ArcBest Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 6, 2024

There are 18 speakers on the call.

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 4th Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I would now like to turn the call over to David Humphrey, Vice President of Investor Relations. Please go ahead.

Speaker 1

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 Q4 and full year 2023 results And then answer some questions. Joining me today for the prepared remarks are Judy McReynolds, Chairman, President and CEO of ArcBest And Matt Beasley, Chief Financial Officer. In addition, Seth Runzer, President of ABF Freight Stephen Leonard, Chief Commercial Certain President of Asset Light Logistics, Dennis Anderson, Chief Strategy Officer and Christopher Atkins, Vice President, Yield Strategy and Management are available to help answer questions. To help you better understand ArcBest and our results, some forward looking statements could be made during this call.

Speaker 1

Forward looking statements, by their very nature, are subject to uncertainties and risks. 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 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 website, arcb.com, in Exhibit 99.3 of the 8 ks that was filed earlier this morning or you can follow along on the webcast. I will now turn the call over to Judy.

Speaker 2

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's resilience, Innovation and customer focus and we recognize this accomplishment with events and programs throughout the year, Including supporting our communities with over $1,000,000 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 4th quarter and full year results. Thanks to our diverse portfolio of solutions, our investment in technology and innovation and our commitment to operational excellence.

Speaker 2

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 $4,400,000,000 the 2nd highest in company history. We implemented cost cutting measures that improved our asset based operating ratio in the 3rd 4th quarters 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.

Speaker 2

We accelerated our existing service center facility plan, increasing our asset base capacity. We grew our Asset Light shipment volume while improving key productivity metrics. We better aligned our with our growth strategy by selling FleetNet America for $100,000,000 We launched the VOXX Freight Movement System, Which was recognized by Fast Company and Time as one of the year's best inventions. And we invested in our business while also returning over $100,000,000 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 Freightway's FreightTech 25, receiving 5 Quest for Quality awards from logistics management readers, Earning our 3rd ecovatus 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 4th consecutive year.

Speaker 2

Furthermore, 3 of our ABF Freight drivers were recently chosen as America's Road Team Captains for 2024 2025, a tremendous honor This showcases their excellence, professionalism and safety record. They join 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 on 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.

Speaker 2

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

Speaker 3

Thank you, Judy, and good morning, everyone. I'm pleased to report that Artvest delivered solid financial performance for Q4 and full year 2023 despite the softer market. Let me start with an overview of our consolidated results. In the Q4 of 2023, we generated $1,100,000,000 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 $81,700,000 which was comparable to the same period last year.

Speaker 3

We achieved a slight increase in adjusted earnings per share reaching $2.47 up from $2.42 in the Q4 of 2022. Before year 2023, revenue was $4,400,000,000 down from the record revenue levels in 2022. Our non GAAP operating income was $258,000,000 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 Q4, our Asset Based revenue $710,000,000 in line with the same quarter last year.

Speaker 3

We also improved our non GAAP operating ratio to 87.7%, A 90 basis point improvement year over year and 110 basis point improvement sequentially. This is a notable achievement considering that historically Our 4th quarter operating ratio was 100 to 300 basis points higher than the Q3 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 4th quarter tonnage per day decreased 7.2%, while our daily shipments decreased by less than 1%.

Speaker 3

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 4th quarter And our Q4 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 Q3 of 2022. For full year 2023, our asset base revenue was $2,900,000,000 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.

Speaker 3

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 Q4 to the Q1 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 ks exhibit we filed this morning.

Speaker 3

Moving on to our Asset Light segment, 4th quarter revenue was $413,000,000 down 14% year over year on a daily basis. Shipments per day increased 12%, driven by higher demand for our managed 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 $1,000,000 for the quarter. Before year 2023, asset light revenue was $1,700,000,000 down 21% from 2022 on a daily basis. Our shipments per day increased 5%, while our revenue per shipment decreased 25%.

Speaker 3

Our full year non GAAP operating income was $5,000,000 And adjusted EBITDA was $13,000,000 We also provided preliminary asset light business trends for January 2024 In the Form 8 ks exhibit filed this morning, we continue to see lower revenue levels as shipments 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 am pleased to share that our business momentum in 2023 generated robust cash flow and ArcBest consolidated adjusted EBITDA from Continuing operations reached $370,000,000 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 $100,000,000 to shareholders Through share repurchases and dividends. Our net capital expenditures in 2023 including equipment financing $245,000,000 of which $144,000,000 was allocated to revenue equipment. We faced some challenges with manufacturing delays and part shortages last Which resulted in a portion of our planned 2023 CapEx primarily for new city tractors and trailers being deferred to 2024.

Speaker 3

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 $325,000,000 to $375,000,000 This includes $155,000,000 of revenue equipment and $130,000,000 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.

Speaker 3

In January, we purchased 3 Yellow facilities for $30,000,000 and spent $8,000,000 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.

Speaker 3

As you may recall, in February 2023, announced $125,000,000 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 am pleased to report that we repurchased almost 1,000,000 shares over the last year At an average price of less than $100 per share for a total of almost $100,000,000 I am also pleased to report that yesterday Our Board of Directors increased our share repurchase program authorization to $125,000,000 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.

Speaker 3

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.

Speaker 2

Thank you, Matt. Our 4th quarter and full year performance is to the experience, values and dedication of the entire ArcBest team. I'm honored to work with such a talented group of people You 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.

Speaker 2

We are not just following the trends, Leading the way with our AI projects, which have already delivered significant efficiency gains and are poised for further development. Our city route optimization project has contributed over $1,000,000 per month in operating income improvement and we've begun a pilot to extend this 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.

Speaker 2

And that is why I'm excited to share that we are launching a new feature on arcv.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 are developing and rolling out this year. We're investing in our people who are 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, A sentiment routinely echoed by our customers.

Speaker 2

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.

Speaker 1

Okay, Danica. I think we're ready for some questions.

Operator

Your first question comes from Jason Seidl with TD Cowen. Please go ahead.

Speaker 4

Thank you, operator. Hey, Judy. Hi, team. Good morning. That you guys sent us, how much of it do you think was weather impacted?

Speaker 4

And then can you guys also remind us when we start lapping The transactional business declines?

Speaker 2

Yes. I mean, Seth, do you want to talk about the weather impact?

Speaker 5

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 January is 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.

Speaker 5

So for the full Q1, we generally average about 174 Closures on a 10 year average, so we are already at about 75% of that and we are just getting into February. So January was pretty extreme from a weather perspective, but proud of the team that we have fully recovered, network is back on cycle and we feel good that we are positioned well.

Speaker 6

Where were you guys last year?

Speaker 5

On weather you are saying? On the amount of closers?

Speaker 4

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

Speaker 5

Yes. It was around that 10 year average, 57.

Speaker 4

It was around? Okay, perfect.

Speaker 2

I'm going to ask Christopher to jump in here also.

Speaker 7

Hey, Jason. Good morning.

Speaker 8

Hey, I'm

Speaker 7

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 are able to swap out that transactional business for more core business. So I would say first half of twenty twenty three is when we are More reliant on that transactional.

Speaker 4

Okay, great. That's my one plus I guess. Thank you.

Speaker 2

Thank you.

Operator

All right. Our next question comes from Jordan Allinger with Goldman Sachs.

Speaker 9

Yes. Hi. Good morning. So wondering, you mentioned I think Good morning. You mentioned the 8 ks, I think that traditional or typical seasonality 4Q to the 1Q is about 400 basis points worse We're higher depending on, I guess, the economic conditions.

Speaker 9

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.

Speaker 3

Yes. Jordan, this is Matt. So you're right. Over the last 10 years, excluding the pandemic effective periods, it's About a 400 basis point increase that we've seen in operating ratio from the Q4 to the Q1. There's certainly a few other factors that are in play This year, I'd say, 1, just some of the market disruption impacts that we saw in the 4th quarter.

Speaker 3

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. Certainly fuel has come down some over the last 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.

Speaker 2

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 Q1 as well. So we have the union contract increase. I think that was I mean, that was there in the Q4. It will be there in the Q1. Another item is just the union incentive will apply in all of 2024.

Speaker 2

So that's a factor. But we have put in cost controls and then if you take a look at the Q4, you'll Pretty good decreases in cartage and purchased transportation and rented equipment, all of that is still in place. And so that's a relatively consistent comment, I guess, to the Q4. 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.

Speaker 9

Okay. 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?

Speaker 3

No, you're absolutely right, Jordan. Yes, we definitely saw Great improvement from the Q3 to Q4 that was ahead of what we would have expected seasonally for those quarters. All right.

Speaker 10

Thanks so much.

Speaker 1

Thanks, Julian.

Operator

All right. Our next question comes from Ravi Shanker with Morgan Stanley. Please go ahead.

Speaker 11

Thank you. Good morning, everyone. One last question on your CapEx. Your CapEx is Stepping up somewhat from 'twenty three to 'twenty four, 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 and more opportunity for growth?

Speaker 11

And how are you thinking about that for next year for this year?

Speaker 2

Well, Robbie, 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 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 All of that fit together pretty well.

Speaker 2

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 we could really gain some benefit 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 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 and

Speaker 7

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 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 With them to find mutual win win opportunities.

Speaker 11

Very helpful. Thanks everyone.

Operator

All right. Your next question comes from Ken Hoexter with Bank of America. Please go ahead.

Speaker 12

Hey, great. Good morning and great job on the margin. So talking about that, I guess, Judy or Matt, 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?

Speaker 5

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 am 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 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.

Speaker 5

It's one of our core values, excellent. 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-twenty 24 And that's really going to expand the digital functionality across all of our service lines.

Speaker 5

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 How 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 and just our history with the quality process is only going to accelerate that as we move forward.

Speaker 12

Do you provide kind of cargo claims levels or on time performance numbers relative to peers or is that not given?

Speaker 2

Well, I mean, Ken, I think there's a lot to consider when you do that. And so our preference Is to not do that, but it's not because we're shy about it. I mean, our service levels are good and customers value them. But there are lots of comparison issues when you look across and we're fully aware of those, especially because we have our managed offering and We do business with a lot of the carriers that are competitors or regional carriers and we see those differences. But on the cargo claims side, we've been best in class for a long time as that 10 time winning award Indicates.

Speaker 12

Got it. And then just to clarify, do you at this point, do you still talk, I don't know, excess capacity or what is available to Still switch between the core and the transactional side?

Speaker 7

So we have opportunity, we've talked about before to do that, That mix update, we still have plenty of runway there to grow our core business and make room with transactional. But we also have upside just in total shipment count To grow, and we've demonstrated that over the last 12 months that we can handle more business. We can bring on more of that variable expense that could Give us upside in total shipment growth as well. So I don't know, Seth, if you want to speak to any of that.

Speaker 5

Yes. I would say on the long term network side of things, we talked About the doors we are adding there, and I really view growth and capacity. It's not just the physical doors you are adding or the people, it's also the efficiency gains that we have. So when Judy was talking about the facilities to an earlier question, what we saw as a good example in 2023 is we opened a And we had our Carlisle facility where we transferred some of that freight over to Camp Hill. And when you look at the Combined operating ratio of those two locations, that's improved over 600 basis points since we opened that facility.

Speaker 5

So I view efficiency as a lever for growth and we have seen that in our real estate plan and that's where we are investing our dollars. So I'd say overall, we probably have about 15%, 20% latent capacity right now. So we feel pretty good about where we're at from People standpoint equipment and real estate perspective as well as efficiencies.

Speaker 12

Appreciate the time and thoughts. Thanks guys.

Speaker 1

Thanks, Keith.

Operator

Great. Our next question comes from Chris Wetherbee with Citi. Please go ahead.

Speaker 13

Hey, good morning guys. It's Rob on for Chris.

Speaker 8

Could you give us an update

Speaker 13

in terms given the terminals you guys were able to from the Yellow Auction.

Speaker 4

Could you give

Speaker 13

us an update on your thoughts about the total shipments per day you're targeting in the network today relative to the 20,500 you guys were talking about last quarter?

Speaker 5

Yes, I would say it's really fluid to be honest with you. So We're targeting honestly as much growth as we can get. So I would say in the what our real estate plan is based around is around 25 percent growth and that's really what we're trying to achieve in the longer term obviously. But I would say we're really doors wide open on the growth side of things.

Speaker 2

And then you might get into detail of your of the what we bought? Yes. The locations we bought?

Speaker 5

Yes. On the actual yellow real estate side of things, we purchased Three properties and then did a lease buy out of 1. So we purchased Des Moines, Springdale and Columbus, Ohio. But that really is part of a longer term real estate plan that we have had. So in 2022, we added about 135 doors to the network, 2023, about 2.99 doors to the network and then in 2024, we plan to add about 347.

Speaker 5

The yellow property accounted for 77 of those door adds. So and those were markets that we are already in. We already do business in, but we saw an opportunity upgrade whether it's doors or yard capacity or whatever the case may be because we see growth opportunities in those markets.

Speaker 13

And then just for my clarification piece, on the shipments per day, there's just a lot of noise in kind of ore tonnage per day. There's a lot of noise given the transactional business you guys were doing. Can you speak a little bit about the sequential trend December from the Q4 that you're seeing so far in the Q1, just so we level set kind of expectations from a volume perspective?

Speaker 7

So I think overall our shipment count is down, If you think from 3rd to 4th and then going into January, I think in January, we were averaging right around 19,000 shipments per day. It's Similar for December, right around 19,000 shipments per day and like we talked about earlier, some of that is a weather effect that we think there's upside as the weather clears up To handle more, like Seth was talking about, we're managing that on a day to day basis. Our sales, yield and operations teams are Closely connected there to make sure that we are getting the right result from a short term positioning standpoint, but also preparing ourselves for long term growth.

Speaker 3

And Rob, we did share in the 8 ks this morning, we are continuing to see higher transactional prices year over year, which And resulting lower transactional volumes, but core shipments as we moved into January were up 6% core tonnage, I'm sorry, yes, core shipments were up 8% core tonnage was up 6% as we moved into January year over year.

Speaker 8

Appreciate the perspective. Thanks guys.

Speaker 1

Thank you. Thanks Rob.

Operator

All right. Our next question comes from Jack Atkins with Stephens. Please go ahead.

Speaker 10

Okay, great. Good morning and thanks for taking my questions. So Seth, if I could go back to something you were talking about earlier, which was sort of this idea that you're kind of positioning the network over the long term for 25% Shipment growth levels. I guess how are you thinking about core LTL market growth over the Long term, I mean do you think it's kind of GDP, GDP plus just kind of what are some of the drivers there, if you could maybe talk about that?

Speaker 5

Yes, I would say it's a mix of everything. Obviously, the macroeconomic conditions, PMI, things like that are obvious indicators, weight per shipment. But The way I try to look at it is a view of our pipeline and it's robust and there's a lot of opportunities that are coming our way as shippers are looking for long term logistics And I think about how our strategy is working because being an integrated logistics company with assets allows us to respond to customers Like we did throughout the turbulence in 2023, so we leverage both of our networks, the Asset Based and Asset Light Networks to meet our customer demand. So When we see the shift to more core business, it's allowed us to be more strategic with our resources. And when you look at most recent pandemic years, it was challenging to find labor.

Speaker 5

So we're trying to position ourselves for the short term and the long term for these growth opportunities that we see in our pipeline.

Speaker 10

Yes, absolutely. I'm sure there's a lot of demand for a high service network like yours. Okay, I guess for my follow-up question, just Kind of back to the yield commentary, we're seeing continued acceleration in terms of the contract renewal rates year over year in Q4. Are you seeing customers wanting to pull renewals forward or I think another carrier talked about seeing a significant increase year over year in renewal rates. Just the number of renewals in the Q4, are you seeing that as well?

Speaker 10

We would just be kind of curious about that.

Speaker 7

Yes. I don't know that we are seeing necessarily any change of trends in renewal rates. We are constantly evaluating those renewals, making sure that we are compensated for the service that we're providing. One trend that I am seeing as it relates to renewals and bids is that there's an interest among the Community and diversifying their carrier base and not relying just on one carrier. So I think that really plays well, like Seth was saying, into our integrated logistics Approach that plays well into our managed solution where if they want to diversify the carrier base, we have stable of carriers that we're able to introduce to them To really de risk their supply chain to not be overly reliant on 1 or 2 carriers.

Speaker 10

Okay. Fantastic. Thanks for the time guys.

Speaker 1

Thank you. Thanks, Jack.

Operator

All right. Our next call comes from Scott Group with Wolfe Research. Please go ahead.

Speaker 14

Hey, thanks. Good morning. So I just want to go back to this core shipments, core tonnage up 6%, Total tonnage down 18%, that's a pretty massive spread. At this point, what percentage of the business Is this transactional?

Speaker 2

Well, Scott, it's certainly lower. I mean, we use transactional to fill in the gaps that we need. And I think what's changed from last year is An emphasis on wanting to make sure that we have we serve core customers well, but we also have capacity to serve them well. Last year when you think back about where we were, we were in a period where it was very important to us To have consistency in our network, we had brought on a lot of people. It had been a very challenging hiring environment.

Speaker 2

As we got into later Q1 into Q2, we were working to get our labor deal done. And so it was really important to us to keep the network working, keeping our people working and staying in a consistent place. And as we entered the latter part of the second quarter and into the third quarter, We started to hear the noise about the yellow situation. Customers were reaching out to us. We started to see A lot of opportunity there, but we were also in early July wrapping up our labor deal.

Speaker 2

And so we saw an opportunity to really Emphasize the core business opportunities that we were seeing. We also saw an opportunity to really Right size the network from a resource standpoint to put the most effective resources on them. We wanted to emphasize the use of our people Rather than 3rd party resources and that equation has proven to be improvement in Growth opportunity of the core customers, but also profitability improvement. And that's where we are as we enter 20 24 as well. What we want to do is be sure that we stay in that place where we're optimizing growth, Profitability and the use of our own labor and resources.

Speaker 2

And it does create some odd comparisons. I would tell you this too that the January weather also plays a role in some of those statistics. In the latter part of January, we saw much stronger Trends in terms of our core customers. So we really think there's a lot at play there. But sometimes when you're giving Good update like we do in our 8 ks that 1 month is just not as instructive as you'd like for it to be for the rest of what you're doing.

Speaker 2

And so Just hope that you can take all of that into consideration as you're looking at it and how that affects what you're doing and thinking in your modeling.

Speaker 14

I guess ultimately what I'm trying to figure out is are you clearly we've pivoted away from this transactional stuff, it's helping yield, it's Helping margin. Are we happy with the mix today? Do we want to go even push the transactional even lower? Or do you think maybe In your view, have we overshot a little too much on tonnage pressure and we want to actually increase our transaction? What are we trying to take this transactional from here?

Speaker 2

I feel like it's in a pretty good place. We feel we have access to a lot of transactional business. So we have the access to it, if that's what we'd like to do. But we do see that It's at a more optimal level than certainly it was last year. But we are constantly evaluating that, Scott.

Speaker 2

I We do it every day. We look at the opportunity set that's there. We look at the lanes that we're running in, how that one more shipment could affect it. And so it's very analytically driven, let's just say. And so but I feel like it's probably in a more optimal place Today than it was in last January for the environment that we have today.

Speaker 2

Last year, we had some different objectives that we were working toward And, I outlined those already.

Speaker 3

All right.

Speaker 2

Thank you. Thanks.

Operator

Okay. Our next question comes from Ben Moore with Deutsche Bank. Please go ahead.

Speaker 15

Hi, Judy, Matt, Chris and Dave. Thanks for taking our questions. Following up on the service discussion, when we look at the most recent Mastio data, it's And pretty volatile in terms of customers' perception of ArcBest service. Not sure if that's more to do with the adjustments you've made on pricing or if that highlights Some deficiencies in some areas that we need to focus?

Speaker 16

Hey, Ben. This is Dennis. And I think you're certainly When we look at the MATHEO study, we're not in a place that we want to be or that we're striving to be. And I think Seth highlighted some of the things From a service perspective that we're working on and have improved really even since that study was in market And we have more coming. So when we look at service, it's also about how we communicate with our customers.

Speaker 16

And so we talked about some of those tools, Especially on the visibility side that we're providing rolling out in fact tomorrow some things on the pre pickup side. So definitely continue to listen to customers, Make changes to make their experience better with us. And I think also you mentioned from a price perspective, Certainly it helps to be more consistent and as we've migrated more to a core type mix here as we've been discussing That is helpful in that consistency conversation

Speaker 5

with customers.

Speaker 15

Thanks. And maybe just as a follow-up, the team did a great job on costs in the quarter. Can you just talk about how you expect the asset based cost structure to trend throughout this year, Given the lower inflationary environment and also a step down in wage inflation?

Speaker 3

Yes. So maybe just a few comments on that. I mean, certainly we do have the Contract increases that we saw in the Q3 of last year, carrying into this year and then those obviously moderate significantly On a go forward basis on the contract, all of the work that we've done on the asset side that we highlighted, That's continuing and in a lot of ways accelerating this year as we continue to work on service and optimization efforts. So again, all the purchase transportation and cartage and maintenance costs and just all the work We've done as well as all the efficiency work that we've done, we expect that to continue to have impacts throughout the year in 2024.

Speaker 15

Great. Thanks very much.

Speaker 8

Thank you.

Operator

All right. Our next question comes from Bruce Chan with Stifel. Please go ahead.

Speaker 4

Thanks, operator, and good morning, everyone. I appreciate the time as always. Judy or Stephen, maybe just a big picture question here on the strategy of Asset Light. A couple of years ago, you bought a young, high growth company. Obviously, the market's changed pretty significantly since then.

Speaker 4

A lot of movement with some of your big competitors in the business. If you could maybe just share how you're thinking about how Asset Like fits into the model in terms of cross selling and other synergies. And then maybe what kind of long term growth or long term margin profile you'd ultimately like Get out of this business in a more normalized environment

Speaker 12

that would be really helpful. Thank you.

Speaker 6

Yes. So from a strategy I mean, we are customer led, so we want to have every opportunity to say yes and Help our customers improve their supply chains from an efficiency and Effectiveness perspective. And so in order to do that, you have to have these services. And so we want to provide those services in an integrated way. And so We feel like what we are doing in Asset Light is a strong part of our long term plan.

Speaker 6

And On top of that, we feel great about where we are with our people and our technology, what we are doing To build out that business and continuously improve, you mentioned the acquisition of Molo and One of the things that we really like about that is the focus that that team has on the customers. We continue to hear from our customers that We are a leader for them from a service perspective. Also from an employee perspective, we are Continuously having getting recognition for being a great place to work, so that allows us to attract the right talent, Which leads to a great customer experience. But overall, we see this and when you look at even our pipeline, our pipeline for Opportunities, whether it be in managed or truckload, continues to grow. The number of deals throughout Q4, The number of deals in our pipeline increased month over month and we have seen that as we move into the 1st part of the year.

Speaker 6

Those services are resonating very well. As you mentioned, we are in a challenging market environment, but we expect that to improve. And then from a margin perspective, we have talked about that 4% to 6% range that we are targeting. So that's how we are thinking about it in the long term.

Speaker 4

Okay. I appreciate that. And just maybe a really quick follow-up. I mean, if I look at the business today, you're roughly, Call it sixty-forty ABF to asset light. Is that the right kind of mix of overall business?

Speaker 4

Is that something you're trying to manage to?

Speaker 2

I'll take that. What we see whenever we look at the market opportunities and our presence in some of those markets, which is relatively We really feel like that the asset light solutions that we have, Stephen mentioned Truckload and Manage, I would add expedite To that, we'll continue to the growth there will continue to outpace the asset base growth, That's just a level of maturity in those markets that we have. I mean, we have a national network. We're mature on the asset base side. Customers still really are compelled by the service offering that we have there, but just the math We take you to a place where over time, the asset light could be a better part or a greater percentage, I guess, Of the total that we have.

Speaker 2

And what I see about that is that would be a good thing, particularly we talked a little bit about managed. That just gives us the closest relationship with the customer. It allows us to help them optimize their supply chain. It allows us to enact the capacity that we have a relationship with, whether it's truckload or LTL carriers or it's business that runs in Our own network. And I'm really excited about the growth potential there as well.

Speaker 2

So, what we see is A great opportunity for growth with the asset light solutions.

Speaker 3

Okay. Appreciate the answers.

Operator

All right. Our next question comes from Tom Wadewitz with UBS. Please go ahead.

Speaker 8

Thanks. This is Mike Traiano on for Tom. So the increase in core LTL shipments post yellow has been beneficial From an efficiency standpoint and it's allowed you to bring down purchase transportation costs in the asset based business. Do you think there is more opportunity for PT cost reduction in 2024 or are you optimized on PT given your current mix of LTL business?

Speaker 5

I would say we are pretty close to optimize, but we are always looking at it's almost The daily management of resource to business levels and we want to be positioned to scale up when the market turns, but those actions that we took in 3rd and 4th They're going to continue throughout the year and we'll continue to look for reductions where possible. Judy mentioned the rollout of Citi optimization That allows us to optimize our city operation, which in turn reduces some of these external city cartage costs. So we're constantly looking at our optimization roadmap And we feel pretty good about some of the projects that are coming online in 2024. The PT side, we're down to a pretty optimal level when you look at PT over the road type usage, so we think that's still a pretty spot, but we could pretty good spot, but we're always looking for As we move through the network to reduce cost and be more efficient.

Speaker 2

The other thing that we've done is we've hired some of the yellow drivers. And so that helps us with the resource and line haul that added to our road board And that's been beneficial as well and should continue to be beneficial as we go forward.

Speaker 5

Yes. And I about the investments in the fleet too. So we had OEM delays as we move through 2020, 2021, 2022. Now that we have seen those more normalized by getting the equipment that we ordered more timely, that's going to help us reduce our rental expense as we move through the New Year.

Speaker 8

Right. So as we think about just the volume growth and your ability to scale Moving forward, do you think that you'll lean more on company assets or do you think that you'll have To scale up PT as the volume growth comes in?

Speaker 5

I really think that we want to lean on our own assets as much as Possible that's the most cost efficient and the best experience for our customers when you have one

Speaker 1

of our drivers show up.

Speaker 5

So we're going to lean more at that side. So when we talked about transactional business earlier, some of what we're doing there is trying to keep that consistency in business, so we can keep our headcount in a good spot For when this turns and we also have some fleet capacity as well. We've been in the Q4 removing some of our older Cost city units, but with the new equipment coming online in 'twenty four, we felt good about that. So I think we're positioned well with a Strategy we're deploying to be positioned when the market does turn to service our core customers.

Speaker 8

Great. Thanks for the time.

Operator

Our next question comes from Stephanie Moore with Jefferies. Please go ahead.

Speaker 17

Hi, good morning. Hi, everybody. Thank you.

Speaker 2

Good morning.

Speaker 17

Kind of a 2 part question here with A little bit of a focus on maybe the underlying macro environment. So first, maybe if you could just touch on what you're seeing on the asset light side. You saw some Pretty strong volume growth this or in the Q4. So I'd love to get your thoughts on what you're seeing there. And then maybe more of a Medium term question, kind of your thought on how the freight environment shakes out in 2024 just based on what you're seeing today and conversations you might be having?

Speaker 17

And then I guess maybe similarly that same question on the underlying freight environment on the asset base side and in your LTL business, if you're seeing any possible green shoots? Thanks.

Speaker 2

Stephanie, it is interesting. I mean, we were talking about this as we were gathering for the call about the Crystal ball that we need to have for 2024. And it's really kind of interesting when you sit back and you think about the length of Time that the manufacturing sector has been in recessionary category. I mean, it's almost going on 2 years and that's pretty unusual. You've also seen the Impact of this, I guess, the top line reduction for truckload in particular and ground expedite, The fact that there's not really been a spot market to speak of, some of those things are just really unusual.

Speaker 2

And We've asked ourselves a lot about what we're looking for. And I think the Truckload team in particular has said that They feel like we're at the bottom, but it seems like we're there for a long time. And we're just waiting For the most part for capacity to exit and there are some signs that we've seen capacity beginning to exit, Although not at the pace that we would all like to see, but we look at these things over the long term. And Again, I think we discussed a little bit ago just the importance of having the solution set that we have whenever we go to have a discussion with a customer that's Really going to be responsive to their needs. And the only other thing I would add is this yellow event Has really helped the LTL market to have some good opportunities for core business.

Speaker 2

We have to be careful with those because we want to be sure that it's business that works well for our customer, but also works well for us and in our network. And some of that takes time. I think we mentioned some stats about bids and winning bids and that sort of thing. We're encouraged by those and they're running all of that's kind of running counter to what's going on in the macro. And that's a really good thing, but we're pleased with how we're positioned.

Speaker 2

And we do see that our Strategic positioning is such that we can be in those conversations even if the LTL network is not the ultimate decision That the customer makes. And I really like that. It's like our company is set up well for what's happening as far as The yellow event and where that business ultimately lands. But I'll stop there and I'm not going to give you a prediction because I don't really have one. But we are positioned well sort of regardless of what's going on in the macro because of what we put together as an approach.

Speaker 17

Got it. That's all really helpful. Thanks for the time.

Speaker 1

Thanks. Hi, Danica. We've got a couple of repeats, so let's

Speaker 5

We don't have a

Speaker 1

lot of time, but maybe we can go pretty quick on these last 2.

Operator

Absolutely. We have Ravi Shanker with Morgan Stanley. Once again, please go ahead.

Speaker 11

Great. Thanks so much for the follow-up. Judy, just a bigger picture question for you. What percentage of the business now comes from e commerce? We are seeing some structural shifts in the e commerce supply chain With increasing regionalization and falling length of haul, what does that mean for the LTL business over time?

Speaker 2

Yes. Well, whenever I think through that just real quickly, about 15% of our business is retail. Now, not a 100% of that would be e commerce, but a large percentage of it would. I can think of examples that really don't Have an online presence that we do business with and we do that well. But so it ends up being, I want to say, 11% or 12% of our shipments whenever I think about last mile.

Speaker 2

So and then again the 15% retail, I think that gives you some perspective on that.

Speaker 11

Great. Thank you.

Speaker 1

Thanks, Robbie. And we have got one more question, I think, Danica.

Operator

Yes. Our final question is from Scott Group with Wolfe Research. Please go ahead.

Speaker 14

Hey, thanks for the quick one. Can you just maybe give us a quick update on where we are with these innovative Technology costs and what we're getting from them and then at what point if any do we need to start thinking about moving those into the Sort of core OpEx

Speaker 3

number? Yes.

Speaker 2

Well, it's really right now as it stands, it's a Creating a new revenue opportunity is what we'll ultimately gain from that. But at this point, we're we've got Really more than one thing going on, but in the main, it's the VOQ system. There's a VOQ sprite system that involves hardware and software And is focused on the rapid pace of loading, unloading and transferring freight takes it from hours to minutes Coming out of the trailer and then we also have the software applications that go along with that. In the next few weeks, we're going to be introducing more offerings that are coming from that. And the pilot work that we're doing is with the Fortune 500 Companies in automotive, manufacturing and retail.

Speaker 2

And some pretty exciting pilot opportunities that we're working toward, But there's it's amazing how we are experiencing the different applications of both the hardware and the software and the combinations with some of this pilot work. And so what we find is that the shippers Customers that are managing warehouses are trying to do is access labor. They need workflows that are more efficient And they also are interested in safety and reducing claims damage. And those are all the things that are the focus This technology, both software and hardware that we're advancing. And so these are what you're seeing are the costs associated with that.

Speaker 2

And obviously, we're looking forward to the revenue stream that can come from that. And there's going to be more that unfolds in the next Weeks, but also as we get further into 2024 there.

Speaker 14

But I guess as the revenue picks up, do we need to start expensing of the stuff or does I mean, I'm trying to figure out if there's any change in accounting coming?

Speaker 2

Yes, yes. I mean, I think once it's operationalized, yes, Scott, you would. I think the reason that we're handling it the way that we are right now is that this is pilot work that we're doing or advanced work That we're doing to get into the pilots. But it doesn't I totally agree with you. Once it becomes You know operationalize, so to speak, than it would be.

Speaker 14

Okay. Makes sense. Thank you, guys. Appreciate the follow-up.

Speaker 2

Yes.

Speaker 1

Okay. Well, I think that concludes our call. We appreciate you joining me this morning and appreciate your interest in ArcBest. And so that concludes our call. Thank you very much.

Operator

Thank you, everyone. You may now disconnect.

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Earnings Conference Call
ArcBest Q4 2023
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