Q4 2021 ArcBest Corp Earnings Call
Greetings and welcome to the Ark Best fourth quarter 2021 earnings conference call to start with a presentation all lines will be in a listen only mode. After which we will conduct a question and answer session at that time. If you have a question. Please.
First the one followed by the four on your telephone.
I didn't attend during the conference you need to reach an operator. Please press star Zero as a reminder, today's call is being recorded Tuesday February <unk> 2022, I would now like to turn the conference over to David Humphrey Vice President of Investor Relations. Please go ahead Sir.
Yeah.
Thank you for joining us on today's call. We will walk you through the details of our recent fourth quarter and full year 2021 results.
Our presentation will be done by Judy Mcreynolds, Chairman, President and CEO of aren't bad.
David Cobb, Chief Financial Officer of Arc Best.
Also joining us for the question and answer period will be Danny LOE, our best President that's it like logistics and sheet yield officer.
Denise Anderson, our best Chief customer Officer.
Michael Lucy our best Chief Innovation Officer, and President of our best technologies.
To help you better understand our fast and its results. Some forward looking statements could be made during this call 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 press release and the company's most recent SEC public filings.
Provide meaningful comparisons certain information discussed in this call includes non-GAAP financial measures as outlined and described in the tables in our earnings press release.
Conciliations of the GAAP financial measures to the related non-GAAP measures discussed in this call are also provided the additional information section of the presentation slides.
As a reminder, the slides that Judy and David will be reviewing here can be found in the art best website <unk> Dot com in exhibit 99.3 of the 8-K that was filed earlier this morning or you can follow along with us on the webcast.
We will now begin with Judy.
Thank you David and good morning, everyone I wanted to start out today by recognizing our excellent employees and our amazing leadership team for their contributions to our success and their hard work that enabled us to deliver outstanding record breaking fourth quarter and full year results.
In 2021 challenges across the world contributed to demand for our services, reaching all time highs while there certainly was a factor in our success over the past year I credit the exceptional nature of our achievements to the art best team and their unwavering commitment to our strategic.
<unk> vision and years of hard work.
This has set us up for success, even in the midst of a global pandemic.
Before I take the time to look back at our quarter and year in more detail I want to look forward our business stands apart because of several key differentiators.
Our dedication to and focus on our customers.
We are strategic advisers to our customers building trusts to ensure we're a reliable partner. This partnership it is what drives our long term growth.
Our employees are adaptable and dedicated to our business.
Without the pandemic and this past year, our team has successfully navigated ongoing change and pressures in the market to deliver for our customers.
Our smart strategic investments, especially in technology, we have a rich history of delivering innovations and leading edge solutions that make it easier for our customers employees and carriers to do business. It is central to our ongoing strategy.
We continuously analyze emerging technologies and collaborate with partners to ensure we can continue supporting our customers' success in the future.
And we have alignment across the organization on our growth strategy, our mission and our strategy are clear and our communicated regularly across the entire organization.
When we're aligned and working towards the same goals success follows.
As a team and an organization we've made great progress and we have no intention of slowing down as we continue to capitalize on the significant opportunities ahead.
I'll highlight some key achievements from our fourth quarter and full year and discuss our prospects for continued business success in 2022 and beyond and then David Cobb will take you through the specifics of our quarterly and annual financials and finally I'll offer a few additional comments.
Before we open it up for some questions.
Slide four shows several milestones we reached in 2021 I am so pleased to be able to share with you art best fourth quarter and full year 2021 financial results in.
In the fourth quarter, we delivered the highest quarterly revenue and net income in our company's nearly 100 year history.
For the full year of 2021, our revenue was $4 billion and our non-GAAP operating income increased 149%.
2021 was a big year for arc best infrastructure growth due to the addition of mellow solutions in November which further deepened our customer relationships through this acquisition, we became a top 15 U S truckload broker strengthening our position in the $91 billion.
Domestic transportation management market. It also more than doubled our number of carrier partners, providing more resources for serving our customers.
We moved closer to our strategic long term goal of marrying our customers' transportation spend as reflected in our revenue mix between asset based and asset light segment.
A decade ago, the asset light segment represented less than 10% of arc best revenue. This grew to 44% by the end of 2021.
During the recent year, we also made significant progress on our corporate ESG and <unk> initiatives I'll share more details on these efforts later in the call.
Importantly, we were also able to continue our track record of balanced capital allocation.
Since the beginning of 2021, we have returned $116 million of capital to shareholders through share repurchases and dividends. This was meaningfully increased by $100 million accelerated share repurchase agreement, we entered into in the fourth quarter and completed last month.
In line with our balanced capital allocation strategy and in light of Art Best continued strong free cash flow generation shareholder returns are a priority and that will continue in 2022.
And finally, we announced a $25 million investment in fan them auto the leading provider of human centered remote operation software.
This investment aligns with our long term goals complementing our existing innovation pipeline technology roadmap and partnerships and building on the important work already underway to support our customers' success and in return strengthen our business for the benefit of all stakeholders.
Slide five outlines our three point strategy to grow revenue and improve margins, which we discussed in prior quarters. Our recent financial results and some of the key highlights that I, just mentioned, including our revenue growth and more balanced revenue mix illustrate the success we are already.
Seeing as we execute on each tenant of this strategy.
As a company we are always looking at strategic investments across our business to enhance shareholder value and efficiently serve customers. Two key elements involved with that are investing in technology and investing in our people.
Through technology investment using new and innovative solutions, we're able to improve efficiencies lower costs and overcome operational disruptions. We also invest in our people who are key to our success, we want to ensure that they have the tools resources and means to do.
Do their jobs every day these investments enable us to expand our revenue opportunities by serving our customers efficiently.
As demonstrated on slide six our growth strategy is grounded in the deep relationships, we develop with our customers. We are constantly working to more effectively partner with them by expanding our offering of the integrated logistics services, we continue to build our suite of solutions to sell.
Our customers in multiple ways when customers buy multiple solutions from us we benefit from higher account revenues improved profitability and better retention.
More than six out of every 10 art best customers utilizing our asset light services are also using ABF freight for LPL services.
Our strategy of offering a comprehensive set of logistics solutions physicians aren't best for sustainable long term growth and value creation.
Art Best has a rich history of innovation in our technology advancements help us better serve our customers our employees and our carrier partners as a result more than three fourths of our revenue comes from digitally connected customers, who do business with us through channels like <unk> dot.
Com a P is our other digital connections having.
Having these digital connections established enables us to more efficiently scale as we further grow the business technology is an important element to ensure that our services are provided in the most efficient manner and are serving customers in the places they want to do business.
And now I'll turn it over to David Cobb for more details on our fourth quarter and full year results.
Thank you Judy and good morning, everyone on slide seven I'll begin with some financial highlights we ended the year with unrestricted cash and short term investments of $125 million or $226 million of debt at the end of 2021 included $50 million borrowed on our credit revolver and $176 million.
Notes payable primarily on our equipment for asset based operation.
The composite fixed interest rate on all of our debt was two 6%.
At the close of 2021 total liquidity was $365 million, including available resources under our credit revolver and our receivables securitization agreement.
As many other companies have experienced due to manufacturing delays in parts shortages, we did not receive all of the equipment. We had planned for in 2021 and two.
'twenty, one to net capital expenditures, including equipment financed totaled $104 million.
Two in 2021 expenditures for revenue equipment totaled $79 million, the majority of which was for art best asset based operation.
Depreciation and amortization cost on property plant and equipment totaled $119 million.
In addition, amortization of intangible assets was $5 million in 2021.
For 2022 total net capital expenditures are estimated to range from $270 million to $290 million, including equipment purchases of approximately $160 million or 2022 investment plans reflect catching up on 2021 tractors as well as investments above.
Normal annual levels and equipment real estate and facility upgrades to support our growth plans.
We also have plans to purchase a small number of class eight electric tractors that are expected to arrive in the second half of the year.
2022, depreciation and amortization costs are expected estimated to range from $125 million to $130 million. This does not include amortization of intangible assets, which is estimated to be around $13 million in 2022, primarily related to purchase accounting amortization associated.
Shaded with a mellow acquisition.
The momentum minimum in our business and strong customer demand produced solid cash flow generation with our 2021, EBITDAR totaling $453 million, our cash balance and total liquidity are also at solid levels and as at the end of the year, we were in a comfortable net debt position.
The operating cash flow combined with the strength of our balance sheet continues to offer opportunities to make investments in our business evaluate external growth opportunities continue our share repurchases and pay a dividend.
With our anticipated cash flows this year, returning capital to shareholders through share repurchases and dividends remains a priority.
Strong balance sheet and free cash flow provides flexibility to increase returns for our shareholders.
On slide eight I will highlight our consolidated information fourth quarter 2021, consolidated revenues were $1 2 billion.
A 45% increase over the prior year.
On a non-GAAP basis consolidated operating income increased 159% to $102 million.
Our adjusted fourth quarter 2021 earnings per diluted share grew 171% to $2 79 per share for all of 2021, our consolidated revenues were $4 billion, a 35% increase over 2020.
non-GAAP consolidated operating income was $318 million a year over year increase of 149%.
2021, adjusted earnings were $8.52 per diluted share an increase of 149% over 2020.
The 2021 effective tax rate that was used to calculate non-GAAP EPS was 26, 7% under the current tax laws. We expect our full year 2022, non-GAAP tax rate to be in a range of 26% to 27%. This may be impacted by discrete items that could occur throughout the year.
Slide nine provides highlights of our key metrics on our asset based business.
Is it based fourth quarter revenue was $684 million in average daily increase of 23% compared to last year.
Fourth quarter non-GAAP asset based operating ratio of 86, 9% is a year over year improvement of 680 basis points fourth quarter daily tonnage increased five 1% and daily shipments increased one 5% total fourth quarter billed revenue per hundredweight increased 17, 3%, including.
Fuel surcharges.
We secured an average 10, 2% increase on asset based customer contract renewals and deferred pricing agreements negotiated during the quarter, which was the highest quarterly increase of any quarter in our history.
On an annual basis in 2021 total asset based revenue was $2 6 billion.
A daily increase of 24% and the highest ever for a B S.
The full year non-GAAP operating ratio was 88, 8%, reflecting an improvement of 540 basis points year over year, and 920 basis points over the past five years totaled.
Total tonnage and shipments grew seven 6% and four 3% respectively.
Total revenue per hundredweight increased 14, 7% with an average seven 8% increase on customer contract and deferred pricing agreements renewed during the year.
As presented on slide 10, our asset based preliminary business trends for January reflect continued strong revenue and pricing increases and slightly higher total tonnage.
The January 2022 asset based tonnage and shipment trends had been impacted by fewer transactional shipments versus last year, which were intentionally moderated to serve increasing demand from core customers are core or published LTE, all tonnage and shipments increased by a percentage in the high single digits in January 2022 over.
In January 2021, the sequential changes in average daily tonnage and shipments with these core customers compared to December where some of the best over the last two years.
Additional details on our January 2020 to business trends can be found in our form 8-K exhibit to the press release.
Our best asset light key metrics are presented on slide 11 in total the fourth quarter revenue in our best asset light businesses increased 80% versus fourth quarter 2020, reflecting strong demand in our best segment. The addition of <unk> and improve events and revenue per unit in the fleet segment.
For the months of November and December mobile added approximately $120 million to the revenue total of the RMS segment.
For all of 2021.
Asset light revenue per day increased 59% over 2020 to $1 6 billion.
Fourth quarter asset light non-GAAP operating income was up 156% over last year and totaled $49 million for the full year of 2021, an increase of 193% over 2023.
During the recent quarter demand for expedite and international solutions drove significant growth in operating income as favorable market conditions and increased project work combined with cost can drove created strong margin leverage.
Fourth quarter asset light EBITDA was $18 6 million more than double the same period of 2020 and totaled $64 million for the full year 2021 and.
163% increase year over year.
Preliminary asset light business trends for January 2022 had been provided in the form 8-K exhibit to the press release, which was filed this morning.
Solid customer demand drove revenue growth in expedite managed solutions and truckload brokerage. In addition, the positive influence of MAU low truckload brokerage revenue on year over year comparisons as reflected in the preliminary January daily.
Revenue increase of 135% as.
As we have previously stated at the time of the Modelo purchased this business was operating at a breakeven level.
We expect that the below business will continue to be breakeven for most of this year, which will have an impact on total asset light margins during that period.
Earnings accretion on the mobile business before purchase accounting amortization is expected to begin in the fourth quarter.
Now I'll turn the call back to Judy.
Thanks, David on Slide 12, we've highlighted some of the environmental social and corporate governance initiatives. We've been working on as shown here. We continue to make progress on our ESG journey. We recently joined the freight waves carbon emissions cohort. We've also committed resources and adding both in ESG program manager and a corporate.
Social responsibility program manager, who will direct our diversity equity and inclusion initiatives. These roles will be critical to helping us advance our ESG strategy. Even further in the years ahead. Our team also continued to focus our efforts on our <unk> strategy throughout 2021 since October .
2020, we've been working with the Kaleidoscope group to help us assess the current state of dei within art best help us align our <unk> vision and gather employee feedback towards the end of last year, we introduced our <unk> strategy roadmap, which centers around four key areas.
Workforce workplace community and marketplace. This roadmap will guide our work in raising awareness of the issues in achieving our goals in this important area as we move forward, while we have more work to do at our best we believe that we are truly at our best when we're listening to our people and we know very person.
<unk> make our company stronger as we serve our customers and communities with excellent.
Our strategy as shown on slide 13 positions us well for revenue growth and improved profitability as an integrated logistics company with our own assets, we provide customers the best of both worlds.
It's the combination of our solutions and the ability to serve customers across modes without switching service providers that sets us apart. We have built technology enabled solutions and products such as the ability to digitally match negotiate and award truckload freight and dynamic LCL pricing to <unk>.
I'm a theme with these tools, we can adjust our business mix to optimize and maximize revenue by utilizing our resources as effectively as a company we have a rich history of using innovative technology that makes it easier for customers to do business. This is central to our ongoing strategy at our best we worked to see.
Our business through the lens of our customers effectively meeting their needs and using technology to drive efficiencies enables us to deliver profitable growth.
As we approach our 100 year anniversary and look forward to the next tender gears. We know we must be agile staying open to new ideas and innovation that will continue to ensure we deliver for our customers every time.
Before opening it up for Q&A I want to introduce our updated long term financial targets as you can see on slide 14, we aim to grow revenue to between $7 billion to $8 billion over the next four years based on our current $4 billion revenue level and the key revenue drivers I outlined earlier.
We are confident that we can double this figure by 2025, our previous goal was to achieve high single digit asset based operating margins with our steady progress and future plans. Our new goal is to consistently generate asset based operating margins between 10% and 15% Likewise.
Our asset light business as we fully integrate <unk> and benefit from combining our asset light and asset based services and a comprehensive customer solutions, we will focus on achieving asset light operating margins, excluding fleet net from 4% to 6%.
And finally for many years, we focused our business on maximizing our return on capital employed we train our team on the elements of RSV and what actions they can take towards increasing that financial metric our employee incentive plans are in part based on our <unk> performance as we move forward in the.
Next few years, we will strive to produce returns in our business that exceed the average RFC S&P 500 companies. We firmly believe that we are in a perfect position to achieve our financial goals. Our strategy is guided by what our customers tell us they need to make their businesses perform better and more efficiently.
And we've transformed our company to allow us to effectively respond to those needs. We are confident that continued profitable growth further enhanced operational efficiency and superior returns on invested our capital employed will drive strong value creation and multiple expansion for the benefit of art best shareholder.
<unk> our record setting performance in 2021 will act as a springboard for a growing and profitable future at art best for many years to come that concludes our prepared remarks, David Humphrey. We can now open the call up to questions.
Okay, Carlos I think we're ready for some questions.
Thank you Sir if you would like to register a question. Please press the one followed by the four on your telephone you were.
We'll hear right. So we took prompt technology request.
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One moment please for the first question.
First question comes from the line of Jason Seidl with Cowen. Please go ahead.
Thank you operator, Judy and team good morning, congratulations on a good quarter here.
Wanted to dive in a little bit.
On the pricing side, I mean, the strongest quarterly.
Contract renewals that you guys have seen.
What's driving that market as it continues to get better and are you seeing that same strength continue here early on in your 2022 variables.
Yes.
This is Damien I would say that there is multiple things that obviously has a robust pricing environment right now there is multiple things driving that.
We look forward just David mentioned, the inability to get all of our 2021, capex purchases and the asset side.
That's a common theme I think you're hearing across.
Across the marketplace, but I think another piece is we are having conversations with our customers and we're making sure that the freight that we put in our asset based network is the freight that we won and as long as you are having those honest conversations with customers about what your costs are doing and what services you are providing to them.
I think thats part of the results, we're getting in the pricing environment right now.
Did central have any impact on the quarter.
Central.
Very low impact as far as we've seen I think the second part of your question you asked about January and so we're seeing similar in January to what we saw in the fourth quarter as far as contract renewals.
Perfect that was my one I appreciate the time as always.
Thank you, Jason and thanks, Jason.
Next question comes from the line of Chris Wetherbee with Citigroup. Please go ahead.
Hey, Thanks, good morning, guys.
Good morning.
Wanted to touch base, a little bit on sort of how you guys are managing the transactional business and maybe how we think how we should think about that impacting tonnage growth as we at least think about the first half of 2022.
Can you give us a sense, maybe the delta I guess between where you might be from 2% tonnage I guess its high singles with the with your core customers.
Just trying to maybe get a better sense of what the.
Tonnage environment is today and maybe how you are managing to that.
Let me talk in general David May follow up with some.
Civic numbers, if we if we need to follow up but we see the transactional businesses ability to fill the network, where we have capacity available to us as David described we're seeing this.
Sequential change from fourth quarter, the first quarter in January of the strongest we've seen in our core published customers and so in those cases that transactional need to feel some capacity in our network is not there and so there's a combination of things that will reduce some of the shipments were getting per transaction, but it also allows better price on that transactional business because we're more.
<unk> about what we put in the network in that and so for US That's a daily weekly monthly review in.
I really don't want to predict what is going to do in future. We just we use it as a as a mechanism to make sure. Our network is forward our network as balanced as we move forward.
And it's I'll just contribute that it's.
Hard to say, what the tonnage growth could be or would be.
But suffice it to say we have more opportunities than we say, yes to because of wanting to serve our core customers, which I think is serving us well in terms of our I.
I think our yield result in our overall margin result.
Satisfying customers that are long term customers for us I think the other thing when we say transaction, we talk a lot, but if it's a network. This is also a benefit to our customers I mean, we're engaging our customers. Thus that's how they were asking us to engage with them. They are making decisions on a shipment by shipment basis and how to route those shipments and so we're just meeting them where they are and.
Some days, we need the shipments of bill so capacity, sometimes we don't and they understand that and they are willing to work with us as we go forward.
Okay. That's super helpful. And then just quickly on the first quarter or sort of the cadence from <unk> and the asset based business. I think you generally talk about a 250 basis point deterioration in the operating ratio. What do you think about this year, what's going on in the pricing environment, what youre doing in terms of managing tonnage on the network is that the right number to be thinking about or are there some puts and <unk>.
Takes we should be considering.
Yes, Chris this is David and good morning.
Youre right. We mentioned the average increase has been approximately 250 basis points.
In recent history.
And I think one thing that's kind of unusual to that comparison is the early <unk>.
We ought to be considered that was we took in November of 2021, when typically we would take a <unk> in the first quarter.
Probably one of the.
The unusual things to consider I guess the other thing is as we're starting.
In the fourth quarter that is.
One of them is the best award that we've had for fourth quarter. So it makes it a challenging comp, but I'll, let say you know I think you're you're pointing out that we have good momentum and opportunities ahead of us.
Okay. That's helpful. Thanks for the time I appreciate it.
Thank you.
Our next question comes from the line of Scott Group with Wolfe Research. Please go ahead.
Hey, Thanks, good morning.
I wanted to ask a few things on the new long term guidance. So double digit revenue growth I'm curious, if you're assuming any acquisitions in that and then with the 10% to 15% LTM margins is the point there that you think even if we go into a freight downturn you think the trough for <unk>.
<unk> is now.
10% and then just last thing on the guidance.
We will obviously have a new teamsters contract by 2025 have you assumed anything meaningfully different in that new contract with this guidance.
Yeah, I'll just start and then let others to fill in as needed here just when you think about these long term targets.
Just really starts about executing on our existing strategy that we have and that.
But Judy mentioned I think on slide five in 13, and then just seeing the customer from the from there.
Operating our business through the customer's perspective.
See you on slide six that Judy went through it and all that to say that the.
The mix of our revenue growth should be a product of our customers' needs.
As we worked through that and when you think about.
Acquisition opportunities, yes, we are.
We're opportunistic about that it's not.
Built into these these revenue targets.
I think just some other color on the revenue target when you think about having <unk> in there for all of our base year. If you were to assume a pro forma Mo LOE for 2021.
Within that CAGR is around 12% to 16%.
In that range and so.
Let's see you also asked about.
Yeah.
If there is an assumption on the teamster contract is a contract that would just say we're continuing.
Cost cost inflation kind of what we would.
We're seeing now.
So no nothing unusual or different around that.
Cost structure.
And how about that point about is there are you contemplating a potential freight downturn I guess.
The question at the point is if you can do a 10% <unk> margin in a downturn when historically its been lower than that I mean that could be pretty powerful. So is that are you contemplating that or is this just say if the freight environment remains good like it is now we think the range is 10 to 15 I'm just trying to understand that.
Yes.
Look back over our history and you just think about what we've been through in the last five years for instance, we've had a great freight environment in <unk>.
We had a freight recession in 19, we had a pandemic in 2020.
It goes back and forth and so.
We're not going to time.
You said it.
Went up freight.
Weakness might occur and industrial weakness or market weakness might occur that's not built into this these are long term targets.
So the assumption is.
Essentially economically it's a positive economic environment.
Overall, if you will on average.
Say, 2% to 3% from a GDP standpoint so.
Okay, and then if I could just ask last one so more near term as I think about 'twenty two right.
Full year margins in <unk> are typically better than the fourth quarter margin. So do you think that we should see some improvement in 'twenty two from from that 86, 9% in the fourth quarter.
Well.
And Scott I mean, we're not going to two <unk>.
Predict what 2022 margins are going to be but we have a lot of great momentum that you see in the fourth quarter and then as we're starting 2022 and now there is a number of things that are from a macro standpoint, I think working in our favor.
And.
I think it is interesting to know you brought up the.
The teams are contracts that we have it it's an overall, 2% increase on a large portion of our costs in the asset based business.
That will be there for the full year of 2022, and we have a robust yield environment. So that's helpful to us when we think about about that plus you know again, we've got some investments that David outlined in the.
Real estate side of things and equipment that.
Lend themselves to growth.
In that business and you know Danny sitting here across the table from me one of the things that he always says as we do the best when we can grow.
You know and also have a good backdrop for yield and we've got great relationships with customers. They are seeing a lot of value in what we're doing and I think the overall strategy that we have as a company really lends itself to helping customers in both the channel.
That they want and in the modes that they want which is very helpful to retention.
All of that.
Good.
Yep.
<unk>.
Thank you very much for the time I appreciate it.
Our next question comes from the line of Jack Atkins.
Jack Atkins with Stephens, Inc. Please go ahead.
Great. Good morning, and thanks for taking my questions. Good morning, Jack I guess, maybe just going back to the long term guidance for a moment one of the questions I've been getting a good bit. This morning from investors is just been around trying to bucket out.
That $7 billion to $8 billion, maybe if you can maybe provide some brackets around how we should be thinking of how that breaks down between the asset based business and the non asset based business. David is there anything you can maybe help us with there.
We will look like I, just said I mean, the mix there is will be a reflection of of our customers' needs. We're an integrated logistics company and as they say.
They need.
Our services, we're positioned well.
Two with the trends that we're seeing in logistics.
We can go into those but.
All that to say is that.
Our services are in high demand and so it's.
We'd rather give this as a.
The top level perspective on our revenue targets.
David that's the way that we manage the best we approach to the customer.
Holistically as a company and as you said, we work from that into what we do for them and it really when you look at this.
We're close to a balanced mix, but that certainly doesn't represent the customer spend it's much more lends itself to full load.
We are well positioned to grow within but that could mean that over time that we have a higher percentage there, but again it would be because that was what the customer desired us to do.
Yes.
Okay.
Good.
And then I guess, maybe for my second question.
David can you talk about the.
The capex investments, specifically related to real estate and <unk>.
Investments in the network.
What is the expectation for door count growth in 2022, if you could provide that that would be helpful to do any of the supply chain challenges maybe push out that.
That network expansion.
Beyond what you were expecting maybe three months to six months ago.
Yeah in terms of.
No I think it's along the same lines.
What we've commented on last quarter, but as you point out I mean, the supply chain constraints are are impacting.
Facility.
<unk> work.
In 2022, our real estate purchases are expected to be somewhere between 45 million $55 million.
In that which is which is that level that we've been talking about now are expansion and impact on facilities could come in the form of a lease.
We said, we lease a portion of our facilities and we own another.
A portion of our facility so.
But we're looking to expand probably probably to enable a shipment growth by the end of 2022 in the mid single digit range.
So we're still.
Looking to to achieve that by the end of this of 2022 and all contribute one one other thing I mean, I think we've been pretty realistic don't you David about the real estate that we can get done in 2022, we'd like to do more.
And we have plans to do more as we go through that that period.
The upcoming years beyond 2022, but I think we've been pretty realistic about it. Although we always know that we spend a little bit less than what we what we have in our plans.
That's a good point.
Okay. That's helpful. Thanks, so much for the time.
Thanks, Jeff.
Our next question comes from the line of.
And Bruce Chan with Stifel. Please go ahead.
Hey, Good morning. This is Matt on for Bruce Thanks for taking the question.
Good morning, Matt.
Good morning.
Just wanted to talk a bit about Santa motto.
Maybe specifically what drew you to them versus others.
Maybe what benchmark return criteria, you're using to evaluate the investment and.
Is this a one off or should we expect more deals of this kind of going forward. Thanks a lot.
Well.
I'll start and then we have Michael New city on that I'll, let him contribute here in just a minute, but we.
We have.
Been a company that through the years, where.
Our innovative thinking has entered into what we do to try to operationally improve our own business, but also.
Just supply chain spending in general.
Hannah motto the investment there is in that vein I mean, we have a you know a tech R&D team that reports to Michael that has.
<unk> always been good at identifying opportunities that we have to optimize costs or improve.
The way we approach these challenges.
And.
They typically have a good set of partners and we've been partnered with Phantom for many years.
Yes, maybe that Michael in February of 2020, and Mike I'll, let you comment about that and.
Yep go ahead, okay, yeah, well I'm not going to share anything on return expectations I think of course, we expect.
Something significant there I'd say, what's compelling for us is that when we look.
At.
Customers managing their supply chains, I think that the shipping component is just one element of the overall operations and getting something from point a to point B. There are numerous operations before our shipments picked that accurate delivered.
Private fleet operations with their own cross dock operations, there is internal work and low consolidation deconsolidation.
Edge operations within our warehouse and managing staging inventories in building loved and so we see an opportunity here with fan them to really bring insights and technology to our customer operations and managing freight.
Before she gets picked up before it's delivered so we see a larger market with our customers in that regard.
Helping them solve their problems and provide supply chain solutions. So it's a really exciting technology for us, especially given the fact that we are.
I see the opportunity with our with our existing customers.
Yeah.
Great. Thanks.
Thanks, Matt Thank you.
Our next question comes from the line of Ravi Shanker with Morgan Stanley . Please go ahead.
Hey, this is Christina Garvey on for Ravi Shanker, how are you guys. Thanks for taking my question.
Interesting.
Good morning.
Yeah, if I can circle back to the long term targets around operating margins and maybe I can ask the question that slightly different way, but.
This year has obviously been very good for margin improvement, probably 50 initiatives. I know you guys have discussed in the past about the sleep and paying off. So maybe you can just talk a little bit about productivity initiatives that you have now kind of what's been most impactful do you still feel that there's runway there is that kind of what pulled us that 15% overtime.
Or how should we think about that.
Well I think one of the things that.
I think it is important to consider is that we've been on a journey to improve about the growth prospects and margins of our business for some period of time beyond this pandemic period, I mean, I think back to 2017, when we initiated the enhanced marketing.
<unk>.
Also introduced the CMC that year that helped us with the pricing.
Decisions and.
Customers, having to provide somewhat more information to make those decisions better, but theres a number of things where we've invested in technology.
Our solutions and then our people.
Through a longer period of time that really brings us to this place where we're positioned to grow and expand margins going forward and so it really I just take it beyond that pandemic period whenever I think about that and then Dennis Anderson's here. He can comment too about just.
The I think the opportunity set on the one hand with our customers, but also the knowledge that our conversation spring you know to the conversation and how that impacts margins absolutely. Thanks, Judy and good morning Christine.
When we think about as Judy said over the last few years, just resetting the conversation with our customers and being able to deliver for them.
In not just in <unk> mode, but really any mode.
That's been a that's been a.
Big win from a strategic standpoint, but it's also been a big win for our customers and especially as you mentioned as we've gone through the pandemic period.
With their supply chain is disrupted there really valuing reliable capacity in and we see that just even in how they think about managing their supply chain managing their inventory and maybe even some some reset and long term thinking of how that comes together so looking for more.
Liability.
Shifting modes more frequently and combining modes are finding new ways to build flexibility in their supply chain. So we really feel great about our breadth of integrated solutions and the modem neutrality that are a differentiator and really enable us to focus on helping our customers solve their challenges building their trust and really creating that.
Value that they're willing to pay for and so from a from a price perspective.
Feel good about where that where that is and where that's headed but then also our ability to partner with them really in any environment has greatly grown and as Judy referenced at the top of the call just using this as a springboard.
For future growth is really what we're focused on.
Got it really helpful color, maybe if I can squeeze in another I think I, if I could quickly because we're planning to take several electric vehicles in the back half of this year, maybe you could just sort of quickly comment on the plan for those and then as you look out over the next couple of years.
And how you plan to kind of scale up and you sort of electric operations.
Yeah I mean.
We're committed to innovative thinking and transformative solutions and approaches as we talked about but and we are investing some certainly time and exploration on the practical utilization of electric vehicles and our asset based network. We recently did a four week test of battery electric.
Electric TR tractor in our Kansas City Service Center, and we've also partnered with multiple companies to investigate the deployment of electric vehicles for our city pickup and delivery and warehouse handling units and our Capex plans do include the purchase of some class eight electric tractors that are expected to arrive.
In the second half of this year. So we're excited to get going on some testing there and see what that means to us and and.
And learning its impact.
Awesome I really appreciate the time, thanks for the color.
Thank you.
Yes.
Next question from the line of.
Ken Hector.
Please go ahead.
Hey, great.
Good morning, and nice strong result.
Judy can you just maybe I know you've had a lot of questions on the margins in your long term outlook.
Just on the asset based side is it fair to think about 100 basis points per year as a target is there anything just given the strength of the pricing that we should still see maybe more of a step function given the environment. We're in now maybe you can kind of just give your thoughts on that or for Dave and then are there any constraints given the union percentage payouts. It seems like youre at the Max nine.
Now maybe what are your thoughts in there for that long term target does it stay at that same level.
Yes, well first of all we are excited to pay that union incentive or start where you ended your question, but we very much are and I think there is going to be excitement among the workforce about that and and we although we don't know what the future holds there I think it's been a win.
When.
For the employees and the shareholders there and so that that's a really good thing I do think that.
We worked through some of the technology enhancements operational improvements.
In a methodical way, we have a robust process that.
<unk> project management that really helps us to gain the benefits of the.
The different whether their software or other.
AI cognitive engagement type improvements that we're making but I'll say this we have a lot on our plate we call them tier one project, we have a lot that we're working on my biggest challenge is prioritizing them to figure out whats best to get done first.
And.
So there's runway there I can't say that that will occur.
And then you know.
Step function or something like that it's just hard for me to say that but I will say this we're very focused on cost optimization. We know we have to be there and we're also focused on the value creation for the work that we do and I think with the intelligence the data.
In information as you know for instance, the work that we do with our manage customers really allows us great insight into.
Both the choices that they have and the options that they have for capacity and that helps us a lot with us making decisions there and then otherwise in our business and so anyway I'll leave it at that but just know that we see that we have runway and.
We are looking forward to being able to produce those numbers in 2025.
Great and if I can do with a follow up on David you talked about the pace of can you talk about the pace of tonnage through the quarter I guess, just kind of more curious about the impacts of all mccrudden bounce back at the end in <unk> and your thoughts into January and then are there any updated thoughts on the buyback.
Okay.
Yes.
Terms of the buyback I mean, we have $42 million available under our share authorization and we intend to utilize that and.
So looking forward to that as we said we completed the ASR in.
In early January .
Terms of the business trends I mentioned that we continue to see solid growth from our core customers.
Our published what we call public still deal pricing customers.
And that continued into January so.
It's just a matter of.
Serving those customers as we talked about I don't know if is there anything else that we do.
We need to add to that.
AK has all the monthly detail right right I think the comp was a little more challenging in October as well, which is part of what that was about it.
Yeah. Thanks, Dave I guess I was just curious about the impact of omicron that youre kind of bouncing around around that I know the monthly, but I just want to understand just given your outlook for January .
We're seeing kind of a deceleration or globally.
We just since you brought that up we have seen an impact of that.
We've had a we had a spike in our cases, Fortunately that's coming back the other way that it did impact the number of our employees that were were out sick.
And and.
And so that creates its own challenges, but we are seeing that we've I think we've seen the peak and we're coming back down and I've talked to Seth runs or yesterday that ABF President and he was he was encouraged by people being able to come back to work, but that hasn't been a challenge and it's a challenge for shippers to which some in some ways affects our productivity.
As we try to interact with them.
Thanks for the time.
Thank you.
Next question comes from the line of Todd Fowler with Keybanc capital markets. Please go ahead.
Hey, great Thanks, and good morning.
I apologize if I missed this but David or Judy can you talk about the required capital to get to the 2025 revenue targets I don't know if you could share either capex as a percent of revenue or just kind of a thought on kind of what the capex level needs to be over the next couple of years.
Then as a follow up to that it feels like at the levels that you're targeting in 25, you'd be generating quite a bit of free cash and so maybe a little volatile last question, but how do you view capital deployment.
For the next couple of years as you move towards these targets. Thanks.
Yes, Todd.
No.
I'll just start with just talking about 2022, capex being elevated from kind of our history.
Some of that has to do with completing the orders from 2021 and 2022, but we've talked about just our intent to invest in the business for growth our growth plans that we have there and so I would I would you could expect our capex to be in the in the range of 250 million.
Beyond 2022.
No I don't have the details to provide you at this time, obviously by year, but it's another I think it's important to to compare that capex level in relation to our revenue levels that we would have at <unk>, which.
We expect would be reasonable.
And again all of that is going to be balanced with our oce targets. So we're looking to.
To drive good return on capital employed so we're going to be disciplined about our investment into the business, making sure that all of those have good returns on them and they have and so that's good and so you're right. It's a good observation that we would produce some positive cash flow.
With those those targets and.
No.
Expect us to be returning capital to shareholders as a result of that.
Obviously, we're going to continue to invest in the business like I said and Judy you talked about a lot of the technology.
That we have.
We've invested in and are seeing the benefits of it and we'll continue to see the benefits of us.
Come to fruition and get matured in our business and so.
I'll, let say is that we're going to have a balanced balanced capital allocation approach and that's.
Investing in the business for good returns, it's going to be.
Opportunistically acting on M&A and <unk> technology investments like we've talked about with Fathom and then there are good return of cash to shareholders.
That's our approach.
No David that's helpful and it's good to know that the like if there's not a step up I mean that the $2 50, as a decent placeholder, but theres not a big step up coming in Capex to get to those numbers. So that's helpful. Just for my follow up any thoughts on kind of the growth rate for mobile I mean, obviously I know theres going be some correlation with what's happening with spot pricing and transaction rates on that.
Quote side, but.
But is that a growth rate that should start to moderate maybe a little bit as you shift towards profitability or does that accelerate underneath your platform because you've got more opportunity to kind of cross sell just kind of curious how youre thinking about more of those growth rate going forward. Thanks.
Okay.
I would say the first phase that we're talking about our integration.
But I think if you look at the point of the mobile acquisition was too is our ability to source capacity for our customers and if youre sourcing capacity for your customers that means you are growing.
So I don't think that.
I won't give a number but we're excited about the potential and there's nothing we've seen so far that dampens that excitement we had at the time of the acquisition.
Got it thanks for the time this morning.
Thank you thanks Don.
I think we got a couple more here that we're going to try to get in.
Next question from the line of Stephanie more with choice. Please go ahead.
Hi, good morning, everybody.
Good morning, Stephanie.
I wanted to.
Touch on the long term margin target again on the asset base side make sure that I'm thinking about it correctly. If you go back over the last five years I think you have a trough asset base LR kind of near that 3%, but I think you've also called out over the last year or so about 600 basis points of permanent or structural margin improvement.
No from a lot of the investments you've called out on the call already and the pricing and the tax so I guess a two part question here. So first if you take the kind of the lowest margin and then you account for these.
600, plus of improvement you get pretty close to the low end here of this 2025 target range. So is that kind of the right way to think about the puts and takes into this new range and then the second point kind of along the same line.
The range also calls for an improvement here on the high end too. So maybe if you could just outline as we look forward what are the main buckets driving these incremental gain kind of up at the high end of this range.
Yes, I mean I'll just.
Martin and others can add to this I mean, you just think about the.
The operating leverage that we would have.
As well as the revenue grows.
And Dennis talked about this Judy talked about.
We're connecting with customers and.
Including digitally and so that's that's that's provides two things one is a growth lever as well as a as an efficiency lever.
Because.
By the way that's the way the customer wants to do wants to do business with us and so it's.
It's more efficient for them.
Which is one of our objectives is to be efficient in our customer experience in.
And the way the customer wants to approach us and do business as well as our carriers and so we've enabled that technology to work with our carrier group as well as with our customer base.
That's going to be an optimization element too to the or bridge.
As well as the operating leverage on the revenue.
So optimization not only in that but also and just other areas, where we have increased visibility of the shipments and so we were able to take out some.
At the time and efforts in the back office areas.
Those are those are some of the big elements that I can think of and including.
Visibility of our cost.
Increase through these technologies, so we're able to improve our routing.
On line haul as well as our city pickup and delivery on the asset based side of the business and so that's an element that's also.
Incremental too.
To our margins.
And I'll, let others.
Obviously I was thinking David one that I'm looking forward to is as we integrate mellow and we get out into some of those years beyond 2022.
As a real opportunity there just from the.
The sheer volume of business that we're doing to make.
US better more intelligent more involved with customers.
To help both them and us make better decisions, which tends to provide.
A lift to your margins as well.
Remind me of another thing just just the retention level that we have by providing these asset light services for one but also just the customer experience that we've been able to.
Through the recent years, our retention rate is at a good level and so that serves to.
Provide a foundation for growth, but also is also more efficient from a from a service standpoint.
Got it.
Could get no. It does that's particularly on the on the upside, but and then maybe one more on the puts and takes on the lower end of your margin guidance and how that tracks with just the performance you've made over the last several years in your kind of prior trough low end of your margin range as well over the last five years.
Yes, I think a number of those things.
Lot of that as well.
Mhm well enough.
I thought the way that you were thinking about it Stephanie made sense I mean it.
Yes.
Perfect really appreciate all the color and congrats on a great quarter. Thanks, guys.
Thank you thank you Sir.
Operator, Carlos I think we've got time for one more.
All right last question from the line of Jeff Kauffman Vertical research partners. Please go ahead.
Thank you very much. Thank you for squeezing me in and congratulations for these results are just amazing.
Yep.
Thank you I'd like to follow up on Todd Fowler's question, and Scott groups question, a little bit.
I just do some basic algebra on the long term guide and I know thats kind of a pin on the wall is a lot of uncertainty.
It's implying earnings in the 15 to $16 range, if I kind of take what David was saying in terms of Capex guidance and things like that it's implying even after capex. If you can achieve those goals youre looking at $10 $11 a share in free cash and I know we can't take.
That is given but you mentioned, though will will increase dividend increase share buyback, but you're still a couple hundred million in extra cash is the feeling that to achieve the growth as Scott group was implying we'd need to accelerate acquisitions, a little bit on the logistics side to get to those levels is the implication that.
The balance sheet, some pretty healthy range once you get past the union negotiation figure out what to do with the cash.
We would see substantially larger returns to the shareholder in terms of dividend Treasury stock.
<unk> cash the Capex side of the capital allocation, if we think about the utilization of free cash if you are able to achieve your goals.
What are the priorities.
And how should we think about that as we think about 2025 earnings target and then carrying it down to the cash flow statement.
Yes, Jeff as I think about that.
First of all it honestly is that we have to be prepared.
<unk>.
Invest as we see the future unfolds for managing supply chains, I mean, that's what you've seen us do with modelo as well as the investment with Phantom Auto and the partnership we have with Phantom auto.
Well, hopefully ultimately go to market with our customers and and we really are at a very early stage of that so.
That's an opportunity as well but.
I mean, we can't see exactly what it means in terms of M&A.
We know that with the disciplined approach that we use that were not.
Going to.
Put that resource to us.
In an inefficient manner and that's I think the message with the RFC target that's out there as well so.
I mean, I think what we know to be the case is that we need to deploy the balance sheet as we're going through that period and the priorities have tended to be in.
Organic sense to make sure that we're gaining the performance from our existing deployed resources.
And then also to be open to M&A and be able to act quickly whenever we see an opportunity there that really advances our platform.
And.
And when.
We look.
At a balance that is beyond that that we will be in a position to return that capital to shareholders.
I think it's just restating what David has said earlier, but that's really the way that we think about it and honestly, we can't tell you exactly what trigger and is it going to be pulled between that M&A and the capital return.
We're going to be open to what that needs to be to advance our strategy and our platform and our customer service.
Just one quick follow up if I can and thank you for that answer.
ESG, just becoming a hotter and hotter topic.
People are talking about moving from scope, one scope two ESG to scope, three which really kind of looks at the supply chain.
Emissions and what have you.
If you look at what's coming down the pipe and then kind of where you want to position the company.
We've got electric vehicles, we've got fuel cell vehicles, we got self driving vehicles and all kinds of things we can do.
In your evaluation, where do you think you need to push capital investment a little harder than that.
Can you give us an idea of kind of how you think the pace of adoption needs to be over the next couple of years.
Well.
I think that it'll be an instructive year as were doing some test work on those electric vehicles. This year that we're going to have some visibility in.
Interestingly with fleet net we get some early visibility of the utilization of electric vehicles by others that they do business with which is I think helpful to just our overall understanding of the performance there.
And we have a.
Group that is that as I mentioned earlier that looking at those advanced technologies and how they could integrate into.
The for instance, the asset based network and so we.
I think have the right resource on it I do think it's going to be.
Slowly through the period up to 2025 in terms of its impact just because you have to do this testing and absorption in understanding and then making these bigger decisions.
But.
We're very.
Open and advancing our thinking on the ESG front, just mentioned real quickly the real estate at work that we're doing is really going to help us there.
We've got that on our minds as I bent.
Benefit to gain.
The other thing I'd say is this year is a data gathering year for us.
And and Cleveland, including the carbon emissions and we're getting into a position where we can see things better. So then we can make them better decisions, but we visited with a number of experts in this field in and especially on the social side, we're doing very well in terms of how we compare.
We love that because that's the company that we are at Jeff.
Yes. This is Dennis I would I would add too from a from a customer perspective, one of the one of the benefits of our strategy is being able to optimize supply chains and we were in a customer conversation yesterday with a very large recognizable brand.
Who said one of their top priorities. This year is sustainability they've set out some some carbon emissions targets, we're actually helping them with that through that and thinking about how can we optimize supply chain. So that'd be just by the very nature of having that kind of an approach we're plugging in.
Customers' supply chains to help them from a sustainability standpoint so.
Investing in our strategy is an investment in sustainability as well.
Thank you very much.
Thanks, Jim Okay. Thanks, a lot Jeff will listen we thank you for joining us. This morning, we appreciate your interest in <unk> and this concludes our call.
Thank you very much.
That concludes today's call. We thank you for your participation and ask you to please disconnect your lines.
Okay.
Uh huh.
Okay.
Thanks.
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