ArcBest Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2024

There are 18 speakers on the call.

Operator

Good morning, and welcome to the ArcBest Third Quarter 2024 Earnings Conference Call. All participants are in a listen only mode. After the speakers' remarks, we will conduct a question and answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Amy Mendenhall, Vice President, Treasury and Investor Relations.

Operator

Thank you. Please go ahead.

Speaker 1

Good morning. I'm here today with Judy McReynolds, Chairman and CEO Seth Runzer, President and Matt Beasley, Chief Financial Officer. We also have other members of our executive leadership team available for the Q and A session. Before we begin, please note that some of the comments we'll make today will be forward looking statements. These statements are subject to uncertainties and risks, which are detailed in the forward looking section of our earnings release and SEC filings.

Speaker 1

To provide meaningful comparisons, we will discuss certain non GAAP financial measures during this call. These measures are outlined and described in the tables of our earnings release. Reconciliations of GAAP measures to non GAAP measures discussed in this call are also provided in the Additional Information section of the presentation slides. You can access the conference call slide deck on our website atarcb.com, in our 8 ks filed earlier this morning or follow along on the webcast. And now I will turn the call over to Judy.

Speaker 2

Thank you, Amy, and good morning, everyone. We remain steadfast in our commitment to our strategic pillars of growth, efficiency and innovation and continue to invest in our people, solutions and technologies as we position ArcBest to capitalize on today's opportunities and those that arise as the freight cycle improves. Our people are at the heart of our success. By providing them with the right tools, training and support, we enhance their ability to deliver exceptional value to our customers and shareholders. This year, our investments in training have not only enabled our workforce to succeed, but we have also seen savings, significant cost savings.

Speaker 2

For example, the operations experts deployed to our largest ABF facilities have already saved us $7,000,000 this year with more savings anticipated as we expand these efforts into 2025. It's crucial that we have the right people in the right roles and investments in our leadership team and employees guarantee a deep bench of talent for the future. Last year, excuse me, last quarter, we promoted Seth to President of ArcBest and Matt Godfrey to ABF President. Recently, we announced that upon Michael New City's retirement, Dennis Anderson will succeed him as Chief Strategy and Innovation Officer. Dennis is a forward thinking leader with a deep understanding of our customers and employees challenges.

Speaker 2

He has been instrumental in driving significant improvements to our digital tools contributing to our number one Masseo ranking for the most useful website. And speaking of Maschio, we are proud to receive external recognition for our hard work in the 2024 survey results, where ABF exceeded the industry benchmark standard for service and ranked number 1 or number 2 in half of the categories surveyed. These rankings affirm our status as a premium provider that customers trust and rely on. I am proud of how we listen and collaborate across our organization to be responsive to our customers' needs. As we navigate a dynamic landscape, our commitment to delivering shareholder value remains unwavering.

Speaker 2

Each and every day, we make decisions to enhance our capabilities and drive sustainable growth. And now I'll turn it over to Seth and Seth will discuss some of the key initiatives that are propelling us forward.

Speaker 3

Thanks Judy and good morning everyone. As I step into my new role, I've had the pleasure of meeting with teams across the organization to identify ways to unlock additional value and drive efficiency. I'm inspired by our employees engagement and dedication to our customers and our company. We remain committed to managing what's within our control, delivering industry leading service and operating our business efficiently. Despite the challenging macro environment, I am confident in our ability to grow and deliver on our strategic priorities.

Speaker 3

My confidence stems from our strong customer relationships, ongoing service improvements and progress on facility expansions and investments in innovation. Our high customer retention underscores the effectiveness of our relationships and satisfaction of our customers. In addition, we have a strong pipeline that represents substantial opportunity for top line growth. We carefully evaluate each opportunity to ensure we create value for the customers while producing the returns that our shareholders expect. Our managed transportation solution is leading the way with double digit shipment growth.

Speaker 3

This solution helps customers optimize their supply chains and it's clear that efficiency driving solutions are more valued than ever. I'm encouraged to see the demand is growing and the customer agreements we are securing now are more than 5 times larger on average than those from 5 years ago. Our revamped onboarding process is improving customer attention and lowering our cost to serve. As more customers opt for managed solutions, we grow both our top line and bottom lines. As we've mentioned before, ABF's LTL on time service is the best it has been in 5 years.

Speaker 3

We've made significant improvements to shipment visibility with approximately 30% better accuracy on our ETA calculations, reducing customer inquiries by 19%. As Judy commented on already, our focus on continuous improvement and serving our customers with excellence is reflected in the recent recognition by Mastio. Superior service drives future growth and a win win outcome on pricing. While I'm proud of the progress we've made, we are not sitting still. We have more work to do.

Speaker 3

We are progressing on our long term ABF facility roadmap and strategically adding capacity. We opened 3 newly remodeled facilities from the Yellow auction, which added nearly 80 doors and replaced current locations. We are wrapping up the addition of 66 doors in Chicago and in early 2025, we plan to complete a facility expansion in San Bernardino, California, which will add another 40 doors of capacity in a growth market. These updated facilities and door additions will enable us to handle more freight with improved productivity and better service. In addition to our facility expansion, we are investing in equipment and technology to further improve our results.

Speaker 3

New equipment investments ensure our fleet remains one of the youngest and most efficient in the industry. In the Q3 of 2024, our repairs and maintenance costs were $5,000,000 lower than last year's Q3. A modern fleet reduces our total cost of ownership and underscores our dedication to operational excellence and long term sustainability. New dock management software provides employee level visibility into productivity. Having this tool in the hands of our frontline managers enables quicker action and provides consistency in our processes and service.

Speaker 3

We have also developed advanced labor planning tools which will enable us to forecast labor needs more accurately, ensuring we have the right people in the right places at the right times, driving productivity and supporting our growth objectives. You've heard us discuss our city route optimization project at ABF before and we are expanding into the next two phases, which will use AI to predict daily demand and optimize our pickup routes. These have been in pilot for 3 months with the rollout plans to begin in the Q4. For our truckload solution, we have developed a self serve carrier portal with features like lane matching and auto offer negotiation, which is resonating with our truckload carriers. We are already seeing a 13% adoption rate, which is ahead of our original targets, and we should grow as more features are added.

Speaker 3

I'm pleased that we are wrapping up the implementation of TriumphPay, a third party solution for carrier payments and invoice auditing. This technology will reduce manual tasks and fraud, improve our carrier partner experience and allow for scalable growth. These investments in facilities, technology, equipment and innovation are contributing to a year over year productivity improvement of 20% for Asset Light and 6% for Asset Based. Our company has evolved tremendously over the past several years. And as you can see, we are intelligently investing for the future to benefit our customers and shareholders.

Speaker 3

I'll now turn it over to Matt to go through the financials in greater detail.

Speaker 4

Thank you, Seth, and good morning, everyone. The Q3 presented another period of softer demand for our industry. The truckload market continues to face challenges and we are comparing to a strong Q3 in 2023 for our Asset Based segment, which saw higher business levels as we help customers navigate market disruptions. Consolidated revenue decreased by 6% from last year's Q3 to $1,100,000,000 Non GAAP operating income from continuing operations was $55,000,000 compared to $75,000,000 in the prior year. Our Asset Based segment saw a $19,000,000 decrease in non GAAP operating income, while the Asset Light segment's non GAAP operating loss of $4,000,000 was unchanged.

Speaker 4

Adjusted earnings per share were $1.64 down from $2.31 in the Q3 of 2023. Now let's discuss our 2 segments in more detail. Starting with our Asset Based business. 2nd quarter revenue was $710,000,000 a per day decrease of 6%. ABF's non GAAP operating ratio was 91%, an increase of 220 basis points year over year and 120 basis points sequentially.

Speaker 4

Our August 8 ks highlighted expected sequential operating ratio performance of flat to a 50 basis point increase. September weight per shipment was lower than expected and was the largest contributor to the higher than expected operating ratio. In addition, higher insurance costs added 40 basis points to the operating ratio sequentially. In the Q3, daily shipments saw a slight decline of less than 1% on a year over year basis. However, weight per shipment decreased by 11%, resulting in an 11% decrease in tons per day compared to the previous year.

Speaker 4

This decline is primarily due to broad industrial weakness as customers are producing less in the current economic environment. Additionally, higher interest rates and low housing inventory have led to fewer household goods moves, which typically involve heavier shipments. Some higher weight LTL shipments have also shifted to the truckload market with its continued low rates and excess capacity. It's also worth noting that some of our shipments related to Yellow's bankruptcy in the Q3 of 2023 were project related, while others shifted to other providers over the past year. Revenue per hundredweight increased by 7% in the Q3.

Speaker 4

On September 9, we implemented a 5.9% general rate increase and we secured an average increase of 4.6% on our contract renewals and deferred pricing agreements during the quarter. Price improvements were partially offset by declining fuel costs. Excluding fuel surcharges, revenue per hundredweight increased in the high single digits year over year. The pricing environment remains rational and we are focused on using pricing and operational efficiency improvements to outpace rising costs and enhance our margins. Changes in the wage rate under our union contract took effect on July 1 and benefits increased August 1 for a combined increase of approximately 2.7%.

Speaker 4

This equates to approximately $8,000,000 in additional costs for the Q3. Despite lower tonnage levels, the volume of shipments remained relatively stable, which meant that labor costs didn't scale proportionally to tonnage declines. However, improved productivity through technology and training helped mitigate increased contract costs while maintaining high service standards. Costs for fuel, repairs and purchased transportation were all lower on a year over year basis, but insurance costs increased by $6,000,000 adding 100 basis points to our operating ratio year over year. On Page 15 of our slide deck, you'll see that our trailing 12 month non GAAP operating ratio stands at 90.1%.

Speaker 4

This marks a 780 basis point improvement since 2016, highlighting the success of our strategic initiatives. In October 2024, ArcBest Asset Based segment experienced lower shipment and tonnage levels compared to the same period last year. This decrease is primarily attributed to the exceptionally strong performance in October 2023, which was driven by additional business at higher prices following a cyber attack on a competitor that tightened capacity. As we served our customers during this market disruption in October of last year, we achieved an 8.1% year over year increase in build revenue per 100 range. This October, our results were impacted by weak industrial production, disruptions from hurricanes and a port strike.

Speaker 4

Despite these challenges, pricing remains rational. The decrease in revenue per 100weight is also influenced by lower fuel prices. Excluding fuel surcharges, revenue per hundredweight remained flat year over year. From September to October, tonnage per day remained flat. We expect the year over year decrease in revenue that we saw in October to moderate throughout the rest of the quarter, resulting in a total expected year over year decrease in revenue per day for the quarter in the mid single digits.

Speaker 4

Historically, the average sequential change in the asset based operating ratio from the Q3 to the Q4 has ranged from a 100 basis point to a 200 basis point increase. With continued softness in the manufacturing environment in truckload markets, we currently expect to be on the high end of the historical range. Moving on to the Asset Light segment. 3rd quarter revenue was $385,000,000 a daily decrease of 10% year over year. Shipments per day were down less than 1% and revenue per shipment decreased by 9% due to the soft freight market and growth in our managed business, which has smaller shipment sizes and lower revenue per shipment levels.

Speaker 4

Our managed solutions set a record in September for both volumes and margins as we onboarded new customers and grew with existing accounts. We maintain our focus on reducing operating expenses and improved employee productivity. However, the non GAAP operating loss of $4,000,000 shows that our business continues to be impacted by current market conditions. Our Molo acquisition contained an earn out feature based on EBITDA targets through 2025. Due to current market conditions, the estimated contingent consideration liability for the earn out was reduced by $92,000,000 in the Q3.

Speaker 4

This is reflected as a reduction to expense in our GAAP operating income results, but has been excluded from non GAAP results to better represent normal operations. In October, we saw a 3% year over year decline in shipments per day and a 10% decrease in revenue per shipment. Sequentially, from September to October, shipments per day decreased by 6% and revenue per shipment rose by 4% as we implemented strategic pricing adjustments. Given the current market conditions, we anticipate a non GAAP operating loss between $5,000,000 $7,000,000 for the Q4. Our asset light offerings play an important role in our overall strategy as customers seek long term logistics partners for all their transportation needs.

Speaker 4

We continue to reduce costs and better align resources to match business levels. We are maintaining our pricing discipline and strategically reducing less profitable freight when appropriate. These initiatives are a top priority as we focus on returning the Asset Light segment to profitability. Turning to capital allocation, year to date through September, we returned $65,000,000 to shareholders through share buybacks and dividends. We ended the Q3 with a net cash position and roughly $500,000,000 in available liquidity.

Speaker 4

The capital expenditure estimate for the year has been revised downward to approximately $300,000,000 primarily due to lower expected spending on real estate. Our strong financial position and strategic investments in technology has significantly enhanced our operational efficiencies. We plan to build on this success as we continue to innovate and position ourselves for sustained growth. I'll now hand it back to Judy.

Speaker 2

Thank you, Matt. Our team continues to show incredible resilience and adaptability. Their hard work and dedication have been pivotal in driving significant improvement. I want to extend my heartfelt thanks to our customers, employees and shareholders for their continued support and trust. We are committed to building on this momentum and delivering even greater value in the future.

Speaker 2

That concludes our prepared remarks and I'll turn it over to the operator for questions.

Speaker 5

Thank

Operator

you. Our first question comes from Jason Seidl from TD Cowen. Please go ahead. Your line is open.

Speaker 6

Thank you, operator, and thanks for taking the question, Judy and team. Question, you talked about a rational pricing environment. It seems like you're still doing pretty well about getting that 4.6%. Has it trended lower throughout the quarter? Has it trended higher?

Speaker 6

Has it sort of stayed that same, that 4.6%. Can you just give us some perspective on that?

Speaker 5

Yes. Hey, Jason, good morning. This is Chris. Good morning. I would say there wasn't necessarily a trend up or down.

Speaker 5

It was pretty consistent by month throughout the quarter. And I know we already talked about it. We took a 5.9% general rate increase on September 9. Had really good retention of that customer base that impacts around 20% of our revenue. So good results there.

Speaker 5

The 4.6% in the 3rd quarter, really pleased with that result. I think year to date, we're right at about a 5%, which at that rate, we're outpacing just the inflationary costs that we're experiencing in the business. So, really just continue to work on that and making sure that our price is in a good place for the value that we're providing our customers.

Speaker 6

That makes sense. And you said you had really good retention. Is it there would you describe the retention as normal?

Speaker 5

I think we've seen some positive trends in retention with our customers. Our customers are challenged just with the environment that they're in. So but we're able to position ourselves as a logistics company to serve them and to improve their efficiency. With our managed business, we see really strong customer retention there as we're able to serve them not just through our asset based solution, but also through other solutions as well to help them optimize their supply chains.

Speaker 6

Appreciate the time. That was my one.

Speaker 5

Sure. Thank you.

Operator

Our next question comes from Ravi Shanker from Morgan Stanley. Please go ahead. Your line is open.

Speaker 7

Thanks. Good morning. Great to see the traction in Mastio. But the question is, is some of the service improvement probably coming at too higher cost? Or kind of how long does it take to get recognition for your service improvement both in

Speaker 6

the form of price and share?

Speaker 8

Yes. Good morning, Robbie. This is Matt Godfrey. Yes, and appreciate you calling out the success we've seen around the Mastio. And when we think about that success, it really speaks to that high level of execution by our teams in the field and our DSY employees to serve our customers with a high level of excellence.

Speaker 8

And it also speaks to our teams here as we listen to our customers and understand our customer needs, spending time on the right initiatives and investments to give our leaders in the field the right tools to serve our customers well and reduce our costs. So not only have we increased our efficiency, we've seen continued improvements in our productivity. So when you think about that and where we fell on the Mastio falling on that fair value line, I think it really speaks to that we've been able to increase the service level to our customers and do it efficiently so that we're keeping our costs in line. So I expect those trends to continue to as we move forward because what excites me the most is while we've rolled out a lot of initiatives aimed at our service and productivity levels, we have a lot still to do. Seth mentioned what we're rolling out additional phases of our city route optimization here as we get into the Q4.

Speaker 8

And we have several initiatives in 2025 that will continue to impact our results positively.

Speaker 7

Great. Thank you.

Operator

Our next question comes from Jordan Alliger from Goldman Sachs. Please go ahead. Your line is open.

Speaker 9

Yes. Hi, morning. So I think you indicated revenue per day will get less negative as we move through the quarter and settle in it down mid single digits. Is I'm well, is this more volume driven? Is it yield driven?

Speaker 9

And what does it imply as we move through the balance of the quarter from a volume perspective? Thanks.

Speaker 4

Sure. Yes. So Jordan, thanks for the question. This is Matt. So it really is the impacts and we highlighted a little bit, but certainly we did see just in October of last year an increase in volumes and an increase in pricing that was somewhat contained in October as we serve customers through the cyber attack that happened on a competitor last year.

Speaker 4

And so I would say it's in all of those categories that you mentioned. So certainly overall when we're looking at revenue per day, we do expect that to moderate and improve as we move into November December. And I would say in some of the other on a at least on a year over year basis, the comps get easier really across the board. So both on a pricing and a volume perspective, we expect both of those stats to improve as we move through November December.

Speaker 10

Thank you.

Operator

Our next question comes from Daniel Imbro from Stephens. Please go ahead. Your line is open.

Speaker 11

Hey, good morning guys. Thanks for taking our questions.

Speaker 12

Judy, maybe you want to remind

Speaker 11

me if we can unpack the ABF results a little bit more, that would be great. I think you talked about in your prepared remarks that the mid quarter you expected OR kind of flat to up 50 basis points, it came in 120 basis points sequentially. You mentioned September weight per shipment, I guess, is the biggest driver. So could we unpack maybe that weight per shipment move lower? What is driving that big of a step down?

Speaker 11

Obviously, it was more than you expected. And when do you think we start to see that stabilize? What are you hearing out there? Yes, when would you expect it to stabilize, I guess, as we look

Speaker 10

forward on weight per shipment? Thanks.

Speaker 5

Hey, good morning, Daniel. This is Christopher. So that weight per shipment difference that we're seeing from a year over year standpoint, it's related to a couple of things that we commented on. One was just the truckload environment. Just as that continues to be suppressed, the prices are low in that area.

Speaker 5

You do see just some LTL business that historically is LTL and it's moving on truckload. The other thing that we're just seeing in our managed business that we're able to help optimize our customer supply chain by bundling some LTL shipments into truckload. And so there's some mode optimization going on in the network or in really in the industry. I think as the market turns, you could see some of that business transition back from truckload to LTL. That's one area and I know that we commented earlier on in the script just

Speaker 7

that

Speaker 5

the household goods moving business just that's not as strong as it historically has been given just the higher interest rates. So homeowner mobility isn't as strong as we've historically seen and that business tends to be heavier weight per shipment as well. So those are 2 kind of key areas that are pushing our weight per shipment lower than what we would historically see there.

Speaker 4

Yes. And Daniel, this is Matt. I would just say it also is just kind of just a difference versus our expectations, particularly for September when we were calibrating that mid quarter update. And so we were just expecting to see a little bit of improvement in weight per shipment just that just didn't come through, I think, likely just given the macro backdrop that we're looking at now.

Speaker 5

Thanks.

Operator

Our next question comes from Ken Hoexter from Bank of America. Please go ahead. Your line is open.

Speaker 13

Hey, great. Good

Speaker 14

morning. I guess sticking on that weight per shipment, I don't know if this is for Seth or Judy, but it seems like a larger decline versus peers or just at kind of run rate now a much lower level than you've historically done. I think you used to run around £12, £1300. Is there a is that just economic? Is there something changing in the mix?

Speaker 14

And then we didn't really hear much about the mix of transactional versus core this quarter. Can you describe what's going on within the network now and kind of where does that stand?

Speaker 3

Yes. So, hey, this is Seth. So, when we look at weight per shipment, what's going on, really what we are trying to highlight with revenue and weight per shipment in our 8 ks is October is unusually from a comp standpoint. We think that's going to normalize on the front side. So as we move through the rest of the quarter, but really where we're focused right now is on revenue growth both across the business, but LTL specifically to your question, And we've seen our pipeline increase pretty decently, but what we're focused on in the pipeline is making sure that those opportunities are profitable for our business.

Speaker 3

Our retention rates have been in a really good spot and growth really comes down to that service you provide your customers and we were happy to see the results there on the Mastio side. Our claims numbers continue to be in a good spot. So we think we're bringing value to our customers. The second piece is the more efficient we are, the better our service is to our customers obviously And we feel like that also impacts the price we deliver to our customers, the more we can reduce our cost to serve. So, I feel like as we move forward, there's not something structurally changing.

Speaker 3

There is the macro impact and things that are going on, but we're focused on things in our control and we feel pretty good about the pipeline that's coming in and the growth that we're going to see as we move past kind of this strange comp period.

Speaker 4

Yes. And Ken, it's Matt. I'd just highlight retention remains high and we can really see this across the business. But particularly when we're looking in our managed business and our asset like segment, we're managing the entirety of some of our customers' logistics spend. I mean, we're just seeing weight per shipment levels be down.

Speaker 4

We're stopping by to make pickups and we might be picking up 2 pallets now instead of 3 pallets. And so again, it's high retention on the customer side, just a little bit smaller shipment sizes when we're coming to pick them up.

Speaker 3

Yes. And Ken, you also mentioned this is Seth again. You mentioned the mix of dynamic. The majority of our business is core and transactional or dynamic business really helps us just maintain consistency in the network, fill empty capacity. Our core business continues to increase, and that's where we're seeing the growth in our pipeline.

Speaker 3

So you'll see that continue to normalize as we move past this unusual comp in October.

Speaker 5

Thank you.

Operator

Our next question comes from Tom Wadewitz from UBS. Please go ahead. Your line is open.

Speaker 5

Yes.

Speaker 4

Good morning.

Speaker 5

Good morning. I

Speaker 15

appreciate that. I guess this is a little bit of a follow-up on Ken's on the dynamic pricing. So I think you don't like to give us precisely what the mix of dynamic pricing is versus core LTL. But can you give us kind of a ballpark of what that looks like? Is it 10% dynamic and 90% LTL or just so we kind of have a sense of what how that looks?

Speaker 15

It sounds like maybe that's been stable, but wanted to see if you could give any further comments on that?

Speaker 3

Yes, Tom, this is Seth again. We the majority of our business is core. We don't disclose that specific mix between transactional and core. Really what that does, like I said, was position us to maintain consistency in the network, especially during this slower times and we've seen the core continue to improve. When you look at weight per shipment, our transactional or dynamic shipments, they're generally heavier and that contributes to some of the weight per shipment changes that you see.

Speaker 3

But really what we're focused on is the profitable growth mix management and making sure that we're delivering excellent service to our customers. What's important to understand is we optimize our mix on a daily basis and it's based on profit maximization based on the market prices and available capacity and that's a daily exercise we've seen and you've seen the improved results. If you look over the longer term that these tools have given us some flexibility in the network that we haven't had before.

Speaker 15

Okay. And I guess related to that, can you give a little more perspective on like how much of the shift to truckload is affecting? It sounded like that might be having an effect on the mix as well. Like how big of a move is that? Is it seems like is that a couple of points shift to volume to truck or what's the magnitude of that?

Speaker 5

Yes. Tom, it's Christopher. I don't know that we have a clear line of thought exactly how much that is. I'll just say again through our our managed business, we see that that is having an impact. And I'd say just that we're prepared to manage the business regardless of how much that shift is.

Speaker 5

And just through our daily management of pricing and through the mix of our business and just through our large pipeline that we've discussed, we're prepared in any environment, but don't have really a clear line of how much that impact is. We know it's having an impact because we see it. We actually helped our customers to do it, but don't have a specific number there.

Speaker 13

Yes. Okay. Thank you.

Operator

Thanks, Tom. Our next question comes from Brian Ossenbeck from JPMorgan. Please go ahead. Your line is open.

Speaker 10

Hey, good morning. Thanks for taking the question. So you mentioned that there is an impact in the quarter from hurricanes and port strikes and some of the other disruptions. I wanted to see if you could put a little bit more context around that. And then maybe just as a quick follow-up, can you just talk a little bit more about the wafer shipment and yield dynamics in October?

Speaker 10

I know you have the tougher comps that's skewing it a little bit, but I wouldn't have thought to see yields ex fuel flat with weight per shipment still down 6%. So is that going to normalize as you go forward? And maybe give a little more context around that as well. Thanks.

Speaker 5

Sure. So just to comment on the hurricane and port strikes, we saw some impact in late September from those events. September started off stronger and then weakened beyond what we would normally see in September, just thinking about it being an end of quarter month. So it wasn't as strong as we'd like to see. And then you saw some impact from hurricanes in October as well, just from some service areas being closed.

Speaker 5

And then when they reopened, we saw some of that demand pull back, but I don't know that it recovered to the level that we would like to see. And then just from a weight per shipment perspective in October, I would just encourage you to look at more sequential trends rather than year over year. There's just some abnormalities that we've already discussed in October of last year. So if you look September to October, it's more normal trends. And I think as we get into November December, you're going to see some normalization there.

Speaker 5

But just we had an odd month last October as it relates to a cyber event last year that we discussed.

Speaker 10

Right. And then from a yield perspective, I guess it's still down 3% sequentially. Is that on a inclusive of fuel perspective or is that excluding fuel?

Speaker 5

Yes. I think it was so I think we commented that it was minus 3% September to October that was with fuel and then without fuel I think we said it was flat.

Speaker 7

To go catch

Speaker 5

a lean.

Speaker 13

Thank you.

Speaker 2

But we also commented that it was profile related. That's right. Yes. I mean, and I think that it just is they're just a different mix as we enter the month of October. But I feel like that when we're looking across what we've seen in Q3 and into Q4, we're not seeing a dramatic change in the yield environment.

Speaker 2

In fact, we feel like it's still in a good place and rational. I think we've seen some of the competition continue to raise rates and announce that publicly and that's all really good as far

Speaker 5

as we're concerned. Sorry, I think the minus 3, I think that was with and without fuel sequentially. Yes.

Speaker 10

Right, right. Okay. Okay, thank you.

Speaker 5

Thanks.

Operator

Our next question comes from Chris Wetherbee from Wells Fargo. Please go ahead. Your line is open.

Speaker 14

Hey, great. Thanks. Good morning.

Speaker 7

Maybe I want to pick up on some

Speaker 14

of those truckload comments. I guess I'm curious as you think about the sort of significant differences in the pricing environment in both truckload and LTL, if the sort of normal back and forth that we've seen through previous cycles will hold this time in particular, what do you need to see on truckload side to be able to have some of that volume come back? And then if I could squeeze in kind of an unrelated follow-up, just on the asset light side, I guess, obviously, it looks like the Q4 is maybe looking at another operating loss. I guess, can we get a sense of what needs to happen to get that business moving in the right direction? Is it at this point just simply an improvement in the cycle or are there other levers that you can pull particularly on the cost side that can improve profitability there?

Speaker 3

Chris, this is Seth. I'll answer your first question on the truckload migrating and how it goes back and forth between channels. The truckload market still has too much capacity and that's driven rates down as we're all aware. That's caused some of those shipments on the fringe in that kind of $7,500,000 to $20,000 range kind of to shift the truckload. And I think that freight probably works better in an LTL environment and that's going to shift back when the market normalizes.

Speaker 3

That shift is really maybe more pronounced this time versus previous cycles, because we've just never seen the level of truckload capacity enter the market as we did in 2021 and 2022 throughout the pandemic. So truckload carriers really don't like to do multi stop loads. So I think that freight is ultimately going to shift back to the LTL market when the market does turn. So what gives me a lot of confidence and positivity is we've continued to invest in our fleet during this time that we can handle those heavier loads as they can make their way back into the LTL market. On the asset light side, I feel like we can get asset light profitability to a better spot and part of my confidence is we as I've moved into this new role, we've really focused on different ways we can do that and we started evaluating it closely.

Speaker 3

And the first is really we need to improve the profitability of our account base. We've been challenged by the macro as you know, but we've developed some tools recently within the last quarter that allows us to take deep dive into account level profitability and also to the lane level. So we started to take those actions and you heard Matt in his prepared comments talk about some of those pricing actions, but we have more work to do and we think we got a lot of runway there. The second is the of our business within truckload is more heavily weighted towards enterprise and we're trying to get the mix more to focus on SMB middle market as much to kind of increase that amount of business simply because it's more profitable. We've invested in a team of about 50 people that are focused on growing middle market and SMB and we're seeing early signs of success there to get our mix in a better spot.

Speaker 3

The third is really around cost control. We took some additional actions in mid to late Q3 and we expect to see those kind of bake themselves in, but we're constantly looking at cost and the way we can control based off the revenue levels that we're given because we don't want to impact future growth opportunities. So it's a delicate balance, but I feel like we're really focused in that area. The 4th is really around managed solutions. That service has resonated with our customers.

Speaker 3

We've seen double digit growth. It is contributing positive operating income to our results. So we feel like we're going to continue to grow there. And then the last is really around efficiency. We saw productivity improved 20% asset light.

Speaker 3

We have a really good roadmap of future improvements. The carrier portal, load board automation, all the AI tools we're working on, we feel like efficiency is going to be in a really good spot. And really we've continued to focus on our people. We feel like we have the best people and getting them the training and tools they need to execute on the business will get Asset Light to a better spot.

Speaker 14

Okay. Appreciate the comment. Thank you.

Operator

Our next question comes from Scott Group from Wolfe Research. Please go ahead. Your line is open.

Speaker 12

Hey, thanks. Good morning. So I want to come back to the yield backdrop. I'm just not sure I'm fully understanding because I totally get there's a tougher a bit of a tougher comp in October. But to go from high single digit yields growth to flat and maybe November, December up a little bit, but wafer shipments down, which should be helping yield.

Speaker 12

You've talked about the GRI, the renewals. I guess I'm just not sure why the reported yield trends are just ex fuel or slowing so much.

Speaker 4

So Scott, this is Matt. I mean certainly we've talked about some of the year over year dynamics on the sequential dynamics from September to October. There just are some profile impacts and so actually weight per shipment was up from September to October. And then we saw a little bit of a decrease in length of haul. And again, I think that's not really indicative of any broader trends related to pricing.

Speaker 4

It's just more some of the freight mix that we saw in October and its impacts on pricing.

Speaker 12

And maybe just bigger picture, right? So we've got tonnage down, yield maybe flattening out, margins, I think your guidance implies down like 500 basis points or something year over year. Do we just need to wait for like the truckload market to tighten in ISM and we're sort of stuck with this for the time being? Or is there stuff we can do to start seeing margin improvement again in 2025 irrespective of just the cycle turning better?

Speaker 3

Hey, Scott, this is Seth. We believe we can improve ROR on the asset base side and it really comes down to a few areas that we're focused on. Revenue growth obviously will help. That's been a headwind and when that becomes a tailwind that will be great. But what gives me a lot of encouragement is the growth in our pipeline.

Speaker 3

We've seen our core business continue to improve with our service levels improving. Our retention rates are in a good place. Our customers are just shipping less. Instead of giving us 3, they're giving us 2 skids and that's why you're seeing that weight per shipment piece. But growth really comes down to that service you provide and we've made some great strides over the past year to get to a better spot, get back to where we've historically been and we hear from our customers that that is what they're feeling as well and that really helps us continue to grow.

Speaker 3

The next is efficiency. We've talked about city optimization. We're getting ready to roll out those next two phases. The new dock software rollout is going well as well. That's given us visibility that we have.

Speaker 3

The team of experts that we deployed that we mentioned in our opening comments, they're really just getting started. We've only done a few facilities. We still have the whole network to go and we have a very detailed roadmap of efficiency gains we can make. So it's a large cost basis. So we think we can although we've hit a multi year high on efficiency, we feel like we got a lot of runway there.

Speaker 3

Real estate investments, they're really centered around where we see opportunities for growth, efficiency and service. In each case where we've opened a new facility or added capacity, we've seen efficiency gains in the double digits and we've also seen growth opportunities where we wouldn't be investing in those areas. So that's been a great win for us. We've added about 800 doors this year, but these aren't 1 year decisions, these are multi year decisions, which is why we invest in these type of cycles, so we can be positioned when things turn around. The 4th is around equipment.

Speaker 3

We really have made sure to maintain a new fleet, keep the uptime in a good spot and it also is helping us from a cost perspective. We saw about $4,700,000 reduction in our fleet cost. And really I mentioned our people when I was speaking earlier, but we have spent an enormous amount of time with our people in the field, bringing them into our corporate headquarters, training them up and we've seen those results directly impacted in our efficiency numbers, our service numbers. And that's why I feel like we'll get asset based OR to a better spot as well.

Speaker 5

Thank you, guys. Thanks, Scott.

Operator

Our next question comes from Bruce Chan from Stifel. Please go ahead. Your line is open.

Speaker 13

Hey, thanks, operator, and good morning, everyone.

Speaker 7

Just want to follow-up on some of

Speaker 13

the asset light commentary, if you can maybe help us to parse the results by service. I know we don't have the same reporting granularity that we used to. So any color on whether some of the non brokerage businesses are contributing positively or those also loss making? And then just a quick follow-up here, I don't know if I missed it, but I think you talked about some of the pricing actions in brokerage. Does that imply that we need to wait for that contract repricing cycle to see maybe some positive contribution from that segment?

Speaker 4

Hey, Bruce, it's Matt. So on the Asset Life side, you're right. We don't provide service line level details. But certainly, I would say the biggest two contributors, one is just the truckload brokerage pricing environment that we've talked about. But on the positive side, we certainly are seeing strong contributions from our managed service line, which is contributing positively to the overall operating income result.

Speaker 4

And then as it relates to pricing, I don't know, Stephen, if you want to comment at all on just maybe kind of what we might expect to see or what that timing might look like?

Speaker 16

Yes. I think as market conditions improve, you'll obviously see opportunities for prices to improve. But prior to that, I mean, we're as Seth mentioned, we're looking at lane level, customer level pricing. We want to make sure that we're compensated for the service we provide. So we're doing that on a regular basis.

Speaker 16

And so we'll continue to focus on any area to improve net revenue as we kind of work towards an improved macro environment.

Speaker 13

Okay. So just not to harp on it too much, but it sounds like that would probably be later in 2025 kind of timeframe for that split the profitability there. Is that fair?

Speaker 16

Well, Seth, the other thing that Seth mentioned is the mix of business we think about segments and we are seeing growth outside of maybe the contract areas. So we have opportunities to improve there as well and we can do that ahead of the cycle. So again, the cycle helps, as it gets as the macro gets better, that helps us, but we have opportunities to improve outside of just a macro improvement. And we're focused on those areas. We've got our people focused there and we're making progress.

Speaker 13

Okay, fair enough. Thank you.

Speaker 14

Thanks.

Operator

Our next question comes from Ari Rosa from Citi. Please go ahead. Your line is open.

Speaker 14

Hi, great. Thanks. Good morning. This is Ben Moore on for Ari here at Citi. Following up on Scott's question on margin outlook, looking to 25% for your LTL, just wanted to get your thoughts on your historical average sequential seasonality for OR based on what we estimate looking at your last 10 years, Q1 on average up 100 to 200 basis points, Q2 down 400 basis points, Q3 down 100 basis points, 4Q up 100 to 200 basis points.

Speaker 14

And your business has changed over time with your space based pricing, your service and culture initiative you mentioned, your city route optimization. I wanted to get your sense, is this reasonable? Can you give us better ranges or what are puts or takes on beating those in 2025?

Speaker 4

Yes. So Ben, appreciate the question. I think we've hit on a lot of the key themes and I think Seth has done a good job just highlighting the focus in the ABF business. I mean, we feel like we're focusing on what we can control. We're in a great spot from a service perspective, on time perspective, productivity perspective, feel great about our pipeline and how that's developing for next year.

Speaker 4

Certainly, we can talk about just kind of what we've experienced historically quarter to quarter over the last 10 years and certainly we have that history and it's available. We can talk through it in some more detail later if that's helpful. But certainly, we continue to be focused on just continuing to achieve pricing outcomes that are, 1, just reflective of the great value that we're providing to our customers. And again, a lot of that's being reflected in the results that you're seeing from Astia this year and really achieving some great improvement over the cost items that we're seeing in those increases on a year over year basis. And we feel good about where that's headed.

Speaker 14

Great. Thank you very much for the color.

Speaker 5

Okay. Thanks.

Operator

Our next question comes from Stephanie Moore from Jefferies. Please go ahead. Your line is open.

Speaker 17

Hi, good morning. Thank you.

Speaker 5

Good morning. Good morning, Liz.

Speaker 17

Maybe sticking on the margin front, if you could just talk about the puts and takes of the 3Q to 4Q margin guide, Clearly called out the weaker top line environment, but maybe if you could kind of talk through whether it's wage inflation, insurance, but also what productivity initiatives you have underway that maybe offset some of that pressure. And then kind of taking it a step further to come in a little bit better than your expectations, what would we need to see? Thanks.

Speaker 4

Yes. So thanks, Stephanie. So certainly, there's not the items in the quarter like we had in the Q3. We had our annual increase for our union wage and benefits. And so I think we've done a good job just highlighting today how we're focused on the cost side and we're going to continue that focus and finish out the year strong there.

Speaker 4

And so I do think that just in terms of where the expectation is for the quarter, that's just based on where we see the macro backdrop developing here over the next couple of months. And so to the extent that that ends up in a stronger place than what we're seeing right now, we could see some improvement. But again, I think we're going to continue to see dividends paid on all the projects that we've been talking about on the productivity and efficiency side, both as we exit the year and as we head into 2025.

Speaker 1

Stephanie,

Speaker 2

I just want to be sure that we're thinking about the I guess the way that we're going to market and the opportunity set that we have. We've talked a lot today about our pipeline and we've also talked about the macro and various initiatives that we have to try to gain ground both in growth and efficiencies. And I just think it's really important for us to be able to relay to you the confidence level that we have in our ability to engage with customers in constructive ways even in a weaker environment. We don't take our foot off the gas pedal because of a weakness in the economy. In fact, the positioning that we have really helps us and especially our customers to navigate through these things.

Speaker 2

So, when we're talking about all the insights we have, it's because we're doing business with customers in different ways, whether it's in our managed offering or somewhere else in the business. But what I love is our ability to navigate around into the solutions that are going to work best for customers in this kind of environment. And we are seeing a lot of success there. The pipeline that we have in managed and LTL and truckload are all really strong and growing in momentum. And we have a lot of that in late stage.

Speaker 2

So as we close out this year and into next year, I feel like we're really strongly positioned to say yes and to help our customers navigate to the best solutions they can possibly have to help their business.

Speaker 17

Thanks Judy. Really appreciate it.

Operator

Our next question comes from Jason Seidl from TD Cowen. Please go ahead. Your line is open.

Speaker 6

Thanks operator. Appreciate you guys squeezing me back in here. Look, I hate to beat a dead horse, but I'm going to have to break out the crop here. Can you help me with a little bit of the details behind your increase sequentially in your weight per shipment that you mentioned and the decrease in your length of haul? Because I'm just trying to sort of level set where you're at because you push through those that nice GRI at 5.9% and then you're getting 4.6% on your contractual business.

Speaker 6

So I would have assumed ex fuel even on a sequential move that you would have been a lot better with those yield numbers. And I would love to see here sort of like what was the big shift in your freight on a sequential basis?

Speaker 5

Yes. Hey, Jason, it's Christopher again.

Speaker 14

Hey, Chris.

Speaker 5

So sequential to October, it's one thing that we haven't talked a lot about is just the weather effect that happened in September. And there's some underlying trends that having a weekly close of service center down for a few days and once you reopen it, something that we've just observed is that those customers, they may have had some freight that they were about to ship 1 pallet, now that they've reopened, now they ship 2 pallets. So just some profile dynamics that the external factors influence on those areas sequentially September to October, you think about those impacted areas had a higher weight per shipment. So you just have some mix changes that I would say were abnormal sequentially September to October that is influencing that revenue per 100weight stat. And again, we just are managing our business day to day to make sure we're getting the best results really regardless of the profile that we have.

Speaker 5

And revenue per 100weight is one yield stat, but obviously we're looking at the core profitability of the business and that's not really the end all be all of the profitability of our business.

Speaker 6

No, I understand that. I was just trying to for you guys to put some numbers around the weight per shipment increase and your length of haul decline. Do you have any sequential numbers for us so we can sort of get a sense of how bad the mix was?

Speaker 4

Yes. I mean, I think we can talk about it in a little more detail. I mean, there really those numbers are not significant. I mean, we're talking about a low single digit increase in weight per shipment and a low single digit decrease in length of haul. Again, I think there's some of these dynamics that Christopher has talked about that we think probably contributed to that.

Speaker 4

But no big trend or read through as it relates to pricing just with the sequential September to October move.

Speaker 6

Okay. I appreciate that. That's helpful. Take care.

Speaker 14

Okay.

Speaker 5

Thanks.

Operator

Our next question comes from Brian Ossenbeck from JPMorgan. Please go ahead. Your line is open.

Speaker 10

Hey, thanks for taking the follow-up question. Maybe if you can just walk through, sort of the changes in the CapEx spend. I think real estate went down a little bit as well as equipment. Is that sort of just normal true ups through the end of the year? Are you taking a different sort of approach there?

Speaker 10

And then I guess on the back of that, obviously, the rest of the Yellow facilities are still up for auction. So anything there that we should expect you to look at or potentially pick up here in the next round?

Speaker 4

Yes, Brian. So as it relates to CapEx, I would say on the equipment side, we expect spend consistent with what we had laid out for the year. On the real estate side, there were some opportunistic purchases that we were considering and that we thought might come to market. And so those have been delayed a little bit. We're still looking at opportunistically making some purchases in some markets, where it makes sense.

Speaker 4

And then as it relates to the yellow process, I'll let Matt Godfrey maybe just comment a little bit on that and what we might be hoping to see there.

Speaker 8

Yes. Thanks, Matt. So as Seth mentioned, we acquired 4 yellow facilities in the previous auction. We've opened 3 of those already and we'll bring the last one online in the Q4 and those facilities have been positive contributors to our efficiency, service and capacity in those markets and we really appreciate what our people have done to transition facilities and not have any disruptions for our customers. And so as you mentioned, the second phase of the auction is about to kick off indications of interest were due last month.

Speaker 8

We've submitted our interest in a few locations and these are locations that we were interested in previously and we're just really awaiting the next steps in the auction process on how that will move forward.

Speaker 5

Okay. Thank you. Thanks.

Operator

Our next question comes from Ari Rosa from Citi. Please go ahead. Your line is open.

Speaker 14

Hey, this is Ben again for Ari. Just going back to LTL margin and touching on what Ravi asked about on your mass deal survey. You are showing tremendous really fantastic improvement across the board, damage, shortage, on time, pickups, deliveries and especially billing accuracy where you're better than a number of your peers, which is very important for all of these for volume and pricing in upcoming quarters. Wanted to ask how much do you attribute these to your various initiatives, your training, your culture service, your city route optimization, others? And then more importantly, how much runway is there left?

Speaker 14

You mentioned on a lot of these, you're done with the 1st phase out of 3 phases, so there's 2 more phases. Does this mean roughly about 66% more runway for all or most of these initiatives for service improvement, which could get you more volume, more margin?

Speaker 3

Yes, Ben, this is Seth. I'll start and then I'll have Matt Godfrey chime in as well. So, we think all of the things that you mentioned around efficiency ultimately improved service. But when we look, we feel like we do have quite a bit of runway there. We went back to our historical position on the mass deal.

Speaker 3

We always exceeded industry benchmarks for 19 of the last 20 years. In 2023. We hired a lot of new people. We got a lot of new process. Just a lot of things happened.

Speaker 3

So we listened to our customers and we responded very quickly to get back on track and move back into the position where we've historically been. Most of the initiatives that we did, I would say improved service on a tactical side. Now we're focused on kind of holistically like website, ETAs, visibility into customer supply chain. A lot of the work around efficiency, which Matt will mention, is also going to improve that. So I feel like we still have quite a bit of runway to go, because even though we're in a great position, we ultimately our goal is to be number 1 on the Mastio, because we think that translates to better growth and better price from our customers.

Speaker 8

Yes, it's a follow-up there. Appreciate your question on city route optimization and trying to understand the percentage of runway. I think the way to think about that is the first phase of city route optimization had the largest impact is going to have the bulk of the impact. But we are excited about phase 2 and phase 3 and really phase 3 around pickup optimization. Not only is there an efficiency runway there, but when you think about the most important things as it relates to the Mastio survey and pickups being high on that list, we think it will have a really positive impact for our customers on the pickup process.

Speaker 8

So we're pretty excited about that. Some other things that we are working on that we're going to begin piloting here later this year around appointments and optimizing that process. That's something our people spend a lot of time on. It's something our customers rely on us for. It's a service that they find value in our offering and we really want to make that process easier for our people and our customers.

Speaker 8

And then another thing we're working on around line haul optimization, again another project focused on service and efficiency. We've made some gains this year kind of in the early stages on that and we're really excited about what's to come on that as well. So we think we have a pretty significant runway not only to improve our service, but to increase our efficiency at the same time.

Speaker 14

Great. Thanks so much for the color.

Operator

Our last question today will come from Scott Group from Wolfe Research. Please go ahead. Your line is open.

Speaker 5

Hey, thanks for the follow-up.

Speaker 12

I just had a longer term question on the pension side. I know no immediate impact and it's still the final ruling still to be determined. But does the outcome of the yellow pension withdrawal liability, how does that how do you think that impacts your long term pension contributions in any way? If they have to pay bigger withdrawal liabilities, does that help? Or how do you think about that?

Speaker 2

Scott, we've watched these issues and monitored them for decades. And what our obligation is, is just to pay in the hourly rate that we negotiate based on the hours worked. And so we have that negotiated obviously through 2028, but also a larger impact here was the American Rescue Plan that put in place a lot of funding and really has positively impacted the most distressed multi employer pension funds. So I think I don't know what the dollars are going to be related to this other settlement. But my feeling is that those won't be significant to the overall situation that we're in today.

Speaker 2

And so I feel like that every 5 years we negotiate the rates here. And the fact that American Rescue Plan better funded the most distressed funds puts us in a place that's better than we were before that law was enacted. And I think that's the way to think about it because it's we're just planning to continue to do the same things that we've always done and it's continued to put us in a more reasonable place. And large increases in pension, We haven't seen anything like that since 2013. So more than a decade, we've been in a position where the hourly rates we pay are more than adequate to address our situation.

Speaker 2

And so that's the way I think about it. It's just something that we obviously have to stay close to and monitor, but it's not a negative for us as we see it.

Speaker 13

Makes sense. Thank

Speaker 5

you, guys. Appreciate it. Thanks, Scott.

Operator

We have no further questions. I would like to turn the call back over to Amy Mendenhall for closing remarks.

Speaker 1

Thank you for joining us today. We appreciate your interest in ArcBest. Hope everyone has a great day.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
ArcBest Q3 2024
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