ArcBest Corp

NASDAQ:ARCB

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the ArcBest First Quarter 2018 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded Thursday, May 10, 2018.

I would now like to turn the conference over to David Humphrey, Vice President of Investor Relations. Please go ahead.

[David Humphrey, Vice President of Investor Relations]

Welcome to the ArcBest First Quarter 2018 Earnings Conference Call. Our presentation this morning will be done – this afternoon, excuse me, will be done by Ms. Judy R. McReynolds, Chairman, President and Chief Executive Officer of ArcBest; Mr. David R. Cobb, Vice President, Chief Financial Officer of ArcBest.

As most of you know, on March 28, we reached a tentative agreement with teams as bargaining team voting ended on Tuesday we’re expecting to receive the final results later today or sometime tomorrow. Out of respect for the vote tabulation process, this afternoon, we will give an update on first quarter results but will not take any questions following our prepared commentary. We hope you can understand our reasons for doing it this way near the conclusion of the vote tabulation process. As needed, following the call and tomorrow, we will be available to speak with you to discuss the publicly disclosed information about our first quarter 2018 results.

We thank you for joining us today. In order to help you better understand ArcBest and its results, some forward-looking statements could be made during this call. As we all know, forward-looking statements, by their very nature, are subject to uncertainties and risk. For a more complete discussion of factors that could affect the Company’s future results, please refer to the forward-looking statements section of the Company’s earnings press release and the Company’s most recent SEC public filings. In order to provide meaningful comparisons, certain information discussed in this conference call includes non-GAAP financial measures as outlined and described in the tables in our earnings release.

We will now begin with Judy.

[Judy R. McReynolds, Chairman, President and Chief Executive Officer]

Thank you, David, and good afternoon, everyone. Conditions in the shipping and logistics market for the first quarter were some of the strongest we have seen in some time for this typically seasonally slow period of the year. This favorable environment and our focus on securing appropriate value for our services led to the positive first quarter results we report today. Customers looking to optimize their supply chains amid tight industry conditions are finding needed solutions and value in the broad scope of ArcBest offerings. Both our Asset-Based and our asset light businesses experienced strong revenue per shipment growth, and our asset light revenues rose nearly 20%.

As we continue to shed the unprofitable business in our Asset-Based segment, that doesn’t adequately compensate us for the value we provide, shipments were impacted. But we are seeing a profile of freight that is better suited to the type of operations we have, and I’m pleased with the way this initiative has been executed along with the new customers we brought on board. As you know, on March 28, the bargaining teams from ABF and the Teamsters reached a tentative agreement on a new contract for a 63-months term. We were pleased to reach an agreement that is affordable for the company and fair to our employees. Votes have been cast and are currently being tabulated. We will provide additional information on the results as they become available.

And now, I’ll discuss more details about our service offering. In the first quarter, our Asset-Based business benefited from the impacts of strong market conditions in the midst of tight industry capacity. This complimented the positive results we continued to experience from yield management actions implemented throughout 2017 and in the first quarter. Our CMC space-based pricing program which began in August of 2017 continues to gain traction and is yielding positive results in improved profit margins on those qualifying shipments.

The first quarter pricing environment improved slightly from the previous quarter as illustrated by the implementation of general rate increases in the marketplace. ABF Freight 2018 GRI went into effect on April 16 at a 5.9% level. Renewal rates on the deferred and contract pricing agreements that were negotiated during the quarter remained at historically high levels. We still believe the market is rational in terms of price, and we have been successfully managing our account base as customer price increases have been enacted. David will provide specific details on our yield management metrics later in the call.

Turning to shipments statistics in the first quarter and through April 2018, continue to reflect the effects of the pricing actions we’ve taken. Though the business level reductions we’ve experienced were not surprising, our first quarter financial results illustrate the positive trade-offs we have made in better aligning customer pricing with a high level of service and cargo handling that ABF Freight offers. In spite of the shipment reductions we have experienced, the average weight of shipments moving through our system continues to climb.

In addition to stronger economic factors contributing to increased order sizes and greater shipment quantities from our customers, growth in the number of truck-liberated shipments handled in our Asset-Based network contributed to a greater average shipment size. Because of the constrained equipment market available to freight shippers, we were able to handle more of these full load transactional shipments at higher prices and better margins.

Despite the recent lower trend, we’ve experienced in our tonnage and shipment levels, we are actively pursuing opportunities that will bring value to the customer and increase our revenue and profit. In unison with the price increases we’ve implemented and the resulting freight reductions, our operational team has done a very good job of managing resources to the business levels we are experiencing and to the profile characteristics of the shipment moving through are Asset-Based network.

In spite of cost controls currently in place, the lower shipment count has impacted our shipment-based productivity metric on the dock and in city pickup and delivery operations. As positive results come from are continuing management focus on returning operational productivity to historic levels, we will benefit from further cost reductions and profitability improvement. During the recent quarter, our cost structure did benefit from reductions in the rental of local city equipment and lower use of city cartage.

In addition, linehaul costs were lower because of strategic management of owned asset and the resulting reductions in the use of purchased transportation. We believe we are achieving a good balance between tight cost control and the superior customer service, which we are known in the marketplace. This will be an important factor going forward as we pursue profitable growth in our business level. During the first quarter, ArcBest Asset-Light business experienced nearly 20% revenue growth despite lower shipment count driven by significant increases in revenue per shipment. This resulted from market rate increases associated with the tight capacity of the current truckload market.

As purchased transportation costs remain high, our fulfillment team was impacted by the challenges of covering committed customer loads while seeking to maximize shipping yields. Growth in total Asset-Light net revenue was the main contributor to improvements in operating income. However, continuing a pattern we’ve seen in recent quarters, Asset-Light net revenue margins declined as the increased cost of purchased transportation outpaced improvements in customer rates.

FleetNet’s first quarter revenue improvement was the result of an increase in total events that generated higher net revenue and an approximately 50% improvement in operating income versus last year. Efficient management of labor and other expenses also positively contributed to the operating income increase. Reductions in ArcBest non-union healthcare costs continue to positively impact our operating results versus the same period last year. In the recent quarter, these costs were approximately 25% below last year, primarily due to a decrease in the number of health claims filed and in the average cost per claim. This continues the positive trend that we experienced throughout 2017. The significant emphasis we placed on corporate wide wellness activities, including specific goals designed to help our employees achieve more healthy lifestyle, is paying big dividends for our ArcBest family and our financial bottom line.

And now, I’ll turn it over to David Cobb for a discussion of the earnings results and operating statistics.

[David R. Cobb, Vice President, Chief Financial Officer]

Thank you, Judy, and good afternoon, everyone. Let me begin with some consolidated information. First quarter 2018 consolidated revenues were $700 million compared to $651 million in last year’s first quarter, a per day increase of 8.4%. On a GAAP basis, we had first quarter 2018 net income of $0.37 per diluted share, compared to net loss of $0.29 per share last year. As detailed in the GAAP to non-GAAP reconciliation table in this afternoon’s earnings press release, adjusted first quarter 2018 net income was $0.29 per diluted share, compared to a loss of $0.22 in the same period of 2017.

Our net income in first quarter of 2018 included $2 million pre-tax charge or $1.5 million after-tax and $0.06 per share related to our non-union pension plan, including settlement expense. The first quarter of 2017 included a similar charge of $1.9 million pretax or $1.2 million after tax and $0.05 per share. Pension expense, including settlement charges for second quarter of 2018 is currently estimated to be approximately $2 million pre-tax or $1.5 million after-tax. As a reminder, we estimate cash funding of approximately $10 million and a pre-tax settlement termination charge of approximately $20 million is expected to occur in the second half of 2018 due to termination of the plan.

Our first quarter 2018 net income included an adjustment of $400,000 pre-tax or $0.01 per share after-tax related to our enhanced market approach. Last year in first quarter 2017, these restructuring charges were $1.6 million pre-tax or $0.04 per share after-tax. We currently expect to incur approximately $1 million of total restructuring cost in 2018 related to this organizational realignment.

This year’s first quarter, the loss reported in the other and eliminations line was $5.4 million, which included the $400,000 of restructuring costs I just mentioned. The other and eliminations line includes expenses related to investments for improving the delivery of services to ArcBest customers as well as investments in comprehensive transportation and logistics services offered across multiples operating segment. Also as we have previously discussed, certain investments in ArcBest technology and innovations are included here.

In the second quarter, we expect a non-GAAP loss in this line to be approximately the same as it was in the first quarter and through all of 2018 we expect the loss from these lines totaled approximately $20 million. Interest expense net of interest income was $1.5 million in the first quarter. We expect the second quarter 2018 net interest expense to be approximately $1.6 million and the full year 2018 interest expense net of interest income to total approximately $7 million.

As we have previously discussed, changes in cash surrender value are reported in the other net line of our income statement of which we had income of $114,000 in the first quarter of 2018 compared to income of $580,000 in first quarter of 2017. We exclude changes in cash surrender value when representing non-GAAP net income and earnings per share.

In addition, the other net line of our income statement now includes some components of the net periodic benefit costs related to non-union pension and other non-union postretirement benefit. Effective January 1, 2018, we retrospective readopted a new accounting standard, which requires changes to the financial statement presentation of certain expenses components of these benefit plans.

As a result, the service cost component of these plans continues to be included in operating expenses, while the other cost components of these plans which totaled $2.4 million for both the first quarter of 2018 and 2017 now appear in the other net line of our income statement.

In our 2018 financial statements, we have reclassified the 2017 amount to conform to the current year presentation. Our first quarter effective tax rate was a benefit rate of 10.7%. As we saw in the fourth quarter, our financial results and tax rate continue to be impacted by the Tax Reform Act that became law in late December. As mentioned last quarter, we recorded a provisional reduction of net deferred tax legibility in the December related to the lower U.S. federal corporate tax rate under the Tax Reform Act. Our fiscal tax year ends February 28.

As a result, the recent first quarter we recorded an additional $2.6 million or $0.10 per share tax benefit due to a reduction of net deferred tax liability through our tax year-end. While the impact of the lower tax rate on deferred tax liability has been recognized, the benefit of paying taxes at the lower rates on these deferred tax items will be realized over many years in the future.

Also tax legislation signed in February of 2018 established retroactive tax credits related to the use of alternative yields in all of 2017. Therefore, this year’s first quarter results include the full year tax benefit of $1.2 million. Additional items impacting our effective tax rate are provided on page 9 of our earnings press release.

Based on our estimate of the impact of the new tax law and the full effect of the alternative fuels tax credit that occurred in the first quarter, we currently expect our full year 2018 tax rate to be in the approximate range of 20% to 25%, while the effective rate in any quarter maybe impacted by items straight to that period.

As a part of our stock repurchase program, in the first quarter, we bought a minimum amount of stock about 6,000 shares for the total amount of $300,000. Under the existing repurchase program we have approximately $32 million of purchase of availability. We ended the first quarter with unrestricted cash and short-term investments of $179 million. Combined with the available resources under our credit revolver and our receivable securitization agreement, our total liquidity currently equals $372 million.

Our total debt at the end of the year of $253 million includes the $70 million balance in our credit revolver, the $45 million borrowed on our receivable securitization and $138 million of notes payable, primarily on equipment for our asset-based operations. The composite interest rate on all of our debt is 2.9%. Full details of our GAAP cash flow are included in our earnings press release.

ArcBest reported asset-based first quarter revenue of $482 million, a per day increase of 4.6% compared to last year. We had 63.5 working days in first quarter of 2018, compared to 64 working days in last year’s first quarter. Asset-based quarterly tonnage per day declined 3.7% versus last year’s first quarter. For first quarter 2018 by month, asset-based daily tonnage versus the same period last year decreased in January by 6.4%, decreased 4.1% in February, and decreased 0.5% in March.

First quarter total shipments per day decreased 9.4% compared to last year’s first quarter. As Judy described, first quarter tonnage and shipment declines were the continued result of yield management initiatives implemented throughout the last 15 months, but including the space-based pricing program introduced at the beginning of last August.

Total asset-based weight per shipment was £1,284, a 6.3% increase from last year’s first quarter, and an increase of 2.7% on a sequential basis compared to fourth quarter of 2017. LTL weight per shipment increased 2.7% versus last year. Average length of haul on asset-based shipments was 1,035 miles, a slight increase over first quarter 2017, and a 1% decrease from fourth quarter 2017. First quarter total billed revenue per hundredweight on asset-based shipments was $32.10, an increase of 8.9% compared to the first quarter of last year.

Year-over-year comparisons of this yield figure were positively impacted by improved price levels and higher fuel surcharge, which offset some downward pressure from freight profile changes. On a sequential basis, this yield metric increased less than 1%. Excluding fuel surcharge, the year-over-year increase in first quarter billed revenue per hundredweight and asset-based LTL freight was in the high single-digits.

We secured an average 4.8% increase on asset-based customer contract renewals and deferred pricing agreements negotiated during the quarter. This equals the second highest first quarter average increase we have secured in the last 19 years.

In total, our Asset-Light businesses had revenue of $230 million, a daily increase of 20% over the last year’s first quarter. First quarter Asset-Light operating income totaled $4.7 million compared to last year’s operating income of $2.1 million, and adjusted operating income of $2.9 million.

Adjusted first quarter 2018 Asset-Light EBITDA was $8.4 million compared to adjusted EBITDA of $6.5 million in last year’s first quarter. Asset-based results for the month of April versus April 2017 are as follows. Total daily billed revenues increased approximately 7%. Total tonnage per day decreased approximately 4% with reductions in LTL tonnage related to our ongoing yield management initiatives, and changes in account mix partially offset by April year-on-year growth in our asset-based truckload rated business. Daily shipment counts decrease approximately 9%.

Total revenue per hundredweight increased approximately 11%. This asset-based yield metric is being positively affected by higher fuel surcharges in our asset-based yield initiatives. Total billed revenue per shipment increased approximately 17%, and total weight per shipment increased approximately 5%. Since the implementation of the current labor contract, the historical average sequential change in ArcBest asset-based operating ratio in the second quarter versus the first quarter has been an improvement of 500 to 700 basis points.

Upon its ratification and implementation, certain expense elements of the new union labor contract will be effective April 1 of this year, such as additional vacation and the amortization of the contract ratification bonus. Also, the asset-based segments first quarter 2018 results benefited from a reduction in healthcare costs due to favorable experience that may not continue. These factors could cause a sequential operating ratio to change – to be different than historical range. We will have 64 working days in second quarter of 2018, which is a half day more than we had in second quarter last year and in this year’s first quarter.

For our ArcBest Asset-Light segment, not including FleetNet, April 2018 revenue per day increased 12% versus last year, positively impacted by higher revenue per shipment. However, we are experiencing year-over-year shipment declines in net revenue compression associated with rising purchase transportation cost and the challenges of adequately passing those costs on to our customers.

Now, I’ll turn it over to Judy for some closing comments.

[Judy R. McReynolds, Chairman, President and Chief Executive Officer]

Thanks, David. Since we implemented our enhanced market approach beginning in 2017, we have received a lot of positive customer feedback. This feedback is in the form of actual comments from customers, is also reflected in the statistics retrack on cross-selling and seen in the percentage of revenue coming from secondary solutions. As customers purchase more than one supply chain solution from us, they also rate us higher in key areas of satisfaction such as problem-solving, being a trusted partner and ease of doing business. This gives me and our management and sales teams a great deal of confidence that we have a lot of additional opportunity to broaden and deepen our customer relationships and share of wallet.

And now as I usually do, I would like to offer some of the additional highlights for the quarter. In February, our training program was once again recognized. We placed 12th on the Training magazine 2018 top 125 and have appeared nine consecutive years. It is truly a great achievement to be so highly ranked on this list once again, which features company’s excellence and employees sponsor training and development program.

In March, the ArcBest Wichita Falls, Texas campus was named one of the 2018 best companies to work for in Texas. Additionally, we announced our new 12-member Road team members from ABF in March, a group of professionals who we are always very proud to have in our ranks. These 12 individuals all have superb driving skills an outstanding safety records and are committed to our customers needs. Congratulations to everyone on the 2018 road team.

We also announced that ArcBest has joined the block chain in transportation alliance becoming a part of a large group of companies that will work to have developed and set standards for block chain technology use in our industry. As you know, our ArcBest technologies group is always looking to enhance the way we do business and ensure that we adapt to a changing market play. We believe that joining this alliance as beneficial for our team and for our customers. Looking ahead to the rest of the year, we will continue to monitor cost as always, and execute on the many initiatives we have to improve our operations and customer experience. I’m encouraged that we will be aided by favorable conditions in the marketplace at large, and confident in our team’s ability to get the job done.

And finally, as I mentioned earlier, we are awaiting results on the contract both from the Teamsters who are in charge of the process. As we have information to share, it will be provided. I’ll turn it over to David for some closing comments now.

[David Humphrey, Vice President of Investor Relations]

Well, we thank you for joining us this afternoon. We appreciate your interest in ArcBest. This concludes our call. Thank you.

[Operator]

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.