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ArcBest to contend with tonnage declines, cost inflation in Q4

Costs step higher, but yield increases providing an offset

ArcBest expects pricing to cover cost inflation moving forward. (Photo: Jim Allen/FreightWaves)

Transportation and logistics provider ArcBest saw results fall off from the second to third quarters as freight demand further slowed. Like the bulk of the trucking complex, the company will now have to navigate higher costs amid declining demand.

The company reported third-quarter adjusted earnings per share of $3.80, 8 cents ahead of the consensus estimate and $1.15 better than the year-ago result. ArcBest (NASDAQ: ARCB) posted adjusted EPS of $4.30 in the second quarter.

The third-quarter result excluded expenses associated with a freight handling pilot, acquisition-related costs and expenses incurred upgrading its vacation policy for nonunion employees. The quarter benefitted from 17 cents per share in gains on sale compared to no gains in the year-ago period.

The asset-based segment, which includes less-than-truckload services, reported a 16% year-over-year (y/y) revenue increase as tonnage increased 4% y/y and revenue per hundredweight, or yield, was up 11% y/y. Excluding fuel, LTL yield was up by a high single-digit percentage.

Contract renewals and deferred pricing agreements increased 7% y/y in the quarter, following growth rates of 8% in the second quarter and 9% in the first quarter.

After y/y increases of 7% and 8% in the first two months of the quarter, asset-based tonnage was down 1% in September and 4% lower in October “as customer demand softened some but remained at a good level,” a news release read. The drop in demand resulted in asset-based revenue moving from up high-teen percentages y/y in July and August to up 11% in September and just 6% higher in October.

In October, revenue per shipment was up 4% y/y with yields (including fuel surcharges) 10% higher y/y. Weight per shipment was down 5% y/y in the month. The deceleration in trends was tied to changes in mix, a reduction in heavier truckload shipments and a decline in shipments at the company’s U-Pack household moving unit. However, management said LTL tonnage and shipments during October were in line with normal sequential changes from September.

Table: ArcBest’s key performance indicators

The asset-based operating ratio improved 140 basis points y/y on an adjusted basis to 85.3% in the quarter. However, a number of cost buckets are seeing inflation step higher.

Management called out higher purchased transportation and cartage expenses. The segment’s purchased transportation and rents expense line increased 160 bps y/y as a percentage of revenue. Cartage costs for local pickup and delivery were 30% higher y/y. Also, parts and maintenance expenses were up double-digit percentages, and new employee productivity has been a headwind as one-third of employees in the division have less than 18 months of experience.

These cost lines will move lower over time as purchased transportation expenses continue to benefit from spot market rate declines, ArcBest refreshes its fleet by taking delivery of new equipment and employee skill sets continue to ramp.

However, the margin headwinds are present in the fourth quarter and the company plans to take its annual general rate increase, which is used to mitigate cost inflation on general tariff codes, later than last year’s Nov. 15 implementation date. ArcBest’s asset-based unit normally sees between 150 bps and 500 bps of OR deterioration from the third to fourth quarters each year.

“As we feel the pressure for cost inflation, there [are] things we can do,” Danny Loe, chief yield officer and head of asset-light logistics, told analysts on a call. “… We see opportunities to control that. But ultimately at the end of the day we have to price our freight to cover the cost of inflation. The environment’s still rational.”

Asset-light revenue, which includes brokerage, increased 63% y/y to $605 million. The top-line jump was largely tied to the MoLo brokerage acquisition, which closed exactly one year ago. The segment’s adjusted OR was flat y/y at 96.7% but 220 bps worse than the second quarter. Falling revenue per load was the reason.

“Overall rates charged for customer shipments decreased sequentially at a more rapid pace than the cost reductions associated with securing carrier partner equipment capacity in the marketplace,” the release stated.

Management said its broad service offering allows it to help customers lower their entire supply chain cost. While customers may push back on rate increases in one area or mode, management said there is usually another area where the customer is paying too much.

Looking at the entirety of freight costs at an account level has allowed ArcBest to push through cost increases for some services while ultimately improving service and reducing the total amount shippers spend on transportation. The approach appears likely to be put to the test as demand has clearly taken a step lower.  

“Regardless of the environment we are facing, we have an answer for our customers,” Loe said.

ArcBest lowered its net capital expenditures plan again. It expects 2022 net capex to range between $200 million and $210 million, which is $40 million lower than the guidance provided three months ago. Equipment purchases will now equal just $105 million, a $10 million reduction, due to production delays at the OEMs. Real estate spending was lowered to a range of $30 million to $40 million, a 30% reduction in plan.

Shares of ARCB were down 1.7% at 11:20 a.m. EDT Tuesday compared to the S&P 500, which was off 0.6%.

Prior to the report, the stock was down 10.4% since ArcBest reported second-quarter results on July 29. By comparison, the MerQube FreightWaves Supply Chain Tech Index (SCTI) was down 11.7% over the same time. The SCTI measures share price performance of tech-enabled supply chain services providers like ArcBest.

Chart: (SONAR: MQFWSCTP.USA). The MerQube FreightWaves Supply Chain Tech Index (Price Returns) tracks the performance of large and liquid companies around the world identified by FreightWaves as best in class in delivering freight technology solutions. The Price Return index considers price movements (capital gains or losses) of the securities that make up the index. To learn more about FreightWaves SONAR, click here.

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Todd Maiden

Based in Richmond, VA, Todd is the finance editor at FreightWaves. Prior to joining FreightWaves, he covered the TLs, LTLs, railroads and brokers for RBC Capital Markets and BB&T Capital Markets. Todd began his career in banking and finance before moving over to transportation equity research where he provided stock recommendations for publicly traded transportation companies.