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LTL, brokerage woes weigh on ArcBest’s Q3
ArcBest said contractual rate increases averaged 4.6% in its less-than-truckload business during the third quarter. (Photo: Jim Allen/FreightWaves)
Weak demand coupled with cost pressure weighed on ArcBest’s third quarter. The company has mitigated some of the earnings pressure through internal initiatives in recent quarters but really needs a more cooperative freight market to push numbers higher.
ArcBest (NASDAQ: ARCB) reported third-quarter adjusted earnings per share of $1.64, 21 cents below the consensus estimate and 67 cents lower year over year.
The adjusted EPS result excluded expenses tied to past acquisitions and ongoing technology pilots. It also excluded a $69.1 million after-tax reduction in the fair value of MoLo’s earnout provision. The MoLo truck brokerage business, which ArcBest acquired three years ago, didn’t meet financial targets last year and isn’t expected to meet them this year.
LTL weakness not a pricing problem, company says
The asset-based segment, which includes ArcBest’s less-than-truckload subsidiary, ABF Freight, reported a 4.2% y/y revenue decline (5.8% lower on a per-day basis), as an 11.3% decline in tonnage per day was partially offset by a 7.4% increase in revenue per hundredweight, or yield. (Yield was up by a high-single-digit percentage excluding fuel surcharges.)
A 10.7% y/y drop in weight per shipment drove the tonnage decline as shipments per day were off just 0.7%. Management said customer retention remains strong, but it is seeing lower pallet counts per stop as the industrial economy remains soft.
Table: ArcBest’s key performance indicators
Tonnage per day declined y/y by 12.5% in July, 9.9% in August and 12.2% in September. Tonnage was down 9% y/y in October but flat with September. October had a tough y/y comparison to October 2023, which benefited from a cyberattack at competitor Estes.
The y/y tonnage declines peaked at 22% in May (down 20.4% on a two-year comparison). Declines are expected to ease as the fourth quarter progresses, largely due to easier comps. Tonnage was down 9.6% y/y last November followed by an 8.3% decline in December.
ArcBest’s prior-year tonnage comps are easier than those of many of its peers. It began swapping out transactional freight with better-yielding freight from core contractual customers around the time Yellow Corp. (OTC: YELLQ) closed. The process dragged down tonnage as the change in freight mix resulted in lower shipment weights.
The 7.4% increase in the yield calculation during the quarter was driven by the decline in shipment weight. Netting out the change in weight resulted in a roughly 3% decline to yield.
Yield was down 3% y/y in October (flat excluding fuel surcharges) and down 3% from September (with and without fuel). Management called out a tough monthly comp to last year (up 8.1%) and a less favorable mix profile as the reasons for the weaker yield result. It said nothing structural has changed around price negotiations, which continue to be “rational” across the industry.
Contractual price renewals averaged 4.6% in the third quarter, which was slightly below a 5.1% increase in the second quarter and increases of 5.3% in the first quarter and 5.6% in the fourth quarter. The company also implemented a 5.9% general rate increase on Sept. 9, which it said has been met by “really good retention” from those customers impacted.
Carriers typically implement GRIs annually to general tariff codes. The stated percentage increase is an expected average of changes to base rates across various lanes and weight classes. ABF’s recent GRI was the same as last year’s but came one month earlier.
Revenue in the asset-based segment fell 12% y/y in October, but the declines are expected to slow during the remainder of the fourth quarter. The company forecast revenue per day to be down by a mid-single-digit percentage y/y in the period.
The unit reported a 91% adjusted operating ratio (inverse of operating margin), 220 basis points worse y/y and 120 bps worse than the second quarter. The segment normally sees no change to 100 bps of OR improvement from the second to the third quarter. Soft demand and an increase in labor and insurance costs weighed on the quarter.
Salaries, wages and benefits expense increased 230 bps y/y as a percentage of revenue. A collective bargaining agreement with its union employees called for a 2.7% increase to wages and benefits on July 1. Insurance expense was up 100 bps y/y.
The asset-based OR normally deteriorates 100 to 200 bps from the third to the fourth quarter. ArcBest expects to see degradation at the high end of that range this year, which implies a 93% OR, 530 bps worse y/y.
Losses at asset-light unit continue
The asset-light unit, which includes truck brokerage operations, reported a $3.9 million adjusted operating loss. The result was flat y/y but $1.4 million worse than the second quarter. This was the fifth consecutive operating loss for the segment.
Revenue was down 8.1% y/y in the quarter (9.6% lower on a per-day basis) due to a depressed truckload market and a mix favoring managed transportation revenue, which has smaller shipment sizes and lower yields.
Revenue was down 13% y/y in October as shipments fell 3% and revenue per shipment was off 10%. The unit is expected to record a $5 million to $7 million operating loss in the fourth quarter.
ArcBest lowered 2024 net capex guidance to $300 million (from $325 million to $375 million). The new budget includes $145 million for equipment purchases, $100 million for real estate projects, and other investments in technology and dock equipment.
It has opened three of the four terminals it acquired from Yellow’s estate earlier this year. Those locations added nearly 80 doors.
It’s also close to completing a 66-door expansion at a Chicago facility and will add 40 doors to a terminal in San Bernardino, California, early next year. ArcBest submitted its interest in a few more Yellow properties that are expected to be sold in January.
Shares of ARCB were off 4.5% at 1:51 p.m. EDT on Friday compared to the S&P 500, which was up 0.6%.
