ArcBest prudent in approach to new freight opportunities

The closure of Yellow Corp. is resulting in better operational performance at ArcBest. The capacity shakeup has led to improved freight selection and highlighted the cost management initiatives the company has pursued.

ArcBest (NASDAQ: ARCB) reported third-quarter adjusted earnings per share of $2.31 Friday before the market opened. The number was ahead of a $1.50 consensus estimate but $1.48 lower year over year (y/y). It excluded numerous one-offs like costs from a freight handling pilot, acquisition-related items and noncash impairments on some leases.

On ArcBest’s July call, when it appeared likely Yellow would fold, management said it would be prudent onboarding freight and that new business wins would need to be accompanied by appropriate yields and margins. Those efforts were visible in the company’s asset-based unit, which includes less-than-truckload operations, during the third quarter.

The segment recorded an 88.8% adjusted operating ratio, 350 basis points worse y/y but 400 bps better than the second quarter. Further, a new labor contract including a 13% wage increase in year one went into effect on June 30. Without the pay hike, the unit would have seen a 750-bp sequential OR improvement. By comparison, the unit usually sees no sequential change in OR from the second to the third quarter each year.

“We’re really targeting a freight profile that maximizes the profitability in our network,” CFO Matt Beasley told FreightWaves.

Improved freight mix and cost savings actions were the catalysts for the turnaround.

Freight mix began to improve late in the second quarter as ArcBest began moving more freight within existing accounts that also worked with Yellow. Shipments form core accounts have increased more than 20% since the second quarter, although the weight per shipment is lower than on the transactional loads it had been hauling.

However, familiarity with those customers led to improved efficiency and ultimately a better margin.

“We’ve certainly demonstrated that we are focused on making sure we’re doing the right freight at the right price with the right customers, which is evidenced in our results,” Beasley said.

The company exited the second quarter handling 19,500 shipments per day, a slowdown from the 21,000 daily shipments it moved in June. It moved 20,373 shipments in the third quarter and is currently targeting roughly 20,500 per day. That’s about a 5% increase from the second-quarter exit rate, but the profitability profile on those loads is much better.

The asset-based unit recorded a 6% y/y decline in revenue to $741 million in the third quarter. Tonnage per day was down 6% but revenue per hundredweight, or yield, increased 2%. Lower tonnage was the result of a 2% increase in daily shipments, which was offset by an 8% decline in weight per shipment.

Yields on LTL shipments were up by mid-single digits, excluding fuel surcharges in the quarter. Contract renewals and deferred pricing agreements came in 4% higher, and the company implemented a 5.9% general rate increase on base rate tariffs starting Oct. 2.

It took a similar GRI last year but this year’s increase took effect one month earlier.

Asset-based revenue was up 3% from the second quarter as tonnage declined 12% but yield jumped 16%. The yield metric includes fuel. Retail diesel prices increased more than 20% from the beginning to the end of the third quarter.

Most expense lines were up slightly as a percentage of revenue. However, rent and purchased transportation expenses were down 490 bps y/y and 340 bps lower than in the second quarter. Tech tools in the company’s cartage operations are helping as well as the mix shift back to core accounts, which usually produces better productivity metrics.

Asset-based revenue per day improved throughout the quarter. It was down 11% y/y in July but flat by September. So far in October, the unit’s revenue is up 5%, the combination of a 4% decline in tonnage and a 9% increase in yield. The yield metric was impacted by an 8% decline in weight per shipment during the month.

The unit normally experiences 100 bps to 300 bps of OR deterioration from the third to the fourth quarter. However, Beasley said it could improve by 100 bps to 200 bps this year given prior actions, which have produced a favorable start to the period.

ArcBest will remain disciplined in its approach to taking market share, but it definitely plans to grow.

The company shaved $10 million off the top end of its capital expenditures budget for 2023 to a new range of $270 million to $285 million. The plan allocates $60 million to $65 million for real estate projects. ArcBest has added more than 200 new doors to the network so far this year and plans to add 500 more by the first quarter of 2025.

The company’s asset-light unit, which includes truck brokerage, reported a 19% y/y decline in revenue to $419 million. Daily shipments were up roughly 4% y/y in the quarter, with revenue per shipment declining more than 20%. Lower revenue per load compressed margins, resulting in a $3.9 million adjusted operating loss in the segment.

So far in October, revenue per day is down 19% y/y as shipments are off 6% and revenue per shipment is down 18%. The company will continue to manage costs to the lower business levels.

Shares of ARCB were up 17.9% at 3:47 p.m. EDT Friday compared to the S&P 500, which was down 0.7%.

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