ArcBest Corporation

Greetings and welcome to the ARCBES third quarter 2021 earnings conference 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 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded Tuesday, November 2, 2021. I would now like to turn the conference over to David Humphrey, Vice President of Investor Relations. Please go ahead.

Thank you for joining us today. On today's call, we will walk you through the details of our record third quarter earnings. Our presentation this morning will be done by Judy McReynolds, Chairman, President, and CEO of ArcBest, and David Cobb, Chief Financial Officer of ArcBest. Also joining us for the Q&A period will be Danny Lowe, ArcBest President of AssetLight Logistics and Chief Yield Officer. To help you better understand ArcBest and its results, some forward-looking statements could be made during this call. As we all know, Forward-looking statements, by their very nature, are subject to uncertainties and risk. For a more complete discussion of factors that could affect the company's future results, please refer to the forward-looking statements section of the company's press release and the company's most recent SEC public filings. In order to provide meaningful comparisons, certain information discussed in this conference call includes non-GAAP financial measures as outlined and described in the tables in our earnings press release. Reconciliation 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, the slides that Judy and David will be referring to here can be found on the ARCBEST website, arcb.com, in Exhibit 99.3 of the 8K 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. This quarter, we achieved the highest quarterly revenue and operating income in ARC Best history, demonstrating the success of our growth strategy and cost management efforts and validating our strategic vision for the company. These results further strengthen our record-breaking 2021 performance and bolster our leading position as an integrated logistics powerhouse. I'd like to begin by highlighting some key achievements of our record third quarter performance and continuing business momentum. Then David Cobb will take you through the specifics of this quarter's financials in greater detail. And finally, I'll offer a few additional comments before we open it up for some questions. As noted on slide four, for the last few years, we've been executing on a three-point strategy to drive revenue growth and improve profitability. These efforts are clearly paying off, as underscored by our profit margin improvements and the increased consistency of our financial performance. The strength we are experiencing in our legacy business, combined with the capabilities we gain with the addition of MoLo, ensure we are well-positioned to continue advancing this strategy, meeting the expectations of our customers, and driving growth and creating value for our shareholders and other stakeholders. This quarter, we are proud of the progress we made toward our goal of balancing our revenue mix. Each step of the way, our willingness to listen and our agility allows us to better support customers who often need both asset-based and asset-light solutions. Our asset-based business offers many advantages and resources that allow ArcVest to craft customized solutions using assets we already own and manage. ABF Freight flourishes when utilized alongside solid asset light services because of the options we're able to provide our customers. These capabilities have been invaluable over the last few years as we have worked to make our customer experience truly seamless across the full breadth of our integrated solutions. To advance the third tenet of this strategy, optimizing our cost structure, We're adopting innovative technologies that help us serve our customers in their preferred channels as an industry-leading digital partner and operate our business in a more intelligent fashion. Our digital capabilities continue to provide us with a significant advantage in streamlining processes, reducing costs, and augmenting human expertise. We stay close to our customers and carrier partners to provide them the services and connectivity they need in the way they want to access them. Our efforts to advance our strategy in each of these three areas are instrumental in helping customers drive the economy forward and continuing to unlock incremental value for our shareholders. Turning to slide five, our third quarter performance outpaced our already record-breaking year-to-date revenue and operating income results. For the first time ever, Our consolidated quarterly revenue exceeded $1 billion. We delivered strong revenue growth across the organization, as illustrated by the year-over-year double-digit percentage increases in all of our operating segments. Building on this significant momentum, we are growing and expanding as an integrated logistics leader. We added MOLO solutions to the ArcBest family. We remain laser focused on serving our customers with customized solutions in the midst of very challenging times. We are responding to tight market demands with agility, expanding our capacity and investing in the right solutions to meet our customers' critical needs at a time, a critical time for their business. We are excited that we can profitably flex, growing our company and expanding our offering to better serve our clients, creating new opportunities for employees, and value for our shareholders at the same time. Yesterday, we announced our plans to increase the return of capital to ARCBEST shareholders by entering into a $100 million accelerated share repurchase program. With the strength of our balance sheet and our ability to generate solid cash flows, utilizing a portion of our cash resources in this way allows us to invest in our stock which doesn't reflect ARCBEST's intrinsic value or our prospects for growth and value creation. Along with our dividend program, enhancing our return of capital in this way illustrates the belief we have in our long-term strategy to grow as an integrated logistics company, meeting the needs of our customers and carrier partners each and every day. Turning to slide six, And as I mentioned earlier, yesterday was a monumental day for us in our efforts to best serve our customers across a broad suite of logistics solutions. We successfully closed the previously announced acquisition of Molo Solutions, a Chicago-based company that is one of the fastest-growing truckload brokerages in America. Importantly, this acquisition moves us significantly closer to delivering on the strategic objectives I just discussed. Bringing our two companies together significantly accelerates our growth by increasing the scale of our truckload brokerage services. Together with Molo, ARCVEST is a top 15 U.S. truckload broker with access to over 70,000 carrier partners, solidifying our position in the $91 billion and growing domestic transportation management market. With the transaction now closed, We are embarking on an exciting new chapter in our company's history, driven forward by the innovative thinking of our people. The reaction of all stakeholders, including those at ArcVest and MOLO, has been very positive. We look forward to welcoming members of the MOLO leadership team to create a world-class management team that can bring these two industry leaders together as a people-first integrated logistics powerhouse. As you can see on this slide, the addition of MOLO has already moved us toward a more balanced revenue mix, which better represents customer transportation and logistics spend. The MOLO acquisition is an important step to build and amplify our powerful portfolio of shipping and logistics services and allow us to continue expanding ARCVEST's role in the transportation marketplace. We have an exciting future ahead, and we enthusiastically welcome the MOLO team to our best. Moving to slide seven, we entered this transaction with a strong balance sheet, and after making the closing cash payment and considering our cash investment in the ASR, we remain in a solid financial position. Our cash and total liquidity are at impressive levels, and we are in a reasonable net debt position on a pro forma basis. Though we are currently dealing with some manufacturing delays, we are continuing our investment plans to expand asset-based capacity to support our growth objectives, as well as our programs to return capital to shareholders through dividends and the accelerated share repurchase program we just announced. With our strong balance sheet and resilient and growing free cash flow, we have the flexibility and firepower to simultaneously invest in organic initiatives and external growth opportunities while accelerating returns to shareholders. And now I'd like to turn it over to David Cobb to let him provide more details on our third quarter results.

Thank you, Judy, and good morning, everyone. Beginning with some highlights of our financial position, we ended the third quarter with unrestricted cash and short-term investments of $468 million. Our $244 million of debt at the end of the third quarter included $50 million borrowed on our credit revolver and $194 million of notes payable, primarily on equipment for our asset-based operation. Composite interest rate on all of our debt was 2.8%. We're encouraged by strong customer demand, the momentum in our business, and the solid cash flow generation as evidenced by $389 million of adjusted EBITDA for the trailing 12 months ended September 30, 2021. The operating cash flow combined with our balance sheet capacity enables us to pursue accretive external growth opportunities like the MOLOA transaction, while making value-enhancing organic investments, paying an attractive dividend, and enhancing our share repurchase program. Our balanced capital allocation plan advances our growth strategy, building on ARCBEST's leading position as an integrated logistics company. Given our prospects for continued growth and value creation, our board believes the current stock price does not reflect ARCBEST's intrinsic value. As Judy mentioned earlier, we announced the $100 million accelerated share repurchase program with final settlement expected to be completed in first quarter of 2022. The $100 million authorization is in addition to the $42 million that remained available under our existing share repurchase program. On slide seven, we note that on a pro forma basis, considering our cash and debt position at the end of the third quarter, and after deducting the $235 million cash payment associated with the Mello acquisition and the $100 million accelerated share repurchase program, we would have a net debt position of $111 million, with total liquidity of $373 million, including our available resources under our credit revolver and our receivable securitization agreement. Regarding 2021 full-year net capital expenditures, we now expect them to be in an approximate range of $100 million to $110 million, which is lower than our previous estimates. Our equipment orders remain in place, but as Judy referenced and as we mentioned last quarter, there have been delays in the original build schedules of our asset-based and asset-light revenue equipment related to part shortages and manufacturing disruptions that have continued into early November. As a result, we now expect that a portion of our planned 2021 revenue equipment will not be delivered until 2022. In addition, other elements of our expected 2021 capital expenditures, including some real estate projects, research and development investments, and other miscellaneous capital items will also be delayed until next year. Therefore, we expect that approximately $40 million to $50 million of previously planned capital expenditures intended for 2021 will carry over into 2022. As stated previously, we are committed to increasing our investments in revenue equipment and real estate additions and upgrades above our normal levels to facilitate future growth and to improve the ability to serve our customers. These are priorities and they offer us the opportunity to generate solid returns in our business. We have a long-term plan for facility investments that include new service centers, expansion of existing facilities, and renovation of others. As a part of our long-term commitment to these growth investments, Our preliminary expectation for 2022 capital expenditures is from $225 million to $250 million. We're currently developing those plans, and we will share more details when we announce our fourth quarter and full year 2021 earnings. On slide eight, I'll highlight our consolidated information. As Judy mentioned earlier, third quarter 2021 consolidated revenues were $1 billion, reflecting a 28% increase over the prior period. On a non-GAAP basis, consolidated operating income more than doubled to $96 million. Our adjusted third quarter 2021 earnings per diluted share grew 112% to $2.59. The year-to-date effective tax rate that was used to calculate the non-GAAP EPS was 26.8%. And under the current tax laws, we expect our full year 2021 non-GAAP tax rate to be in a range of 26.5% to 27%. The effective tax rate may be impacted by discrete items that could occur during the remainder of the year. Slide 9 provides highlights of our key metrics in our asset-based business. Asset-based third quarter revenue was $681 million, an average daily increase of 21% compared to last year. The third quarter non-GAAP asset-based operating ratio of 86.7% is a year-over-year improvement of 570 basis points, and a sequential improvement of 230 basis points versus the second quarter of 2021. The year-over-year increases in the third quarter tonnage and shipment comparisons were impacted by our deliberate moderation of the number of transactional and UPAC household goods shipments we handled in order to serve core LTL customers. The increase in third quarter total billed revenue per hundredweight on asset-based shipments was impacted by higher fuel surcharges versus last year. Revenue per hundredweight on LTL-rated business, excluding fuel surcharge, reflected a double-digit percentage improvement. We also secured an average 8.6% 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. As you can see on slide 10, preliminary business trends for October reflect continued strong revenue increases on positive average tonnage and shipments. As we experienced in third quarter, the October asset-based tonnage and shipment trends have been impacted by fewer UPAC shipments versus last year, as well as increasingly stronger business-level comparisons in the prior year month. We continue to have strong customer demand in our core LTL business. Our core or published LTL tonnage and shipments increased double digits in the third quarter over the prior year third quarter, demonstrating continued growth and advancement of our strategy. In October, the sequential changes in average daily tonnage and shipments with these core customers compared to September were the best of what we have seen during the last 10 years, increasing versus September when there is typically a seasonal decline in these counts. Additional details on our October 2021 business trends can be found in the Form 8K exhibit to the press release. On slide 11, you can see that in total, the revenue in ARCBEST asset light businesses increased 39% versus the prior year quarter, reflecting strong demand in our ARCBEST segment and improved events and revenue per event in the FleetNet segment. Third quarter asset light operating income was $11.5 million compared to $5.8 million last year. Third quarter 2021 asset light EBITDA was $14.2 million compared to EBITDA of $8.6 million in third quarter 2020. Preliminary asset-light business trends for October have been provided in the Form 8K exhibit to the press release, which was filed this morning. Solid customer demand for our capacity options continues to be evident as October revenue for asset-light ARCBES segment, excluding fleet net, increased 39% versus October 2020, and with one less business day this year, that equates to an increase of 46% on a per-day basis. Margins on the net revenue are also running better than the prior year month. Now I'll turn the call to Judy.

Thanks, David. On slide 12, you'll note that our 2020 ESG report was released in the third quarter. It is the second ESG report we have produced, and it details the actions and progress we've made on environmental, social, and corporate governance initiatives across our business. I am particularly proud of our people-first response to COVID-19, which showcases how we put our people first every single day. The report highlights how we've grounded our actions in the ARCBEST mission to connect and positively impact the world by solving logistics challenges. Now and long into the future, we are committed to operating responsibly and creating long-term value for all of our stakeholders. This commitment includes a strong focus on advancing key priorities, including sustainable procurement, human rights, ethics, and community involvement. As our report demonstrates, we've made significant progress this year on our ESG journey. The Echovatus Bronze Medal that was awarded to us in March recognized ArcBest's sustainability performance among the top half of all rated companies and industries across the world. In April, for the third consecutive year, we were recognized as one of America's best employers for diversity by Forbes and Statista. At ArcBest, our people are at the heart of our success and we're committed to providing a work environment that embraces differing backgrounds and makes everyone feel welcomed and valued. We formally announce the diversity, equity, and inclusion efforts underway across our organization in our inaugural 2019 ESG report, and we're committed to publicly sharing the progress we are making in each report moving forward. On a local level, In May, we partnered with the Fort Smith Public Schools and invested a million dollars in the Peak Innovation Center to help prepare our communities and workforce for tomorrow's careers. The center opens next year and will serve 43,000 students across 22 regional school districts in our area. As we close out this portion of today's call, I want to discuss some of the major advantages of our customer-led strategy. We are well on our way to becoming a unified provider of integrated asset-based and asset light services. We are winning. We have great momentum. The strength of our results demonstrates how our breadth of services differentiate us and are truly better together. As shown here, when we cross-sell our services, we enhance our account revenue, our account profitability increases, and it's easier to retain customers. Our research also shows that more than six out of every 10 ArcBest customers utilizing our asset light services are also using ABF Freight for LTL services. At ArcBest, we work hard to see our business through the lens of our customers. As trusted advisors, we work directly with them to understand the challenges and put together creative, customized solutions to meet their critical supply chain needs. The markets in which we operate are large, and our opportunities with customers are significant. We've put the right people, resources, and tools in place to set ourselves up for success and ensure we continue to profitably grow our business and create value for shareholders. As we move into the future, we're also not afraid to change and adjust when needed. We've worked hard over the last several years to position our company for sustainable long-term growth and value creation. We're excited about our progress to date as well as the possibilities ahead as we increase our investments in our innovation, technology, and our people. Together as a team, we'll continue to find a way each and every day, and we expect that our efforts will continue to benefit our customers as well as our investors. And finally... From a position of financial strength, we have taken recent steps to further secure our future as an integrated logistics provider while enhancing the returns of those shareholders who are invested with us. Our purchase of Molo further accelerates our growth by increasing the scale of our asset-light business. The people, equipment, and real estate investments we are continuing to make in our asset-based business will facilitate future expansion in that portion of the business. Along with our quarterly dividend, the accelerated share repurchase program that we announced yesterday increases capital returns for our shareholders. The prudent actions we've taken in recent years have allowed us to move forward into the future in a position of strength and purpose. Thank you for your continued interest and confidence in ARCBEST. We are excited about the road ahead and look forward to reporting next quarter on our continued growth and success. That concludes our prepared remarks, David, and I think we're ready for some questions.

Okay, Sylvana, I think we are ready to take some questions.

Thank you. If you'd like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. One moment, please, for the first question. And our first question comes from Jason Seidel with Cohen. Please proceed with your question.

Thank you, operator. Judy, David, David, good morning. Good morning. Hey, Jason. Wanted to focus a little bit here on sequentially between 3Q and 4Q. I know historically you guys stepped down on the asset-based side and the OR a bit. But, you know, as I look at your commentary, you get the best core customer growth in your last 10 years. I think it's safe to say the pricing environment has never been better for LTL companies, at least not in my career, which dates back, I don't know, a minute now, but almost three decades. How should we look at that as we sort of marry up the two as we look to 4Q?

Yeah, I think, you know, Jason, good morning. This is David Witt. You know, historically, as you pointed out, we've seen an increase in the OR about 200 basis points from the third to the fourth quarter. You know, I would just say that I think, you know, we're seeing or we are seeing just, you know, endorsement of our strategy, first of all, just where we're seeing increased retention of accounts just because we're able to provide customers more than one service. And so that's enhancing, I think, our performance. or it is enhancing our ability to retain customers. And as I talked about, the strength of that core LTL business is showing up in October in a great way. And so if you think about that continuing, there's opportunity for that to produce good results as we move forward, not only just quarter to quarter, but I think beyond these near-term quarters. And so we're enthusiastic and optimistic about what we're seeing along those lines. And just kind of narrowing down into your question specifically around this year, there's obviously a lot of puts and takes, but we're continuing to see the higher purchase transportation usage, and that's really to serve a lot of those customers. And so we're getting compensated for that, but that's probably going to continue in the near term as we – We are successful in hiring, but that's just taking a longer period of time than we would like. And so we'll continue to see a higher level of PT than we probably normally have. You know, there may be some, you know, due to the supply constraints that you're well aware of, there may be some parts and maintenance costs that could be at a different level than we've seen in the past. But by and large, the business momentum is strong, the pricing environment is good, and we're serving our customers. So I hope that helps.

No, it doesn't. And my one follow-up is going to be on the share repurchase side. I understand the $100 million share repurchase, but your existing $42 million, how should we look at timing when trying to complete that? Are you guys going to be opportunistic, or are you going to be aggressive in the marketplace?

Regarding the $42 million, Jason?

Yes, yes.

Is that what you're – yeah. Yeah, that will kick back in once the ASR is complete, which, as I mentioned, matures in the first quarter. And so then that would be along the lines of opportunistic sort of buys at that point. That's right. Okay, perfect. Those are my questions.

Guys, appreciate the time as always, and congrats on the quarter.

Thanks a lot. And our next question comes from the line of Ken Hexter with B of A. Please proceed with your question.

Hey, good morning and great job on the quarter and the ASR. Dave, just on, or Judy, I guess for the progress of your innovative tech, what is left to spend? What's left to accomplish on there? Maybe talk about your goals and what that can mean for your operating ratio. And then just, David, just ARAP scaled, is that just a factor of the MOLO acquisition or is there something else going on there?

Yeah, I'll hit the ARAP. No, MOLO, again, we just closed that yesterday, so that is not in our third quarter results. It will be reflected in our fourth quarter accounting. The ARAP is really just a growth in the business. You see both of those kind of moving in tandem, I think, from year end on our cash flow statement.

Does that help, Ken? Yeah. Yeah, but it seemed like an outsized large gap, but that's fine.

Okay. You know, I think, Ken, I think you were specifically asking about the asset-based business. Is that right with regard to the technology piece?

Exactly. Yep.

Yeah. That's what I thought. Okay. And so we are seeing progress, you know, there. And I think, as you know, we have our pilot locations there. for the new mobile platform technology and process. And that's in about three locations, one of those being a distribution center in Kansas City. And so, you know, we've been experimenting with a lot of different approaches there and making good progress on the software and narrowing down, you know, what the ultimate answer will be. And so as we move into 2022, we're planning for another distribution center toward the end of 2022, and that's going to be in Salt Lake City where this technology is deployed. And so what's happening is the operating software, which is all-encompassing, it's our operating platform as well as running the flash process, is going to be in a larger number of facilities as we move forward. And we are seeing the benefits of that expansion. It gives us greater visibility on individual shipments. It gives us the ability to do better planning. It's a better claims answer, and it's a better work experience for our workforce, which all of those are really positive. And again, as we narrow down the different scenarios that we're looking at, we expect it to really begin to have some impact on the results. But we've disclosed, I think, what the costs are on a quarter, and then you can see it accumulated over the period. And just suffice it to say that we're positive on it, and we're excited about it, and there's going to be more to come on how all of that impacts the operation. But it's certainly designed to have a positive impact. We have improved the operating performance for ABF pretty drastically over the last five years, I think probably 750 basis points. And, you know, and this whole project has really not had, you know, the impact yet that it could have. And so it's going to be a contributor to you know, to future, you know, positive margin expansion, as well as what David talked about in terms of the yield environment. And remember, our labor contract goes through the end of June 2023, and it's got an overall 2% increase for wages and benefits in it as well. And so, you know, all of that comes together in a pretty good formula for you know, for continued improvement at ABF. And then I think David also mentioned the growth potential coming at us, and that's exciting too.

Yeah, that's what I was getting at. There still seems like there's upside from those investments. Oh, yeah. And then just if I can clarify before my time runs out, Dave, the 27% growth per day, obviously you just mentioned MOLO is not in there. Do you want to give a thought on what it is as you look for the quarter with MOLO in terms of your revenue per day?

Yeah, I don't have a stat for you, but what we've talked about with MOLO, and Danny's here also. He can maybe add some color if you'd like around MOLO. But we talked about MOLO having a 2021 revenue year of around $600 million. So if you think about us capturing a couple months of that, I mean, that's probably one way to think about revenue added to our fourth quarter. I think that's fair. So... I don't know if Danny has any other color to add to that.

No, I agree with David's comments on that. I would think, as you think through the year, that they have been on a growth trajectory. So when you think of the annual revenue, that it would be heavier towards the back end of the year than it was in the front end of the year, as you think through your model.

Great. Appreciate the time. Thanks, guys. Thanks, Keith.

Our next question comes from Chris of Weatherby with Citi. Please proceed with your question. Hey, guys. James on for Chris.

I wanted to actually get a review for underweight and improved sequentially for, I guess, at least the past six quarters. Should we expect that to continue to improve? Is there anything from a mixed perspective that would sort of allow, cause it not to? I mean, given fuel and price, it seems like there's some strong tailwinds. Just wanted to understand the puts and takes of that particularly.

Yeah, I am so sorry. We can hardly hear you and didn't really understand the question. Can you just repeat the first part of that to get us going?

Yep. Apologies for that. Is this better? Yeah, just wanted to actually touch on revenue per underweight. It's been improving sequentially. Wanted to know if there's anything to be thinking of in terms of mix to be aware of that we should be sort of considering as we model that moving forward over the next few quarters. Price is strong. Fuel is strong. Just wanted to know if there's anything to be considered of from a mix perspective.

This is Danny. I would say when you think through the revenue per underweight, I mean, mix is a piece that we've seen as we've gone through this, but As Judy and David commented, we've seen really growth from our core customers, and so we can – the strongest sequential we've seen. So as we look forward from that, that mix seems to be kind of a steady state now as we view it. So I don't see anything at this point that would be from a mixed standpoint that would change that.

Great. And then in terms of also just the pricing environment overall, is there – You commented on the general strength of it. Is there any sort of freight that you're pushing off from sort of an OR perspective that could essentially lead to any sort of step changes or anything? Or is the mix sort of where you want it now? Or is basically the work done on that side?

Yeah, I wouldn't target anything specifically. I think we have better visibility and a better understanding of our costs and what our network needs. And so really, Since 2017 with space-based pricing, 2019 when we introduced dynamic pricing, we just have better tools and better technology to help us understand what the system needs. And so really our focus is on what the system needs and getting the right price on that freight.

Thank you.

Our next question comes from Jack Atkins with Stevens. Please proceed with your question.

Great. Good morning and congrats on a great quarter.

Thank you, Jack. Hey, Jack. Good morning.

Good morning. So, Judy, I guess maybe going back to your comment a moment ago about the accelerating momentum that you're seeing in your business, really kind of across both the top and the bottom line. You know, I'm just sort of curious, when we think about the asset-based business for a moment, you know, it feels like we're going to be trending towards a double-digit operating margin, a sub-90 operating ratio in 2021. As you think forward, given the momentum that you're seeing in the business, how are you thinking about operating margin, operating ratio potential within the asset-based business over the next several years? I mean, is a mid-80s operating ratio now sort of on the table as you're thinking about the potential for the business? Just sort of curious if you can provide some thoughts around that.

Well, you know, it absolutely is. I mean, we're really there over the last, you know, two quarters, just really good momentum. And, you know, I think when I look over longer periods of time at what we're experiencing in the asset-based business, there's a couple things. One is just the value of our LTL network, you know, to customers, and especially as we combine it with some of the asset-light solutions that we offer. We talked about that a little bit in the prepared comments. But, you know, it really is the case. I mean, the growth at times can come in a more holistic approach with an account where, you know, you're bringing that account on as an overall provider of solutions to them. And it just means a lot, especially right now, that you have assets to deploy in that solution set just because of the certainty of it. And it just works well. So, you know, with that backdrop, you know, when I think about our approach, I feel like, and, you know, Danny's here on this call, so we'll give him a compliment, he and his team. I mean, we have the best yield managers in the industry. And we're seeing a lot of value in the technology that we've deployed, giving us visibility on, you know, the best answers and options for us. And we feel like that's going to help us with consistency, you know, even as economic conditions change, which, you know, that's a great feeling knowing, you know, that in the past, you know, there may have been some difficulty that we would have in anticipating, you know, what would be best to do. But, you know, that helps us with our workforce. I mean, we've hired a lot of people, I think 850 people net, What we want to do with those people is to make sure that as things move forward, despite the environment changes, that we have those people working. And, you know, I feel good about our ability to do that. And then in the near term, I think I've already mentioned it, you know, we do have a predictable labor wage and benefit increase level. And, you know, what we have at the same time is an overall package of that we provide to our employees that's the best in the industry. And so that combination of things really lends itself to, you know, further margin expansion and, again, as I spoke to earlier, the growth opportunities that we have with our holistic approach with customers. So we're bullish. We're excited about it.

Okay, great. That's fantastic to hear. And I guess for my follow-up question, David Cobb, with regard to the capacity expansion plans over the next 12 to 18 months that you guys outlined on the last conference call, could you maybe update us on your outlook for terminal door growth maybe in 22? I'm just sort of curious, given some of the supply chain challenges that are out there that I think everyone's aware of, how that may be impacted as we think about capacity growth next year.

Yeah, thank you, Jack. You know, we've talked about and we are intentional about expanding our capacity. You know, first of all, we're on a solid hiring pace. I mean, that's critical for us right now is adequate personnel, and certainly in certain locations it's more critical than others, and that's a big part of our growth plans. But in terms of the investment from a capital standpoint, again, You know, we've talked about fleet expansion above historical levels, and we're targeting that. You mentioned the supply constraints, and that is, you know, putting a little delay, we think, in some of our deliveries of equipment. And so we do see that impacting us some. We do think we'll get our tractor orders for 2021 at least by early 2022, and then our 2022 expectation at a higher level. is expected to come in at this point anyway in 2022. So it's good on the tractor front. Trailers is a little more challenging standpoint. But nevertheless, you know, we're adding there and think that's a good opportunity for us to grow. From a facility standpoint, you know, we manage that through some owned properties as well as leased properties. And so, as you mentioned, these facilities, supply chain is impacting that as well, making some of these projects a little longer term than we would like. And those are, you know, this environment for the real estate market is a tough one as well. But nevertheless, you know, we've got a five-year plan targeting certain locations. Some of those are renovations that are more feasible to get done. And those renovations will help in a number of ways. Those, in certain cases, they'll add some capacity, some door capacity. Other cases, they're also improving our energy efficiency and work life arrangements for our people. So that's always good. But in terms of just, you know, our longer term target of increasing, you know, I talked about increasing a level of spend there kind of on an annual basis above historical levels of around the $50 million range. And that's that's, you know, still on our plans. It's just a matter of getting those done. Now, some of that may, as I mentioned, be in terms of a lease as opposed to capital, so it may not fall into a strict capex kind of a format on the financial statements. But, you know, I target, I think, it's easy or reasonable to say that we would look to add an increased shipment capacity in the mid-single-digit percentage range kind of by the end of 2022 to our existing plans. footprint there. You think about productivity improvements could also provide an opportunity to increase revenue per facility. An example of that is, think about some of our warehouse configurations that we've added, like a Kansas City distribution center we've talked about. It doesn't necessarily add doors, but it adds the opportunity to increase throughput in a situation like that. There's a number of moving parts, obviously, but hopefully that's helpful to you, Jack.

It is. Thanks so much for the time. Really appreciate it.

Thanks, Jack.

Our next question comes from Ravi Shankar with Morgan Stanley. Please proceed.

Great. Thanks. Morning, everyone. Judy, can you help unpack the expedited business a little bit more? I kind of feel like that's a business that should be really killing it right now. and may also be a little bit of a leading indicator on kind of where we are in the cycle and where the industrial environment looks like. So maybe a little more detail there, right?

Sure. Well, and I'll make a couple comments, and then Danny can, I think, speak to that a little bit in more detail. But, you know, we're excited about how we're doing in all parts of our business, as we mentioned. And, you know, the expedite is certainly doing very well right now. And, you know, it is a great solution to some of our customers' most significant supply chain challenges and just works well in this kind of environment. But we've also got a lot of plans for the sustainability of that and as we move forward. So, Danny, you want to make some comments about that?

Sure. You know, I think, Judy, when I think of our expedite business, it's in the asset-like category. But for many of our customers, it's like an asset because of the surety that we can provide the service with those customers. And so... in this environment, obviously there, there is more demand for it, but I think one thing that we really haven't mentioned there when we think moving forward is that, you know, we have some headwind really with the auto industry in that area. And so the strength is really coming from manufacturing. And so it'd be interesting as, as auto returns, you know, in the general scheme of things that will take capacity out of truck load as well. So, you know, we're, we're so bullish on expedite. And as Judy said, the, We're looking at how do we maintain the sustainability of expertise as we go forward.

That makes sense. And maybe a bigger picture follow-up. Judy, it's been a little bit of a banner year for you, kind of just given everything that's happened in the macro, the acquisitions, other stuff as well. I think it's about time for another analyst day. But short of that, Maybe on this call, what's next for you guys? I mean, what are the big missing pieces, things to build on? What does ArcPath look like five years from now?

Yes, well, thank you for that question. And I agree with you. We do need to get together some dates for another analyst day and to reset some of our targets whenever possible. you know, you see the results, that certainly speaks to the need for that. So I'm excited about that opportunity. But, you know, when we look at our overall business, there's so much potential, you know, with what we offer. I mean, we, you know, we do business in markets that total $330 billion. We have $3 billion of opportunity within our most loyal customers. A lot of that comes from the truckload business. And that's why the Molo acquisition makes so much sense. I mean, we're excited about embracing that and bringing it into that team that's so experienced and additive to what we're doing. And we feel like there's a lot of runway there. I mean, the domestic transportation management market is $91 billion and growing. And I think logistics services are predicted to grow 10 to 15% over the next, you know, decade on an annual basis. And so, you know, we've got a lot of opportunity there. But I will mention, you know, another part of our strategy that we're working toward that we talked about a little bit earlier, which relates to our R&D efforts. You know, we have a lot of potential there. to get our flash process, you know, the mobile platforms and that process deployed within the asset-based business, you know, but also thinking about that as a solution for our customers and some investments that we're looking at with our innovation accelerator and that R&D team specifically. And so these are things that are adjacent to you know, maybe in some ways, but also, for the most part, they are just really solutions that help us, you know, impact either our growth potential of our existing business or the efficiency of it. And so, you know, we're excited about having the dollars of capital, you know, available for those types of investments as well. And there will be more to come on that, you know, in the next months and And, you know, into 2022. And I'm excited about that part of our opportunity as well. So thank you.

Hey, Robbie, I think we're going to move along. We've got a few more to get to.

Our next question comes from Scott Group with Wolf Research. Please proceed.

Hey, thanks. Good morning. Scott. Judy, you talked about, I think, 2% wage inflation next year. Can you just remind us, is that all in and including the benefits? And then I don't think there's any incremental payout to the Teamsters if the OR gets better from here, but can you just confirm that?

Yeah, yes. When we talk about the 2%, that is the the wage, the annual wage, and health welfare and pension increase. So that's all encompassing on that. And then in addition, as you mentioned, there is an incentive plan for those employees. And I think in our 8K, we reproduced the scale for that. And so the 3% level is there for a gap OR of a 93 and below. And so as things improve, From this point, the encouraging thing is there's a 3% incentive that goes with it. So, yes, good observation.

But meaning it doesn't go above 3%.

Yeah, I mean, that's where the scale ends, you know, as far as that percentage. But to point out, when we look at past times that we've paid, it's been at 1%. So, you know, we're very excited about, you know, the benefits that this could provide, you know, to our employees.

Okay. And then I just want to ask about the tonnage environment. And It sounds like the core LTL business has really good tonnage growth right now, and it strikes me that almost no other place in transportation has much volume growth right now. Do you think there's something about these supply chain issues and disruptions that is uniquely benefiting the LTL volume environment right now?

Well, as I mentioned earlier, I just feel like the LTL networks you know, work well in, you know, this type of environment. Some of that, I was speaking to the certainty of it, you know, the delivery, the pickup and the delivery of your shipments. But also I think as e-commerce has become a greater portion, you know, of the economy, when you think about the first, middle, and last mile, LTL networks can participate in all three of those. and do that effectively. And I think it, you know, for us, it provides us a lot of optionality, you know, in dealing with customers. And so we find situations where, you know, we're utilizing one segment of that combined with some other modes that we do, you know, that really help facilitate an overall solution for a customer. So, you know, I think some of it is the growth there, but I think it's also the case when we look at our situation with our drivers, you know, our turnover is very low in comparison to certainly the truckload industry. I mean, it's low relative to other LTL carriers as well, but, David, I want to say it's Six with retirements, yeah, is what David Humphrey is saying to me. And, you know, that's just a benefit. If you're a customer wanting certainty, that helps. And so I'll stop there, but I think that's a good positive.

Makes sense. Thank you, guys. Thank you. Thanks, Scott.

Our next question comes from Jordan Alliger with Goldman Sachs. Please proceed.

Yeah, hi, morning. I'm wondering, now that MOLO is closed, I'm curious their thoughts or your thoughts on where they see the truck brokerage market fundamentals. But then secondly, you had talked, I think, when you had the conference call a while back about timing of breakeven and being in the black. And I just wanted to see if there's an update on that. I think you had said the fourth quarter, and I didn't know if it was Operating income was going to be in the black by the fourth quarter and break-even until then. Any update on that would be great. Thanks.

Yeah, this is Danny. You know, I'll give a quick on that. Really nothing's changed since our previous thing. You know, we see they've been around a break-even and that our plan is that as we head into the fourth quarter that they would be on the run rate that we kind of have the target for 2023. I think just, you know, as you look at the overall, I think – There's not really been a break in kind of what you see in the tender rejection index, which to me is an indicator of the overall market. The market is tight. Capacity is tight in that area. You may see a weekly tight softening, and then it returns the next week. So I think overall what you've seen is just a very consistent that there's a little more demand than capacity in the truckload area.

Okay, thank you.

Our next question comes from Bruce Chan with Stiefel. Please proceed.

Hey, thanks, and good morning, everyone. Congrats on the results here and the good news. Thank you. David, you talked a little bit about the elevated PT experience just given the tightness in the market right now, and that makes a lot of sense. I wanted to get maybe both of your thoughts here on how you see that trending as Molo kind of enters the picture and you know, is there an opportunity to get, you know, better on procurement and what's sort of the pathway for that? And then maybe just a little bit more broadly, when we think about the interaction between, you know, all of the pieces, you know, the asset light, you know, expedited and LTL, is it all purely arm's length or is there any preference of priority of capacity to MOLA or loads to Panther or ABF that we should think about? Thank you.

You know, Bruce, this is Danny. I think the biggest piece when you look at this is we're really looking at it from a customer angle on this. We make the best decisions for our customers that flows through to our business lines. Being the logistics company we are, we have those options. We get to make the decisions that's best for the customer. Typically, if we make the decision best for the customer, it leads down and it's the best decision for our best as well, too. Priority-wise, it's hard to say there's a single priority. It's just the ability to have those options lets you make decisions that work both for the customers and for us.

I mean, I think, Bruce, what's being highlighted there, and this is a decision that we made several years ago, is that we are mode neutral, which means that we do see our business through the eyes of the customer. So we're not trying to force an answer one place or the other. We're trying to identify the best solution for them. And at the time that we made that decision, it was not that easy to make that decision. Today it's a lot better, we're a lot more equipped, and we're glad we have that in place. But that's the mentality here, and I think it's the right one.

Got it. Well, that's my one. Appreciate the time.

Thanks, Grace.

Our next question comes from Todd Fowler with KeyBank Capital Markets. Please proceed.

Great. Thanks. And good morning. Judy, with the step up in the profitability in the asset base segment, you know, a big improvement in the OR here this year. How do you think about the ability to show continued improvement going forward? Is this something that, you know, some of your peers have talked about the ability to show 100 or 200 basis points of annual improvement? Do you think that the business has shifted now where you can see steady improvement in the OR and kind of remove some of the cyclicality from that segment going forward?

Yes, I mean, I talked about this a little bit earlier, but I do believe that the steps that we've taken put us in a position where there's going to be the ability to grow more consistently and to be less of a victim to the depths of the cycles. But it's really not just defined within the asset-based business. It's really kind of our holistic approach that we've been talking about. But I do think that, for instance, some of the yield actions that we've taken, you know, with space-based pricing and then the visibility that we have connecting our operating needs with the opportunity set that we get from customers on quoted business, you know, those combined with the work that we're doing to grow our core customers really puts a good flow of freight into into the asset-based business as we move forward. And I feel like that some of our technology and optimization efforts that we have yet to go are going to further improve efficiency. And in that business, when you improve efficiency and throughput, you improve the ability to grow. And then in the near term here, what we've been encountering is a need to have more people in the business. And we've hired more people than we ever have in the history of the company. We've also had, you know, a good number of retirements. But on the net, we've added 850 people to that business, and we continue to need to add more. But, you know, again, that really has been our obstacle, you know, to growing more. So as we get them in place and trained and everything, we should see that potential, the throughput potential and the growth potential accelerate. And then I think David's already talked about the potential that we have with our equipment and our real estate. So, you know, a good backdrop.

Yeah, no, it certainly sounds like that you've got everything positioned now going forward, which is really encouraging. So maybe just for a quick follow-up to that point, Does it feel like at this point, you know, the network with, you know, doing some actions to supplement with heavier weighted shipments last year, you know, some of the home moving business is kind of all of that, you know, kind of where you want it to be. And so when we think about tonnage growth going forward, we're in kind of more of a normal cadence of tonnage growth, kind of core LTL tonnage growth from this point as we move into 22. Thanks.

Yeah, I mean, I think our view of demand from core customers is that it's good and that it's continuing. And, you know, that's into 2022. But to your point, you know, those other two spot market opportunities really help us both as we see imbalance in the system and also as we see seasonal changes in the business. So we're glad to have that as well.

Yep, understood. Thanks for the time this morning. Congratulations.

Thanks, Todd. Thank you.

And, Sylvana, I think we've got time for one more question.

Our final question comes from Stephanie Moore with Truist. Please proceed with your question.

Hi. Good morning. You know, I wanted to follow up a little bit on the comments. Good morning. Judy, you made actually Jack's question a little bit earlier. You know, you talked about the revenue opportunity from cross-selling LTL and asset-like customers, kind of better servicing, you know, what that customer needs, which often isn't just one customer. mode of transportation, but is there any associated margin benefit opportunity as well? Maybe some cost synergies or just from taking that more holistic approach to providing these services?

Stephanie, I'll just direct you back to that slide 13 that we have in our presentation, which the profit per account is four times higher on cross-sold accounts. You know, that's what we look at. And revenue per account is five times higher. And our retention is nine percentage points higher. So those are really good, solid statistics that support our approach. And, again, we're excited about it. And we see that. I mean, you know, we know that when we serve a customer well this way, that what we're doing is we're actually partnering with them on their supply chain to and really getting involved with them and understanding what's going to work well for them. And that's very important right now to our customer base.

Great. Well, thank you so much. Thank you.

All right. Well, we want to thank everybody for joining us today, and this concludes our call. 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 lines.