Forward Air - Q2 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and welcome to the Forward Air second quarter 2024 earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. So others can hear your questions clearly, we ask that you please pick up your handset for best sound quality. Lastly, if you should require operator assistance, please press star zero. I would now like to turn the call over to Mr. Tony Carrino, Senior Vice President of Treasury and Investor Relations. Mr. Carrino, please go ahead, sir.

Tony Carreno (SVP of Treasury and Investor Relations)

Thank you, operator, and good afternoon, everyone. Welcome to Forward Air's second quarter 2024 earnings 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 forwardair.com. With us this afternoon are Shawn Stewart, Chief Executive Officer, and Jamie Pierson, Chief Financial Officer. By now, you should have received the press release announcing Forward Air's second quarter 2024 results, which was also furnished to the SEC on Form 8-K. We have also filed a slide presentation outlining the second quarter 2024 earnings highlights and a business update. Please be aware that certain statements in the company's earnings release announcement and on this conference call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

This includes 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 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 direct comparable GAAP measures are included in today's press release and webcast presentation. I will now turn the call over to Shawn.

Shawn Stewart (CEO)

Thank you, Tony, and good afternoon, everyone. Thank you for joining the call today. I would like to start by reiterating my excitement about the opportunity that lies ahead of us. We are in the nascent stages of taking two good companies and making them great as a single, unified global logistics enterprise. We are building on their individual strengths and leveraging our global freight forwarding capabilities of the legacy Omni entities while continuing our best-in-class domestic expedited LTL, truckload, and intermodal offerings. Those legacy strengths are many, and I am proud to share that we are being recognized by objective third parties.

For the fourth consecutive year, Forward Air has been recognized by Inbound Logistics as a top 100 third-party logistics provider, and our Omni team in Asia was honored with an award from Cirrus Logic in recognition of the long-standing partnership, best-in-class customer service, and impeccable inventory accuracy we provide. I'm incredibly proud of our associates who make our customers their first priority and treat them as an extension of our own family. It is because of them that we are able to receive such awards and retain and grow our customer base. Shifting gears for a second, I wanted to address some more holistic and strategic items before turning the call over to Jamie to report on the quarter's results. First of all, the integration is progressing as planned and delivering the synergies and the cost savings as originally anticipated.

The transaction closed a little over six months ago, and since that time, we have actioned certain initiatives. We expect these initiatives will reduce our operating expenses as well as reduce our real estate footprint and employee headcount, thus improving our operating leverage, which is expected to position us very well when the freight market returns to normal or improves from the current levels. In terms of timing, we have already actioned all vital activities and expect to be at a full run rate savings basis by the end of the first quarter 2025. Secondly, I want to discuss the undue concern over customer attrition. Did we lose some volume prior to and immediately after the transaction closed? Yes, we did. Very few, if any, companies in the world can go through a complex integration like the one we did and not experience some disruption.

However, we have spoken to many of these customers and clarified our continued commitment to them, which aligns with our strategy. We have seen some of those volumes already return... We believe the service we provide will be the ultimate driver of customer retention and growth. Everyone on this call, as well as our customers, are aware of the level of service this company has and continues to provide. To that end, we are starting to see the power of the synergy of our combined capabilities. Customers continue to see the value in the combination of our air import service paired with our LTL network. We mentioned this last quarter. Another recent customer win stemmed from our ability to offer contract logistics, warehousing, LTL, truckload service in combination. We do not believe that this would have been possible prior to the Omni acquisition.

Thirdly, going forward, we will be transforming from two separate companies to a product-focused and operations-driven company. We will be going to market on an incredibly focused vertical basis in ground, air, ocean, contract logistics, and customs brokerage services. Transforming two multi-billion dollar companies with almost 7,000 employees does not occur overnight. But my years of experience in this industry leads me to believe that building trustworthy relationships, customizing best-in-class solutions, and offering competitive pricing with great on-time service is what customer wants, and that's what we intend to give them. We expect to enter 2025 as one unified company, having actioned all necessary activities to take advantage of the combined company's strength and having harmonized the cultures of two very successful and proud companies.

Going forward, we will share the same goals, same mission, values, and above all, an employee base that shares the same focus on customer experiences that are best in the industry. We still have a lot of work to do, like harmonizing of IT systems, business rules, benefit plans, compensation plans, none of which I take lightly and certainly not easy. But the most important, we intend to have our operations fully integrated with one exception. Our ground LTL will stay neutral as we remain an open network supporting our 3PL and freight forwarder customer base. This will allow us to take full advantage of our combined operational earning power by the end of the first quarter in 2025. In closing, in the first call, I was asked why I joined Forward. Today, I am more resolute in my decision than I was even three months ago.

I believe in the combined power of this company. That is not to say that there will not be setbacks along the way, because there will be, but rather, the difficulty should be worth the effort, and I am excited about where we are heading. Another reason for my excitement is attributable to the arrival of Jamie, whose collective experience is helping me lead and drive the organization currently and into the future. With that, I will give some closing comments at the end, but I will turn it over to Jamie to go through the results for the quarter.

Jamie Pierson (CFO)

Thanks, Shawn, and good afternoon, everyone. Before jumping right in, I'd like to take a second and thank everyone for their warm wishes. I know it's barely been two months since darkening the door, but everyone has been incredibly gracious, and I appreciate everyone's support to date and look forward to reconnecting with many of you from my past. Before you ask, what attracted me to this opportunity, let me answer in advance and say that the past 20 years of my experience has been preparing me for this very role. From my previous public company CFO roles, to my operating advisory days, to my transportation experience, they have all led me here today, talking to you. Selfishly and personally speaking, let me say that I'm honored to be a part of this team and look forward to the great things to come.

I'm also excited for the opportunity to work alongside Shawn. He's a very skilled and proven leader, and his long-tenured sales and operating experience is very complementary to my finance acumen, and I'm confident in our collective abilities to get the job done. In terms of focus and priorities out of the box, notwithstanding the obvious performance, leverage, covenant compliance, and liquidity, it has been and will be for the foreseeable future, people, processes, and data. Specifically, upgrading and integrating the finance and accounting teams, instituting more rigorous and disciplined financial and accounting processes, and access to actionable data. All of this should lead to an ability to run the business on a more predictive, data-driven basis, and to increase credibility through our ability to deliver on commitments and to better explain our results to you.

As everyone knows, Omni was not a public company and consequently lacks the reporting and advanced analytics that I like to utilize and am accustomed to seeing. So we have a ton of work to do here, and the product-specific focus that Shawn mentioned earlier will require yet another heavy lift, but we will get it done. In terms of level of effort, I want to be very clear. Transformations of this size, magnitude, and complexity are never linear... And for those of you who have been involved in one, actually on the front lines, then you know there are days when the rate of improvement is straight up, there are some days that are sideways, and there are even those days that are down or backwards. What is important is creating the time and space to execute on the end goal and the associated timing to get there.

Now that I've got all the words out of the way, let's turn to the numbers for the quarter. I know many of you all too well, and know that you're not listening to a single word I'm saying, but you're scouring through the press release for the stats and the results. So I'll try to keep my comments high and tight, so we can leave more time at the end for questions. Our second quarter revenue was $644 million, an increase of 93% or $310 million as compared to the second quarter of the prior year. The increase over the prior year was obviously largely driven by the Omni transaction.

More germane, would be to look at the revenue from our three reporting segments: Expedited, Intermodal, and Omni, which were as follows: Revenue from Expedited increased $22 million or 8% to $291 million from the previous year's comparable quarter of $269 million. The increase is primarily driven by small yet consistent gains across all revenue operating KPIs. Namely, a 1.4% increase in shipments per day, 2.5% higher weight per shipment, and most importantly, higher revenue per shipment ex fuel at 3.7%. Revenue from Intermodal decreased $5 million or 8% to $59 million from the previous year's comparable quarter of $64 million.

The decrease is primarily driven by 4.8% less shipments for the comparative quarter and 3.2% lower revenue per shipment as the industry normalizes from the post-pandemic exuberance, winding down in the second quarter of 2023. The revenue increase from Omni's results, which were not included for the previous year's comparable quarter, was the full $311 million. Turning to income or loss from operations, it is incredibly important to note that we incurred an impairment charge in the amount of $1.1 billion, related to the, our Omni reporting unit that negatively impacted the quarter. For those of you that care, we are simply following accounting guidance as it is customary to revalue goodwill based on current market conditions as indications warrant, but no less than on an annual basis.

On a pre-impairment basis, loss from operations would have been $3 million. I believe it is equally as important to note that this is a non-cash charge. Again, we're simply following accounting guidance on a non-cash charge and are moving forward on integrating two companies to form a singular global logistics powerhouse. As for consolidated EBITDA, as defined in our credit agreement, we reported consolidated EBITDA for 2Q 2024 of $81 million. Since we did not own Omni in the second quarter of 2023, it is difficult to make a meaningful year-over-year comparison, so we will focus our comments on a sequential basis. To wit, the $81 million represents a $26 million increase in consolidated EBITDA as compared to the first quarter of this year.

Our cash used by operations in the second quarter of 2024 was $45 million, compared to a cash consumed by operations of $52 million in the first quarter of this year. As illustrated on page 11 of the earnings presentation uploaded to our website, approximately $34 million of cash was consumed this quarter from legacy transaction costs and professional fees, and another $46 million from interest payments. On page 9 of that same presentation, and based on our gross debt balance at the end of the quarter and after netting domestic unrestricted cash, our net debt to consolidated LTM EBITDA covenant was 5.2x, compared to a maximum covenant level of 6x, implying an approximate $40 million cushion against the consolidated EBITDA for the quarter.

We have also included a quarterly consolidated EBITDA reconciliation in the appendix to help you build your models and track our progress. I thought you guys would appreciate that. Turning to liquidity, we ended the quarter with total cash of $105 million. After adding that $105 million to $340 million of availability under our revolving credit facility, liquidity was $445 million at the end of the quarter. For those of you who know me from my previous quarterly calls, you will remember that I generally try to leave you with a couple of additional points of color every quarter. Holding on to that tradition, I will try to do the same here, as there is no shortage of things to talk about. First of all, I would like to address the status of our integration.

If you will refer to page 7 of the presentation, you will see the stages we have mapped out, inclusive of forecasted or anticipated savings. For reference, we have been managing expectations to approximately $75 million in annualized savings. The good news is, we now expect to reach that run rate earlier than previously communicated and have increased the anticipated amount of savings. Now, we expect to reach that level by the end of the first quarter of 2025, and have added an approximate $20 million of additional annualized headcount savings from actions already taken in June of this year. Point two, everyone is fully aware of our need to delever. To that end, since starting, we have commissioned a full portfolio review of all of our operations with a particular focus on those we deem non-core to our strategy.

Before you ask, let me say in advance that we will not publicly comment on which operations those are. Asset dispositions aside, the most important thing we can do to delever is to operate and generate cash. Since it is a net debt calculation, shrinking the numerator while simultaneously growing the denominator will do wonders for our leverage profile. Thirdly, is cash consumption. In our first quarter call, we did not do a very good job explaining the decrease in cash. In an effort to be transparent, please reference page 11 of the posted presentation. Literally, 100% of the cash consumed in the first quarter was consumed by transaction costs, integration expenses, debt principal pay down, interest payments, and earnouts in purchase price adjustments from previous transactions. In the second quarter, very similar, albeit on a much more scaled-down basis.

As previously stated, approximately $34 million of the cash was consumed this quarter was from legacy transaction costs and professional fees, and another $46 million from interest payments. With the transaction expenses winding down, going forward, we anticipate being neutral to inflecting cash flow positive in the third or fourth quarters of this year. For my final point, while I have only been here a little over two months, I see opportunity around just about every corner. Please, do not get me wrong. Culturally, we have a considerable lift ahead of us. Operationally, we have two very good companies who just got distracted during a fairly tumultuous period of time, and 7,000 very hardworking employees that have recently joined forces as, as one. I do not want anyone thinking that we have all the answers.

Far from it, but we are almost literally working around the clock to build a robust consolidated reporting organization that will partner with sales and ops to take full advantage of the opportunity we have been given. To date, there hasn't been anything that I have not seen before, and in one very, very rare occasion, where I speak for Shawn and the extended leadership team, we are most concerned with putting points on the board versus hyperbole or press releases. So I would not look for us to say much, but we will spend our time, energy, and effort on the task at hand in improving results. I will now pass the mic back over to Shawn for a closing comment before Q&A.

Shawn Stewart (CEO)

All right. Thank you, Jamie. As promised on the first quarter call, I committed to giving full year 2024 guidance. While the external macro environment has remained challenging and the integration itself introduces a level of volatility into the results, I will share with you that I believe that we will end 2024 with consolidated EBITDA, as defined in our credit agreement, of somewhere between $310 million-$325 million. As already shared, we have a lot of work to do. While we cannot declare victory yet, I am confident in this team's ability to deliver, and I'm honored to lead this team. I will now turn the call to the operator to take questions. Operator?

Operator (participant)

Thank you very much, Mr. Stewart. Ladies and gentlemen, at this time, if you would like to ask a question, please press star one on your telephone keypad, and you may remove yourself from the queue at any time by pressing star two. Once again, star one for questions. We go first this afternoon to Bruce Chan of Stifel.

Bruce Chan (Managing Director)

Yeah, thanks, operator, and, you know, good afternoon, gents. You know, really good to have you on the call. Certainly appreciate the time here. A bunch of questions. Maybe I'll just, you know, keep it to a few and then jump back, jump back in line here. You know, maybe to start off on the class rate sales side, I know, you know, that had been one of the key strengths, you know, it for the legacy Omni business. Wondering if you've seen any significant departure or attrition there, just in terms of the sales force, and, you know, do we still feel like that high-growth organization is intact there?

Shawn Stewart (CEO)

Yeah, good afternoon, Bruce. Good to talk to you. Yeah, we've seen no real attrition, to be honest with you. I would say the biggest impact is just being able to sit down with a team, explain the vision to them of where we're going. They've been very invigorating in the last several months and even better things to come than even probably legacy before I arrived of what was said. So yes still very, very, excited about our future with that Omni sales team, on the direct side. And, we see the pipeline increasing. We see high, high, achievement rates on converting that pipeline, and they're moving extremely fast. So more to come.

Bruce Chan (Managing Director)

Okay, great. That's super helpful. And then, you know, really appreciate the color on the 2024 guidance and, you know, sticking to your promise there, Shawn. Obviously some moving parts in terms of how the EBITDA is tabulated. Maybe if you can offer any color on, you know, what the revenue and OR assumptions that are used to kind of underpin that guidance might be, might be helpful.

Jamie Pierson (CFO)

Hey, Bruce, it's Jamie. Yeah, we're not going to give you any guidance on anything other than what we did already. In terms of where we are, you know, there's still a lot of volatility that's in the numbers. So our perspective is really running the business between now and the end of the year and doing better than, you know, obviously, what we're trying to commit to here. So we're going to stick to the guidance that we've given. And then in terms of the pieces, you know, there's still some of the segments in between that are, you know, some will contribute more than others.

But, you know, we're going to change or intend to change the reporting segments again by the end of the year, the way that Shawn said during the his prepared remarks. It's absolutely the right thing to do, Bruce, especially for the long-term success of this company and the business, but it's going to add another level of granularity in how we run this business. But we're not prepared to report on anything other than what we've already given.

Bruce Chan (Managing Director)

Okay, that's fair. And then maybe just, you know, a last one here, you know, on the topic of granularity. I know you said you're still working on that, but if I'm to think through the volume performance in the quarter, especially, you know, on the legacy Forward Air side of the house, any kind of commentary that you can give as far as, you know, how the revenue progression and specifically volume trended between, you know, the kind of classic A-to-A business and then some of the other lines?

Jamie Pierson (CFO)

Yeah, I don't in terms of where I've been here, Bruce, literally, it's, you know, not even three months, 2.5 months, not prepared to go into that just yet. What I would say is, from our perspective, you see the small marginal gains across the entire segment for the quarter. You know, pounds are up, shipments are up, revenue per hundredweight is up, revenue per shipment ex fuel is up. You know, from my perspective, we'll get more granular once we get into the segment pieces. But right now, I'm just focusing on the total segment as opposed to the individual pieces.

Bruce Chan (Managing Director)

Okay, got it. Appreciate the time, and I'll hop back in queue.

Operator (participant)

Thank you. We go next now to Bascome Majors at Susquehanna.

Bascome Majors (Senior Equity Research Analyst)

Good evening. As we look forward to your opportunity to reach that neutral to cash flow positive sometime in the second half of this year, can you walk us through some of the assumptions to get there? I guess we have your EBITDA guidance, which implies you do maybe on average $10 million or more per quarter in 3Q and 4Q than you did in the second quarter. What else is happening on the cash flow model to get you to that bridge? Thank you.

Jamie Pierson (CFO)

Yeah, absolutely, Bascome, and good, good to finally meet you and talk to you. Yeah, so there, there are two primary assumptions going there, is, really turning down these one-time items as it pertains to legacy, transactional, and integration costs that goes with that, and, any cash payments that related to, Bascome and things that occurred in 2023, that we're having to pay for in-- I'm sorry, happened in 2023, that we're paying for in 2024. Things like earnouts from previous deals, working capital true-ups from previous dispositions. So the, the assumption to get there is really not that, not that great, candidly. $33 million of the cash consumption in this quarter of the $68 was from the-- from those kind of one-time items.

Other than that, covering debt service at $46 million, we don't have to improve the operations that much to actually become cash flow break even, if not positive, on a levered basis. So I think you'll see small improvements. The assumptions are small improvements on the expo side, Expedited, especially in the truckload side. Intermodal just holding serve because they're performing well, you can see here in the press release, and then the continued increase in performance on the Omni side. If you look at the first quarter of this year, Omni reported -$6 million in EBITDA, this quarter, +$20 million. So I'm really focused on the sequential improvement in Omni and continued small improvements in the other aspects of our business, and turning down those one-time transactional expenses that will get us to that magical break-even point.

Bascome Majors (Senior Equity Research Analyst)

And extending that, you know, you're at 5.2x leverage ratio on your covenant calc right now. As you get into the back half of the year, where do you expect that headroom based on your forecasting to stay? And do you have full access to the liquidity on your revolver in this condition? Thank you.

Jamie Pierson (CFO)

... Yeah, so the answer in backwards order, yes, we still have full access. We're in compliance, and we have $445 million of liquidity since we are in compliance. So one thing that we kind of skipped past in some of the, I guess, prepared remarks, is that having a little less than $500 million in liquidity, $445 million, to be exact, is a good spot to be in. In terms of where we're going to go through the back half of the year, if you look at the appendix, I know, Bascome, we've not given you much time to do this, but we're trying to be more transparent.

If you think about where we are or where we ended this quarter at $325 million in LTM consolidated EBITDA, the guidance that we just gave you is really sideways. And so there, there is not a tremendous amount of improvement that we're forecasting in the business. And the step down in the covenant goes from 6x today to 5.5x at the end of the year. So we're still forecasting to be in compliance at 5.2x.

Bascome Majors (Senior Equity Research Analyst)

And lastly, for me, you made a comment in your prepared remarks, Jamie, about just giving yourself the time and space to execute on the strategy and deliver on the transformation. And, you know, you've made some pretty pointed comments on the lender and cash flow constraints and risk, and I think given the market a lot more comfort on that. You know, on your list of what could go wrong or be a setback, you know, outside of just cyclical downturn, you know, what do you think about what keeps you up at night on not being able to deliver the plan as you see fit?

Jamie Pierson (CFO)

Yeah, what keeps me up at night, Bascome, is the fact that we're working 24/7. So, very little sleep as we work through this. But, in terms of creation of the time and space I'm talking about, it really is, two or three things. One is, Bascome, we have to prioritize. You know, we in my prepared remarks, I talked about, you know, opportunities around every corner. There are so many opportunities for us to improve around the edges that we need to focus on those that move the needle or the lever the most. So, and it's a challenge because we all want to perform well and do well, but we can't go after everything all at once. So being disciplined about going after the bigger items first would be, you know, part of that time and space.

And then the other thing that keeps me up at night is just making certain that we can complete the integration and increase sales at the same time. It, it's a little bit of a, of a triple whammy, if you will, but there is a balance that we've got there that we've got to take advantage of and avail ourselves of the cost-saving opportunities that we have in a $2.5 billion organization. At the same time, making certain that we continue to service the customer like we always have, and keep that claims ratio low. When people go through times of distress and turmoil like this, it's easy to take your eye off the needle. I'm not talking about anybody in the four corners of this building. I'm talking about out there in the front lines.

Not many things keep me up at night, other than the fact that we're literally working around the clock to make this thing the best thing that we have.

Shawn Stewart (CEO)

And Bascome, to expand on that a little bit, I, I constantly challenge the group. Everything in this environment is important, but the key is what is vital. And we are separating the difference between important and vital, and we're going after all of the vital things and putting in the top priority, important things to execute on a daily basis.

Bascome Majors (Senior Equity Research Analyst)

Thank you both.

Shawn Stewart (CEO)

Thank you.

Operator (participant)

We'll go next now to Scott Group of Wolfe Research.

Scott Group (Managing Director and Senior Analyst)

Hey, thanks. Afternoon, guys. So I want to. There's a lot of numbers, just trying to work our way through all of it. I just. You know, there's a pretty big delta between a $3 million adjusted operating income loss and $81 million of adjusted EBITDA. I just want to sort of understand the pieces there. So, like, all the transaction costs and severance costs, are those being included or excluded from the operating income loss?

Jamie Pierson (CFO)

So no, they're included. That's why it's, it's a -$3 million for all intents and purposes. If I, if I could, Scott, get you to focus on page 15 for a second. This is where I'm trying to be more transparent, give you guys a little bit more granularity, not only in terms of those, those categories that you're asking for right now, but also giving you more time and transparency of, of backwards look. So if you'll go through, if you'll just look at page 15, we've actually broken it out by the type of add back that the credit agreement allows us.

You know, you got the transaction costs, you have severance, then you got the normal add backs as you get to EBITDA, then you have a couple of transaction expenses, our ability to add back the cost synergies on a pro forma basis. And then the very last one is we get the opportunity to add back what is quoted, a pro forma event in the senior notes document, that allows us to take an LTM advantage of an action or an event as if we had had it for the last 12 months. So let me be very specific. The June 15th reduction in force that we took, that garnered us an additional approximate $20 million in run rate EBITDA, we got to take that into the calculation as if we'd had it for the last 12 months.

If you just think about operating income, add back your garden variety interest, D&A, and taxes, and then what I've tried to do here is kind of open up the kimono a little bit and show you where we're able to add back the other items under the credit agreement.

Scott Group (Managing Director and Senior Analyst)

If I'm understanding this right, if you implement new cost reductions in Q3 of this year, you get to restate prior quarter EBITDA numbers, and add whatever cost savings you have going forward, backward as well?

Jamie Pierson (CFO)

Yeah, I'd say it a little bit differently, but you're on the right track, Scott. Yes, we don't restate the past. The past is the past, but on the current, let's say, the third quarter that you're using as an illustration, we would get the benefit of that as if it had been in place for the last 12 months. That is correct.

Scott Group (Managing Director and Senior Analyst)

Okay. But so, what we're seeing on this slide 15, right? Now, these numbers are... We shouldn't have additional numbers. The add backs for pro forma cost synergies and June headcount reductions, we shouldn't see similar numbers in Q3 because they're now embedded in the actual operating results.

Jamie Pierson (CFO)

That's right. You, you'll see, you'll see those roll off and become actual results. Correct.

Scott Group (Managing Director and Senior Analyst)

Okay. Okay. Okay. A lot of moving parts there. Okay, and then just I want to clarify one thing, the free cash flow. Did you say positive to neutral cash from ops or positive to neutral free cash flow? I just want to understand the. I just want to make sure we're good.

Jamie Pierson (CFO)

Yeah, in total, Scott. So not from ops, just I don't want to say I don't care where cash comes from, because you know I do. But I think we all on this call care that we're generating cash so that we can net it against the debt, not only for covenant purposes, but it also speaks to the improvement in the base or the underlying performance of the company.

Scott Group (Managing Director and Senior Analyst)

Okay. And then just last one, more fundamental. Any color on July, tonnage revenue trends you could share?

Jamie Pierson (CFO)

Yeah, no, we're not, we're not going to give intra-quarter guidance at this point, Scott. We're stretching our necks enough out there right now to do what we've done in terms of the full year. You know, we're going to reevaluate that next quarter, but right now, we're going to prioritize and focus on integrating the networks, and to the extent that we get more comfortable with, I like to say more than two at-bats, two at-bats being two months under our belts, we'll reevaluate that, but right now, we're just going to stick to with what we've given.

Scott Group (Managing Director and Senior Analyst)

Thank you, guys. Appreciate it.

Jamie Pierson (CFO)

Thanks, Scott.

Operator (participant)

Thank you. We go next now to Christopher Kuhn at Benchmark.

Christopher Kuhn (Equity Research Analyst)

Yeah. Hi, good afternoon, guys. Thanks for taking my question.

Jamie Pierson (CFO)

Hey, Chris.

Christopher Kuhn (Equity Research Analyst)

So I just double-checking here. I think it makes sense, but the $55 million adjusted EBITDA that you have on slide 15, that's up from reported 1Q. That's the adjustments that you talked about in the previous press release about the changes, right?

Jamie Pierson (CFO)

Yes. Well, what we gave in the previous press release was an update for the total LTM period. It wasn't just the last quarter.

Christopher Kuhn (Equity Research Analyst)

Yeah, that's right. That's right. But some of that is in that adjustment for 1Q.

Jamie Pierson (CFO)

That is correct.

Christopher Kuhn (Equity Research Analyst)

Okay. And then maybe just a big picture. Some of the, Shawn, you mentioned some of the volumes left in the quarter and then came back. Maybe just can you help us understand why the volumes left and why, more importantly, why they might have come back?

Shawn Stewart (CEO)

Well, say, say that one more time, Chris. I didn't understand the question.

Christopher Kuhn (Equity Research Analyst)

Sure. You talked about, you know, during the, you know, transition, some volumes left-

Shawn Stewart (CEO)

Ah, yeah

Christopher Kuhn (Equity Research Analyst)

... the network.

Shawn Stewart (CEO)

Okay.

Christopher Kuhn (Equity Research Analyst)

Then some of it came back. Can you just briefly run through why they might have left and then why they came back?

Shawn Stewart (CEO)

Yeah. So Chris, I would just share, you know, just in my conversations with customers, just the uncertainty, the non-clarity of where the organization was going with this acquisition. You know, unsure of the strategy, clarity. Do you want me? Do you need me? Are you keeping the network open? We see you're building a direct sales force. We're not comfortable with that. And we're mainly talking about, Chris, the legacy forwarders, freight forwarders and 3PLs. So been traveling a lot, seeing as many of them in person, and this is the feedback I'm getting. So first and foremost, there is no more direct selling in the legacy Forward Air. We shut down that entity in Q2. There's just indirect sales, that meaning the airline partners, the 3PLs, and the freight forwarders.

There is only direct selling in the combined organization on the Omni side. So we're running two sales channels, indirect on the legacy Forward, direct on the legacy Omni, and that brought clarity and then obviously being very clear that we will remain an open LTL network for not just ourselves, but for those legacy customers in those three categories that we mentioned. And we are going to do that in a very neutrality-driven morally and ethically sound full non-disclosure agreements with these customers not to back solicit. Made it clear we don't need to do that. And so we are good stewards of growing our own business, but also supporting those customers and growing theirs.

So that's that, to be honest, is what I would attribute to why those volumes came back.

Christopher Kuhn (Equity Research Analyst)

Yeah, no, that's fair. And I know you didn't want to get too specific, but just overall, when you think about the portfolio reshaping, and you think about the impact it might have on maybe some of the, you know, cross-selling, if bundled selling or whatever you want to call it, I mean, how do you think about portfolio reshaping in the context of, you know, selling multiple services to customers?

Shawn Stewart (CEO)

Yeah, so if you just look—I mean, let me finish the comment here. I didn't make a comment on everything I just told you. We are still a fantastic best-in-class service business on both legacy companies, and we are going to continue to honor that and even enhance that. So when you go back to some people call it cross-selling, I call it really synergy selling. So when you look at the product-based verticals that we're going to in air, ocean, ground, of which many of that is the legacy Forward, contract logistics, warehousing, which we do a lot of, on the legacy Omni side, and then customs brokerage, you really want to draw those synergy selling in between. So that really is the strategy.

Your most stickiness is when you, when you have customers' inventory, i.e., the contract logistics space in your warehouses, and the second most important is the customs brokerage. You know, there's a phrase out there that says you, you date your, your forwarder and you marry your broker. And so, those are the two stickiness. But when you look at bringing these two companies together, having the legacy air freight, global air freight in the, in the omni side, with the best-in-class LTL distribution of pre- and post-positioning of your international for, pushing your exports into a consolidation gateway to go outbound or deconsolidating your imports for, for distribution and delivery on the inbound, having that network, is a best in class, and, we fully intend to, to cross-utilize that. So that's just some examples. I hope that answers your question.

Jamie Pierson (CFO)

Yeah, and Chris, if I can add to that, there's something that Shawn's really impressed upon me, and we had a, we had a recent good customer win that I don't think that we would have gotten individually as a company. It's only because of the combined services that the two companies provide that we're able to get this win. So we, we have a very good win on the international inbound side, and then once it hits the ground here in North America, we're able to get it to the final destination. I'm not so sure that we would have been able to get that win in terms of cross-selling our services across both companies, had we not been as one.

Christopher Kuhn (Equity Research Analyst)

Okay, I'll stop there. Thanks for the time, guys.

Shawn Stewart (CEO)

Thank you.

Operator (participant)

Ladies and gentlemen, just a quick reminder: star one, please, for questions. We'll go next now to Stephanie Moore at Jefferies.

Stephanie Moore (Managing Director)

Hi, good afternoon. Good to meet you, Jamie, and thanks for all the color.

Jamie Pierson (CFO)

Absolutely, Stephanie. Looking forward to talking to you.

Stephanie Moore (Managing Director)

Absolutely. So I wanted to maybe go back to a couple of questions on just the reported EBITDA now, just so I have this clear. So maybe using the first quarter as an example, understood that you're now calculating EBITDA under your pursuant to credit agreement. That's fine. So the first quarter, you know, now calling that $55 million, the prior calculation definition got you to a 1Q EBITDA of $29 million. So the simple math would imply a $26 million difference. Is that about the same differential that we could apply to 2Q if you were doing that same kind of pre- and post-calculation?

Jamie Pierson (CFO)

No, I wouldn't do that, Stephanie, and here's why. It is in the first quarter, we didn't have the benefit of the headcount rejections in June. So the comparable number that you should be basing what you're trying to bridge is on $49 million, not $55 million. That's the first point. But also we went back, and I think it's important to note, Stephanie, that we went back, tore the credit agreement apart with counsel, with our accountants, with management, and we did a complete 365 historical review. So it wasn't just in the first quarter, and I'm so thankful that you asked, and I'm able to explain, is it goes back over the last 12 months in total, not any one particular quarter. And there are items that we just candidly, Stephanie, we missed.

You know, some of the things were severance that we didn't add back, that we should have. There are some purchase price adjustments that we didn't avail ourselves of, that we caught in the review, and even some due diligence and transaction costs. But it wasn't all in the first quarter. It transcends the entire four-quarter period.

Stephanie Moore (Managing Director)

Okay, that's helpful.

Jamie Pierson (CFO)

I can tell by your silence, I didn't answer your-

Stephanie Moore (Managing Director)

Yeah.

Jamie Pierson (CFO)

I can tell by your silence I didn't answer your question.

Stephanie Moore (Managing Director)

No, no, no.

Jamie Pierson (CFO)

I just don't want you using the first quarter as an extension of what you could expect in the future.

Stephanie Moore (Managing Director)

Right. No, I think that's fair, but okay, so again, going off of... Is then if you're going off of a trailing twelve-month basis, do you have the delta between how it is being calculated now, per, you know, in the, in your opinion, more accurate way versus it was before? So if $26 million in the first quarter is not the run rate, right run rate, what's the trailing twelve-month differential?

Jamie Pierson (CFO)

I'm not following your question.

Stephanie Moore (Managing Director)

... It's fine. I can, I can certainly ask this offline.

Jamie Pierson (CFO)

Okay.

Stephanie Moore (Managing Director)

So I guess going to a different question here, so maybe a little bit more on the strategic side. Appreciate your color on, you know, kind of going from a go-to-market strategy from a product vertical basis. Are there any kind of incremental hiring needs to be made to kind of support this go-to-market strategy and kind of, you know, I understand running the two distinct sales forces, but any other kind of incremental changes?

Shawn Stewart (CEO)

I don't think so, Stephanie, not necessarily in a go-to-market basis. We've got, you know, as Jamie said earlier, we've got best-in-class people from both organizations. There is some great individuals all throughout the organization. So we are looking mainly internally as we move things around, to, you know, promote and empower, step up people, to take on new positions as we make this transition.

Jamie Pierson (CFO)

Yeah, if your question is, is there incremental CapEx dollars needed?

Shawn Stewart (CEO)

No.

Jamie Pierson (CFO)

Yeah, I agree with that. We're basically turning the organization on the side.

Stephanie Moore (Managing Director)

Got it. And then lastly for me, you know, maybe you could touch a little bit on the, on the capital structure. Is it, you know, kind of at this point, how we should think about preferred, minority interest, anything else? It's our understanding that, you know, you did vote on some of, you did make some of these changes, but, you know, kind of an update there would be helpful.

Jamie Pierson (CFO)

Yeah. So at the shareholder meeting, I believe it was June 15th, they all voted to convert. There's still some that are outstanding out there, so on a fully diluted basis, I think it's going to be closer to $40 million. That election, Stephanie, is at the holders' I guess behest. So it's nothing that we can force. I think it would just come in through time.

Stephanie Moore (Managing Director)

Okay, so we should still expect to kind of see some of those adjustments for, for some time now?

Jamie Pierson (CFO)

Yeah, and again, there are numerous individual holders, and it is at their election, impossible to predict when that would happen. But that's why I look at the fully diluted as if converted basis around 40 million shares.

Stephanie Moore (Managing Director)

Okay. All right, I will turn it back over. Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, just a final reminder, star one, please, for any further questions this afternoon. Gentlemen, it appears we have no further questions. Mr. Stewart, I'd like to hand things back to you, sir, for any closing comments.

Shawn Stewart (CEO)

All right. Thank you so much. All right, so in closing, I want to personally thank everyone for your time and patience, as we bring out the best of Forward Air can be. As previously stated, there's still much to do, but we believe in the results, and, we've also believed that, it'll be something worth that we can all be proud of. So, appreciate your time today, and we'll talk to you soon. Take care.

Operator (participant)

Thank you, Mr. Stewart. Ladies and gentlemen, that will conclude today's Forward Air second quarter earnings conference call. Again, we'd like to thank you all so much for joining us, and wish you all a great remainder of your day. Goodbye.