and approach that goes together in her case also with a great way of leading teams, developing teams and also having a great relationship kind of building mentality with customers. So I think between having started to doing the SMB secondly, announcing we're going to do it now for the entire direct market and third, having the right leadership in place.

Speaker 1

We've got the ingredients now, Bascome, that we didn't have 3 or 4 years ago.

Speaker 7

Thank you for walking through that, Tom. I'm going to ask one more big picture question then pass it on here. But I mean, it's frankly been difficult for investors to keep up since early August. This war has kind of grown on several fronts, expanded to include your acquisition target itself late last week. And I realize you can't talk about the specific path forward given the myriad legal issues involved, but if we were to go to sleep today and wake up in February to your 4Q release and initial 2024 outlook and everything has gone to plan from your perspective over those 4 months.

Speaker 7

What are your customers, employees and investors looking at for the company structure, strategy and go forward outlook.

Speaker 1

Yes. So and Bascome, I truly appreciate and I'm very grateful to our team and also to our business partners for having had support and patience over the last several months, all we were doing is pursuing our strategy of go forward. We talked about this before. And yes, I think the fact that we were exploring different tactics getting to a larger customer and revenue base direct caused a lot of emotional upheaval on multiple fronts. And I realize that I'm sorry for that and I apologize for that because that's obviously not what we intended to do here.

Speaker 1

We are doing the right thing. We are the best company in the high and the value freight space and we are working through our go forward strategy to get to provide that type of world class service to more customers and business partners. And it's been a bit rocky over the last several months trying to get to the best path to execute here. 4 months from now, when we all wake up in February to our and outlook for 2024, I certainly will do everything possible to have stability in place, so that we know kind of how we're going to go forward organically with that strategy. Secondly, I would expect us to be extremely mathematical with a multiyear scorecard of LTL revenue, LTL margins and LTL as a percentage of overall company revenue.

Speaker 1

And third, I would expect that, that corporate clarity with portfolio review will have yielded consequences by then.

Speaker 7

Thank you, Tom. Appreciate it.

Speaker 1

Okay. Thanks, Bascome.

Operator

We'll now go to the line of Christopher Coon with The Benchmark Company. Please go ahead.

Speaker 4

Hey, Tom. Hey, Rebecca. Good morning.

Speaker 1

Good morning, Chris.

Speaker 3

Tom, maybe just

Speaker 4

to the extent, If you did take on some of Yellow and SD's volume, what's your sort of thought process around keeping that volume? Do you think some of that then kind of settle or somewhere else or do you feel confident you can keep some

Speaker 7

of that?

Speaker 1

Yes. So again, Christa, one thing and I think we even talked about this before. I strongly believe based on data sets that we saw from 1 week to the next, like over the last 2 or 3 months, we were a volume beneficiary from those two dislocations, but we were much less a volume beneficiary than some of and the great class rate companies. So we're talking literally a couple or 3 percentage points, not 8 or 10. And but the business that we were going after was long haul business that fits us well.

Speaker 1

And it also was some events business. So my sense is what came, came here for a reason. It wasn't a hell of a lot, but what came here should have come Here is going to be here to stay. So those volume trends that we're seeing right now, I expect to continue seeing them.

Speaker 4

Okay. And then just as you go after sort of the larger customers for your direct sales, I know you're going after customers that don't use forwarders, but do forwarders market to them and will you be stepping on some of your customers' toes as you try to grow The large businesses.

Speaker 1

Yes. So this is again where, Chris, we have to get this as black and white as possible. Gray is not helpful here. So, but fundamentally, if you look at this, go into the automotive industry, go into the, like some of the industrial verticals, You do have companies and they are in the same space and some of them say transportation and supply chain for us is a core competency and others say in the same industry That's not something that's core to us. We are going to use a world class company to help us with that.

Speaker 1

And all we have to do is very surgical. We have developed the right and the press release and the press release and the press release and the press release and the press release and the press release and the press release and the press release and the press release and the press release and the press release

Speaker 4

and the press release and the press release

Speaker 1

and the press release and the press

Speaker 4

release and the press

Speaker 1

release and the press release and the press release and the press release and the press

Speaker 4

release and the press release and

Speaker 1

the press release and

Speaker 4

the press release and the press release and the press release and the

Speaker 1

press release and the press release and the press release. And the that capability and has 50 or 80 people sitting in their operations research and transportation floor and doing all that themselves. And if it's the latter, these people tend to not use forwarders. I was with DB Schenkel for 3 years between 2015 2018, and we had customers in the same industry embracing us and the same industry, other customers telling us, sorry, no need for you. We're going to deal with the transportation providers directly.

Speaker 1

So I'm very used with this with that 2 pronged complementary approach. And it's actually, as we saw in the last 2 years, very well executed by our sales team in the SMB space, it's fairly if you go about it in a disciplined way, It's fairly doable to find out which of these 2 you're dealing with. So Chris, I would not expect that stepping on our partner's toes at all.

Speaker 4

Okay. I'll leave it at that, Tom. Thanks.

Speaker 1

Thank you, Chris.

Operator

Our final questioner for today will be Scott Group with Wolfe Research. Please go ahead.

Speaker 3

Hey, guys. Thanks for the follow-up. I just want to again follow-up on a few things I heard today. So Tom, when you talked about a mid-80s OR in the last couple of months, is that the whole expedited segment or just a piece of that?

Speaker 1

That's just LTL and that's the type of OR view and mindset that you're going to be seeing next year starting Q1 systemically.

Speaker 3

And then so within LTL, can you maybe can you give us a sense of if it's at a mid-80s OR, what's the airport to airport OR doing versus what's the door to door OR doing right now?

Speaker 1

Yes. So We have not made that public. And but again, this may be something we may want to do for those dashboards that we're going to be developing. We're obviously tracking both of them separately. Airport to Certainly, airport to airport always was the most profitable part of our business.

Speaker 1

And again, it's our effort. So if you think of one more in the high teens and perhaps the other one more in the low teens that directionally gets you there. But we need to clearly get better and better with direct and door to door. Some of the class freight companies are clearly demonstrating that it's possible to get into, 85, 80 and sub-eighty ORs when you sell Door to door. So there's certainly discipline that we still need to get better at, but it's certainly not rocket science to get there.

Speaker 3

I mean, I guess ultimately what I'm trying to get to is, you keep saying, you really, really want to grow this LTL business, this door to door business. But you said multiple times on the call like that you still haven't figured out the sweet spot of volume and price in this door to door business. So I guess strategically, I'm just sort of struggling a little bit like if it's a business we haven't figured out yet, why are we so gung ho about growing it? I'm just Like I said, I'm a little confused.

Speaker 1

Yes. It's well, let me when given the opportunity, people choose to be confused, so let me take that opportunity away. The door to door business, when we went into that 6, 7 years ago, the main reason to go into it was that the TAM is at least 10x of airport to airport. So in terms of just and the addressable market, it's a much bigger pond in which we can fish in. Secondly, when you sell direct, You also to people who do not use forwarders, you also potentially deal with a much larger margin potential because there's no and other group in between that's also looking to make a margin off of that opportunity.

Speaker 1

And third, we do have some verticals and we have some customers in the direct space that margin wise work beautifully. So we know it's vast in terms of the TAM, we know that the margin potential, look at some of the best class rate companies, also look at the Pure math formula of not having an intermediary in this case. So there's a it's a vast market. It has huge margin potential. And in pockets, Scott, in pockets we are seeing that we actually can make very, very good margins with it.

Speaker 1

All we have to do is Make it a main priority for us to do it more comprehensively across the board.

Speaker 3

And then just the last thing, if I may. So assuming you're able to get out of this and the omni transaction and obviously save a lot of capital. Do you think about deploying that capital to there's a whole lot of yellow terminals about to come to market like if you want to actually become an

Speaker 4

LTL, maybe

Speaker 3

we need some of those terminals. How do you think about that?

Speaker 1

Yes. So we obviously clearly have our and capital priority kind of set, which organic growth always is number 1. You could actually argue that the building out organic the direct sales business and then having an accelerated terminal expansion would go well together. So Yes, we clearly would be looking at organic growth, including make sure we have the network in place as something that would be a great use for our capital. And Scott, you just mentioned one very particular application, which with the yellow terminals.

Speaker 1

We So that would come first and foremost, and then we have our regular priority set between M and A, which would be typically smaller tuck ins, but it could be tuck ins in the LTL space and then we obviously have dividends, which we always stick to and buybacks, all of that, I think, has quite a bit of breathing room With the termination opportunity of the Omni transaction.

Speaker 3

Okay. Thank you for the time. I appreciate it.

Speaker 1

Thank you, Scott.

Operator

And the press release 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.

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Earnings Conference Call
Forward Air Q3 2023
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