Q4 2022 ArcBest Corp Earnings Call
During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one followed by the four on your telephone.
At any time during the conference you need to reach an operator, Please press star zero.
As a reminder, this conference is being recorded on Friday February 3rd 2023.
I would now like to turn the conference over to Mr. David Humphrey Vice President of Investor Relations. Please go ahead.
Thank you for joining us on today's call. We will provide an update on our business walk you through the details of our recent fourth quarter and full year 2022 results and then answer some questions. Joining me today are Judy Mcreynolds, Chairman, President and CEO of Art Best David Cobb, Chief Financial Officer of Arc Best.
Danny LOE aren't best President of asset light logistics, and cheap yield officer as well as Dennis Anderson Arent best Chief customer Officer.
To help you understand heartbeats 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 risks for a more complete discussion of factors that could affect our best future results. Please refer to the forward looking statements section of our earnings press release, and our most recent SEC public filings to provide meaningful comparisons certain information.
As discussed in this call includes non-GAAP financial measures as outlined and described in the tables in our earnings press release reconciliations of the GAAP financial measures to the related non-GAAP measures discussed in this call are also provided in the additional information section of the presentation slides.
As a reminder, there is a conference call slide deck that can be found on the art best website, <unk> Dot com and exhibit 99.3 of the 8-K that was filed earlier. This morning or you can follow along on the webcast. We will now begin with Judy.
Good morning, and thank you all for joining us I would like to begin by acknowledging a few tremendous milestones for art best first we exceeded $5 billion in annual revenue for the first time in company history with year over year revenue growth of $1.3 billion. We also achieved the high.
First earnings per share in our company's history. These important accomplishments could not have happened without the hard work and dedication of the entire art best team.
The other important milestone I want to highlight is a celebration 2023 marks our 100 <unk> anniversary.
Art Best has flourished over the past century, and we are positioned to continue driving this momentum forward into the next century. The road to 100 years has been paid with resilience flexibility innovative thinking cutting edge solutions and a commitment to our core values, we know who we are.
Because we have stayed true to our values and focused on our strength, we've been able to innovate and successfully navigate enormous amounts of change nothing intimidate us we have a saying we'll find a way which means will stop at nothing to get the job done well I'm incredibly proud of what we've accomplished.
<unk> together.
Our results remained strong as does our growth opportunity regardless of the obstacles facing our industry.
We are on track to achieve our long term financial target of $7 million to $8 million in revenue by 2025, and we will continue to manage the business in the short term as market conditions evolve.
As we've shown time and again, we are a company that thinks ahead and plans for the long term.
We continue to strengthen our competitive edge through our diverse portfolio. The breadth of modes, we offer our customers allows us to make the most personalized and strategic decisions for them.
That will help them grow in fact, I recently connected with a customer whose supply chain. We started managing last year. They initially saw aren't bad Susan L. T L company, but after learning about our additional solutions. They selected art best as their logistics partner within a fairly short amount of time, we developed a D.
Partnership mean.
Managing their transportation and creating exceptional value for them as a result, we're expecting double digit growth with this customer in 2023.
It is deep trusted customer relationships like this that have and will continue to contribute to our success in any operating environment.
Throughout 2022, we continued our strategic investments in technology and innovation.
Innovation isn't just a buzzword for art best it's embedded throughout our long term plans and in the way that we approach our daily work.
We started and completed numerous technology projects in 2022, which allow us to run our business with more precision better identify issues and quickly address the root causes with a tailored solution.
Looking ahead, we're advancing our use of technology to strengthen our business and better serve our customers. We bring our innovative mindset every partnership building processes and digital capabilities that make it easier and more efficient to do business. We prioritized investments in these critical parts of our business.
To stay ahead and succeed now and in the future.
Building on that you've heard us reference in innovation investments, we've made which includes patented handling equipment software and a patented process to load and unload trailers. In addition to being used in parts of our network. We are currently piloting this program in several customer locations. We're encouraged.
The early value, it's delivering and we have several large customers already interested in broader deployment of the solution. We believe it has the potential to be an industry game changer and look forward to sharing more later this quarter.
Of course, none of our innovation or our results this year and over the past 100 years would have been possible without great people, who work hard every day to solve logistics challenges for our customers.
A sincere thank you to the Ark best team and now I'll turn it over to David who will take you through the quarter and the year in greater detail.
Thank you Judy and good morning, everyone.
I'll begin by highlighting our consolidated results fourth quarter 2022, consolidated revenues were $1.2 billion, a 5% increase over last year.
On a non-GAAP basis consolidated operating income decreased 19% to $83 million.
Our adjusted fourth quarter earnings per diluted share was $2 45 students.
For all of 2022, our consolidated revenues were $5 $3 billion, a 34% increase over 2021.
non-GAAP consolidated operating income was $473 million a year over year increase of 49%.
2022, adjusted earnings were $13.66 per diluted share an increase of 60% over 2021.
The 2022 effective tax rate that was used to calculate the fourth quarter non-GAAP EPS was 26, 3% and under current tax laws. We expect our 2023 non-GAAP tax rate to range from 26% to 27% of course this may be impacted by discrete items throughout the year.
We're pleased that our business momentum this year produced solid cash flow with our 2022, EBITDA totaling $572 million, our best cash balance and total liquidity are also at strong levels and as of the end of 2022, we had net cash of $61 million an improvement of 13.
Since the end of the third quarter.
Total liquidity of $566 million remains at a very healthy level and despite rising rates the composite interest rate on the company's outstanding debt at year end was just under 3%.
Our strong balance sheet and the operating cash flow generated in 2022 allowed us to invest in our business through new equipment purchases real estate additions and improvements and technological innovations.
All of which will strengthen our competitive edge and ability to serve customers well.
We regularly review external growth opportunities and are pleased to have returned capital to shareholders with enhanced share repurchases and the quarterly cash dividend, which the board increased by 50% in April of 2022.
We will maintain our balanced approach to capital allocation targeting investment grade credit metrics, while prioritizing returning capital to shareholders through share repurchases and dividends and considering M&A opportunities when appropriate.
Additionally, in the current environment with reduced business levels were especially focused on effectively managing personnel equipment and other resources to provide superior customer service, while controlling cost and improving profit margins.
Turning to the key metrics in our asset based business.
Our asset based fourth quarter revenue was $711 million in average daily increase of 5% over last year.
The fourth quarter non-GAAP asset based operating ratio of $88 six.
The year over year increase of 170 basis points.
As mentioned last quarter repairs and maintenance had been elevated due to inflationary cost in part due to delays in receiving replacement equipment.
Those costs were in the asset baseline for fuel supplies and expenses.
Also as I mentioned last quarter, we were able to make good progress on optimizing our usage of outside resource cost with purchase transportation declining as a percent of revenue.
Fourth quarter tonnage per day decreased five 5% and daily shipments increased by 1%.
Total fourth quarter billed revenue per hundredweight increased nine 3%, including fuel surcharges.
We secured an average five 4% increase on asset based customer contract renewals and deferred pricing agreements that were negotiated during the quarter.
In 2022 total asset based revenue was $3 billion, a daily increase of 17% in the highest ever for a b F <unk>.
Total tonnage and shipments both grew approximately 2%.
Total revenue per hundred weight increased 14.5% with an average seven 3% increase on customer contract and deferred pricing agreements renewed during the year.
The full year non-GAAP operating ratio was 86, 4%, reflecting an improvement of 240 basis points year over year, and 1100, and 50 basis points over the previous six year period.
As we look at January trends the slowdown in the general economy has impacted customer order quantities, and resulting shipment sizes compared to January 2022.
On a preliminary basis, our January 2023 asset based tonnage increased 1% and shipments increased 7% year over year.
For additional details on our January 2023 trends. Please refer to our form 8-K exhibit to the press release.
And our best asset light business total fourth quarter revenue was $572 million, a daily increase of 7% versus fourth quarter of 2021, and reflecting a full quarter of mobile operations in 2022 compared to only two months in last year's results, but also offset by a slowdown in customer shipping volumes.
Softness in market rates and changes in business mix.
In the fleet net segment events and revenue Peruvian increased over the prior year period.
And for all of 2022 asset light revenue increased 60% over 2000 $21 billion to $2.5 billion, reflecting the impact of the full year of mellow and strong customer demand for logistics services, particularly in the first half of 2022.
Fourth quarter asset light non-GAAP operating income was $11 million and for full year 2022 totaled $90 million, an increase of 82% over full year 2021.
Fourth quarter asset light EBITDA was $13 million and totaled $99 million for all of 2022, a 74% year over year increase.
We provided preliminary asset light business trends for January 2022, and the form 8-K exhibit to the press release filed this morning.
Current trends in that business continued to be softer, reflecting the recent demand downturn slowdown.
In 2022, net capital expenditures, including equipment financed totaled to $211 million.
2022 expenditures for revenue equipment totaled $93 million, most of which was for our art best asset based operation.
Depreciation and amortization cost on property plant and equipment totaled $127 million.
In addition, amortization of intangible assets was $13 million in 2022.
As in 2021 manufacturing delays in parts shortages impacted us in 2022 and as a result, we had to reduce some trailer orders and a portion of our asset based equipment and real estate projects were pushed out during the year and into 2023 four.
For 2023, we expect total net capital expenditures of $300 million to $325 million, including equipment purchases of approximately $175 million. The majority of which is where our best asset based operation.
As I mentioned, our 2023 investment plans reflect catching up on some 2022 equipment and real estate projects as well as 2023 investments above last year's levels and equipment.
To support our growth plans toward our long term targets 2023, depreciation and amortization costs are estimated to be approximately $130 million. This does not include amortization of intangible assets, which is estimated to be around $13 million for 2023, primarily ready to purchase accounting amortization associated with the Belo acquisition.
We are very pleased with our financial results in 2022, our financial strength and century loan commitment to effectively meeting customer needs positions us to navigate market challenges effectively while focusing on our strategy for long term growth and sustained profitability.
Now I'll turn the call today.
Thanks, David Good morning, everyone.
I'll provide an update on the asset light side of the business and give a high level overview on yield.
We continue to see benefits from an improved truckload offering as well as benefits from the <unk> acquisition.
Timing of that acquisition has been particularly favorable as I brought us more contractual business and better procurement in the spot market.
While spot truckload spot rates declined sharply in the fourth quarter, we still grew shipments which is a testament to the strength of our truckload solution.
We continue to focus on profitable shipment growth in pursuit of our long term financial targets, despite market pressures that impacted us in the fourth quarter.
Shorter term we are also focused on what we can control and part of that is managing calls we continue to invest in our existing team with a focus on employee productivity.
Additionally, we have better capacity capabilities and are continuing to benefit from all those carrier management approach.
On the asset based side pricing is also around rational and our focus continues to be on profitable growth and effective cost control.
We have submitted our general rate increase in early November and we will price appropriately to reflect our high quality service offering.
As we enter our 100th year, we continue and evolve to better serve our customers, which positions us well in any market environment, we have diversified our solutions and worked diligently to integrate them. So customers have seamless access to our services. We are streamlining our business from the initial interactions with our customers.
So the day to day execution and are seeing the benefits of this strategic work.
We have built additional revenue streams through solutions like dynamic pricing and you pack, which supplement our published LCL business and allow us to flex based on customer needs and market dynamics in times like these we strategically you use these tools to fill empty capacity with profitable transactional shipments which up to this.
<unk> has enabled us to avoid furloughs or layoffs and provide a more sustainable service offering while being better positioned for profitable growth towards our long term targets in short a big win for our best our employees and our customers.
There's debate in our industry about a technology centered versus a human centered approach. We believe the key is having a blend of both using technology to improve efficiency for employees, while giving our customers the choice and the ability to seamlessly switch from technology, driven solutions to human driven ones based on their needs at that moment, we are.
Pleased with the progress we have made and the feedback we've received from our customers having productive employees is critical and we are pleased with the productivity improvements we are seeing with having all of our truckload employees on the same operational platform.
With 100 years of experience, we are uniquely positioned to help our customers find the best solutions for their supply chain needs, taking a broader logistics partnership has benefited both segments of our business. It has enabled ABF to have a better selection of freight with the ability to choose shipments that fit best within that network and has allowed us to say yes.
Two customers, who move freight another way, but won't art Vesta coordinates coordinate and centralize the logistics experience.
So we began a pilot that would expand broker to LPL to transactional shippers and through this we learned some important lessons as a result of our close relationships, we were able to gather valuable feedback from customers and our LTE all carrier partners and learned that there were some places that experience can be much more efficient.
Using our internal tech team and leveraging our 100 years of experience in the <unk> industry.
Quickly stood up a proprietary system to address the inefficiencies identified.
While this project is still in pilot phase we are encouraged by the early results and look forward to expanding the pilot to serve more customers now.
Now I'll turn it over to Dennis.
Thank you Danny and good morning, everyone.
Our focus remains on creating value for our customers and we have taken important steps to help us advance this goal, including strengthening our organizational alignment and collaboration.
And making strategic investments in technology.
We have tightened coordination across our sales marketing operations and service teams, which enables us to be more productive and efficient while providing a more seamless experience for customers.
You hear us talk a lot about our customers and we are celebrating our 100th anniversary. This year because they continue to trust us to solve their logistics challenges.
When they win we win and we strive to make decisions with a customer focused mindset.
Of course that means having a superior service offering that they value, but it also means serving them efficiently.
Technology is a big part of making that happen and over the last few years, we have been diligently working to build systems to give our customers a best in class experience.
We view this as an investment that strengthens every point on the customer journey.
Providing a best in class experience throughout that journey starts by giving our employees the tools they need.
So we work with a disciplined approach to improve system and process efficiency.
An example of this is our city route optimization project, which has already been rolled out to about a third of our service centers, which handle nearly half of the freight and the ABF network.
This deploys advanced analytics to dramatically reduce the amount of time. It takes our people to plan pickup and delivery routes. So that they can focus more on managing the operation in real time.
Locations using this technology, we are 80% more effective at reducing cartage in the fourth quarter.
This is just one example of how we are relentlessly pursuing better more efficient ways of doing business.
Customers also want better supply chain visibility and based on their feedback we began building a platform to enhance that visibility across all of our solutions.
This is no small feat given our breadth of mode options and capacity sources, but we know it's important for our customer success and an opportunity to enhance our value proposition for them.
So we will begin testing with customers later this year.
Additionally, we just launched our redesigned website at <unk> dot com and will be rolling out enhancements there throughout the year, improving the site's functionality and enhancing the user experience.
Our customer needs to drive our strategy and innovation investments.
We are in a strong position both to listen to and act on customer feedback.
The pilots, we've been running with our customers to transform the way they handle freight are providing encouraging results and we're excited to share more with you about that solution. Later this quarter in short innovative technology is an important driver of growth and efficiency for our company and an important differentiator for art best with our customers.
Despite the softening occurring in our industry and the economy does designing and running efficient and effective supply chain has never been more critical.
The opportunity for us is as significant as it has ever been.
Shippers have largely shifted their focus from just securing capacity to improving supply chain efficiency and we are in prime position to capitalize on that opportunity as our integrated solutions and our managed transportation offering in particular are designed just for that.
Additionally, our customer pipeline is robust.
We are closing more and larger deals and more customers are using more than one of our solutions.
Customer retention remains strong and with our diversification across multiple industries, we are positioned better than ever before to perform through any cycle.
It's not uncommon to have customers, who change companies, even take us with them as their logistics provider.
Recently, I was talking with a customer who did this they would use us to manage their transportation at their prior company, but when they joined the new organization the solution. They needed help with the most was truckload. So that's where we started.
Hearing these stories from customers is a testament to the deep relationships, we have with them as we partner to build the best supply chain for their business.
I'm very proud of what our entire team accomplished this past year.
Our long term focus on customer value creation, our breadth of integrated solutions the expertise of our people and our tech savvy and innovative spirit mean that we are poised to capture the large market opportunity ahead of us and reach our long term financial targets, regardless of the environment now Judy I'll turn it back.
Over to you.
Thank you Dennis before we conclude I first wanted to take a moment and thank David Cobb for his contributions to art best David recently announced that he will be retiring later this year and we are actively working to identify his successor when David joined the organization in 17 years ago, We had $1 9 billion in revenue.
And 97% of our revenues.
I'm from the asset base side of our business. David has worked alongside me and other leaders every step of the way to help transform arc burst into the integrated logistics company. It is today. He has led with integrity and scale, helping us navigate many changes and on top of it all working with David has been a.
Pleasure, we will Miss working with David when he leaves in October but wish him the best in his retirement.
As we close I want to reflect one last time on our strategy and position supply chains have never been more critical or complex, we regularly revisit our strategy to make sure it's sound and that we're executing well against it when customers needed capacity, we were positioned to serve them and grow with our own.
Assets in our network up currently over 95000 carrier partners and now with customers looking for efficiency, we are well positioned to deliver we have an incredibly talented group of employees, who are experts in our field, including a nearly 500 person in house technology team building and implementing.
<unk> systems to make us and our customers' businesses more efficient our breadth of solutions and our innovative mindset allow us to build flexible resilient supply chains. While there are some macroeconomic headwinds art mess has demonstrated resilience throughout its history. We are ready for what's ahead, but this year and beyond.
Yeah.
I want to close by thanking our current and past employees, our customers partners and shareholders for helping us reach our 100th anniversary.
You for the opportunity to serve you we are proud of what we've accomplished but we are just getting started we're committed to keeping the global supply chain moving delivering on our goals and driving growth as we look forward to our next 100 years that concludes our prepared remarks, David Humphrey. We can now open the call up to question.
Okay, Frank I think we're ready for some questions.
Thank you.
If you would like to register a question. Please press the one four on your telephone.
You will hear it III prompt to acknowledge your request.
If your question has been answered and you would like to withdraw your registration. Please press. The one followed by the three one moment. Please for the first question.
Yeah.
Our first question comes from Chris Wetherbee with Citigroup. Please proceed.
Hey, Thanks, good morning, everybody.
Good morning, Chris.
I guess I wanted to start on demand trends and what you guys are seeing in the asset based business. So if we look at the monthly tonnage.
Looks like it decelerated a bit over the course of the quarter, but then the January number I think was plus one so maybe it looks like a little bit of a reversal of that so don't necessarily want to get too hung up on any one given month, but kind of get a wanted to get a sense of what you're feeling in terms of rounding the corner on 2022 and coming into 2023 in terms of customer demand and LPL.
Okay.
Hey, Chris This is Dennis.
First of all we did see a deceleration as the quarter progressed certainly.
In a weakening environment retail led that but of course we.
Have seen some softening as the quarter progressed and manufacturing as well.
Really as we progressed into January .
The trends are similar I mean look at the year over year number but.
The demand environment feels very similar to where it ended the fourth quarter.
And certainly.
I'll, let Danny comment if he has any other things to add.
That's what Dennis has consistent it's broad based.
Dennis said retail is leading but I think we felt weakness across.
Maybe.
Representation of what we see is really what's our managed customers.
We have a very high retention rate really can't remember the last time, we lost a customer necessarily that but we've seen a deceleration in top line revenue for that which is meeting our customers aren't shipping as much inside that business, because we see the whole supply chain. So I think that's representative of really what we saw across all of our business through the fourth quarter and even into the journey.
At this point.
Yes, that's true that trends consistent across asset based on asset light.
Customer retention is still terrific.
The customers in general are shipping less across the board.
Okay. That's helpful color and just a follow up on pricing. So I noticed in the 8-K, you mentioned that the increases ex fuel in January are coming in on the <unk> side in the double digits kind of getting a sense just what your feel is about the sustainability of that level of pricing power.
I know comps clearly has something to do with that as well as the year progresses, but wanted to get a sense of how you're sizing up sort of the sustainability of really good pricing power in the wholesale business as we move through some of the softer tonnage environment over the next several months or maybe several quarters.
Sure.
This is Dan again.
Pricing environment still rational we really haven't seen weaknesses across that piece of it is obviously not the same as last year, but if you look at our increases in the fourth quarter on deferred contracts like you mentioned, what we're seeing in January with the revenue per hundred weight.
We're comfortable that we can continue to price and price above inflation as.
As we go forward, our transactional business that we talk about it.
It gives us strength to helps us have more confidence in the core business and what we can do with the price levels there.
But right now we again I would say that it's consistent with what we've seen through the fourth into the into the first quarter. So far.
Okay. Thanks, very much for the time this is more I appreciate it.
Thanks, Chris.
Our next question comes from Ravi Shanker with Morgan Stanley . Please proceed.
That's why everyone Congrats David and congrats to everyone our best what the 100th anniversary.
There was a perfect catalyst of hosting another analyst day and give us Some limited edition swag, but that's just me.
We have some good.
Yeah.
Uh huh.
Yeah definitely be good catalyst.
So just to kind of follow up on the previous question and kind of how do you think about that algorithm between tonnage growth and pricing kind of at what point is there such a thing as too much price that you'll kind of dialed down to get some more volumes to kind of drive up the operating leverage or just a little bit of some background to that process would be helpful.
Sure Robbie this is Danny again, I'll start and maybe Dennis may have some more.
We are seeking the right balance, but I think the key to that is we have more visibility than we've ever had we're able to make decisions.
My yield team meets with the operations team with ABF really every week, but really conversations going on every day and we're able to make decisions about what we want into our network and again, having the ability to have the core business kind of that committed long term business and then fill in where we're having capacity with with transactional is really unique and gives us.
It's an advantage in how we approach the marketplace and so one of the biggest things that we're able to do we'd mentioned nothing.
That we haven't had a need to furlough or lay off employees that puts us in great position for our long term targets. If the market turns with that we can move from transactional to core business as our customers demand comes back and the approaches and that that business is at a higher revenue per hundred weight than the transactional business, but the transactional business is profitable and puts us in a great position right now.
That's really how we were thinking about it we kind of adjust as the market goes and so the flexibility is the key there that as the market dynamics change, we're able to bend and flex to the right answer for our company.
Ravi. This is this is Dennis just just adding there.
When you look at what our pipeline looks like for <unk>.
<unk> business that strengthen.
And we have more opportunity really then than seen in a long time to grow that demand base and we think about where we're positioned as an integrated logistics company, we're seeing more opportunities and able to manage this is Danny you talked about what business we really.
Can take and want in that asset based business and so we.
We have the capability with that integrated logistics approach.
To be able to really.
Optimize that answer for us.
Got it that makes sense.
Maybe as a follow up can you just parse.
Some of the differences in the outlook, you're seeing out there between your retail customers in your industrial end customers. I think there is some expectation that retail customers might see normalization fairly soon but industrial those might take longer.
Can you remind us of your mix of the two of them and also what the outlook difference might be between them.
Yes, certainly.
Manufacturing is still the leading.
Part of our customer base and its about little over a third of our customer base.
And then retail.
It follows behind that but in the in the retail industry.
We're seeing some normalization of inventory levels certainly what we're hearing from most of our customers is that they are back either at or near pre pandemic levels, but that does vary within that does vary within the retail space.
Certainly by the type of retailer.
And so we see some different different trends within that but on the manufacturing side of things I mean, certainly as I mentioned that that's lagged a little bit the retail.
Weakness and so we saw we saw retail weakness is probably a little bit before we saw the manufacturing weakness that showed up really as the as the fourth quarter progressed. So.
That's really what we're seeing there.
It sounds good thank you everyone.
Thank you.
Our next question comes from Jason Seidl with Cowen. Please proceed.
Thank you, operator, Hey, Judy Hey team good morning, David Congratulations.
Couple of quick questions.
Thank you very much that's all you're so welcome David well deserved Sir.
It's a pricing a little bit here, you know were still seeing I think what you would call it good and rational marketplace, but you did see some sequential drop in terms of your rock contract renewals I think in your slides it said 480 bps.
We're getting it closer to a point, where we're starting to worry about being able to price above sort of your cost inflation, which everyone is seeing a lot of costs going up right now and number two are we are we feeling that you could see a drop off in volumes if the economy slows that could be a detriment to the pricing market as we move throughout the year.
Sure.
Yes, Jason this is Danny so two things one.
Just the levels that you talked about five 4% in fourth quarter. If we go back is still probably a top 25th percentile for US all on increases it's is still a rational market as far as continuing ahead, yes, we feel confident we can price to cover inflation and also capture value and our service offering.
As we go forward I think the other piece is still is to look back at over the two year stack of the pricing improvements that we've had it puts our core business had a really great level that that takes pressure off of trying to get larger increases if you're just trying to cover the inflationary pieces of it that you go forward.
Your other question with regard to does declining demand put pressure is kind of what I mentioned before I think we feel confident right now that we have transactional lever that can keep us keep our employees active in key profitable shipments into our business.
That takes some pressure off of the price on our core business.
And again, we will keep it going.
We will keep focusing on and pricing above inflation and we also have the network and the the the employees. So that as demand returns that were positioned for it. The other piece is we're a logistics company and so as customers come back to us from a pricing standpoint.
<unk> is the immediate thing they want to we're gonna have a supply chain discussion with them and talk about our managed operations and what they're trying to accomplish with their business and so if it really is to a point that we can handle that in ABF at the price level. They want we're going to move the business into our managed operation will service the customer well might margin off of it using our logistics partners and so we're just.
Well positioned no matter, which way the customer returns.
That's good color wanted to get my next question here on Modelo, I guess, Judy where where do you think it is relative to your prior expectations. When you guys bought it and then looking forward. The market is what the market is for brokerage, but are there any are there any levers on the cost.
Or anything you guys can do to sort of improve the productivity there.
Well it has met our expectations in the initial year and are in a little bit here and we were you know that the.
The performance last year for all of asset light, but in particular the truck load solution was was good.
And you know one of the critical areas are actually two things one you know.
Just the knowledge of that capacity and you know buying and.
You know the approach the business model that was really used their ads fully.
Adopted into what we're doing today and successful and then the opening up of customer opportunities by having a greater truckload solution at scale has really helped us and we are on track with the EBITDA targets as we closed out the year and that's what we had predicted and so we feel good about that but.
You know I do.
Hear what you're saying about the current environment. It is certainly depressed I'm, just an absolute spot market.
And you know we're navigating through that we do have some cost reviews going on too.
Better positioned.
S. A with costs that are appropriate I think we've already talked a little bit about the technology areas of advancement trying to enable our people to be more efficient and all of that is going to help us as we move forward, but I wanted to say this you know we're focused on those 2025 targets, we want to grow this and we're going.
To position ourselves to be able to grow and that's the environment that we're in right now is not going to last.
Forever and we feel like we're in a good position as we come out of it.
Yeah.
Thanks, Judy and team appreciate the time as always.
Thank you.
Our next question comes from Jordan Alger with Goldman Sachs. Please proceed.
Hi, Yeah, just on the cost side for the asset base. So maybe can you talk to.
Some of the lines that you may be able to lever as we in this demand slowdown are you doing things on head count additional stuff on purchase transport just trying to get a sense for you.
The ability to maintain your O R over the course of the year and at least for the start of the year, what could be a softer demand situation. Thanks.
Yeah. This is David I'll start off here and others have something to add but.
I've mentioned, a couple of things in the opening comments just about a progression.
In the quarter, where we made some ground on outside resource utilization and that comes with as.
As we've mentioned having that good employee base and we're able to.
To do more of that internally, which we like to do and so we see opportunity there as we move forward as we get our team more productive.
He did a lot of hiring in 2022, and so we expect that team.
Two to improve and their productivity as we move forward. So that's one area I think the other area is the repairs and maintenance is one of those items that I called out where we had some elevated costs. Some of that is due to the the equipment replacement cycle and timing of that but some of that's just inflationary cost in the repairs and service side of it.
You know that we were seeing but but.
We can make some progress on that as we have a good capex plan in place and as we bring on this some of the scripts in that equipment.
It didn't didn't get delivered until late.
Late in the year and into <unk>.
2023, and so this is our 2022 or so im talking about so so there is opportunity there as well but.
So those are probably some of the as we move forward areas, where we can see improvement.
And then the head count front I mean, do you expect it to stay relatively static for now or whats your thoughts on that.
Well I think that's obviously going to be dictated by our business levels to certain extent, but.
Where we are.
I would say just moving from December too we've been hiring through the year of 2022, but moving from December to January roughly kind of flattish right now and then we're certainly going to monitor that as business levels.
Proved so well you know the other thing David is naturally we have retirements right you know and you know that that's something that we're focused on and making sure that we have people in the right places, but we you know we really have that opportunity as we go and then our visibility into the network about you know the business volumes that we have.
And given locations has never been better it's one of the reasons why some of the transactional business that he's talked about already works well for us and that really provides an opportunity for us to better manage our costs and we have a pilot of our city route optimization Tech.
<unk> and initial results of that improved productivity by a percent and a half and also we had 67% reduction in cartage.
Those locations and that's better than 25% reduction in some other locations. So you know not only do we just have the peer matching of the head count to the business levels, but we also have this type of work that's going on to optimize as well as the ability to attract that transactional or quoted business.
To best serve our needs when we have those in the network.
Great. Thanks, so much.
Our next question comes from Jack Atkins with Stephens incorporated please proceed.
Hey, great Good morning, and David I'll add my congratulations to the others.
Thanks for thanks for all the year.
So I guess, maybe kind of a kind.
Kind of for you on this David I mean, as you sort of think about the business here in the first quarter. You know you guys have really highlighted all the efforts that you've that you've undertaken to make the business more resilient through cycle.
And make it more dynamic in terms of.
Operations I mean, as you sort of think about it.
We ended the first quarter you highlighted in the 8-K I.
I think.
Average.
Sequential deterioration in fourth quarter to first quarter about 400 basis points, it's greater than that during periods of economic uncertainty.
Should we think about you guys performing better than you would historically based on all the items you just flagged in terms of the business processes that you've implemented.
Yeah, Jack you know what.
There as well.
We give that point of reference there is a historical sort of number and that's a that would be our intention to try to beat that.
He was certainly would try to we think it's achievable to get our cost per shipment kind of in a lower place.
There's opportunity there and in in those areas you know that Judy mentioned from technologies, and then as I mentioned around.
Our stable workforce.
Certainly the macro though is going to dictate.
A bit of things and so and have an influence and so we'll manage carefully through that but but the but just it's.
It's not about managing quarter to quarter, it's really about staying focused on these longer term.
<unk> targets and I'm excited about that for the business.
Okay. Okay.
So.
Just sort of who we asked you to watch how that on Volta. This year and then I guess for my follow up question.
You know as you sort of think about the second half of this year you have the labor negotiations.
I know you don't want to.
Bring the bargaining table to the fourth quarter conference call, but is there anything you can kind of maybe help us kind of think through in terms of timing.
Yeah.
There was another large union employer, they reported last week that it doesn't feel like they are expecting a significant step up in their expenses related to their new contract. They feel like they are sort of.
Towards the market there.
Their business has been sort of keeping up with inflation is there anything you can maybe help us think through because I know that's a point of concern for investors that there could be some labor inflation in the second half of the year. Thank you.
Well you know as as we always are.
We're prepared for what's coming in terms of the contract negotiations I felt like you know our team has a has prepared and planned.
And we're in a good place and.
Our leaders are regularly in the field with our employees and hear directly from them.
About what's on their minds and so we're in a good place I feel like that.
Very experienced and I've been through a number of these and you know they're all different.
Different but you know as long as you're prepared and you had the good approach and intentions in information you know typically we can work our way through this and and so you know it.
Obviously between.
You know now and.
The expiration of the contract there's a lot of work to do and so we're going to stay focused on that.
Okay would you expect it to be a win win win I think is what UBS framed it up is that your expectation as well.
Well I mean, you know I really rather not comment on on that because you know its still has yet to be worked through but.
Certainly you always want one a winning situation a winning outcome.
Okay. Thank you.
Our next question comes from Scott Group with Wolfe Research. Please proceed.
Hey, guys. This is actually Aaron on for Scott.
I just wanted to follow up a little bit on the January tonnage.
The the.
The deceleration throughout fourth quarter, and then you know sleep.
Got.
I'm just curious like how that is versus normal seasonality I know that you said that the December versus January trends are pretty similar but I'm just curious like how that is versus seasonality and.
What youre kind of expecting seasonally or times throughout the quarter.
Yes, there is.
Just back up a little bit and just talk about for the fourth quarter, you know certainly some month to month changes.
But when you think about sequentially fourth quarter compared to third quarter. It was one of the worst sort of periods in terms of tonnage.
And kind of our past 10 years.
But sequentially versus December .
January tonnage and shipments are up about a one.
1% when typically that's a sequential trend that's lower from December to January . So this is it's hard to comment really about one particular month.
But I would say, it's trending above normal seasonality I mean, I think certainly the customer demand environment is similar though.
Got it Okay, and then just quickly on fuel and how how should we think about the net impact of fuel. This year I know that there's some tougher comps.
Later in the year I guess, how do you guys think about that second half could that be a potential headwind.
Midyear.
Yes, certainly fuel is a big part of the overall revenue.
You know that we will have an.
<unk> the dollars per shipment.
We are.
Not sure where the price will go but as you mentioned I think the fuel prices in 'twenty 2022 kind of peaked in.
In the spring.
Yes.
From this level there is.
It's lower now versus when it was in the spring of last year of 2022, so so that'll be a little tougher comp, but you know fuel our fuel surcharge mechanism works really well in terms of.
For the customer as well as for us and so.
It just really is.
There's a lot of impacts of fuel in our business and our cost and so that fuel surcharge mechanism serves to service to cover those costs.
Okay again, thank you for your time.
Thank you.
Our next question comes from Todd Fowler with Keybanc capital markets. Please proceed.
Hey, great Thanks, and good morning.
I guess I wanted to ask on the growth plans I know in the Capex, you've got I think it's like 55% to $65 million earmarked for real estate.
In this environment I know you've talked about expansion.
Going back you know over the past year or so but as the environment changes how much flexibility do you have an expanding out the network at this point and maybe you can just talk about the cadence and your thoughts around expansion in the environment. Thanks.
Yes.
Good.
You know that real estate plan for 'twenty three is similar to what we did in 2022 and as we've talked about we.
We have.
We haven't invested in that area.
In a number of years and it's great to have the cash flow and the great balance sheet that we have.
To position ourselves in a better way and so.
We're looking to be able to to have the capacity to expand our shipment count by the you know mid single digits again and bye.
By the end of 2023 with that from just the capacity that we're adding from a real estate perspective, and so like Judy said.
Positioning ourselves to grow and with every recessionary freight recession. There is an eventual upturn and so we want to be positioned for that and that's what our plans call for it and we're taking a measured approach around our capex program and replacing equipment.
And our timely you know sort of total cost of ownership perspective on our equipment side and so you know as we said this is a little heavier year because of some of the spillover from 2022.
And some catch up that we needed to do there so hopefully that helps.
Yes, David It makes sense and certainly we appreciate the short term versus the long term you just kind of thinking about the.
<unk>.
The startup costs in that piece of it but that makes sense, maybe just for a quick follow up Judy I'll I'll take the bait I think he teased about it a couple of times with.
The handling technology that you have and maybe some more details later in the quarter, but.
What are you willing to share with US now it sounds like maybe partnering with some customers and having them use that technology is that something that would be you know a fee based service or they'd be paying you for that or or what are you willing to share with us now with the teaser that you put out here today.
Well you know I mean, I think it's a they are technology and equipment and process that we've talked about before and you know not only are we piloting that within the ABF network, but we have opportunities that have presented.
Presented themselves with customers outside and Ah within the work that they're doing and so we're excited about it and obviously if if it's work that we're going to be doing for our customer once we work through the pilot we would eventually be paid for that and so sometimes you know when you're in a pilot.
At scenario.
You have to have some flexibility over the things that you do with them, but it's an exciting thing it will be later in the quarter. When we talk more about it but you know it is connected to the again.
Again, the technology equipment and process that we've referred to before.
And so look forward to sharing more.
Alright, it sounds good we'll stay tuned thanks for the time this morning.
Thank you.
Our next question comes from Ken <unk> with Bank of America. Please proceed.
Hey, great Good morning, Judy David and team and good morning, David again, thanks, Thanks for all the discussions over the years and congrats.
Thanks, Ken.
Yeah, you got it Dave.
If you could talk about the shift in pure pricing ex fuel I mean, I've heard the discussion through the Q&A, but maybe I'm just a little confused here. It seems like you've talked about low single digits in the fourth quarter now with double digits in January in the face of what still tough pricing comps from early 'twenty two am I am I missing something there or.
Or are you talking about different different categories.
So when we talk about double our double digits thats really on that core business that we're talking about the long term committed price that we've offered to our customers kind of we may have call. It published at some point in the past and its year over year in January in January .
That's what we're referring to and then that the other piece is just that contracts that renewed in the fourth quarter, we're at 5% year over year, yes, and so really it's it is different.
It's different categories, but it's it's just indications of the strength of the pricing environment is what we're trying to give you just gave you color in a couple of different areas on that.
But then on a on a revenue per hundredweight. It looks like you know if you if.
Low single digits, and then you remove I guess the comps.
Are you, saying it is holding firm or is it decelerating as you're moving forward into January .
Yes.
Yeah.
So the core business like we said, we kind of gave those numbers I think when you look at the overall piece you get mix involved in that and so the transactional business that we are bringing on to fill submitted capacity could be at a lower revenue per hundredweight, but like I mentioned, it's profitable, but from a revenue per hundredweight standpoint.
It could be that factors into the mix that you are getting too. So I can let me let me try this on the what we call our core customers. That's our regular customers that are shipping and and those are that have published rates and so that's what we're referencing there what Danny just talked about.
Does win and particularly when Windows business levels are weaker you know and when the network needs to be filled in certain lanes, we're supplementing that with a transactional business that comes at the market and so you can have some differences and the <unk>.
Revenue per hundred weight comparisons, both because of that and also because of the profile of the fright. That's involved but you know I think Dan he made the comment earlier we're.
We're seeing the pricing environment be strong and we're not seeing any real change to that.
That's a really helpful clarification, because I think there was some concern on on what is going on in the pricing market.
Okay.
Yeah.
Judy if I could follow up on Jack's question, but before I just want to understand.
They kind of run through on costs and your expectation now I guess for operating ratio.
He made a structural move it seemed like into the into the eighties I think after kind of 20 plus years in the high nineties.
How do you view this maybe David with with kind of as volumes decelerate.
You talked about some of the costs and then the cost levers you've got.
But with a sequential normal historical sequential shift do we do we see that bounce back up above that 90 level.
I guess, what your thoughts are as we go into 'twenty three.
Yeah, well just just in reference you know short term kind of a short term comment here and just talking about fourth quarter to first quarter.
You'd think about that 400 basis points and if you added that to our fourth quarter that would give you a first quarter. That's that's probably the second best first quarter award in the past 20 years for ABF, despite it being a weak freight environment and so.
No that's a that.
That's the short term like I said.
We're building this business for even a longer term.
Perspective and to operate in those long term targets operating profit margin targets of 10% to 15%.
More consistent.
And that's for an annual kind of or our operating profit margin perspective, and we know that first quarter is typically our weakest quarter of any given year.
So you know what.
Its share that with you from a from a quarter perspective, we're not trying to manage those quarter to quarter again, we're trying to to build for a longer term view.
No. That's helpful. I guess I'm, just trying to understand given that fourth quarter was such a maybe a flattish sees.
Seasonal business and I know, you're not typically as retail exposed, but given it was flatter if that first quarter then becomes.
Even better than that seasonal shift becomes a little bit different than normal.
Sequential shifts between four came a long queue.
Well I mean, I think it's just a I think all of this is really hard to read right now I mean, I really do but I think we're better positioned than we've ever been to see you know what the opportunities are and where we need the business and help customers navigate through that and then also benefit ourselves.
As a result so.
But it is you know, it's an interesting environment to try to predict for sure.
Great I appreciate the insights and look forward to the progress on the negotiations thanks Judy.
Thank you.
It looks like we're going to go over just a few minutes, but I got a couple more that want to ask some questions. So we'll go ahead and per se.
Our next question comes from Ari Rosa with Credit Suisse. Please proceed.
Great Good morning, and I'll, just echo everyone else's comments.
Thanks, Congrats to David on the pending retirement, so one of the things and we've kind of been talking about throughout the call, but one of the things I think that was noteworthy was.
In the context of a challenging volume environment, we saw your shipment declines less than than competitors. It sounds like maybe the reason for that was you were using some of these transactional opportunities to fill to fill empty capacity I'm just curious could.
Could you kind of confirm whether or not that's the case and then also.
How easy is it to then clear out that business from the network when when volume returns or when demand returns.
Hi, This is Danny I'm glad that you got our point.
Yes, we are using transactional business to fill the empty capacity, we have in our network and again, you know I'm going to reiterate this profitable business as Judy pointed out its market price business.
We're making a shipment by shipment commitment on those and so has the ability to move that out of our network and bring on additional of the core business is by day basically as we so we see the demand from our customers. We can turn our dolls and we will pull back on some of the transactional business to fulfill the needs of our demands of our shippers as it comes back again.
Okay.
Got it.
That's super helpful. And then just I wanted to ask one I guess modeling question, perhaps but.
You mentioned the profit sharing bonus that's going to be paid to employees.
How does that get reflected in our results should we expect a step up in compensation expense than in first quarter or how should we model for that.
Yeah.
Well I would just say that we were glad to be able to pay for 2022.
The the highest.
Turn out on that.
Bonus or incentive and so are we.
We think that's a good thing for our employees and we're glad to be able to do that and typically as we when we have those programs we accrued for those throughout the year as we as earnings are made.
One in.
Particular quarter relative to the full year and so that's the way we do that it's accrued throughout the year as the process.
Got it okay very helpful. Thanks for the time.
Thank you Gary.
Our next question comes from Jeff Kauffman with vertical research partners. Please proceed.
You're very much well congratulations and.
David going to Miss talking to you. So I guess I'll have to ask you a question before you go.
Judy and Dave I'd say, a more strategic question.
So we're at $5 3 billion in revenue you expressed your confidence in achieving our long term targets by 2025.
I'm just going to assume 2023 may not push that all that much forward. So when I think about 23 to 25.
We got to grow revenue 35, 40% to hit the low end of that range organically.
Organically I don't know if it gets it there. So can you give us an idea of what types of potentially acquisitive growth would makes sense the way you're building the franchise and then the David part of the question.
Is with the Capex bump, there's not as much free cash this year, but your balance sheet looks very strong how high would you go leverage wise for the right strategic opportunity.
Okay, well and you know, we Jeff as you've seen us do with the approach that we're using is we'll look for opportunities that that adds scale to.
Our already existing.
The solutions that we're providing customers we're constantly listening to customers to see what they need.
And you know we have opportunities.
To advance our tech platform and what we're doing on some of these customer pilots and we also are always involved in the startup space looking at disruptive sort of technologies that are going to be either something that could help us.
You know better execute and perform or better achieve our results on the top line and then also to benefit our customers. So we have all of those things. We're very active in looking at what comes onto the market and I'm excited about how that Kid you.
You know make its way into the results for 2025, but I'll say this we don't have to have an acquisition as we see it to achieve those.
Those targets, but you know again, just like we did with no low if you see a company that's out there that has an approach. That's advantageous you know we're in a position where we can go after that but we do see a robust opportunities to invest organically, which gets you to David's question.
I would just say that generally speaking.
We would like to stay within an investment grade credit metrics and so.
We had a strong EBITDA.
We've got you know for.
For the year end.
If you were just to go one times at EBITDA, you could borrow up.
$400 million or so just under our additional.
Facilities that we have in place and so.
With total liquidity of $566 million at the end of the year, we feel like we're in a good place and.
Have a good solid capex plan for the year.
And investing into our business there with good returns and so we're excited about where we are.
Oh, that's my one and a half questions. So thank you.
Thanks, a lot Jeff.
Frank I think we've got time for one more question.
Our question comes from Bruce Chan with Stifel. Please proceed.
Hey, good morning, everyone.
Just want to follow up on some of the comments around having some of those brought our supply chain conversations with your customers and maybe understand a little bit more about how pricing works and the cross selling process.
You gave us a good rundown of all the benefits of cross selling in the slides so.
I guess thinking about all of those philosophically is there any inclination to maybe incentivize cross sold growth of growth in one part of the business versus another or is that just an entirely separate RFP and sales process.
And thanks, Bruce this is Dennis.
I would say that we look at our customers Holistically and so we think about.
What their supply chain needs are we're not typically going in and prescribing a specific.
Service for them until we understand their needs and so as we as we learn about their needs and their need shift and so we get into these conversations about whats going on their supply chain today, and what might be happening tomorrow.
And understanding their pain points and.
So.
That becomes then once we identify the need then we step into the process of understanding you know what what solution needs to be built and how those needs to be priced in so.
I'll turn it over to Danny case, he has any other yes, just a follow up on what Dennis said, when we think about supply chain do you think about supply chain optimization really the.
What we're seeing and that is if we had the right conversations we could eliminate costs from the supply chain, which takes pressure off of price and so there's not a need at that point to kind of kind of thinking as you described we were able to lower the overall by taking inefficiencies out of the supply chain and so customers are excited and that allows us to have the margin that we need on our business there.
Yes to add to.
Danny it's an order of magnitude different having.
Having a rate conversation for for cost reduction for our customer versus changing the way that their supply chain works and so.
If you are able to optimize how they are the frequency and the distribution points.
But theyre shipping product.
That that is a significantly different cost savings conversation than a rate conversation.
Okay. Now that's helpful color and I guess, maybe just to clarify and put it simply.
As your business is growing and as your service lines are growing or you know managing or optimizing more towards an all in kind of fully baked price for customers.
Bruce I would say that you know kind of as Dennis described we're having overall conversation theres still individual pricing components underneath a structure, but those vary depending on what the solution is to have it. So yes, we think overall holistically with our custom.
But then it still drives down the individual components after that.
Got it very clear thank you.
Thank you.
Okay, well I think that concludes our call. We appreciate everybody being with US. This morning, we ask you to disconnect now thank you very much.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect. Your line have a great day everyone.
Okay.
[music].
Yes.
Sure.
Uh huh.
Okay.
Okay.
Hum.
Okay.
Sure.
Okay.
Yes.
So.
Uh huh.
Sure.
Yeah.
Okay.
Uh huh.
Okay.
Okay.
Okay.
Sure.
Okay.
Okay.