ArcBest Corporation

Greetings and welcome to the ARCBEST fourth quarter 2021 earnings conference call. At the start of the presentation, all lines 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, today's call has been recorded Tuesday, February 1, 2022. I would now like to send the conference over to David Humphrey, Vice President of Investor Relations. Please go ahead, sir.

Thank you for joining us. On today's call, we will walk you through the details of our recent fourth quarter and full year 2021 results. Our presentation will be done by Judy McReynolds, Chairman, President, and CEO of ARCBEST, and David Cobb, Chief Financial Officer of ARCBEST. Also joining us for the question and answer period will be Danny Lowe, ARTBEST President of Asset Light Logistics and Chief Yield Officer, Dennis Anderson, ARTBEST Chief Customer Officer, and Michael Newcity, ARTBEST Chief Innovation Officer and President of ARTBEST Technologies. To help you better understand ARTBEST 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 the company's future results, please refer to the forward-looking statement section of the company's press release and the company's most recent SEC public filings. To provide meaningful comparisons, certain information discussed in this call includes non-GAAP financial measures as outlined and described in the table 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, the slides that Judy and David will be reviewing here can be found on the ARCBEST website, arcb.com, in Exhibit 99.3 of the 8-K that was filed earlier this morning, or you can follow along with us on the webcast. We will now begin with Judy.

Thank you, David, and good morning, everyone. I want to start out today by recognizing our excellent employees and our amazing leadership team for their contributions to our success and their hard work that enabled us to deliver outstanding, record-breaking fourth quarter and full year results. In 2021, challenges across the world contributed to demand for our services reaching all-time highs. While this certainly was a factor in our success over the past year, I credit the exceptional nature of our achievement to the ARCBEST team and their unwavering commitment to our strategic vision and years of hard work. This has set us up for success, even in the midst of a global pandemic. Before I take the time to look back at our quarter and year in more detail, I want to look forward. Our business stands apart because of several key differentiators. Our dedication to and focus on our customers. We are strategic advisors to our customers, building trust to ensure we're a reliable partner. This partnership is what drives our long-term growth. Our employees are adaptable and dedicated to our business. Throughout the pandemic and this past year, Our team has successfully navigated ongoing change and pressures in the market to deliver for our customers. Our smart strategic investments, especially in technology. We have a rich history of delivering innovations and leading edge solutions that make it easier for our customers, employees, and carriers to do business. It is central to our ongoing strategy. We continuously analyze emerging technologies and collaborate with partners to ensure we can continue supporting our customers' success in the future. And we have alignment across the organization on our growth strategy. Our mission and our strategy are clear and are communicated regularly across the entire organization. When we're aligned and working toward the same goals, success follows. As a team and an organization, we've made great progress and we have no intentions of slowing down as we continue to capitalize on the significant opportunities ahead. I'll highlight some key achievements from our fourth quarter and full year and discuss our prospects for continued business success in 2022 and beyond. And then David Cobb will take you through the specifics of the quarterly and annual financials. And finally, I'll offer a few additional comments before we open it up for some questions. Slide four shows several milestones we reached in 2021. I am so pleased to be able to share with you ARCBEST's fourth quarter and full year 2021 financial results. In the fourth quarter, we delivered the highest quarterly revenue and net income in our company's nearly 100-year history. For the full year of 2021, our revenue was $4 billion, and our non-GAAP operating income increased 149%. 2021 was a big year for ArcBest's infrastructure growth due to the addition of Molo Solutions in November, which further deepened our customer relationships. Through this acquisition, we became a top 15 U.S. truckload broker, strengthening our position in the $91 billion domestic transportation management market. It also more than doubled our number of carrier partners, providing more resources for serving our customers. We moved closer to our strategic long-term goal of mirroring our customers' transportation spend as reflected in our revenue mix between asset-based and asset-light segments. A decade ago, the asset light segment represented less than 10% of ARCBEST revenue. This grew to 44% by the end of 2021. During the recent year, we also made significant progress on our corporate ESG and DEI initiatives. I'll share more details on these efforts later in the call. Importantly, we were also able to continue our track record of balanced capital allocation. Since the beginning of 2021, we have returned $116 million of capital to shareholders through share repurchases and dividends. This was meaningfully increased by the $100 million accelerated share repurchase agreement we entered into in the fourth quarter and completed last month. In line with our balanced capital allocation strategy and in light of ARCBEST's continued strong free cash flow generation, shareholder returns are a priority, and that will continue in 2022. And finally, we announced a $25 million investment in Phantom Auto, the leading provider of human-centered remote operations software. This investment aligns with our long-term goals. complementing our existing innovation pipeline, technology roadmap and partnerships, and building on the important work already underway to support our customer success and, in return, strengthen our business for the benefit of all stakeholders. Slide 5 outlines our three-point strategy to grow revenue and improve margins, which we discussed in prior quarters. Our recent financial results and some of the key highlights that I just mentioned, including our revenue growth and more balanced revenue mix, illustrate the success we are already seeing as we execute on each tenant of this strategy. As a company, we are always looking at strategic investments across our business to enhance shareholder value and efficiently serve customers. Two key elements involved with that are investing in technology and investing in our people. Through technology investment using new and innovative solutions, we're able to improve efficiencies, lower costs, and overcome operational disruptions. We also invest in our people, who are key to our success. We want to ensure that they have the tools, resources, and means to do their jobs every day. These investments enable us to expand our revenue opportunities by serving our customers efficiently. As demonstrated on slide six, our growth strategy is grounded in the deep relationships we develop with our customers. We are constantly working to more effectively partner with them by expanding our offering of integrated logistics services. We continue to build our suite of solutions to serve our customers in multiple ways. When customers buy multiple solutions from us, we benefit from higher account revenues, improved profitability, and better retention. More than six out of every 10 ArcBest customers utilizing our asset-light services are also using ABF Freight for LTL services. Our strategy of offering a comprehensive set of logistics solutions positions ArcBest for sustainable, long-term growth, and value creation. ArcVest has a rich history of innovation, and our technology advancements help us better serve our customers, our employees, and our carrier partners. As a result, more than three-fourths of our revenue comes from digitally connected customers who do business with us through channels like ARCB.com, APIs, or other digital connections. Having these digital connections established enables us to more efficiently scale as we further grow the business. Technology is an important element to ensure that our services are provided in the most efficient manner and are serving customers in the places they want to do business. And now I'll turn it over to David Cobb for more details on our fourth quarter and full year results.

Thank you, Judy, and good morning, everyone. On slide seven, I'll begin with some financial highlights. We ended the year with unrestricted cash and short-term investments of $125 million. Our $226 million of debt at the end of 2021 included $50 million borrowed on our credit revolver and $176 million of notes payable primarily on our equipment for our asset-based operation. The composite fixed interest rate on all of our debt was 2.6%. At the close of 2021, total liquidity was $365 million, including available resources under our credit revolver and our receivables securitization agreement. As many other companies have experienced, due to manufacturing delays and part shortages, we did not receive all of the equipment we had planned for in 2021. In 2021, the net capital expenditures, including equipment financed, totaled $104 million, 2021 expenditures for revenue equipment totaled $79 million, the majority of which was for ARTBEST asset-based operation. Depreciation and amortization costs on property, plant, and equipment totaled $119 million. In addition, amortization of intangible assets was $5 million in 2021. For 2022, total net capital expenditures are estimated to range from $270 million to $290 million, including equipment purchases of approximately $160 million. Our 2022 investment plans reflect catching up on 2021 tractors, as well as investments above normal annual levels in equipment, real estate, and facility upgrades to support our growth plans. We also have plans to purchase a small number of Class 8 electric tractors that are expected to arrive in the second half of the year. 2022 depreciation and amortization costs are estimated to range from $125 million to $130 million. This does not include amortization of intangible assets, which is estimated to be around $13 million in 2022, primarily related to purchase accounting amortization associated with a MOLO acquisition. The momentum in our business and strong customer demand produce solid cash flow generation. with our 2021 EBITDAR totaling $453 million. Our cash balance and total liquidity are also at solid levels, and as of the end of the year, we were in a comfortable net debt position. The operating cash flow, combined with the strength of our balance sheet, continues to offer opportunities to make investments in our business, evaluate external growth opportunities, continue our share repurchases, and pay a dividend. With our anticipated cash flows this year, returning capital to shareholders through share repurchases and dividends remains a priority. Our strong balance sheet and free cash flow provide flexibility to increase returns for our shareholders. On slide eight, I'll highlight our consolidated information. Fourth quarter 2021 consolidated revenues were $1.2 billion, a 45% increase over the prior year. On a non-GAAP basis, consolidated operating income increased 159% to $102 million. Our adjusted fourth quarter 2021 earnings per diluted share grew 171% to $2.79 per share. For all of 2021, our consolidated revenues were $4 billion, a 35% increase over 2020. Non-GAAP consolidated operating income was $318 million, a year-over-year increase of 149%. 2021 adjusted earnings were $8.52 per diluted share, an increase of 149% over 2020. The 2021 effective tax rate that was used to calculate the non-GAAP EPS was 26.7%. Under the current tax laws, we expect our full year 2022 non-GAAP tax rate to be in a range of 26% to 27%. This may be impacted by discrete items that could occur throughout the year. Slide nine provides highlights of our key metrics in our asset-based business. Asset-based fourth quarter revenue was $684 million, an average daily increase of 23% compared to last year. The fourth quarter non-GAAP asset-based operating ratio of 86.9% is a year-over-year improvement of 680 basis points. Fourth quarter daily tonnage increased 5.1%, and daily shipments increased 1.5%. Total fourth quarter billed revenue per hundredweight increased 17.3%, including fuel surcharges. We secured an average 10.2% increase on asset-based customer contract renewals and deferred pricing agreements negotiated during the quarter, which is the highest quarterly increase of any quarter in our history. On an annual basis in 2021, total asset-based revenue was $2.6 billion, a daily increase of 24% and the highest ever for ABF. The full-year non-GAAP operating ratio was 88.8%, reflecting an improvement of 540 basis points year-over-year and 920 basis points over the past five years. Total tonnage and shipments grew 7.6% and 4.3%, respectively. Total revenue per hundredweight increased 14.7%, with an average 7.8% increase on customer contract and deferred pricing agreements renewed during the year. As presented on slide 10, our asset-based preliminary business trends for January reflect continued strong revenue and pricing increases on slightly higher total tonnage. The January 2022 asset-based tonnage and shipment trends have been impacted by fewer transactional shipments versus last year, which were intentionally moderated to serve the increasing demand from core customers. Our core or published LTL tonnage and shipments increased by a percentage in the high single digits in January 2022 over January 2021. The sequential changes in average daily tonnage and shipments with these core customers compared to December were some of the best over the last 10 years. Additional details on our January 2022 business trends can be found in the Form 8K exhibit to the press release. ArcBest asset-light key metrics are presented on slide 11. In total, the fourth quarter revenue in ArcBest asset-light businesses increased 80% versus fourth quarter 2020, reflecting strong demand in our ArcBest segment, the addition of MOLO, and improved events and revenue per event in the FleetNet segment. For the months of November and December, MOLO added approximately $120 million to the revenue total of the ArcBest segment. For all of 2021, asset-light revenue per day increased 59% over 2020 to $1.6 billion. Fourth quarter asset-light non-GAAP operating income was up 156% over last year and totaled $49 million for the full year of 2021, an increase of 193% over 2020. During the recent quarter, demand for expedite and international solutions drove significant growth in operating income As favorable market conditions and increased project work, combined with cost control, created strong margin leverage. Fourth quarter asset-light EBITDA was $18.6 million, more than double the same period of 2020, and totaled $64 million for the full year of 2021, a 163% increase year-over-year. Preliminary asset-light business transfer January 2022 had been provided in the Form 8K exhibit to the press release, which was filed this morning. Solid customer demand drove revenue growth in expedite, managed solutions, and truckload brokerage. In addition, the positive influence of MOLO truckload brokerage revenue on year-over-year comparisons is reflected in the preliminary January daily revenue increase of 135%. As we have previously stated, at the time of the MOLO purchase, this business was operating at a break-even level. We expect that the BOLO business will continue to be break-even for most of this year, which will have an impact on total asset-light margins during that period. Earnings accretion on the BOLO business before purchase or accounting amortization is expected to begin in the fourth quarter. Now, I'll turn the call back to Judy.

Thanks, David. On slide 12, we've highlighted some of the environmental, social, and corporate governance initiatives we've been working on. As shown here, we continue to make progress on our ESG journey. We recently joined the FreightWave's carbon emissions cohort. We've also committed resources in adding both an ESG program manager and a corporate social responsibility program manager who will direct our diversity, equity, and inclusion initiatives. These roles will be critical to helping us advance our ESG strategy even further in the years ahead. Our team also continued to focus our efforts on our DEI strategy throughout 2021. Since October of 2020, we've been working with the Kaleidoscope Group to help us assess the current state of DEI within ArcBest, help us align our DEI vision, and gather employee feedback. Toward the end of last year, we introduced our DEI strategy roadmap, which centers around four key areas, workforce, workplace, community, and marketplace. This roadmap will guide our work in raising awareness of DEI issues and achieving our goals in this important area as we move forward. While we have more work to do at ArcBest, we believe that we are truly at our best when we are listening to our people and we know varied perspectives make our company stronger as we serve our customers and communities with excellence. Our strategy, as shown on slide 13, positions us well for revenue growth and improved profitability. As an integrated logistics company with our own assets, we provide customers the best of both worlds. It's the combination of our solutions and the ability to serve customers across modes without switching service providers that sets us apart. We have built technology-enabled solutions and products such as the ability to digitally match, negotiate, and award truckload freight and dynamic LTL pricing, to name a few. With these tools, we can adjust our business mix to optimize and maximize revenue by utilizing our resources effectively. As a company, we have a rich history of using innovative technology that makes it easier for customers to do business. This is central to our ongoing strategy. At ArcBest, we work to see our business through the lens of our customers, effectively meeting their needs, and using technology to drive efficiencies enables us to deliver profitable growth. As we approach our 100-year anniversary and look forward to the next 100 years, we know we must be agile, staying open to new ideas and innovation that will continue to ensure we deliver for our customers every time. Before opening it up for Q&A, I want to introduce our updated long-term financial targets. As you can see on slide 14, we aim to grow revenue to between $7 billion to $8 billion over the next four years. Based on our current $4 billion revenue level and the key revenue drivers I outlined earlier, we are confident that we can double this figure by 2025. Our previous goal was to achieve high single-digit asset-based operating margins. With our steady progress and future plans, our new goal is to consistently generate asset-based operating margins between 10% and 15%. Likewise, in our asset light business, as we fully integrate MOLO and benefit from combining our asset light and asset-based services into comprehensive customer solutions, we will focus on achieving asset light operating margins, excluding fleet net, from 4% to 6%. And finally, for many years, we've focused our business on maximizing our return on capital employed. We train our team on the elements of ROCE and what actions they can take toward increasing that financial metric. Our employee incentive plans are in part based on our ROCE performance. As we move forward in the next few years, we will strive to produce returns in our business that exceed the average ROCE of S&P 500 companies. We firmly believe that we are in a perfect position to achieve our financial goals. Our strategy is guided by what our customers tell us they need to make their businesses perform better and more efficiently, and we've transformed our company to allow us to effectively respond to those needs. We are confident that continued profitable growth, further enhanced operational efficiency, and superior returns on capital employed will drive strong value creation and multiple expansion for the benefit of our best shareholders. Our record-setting performance in 2021 will act as a springboard for a growing and profitable future at ARCBEST for many years to come. That concludes our prepared remarks. David Humphrey, we can now open the call up to questions.

Okay, Carlos. I think we're ready for some questions.

Thank you, sir. If you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a 3-tone prompt acknowledgement request. If your question has been answered and you would like to withdraw your registration, please press 1-3. One moment please for the first question. First question comes from the line of Jason Seidel with Cohen. Please go ahead.

Thank you, operator. Judy and team, good morning. Congratulations on a good quarter here. Wanted to dive in a little bit on the pricing side. I mean, the strongest quarterly contract renewals that you guys have seen, you know, what's driving that market as it continues to get better, and are you seeing that same strength continue here early on in your 2022 renewals?

Yeah. This is Danny, and I'd say that there's multiple things. Obviously, it's a robust pricing environment right now. You know, there's multiple things driving that, that, you know, as you look forward, just, you know, David mentioned the inability to get all of our 2021 CapEx purchases in the asset side. And, you know, that's a common theme I think you're hearing across the marketplace. But I think another piece is we're having conversations with our customers and we're making sure that the freight that we put in our asset-based network is the freight that we want. And as long as you're having those honest conversations with customers about what your costs are doing, and what services you're providing to them, I think that's part of the results we're getting in the pricing environment right now.

Did Central have any impact in the quarter?

Central? Very little impact as far as we've seen. I think the other second part of your question, you asked about January, and so we're seeing similar in January to what we saw in the fourth quarter as far as contract renewals. Perfect. That was my one. Appreciate the time as always.

Thank you, Jason. Thanks, Jason.

Next question comes in the line of Chris Weatherby with Citigroup. Please go ahead.

Hey, thanks.

Good morning, guys.

Good morning. Morning. Wanted to touch base a little bit on sort of how you guys are managing the transactional business and maybe how we should think about that impacting tonnage growth as we at least think about the first half of 2022. Can you give us a sense, maybe, the delta, I guess, between where you might be from 2% tonnage to, I guess, it's high singles with your core customers? Just trying to maybe get a better sense of what the tonnage environment is today and maybe how you're managing to that.

Let me talk in general. David may follow up with some specific numbers if we need to follow up. you know, we see the transactional business's ability to fill the network where we have capacity available to us. And as David described, we're seeing this, you know, the sequential change from fourth quarter, the first quarter in January of the strongest we've seen in our core published customers. And so in those cases, that transactional need to fill some capacity in our network is not there. And so there's a combination of things that will reduce some of the shipments we're getting from transactional, but it also allows better price on that transactional business because we're more selective about what we put in the network in that. And so, you know, for us, that's a daily, weekly, monthly review and really don't want to predict what it's going to do in the future. We just, we use it as a, as a mechanism to make sure our network is full and our network is balanced as we move forward.

And it's, I'll just contribute that it's hard to say what the tonnage growth could be or would be, but suffice it to say, we have more opportunities you know, than we say yes to because of wanting to serve our core customers, which I think is serving us well in terms of our, I think, our yield results and our overall margin results and satisfying customers that are long-term customers for us.

I think the other thing, when we say transactional, we talk a lot about how it benefits the network. This is also a benefit to our customers. I mean, we're engaging our customers. That's how they're asking us to engage with them. They are making decisions on a shipment-by-shipment basis and how to route those shipments. And so we're just meeting them where they are. And some days we need the shipments to fill some capacity and some days we don't, and they understand that and they're willing to work with us as we go forward.

Okay, that's super helpful. And then just quickly on the first quarter, sort of the cadence from 4Q to 1Q in the asset-based business, I think you generally talk about a 250 basis point deterioration in the operating ratio. When you think about this year, what's going on in the pricing environment, what you're doing in terms of managing tonnage on the network, Is that the right number to be thinking about, or are there some puts and takes we should be considering?

Yeah, Chris, this is David, and good morning. You're right. We mentioned the average increase has been approximately 250 basis points in recent history, and I think one thing that's kind of unusual to that comparison is the early GRI that probably ought to be considered that we took in November last of 2021, when typically we take a GRI in the first quarter. That's probably one of the unusual things to consider. I guess the other thing is just we're starting in a fourth quarter that is the best OR that we've had for a fourth quarter. So it makes it a challenging count. But all that to say, I think you're pointing out that we have good momentum and opportunities ahead of us. Okay. That's helpful. Thanks for the time. Appreciate it.

Thank you.

Our next question comes from the line of Scott Group with Wolf Research. Please go ahead.

Hey, thanks. Good morning. I wanted to ask a few things on the new long-term guidance. So double-digit revenue growth, I'm curious if you're assuming any acquisitions in that. And then with the 10% to 15% LTL margins, is the point there that you think even if we go into a freight downturn, you think the trough for LTL is now 10%? And then just last thing on the guidance, we'll obviously have a new Teamsters contract by 2025. Have you assumed anything meaningfully different in that new contract with this guidance?

Yeah, I'll just start and then let others fill in as needed here. I guess when you think about these long-term targets, You know it just really starts about executing on our existing strategy that we have and that Judy mentioned I think on slide 5 and 13 and and then just seeing the customer from the you know from their Operating our business through the customers perspective You know as you can see on slide 6 that Judy went through it and all that to say that The mix of our revenue growth should be a product of our customers needs as we work through that and And when you think about acquisition opportunities, yes, we're opportunistic about that. It's not built into these revenue targets. I think just some other color on the revenue target, when you think about having MOLO in there for all of a base year, if you were to assume a pro forma MOLO for 2021, then that CAGR is around 12% to 16%. in that range. And so, let's see, you also asked about... Yeah, if there's an assumption on the Teamster contract. Teamster contract. I would just say that we're continuing, you know, cost inflation, kind of what we're seeing now. So nothing unusual or different around that cost structure.

And how about that point about, right, is there... Are you contemplating a potential freight downturn? I guess the question, the point is, if you can do a 10% LTL margin in a downturn when historically it's been a lot lower than that, I mean, that could be pretty powerful. So is that, are you contemplating that? Or is this just a, if the freight environment remains good like it is now, we think the range is 10 to 15. I'm just trying to understand that.

Yeah, I think, you know, you look back over our history and you just think about what we've been through in the last five years, for instance. We've had a great freight environment in 18. We had a freight recession in 19. We had a pandemic in 2020. And, you know, it goes back and forth. And so, you know, we're not going to time, you know, when a freight weakness might occur or market weakness might occur. That's not built into this. These are long-term targets. And so the assumption is essentially, economically, it's a positive economic environment overall, if you will, an average of, say, 2% to 3% from a GDP standpoint.

OK. And then if I could just ask the last one, and so more near-term, as I think about 22. Full year margins in LTL are typically better than fourth quarter margins. So do you think that we should see some improvement in 22 from that 86.9 in the fourth quarter?

Well, you know, Scott, I mean, we're not going to, you know, predict what 2022 margins are going to be, but we have a lot of great momentum, you know, that you see in the fourth quarter and then as we're starting, you know, 2022. You know, there's a number of things that are, from a macro standpoint, I think working in our favor. And, you know, I think it is interesting to note, you brought up the Teamster contract that we have. It's an overall 2% increase on a large portion of our costs in the asset-based business, you know, that will be there for the full year of 2022. And we have a robust yield environment. So that's helpful to us when we think about that. Plus, again, we've got some investments that David outlined in the real estate side of things and equipment that lend themselves to growth in that business. And Danny is sitting here across the table from me. One of the things that he always says is we do the best when we can grow and and also have a good backdrop for yield. And we've got great relationships with customers. They're seeing a lot of value in what we're doing. And I think the overall strategy that we have as a company really lends itself to helping customers in both the channels that they want and in the modes that they want, which is very helpful to retention.

All that's a good backdrop.

Thank you very much for the time.

I appreciate it.

Thank you. Thank you.

Our next question comes from the line of Jack Adkins. Jack Adkins with Stevens Inc. Please go ahead.

Yeah, great. Good morning, and thanks for taking my question. Good morning, Jack. I guess maybe just going back to the long-term guidance for a moment, one of the questions I've been getting a good bit this morning from investors has just been around trying to bucket out That $78 billion, you know, maybe if you can provide some brackets around how we should be thinking and how that breaks down between the asset-based business and the non-asset-based business. David, is there anything you can maybe help us with there?

Well, like I just said, I mean, the mix there will be a reflection of our customers' needs. You know, we're an integrated logistics company, and as they need, you know, our services, we're positioned well positioned With the trends that we're seeing in logistics, we can go into those. All that to say is that our services are in high demand. We'd rather give this as a top-level perspective on the revenue targets.

David, that's the way that we manage the business. We approach the customer first. you know, holistically as a company. And as you said, we work from that, you know, into what we do for them. And it really, when you look at this, we're close to a balanced mix, but that certainly doesn't represent the customer spend. It's much more lends itself, you know, to full load, which we're well positioned to grow within. But, you know, that could mean that over time, you know, that we have a higher percentage there. But, again, it would be because that was what the customer desired us to do.

And so, yeah. Okay. Understood. Then I guess maybe for my second question. David, can you talk about the CapEx investments, specifically related to real estate and investments in the network? What is the expectation for door count growth in 2022? If you could provide that, that would be helpful. Do any of these supply chain challenges maybe push out that network expansion beyond what you were expecting maybe three to six months ago?

Yeah, in terms of no, I think it's along the same lines of what we commented on last quarter. Just just but as you point out, I mean the supply chain constraints are are impacting you know facility facility work. You know in 2022 our real estate purchases are expected to be somewhere between 45 million 55 million. In that which is which is that level that we've been talking about now. Our expansion and impact on facilities could come in the form of a lease. You know, as we said, we lease a portion of our facilities, and we own another portion of our facilities. But, you know, we're looking to expand probably to enable a shipment growth by the end of 2022 in the, you know, mid-single-digit range. So we're still... looking to achieve that by the end of 2022.

Yeah, and I'll contribute one other thing. I mean, I think we've been pretty realistic, don't you, David, about the real estate that we can get done in 2022. We'd like to do more, and we have plans to do more as we go through that period. you know, of the upcoming years beyond 2022. But I think we've been pretty realistic about it, although we always know that we spend a little bit less than what we have in our plans.

Yeah, that's right. That's a good point.

Yeah.

Okay. That's helpful. Thanks so much for the time. Thanks, Jen.

Our next question comes from the line of Bruce Ted with Stifel. Please go ahead.

Hey, good morning. This is Matt on for Bruce. Thanks for taking the question.

Good morning, Matt.

Good morning. I just wanted to talk a bit about Phantom Auto and maybe specifically what drew you to them versus others. Maybe what benchmark or return criteria you're using to evaluate the investment, and is this a one-off, or should we expect more deals of this kind going forward? Thanks a lot.

Well, you know, I'll start. I mean, we have Michael Newcity on that I'll let him contribute here in just a minute. But, you know, we have been a company that through the years, you know, where, you know, our innovative thinking has entered into what we do to try to operationally improve our own business, but also, you know, just supply chain spending in general. And, you know, Phantom Auto, the investment there is in that vein. I mean, we have a you know, a tech R&D team that reports to Michael that has always been good at identifying, you know, opportunities that we have to optimize costs or improve, you know, the way we approach these challenges. And, you know, they typically have a good set of partners. And we've been partnered with Phantom for many years, I guess maybe back, Michael, in February of 2020. And so, Michael, I'll let you comment about that. And, yeah, go ahead.

Yeah, okay. Yeah, you know, while I'm not going to share anything on return expectations, I think, of course, we expect something significant there. I'd say what's compelling for us is that when we look at customers managing their supply chains, I think that, you know, the shipping component, It's just one element of the overall operations and getting something from point A to point B. There are numerous operations before a shipment's picked up, after it's delivered, private fleet operations with their own crosstalk operations. There's internal work and load consolidation, deconsolidation, edge operations within a warehouse and managing, staging inventories and building loads. And so we see an opportunity here with FANOM to really bring insights and technology to our customer operations and managing freight before it's picked up, before it's delivered. So we see a larger market with our customers in that regard and helping them solve their problems and provide supply chain solutions. So it's a really exciting technology for us, especially given the fact that we see the opportunity with our existing customers.

Great, thanks. Thanks, Matt. Thank you.

Our next question comes from the line of Ravi Shankar with Morgan Stanley. Please go ahead.

Hey, this is Christine McGarvey. I'm for Ravi Shankar. How are you guys? Thanks for taking the question.

Good morning, Christine. Good morning.

Maybe if I can circle back to the long-term targets around operating margins, and maybe I can ask the question in a slightly different way, but Um, you know, this year has obviously been, uh, you know, very good for margin improvement. It's productivity initiative. I know you guys have discussed in the past have obviously been, been paying off. So maybe you can just talk a little bit about, you know, productivity initiatives that you have now kind of, you know, what's been most impactful. Do you still feel that there's runway there? Is that kind of what pulls us, you know, to that 15%, you know, over time or, or how should we think about that?

Well, you know, I think one of the things that, that, um, I think is important to consider is that we've been on a journey, you know, to improve both the growth prospects and margins of our business for some period of time beyond, you know, this pandemic period. I mean, I think back to, you know, 2017 when we initiated the enhanced market approach. We also introduced the CNC that year that helped us with the pricing process. decisions and customers having to provide somewhat more information to us to make those decisions better. But there's a number of things where we've invested in technology, our solutions, and then our people through a longer period of time that really brings us to this place where we're positioned to grow and expand margins going forward. And so It really, you know, I just take it beyond that pandemic period whenever I think about that. And, you know, Dennis Anderson's here. He can comment, too, about, you know, just the, I think, the opportunity set on the one hand with our customers, but also the knowledge that our conversations bring, you know, to the conversation and how that impacts margins.

Absolutely. Thanks, Judy. And good morning, Christine. When we think about, as Judy said, over the last few years, just resetting the conversation with our customers and being able to deliver for them in not just an LTL mode, but really any mode, that's been a big win from a strategic standpoint, but it's also been a big win for our customers. And especially, as you mentioned, as we've gone through the pandemic period, with their supply chains disrupted, they're really valuing reliable capacity. And we see that just even in how they think about managing their supply chain, managing their inventory, and maybe even some reset in long-term thinking of how that comes together. So looking for more reliability, shifting modes more frequently, and combining modes or finding new ways to build flexibility in their supply chains So we really feel great about our breadth of integrated solutions and the mode neutrality that are differentiated and really enable us to focus on helping our customers solve their challenges, building their trust, and really creating that value that they're willing to pay for. And so from a price perspective, we feel good about where that is and where that's headed, but then also our ability to partner with them really in any environment has greatly grown And as Judy referenced on the top of the call, just using this as a springboard for future growth is really what we're focused on.

Got it. Really helpful caller. Maybe if I can squeeze in another. I think I heard correctly you guys are planning to take several electric vehicles in the back half of this year. Maybe you could just sort of quickly comment on the plan for those and then as you look out over the next couple of years. You know, if and how you plan to kind of scale up any sort of electric operations.

Yeah, I mean, you know, we're committed to innovative thinking and transformative solutions and approaches, as we talked about. But, you know, and we are investing some certainly time and exploration on the practical utilization of electric vehicles in our asset based network. We recently did a four-week test of battery electric yard tractor in our Kansas City Service Center, and we've also partnered with multiple companies to investigate the deployment of electric vehicles for our city pickup and delivery and warehouse handling units. And our CapEx plans do include the purchase of some Class 8 electric tractors that are expected to arrive in the second half of this year. So we're excited to get going on some testing there and see what that means to us and, you know, and learning its impact.

Awesome. I really appreciate the time. Thanks for the call. Thank you. Thank you.

Next question from the line of Ken Hexer with BOA. Please go ahead.

Hey, great. Good morning. And nice, strong results. Judy, can you just maybe I know you've had a lot of questions on the margins and your long term outlook. But, you know, just on the asset based side, is it fair to think about 100 basis per year as a target? Is there anything just given the strength of the pricing that we should still see maybe more of a step function given the environment we're in now? Maybe you can kind of just give your thoughts on that or for Dave. And then are there any constraints given the union percentage payouts? It seems like you're at the max now. Maybe what are your thoughts in there for that long-term target? Does it stay at that same level? Thanks.

Yes. Well, first of all, we are excited to pay that union incentive. I'll start where you ended your question, but we very much are. And I think there's going to be excitement among the workforce about that. And And, you know, and we, although we don't know what the future holds there, I think it's been a win-win for, you know, the employees and the shareholders there. And so that's a really good thing. I do think that, you know, we work through some of the technology enhancements, operational improvements. You know, in a methodical way, we have a robust process that involves project management that really helps us to gain the benefits of the different, whether they're software or other, you know, AI, cognitive engagement type improvements that we're making. But I'll say this. We have a lot on our plate. We call them tier one projects. We have a lot that we're working on. My biggest challenge is prioritizing them to figure out what's best to get done first. And, you know, so there's runway there. I can't say, you know, that that will occur, you know, in a step function or something like that. It's just hard for me to say that. But I will say this. We're very focused on cost optimization. We know we have to be there. And we're also focused on the value creation aspect. you know, for the work that we do. And I think with the intelligence, the data, you know, the information, you know, for instance, the work that we do with our managed customers really allows us great insight into both the choices that they have and the options that they have for capacity. And that helps us a lot with both making decisions there and then otherwise in our business. And so... Anyway, I'll leave it at that, but just know that we see that we have runway and, you know, we are looking forward to being able to produce those numbers in 2025.

Great. And if I can do the follow-up on, David, you talked about the pace of, Ken, you talked about the pace of tonnage through the quarter. I guess just kind of more curious about the impacts of Omicron and the bounce back at the end and your thoughts into January. And then are there any updated thoughts on the buyback? Thanks.

Yeah, just in terms of the buyback, I mean, we have $42 million available under our share authorization, and we intend to utilize that. So looking forward to that. As we said, we completed the ASR in early January. In terms of the business trends, I mentioned that we continue to see just solid growth from our core customers, our published, what we call published LTL pricing customers and And that continued into January. And so, you know, it's just a matter of serving those customers as we talked about. I don't know if there's anything else that we need to add to that.

The 8K has all the monthly details.

Right, that's right. I think the comp was a little more challenging in October as well, which is part of what that was about, I think.

Yeah, thanks, Dave. I was just curious about the impact of Omicron, that you're kind of bouncing around around that. I know the monthly, but I just want to understand, just given your outlook for January, if we're seeing kind of deceleration or what?

We just since you brought that up, we have seen an impact of that. You know, we've had a we had a spike in our cases. Fortunately, that's coming back the other way. But it did impact the number of our employees that were were out sick. And, you know, and so that creates its own challenges. But we are seeing that we've, I think we've seen the peak and we're coming back down. And I talked to Seth Runzer yesterday, the ABF president, and he was encouraged by, you know, people being able to come back to work. But that has been a challenge. And it's a challenge for shippers, too, which in some ways affects our productivity as we try to interact with them.

Thanks for the time.

Thanks, Ken.

Next question comes from the line of Todd Fowler with KeyBank Capital Markets. Please go ahead.

Hey, great. Thanks and good morning. I apologize if I missed this, but David or Judy, can you talk about the required capital to get to the 2025 revenue targets? I don't know if you could share either CapEx as a percent of revenue or just kind of a thought on kind of what the CapEx level needs to be over the next couple of years. And then as a follow-up to that, it feels like at the levels that you're targeting in 25, you'd be generating quite a bit of free cash. And so maybe a little follow-up to the last question, but how do you view capital deployment, you know, over the next couple of years as you move towards these targets? Thanks.

Yeah. Yeah, Todd. You know, to start with, just talking about 2022 CapEx being elevated from kind of our history, right, Some of that has to do with completing the orders from 2021 in 2022. And but, you know, we've talked about just our intent to invest in the business for growth, our growth plans that we have there. And so, you know, I would I would, you know, could expect our capex to be in the in the range of $250 million beyond 2022. You know, I don't have the details to provide you at this time, obviously by year, but I think it's important to compare that CapEx level in relation to our revenue levels that we would have in those years, which we expect would be reasonable. And again, all that is going to be balanced with our ROCE targets. So we're looking to continue to drive good return on capital employed. So we're going to be disciplined about our investment into the business, making sure that all those have good returns on them. And they have. And so that's good. And so you're right. It's a good observation that we would produce some positive cash flow with those targets. And I expect us to be returning capital to shareholders as a result of that. Obviously, we're going to continue to invest in the business, like I said. And Judy talked about a lot of the technology that we've we've invested in and are seeing the benefits of and will continue to see the benefits of as they come to fruition and get matured in our business. And so all that to say is that, you know, we're going to have a balanced capital allocation approach, and that's, you know, investing in the business for good returns. It's going to be, you know, opportunistically acting on M&A and or technology investments like we've talked about with Phantom. and then a good return of cash to shareholders. So that's our approach.

No, David, that's helpful, and it's good to know that there's not a step-up. I mean, the 250 is a decent placeholder, but there's not a big step-up coming in CapEx to get to those numbers, so that's helpful. Just for my follow-up, any thoughts on kind of the growth rate for Molo? I mean, obviously I know there's going to be some correlation with what's happening with spot pricing and transaction rates on the truckload side. But is that a growth rate that should start to moderate maybe a little bit as you shift towards profitability? Or does that accelerate underneath your platform because you've got more opportunity to kind of cross-sell? Just kind of curious how you're thinking about Molo's growth rate going forward. Thanks.

You know, I would say, you know, the first stage we're talking about our integration, you know, but I think if you look at the point of the Molo acquisition was, too, it was our ability to source capacity for our customers. And if you're sourcing capacity for your customers, that means you're growing. So I don't think that, you know, I won't give a number, but we're excited about the potential, and there's nothing we've seen so far that dampens that excitement we had at the time of the acquisition.

Got it. Thanks for the time this morning.

Thank you.

Thanks, Todd. I think we've got a couple more here that we're going to try to get in.

Next question from the line of Stephanie Moore at Witchewist. Please go ahead.

Hi, good morning, everybody. Good morning, Stephanie. I wanted to touch on the long-term margin target again on the asset-based side just to make sure that I'm thinking about it correctly. If you go back over the last five years, I think you have a trough asset-based OR kind of near that 3%, but I think you've also called out over the last year or so about 600 basis points of, you know, permanent or structural margin improvement, you know, from a lot of the investments you've called out on this call already in the pricing and the tech. So I guess a two-part question here. So first, if you take the, you know, kind of the lowest margin and then you account for these, you know, 600 plus of improvements, you get pretty close to the low end here of this 2025 target range. So is that kind of the right way to think about the puts and takes into this new range. And then the second point, kind of along the same lines, the range also calls for an improvement here on the high end too. So maybe if you could just outline as we look forward, what are the main buckets driving these incremental gains kind of at the high end of this range? Thanks.

Yeah, I mean, I'll just start and others can add to this. I mean, you know, just think about the operating leverage that we would have as well as the revenue grows. And Dennis talked about this, Judy talked about the way we're connecting with customers, including digitally. And so that provides two things. One is a growth lever as well as an efficiency lever. Because in a lot of ways, that's the way the customer wants to do business with us. And so It's more efficient for them, which is one of our objectives, is to be efficient in our customer experience in the way the customer wants to approach us and do business, as well as our carriers. And so we've enabled that technology to work with our carrier group, as well as with our customer base. And so that's going to be an optimization element to the OR bridge, as well as the operating leverage on the revenue side. So optimization, not only in that, but also in just other areas where we have increased visibility of shipments, and so we're able to take out some time and efforts in the back office areas. Those are some of the big elements that I can think of, including visibility of our cost has increased through these technologies, so we're able to improve our routings both on line haul as well as our city pickup and delivery on the asset-based side of the business. And so that's an element that's also incremental to our margins.

And I'll let others... I was thinking, David, one that I'm looking forward to is as we integrate MOLO and we get out into some of those years beyond 2022, there's a real opportunity there just from... you know, the sheer volume of business that we're doing to make us better, more intelligent, more involved, you know, with customers to help both them and us make better decisions, which tends to provide, you know, a lift to your margins as well.

And the other, that reminded me of another thing, just the retention level that we have by providing these asset-light services for one, but also just the customer experience that we've been able, you know, through the recent years, our retention rate is at a good level. And so that serves to provide a foundation for growth, but also is also more efficient from a service standpoint.

Got it. And then maybe if you could just... No, it does, particularly on the upside, but then maybe more on the puts and takes on the lower end of your margin guidance and how that tracks with just the performance you've made over the last several years and your kind of prior low end of your margin range as well over the last five years.

Yeah, I think a number of those things apply to that as well.

Well, and I thought the way that you were thinking about it, Stephanie, made sense. I mean, it does.

Perfect. Well, really appreciate all the color, and congrats on a great quarter. Thanks, guys.

Thank you.

Thanks, Debbie. Operator Carlos, I think we've got time for one more.

All right. Last question from the line of Jeff Kaufman, Vertical Research Partners. Please go ahead.

Thank you very much. Thank you for squeezing me in, and congratulations. These results are just amazing. Thanks, Jeff. Thank you. I'd like to follow up on Todd Fowler's question and Scott Group's question a little bit. If I just do some basic algebra on the long-term guide, and I know that's kind of a pin on the wall, a lot of uncertainty, it's implying earnings in the $15 to $16 range. If I kind of take what David was saying in terms of CapEx guidance and things like that, it's implying even after CapEx, if you can achieve those goals, you're looking at $10 to $11 a share in free cash. And I know we can't take that as given, but you mentioned, oh, well, we'll increase dividend, increase share buyback, but you're still a couple hundred million in extra cash. Is the feeling that to achieve the growth, as Scott Group was implying, we need to accelerate acquisitions a little bit on the logistics side to get to those levels? Is the implication that the balance sheet's in pretty healthy range. Once you get past the union negotiation, figure out what to do with the cash, we would see substantially larger returns to the shareholder in terms of dividend, treasury stock. You know, moving past the CapEx side of the capital allocation, if we think about the utilization of free cash, if you're able to achieve your goals, what are the priorities and how should we think about that as we think about a 2025 earnings target and then carrying it down to the cash flow statement?

Yeah, you know, Jeff, as I think about that, you know, my first thought, honestly, is that we have to be prepared, you know, to invest as we see the future unfold, you know, for managing supply chains. I mean, that's what you've seen us do, you know, with Molo, as well as the investment with Phantom Auto. And, you know, the partnership we have with Phantom Auto is you know, will hopefully ultimately go to market, you know, with our customers. And, you know, we really are at the very early stage of that. So, you know, that's an opportunity as well. But, you know, I mean, we can't see exactly what it means in terms of M&A, but we know that with the disciplined approach that we use that we're not – going to put that resource to use in an inefficient manner. And that's, I think, the message with the ROCE target that's out there as well. So, you know, I mean, I think what we know to be the case is that we need to deploy the balance sheet as we're going through that period. And, you know, the priorities have tended to be um you know in the organic sense to make sure that we're gaining the performance from our existing deployed resources um and then also to to be open to m a and be able to act quickly whenever we see an opportunity there that really advances our platform and um you know and when um you know we we look uh at a balance that is beyond that, that we will be in a position to return that capital to shareholders. So I think it's just restating what David had said earlier, but that's really the way that we think about it. And honestly, we can't tell you exactly what trigger is going to be pulled between that M&A and the capital return because, you know, we're going to be open to what that needs to be to advance our strategy and our platform and our customer service.

Just one quick follow-up, if I can, and thank you for that answer. ESG, just becoming a hotter and hotter topic, and people are talking about moving from Scope 1, Scope 2 ESG to Scope 3, which really kind of looks at the supply chain emissions and what have you. As you look at what's coming down the pipe and then kind of where you want to position the company. We've got electric vehicles, we got fuel cell vehicles, we got self driving vehicles, you know, all kinds of things we can do. In your evaluation, where do you think you need to push capital investment a little harder? And can you give us an idea of kind of how you think the pace of adoption needs to be over the next couple years?

Well, I think that it'll be an instructive year as we're doing some test work on those electric vehicles this year that we're going to have some visibility in. Interestingly, with FleetNet, we get some early visibility of the utilization of electric vehicles by others that they do business with, which is, I think, helpful to just our overall understanding of the performance there. You know, and we have a group, you know, that is, as I mentioned earlier, that's looking at those advanced technologies and how they could integrate into, you know, the, for instance, the asset-based network. And so, you know, we I think have the right resource on it. I do think it's going to be slowly you know through the period up to 2025 in terms of its impact just because you have to do this testing and absorption and understanding and then you know making these bigger decisions but we're very open and advancing our thinking on the ESG front I just mentioned real quickly the real estate work that we're doing is really going to help us there You know, we've got that on our minds as a benefit, you know, to gain. The other thing I'd say is this year is a data gathering year for us, including the carbon emissions. And, you know, we're getting into a position where we can see things better so then we can make some better decisions. But, you know, we've visited with a number of experts in this field, and especially on the social side, we're doing very well. in terms of how we compare. And we love that because that's the company that we are.

Jeff, this is Dennis. I would add, too, from a customer perspective, one of the benefits of our strategy is being able to optimize supply chains. And we were in a customer conversation yesterday with a very large, recognizable brand who said one of their top priorities this year was is sustainability. They've set out some carbon emissions targets. We're actually helping them with that, through that, in thinking about, you know, how can we optimize supply chains? So, I mean, just by the very nature of having that kind of an approach, we're plugging into customers' supply chains to help them from a sustainability standpoint. So, you know, investing in our strategy is an investment in sustainability as well.

Thank you very much.

Thank you. Thanks, Jeff. Okay. Thanks a lot, Jeff. Well, listen, we thank you for joining us this morning. We appreciate your interest in Art Best, and this concludes our call. Thank you very much.

That concludes today's call. We thank you for your participation and ask you to please disconnect your lines.