Forward Air Corp (Delaware) (FWRD) 2022 Q1 法說會逐字稿

Thank you for joining Forward Air Corporation's First Quarter 2022 Earnings Release Conference Call. Before we begin, I'd like to point out that both the press release and webcast presentation for this call are accessible on the Investor Relations section of Forward Air's website at www.forwardaircorp.com. With us this morning are CEO, Tom Schmitt; and CFO, Rebecca Garbrick.

By now, you should have received the press release announcing our first quarter 2022 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. Forward-looking statements can be identified by the use of words such as anticipate, intend believe, estimate, plan, seek, project, expect, may, will, would, could or should, and the negative these terms or other comparable terminology.

This conference call and the company's earnings press release contain forward-looking statements which include, but are not limited to, statements related to future operations and results. Any statements of plans, strategies and objectives of management for future operations and any statements about future financial and operational targets and the likelihood of achieving the same. 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 applied 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 these earnings calls. The company undertakes no obligation to update any forward-looking statements, whether as a result of [or] new information, future events or otherwise. During the call, there may be a discussion of financial metrics that do not conform to US generally accepted accounting principles or GAAP definitions, and reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the press release issued, which is available in the Investor's tab of our website.

I would now like to turn the conference over to Tom Schmitt. Please go ahead.

Thank you, operator, and good morning to all of you joining us on the call this morning. First things first, congratulations to all our drivers, teammates and our business partners for making our best quarter ever happen, Q1 2022, and finishing the quarter with a March that was the best month in the history of our company. In March, we also had in our core LTL business, 5 of the highest tonnage weeks in the company's history. So lots of momentum. LTL inside our Expedited Freight segment was actually flirting with a 7 as the first digit of operating ratio, ending up at 80.5%. And we believe we will get to an OR in LTL that starts with a 7 later this year.

Our freight selection, pricing and our cleansed network keep providing momentum to us. And I want to give you a couple of observation points that show that momentum.

The first one has to do with working with our customers and business partners to bring our events business back. Last year, I said [believe] 2021 of the 15% to 20% of our LTL business at events-based conferences, concerts, tours, cruise lines. Last year we may have had about 20%, 25% of that. Rebecca Garbrick, our CFO, and I, we actually took one of our shareholders to our Atlanta terminal a few weeks ago. And I had not seen this much trade show business, whether it's Orlando based, heading to Las Vegas - this much conference business, trade show business, and also concert business. I'm going to get to that in the moment.

The other thing that's really encouraging, we introduced a guaranteed service last year and we, actually, from a positioning perspective, positioned those containers close to the doors. And we had a blue ribbon about - around them. I had not seen as many blue ribbons as I saw a few weeks ago.

Concerts, I was walking in the floor and I saw a container by the band Beach House. That was music equipment that just came from Raleigh, North Carolina, and for the performance here in Atlanta and then heading to Austin. The beautiful thing is, one, it's a wonderful band. You should check it out. The more important one for us here is once you actually sell to a band moving their music equipment with high precision execution, it's one selling effort, which is difficult, but once it's done, you literally have 20-plus opportunities from one leg to the next to create revenue opportunities in one of our most profitable business segments. So lots of momentum there.

Another observation point about momentum is, as we told you last year, we started selling to small and medium-sized businesses direct, while in the past, we typically went to larger companies as customers through our great intermediary partners. We're going to continue doing that. And on top of that, we started selling direct. This is not a huge business, yet. It may be $20 million or so in revenue this year. And - but it's highly profitable and we expect this to be a $100-plus million business in the next 1 to 3 years. That's our intention and we're going to go that route. That position execution in support of highly sensitive events businesses, small, medium-size shippers with a direct selling effort with no split margins is contributing to our expected 150 basis points to 200 basis points LTL margin improvement, both in 2022 and once again in 2023. And you see that quality also reflected in some of our stats. The revenue per ton mile ex fuel, 17% over same quarter last year. Revenue per @ rate ex fuel, 16% over last year.

So there's a lot of quality of freight that has nothing to do with fuel, which did help us, but our volumes and our pricing actions helped us more.

One stat, an interesting one also, even if fuel had been at the level of last year's first quarter, we still would've exceeded the high end of guidance for Q1. So this drive and penetration into our events business, bringing it back again, more small, medium-sized businesses also means we are building out our footprint because we need to. Last couple of years, we added terminals in smaller markets. And this year, later in the year, Q3 or Q4, 2 large terminals coming online, Atlanta #2 and Chicago #3. And we're going to continue building our terminal footprint, both in secondary markets and also large terminals in our primary markets, such as Atlanta and Chicago in Q3 or Q4.

Our supporting businesses, Truckload, Final Mile inside Expedited Freight and Intermodal also are making our LTL business better, whether it's backhauls, co-locating locally, selling complementary services. As an example, today, 94% of our LTL customers also buy truckload from us. 2 years ago, that number was 60%. And Final Mile is stepping up in a big way. We already opened 3 new markets this year, Memphis, Richmond, Philadelphia. That Home Depot Award as appliance Partner of the Year, truly helping us out as a strong sign of approval as the position execution company in that space also.

Intermodal is targeting more BCO customers, meaning also selling more direct, which is the more profitable route to go. And then as a consequence, both Truckload and Final Mile are in the mid to high single-digit margin territory inside Expedited Freight, and Intermodal is always a consistent, double, double - double revenue growth, double-digit margin. We will drive discontinued momentum into Q2 and throughout the year and into next year.

If you remember in October, we announced a $6.30 EPS for 2023, almost 50% more than in 2021. And we have one of our leadership imperatives saying we don't wait. So we actually anticipate pulling that $6.30 EPS forward from next year to make it this year's number. That enhancement of profitability and growth will continue into 2023. That high end of $6.70 EPS that we announced in October, we actually expect to achieve next year, even without larger acquisitions.

For those of you who are following us on a kind of quarter-by-quarter basis, you will see that as we put guidance out for second quarter of this year, as we put a target out for the full year of 2022, pulling forward the $6.30 from last - from next year to this year, we did not build in the typical sequential buildup from Q1 to Q2, or even from the first half to the second half, which in essence means for what we are driving, what we are controlling, there's still upside to what we put out there. The best is still to come.

So with that, I want to give it to you, David, and open up for questions. And please feel free to go back and forth because I want to make sure you leave this call with what's most helpful to you. Back to you, David.

(Operator Instructions) We will now go to Bruce Chan with Stifel.

Tom, it's great to hear about the events business and the direct channel SMB opportunity. Sounds like a lot of good potential there. You reaffirm that 150 basis points to 200 basis point guide on the LTL improvement this year and next. And I just wanted to think through maybe what percentage of that opportunity is market dependent and what percentage of that is completely within your own control?

Bruce, we believe that we control our actions and we control our outcomes. I mean, very specifically - and we made - we did this also in a presentation that's on our website, when we tend to sell direct to small, medium-size businesses, the margin opportunity goes to us entirely versus having to split it, rightfully so, with our partners when we sell through an intermediary. So the profitability of the small, medium-size business is tremendous. And the profitability also of the events business is tremendous. So as we make this - these lines of business, $20 million, $50 million, $100-plus million over next year or 2, that will help us drive that 150 basis points, 200 basis points. So I do believe we control our destiny here.

Okay. No, that's very helpful. And then maybe just to hone in on that a little bit further, when you think about the risk to the macro conditions here, I mean, what sort of assumptions underpin that opportunity and I guess more broadly, your guidance for the end of the year and next year?

Yes, so we actually - we're heavily focused on what we believe with our sales machine and sales efforts, the continuous improvement we're driving in terms of reach out to customers and prospects, conversion rates, which are getting better in terms of elite, getting to a close, a close getting to activation, that we actually assumed that we are driving our - the success of our business in an environment which may or may not pull back. And we actually also believe that we - if - I had mentioned this before, Bruce, if we can't win what I call a size-of-pie game, because there's less tailwind, we are determined and we have the capabilities and we have the untapped upside opportunity to win a slice-of-size game. So we actually did assume continued profitable growth based on what we control, because there's a lot of untapped upside in the high value freight market, even in a high value freight market that may be flat.

Okay, great. That's very helpful. And then just one final question here, maybe on the Intermodal side, and when you think about the potential disruption on the West Coast with upcoming labor negotiations, have you been seeing any signs of shippers diverting to East Coast ports or trying to secure capacity there?

Bruce, I'm actually smiling. Yes, we all have. So, as well, there's like this greasing-the-balloon business or whatever the example with, like, the hammer and the head coming out of the board and then you hit it here, then it pops up somewhere else. That's a bit what's happening with the ocean-to-land movements. Yes, so there was a shift over the last several months. You can see it in Charleston. You can see it in Savannah. Charleston and Savannah are high performing ports. So actually we kind of like the idea of them coming where they're going now, which is more East Coast based. We also have a very strong presence in the Southern Carolina and Georgia markets, even Jacksonville on top of that. So it's what you're describing, Bruce, is happening and we like seeing it.

Excellent. Well, congrats on the result.

Thanks, Bruce.

Thank you.

We'll now go to the line of Jack Atkins with Stephens.

So I guess maybe to start, I'd love to get an update on - and I missed the very, very beginning of the call. I was kind of hopping between conference calls, but maybe an update on what you're seeing in April. And is there any sense that some customers or maybe some in market verticals are starting to maybe see a little bit of pressure from the macro, whether it's consumer shift from goods to services or anything like that? Are you seeing any maybe cracks in terms of what your customers are telling on the demand side? I know the events business is [spooling] back up and that's a positive, but we would just be curious if you're seeing anything there and then just kind of broadly what you're seeing in April.

Yes, Jack. So my sense is on the appliance side, the kind of hyper growth that you've seen over the last 2 years has been leveling off. And on the e-commerce side, light-weight e-commerce, you do see a leveling off.

Now having said this, and this is exactly why we are so confident in our strategy, those especially lightweight e-commerce, that's less relevant to us today than it was a year ago. Our shift towards palletized high-value freight, and then again, any of our metrics point towards that happening successfully, makes us, to some extent, a little bit less vulnerable to some of those e-commerce shifts or normalizations of, I call it kind of a home-based economy back to more of an experience-based or event-based economy. So the downside of that shift, we see less with our current freight mix than what we used to see and the upside of that service and experience and events economy kicking back in, is fully ours to take.

Okay, got it. And then I guess maybe shifting gears a bit, how are you guys thinking about the latent or available capacity available to you in the network today? Sequential trends, fourth quarter to first quarter, in terms of the Expedited LTL business, were certainly better than what we would've expected to see with normal seasonality. Do you feel like you're beginning to backfill some of that capacity that you opened up through the network changes in 2021? And I guess maybe help us think about how much room you have to continue to grow with the capacity in the network today.

Yes, Jack, I mean, you saw us basically getting ready for some of those larger terminals in primary markets which makes a ton of sense. Obviously, when you have a primary terminal that's 15, 20 miles south of Atlanta but there's a significant northern suburb market, you want to have a second terminal there. But you saw us having to being able to take a little bit of time getting ready for that. And that's exactly what the cleanse enabled us to do in a - de facto giving us 15% to 20% additional capacity without adding one single dollar of CapEx. So we definitely would've had to add more capacity to our system in fall of last year already if we hadn't done the cleanse. But we are getting to a point with the sales machine becoming more and more effective, our conversion rates becoming higher, the small, medium-sized business ramping up, the events business coming back at full force, that we do believe the capacity we're bringing on as we get closer to peak - Atlanta, Chicago are 2 of the examples that we are committed to - will be necessary.

So we've kind of bought ourselves a year, possibly, having to add capacity fall of this year, into peak season versus fall of season - fall of last year. So [thereby] we are getting to the point where, again, the sales machine and its effectiveness is asking us to add capacity this fall.

Okay, got it. And then, I guess maybe for my last question before I turn it over, very encouraged to hear the bottom end of the 2023 guidance getting pulled into 2022 and the outlook for $6.70 being achievable without additional M&A. But when I sort of think about the reiteration of the margin target improvement over the course of the next couple years, it would seem like if you were able to see 150 basis points or more of margin improvement this year and next year in Expedited LTL, you should be able to significantly exceed $6.70. So I guess is the idea behind not taking that number up, or walking that number up, that we just don't know what the macro's going to give us over the next 12 months to 18 months. And I guess maybe I'm beating around the bush asking the question, do you feel like you can earn $6.70 regardless of what the macro or the freight cycle throws at you? Because that seems to be what's implied by the line item guidance you're giving?

Yes. And Jack, I mean, you probably about as a math inclined as I am. And we both can run the same number. So we do believe that with what we control, there is significant upside to the numbers that we put out.

Now having said this, we have seen a pent-up demand in the first quarter being unleashed. So there was some perhaps amplification that you wouldn't necessarily see in every single first quarter. And there are some supporting tailwind items - fuel is one of them - that actually has been tremendously helpful to the entire industry. Having said all of that, if you do the same math we do, we tend to be doing better in second quarter than in the first quarter. We didn't build a lot of that in yet. We tend to do better in the second half than we do in the first half. That's untapped upside we're going to go after.

So it's my expectation that these numbers are achievable. It's my expectation that's in our control to get past those numbers. And frankly, as we get deeper into the year, we might update some of those targets, but I like the momentum and I like the possibility of beating those numbers.

Well, same here.

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

Just congrats on the momentum, obviously super impressive to see. I want to kind of come back to what we've been talking about here, about - really about the durability of the results. Because I still get the sense when we talk to investors that there's concern that once the market rolls, you may have to move backwards on some of these freight characteristic initiatives. So again, I was just kind of hoping if you could talk about the stickiness or the durability around the changes that you've made it (inaudible) and kind of how your go-to-market strategy would, if at all, change if things do slow down.

I'm actually surprised, Tyler, that you would even consider for us - and I mean this very non-judgmentally - for us to walk our cleansing efforts backward. We will continue with an exclusive focus on high value freight, whether it's at the appliance business final mile, or whether it's the LTL business with medical devices, industrial goods, spare parts, all of the things that we brought on, in addition to the events business that we talked about.

So the - and frankly we talked about, I think, even on one of the earlier calls. This is an operational efficiency issue. It's also a safety issue. When you are 100% palletized, everything can be done with a forklift, everything then can be done with safety and - health and safety first. A forklift driver only has to leave his forklift or her forklift when he or she needs to take a break, not to readjust some loose freight.

It's a talent attraction and retention issue in a time of war of talent where it's hard to recruit and keep people. I think I mentioned on one of the calls earlier, Chris Rubie, our COO, and I, we got a standing ovation by our forklift drivers in California last week - last year once we actually improved the quality of the freight. And these people told us and their wonderful teammates that they're actually going to become great ambassadors for this being a better place to recruit into.

So there's absolutely a100% certainty that we are going to take path 1. Path 1 is let's deeper penetrate the high value freight that we are owning now. We are in the most attractive space of the - what I believe are the 3 most valuable letters in US ground transportation, LTL, and we have - we are in high single-digit market share. So the marching order for us is all the energy positively towards deeper penetration in this goodness, and certainly not walking back to something that we [thought], together with our customers, in a positive, collaborative way, to enhance last year. So that goodness we will propel. And if I've got a choice between deeper penetration of goodness or walking back, that's an easy call.

Yes, no, [love] it. Thank you for that so much. I do have to ask about the 8K that came out the other day about Scott Schara leaving the organization though. Obviously, commercial success has been key. Can you just talk about back filling that role?

Yes, so first of all, Scott did a tremendous job here over the last 2 years, tag teaming, frankly, with me and many of his Sales and Marketing professionals, making this place kind of more robust and getting more of a sales machine in place. It's in Scott's background and in his DNA, it's in my background, in my DNA. We tag-teamed here and I will definitely keep working with the Sales and Marketing professionals the same way he and I did over the last 2 years.

We want to be known as a company that attracts great people, stretches great people, mostly internally. And then sometimes we have the high quality problem where, unfortunately or unfortunately, that next great opportunity for someone is external. Scott's got a great opportunity where he can combine his 2 passions of leading a salesforce and leading a brokerage business. And again, I want to be known as a company that stretches the professional franchise of our talent. And because that's - when people see that, that people advance inside Forward Air, and sometimes they advance to the next opportunity somewhere else, they're going to point to us and say, like, "That's the place I want to be part of because they're stretching people and they actually are not putting hurdles in the way of their people but actually are encouraging and cheering people when they actually get a chance to stretch a professional franchise."

So the short answer is I'm happy about people stretching. Sometimes it's a high quality problem that the next stretch happens to be outside. And still, I want to be known for that. To the specific point that you made about how are you going to succeed here, I'm working directly with the Sales, Marketing, Pricing, Communication, Sales Support leaders. We've got a tremendous set of leaders in this place, in these spaces. And in those next few weeks, we'll get a pretty clear picture that next Commercial - Chief Commercial Officer, whether she or he need to have a digital access bend where we actually go more digital, SEO, SEM looking for business, or should have a more data-driven kind of sales machine bend. Working with those leaders even more directly than I did in the last 2 years puts me in a very good position over the next few weeks to really get the specs for that success profile as close to perfect as possible.

Okay. Extremely helpful. That's very helpful. But your asset-light model has kind of been an interesting part of this cycle. So your Expedited gross margins, if I just look at revenue less [PT], I think they were the best since 2019 when things were a bit looser. Is it right to think that were the Truckload market to continue to cool, that you might actually see some gross margin expansion from that, that could offset any weakness as well?

Tyler, well put. This is a puts and takes game. Obviously, that particular part, which is purchased transportation going down, we had seen $3.20 a mile, even $3.30 a mile. Now we are starting to see something that starts with a $2-and-something, not $3-and-something. So clearly this is also why I'm so bullish about kind of the numbers we put out and the upside on top of those numbers, because we actually, even in a loosening market, have puts and takes that actually are on the positive side of the ledger for us, like the one you just talked about.

Okay. Okay, great. And then my last one, Rebecca, can you just refresh us on where you think CapEx will shake out this year, just for modeling purposes?

Sure, Tyler. So I think it's going to shake out around $40 million this year. It's up a little bit. But - and I think the breakout of that would be about a third would be with equipment, about a third for technology and a third for kind of our Columbus facility, which we just announced and moved into. So most of the Columbus has already been spent but the remainder of those other 2 will come out for the rest of this year.

Okay, perfect. Great quarter.

Thanks Tyler.

Our next question will come from line of Todd Fowler with KeyBanc Capital Markets.

So I have to - I want to come back to Jack's question around the guidance and I guess I'm a little bit unclear kind of what the messaging is, both about the second quarter and the second half of '22. Your prepared remarks, the commentaries very, very positive, certainly what you saw in March, continuing into April. Not a lot of movement into the second quarter. So is the message here that we're really just trying to be conservative and you think that there's upside? Is there something else that's holding you back? And I guess I'm just trying to understand what you're trying to set expectations for, both for 2Q and the second half.

Yes. Todd, I mean, I'm looking at this perhaps similar to the way you are, where we are getting better and better with precision execution ramping up the type of high value freight that we're going after exclusively. You're absolutely correct. I mean, the first quarter was spectacular and everything we see would tell us that our momentum is continuing. So as and if and when this does, we might come back and say, you know what, these numbers were conservative. We can actually up them. If you remember last time, when we had our call, we said, like, we have 1 or 2 months into 2022 that may not be the time to update and upgrade some of those targets yet. Clearly, in the release yesterday and as we're talking right now, we have updated some of our expectations with the pull forward of the $6.30 to 2022. Everything we're doing would indicate to me, momentum is still there. We like what we see. More importantly, we like what our teams do and that's upside to what we put out there.

So Tom, if we think about the upside versus your initial guidance for the first quarter, is there a way to bucket how much of that was a better freight environment, fuel, kind of what drove the difference between your initial expectations and where you ended up for 1Q?

Yes. So let me give you a couple of numbers. The first one is if you, in a very rough sense, say the upside that we saw Q1 this year over Q1 of last year, and you put this into 3 buckets, 1 is in the wider sense volume related, 1 is pricing actions and 1 is fuel as a percentage of the cost of freight. The first 2 are larger than the third 1 in terms of impact. So the majority - not the vast majority, but the majority of our impact is actually earned. It's tonnage, and the ability to actually capture the fair value of that opportunity and that value that we create, i.e. pricing.

But there is 30% to 40% or so of that upside that comes from fuel. One different way that I think put it - I put it a half an hour ago, if you said, let's take fuel all the way back to first quarter of last year's levels and we just assume hypothetically, that's the fuel level that we would've had in the first quarter of this year, we still would've exceeded the top end of our Q1 guidance. So we are very, very, very grateful for the tailwind we're getting, and at the same time, the majority of the impact we are actually achieving on the basis of actions that we are taking.

Yes. Got it. All of that's helpful. I'm just trying to - I think on one hand it's helpful to have guidance that's realistic, but not overly conservative. And so just trying to get a sense of the things that are different versus your initial expectations. So that helps. Just 1 last clarification on the margin improvement that you're talking the 150 basis points to 200 basis points annually. Is that just for the LTL business within Expedited Freight, or is that for the entire Expedited Freight segment on a consolidated basis?

That's LTL specific, Todd.

So Tom, do you have a number that you could share for the Expedited Freight segment, what you'd expect the margin improvement there?

We haven't - I mean, obviously, we do have calculations and we have (inaudible) [over] '23 model that tells us like how we get all of our businesses to be better. So we haven't itemized the Truckload to Final Mile in the [model] (inaudible) numbers. All of these margins we expect to go upward, that's for certain. They may not go upward quite as intensely as we expect the LTL to go upward. So, (inaudible)...

Yes, okay. Yes, it's a little bit tough because we don't see the individual line items. We just see that consolidated piece. So maybe sharing that could be something that would be helpful going forward.

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

Can you just share the - can you share the monthly tonnage trends in what you're seeing in April?

We have some initial numbers obviously because we're almost through the month. April is up as we had expected it. Now the one thing you do have to see, and I'm going to turn it over to Rebecca in a moment, last year in April, we still had all the lower weight, loose, non-palletized e-commerce freight in our business, so that - so we are backfilling this with higher value freight. We expect more of that to come as we get into spring even more, but tonnage in April is up year-over-year.

Yes. And then Scott, just to give you some specific numbers. So January, our tonnage was up, daily tonnage was up 5.5%. February was about 16.5% and March was about 5%. And we're seeing the same trend in April that we saw in March.

Okay. So April's up in that mid-single digits.

That's right.

Yes. Okay, great. You talked about the events business. I apologize if you've given this before, but can you just put some perspective, what percentage of the total revenue is that business today and where was it? So we have a sense of where it can get to.

Yes, it can be in my estimate, and it is an estimate. This sounds bizarre, Scott, the reason why it's an estimate, we do a lot of business, obviously the vast majority, through intermediaries. They have to classify some of the business to us, especially if it's like hazmat, but they don't have to classify most of the other business. Now we obviously - when we look at the containers, we have a pretty good sense. My estimate is event-based business can be 20% of our portfolio. That's an estimate. And last year we had only about 20% to 30% of that, and this year we expect to have about 70% of that.

And when you say 20%, you're talking about the total revenue or you're talking about of 20% of what?

Of roughly speaking, the billion-dollar LTL business that we have.

Okay. So 20% of the LTL. Okay.

And so that's what it was, that's what it can be. And last year we probably only had 20-plus percent of that number, so call it $40 million and these are estimates. And this year we should have 70% of those numbers, call it $140 million.

Okay. Helpful. And then you had a comment that there's puts and takes of spot rates falling, and - but the net of it should be positive for you. And I just wanted to get your perspective, because clearly, if you look in a really tight market, you guys have seen a headwind from PT, but overall, it's been a pretty clear benefit for you. So what gives you the confidence that a loosening market ends up being a positive as well? How do you get positive on both sides?

Yes, we love - and that's a service proposition in support of our customers, first and foremost. We love using our independent contractors for the vast majority of our moves. They know our customers, they know us, our service levels are better, the damage ratios go down because we can rely on these people. They've been working on our behalf for a long time. If you remember, Scott, we had - in 2019, we had single-digit purchased outside miles, like third-party miles, PT miles. And those numbers went up all the way into the high 20s. So service levels, cost, damages, everything that's on our KPI list gets significantly better in a loosening market. And by the way, also with our recruiting team doing a phenomenal job attracting and keeping drivers. We believe our churn rate of drivers is half of the industry. And we are on track this year to a growing fleet. We are ahead of - we have more [seated] drivers and seated trucks now than we had at the beginning of the year. That was not the case last year.

So the confidence I'm having is a service confidence, a cost confidence. PT in the high single digits, third-party miles or low teens is a huge benefit, service wise and cost wise.

Okay. And then just last thing, I think you've addressed this talking about like the full year guidance commentary, but your 2Q guidance of margins that maybe come down a little bit from 1Q, you would just say that that's conservative, and you think you'll do better than that?

That's one person's opinion and that's my opinion, but it's somewhat experience and fact based, yes.

We'll now go to the line of Bascome Majors with Susquehanna.

Tom, wanted to go back to the sales questions from earlier. Can you talk a little bit about where you are and the evolution of your sales incentives and, as far as - how far along you are as getting the profit-driven incentives into the system, and what's left to go on that. And maybe tie in what skillsets or any other sort of thing you're looking for in the next leader of that group to kind of take you to the natural evolution of what you've done here.

Yes. Bascome, 2 things. One is on the sales side specifically and we - this was not externally communicated, but it's worth pointing it out. In sales, 1 of our longstanding, 23 years, he corrected me recently, serving for our company, Lance Small, he was our Senior Sales Officer working for and on Scott Schara's team, as did the Head of Marketing or the Head of Communications, or the Head of Sales Support. Lance Small has retired. And - but here's the beautiful thing, on sales execution, think of that as kind of getting a salesforce.com based machine in place where we have a book of business, we have call cycles, we track kind of conversion rates, close rates, activation rates, we help each other in peer-to-peer discussions. All of this, our sales leaders over the last 2 or 3 years with the sales support team, led by Keith Karczewski, have done a beautiful way, kind of getting better and better at this.

So that's what I talk about when I talk about getting the sales machine to be more precise and to be more effective. We have sales leaders that know - after the 2 (inaudible), who know extremely well how to do that. Lance Small is handing off the baton to our next sales leader, who actually is on our team already. We have tremendous kind of next generation sales leaders. We stretch our people. We - one of our leadership imperatives is we enable our teammates to move forward.

So we have the sales head on the team already, and over next few weeks, we're getting Lance Small's successor in place.

The second question is to one that I think, Bascome, you are referring to across all of the commercial dimensions, the Chief Commercial Officer that also has Marketing, Communications, Sales Support under her or his kind of scope. There is where I'm going to spend a few weeks making very certain that I understand whether it's a heavy digital access bend so that we can access some of the micro companies, or whether it's more of the sales machine, so that we have a kind of a sales machine expert on top of and tag-teaming with the sales leaders. That profile, I'm going to be getting a bit more specific about over the next several weeks.

So short answer would be sales, just pure sales leadership. We are in a tremendously good place with first-class leader. Lance Small left his place better than he found it. And they're going to get a successor from inside our team. Chief Commercial Officer, specific specs being refined over the next several weeks. And again, I have no monopoly to wisdom here, but it may be worthwhile mentioning my own background is in sales, marketing and pricing. And that's where I spent most of my focus over the last 2 decades in the transportation industry. Doesn't give me any monopoly to wisdom, but it does put me in a good position as a mental kind of ping pong partner, trying to figure out exactly what the success formula for the next Chief Commercial Officer looks like.

I do believe that's going to be quite a bit of a digital access kind of marketing, getting to micro accounts expertise that's going to be part of that profile.

Extending the sales discussion, at the presentation that you referenced a few weeks back, you put out some numbers basically suggesting that you were earning 10%, 15% better margins on this much smaller pie of SMB business that you're growing very quickly compared to your traditional 3PL business that's the bulk of what you do in LTL. Can you talk a little bit about - I mean, I think the number you said was that was only $10 million or so revenue. Can you give some context on how big that pie is and how big it can be 6, 12, 18 months out if you hit the targets you're shooting for?

Yes. So couple things I did say earlier, Bascome, that this could be - this is going to be still a very small business right now, because we literally just started getting into this last year. So expecting somewhere around $20 million or so in high profitability revenue this year.

Now what's possible here, and this is where we believe there's $10-plus billion in high value freight LTL out there, where we should be the most compelling provider for. Of that, about 30% we estimate or expect to be in the SMB space. So there's clearly multiple billions, $2 billion, $3 billion of potential there. So the upside is huge. Now what we are still doing as pard of our Forward '23 effort is putting specific multiyear targets in place, how we get from zero a year ago to $20 million this year to a kind of high-growth kind of outcome.

So I said in my remarks upfront at this call, I expect this to be $100-plus million business within the next 1 to 3 years. But the sky's the limit here. SMB as part of high-value freight is probably about 30% of the total high-value freight market and therefore. We're talking several billion dollars. So - and the marching expectation matches our reality of what we've seen so far. And Bascome, it makes logically sense, right? I mean, if you believe - take Old Dominion as a first-class company in our space, they just put a Q1 out there. I think there were [hours] around :. You guys probably are watching it even more closely than we are watching it. That is our experience. When you sell directly to people, you have the opportunity of a 30% margin or 70 OR. And if you obviously sell to intermediaries who do a first class job working with us and our customers, you somehow have to take that 30% opportunity and split it somewhere in the middle, 15% for the intermediary, 15% for us.

So clearly Old Dominion as a data point. More importantly, our own reality so far is telling us, there's a 30% opportunity when you can actually work with those customers directly. So significant upside. Still to be quantified what we expect over next several years. I do believe this should be $100-plus million LTL business in the short- to medium-term future, i.e., less than 3 years. And there's significantly more opportunity on top of that. I will do everything possible, together with this team, to tap into this at maximum plausible speed.

Just one last one. I'd be remiss if we didn't ask about opportunities to both grow the part of the portfolio, liquidity that you're leaning into, particularly in LTL. You've talked a little bit about adding to the footprint, and I'm just curious how that process is going, if it's changed as freight market expectations have shifted in the last couple of months. And number 2, maybe conversely, is there an opportunity to simplify the story by potentially monitor some assets that are less a part of the transition that you've made so successfully over the last couple of years?

Yes, Bascome, completely fair questions, obviously, and you know us increasingly well. So the first thing is we're playing this game for the long haul. So building out the footprint is something that we know for a fact, if you're going for a significant leadership share of a $10-plus billion LTL, the high value freight market, we need a bigger footprint. So I said last year, the J&P Hall acquisition may be an appetizer, there should be a main course. That's still the case, but we are obviously doing the right thing at the right time for the right price and frankly, with the right company, the right partner. But I still expect there to be the possibility of inorganic LTL on top of organic LTL, i.e., Atlanta. Chicago coming up in the next few months.

In terms of flip side of that, we believe at this point, there's a tremendous collaboration on the operational side between Final Mile and LTL co-locating. We have 20 locations where we actually run both businesses out of the same location, co-routing. There's tremendous collaboration, I mentioned 94% of LTL customers now also buying TL and helps us with back haul, helps us with recruiting. So we believe that the portfolio we have right now is a good combination.

Now having said this, we're with the board together, consistently reviewing our portfolio. As and if and when we believe that somebody is not core anymore to helping the main show, which is LTL, then it may be graduation time. We had graduation of a great retail support business because frankly, we did not see the [pull] business to be essential to making our LTL business better. And the main show here is we are the best expedited, high value LTL company in the business. We have significant upside here and it's the main show, and LTL needs to get supported by the other business lines. As long as they do that in a way where they actually contribute significantly, they're a good member of our portfolio of.

There are no further questions.

Well, then, operator, I think it's time to wrap up. I want to be respectful of everybody's time. Thank you to all of the business partners for playing great mental ping pong with us. As I said, we like our untapped upside and we like our odds of being charged - in charge of our control and with the possibility of even beating the numbers that we put out. So thank you, operator, I think you can close the call.

Thank you.

Thank you. That concludes Forward Air's First Quarter 2022 Earnings Call. Please remember that this broadcast will be available on the Investor Relations section of Forward Air's website at www.forwardaircorp.com shortly after this call. Thank you again. You may now disconnect.