ArcBest Corporation (NASDAQ:ARCB) Q4 2023 Earnings Call Transcript

ArcBest Corporation (NASDAQ:ARCB) Q4 2023 Earnings Call Transcript February 6, 2024

ArcBest Corporation misses on earnings expectations. Reported EPS is $0.00201 EPS, expectations were $2.19. ArcBest Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. My name is Danica and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the ArcBest Fourth Quarter ’23 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to David Humphrey, Vice President of Investor Relations. Please go ahead.

David Humphrey: Thank you for joining us. On today’s call we’ll provide an update on our business, walk you through the details of our recent fourth quarter and full year 2023 results, and then answer some questions. Joining me today for the prepared remarks are Judy McReynolds, Chairman, President and CEO ArcBest; and Matt Beasley, Chief Financial Officer. In addition, Seth Runser, President of ABF Freight; Steven Leonard, Chief Commercial Officer and President of Asset-light Logistics, Dennis Anderson, Chief Strategy Officer; and Christopher Adkins, Vice President of Yield Strategy & Management are available to answer questions. To help you better understand our best and our 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 more complete discussion of factors that can affect our best 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 called slide deck that can be found on the ArcBest website arcb.com in exhibit 99.3, of the 8-K that was filed earlier this morning or you can follow along on the webcast I will now turn the call over to Judy.

Judy McReynolds: Thank you, David, and good morning, everyone. 2023 was a special year as we celebrated our Company’s 100-year anniversary. This extraordinary milestone reflects ArcBest resilience, innovation and customer focus and we recognize this accomplishment with events and programs throughout the year, including supporting our communities with over $1 million of Centennial giving. As we looked back on our past, we remain focused on our present and future. Despite a slower freight market, ArcBest delivered solid fourth quarter and full year results. Thanks to our diverse portfolio of solutions, our investment in technology and innovation and our commitment to operational excellence. We continue to serve as trusted advisors to our customers, helping them navigate a complex and evolving logistics landscape with our integrated service offering and century of experience.

Let me share with you some highlights from the year. We achieved annual revenue of $4.4 billion the second highest in company history. We implemented cost cutting measures that improved our asset based operating ratio in the third and fourth quarters our and we believe these measures will benefit us as the market recovers. We participated in 90% more new business LTL bids and increased our wins by more than 150% when compared to 2022. We finalized a 5-year labor agreement last July, reflecting our strong employee relationships. We accelerated our existing service center facility plan, increasing our asset-based capacity. We grew our asset-light shipment volume, while improving key productivity metrics. We better aligned our business with our growth strategy by selling FleetNet America for $100 million.

We launched the Vaux freight movement system which was recognized by Vaux company and time as one of the year’s best inventions. And we invested in our business while also returning over $100 million to shareholders through dividends and share repurchases. Our employees hard work and dedication did not go unnoticed and I’m proud of the more than 40 awards we won in 2023, including the American Trucking Association’s Excellence in Cargo Claims and Loss Prevention Award, making ABS the only 10 time winner of that award. Ranking number 20 on Freightwaves Freightech 25, receiving five Quest for Quality Awards from Logistics Management readers. Earning our third EcoVadis bronze medal placing us in the top 50% of rated companies for sustainability and being named to Forbes list of America’s best in state employers for the fourth consecutive year.

Furthermore, three of our ABF Freight drivers our recently chosen as America’s Road Team Captains for 2024 and 2025, a tremendous honor that showcases their excellence, professionalism and safety record. They joined a team of 21 other captains who will represent our and travel across the nation to educate and inspire others about the importance of trucking. Finally, 2024 marks the 40th anniversary of our quality process, a program that has shaped ArcBest into the efficient and effective organization it is today. Our customers expect us to deliver a high-quality product, which means excellent service. To celebrate this milestone, we are reenergizing our focus excellence this year, striving for daily excellence in everything we do, no matter how big or small as we embark on our journey into our next 100 years.

Now I’ll turn it over to Matt to take you through the results in greater detail.

Matt Beasley: Thank you, Judy, and good morning, everyone. I’m pleased to report that ArcBest delivered solid financial performance for fourth quarter and full year 2023 despite the softer market. Let me start with an overview of our consolidated results. In the fourth quarter of 2023, we generated $1.1 billion in revenue, down 6% year-over-year mainly due to lower revenue in our Asset Light segment as a result of lower truckload brokerage revenue. Consolidated operating income on a non-GAAP basis was $81.7 million, which was comparable to the same period last year. We achieved a slight increase in adjusted earnings per share reaching $2.47 up from $2.42 in the fourth quarter of 2022. Before year 2023, revenue was $4.4 billion, down from the record revenue levels in 2022.

Our non-GAAP operating income was $258 million and adjusted earnings per share were $7.88, which were both down from the prior year. Now, let me turn to our segment results starting with our Asset-Based business. In the fourth quarter, our Asset-Based revenue with $710 million in line with the same quarter last year. We also improved our non-GAAP operating ratio to 87.7%, a 90 basis point improvement year-over-year and 110 basis point improvements sequentially. This is a notable achievement considering that historically our fourth quarter operating ratio was 100 to 300 basis points higher than the third quarter excluding pandemic affected periods. This accomplishment highlights our collaboration value and was a result of disciplined pricing, operational efficiency and cost management as well as our ability to respond quickly to customer needs due to our integrated approach.

I want to thank our employees who contributed to this outstanding result. Our fourth quarter tonnage per day decreased 7.2%, while our daily shipments decreased by less than 1%. These declines were driven by lower transactional volumes due to higher transactional prices. Our core LTL daily shipments grew by over 10% year-over-year in the fourth quarter and our fourth quarter revenue per hundredweight including fuel surcharges increased by 6.8%. We secured an average increase of 5.6 on our Asset-Based customer contract renewals and deferred pricing agreements during the quarter, which was the highest quarterly percentage increase we’ve achieved for these types of accounts since the third quarter of 2022. For full year 2023, our Asset-Based revenue was $2.9 billion down 4% from 2022 and our non-GAAP operating ratio was 90.4%, up 400 basis points from the prior year.

Looking at preliminary January 2024 results, total shipments and tonnage declined from 2023 levels due to lower transactional shipments as a result of higher transactional prices. In addition, due to smaller customer orders and changes in freight profile and business mix, our average weight per shipment in the Asset-Based segment decreased year over year. Despite the softer freight environment, our Asset-Based segment core shipments and tonnage have increased on a year-over-year basis. We remain agile responsive to market changes and are ready to scale up as demand increases. Excluding pandemic affected periods, the average sequential change in ArcBest Asset-Based operating ratio from the fourth quarter to the first quarter over the past 10 years has been an increase of about 400 basis points with larger increases occurring during declining economic environments.

For more details on our January trends, please refer to the Form 8-K exhibit we filed this morning. Moving on to our Asset Light segment, fourth quarter revenue was $413 million, down 14% year over year on a daily basis. Shipments per day increased 12%, driven by higher demand for our maintenance solutions, while revenue per shipment decreased 24% due to continued softness in market rates. While we reduced operating expenses and improved productivity, the segment saw a non-GAAP operating loss of $1 million for the quarter. For full year 2023, asset-light revenue was $1.7 billion down 21% from 2022 on a daily basis. Our shipments per day increased 5%, while our revenue per shipment decreased 25%. Our full year non-GAAP operating income was $5 million and adjusted EBITDA was $13 million.

We also provided preliminary asset-light business trends for January 2024 in the Form 8-K exhibit filed this morning. We continue to see lower revenue levels as shipment growth is offset by lower revenue per shipment in the softer market. Purchase transportation expense as a percentage of revenue increased as we saw more limited carrier capacity after the holiday season and during several winter storms. I’m pleased to share that our business momentum in 2023 generated robust cash flow and ArcBest consolidated adjusted EBITDA from continuing operations reached $370 million. Our business performance and solid financial position enabled us to strategically invest for the future in 2023, including investments in equipment, real estate, technology and innovation, while returning over $100 million to shareholders through share repurchases and dividends.

Our net capital expenditures in 2023 including equipment financing were $245 million of which $144 million was allocated to revenue equipment. We faced some challenges with manufacturing delays and part shortages last year, which resulted in a portion of our planned 2023 CapEx primarily for new city tractors and trailers being deferred to 2024. The supply chain issues that affected our tractor and trailer orders have mostly been resolved, lead times are shortening and we are anticipating the same level of revenue equipment CapEx carry forward in future periods. We also had some real estate project work that will carry over into 2024. For 2024 including financed equipment, we anticipate net capital expenditures in the range of $325 million to $375 million.

This includes $155 million of revenue equipment and $130 million of real estate. Remaining amount includes items related to technology and miscellaneous dock equipment upgrades and enhancements. We are constantly evaluating opportunities to expand and enhance our ABF network. In January, we purchased three Yellow facilities for $30 million and spent $8 million to acquire the lease for another Yellow facility. These locations are part of our long-term facility roadmap, are strategically located in their respective markets and are more cost effective than new construction. The Yellow auction process highlighted the value of LTL real estate assets, while underscoring the high barriers to entry in the sector. We are currently evaluating additional real estate investment opportunities and we’ll provide you with more updates as opportunities develop.

As always, we are being disciplined and prudent and expect that any investments will generate attractive returns. As you may recall, in February 2023, we announced $125 million share repurchase program in conjunction with our fleet net sale announcement. We recognize that repurchasing undervalued shares creates value for remaining shareholders as valuation gaps narrow. I’m pleased to report that we repurchased almost 1 million shares over the last year at an average price of less than $100 per share for a total of almost $100 million. I’m also pleased to report that yesterday, our Board of Directors increased our share repurchase program authorization to $125 million. This will allow us to continue returning capital to shareholders, while maintaining sufficient liquidity and financial flexibility to invest in our business and pursue strategic opportunities.

We intend to continue executing this program in a disciplined and opportunistic manner. As Judy mentioned, we are proud of ArcBest’s performance in 2023. We leveraged the company’s century of experience, customer centric approach and solid financial position to navigate a changing market while pursuing long-term growth and profitability. In November 1993, our former Chairman and CEO, Robert A. Young III dedicated a grove of trees on one of our campuses to the retired men and women of ArcBest who planted seeds for the company’s success. As we enter our 2nd century, we continue planning and investing for the future and remain confident about the opportunities ahead. Now I’ll turn the call back to Judy for some final comments.

Judy McReynolds: Our fourth quarter and full year performance is a testament to the experience, values and of the entire ArcBest team. I’m honored to work with such a talented group of people who always go above and beyond. I want to emphasize that we are not only focused on managing our costs, but also on investing for growth. We are investing in technology to enable our employees to work smarter and more efficiently. We are not just following the trends, but leading the way with our AI projects, which have already delivered significant efficiency gains and our poised for further development. Our city route optimization project has contributed over $1 million per month in operating income improvement and we’ve begun a pilot to extend this program into our shipment pickup process.

We are investing in solutions to deliver exceptional value to our customers. We pay attention to customer feedback and collaborate with them to solve their logistics challenges. One of the common requests we hear from them is to have more visibility into their shipments even before they are picked up. And that is why I’m excited to share that we are launching a new feature on arcb.com tomorrow that will give our customers real time pre pickup status information for LTL shipments. This is just one of the many digital toolset enhancements that we’re developing and rolling out this year. We’re investing in our people who have the heart of our success. We have built an industry leading employee experience fostering engagement and productivity. And I’m proud to say that we have the best team in the industry, sentiment routinely echoed by our customers.

Over the last year, we have evolved from our beginnings as a local freight hauler into a leading logistics company that keeps the global supply chain moving. ArcBest has differentiated itself through our unrelenting customer focus and suite of full service logistics solutions, including our own assets, which makes it easier for our customers to do business. Our continued investments in technology, solutions and people benefit our employees, customers, capacity partners and shareholders. As we enter our 2nd century, we are better positioned than ever to capitalize on the vast market opportunity available to us by partnering with our customers to solve their most complex logistics challenges. That concludes our prepared remarks, and I’ll turn it back over to David Humphrey.

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

Operator: [Operator Instructions] Your first question comes from Jason Seidl with TD Cowen.

Jason Seidl: I wanted to talk a little bit about January trends that you guys sent us. How much of it do you think was weather impacted? And then can you guys also remind us when we start lapping the transactional business declines?

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Q&A Session

Judy McReynolds: Yes. Seth, do you want to talk about the weather impact?

Seth Runser : Yes. On the weather side, so obviously winter weather comes every year. It’s nothing new to us, but January was a little bit more extreme than traditional Januarys that we’ve seen. So in January, we had about 130 service center closures due to weather. And if you look at our trailing 10-year average, it’s about 57 service center closures in January. So, for the full first quarter, we generally average about 174 closures on a 10-year average. So, we’re already at about 75% of that and we’re just getting into February. So, January was pretty extreme from a weather perspective. But proud of the team that we fully recovered, network is back on cycle and we feel good that we’re positioned well.

Jason Seidl: And where were you guys’ last year?

Seth Runser : On weather you’re saying? On the amount of closures?

Jason Seidl: Yes, on service center closures, yes. You gave a 10-year average, but last year if I remember was kind of a light winter?

Seth Runser : Yes. It was around that 10-year average 57%.

Jason Seidl: It was around. Okay, perfect.

Matt Beasley: I’m going to ask Christopher to jump in here also.

Christopher Adkins: Hey, Jason, good morning. Hey, I’m going to the transactional business, really that first half of 2023 is where we’ve relied more heavily on that. And then as you think about the market disruptions in the second half, that’s where our core business took a pretty meaningful step up where we were able to swap out that transactional business for more core business. So, I would say first half of 2023 is when we are more reliant on that transactional.

Operator: Our next question comes from Jordan Alliger with Goldman Sachs.

Jordan Alliger: You mentioned the 8-K, I think that traditional or typical seasonality 4Q to the 1Q is about 400 basis points worse or higher depending on I guess the economic condition. So, is there a way to think about the plus minus this year? You have still soft economy, but you’re really shifting hard into the core LTL shipments, which I assume is favorable for profitability and mix. So how do we think about that interplay? Thanks.

Matt Beasley: Yes. Jordan, this is Matt. So, you’re right. Over the last 10 years, excluding the pandemic affected periods, about a 400 basis point increase that we’ve seen in operating ratio from the fourth quarter to the first quarter. There’s certainly a few other factors that are in play this year, I’d say, one, just some of the market disruption impacts that we saw in the fourth quarter. Obviously, there is, as you mentioned, the substantial increases that we’ve seen on our core business over the last few months that we’re carrying into this year. We already talked about a little bit of weather impact and certainly, fuel has come down some over the last a month or so. And so I think those kind of are just a few items that I would highlight in addition to maybe what we had seen on a historical basis sequentially.

Judy McReynolds: The other thing I’ll mention, Jordan, is that we did put in some cost controls, really back in, say, the August timeframe that have carried forward into the first quarter as well. So, we have the union contract increase. I think that was, I mean, that was there in the fourth quarter, it will be there in the first quarter. Another item is just that the union incentive will apply in all of 2024. So, that’s a factor. But we have put in cost controls. And then, if you take a look at the fourth quarter, you’ll know, pretty good decreases in cartage and purchase transportation and rented equipment, all of that is still in place. And so that’s a relatively consistent comment, I guess, to the fourth quarter. There’s a lot going on here, including the weather that Seth mentioned earlier.

We’re looking forward to having the month of February hopefully with maybe fewer storms or something to be able to look at. But I’m really pleased with the strength of our core business, The opportunities that we’re seeing in terms of bids and our win rate and that’s helpful as we think about the rest of 2024.

Jordan Alliger: Certainly, a lot of puts and takes, but I think the 4Q did better than seasonality. So I don’t know, I guess the weather makes it a little tricky, but as you said, the cost controls are still in place. So maybe it could look a little bit better than normal, who knows?

Matt Beasley: No, you’re absolutely right, Jordan. Yes, we definitely saw great improvement from the third quarter to fourth quarter that was ahead of what we would have expected seasonally for those quarters.

Operator: Our next Question comes from Ravi Shanker with Morgan Stanley.

Ravi Shanker: One last question on your CapEx. Your CapEx is stepping up somewhat from 23% to 24%, but you’ve seen some of your peers pretty significantly ramp up their CapEx into 2024. Is that something you consider kind of is there a risk that others may spend more and kind of end up with more capacity have more opportunity for growth. And how are you thinking about that for next year, for this year?

Judy McReynolds: Ravi, I think that, what we’re doing specifically is just relative to a very purposeful plan that we had in place, I think in our presentation that we put out there today, there’s a facility plan outline there of how the doors that we have in the network have increased since 2021, I think it’s on page 10 of that. And so that could be instructive for you. But it is interesting all that’s happened because we were embarking on a facility plan to really make more efficient some of the facilities that we have improved, some of the existing facilities and then also to add facilities in areas where we knew that we had great opportunities for growth. So it’s very purposeful as we think through it. So when we were looking at the auction properties that were available and considering what we would bid and then I guess you can see what we ultimately won.

All of that fit together pretty well. And the other thing was, I was really proud of our team for how informed we were about the values that should be paid. And as we looked at those, we knew that we would really gain some benefit from them. And so I see what we’ve done is really an efficiency gain as well as a growth opportunity and that’s really a win, win for us over the longer term. I feel like that there’s a lot going on with other competitors. I’ll just let Christopher comment about from a pricing standpoint, I think that’s the ultimate concern, what your view of that is.

Christopher Adkins: Sure. So really as you think about all the investment that’s going into other carriers’ networks that to me that’s a level up in terms of the cost basis that they have to cover for. So I expect that could lead to some positive trends in pricing. And the other thing is that as other LTL carriers are investing in their networks, we collaborate with them from a managed perspective. We work really, have some really strong relationship with those other carriers. And so we see just as they become stronger in the market, we see an opportunity for us to collaborate even stronger with them to find mutual win, win opportunities.

Operator: Your next question comes from Ken Hoexter with Bank of America.

Ken Hoexter: So, talking about that I guess, to your met, you’re looking at your yields up your new adds up 5.6% I guess best in class just a little bit higher than that, up just over 8%. Can you talk about your service levels? What’s left on the core versus transactional mix in order to still convert back to core, because it looked like core was up while a big down dip on the transactional? So maybe just kind of walk us through that to understand the transition still to occur?

Matt Beasley: Yes. I would say on the service levels, we’ve returned to our historical levels. We’ve been in a good place now for quite some time. Judy mentioned the external recognition and I’m proud of the team being the only 10 time winner of the Excellence in Cargo Claim Prevention Award for the ATA. And we go head-to-head with our all of our competitors there. So, as we shift to 2024, we talked about that focus on excellence and our quality process, the 40-year anniversary, and we’ve had that in place and it’s really ingrained in our culture when you think about it. It’s one of our core values, excellence. So we have a lot of initiatives in place to take service offering to another level to be honest with you in 2024. That includes tactical execution, our shipment visibility tool, which Judy mentioned, we’re rolling out some new pre-pickup statuses tomorrow to all of our customers.

We’re testing a lot of digital tools with a small group of customers right now. We expect those to be installed mid-2024, and that’s really going to expand the digital functionality across all of our service lines. And we mentioned our focus on compliance last quarter. We have a team that’s going out to the field. It’s a team of operational experts that are getting with some of our newer folks and get them trained up to run an efficient operation. And the better efficiency you have, the better it’s going to translate to service. So, I’m excited about our high-level service we already offer and this focus on excellence than just our history with the quality process is only going to accelerate that as we move forward.