Less-than-truckload transportation provider ArcBest pushed back on concerns that an extended industrial downturn and the redeployment of bankrupt Yellow Corp.’s terminals has created too much capacity, which is pressuring yields.
Management from the company described the market as “very rational” on a Tuesday call with equity analysts.
“When we look at the opportunities that we have, nothing has changed,” said ArcBest Chairman and CEO Judy McReynolds on the call. She said the company is still “seeing good increases on the most price-sensitive accounts.”
ArcBest (NASDAQ: ARCB) reported first-quarter adjusted earnings per share of 51 cents ahead of the market open on Tuesday. The result was 83 cents lower year over year and just 1 cent better than the consensus EPS estimate that had gapped down 30 cents in the lead-up to the report.
The company’s asset-based unit, which includes results from less-than-truckload subsidiary ABF Freight, reported just a 1.7% y/y increase in revenue per hundredweight, or yield. A 3.9% decline in weight per shipment (the denominator in the equation) benefited the metric. When netting shipment weight, yields were likely negative in the period.
Tonnage inflected positively y/y in April while yields moved in the other direction, prompting analysts to voice concern on the call about the pricing dynamics of an industry often viewed as oligopolistic among national carriers.
Several factors were noted on the call.
Table: ArcBest’s key performance indicators
No competitor sacrificing yield for volume, ArcBest says
Yields were higher by a low- to mid-single-digit percentage excluding fuel surcharges in the quarter, and the company was up against a tough y/y comp – plus-15.6% in the 2024 first quarter. (The year-ago comp was the result of ABF taking on a higher mix of better-priced LTL freight from core customers following Yellow’s (OTC: YELLQ) demise in lieu of the transactional, dynamically priced shipments it leaned on prior to keep the network full.)
Management also said it has more “easier-to-handle freight” from core accounts that carry lower yields but “are operationally more efficient” and produce good margins. A decline in higher-yielding shipments from the manufacturing sector was also a headwind.
“There’s really no peer out there that’s really going after growth at the expense of pricing,” Chief Commercial Officer Eddie Sorg said on the call. “In this environment, I think there’s always a chance that increases could suffer at the expense of business, but we’re really not seeing that at this point.”
Contractual rate increases averaged 4.9% y/y, which followed a 5.3% increase in the year-ago quarter (a 10.2% increase on a two-year-stacked comp).
SONAR: Longhaul LTL Monthly Rate per Ton Mile, Class 50-65 Index. Less-than-truckload monthly indices are based on the median rate per ton mile for four National Motor Freight Classification groupings and five different mileage bands. To learn more about SONAR, click here.
Aren’t demand headwinds weighing on pricing?
Analysts appeared to struggle with the pricing commentary as industrial production and housing metrics sag, and as the truckload space takes a little share from LTL on the edges given depressed spot rates.
The asset-based unit reported revenue of $646 million, a 3.7% y/y decline (down 3% on a per-day basis). Tonnage per day was off 4.3% as daily shipments fell 0.4% and weight per shipment was down 3.9%.
Tonnage declines eased as the quarter progressed, from down 9.2% in January to just 1.6% lower by March, and inflecting positively in April (up 1% y/y). However, the prior-year comps (mid- to high-teen declines) also eased notably in the period. They are easier (high-teen to low-20% declines in the year-ago periods) in the second quarter.
The company began taking on more TL freight in February to offset market weakness. It’s also leaning into a dynamic-pricing model, which prices freight based on real-time changes in available network capacity.
Sorg said digital capabilities are allowing it to quote on 200,000 dynamic shipments daily and that the quote book now includes more queries from core customers. He said the shipments are “incrementally profitable” and that revenue per shipment on the business has increased 50% since 2020.
“Ultimately, we’re going to make the right decisions on an account-by-account basis to drive profitable growth over time,” Sorg said.
As the tonnage trends have improved, yields have turned negative, moving from 7% higher y/y in January to down 1.8% in March. (April was down 2% y/y and slightly negative excluding fuel.) The prior-year comp will again create some noise in the second quarter (plus-23% y/y in the 2024 second quarter).
ArcBest not seeing much tariff impact yet
Management said customers are reacting differently to the tariffs. Some customers have pulled forward freight, storing inventory in customs-bonded warehouses, while others remain in wait-and-see mode. There’s also a grouping of customers that have seen little change or have begun to source more goods domestically.
ArcBest’s direct China exposure appears minimal on the surface as just 10% of its consolidated revenue is derived from the retail sector. However, tariffs have already begun to have ripple effects across manufacturing, which should be reflected in the April Purchasing Managers’ Index (to be released Thursday) based on the latest manufacturing surveys conducted by several Federal Reserve Banks.
Regardless of the volume-price mix, OR is taking a beating
The LTL unit reported a 95.9% adjusted operating ratio (inverse of operating margin), 390 basis points worse y/y and sequentially. The sequential change was within the normal range of 350 to 400 bps of deterioration, which was management’s guidance.
ArcBest said it anticipates a typical seasonal demand uptick during the second quarter. That call is part of its margin guidance calling for 300 to 400 bps of improvement from the first to the second quarter, in line with normal seasonality. That implies a 92.4% OR at the midpoint of the range, which would be 260 bps worse y/y.
It said efficiency programs are helping to reduce costs.
A best-practices training initiative at nine terminals in the first quarter generated $6 million in cost savings. The company hasn’t enacted any sweeping cost cuts and said its union labor contract, which called for a 2.7% annual wages-and-benefits increase last July, gives it visibility into the biggest portion of its cost structure.
Asset-light loss narrows
The asset-light unit, which includes truck brokerage, reported a $1.2 million adjusted operating loss. That was the seventh straight loss for the unit and the smallest in a year. Management forecast an operating loss of $1 million to $2 million for the second quarter.
Asset-light revenue was down 10.2% y/y to $356 million in the first quarter as daily shipments declined 3.7% and revenue per shipment was off 5.9%. A soft freight market and a mix shift to managed transportation, which has smaller shipment sizes, were cited as the culprits.
The unit saw efficiency – daily shipments per employee – increase 23.6% y/y in the period.
ArcBest is now targeting the low end of its 2025 net capex guidance range of $225 million to $275 million. Approximately $130 million to $140 million is designated for rolling stock, $60 million to $80 million for real estate projects, and the remainder will be used to make upgrades to dock equipment. The company said its real estate spend may come in lower than the original forecast.
ArcBest ended the quarter with $350 million in available liquidity, a $100 million reduction from the fourth quarter.
Shares of ARCB were down 5.1% at 1:38 p.m. EDT on Tuesday compared to the S&P 500, which was up 0.4%. The stock is off 38% year to date.
