Yahoo Finance Forward Air Corporation (NASDAQ:FWRD) Q4 2023 Earnings Call Transcript
Forward Air Corporation (NASDAQ:FWRD) Q4 2023 Earnings Call Transcript February 29, 2024
Forward Air Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Forward Air Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open following the presentation. [Operator Instructions]. 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 Interim CEO, Michael Hance; and CFO, Rebecca Garbrick. By now, you should have received the press release announcing our fourth quarter 2023 results, which was furnished to the SEC on Form 8-K and on the wire yesterday after the market closed.
Forward Air has determined that it is unable to file its annual report on Form 10-K for the year ended December 31, 2023, by the prescribed due date without unreasonable effort or expense as the company requires additional time to complete its financial statement reporting process in light of recent significant company transactions. This process includes finalizing the accounting treatment and related disclosures of the debt issued in connection with the acquisition of Omni, which impacts the company's balance sheet as of December 31, 2023, and statement of cash flows for the year then ended. The company expects to file its annual report on Form 10-K for the year ended December 31, 2023, within the extension period of 15 calendar days as provided under Rule 12b-s25 under the Securities Exchange Act of 1934 as amended.
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 first quarter 2024 and fiscal year 2024. 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.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 comparable GAAP measures are included in the press release issued which is available in the Investors tab on our website. Now I'd like to turn the conference over to Michael Hance. Michael?
Michael Hance: Good morning, everyone. Thank you for joining the call today. Before we jump into the quarter, I just wanted to take a few moments to acknowledge the recent changes at Forward and introduce myself. Forward has been navigating a period of turbulence in the freight market and within our company. The past few months have been bumpy, but I am confident that is behind us, and we are all united and energized by the opportunities ahead. We are moving forward. We appreciate the support we've received from many listening to the call today. We value your feedback and perspectives. And as you've seen from recent announcements, our Board has taken decisive action to ensure Forward is on the right track for the future. Earlier this month, the Board appointed me interim CEO in addition to my position as Chief Legal Officer and Secretary.
Now I've been with this company for 18 years in a number of different roles in legal and HR and have a strong understanding of the transportation industry in Forwards business. Taking on this role is personal for me. It is a position of trust. I care deeply about this company's success and the great people who come to work every day and serve our customers. I know that our people, our customers and our shareholders are counting on us. My mandate during this period as interim CEO is to make sure we have the appropriate leadership to move forward while our Board's dedicated search committee promptly identifies a top quality CEO to run the company during the next phase of our future growth and development. I want to be clear with you. We are not waiting or standing steel during this interim period.
Instead, we are rolling up our sleeves and doing the challenging and exciting work of integrating Forward and Omni and positioning us to quickly capture the value this acquisition has made possible. I have the privilege of working with an incredibly capable management team, now complemented by colleagues from Omni. We are laser focused on integration. Over my 18 years with the company, I have come to firmly believe that the key to Forward’s success lies squarely with the dedicated people consistently delivering incredible service to our customers for their mission-critical freight. Our LTL customers expect and enjoy the highest levels of service and lowest claims and damage ratios in the industry. This continued without interruption during the last year and it's not changing.
We have been delighted to learn that Omni's success was built on the same foundation of high-quality service. A key part of my new role is to ensure that we do not waver in our collective commitment to this core principle and that it acts as the cornerstone of our integration plan. Now I've been in my new role for about 3 weeks now. So I won't attempt to be exhaustive on this call. Here's what we're going to do. Today, we're going to provide you with an overview of Forward Air's Q4 financial performance as well as the current performance of the legacy Forward Air business and our path to deleveraging through prudent capital allocation. We will then provide updates on customer retention, omni integration and the combined company. Now the information we provide about Omni's performance and our integration progress will be high level at this point, but we are committed to transparency and providing you with more detailed updates on both topics as we move forward.
Before turning the call over to Rebecca, I do want to note upfront that during this period of transition, we will not be issuing quarterly guidance and we'll evaluate when the timing is right to provide it on a go-forward basis. And now over to Rebecca to run through the quarter.
Rebecca Garbrick: Thanks, Michael, and good morning, everyone. I'll start by briefly touching on the 10-K, which was mentioned at the top of the call. We will require additional time to complete our financial reporting and file our 2023 Form 10-K. In light of the compressed closing time line of the Omni acquisition, we expect to file it within the extension period of 15 calendar days. What remains outstanding is finalizing the technical accounting treatment of the debt connected with the acquisition which would impact our balance sheet at December 31, 2023, and statement of cash flows for the year then ended. However, we are confident that the outstanding item will have no impact on our income statement. Let's move on to reviewing the fourth quarter.
In Q4, we announced the sale of our Final Mile business to Hub Group in December for an estimated total cash consideration of $260 million. Our results are adjusted for the sale of that business, which had an impact on our fourth quarter guidance. As a result of the Omni transaction, our reported fourth quarter results reflect two one-off items that impact profitability and free cash flow generation. The first are the professional fees or transaction costs incurred in connection with the acquisition of Omni Logistics in the amount of $30 million. But all these costs were incurred in 2023, the company expects to have transaction costs in the first quarter in connection with the closing of the acquisition in addition to integration costs. The second are the net interest payments due on table on the high-yield notes and the Term Loan B in the amount of $21 million.
The $21 million reflects the interest expense offset by the interest income earned on the investment of the proceeds. Both the high-yield notes and the Term Loan B closed into escrow during the fourth quarter. As we continue to execute our growth strategies in the fourth quarter, we saw positive trends in our less than Truckload business with pounds per day growth of more than 6% over the same period last year. Our freight quality also improved as weight per shipment increased more than 11% to GBP 815 over the prior year period. During the fourth quarter, we saw a 2.5% increase in the revenue per shipment, excluding fuel and an 8% decrease in the revenue per hundredweight, excluding fuel. The decline in the revenue per hundredweight, excluding fuel, was primarily driven by the shift in the business mix as we execute upon the expansion of our door-to-door solution.
Challenging market conditions persisted throughout the quarter, particularly in the intermodal and Truckload brokerage lines of businesses, which led to decreased customer demand for these services, a pattern that we've seen since the second quarter. This resulted in Q4 revenue of $338 million on a consolidated continuing operations basis compared to $403 million, a 16% decline. This was within the guidance range of 9% to 19% decline. Operating income on an adjusted basis was $32.6 million compared to $58.4 million for the fourth quarter. which reflects the add-back of the one-off costs that I mentioned earlier. We reported adjusted net income per diluted share on a continuing operations basis of $0.81 above the guidance range of $0.78 to $0.80.
Our free cash flow for the fourth quarter was $48.9 million compared to $43.5 million for the same period in the prior year. The free cash flow was impacted by the payment of the professional fees incurred in connection with the acquisition of Omni. Looking to 2024, in January, as noted in our earlier press release, weight per shipment increased 9.8%. Pounds per day also increased 9.2% compared to the same period last year. Revenue per ton mile increased 1.9% over the prior year, excluding fuel. For the first few weeks in February, our pounds per day increased 8% over the same period last year. This increase excludes the impact of folding the Omni network into the Forward network. The 5.9% general rate increase we announced in December went into effect in February and will enable us to continue to serve customers with the same precision execution in an environment with rising operating costs.
The capture rate was higher than 222 and the rate increase is commiserate with the increase in operating costs expected for 2024. With regards to our capital position, we are still awaiting on the 2023 audited financials, but our net leverage ratio at the close of the transaction was estimated to be 5.2 times. This is based on our leverage formula used in the lender's net debt-to-EBITDA covenant. The calculation includes the full realization of cost synergy opportunities and a maximum of $50 million of cash as an offset to debt. As of December 31, the combined entity had more than $200 million cash on hand. We are working to optimize our capital structure, and we'd like to share a number of relevant terms of our existing debt facilities. First, we announced several weeks ago that we were able to amend our credit facility to temporarily increase the maximum consolidated first lien net leverage ratio permitted by our covenants.
This amendment provides headroom as we continue to focus on our integration of the 2 companies and realize the cost synergy opportunities. We also repaid $80 million of aggregate principal on the Term Loan B along with accrued and unpaid interest. This reduced our net leverage ratio by 0.2 times and aligns with our capital allocation policy to use cash generated from the divestiture of businesses for the repayment of debt to accelerate the path to deleverage. Going forward, our debt mix of Term Lone B and bonds provides us with a payment flexibility, and we have additional capacity on our revolver. Under the new covenants, we are committed to returning to net leverage of 4.5 times by the end of 2025. We are committed to derisking our capital structure, and we are already undertaking several initiatives to deleverage.
As we have previously communicated, our policy is to run at a net leverage ratio of under 2 times, and we are committed to taking the necessary steps to adhere to that policy. These steps include a key focus on profitability of the combined entity and the realization of the cost synergies to generate cash from operations as well as an accelerated portfolio review to identify potential divestitures. As part of the Omni integration efforts, we are identifying ways to streamline our portfolio and accelerate the repayment of debt. In response to the recent acquisition of Omni, we are making adjustments to our capital allocation policy, and we'll prioritize the repayment of debt ahead of dividends, share repurchases and M&A activity. We will continue to reinvest into our operations through capital expenditures that positively affect productivity, automation and the replacement of vintage equipment to improve the operating efficiency of our LTL network.
In line with our focus on reducing leverage, as we announced in our earnings release, we have made the decision to suspend our quarterly dividend beginning with the first quarter of 2024, which would typically have been paid in March. We will provide updates in connection with reinstating the quarterly dividend as we make progress with our capital structure and the achievement of our net leverage target. While we still await the audited financial statements for Omni for 2023, we wanted to provide context around trends we are seeing in Omni businesses. In line with observations for our own business, certain of Omni's businesses were impacted by the challenging market conditions in 2023 that led to decreased customer demand. In the first 2 months of 2024, we are beginning to see demand improvements in the domestic market.
though it remains soft internationally. We are cautiously optimistic about improvements in the back half of the year. I'll now turn the call back to Michael to discuss the path forward.
Michael Hance: Thanks, Rebecca. One of my top priorities is to ensure that we successfully integrate Omni and capitalize on the many opportunities that it will create for our customers, employees and shareholders. We are taking a thoughtful approach to executing our integration plan with a strong focus on combining our employees and services seamlessly and without disruption. As we move through integration, customer service and retention remain top priorities. We are committed to serving and honoring our commitments with our legacy customers, and we will continue to focus efforts on growing and winning business with them. There will now be 3 distinct commercial channels within the combined organization, wholesale, shipper asset and Omni services.
Our commercial strategy is built to relieving our customers where and how they want to buy. Our wholesale customer channel includes our legacy forward customers, including freight forwarders, airlines and 3PLs. We are committed to continuing to provide them with our premium LTL services to enable them to grow their businesses. Our shipper asset customer channel includes direct shippers that require an asset-based provider to increase their supply chain control. And lastly, our omni services channel includes customers with supply chain goals based on unique curated end-to-end solutions. Of course, the quality of our service to customers in each of these channels will remain first rate. I cannot emphasize this enough. We are committed to taking care of all of our customers across these 3 channels.
We are pleased with the customer response we've seen so far. Volumes from our wholesale customer channel remained strong. In the 6 months before and after the transaction was announced, forward saw a decrease in volumes with our domestic forwarders of 8.9%, but we believe almost all of that decline is driven by a softer freight market rather than customer attrition. That view is supported by some of the negative volume developments of our LTL peers in Q4. Also, volumes with 50% of our legacy customers actually grew during the last 6 months. Earlier this month, at the Air Cargo conference held in Louisville, Forward was recognized by the Air Forwarders Association as the 2024 surface vendor of the year, an award reflecting how our great service has helped our legacy customers grow their businesses over the past year.
However, we realize that we have to earn the business of all our customers every single day and we plan to do just that through our integration and beyond. Since closing the transaction last month, we have seen some early wins resulting from the acquisition. To date, we've captured $17 million of annualized new premium LTL business from Omni customers in the fulfillment and entertainment spaces. We are still in the early days of our integration work, but we believe that's a good start and that more wins will come. I'd like to now spend some time discussing the Omni integration and how we're positioning Forward for success in its next phase of growth. As one company, we are laser-focused on creating value for employees, customers and shareholders.
We continue to believe in the industrial logic of the transaction and the significant and attractive synergy opportunities to be unlocked. As part of the integration process, we are revisiting those targets amidst the softer freight environment and identifying new pockets of synergies, which we will provide updates on in the future. This combination creates the category leader in expedited LTL market built on precision execution and provides customers with a less than truckload service that is the best in the industry for damage-free, intact on-time shipments. Among others, we see 2 major opportunities coming out of the transaction. First, doing business with Omni customers who have premium LTL needs. These customers need the kind of network we offer with a high level of service, low claims and visibility all in one place.
We've already realized some of these opportunities. And second, we're well positioned to work with Omni's customers who have international operations with domestic network needs. Our team of operators and transportation professionals led by my colleague and 28-year forward veteran, Chris Ruble, has our LTL network running at the same high level of performance as always. This makes forward the most compelling choice for customers with high-value, mission-critical and time-sensitive freight needs, and we plan to focus on that portion of the market not using intermediaries. We believe that the size of that market will allow us to grow our direct shipper business while continuing to serve and assist our intermediary freight forwarder customers in growing their businesses.
Also, as Rebecca has already noted, part of our integration plan involves a portfolio review to assess the fit of each of our businesses within the company's overall strategic plan. Our plan is to divest of any businesses that are determined not to fit and use the proceeds from those divestitures to accelerate our path to deleveraging. I would like to now sort of acknowledge the great resources we have at the Board level for our integration work. It's been a pleasure to have Gil West leading our Board's recently formed integration committee, and I've been working closely with him, the committee and other senior leaders to ensure a smooth integration process. Gil is the former Senior Executive Vice President and Chief Operating Officer at Delta Airlines, and he's led the successful integration of numerous transformational transactions.
Moving forward, we will provide a dashboard to track progress of the integration focused on synergy capture, and we're already seeing initial success. We have folded Omni's linehaul business into the forward network, which has led to a year-over-year pounds per day increase of more than 20% in the first week post-closing. We look forward to providing an update on our progress in the coming months. In my time at Forward, I've seen that if you take care of your people, they will take care of your customers, which drives positive and sustainable results. In my role as interim CEO, I remain committed to bringing these 2 high-quality hard-working teams together, working closely with the Board, Rebecca, Chris Ruble, Nancy Ronny and our other senior leaders.
I view my mandate during this transitional period as providing stable leadership that facilitates the integration of Omni, the execution of Forward's business plan and the continued development and enhancement of our customer relationships. As we charge ahead with creating value, our Board has formed a search committee and is working diligently to identify a new leader who will then be in a position to outline the next phase of strategy and financial targets. We look forward to providing an update on those efforts when appropriate. In closing, we are focused on smoothly integrating Omni and Forward while continuing to serve our customers with our usual level of excellence. The combined entity will be even better positioned to excel in the expedited LTL market.
I'm confident the next phase of Forward's growth will be a successful one. And I'm determined to ensure that Forward successfully navigates this transition while delivering value to our shareholders, customers and teammates. With that, let's open up the lines for comments and for questions. Operator?
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