Logistics provider ArcBest Corp. (NASDAQ: ARCB) is hopeful for continued improvement in industrial activity as the new year progresses.
On Tuesday, the Fort Smith, Arkansas-based company reported fourth-quarter adjusted earnings per share of 97 cents, 5 cents ahead of consensus and 41 cents ahead of the 2019 fourth quarter. The period benefited from a lower tax rate.
Tonnage trends seeing lift from industrial sector
On the fourth-quarter earnings call, Chairman, President and CEO Judy McReynolds said manufacturing-related freight started improving in the third quarter and improved by a lesser degree in the fourth quarter.
McReynolds called out a Monday survey of manufacturing supply executives, which remained in expansion territory for the eighth consecutive month during January. The Purchasing Managers’ Index dipped 1.8 percentage points to 58.7% in the month but was still well above the all-important 50% threshold, indicating growth in U.S. manufacturing.
McReynolds said ArcBest’s industrial freight lags changes in the index by approximately four months. Manufactured goods can represent more than 80% of tonnage for some LTL carriers.
The company’s first-quarter 2021 year-over-year tonnage comparisons step up modestly. Tonnage increased by mid-single-digit percentages in January and February of 2020 with March, the early days of the pandemic, moving only slightly higher.
During the fourth quarter, asset-based tonnage, including the less-than-truckload unit, increased 8% year-over-year (+10.5% in October, +8% in November and +4.7% in December). However, LTL tonnage was up by double-digit percentages, with weight per shipment increasing 10%. Management said the increase in weight wasn’t the result of spillover freight from truckload, or heavier shipments that aren’t true LTL loads coming to the network due to a lack of capacity in the TL market.
In January, total asset-based tonnage was up 6% year-over-year, with shipments 5% higher.
Yields and margins tick higher
Total asset-based revenue per hundredweight, or yield, was up slightly in the period. Heavier weights and lower fuel revenue were headwinds. Excluding fuel surcharges, yields were up in the low-single digits for traditional published LTL freight and 4% higher on contract renewals.
The division posted a 93.7% adjusted operating ratio, 130 basis points better year-over-year. The company reached a full-year OR of 95.3%, 94.2% on an adjusted basis, qualifying its union employees for a profit-sharing bonus for the second consecutive year.
The strong housing market contributed to improved freight demand and higher shipment weights. Efficiencies with dockworkers and the fleet were contributors to the OR improvement.
ArcBest’s margins in the first quarter historically decline 350 bps to 450 bps from the fourth. However, with the recent improvements in tonnage and margin makeup due to heavier shipments, CFO David Cobb said the company will “strive to beat the historical sequential change,” noting the recent “good momentum.”
There are some cost headwinds in the first half of 2021, including an unfavorable comp from cost-savings actions during the pandemic and a return of travel expenses. The cost reductions led to a $15 million savings during the second quarter of 2020.
Impact of TFI’s acquisition of UPS Freight
McReynolds said she was “encouraged” by Canadian trucking and logistics provider TFI International’s (NYSE: TFII) acquisition of UPS Freight from UPS (NYSE:UPS). The $800 million deal will immediately establish TFI as a top-5 LTL carrier in the U.S when it closes in the second quarter.
Long known as a loss leader, UPS’ LTL pricing strategy has been to bundle services with its package and courier business to the same customers, leaving many of its LTL contracts priced under water on a standalone comparison. On TFI’s Jan. 25 acquisition call, management said the biggest task going forward will be raising rates on those accounts, indicating the first phase will require 12 months to 18 months to complete.
McReynolds said the removal of an industry loss leader was likely a “good thing” and could be a tailwind to an already rate-disciplined LTL market.
Looking at asset-light acquisitions
At the year end, ArcBest had $663 million in liquidity, including cash and short-term investments of $369 million. The company plans net capital expenditures to be in the range of $150 million to $160 million in 2021. The bulk of the spending will include approximately $100 million in equipment replacements with the remainder pegged toward investments in real estate and technology.
ArcBest restored its $50 million share repurchase authorization. McReynolds said the company is exploring acquisitions of asset-light providers but noted valuations are high.