ArcBest Corporation (NASDAQ:ARCB) Q4 2022 Earnings Call Transcript

ArcBest Corporation (NASDAQ:ARCB) Q4 2022 Earnings Call Transcript February 3, 2023

Operator: Greetings, and welcome to the ArcBest Fourth Quarter 2022 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded on Friday, February 03, 2023. I would now like to turn the conference over to Mr. David Humphrey, Vice President of Investor Relations. Please go ahead.

David Humphrey: Thank you for joining us. On today’s call, we will provide an update on our business, walk you through the details of our recent fourth quarter and full-year 2022 results, and then answer some questions. Joining me today are Judy McReynolds, Chairman, President and CEO of ArcBest; David Cobb, Chief Financial Officer of ArcBest; Danny Loe, ArcBest President of Asset-light Logistics, and Chief Yield Officer; as well as Dennis Anderson, ArcBest Chief Customer Officer. To help you understand ArcBest and its results, some forward-looking statements could be made during this call. Forward-looking statements, by their very nature, are subject to uncertainties and risk. For a more complete discussion of factors that could affect ArcBest’s future results, please refer to the forward-looking statements section of our earnings press release, and our most recent SEC public filings.

To provide meaningful comparisons, certain information discussed in this call includes non-GAAP financial measures as outlined and described in the tables in our earnings press release. Reconciliations of the GAAP financial measures to the related non-GAAP measures discussed in this call are also provided in the additional information section of the presentation slides. As a reminder, there is a conference call slide deck that can be found on the ArcBest Web site arcb.com, in Exhibit 99.3 of the 8-K that was filed earlier this morning, or you can follow along on the webcast. We will now begin with Judy.

Judy McReynolds: Good morning, thank you all for joining us. I would like to begin by acknowledging a few tremendous milestones for ArcBest. First, we exceeded $5 billion in annual revenue for the first time in company history, with year-over-year revenue growth of $1.3 billion. We also achieved the highest earnings per share in our company’s history. These important accomplishments could not have happened without the hard work and dedication of the entire ArcBest team. The other important milestone I want to highlight is a celebration, 2023 marks our hundredth anniversary. ArcBest has flourished over the past century, and we are positioned to continue driving this momentum forward into the next century. The road to 100 years has been paved with resilience, flexibility, innovative thinking, cutting edge solutions, and a commitment to our core values.

We know who we are, and because we have stayed true to our values and focused on our strengths, we’ve been able to innovate and successfully navigate enormous amounts of change. Nothing intimidates us. We have a saying, “We’ll find a way,” which means we’ll stop at nothing to get the job done well. I’m incredibly proud of what we’ve accomplished together. Our results remain strong, as does our growth opportunity, regardless of the obstacles facing our industry. We are on track to achieve our long-term financial target of $7 billion to $8 billion in revenue by 2025, and will continue to manage the business in the short-term as market conditions evolve. As we’ve shown time and again, we are a company that thinks ahead and plans for the long-term.

We continue to strengthen our competitive edge through our diverse portfolio. The breadth of modes we offer our customers allows us to make the most personalized and strategic decisions for them; decisions that will help them grow. In fact, I recently connected with a customer whose supply chain we started managing last year. They initially saw ArcBest as an LTL company, but after learning about our additional solutions they selected ArcBest as their logistics partner. Within a fairly short amount of time, we developed a deep partnership, managing their transportation, and creating exceptional value for them As a result, we’re expecting double-digit growth wit this customer in 2023. It is deep, trusted, customer relationships like this that have and will continue to contribute to our success in any operating environment.

Throughout 2022, we continued our strategic investments in technology and innovation. Innovation isn’t just a buzzword for ArcBest; it’s embedded throughout our long-term plans, and in the way that we approach our daily work. We started and completed numerous technology projects in 2022, which allow us to run our business with more precision, better identify issues, and quickly address the root causes with a tailored solution. Looking ahead, we are advancing our use of technology to strengthen our business and better serve our customers. We bring our innovative mindset to every partnership, building processes and digital capabilities that make it easier and more efficient to do business. We prioritize investments in these critical parts of our business to stay ahead and succeed now, and in the future.

Building on that, you’ve heard us reference an innovation investment we’ve made which includes patented handling equipment, software, and a patented process to load and unload trailers. In addition to being used in parts of our network, we are currently piloting this program in several customer locations. We’re encouraged b the early value it’s delivering, and we have several large customers already interested in broader deployments of this solution. We believe it has the potential to be an industry game changer, and look forward to sharing more, later this quarter. Of course, none of our innovation or our results this year and over the past 100 years would have been possible without great people who work hard every day to solve logistics challenges for our customers; a sincere thank you to the ArcBest team.

And now, I’ll turn it over to David who will take you through the quarter and the year in greater detail.

David Cobb: Thank you, Judy, and good morning, everyone. I’ll begin by highlighting our consolidated results. Fourth quarter 2022 consolidated revenues were $1.2 billion, a 5% increase over last year. On a non-GAAP basis, consolidated operating income decreased 19% to $83 million. And our adjusted fourth quarter earnings per diluted share was $2.45. For all of 2022, our consolidated revenues were $5.3 billion, a 34% increase over 2021. Non-GAAP consolidated operating income was $473 million, a year-over-year increase of 49%. 2022 adjusted earnings were $13.66 per diluted share, an increase of 60% over 2021. The 2022 effective tax rate that was used to calculate the fourth quarter non-GAAP EPS was 26.3%. And under current tax laws, we expect our 2023 non-GAAP tax rate to range from 26% to 27%.

Of course, this may be impacted by discreet items throughout the year. We’re pleased that our business momentum this year produced solid cash flow, with our 2022 EBITDA totaling $572 million. ArcBest’s cash balance and total liquidity are also at strong levels. And as of the end of 2022, we had net cash of $61 million, an improvement of $13 million since the end of the third quarter. Total liquidity of $566 million remains at a very healthy level. And despite rising rates, the composite interest rate on the company’s outstanding debt at year-end was just under 3%. ArcBest’s strong balance sheet and the operating cash flow generated in 2022 allowed us to invest in a business through new equipment purchases, real estate additions and improvements, and technological innovations, all of which will strengthen our competitive edge and ability to serve customers.

We regularly review external growth opportunities and are pleased to have returned capital to shareholders, with enhanced share repurchases in the quarterly cash dividend, which the Board increased by 50%, in April of 2022. We will maintain our balance approach to capital allocation, targeting investment-grade credit metrics, while prioritizing returning capital to shareholders through share repurchases and dividends, and considering M&A opportunities when appropriate. Additionally, in the current environment with reduced business levels, we’re especially focused on effectively managing personnel, equipment, and other resources to provide superior customer service while controlling costs and improving profit margins. Turning to the key metrics in our Asset-Based business, our Asset-Based fourth quarter revenue was $711 million, an average daily increase of 5% over last year.

The fourth quarter non-GAAP Asset-Based operation ratio, of 88.6, is a year-over-year increase of 170 basis points. As mentioned last quarter, repairs and maintenance have been elevated due to inflationary costs, and in part due to delays in receiving replacement equipment. Those costs are in the Asset-Based line for fuel, supplies, and expenses. Also as I mentioned in the last quarter, we were able to make good progress on optimizing our usage of outside resource costs with purchase transportation declining as a percent of revenue. Fourth quarter tonnage per day decreased 5.5%, and daily shipments increased by 1%. Total fourth quarter build revenue per hundredweight increased 9.3% including fuel surcharges. We secured an average 5.4% increase on Asset-Based customer contract renewals and deferred pricing agreements that were negotiated during the quarter.

Photo by Josiah Farrow on Unsplash

In 2022, total Asset-Based revenue was $3 billion, a daily increase of 17%, and the highest ever for ABF. Total tonnage and shipments both grew approximately 2%. Total revenue per hundredweight increased 14.5% with an average 7.3% increase on customer contract and deferred pricing agreements renewed during the year. The full-year non-GAAP operating ratio was 86.4%, reflecting an improvement of 240 basis points year-over-year, and 1,150 basis points over the previous six-year period. As we look at January trends, the slowdown in the general economy has impacted customer order quantities and resulting shipment sizes compared to January 2022. On a preliminary basis, our January 2023 Asset-Based tonnage increased 1%, and shipments increased 7% year-over-year.

For additional details on our January 2023 trends, please refer to our Form 8-K exhibit to the press release. In ArcBest Asset-Light business, total fourth quarter revenue was $572 million, a daily increase of 7% versus fourth quarter of 2021, and reflecting a full quarter of MoLo operations in 2022, compared to only two months in last year’s results, but also offset by a slowdown in customer shipping volumes, softness in market rates, and changes in business mix. In the FleetNet segment, events and revenue per event increased over the prior-year period. And for all of 2022, Asset-Light revenue increased 60% over 2021, to $2.5 billion, reflecting the impact of the full year of MoLo and strong customer demand for our logistic services, particularly in the first-half of 2022.

Fourth quarter Asset-Light non-GAAP operating income was $11 million, and for full-year 2022, totaled $90 million, an increase of 82% over full-year 2021. Fourth quarter Asset-Light EBITDA was $13 million, and totaled 2022, a 74% year-over-year increase. We provided preliminary asset-light business trends for January 2022 in the Form 8-K exhibit to the press release filed this morning. The current trends in that business continuing to be softer, reflecting the recent demand slowdown. In 2022, net capital expenditures including equipment financed totaled $211 million. 2022 expenditures for revenue equipment totaled $93 million, most of which for ArcBest’s Asset-Based operation. Depreciation and amortization cost on property, plant, and equipment totaled $127 million.

In addition, amortization and tangible assets was $13 million in 2022. As in 2021, manufacturing delays and part shortages impacted us in 2022. And as a result, we had to reduce some trailer orders in a portion of our asset-based equipment. And real estate projects were pushed out during the year and into 2023. For 2023, we expect total net capital expenditures of $300 million to $325 million including equipment purchases of approximately $175 million. A majority of which is for ArcBest’s Asset-Based operation. As I mentioned, our 2023 investment plans reflect catching up on some 2022 equipment and real estate projects as well as 2023 investments above last year’s levels in equipment, to support our growth plans through long-term targets. 2023 depreciation and amortization cost are estimated to be approximately $130 million.

This does not include amortization in tangible assets which is estimated to be around $30 million for 2023, primarily related to purchase accounting amortization associated with the MoLo acquisition. We are very pleased with our financial results in 2022. Our financial street and century loan commitment to effectively meeting customer needs positions us to navigate market challenges effectively while focusing on our strategy for long-term growth and sustained profitability. Now, I’ll turn the call to Danny.

Danny Loe: Thanks, David. Good morning, everyone. I’ll provide an update on the asset-light side of the business and give a high level over view on yield. We continue to see benefits from an improved truckload offering as well as benefits from the MoLo acquisition. The timing of that acquisition has been particularly favorable as it brought us more contractual business and better procurement in the spot market. While truckload spot rates declined sharply in the fourth quarter, we still grew shipments, which is a testament to the strength of our truckload solution. We continue to focus on profitable shipment growth in pursuit of our long-term financial targets despite market pressures that impacted us in the fourth quarter. Shorter term, we are also focused on what we can control.

And part of that is managing cost. We continue to invest in our existing team with a focus on employee productivity. Additionally, we have better capacity capabilities, and are continuing to benefit from MoLo’s career management approach. On the asset-based side, pricing has also remained rational. And our focus continues to be on profitable growth and effective cost control. We estimated our general rate increase in early November. And we will price appropriately to reflect our high quality service offering. As we entered our 100th year, we continue and evolve to better serve our customers which positions us well in any market environment. We have diversified our solutions and worked diligently to integrate them so customers have seamless access to our services.

We are streamlining our business from the initial interactions with our customers to the day-to-day execution and are seeing the benefits of this strategic work. We have built additional revenue streams through solutions like dynamic pricing and U-Pack, which supplement our published LTL business and allow us to flex based on customer needs and market dynamics. In times like these, we strategically use these tools to fill empty capacity with profitable transactional shipments, which up to this point has enabled us to avoid furloughs or layoffs and provide a more sustainable service offering, while being better positioned for profitable growth toward our long-term targets. In short, a big win for our ArcBest, our employees, and our customers.

There is debate in our industry about a technology-centered versus a human-centered approach. We believe the key having a blend of both, using technology to improve efficiency for employees while giving our customers the choice and the ability to seamlessly switch from technology driven solutions to human driven ones based on their needs at that moment. We are pleased with the progress we have made, and the feedback we have received from our customers. Having productive employees is critical. And we are pleased with the productivity improvements we are seeing with having all of our truckload employees on the same operational platform. With the hundred years of experience, we are uniquely positioned to help our customers find the best solutions for their supply chain needs.

Taking a broader logistics partnership has benefited both segments of our business. It has enabled ABF to have a better selection of freight with the ability to choose shipments that fit best within that network. And has allowed us to say yes to customers who move freight another way but want ArcBest to coordinate and centralize the logistics experience. So we began a pilot that would expand brokered LTL to transactional shippers. And through this, we learned some important lessons. As a result of our close relationships, we were able to gather valuable feedback from customers and our LTL carrier partners and learned that there were some places that experience could be much more efficient. Using our internal tech team and leveraging our 100 years of experience in the LTL industry, we quickly stood up a proprietary system to address the inefficiencies identified.

While this project is still in pilot phase, we are encouraged by the early results, and look forward to expanding the pilot to serve more customers. Now I’ll turn it over to Dennis.

Dennis Anderson: Thank you, Danny, and good morning, everyone. Our focus remains on creating value for our customers, and we have taken important steps to help us advance this goal, including strengthening our organizational alignment and collaboration, and making strategic investments in technology. We have tightened coordination across our sales, marketing, operations and service teams, which enables us to be more productive and efficient while providing a more seamless experience for customers. You hear us talk a lot about our customers. And we’re celebrating our 100th anniversary this year because they continue to trust us to solve their logistics challenges. When they win, we win. And we strive to make decisions with a customer focused mindset.

Of course, that means having a superior service offering that they value, but it also means serving them efficiently. Technology is a big part of making that happen. And over the last few years, we have been diligently working to build systems to give our customers a best-in-class experience. We view this as an investment that strengthens every point on the customer journey. Providing a best-in-class experience throughout that journey starts by giving our employees the tools they need. So we work with a disciplined approach to improve system and process efficiency. An example of this is our city route optimization project, which has already been rolled out to about a third of our service centers, which handled nearly half of the freight in the ABF network.

This deploys advanced analytics to dramatically reduce the amount of time it takes our people to plan pickup and delivery routes so that they can focus more on managing the operation in real time. Locations using this technology were 80% more effective at reducing cartage in the fourth quarter. This is just one example of how we are relentlessly pursuing better, more efficient ways of doing business. Customers also want better supply chain visibility. And based on their feedback, we began building a platform to enhance that visibility across all of our solutions. This is no small feat given our breadth of mode options and capacity sources. But we know it’s important for our customer success and an opportunity to enhance our value proposition for them.

So, we will begin testing with customers later this year. Additionally, we just launched a redesigned website at arcb.com and we’ll be rolling out enhancements there throughout the year improving the sites functionality and enhancing the user experience. Our customer needs drive our strategy and innovation investments. We’re in a strong position both to listen to and act on customer feedback. The pilots we’ve been running with our customers to transform the way they handle freight are providing encouraging results. And we’re excited to share more with you about that solution later this quarter. In short, innovative technology is an important driver of growth and efficiency for our company and an important differentiator for ArcBest with our customers.

Despite the softening occurring in our industry in the economy, this designing and running efficient and effective supply chains have never been more critical. The opportunity for us is as significant as it has ever been. Shippers have largely shifted their focus from just securing capacity to improving supply chain efficiency. And we’re in prime position to capitalize on that opportunity as our integrated solutions and our managed transportation offering in particular are designed just for that. Additionally, our customer pipeline is robust. We’re closing more and larger deals, and more customers are using more than one of our solutions. Customer retention remained strong. And with our diversification across multiple industries, we are positioned better then ever before to perform through any cycle.

It’s not uncommon to have customers who change companies, even take us with them as their logistics provider. Just recently, I was talking with a customer who did this. They had used us to manage their transportation at their prior company. But when they joined a new organization, the solution they needed help with the most was truckload. So, that’s where we started. Hearing these stories from customers is a testament to the deep relationships we have with them as we partner to build the best supply chain for their business. I am very proud of what our entire team accomplished this past year. Our long-term focus on customer value creation, our breadth of integrated solutions, the expertise of our people, and our tech-savvy and innovative spirit mean that we are poised to capture the large market opportunity ahead of us, and reach our long-term financial targets regardless of the environment.

Now, Judy, I’ll turn it back over to you.

Judy McReynolds: Thank you, Dennis. Before we conclude, I first want to take a moment and thank David Cobb for his contributions to ArcBest. David recently announced that he will be retiring later this year, and we are actively working to identify his successor. When David joined the organization 17 years ago, we had $1.9 billion in revenue, and 97% of our revenues came from the Asset-Based side of our business. David has worked alongside me and other leaders every step of the way to help transform ArcBest into the integrated logistics company it is today. He has led with integrity and skill, helping us navigate many changes. And on top of it all, working with David has been a pleasure. We will miss working with David when he leaves, in October, but wish him the best in his retirement.

As we close, I want to reflect one last time on our strategy and position. Supply chains have never been more critical or complex. We regularly revisit our strategic to make sure it’s sound and that we’re executing well against it. When customer needed capacity, we were positioned to serve them and grow with our own assets and a network of currently over 95,000 carrier partners. And now, with customers looking for efficiency, we are well-positioned to deliver. We have an incredibly talented group of employees who are experts in our field, including a nearly 500-person in-house technology team building and implementing systems to make us and our customers’ businesses more efficient. Our breadth of solutions and our innovative mindset allow us to build flexible, resilient supply chains.

While there are some macroeconomic headwinds, ArcBest has demonstrated resilience throughout its history. We are ready for what’s ahead both this year and beyond. I’m going to close by thanking our current and past employees, our customers, partners, and shareholders for helping us reach our 100th anniversary. Thank you for the opportunity to serve you. We are proud of what we’ve accomplished, but we are just getting started. We’re committed to keeping the global supply chain moving, delivering on our goals, and driving growth as we look forward to our next 100 years. That concludes our prepared remarks. David Humphrey, we can now open the call up to questions.

David Humphrey: Okay, Frank, I think we’re ready for some questions.

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Q&A Session

Operator: Thank you. Our first question comes from Chris Wetherbee with Citigroup. Please proceed.

Chris Wetherbee: Hey, thanks. Good morning, everybody.

Judy McReynolds: Good morning, Chris.

Chris Wetherbee: I guess I wanted to start on demand trends and what you guys are seeing in the Asset-Based business. So, if we look at the monthly tonnage, looks like it decelerated a bit over the course of the quarter. But then the January number, I think, was plus 1. So, maybe it looks like a little bit of a reversal of that. So, don’t necessarily want to get too hung up on any one given month, but wanted to get a sense of what you’re feeling in terms of rounding the corner on 2022 and coming into 2023, in terms of customer demand in LTL?

Dennis Anderson: Hey, Chris, this is Dennis. First of all, we did see a deceleration as the quarter progressed. Certainly in a weakening environment, retail led that. But, of course, we have seen some softening, as the quarter progressed, in manufacturing as well. Really, as we progressed into January, where the trends are similar, I mean when you look at the year-over-year number. But the demand environment feels very similar to where it ended the fourth quarter, and certainly I’ll let Danny comment if he has any other things to add.

Danny Loe: No, I think that’s — what Dennis said is consistent. It’s broad-based. Dennis said retail is leading it, but I think we felt leanness across. Maybe a great representation of what we see is really with our managed customers. We have a very high retention rate, really can’t remember the last time we’ve lost a customer necessarily in that. But that we’ve seen a deceleration in top line revenue for that, which is meaning our customers aren’t shipping as much inside that business because we see the whole supply chain. So, I think that’s representative really of what we saw across all of our business through the fourth quarter, and into January, at this point.

Dennis Anderson: Yes, that trend is consistent across Asset-Based and Asset-Light. Customer retention is still terrific, but the customers, in general, are shipping less across the board.

Chris Wetherbee: Okay, yes, that’s helpful color. And just a follow-up on pricing, so I noticed in the 8-K you mentioned that the increases ex fuel, in January, are coming in on the LTL side in the double digits, kind of getting a sense just what your feel is about the sustainability of that level of pricing power? And I know comps clearly have something to do with that as well as the year progresses. But wanted to get a sense of how you’re sizing up the sustainability of really good pricing power in the LTL business as we move through some of this softer tonnage environment over the next several months or maybe several quarters?

Danny Loe: Sure. This is Danny again. The pricing is still rational. We really haven’t seen weaknesses across that piece of it. It’s obviously not the same as last year, but if you look at our increases in the fourth quarter on deferred contracts, like you mentioned what we’re seeing in January with the revenue per hundredweight. We’re comfortable that we can continue to price and price above inflation as we go forward. Our trends — our actual business that we talk about gives us strength to — helps us have more confidence in the core business and what we can do with the price levels there. But right now, we, again I would say that it’s consistent with what we’ve seen through the fourth into the first quarter so far.

Chris Wetherbee: Okay, thanks very much for the time this morning. Appreciate it.

David Cobb: Thanks, Chris.

Operator: Our next question comes from Ravi Shanker with Morgan Stanley. Please proceed.

Ravi Shanker: Thanks for everyone. Congrats, David, and congrats to everyone, wish best with the 100th anniversary. I think this is the perfect catalyst to host another Analyst Day and give us some limited edition swag, but that’s just me.

Judy McReynolds: We have some good swag.