ArcBest Sees Improvement Beyond Record Q3 Performance

Management from ArcBest isn't shying away from the prospect of its asset-based unit, which includes less-than-truckload operations, achieving a mid-80% operating ratio. On a Tuesday call with analysts, company officials said the potential for further margin improvement stems from capacity investments it is making in its fleet, terminals, and people, as well as several years of yield improvement on its customer book.

ArcBest ARCB reported third-quarter adjusted earnings per share of $2.59, 14 cents better than the consensus estimate, more than double the prior-year period, and a new quarterly record.

Asset-based revenue increased 21% year-over-year to $681 million as daily tonnage was up slightly more than 2%, with yield, revenue per hundredweight, 17% higher at $41.79.

Higher fuel surcharges were a tailwind, partially offset by an increase in weights. Yields, excluding fuel, were up by double digits on LTL shipments. Rates on contract renewals and deferred pricing agreements negotiated in the quarter increased 8.8%, the highest on record.

The unit posted an 86.7% OR, 570 basis points better year-over-year. The segment has seen 750 bps of OR improvement over the past five years.

Asset-based revenue per day was up 20% year-over-year in October with tonnage up 1% and yield up 18%. Daily revenue for the month saw a 90-bp acceleration in the year-over-year growth rate in September and was 480 bps higher than the growth recorded in August.

Table: ArcBest's key performance indicators

The bridge to a mid-80s OR has several tailwinds.

Improved yields as well as revenue and cost synergies have provided better operating results. ArcBest is rolling out an enhanced operating platform across the network, which will further these initiatives.

The company also has set 2% increases for wages and benefits annually with its union workforce. This is proving to provide cost stability during a period when other carriers are seeing material inflation. The current collective-bargaining agreement runs through June 2023 and includes a tiered annual profit-sharing bonus up to 3% if the segment's unadjusted OR (which includes the costs of the freight-handling pilot program), is 93% or better.

Higher demand for expedited and truckload services pushed asset-light revenue 39% higher year-over-year to $372 million in the quarter. Operating income in the unit doubled to $11.5 million.

The asset-light segment will see a large revenue boost going forward.

ArcBest announced Monday that it has closed on the acquisition of truckload brokerage MoLo Solutions. MoLo is projected to generate $600 million in revenue this year. It adds 70,000 carriers to ArcBest's platform, making it a top-15 truck broker in the U.S.

MoLo lifts ArcBest's asset-light revenue to 44% of consolidated revenue and moves it closer to the goal of reaching revenue parity with the asset-based division. Management said revenue per account is five times higher when the customer uses an offering from each segment. Profit per account is four times higher on cross-cold accounts.

"Those are really good, solid statistics that support our approach," Judy McReynolds, chairman, president and CEO, said on the call. "What we're doing is we're actually partnering with them on their supply chain and really getting involved with them in understanding what's going to work well for them. And that's very important right now."

Following the deal, management said ArcBest has the ability to deploy further capital on accretive acquisitions as well as internal growth initiatives, share repurchases and dividends. It plans to record elevated capital expenditures moving forward as it adds new service centers and expands existing facilities.

Given production headwinds, which have limited equipment deliveries this year, ArcBest is projecting net capex to be in the range of only $100 million to $110 million. However, it plans to spend $225 million to $250 million on tractors and trailers in 2022, which now includes $40 million to $50 million in deliveries that will spill into the year. The company is also planning for investments in terminals to run above its $50 million annual average.

The investments are designed to increase shipment capacity by a mid-single-digit percentage by 2022.

Citing a low valuation of its shares, ArcBest announced an accelerated share repurchase (ASR) program of $100 million, which will run through the first quarter. It will resume buying under the prior authorization, which has $42 million remaining, once the ASR is exhausted.

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