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spk03: Greetings and welcome to the ARCBEST fourth quarter 2022 earnings conference call. During the presentation, all participants will be in the 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 on Friday, February 3rd, 2023. I would now like to turn the conference over to Mr. David Humphrey, Vice President of Investor Relations. Please go ahead.
spk14: Thank you for joining us. On today's call, we will provide an update on our business, walk you through the details of our recent fourth quarter and full year 2022 results, and then answer some questions. Joining me today are Judy McReynolds, Chairman, President, and CEO of ArcBest, David Cobb, Chief Financial Officer of ArcBest, Danny Lowe, ArcBest President of Asset Light Logistics and Chief Yield Officer, as well as Dennis Anderson, ArcBest's Chief Customer Officer. To help you understand ArcBest and its results, some forward-looking statements could be made during this call. Forward-looking statements, by their very nature, are subject to uncertainties and risk. For more complete discussion of factors that could affect ARPBEST's future results, please refer to the forward-looking statements section of our earnings press release and our most recent SEC public filings. To provide meaningful comparisons, certain information discussed in this call includes non-GAAP financial measures as outlined and described in the tables in our earnings press release. Reconciliations of the GAAP financial measures to the related non-GAAP measures Discussed in this call are also provided in the additional information section of the presentation slides. As a reminder, there is a conference called Slide Deck that 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 on the webcast. We will now begin with Judy.
spk01: Good morning, and thank you all for joining us. I would like to begin by acknowledging a few tremendous milestones for ArcBest. First, we exceeded $5 billion in annual revenue for the first time in company history, with year-over-year revenue growth of $1.3 billion. We also achieved the highest earnings per share in our company's history. These important accomplishments could not have happened without the hard work and dedication of the entire ArcBest team. The other important milestone I want to highlight is a celebration. 2023 marks our 100th anniversary. ArcBest has flourished over the past century, and we are positioned to continue driving this momentum forward into the next century. The road to 100 years has been paved with resilience, flexibility, innovative thinking, cutting-edge solutions, and a commitment to our core values. We know who we are, and because we have stayed true to our values and focused on our strengths, we've been able to innovate and successfully navigate enormous amounts of change. Nothing intimidates us. We have a saying, we'll find a way, which means we'll stop at nothing to get the job done well. I'm incredibly proud of what we've accomplished together. Our results remain strong, as does our growth opportunity, regardless of the obstacles facing our industry. We are on track to achieve our long-term financial target of $7 to $8 billion in revenue by 2025 and will continue to manage the business in the short term as market conditions evolve. As we've shown time and again, we are a company that thinks ahead and plans for the long term. We continue to strengthen our competitive edge through our diverse portfolio. The breadth of modes we offer our customers allows us to make the most personalized and strategic decisions for them, decisions that will help them grow. In fact, I recently connected with a customer whose supply chain we started managing last year. They initially saw ArcBest as an LTL company, but after learning about our additional solutions, they selected ArcBest as their logistics partner. Within a fairly short amount of time, we developed a deep partnership managing their transportation and creating exceptional value for them as a result we're expecting double-digit growth with this customer in 2023 it is deep trusted customer relationships like this that have and will continue to contribute to our success in any operating environment throughout 2022 we continued our strategic investments in technology and innovation Innovation isn't just a buzzword for ArcBest. It's embedded throughout our long-term plans and in the way that we approach our daily work. We started and completed numerous technology projects in 2022, which allow us to run our business with more precision, better identify issues, and quickly address the root causes with a tailored solution. Looking ahead, we're advancing our use of technology to strengthen our business and better serve our customers. We bring our innovative mindset to every partnership, building processes and digital capabilities that make it easier and more efficient to do business. We prioritize investments in these critical parts of our business to stay ahead and succeed now and in the future. Building on that, you've heard us reference an innovation investment we've made, which includes patented handling equipment, software, and a patented process to load and unload trailers. In addition to being used in parts of our network, we are currently piloting this program in several customer locations. We're encouraged by the early value it's delivering, and we have several large customers already interested in broader deployments of the solution. We believe it has the potential to be an industry game changer and look forward to sharing more later this quarter. Of course, none of our innovation or our results this year and over the past 100 years would have been possible without great people who work hard every day to solve logistics challenges for our customers. A sincere thank you to the ArcBest team. And now I'll turn it over to David, who will take you through the quarter and the year in greater detail.
spk17: Thank you, Judy, and good morning, everyone. I'll begin by highlighting our consolidated results. Fourth quarter 2022 consolidated revenues were $1.2 billion, a 5% increase over last year. On a non-GAAP basis, consolidated operating income decreased 19% to $83 million. and our adjusted fourth quarter earnings per diluted share was $2.45. For all of 2022, our consolidated revenues were $5.3 billion, a 34% increase over 2021. Non-GAAP consolidated operating income was $473 million, a year-over-year increase of 49%. 2022 adjusted earnings were $13.66 per diluted share, an increase of 60% over 2021. The 2022 effective tax rate that was used to calculate the fourth quarter non-GAAP EPS was 26.3%. And under current tax laws, we expect our 2023 non-GAAP tax rate to range from 26% to 27%. Of course, this may be impacted by discrete items throughout the year. We're pleased that our business momentum this year produced solid cash flow with our 2022 EBITDA totaling $572 million. ARCBES cash balance and total liquidity are also at strong levels, and as of the end of 2022, we had net cash of $61 million, an improvement of $13 million since the end of the third quarter. Total liquidity of $566 million remains at a very healthy level, and despite rising rates, the composite interest rate on the company's outstanding debt at year-end was just under 3%. ArcBest's strong balance sheet and the operating cash flow generated in 2022 allowed us to invest in the business through new equipment purchases, real estate additions and improvements, and technological innovations, all of which will strengthen our competitive edge and ability to serve customers. We regularly review external growth opportunities and are pleased to have returned capital as shareholders with enhanced share repurchases and the quarterly cash dividend, which the board increased by 50%. in April of 2022. We will maintain our balanced approach to capital allocation, targeting investment-grade credit metrics while prioritizing returning capital to shareholders through share repurchases and dividends, and considering M&A opportunities when appropriate. Additionally, in the current environment with reduced business levels, we are especially focused on effectively managing personnel, equipment, and other resources to provide superior customer service while controlling costs and improving profit margins. Turning to the key metrics in our asset-based business, our asset-based fourth quarter revenue was $711 million, an average daily increase of 5% over last year. The fourth quarter non-GAAP asset-based operating ratio of 88.6 is a year-over-year increase of 170 basis points. As mentioned last quarter, repairs and maintenance have been elevated due to inflationary costs and in part due to delays in receiving replacement equipment. Those costs are in the asset baseline for fuel supplies and expenses. Also, as I mentioned last quarter, we were able to make good progress on optimizing our usage of outside resource costs with purchase transportation declining as a percent of revenue. Fourth quarter tonnage per day decreased 5.5% and daily shipments increased by 1%. Total fourth quarter build revenue per hundredweight increased 9.3%, including fuel surcharges. We secured an average 5.4% increase on asset-based customer contract renewals and deferred pricing agreements that were negotiated during the quarter. In 2022, total asset-based revenue was $3 billion, a daily increase of 17% and the highest ever for ABF. Total tonnage and shipments both grew approximately 2%. Total revenue per hundredweight increased 14.5% with an average 7.3% increase on contract customer contract, and deferred pricing agreements renewed during the year. The full year non-GAAP operating ratio was 86.4%, reflecting an improvement of 240 basis points year-over-year and 1,150 basis points over the previous six-year period. As we look at January trends, the slowdown in the general economy has impacted customer order quantities and resulting shipment sizes compared to January 2022. On a preliminary basis, our January 2023 asset-based tonnage increased 1% and shipments increased 7% year-over-year. For additional details on our January 2023 trends, please refer to our Form 8K exhibit to the press release. In ARCBEST asset light business, total fourth quarter revenue was $572 million, a daily increase of 7% versus fourth quarter of 2021. and reflecting a full quarter of mobile operations in 2022 compared to only two months in last year's results, but also offset by a slowdown in customer shipping volumes, softness in market rates, and changes in business mix. In the FleetNet segment, events and revenue per event increased over the prior year period. And for all of 2022, asset-light revenue increased 60% over 2021 to $2.5 billion, reflecting the impact of the full year of MOLO and strong customer demand for our logistic services, particularly in the first half of 2022. Fourth quarter asset light non-GAAP operating income was $11 million, and for full year 2022, totaled $90 million, an increase of 82% over full year 2021. Fourth quarter asset light EBITDA was $13 million and totaled $90 million in 2022, a 74% year-over-year increase. We provided preliminary asset-light business trends for January 2022 in the Form 8K exhibit to the press release filed this morning. Current trends in that business continue to be softer, reflecting the recent demand slowdown. In 2022, net capital expenditures, including equipment financed, totaled $211 million. 2022 expenditures for revenue equipment totaled $93 million, most of which was for ARCBEST asset-based operation. Depreciation and amortization costs on property, plant, and equipment totaled $127 million. In addition, amortization of intangible assets was $13 million in 2022. As in 2021, manufacturing delays and parts shortages impacted us in 2022, and as a result, we had to reduce some trailer orders and a portion of our asset-based equipment and real estate projects were pushed out during the year and into 2023. For 2023, we expect total net capital expenditures of $300 million to $325 million, including equipment purchases of approximately $175 million, the majority of which is for ARTBEST asset-based operation. As I mentioned, our 2023 investment plans reflect catching up on some 2022 equipment and real estate projects as well as 2023 investments above last year's levels in equipment to support our growth plans toward our long-term targets. 2023 depreciation and amortization costs are estimated to be approximately $130 million. This does not include amortization of intangible assets, which is estimated to be around $13 million for 2023, primarily related to purchase accounting amortization associated with the MOLO acquisition. We are very pleased with our financial results in 2022. Our financial strength and century-long commitment to effectively meeting customer needs positions us to navigate market challenges effectively while focusing on our strategy for long-term growth and sustained profitability. Now I'll turn the call to Danny.
spk13: Thanks, David. Good morning, everyone. I'll provide an update on the asset light side of the business and give a high-level overview on yield. We continue to see benefits from an improved truckload offering as well as benefits from the MOLO acquisitions. The timing of that acquisition has been particularly favorable as it brought us more contractual business and better procurement in the spot market. While truckload spot rates declined sharply in the fourth quarter, we still grew shipments, which is a testament to the strength of our truckload solution. We continue to focus on profitable shipment growth in pursuit of our long-term financial targets, despite market pressures that impacted us in the fourth quarter. Shorter term, we are also focused on what we can control. and part of that is managing costs. We continue to invest in our existing team with a focus on employee productivity. Additionally, we have better capacity capabilities and are continuing to benefit from Molo's carrier management approach. On the asset-based side, pricing has also remained rational, and our focus continues to be on profitable growth and effective cost control. We implemented our general rate increase in early November and we will price appropriately to reflect our high-quality service offering. As we enter our 100th year, we continue and evolve to better serve our customers, which positions us well in any market environment. We have diversified our solutions and worked diligently to integrate them so customers have seamless access to our services. We are streamlining our business from the initial interactions with our customers to the day-to-day execution and are seeing the benefits of this strategic work. We have built additional revenue streams through solutions like dynamic pricing and UPAC, which supplement our published LTL business and allow us to flex based on customer needs and market dynamics. In times like these, we strategically use these tools to fill empty capacity with profitable transactional shipments, which up to this point has enabled us to avoid furloughs or layoffs. and provide a more sustainable service officing while being better positioned for profitable growth toward our long-term targets. In short, a big win for our best, our employees, and our customers. There's debate in our industry about a technology-centered versus a human-centered approach. We believe the key is having a blend of both, using technology to improve efficiency for employees while giving our customers the choice and the ability to seamlessly switch from technology-driven solutions to human-driven ones based on their needs at that moment. We are pleased with the progress we have made and the feedback we've received from our customers. Having productive employees is critical, and we are pleased with the productivity improvements we are seeing with having all of our truckload employees on the same operational platform. With 100 years of experience, we are uniquely positioned to help our customers find the best solutions for their supply chain needs. Taking a broader logistics partnership has benefited both segments of our business. It has enabled ABF to have a better selection of freight with the ability to choose shipments that fit best within that network and has allowed us to say yes to customers who move freight another way but won't arc best to coordinate and centralize the logistics experience. So we began a pilot that would expand brokered LTL to transactional shippers. And through this, we learned some important lessons. As a result of our close relationships, we were able to gather valuable feedback from customers and our LTL carrier partners and learned that there were some places that the experience could be much more efficient. Using our internal tech team and leveraging our 100 years of experience in the LTL industry, we quickly stood up a proprietary system to address the inefficiencies identified. While this project is still in pilot phase, we are encouraged by the early results and look forward to expanding the pilot to serve more customers. Now, I'll turn it over to Dennis.
spk18: Thank you, Danny, and good morning, everyone. Our focus remains on creating value for our customers, and we have taken important steps to help us advance this goal, including strengthening our organizational alignment and collaboration and making strategic investments in technology. We have tightened coordination across our sales, marketing, operations, and service teams, which enables us to be more productive and efficient while providing a more seamless experience for customers. You hear us talk a lot about our customers. and we're celebrating our 100th anniversary this year because they continue to trust us to solve their logistics challenges. When they win, we win, and we strive to make decisions with a customer-focused mindset. Of course, that means having a superior service offering that they value, but it also means serving them efficiently. Technology is a big part of making that happen, and over the last few years, we have been diligently working to build systems to give our customers a best-in-class experience. We view this as an investment that strengthens every point on the customer journey. Providing a best-in-class experience throughout that journey starts by giving our employees the tools they need. So we work with a disciplined approach to improve system and process efficiency. An example of this is our city route optimization project which has already been rolled out to about a third of our service centers, which handle nearly half of the freight in the ABF network. This deploys advanced analytics to dramatically reduce the amount of time it takes our people to plan pickup and delivery routes so that they can focus more on managing the operation in real time. Locations using this technology were 80% more effective at reducing cartage in the fourth quarter. This is just one example of how we are relentlessly pursuing better, more efficient ways of doing business. Customers also want better supply chain visibility, and based on their feedback, we began building a platform to enhance that visibility across all of our solutions. This is no small feat given our breadth of mode options and capacity sources, but we know it's important for our customers' success and an opportunity to enhance our value proposition for them. So we will begin testing with customers later this year. Additionally, we just launched a redesigned website at arcb.com, and we'll be rolling out enhancements there throughout the year, improving the site's functionality and enhancing the user experience. Our customer needs drive our strategy and innovation investments. We are in a strong position both to listen to and act on customer feedback. The pilots we've been running with our customers to transform the way they handle freight are providing encouraging results, and we're excited to share more with you about that solution later this quarter. In short, innovative technology is an important driver of growth and efficiency for our company and an important differentiator for ARCBEST with our customers. Despite the softening occurring in our industry and the economy, designing and running efficient and effective supply chains have never been more critical. The opportunity for us is as significant as it has ever been. Shippers have largely shifted their focus from just securing capacity to improving supply chain efficiency, and we are in prime position to capitalize on that opportunity as our integrated solutions and our managed transportation offering in particular are designed just for that. Additionally, our customer pipeline is robust. We are closing more and larger deals, and more customers are using more than one of our solutions. Customer retention remains strong, and with our diversification across multiple industries, we are positioned better than ever before to perform through any cycle. It's not uncommon to have customers who change companies even take us with them as their logistics provider. Just recently, I was talking with a customer who did this. They had used this to manage their transportation at their prior company, but when they joined a new organization, the solution they needed help with the most was truckload. So that's where we started. Hearing these stories from customers is a testament to the deep relationships we have with them as we partner to build the best supply chain for their business. I'm very proud of what our entire team accomplished this past year. Our long-term focus on customer value creation, our breadth of integrated solutions, the expertise of our people, and our tech-savvy and innovative spirit mean that we are poised to capture the large market opportunity ahead of us and reach our long-term financial targets, regardless of the environment. Now, Judy, I'll turn it back over to you.
spk01: Thank you, Dennis. Before we conclude, I first want to take a moment and thank David Kopp for his contributions to ArcBest. David recently announced that he will be retiring later this year, and we are actively working to identify his successor. When David joined the organization 17 years ago, we had $1.9 billion in revenue, and 97% of our revenues came from the asset-based side of our business. David has worked alongside me and other leaders every step of the way to help transform ArcBest into the integrated logistics company it is today. He has led with integrity and skill, helping us navigate many changes. And on top of it all, working with David has been a pleasure. We will miss working with David when he leaves in October, but wish him the best in his retirement. As we close, I want to reflect one last time on our strategy and position. Supply chains have never been more critical or complex. We regularly revisit our strategy to make sure it's sound and that we're executing well against it. When customers needed capacity, we were positioned to serve them and grow with our own assets and a network of currently over 95,000 carrier partners. And now, with customers looking for efficiency, we're well positioned to deliver. We have an incredibly talented group of employees who are experts in our fields, including a nearly 500-person in-house technology team, building and implementing systems to make us and our customers' businesses more efficient. Our breadth of solutions and our innovative mindset allow us to build flexible, resilient supply chains. While there are some macroeconomic headwinds, ArcBest has demonstrated resilience throughout its history. We are ready for what's ahead, both this year and beyond. I want to close by thanking our current and past employees, our customers, partners, and shareholders for helping us reach our 100th anniversary. Thank you for the opportunity to serve you. We are proud of what we've accomplished, but we are just getting started. We're committed to keeping the global supply chain moving, delivering on our goals, and driving growth as we look forward to our next 100 years. That concludes our prepared remarks. David Humphrey, we can now open the call up to questions.
spk14: Okay, Frank, I think we're ready for some questions.
spk03: Thank you. If you would like to register a question, please press the 1-4 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.
spk04: One moment, please, for the first question. Our first question comes from Chris Weatherby with Citigroup. Please proceed.
spk06: Hey, thanks. Good morning, everybody. Good morning, Chris. You know, I guess I wanted to start on demand trends and what you guys are seeing in the asset-based business. So if we look at the monthly tonnage, you know, it looks like it decelerated a bit over the course of the quarter, but then the January number, I think, was plus one. So maybe it looks like a little bit of a reversal of that. So, you know, don't necessarily want to get too hung up on any one given month, but kind of wanted to get a sense of what you're feeling in terms of rounding the corner on 2022 and coming into 2023 in terms of customer demand and LTL.
spk18: Hey, Chris, this is Dennis. First of all, we did see a deceleration as the quarter progressed, certainly in a weakening environment. Retail led that, but of course, we have seen some softening as the quarter progressed in manufacturing as well. Really, as we progress into January, the trends are similar. I mean, we look at the year-over-year number, but The demand environment feels very similar to where it ended the fourth quarter. And certainly, you know, I'll let Danny comment if he has any other things to add.
spk13: No, I think that's what Dennis said is consistent. It's broad-based. You know, Dennis said retail is leading, but I think we've felt weakness across. Maybe a great representation of what we see is really with our managed customers. We have a very high retention rate. Really can't remember the last time we've lost a customer necessarily in that. But we've seen a deceleration in top-line revenue for that, which is meaning our customers aren't shipping as much inside that business because we see the whole supply chain. So I think that's representative of really what we sell across all of our business through the fourth quarter and even into January at this point.
spk18: Yeah, that trend's consistent across asset-based and asset-light. Customer retention is still terrific. But the customers in general are shipping less across the board.
spk06: Okay. That's helpful, Culleran. Just a follow-up on pricing. So I noticed in the 8K you mentioned that the increases ex-fuel in January are coming in on the LTL side in the double digits. Kind of getting a sense just what your feel is about the sustainability of that level of pricing power. I know comps clearly have something to do with that as well as the year progresses, but I wanted to get a sense of how you're sizing up sort of the sustainability of really good pricing power in the LTL business as we move through some of this softer tonnage environment over the next several months or maybe several quarters.
spk13: Sure. This is Danny again. The pricing environment is still rational. We really haven't seen weaknesses across that piece of it. It's obviously not the same as last year, but if you look at Our increases in the fourth quarter on deferred contracts, like you mentioned, what we're seeing in January with the revenue per hundredweight, we're comfortable that we can continue to price and price above inflation as we go forward. Our transactional business that we talk about gives us strength, helps us have more confidence in the core business and what we can do with the price levels there. But right now, again, I would say that it's consistent with what we've seen through the fourth into the first quarter so far. Okay.
spk04: Thanks very much for the time this morning. Appreciate it. Thanks, Chris. Thank you. Our next question comes from Ravi Shankar with Morgan Stanley.
spk03: Please proceed.
spk16: Thanks, everyone. Congrats to David and congrats to everyone at ArchBest for the 100th anniversary. I think this is the perfect catalyst to host another analyst day and give us some limited edition swag, but that's just me.
spk00: We have some good luck.
spk16: Yeah, that would be a good catalyst for that. So just to kind of follow up on the previous question, kind of how do you think about that algorithm between tonnage growth and pricing? Kind of at what point, like is there such a thing as too much price that you kind of dial down to get some more volumes to kind of drive up the operating leverage? Or just a little bit of some background on that process would be helpful.
spk13: Sure. Robby, this is Danny again. I'll start, and maybe Dennis may have some more. You know, we are seeking the right balance, but I think the key to that is we have more visibility than we've ever had. We're able to make decisions. My yield team meets with the operations team with ABF really every week, but really conversations going on every day, and we're able to make decisions about what we want into our network. And, again, having the ability to have the core business, kind of that committed, long-term business, and then fill in where we're having capacity with transactional is really unique and gives us an advantage in how we approach the marketplace. And so one of the biggest things that we're able to do, we mentioned that we haven't had a need to furlough or lay off employees. That puts us in great position for our long-term targets. If the market turns with that, we can move from transactional core business as our customer's demand comes back and they approach us. And that business is at a higher revenue per hundredweight than the transactional business. But the transactional business is profitable and puts us in a great position right now. So that's really how we're thinking about it. We kind of adjust as the market goes. And so the flexibility is the key there that as the market dynamics change, we're able to bend and flex to the right answer for our company.
spk18: Hey, Robbie, this is Dennis. Just adding there, you know, when you look at what our pipeline looks like for LTL business, that's strengthened significantly. And we have more opportunity really than, you know, seen in a long time to grow that demand base. And we think about where we're positioned as an integrated logistics company, we're seeing more opportunities and able to manage, you know, as Danny talked about, what business we really can take and want in that asset-based business. And so, we have the capability with that integrated logistics approach to be able to really optimize that answer for us.
spk04: Got it.
spk16: That makes sense. And maybe as a follow-up, can you just parse some of the differences in the outlook you're seeing out there between your retail customers and your industrial end customers? I think there's some expectation that retail customers might see normalization fairly soon, but industrials might take longer. Can you remind us of your mix of the two of them and also what the outlook difference might be between them?
spk18: Yes, certainly. Manufacturing is still the leading part of our customer base. It's about a little over a third of our customer base. And then retail... It follows behind that. But in the retail industry, you know, we're seeing some normalization of inventory levels. Certainly what we're hearing from most of our customers is that they're back either at or near pre-pandemic levels. But that does vary within the retail space, certainly by the type of retailer. And so, you know, we see some different trends within that. But on the manufacturing side of things, I mean, certainly, as I mentioned, that lagged a little bit, the retail weakness. And so we saw retail weakness probably a little bit before we saw the manufacturing weakness that showed up really as the fourth quarter progressed.
spk04: So that's really, you know, what we're seeing there. Sounds good. Thank you, everyone. Thank you.
spk03: Our next question comes from Jason Seidel with Cowen. Please proceed.
spk19: Thank you, operator. Hey, Judy. Hey, team. Good morning, David. Congratulations. A couple quick questions. Thank you.
spk17: Thank you very much.
spk19: Oh, you're so welcome, David. Well-deserved, sir. I want to go to pricing a little bit here. You know, we're still seeing, I think, what you would call a good and rational marketplace. but you did see some sequential drop in terms of your contract renewals. I think in your slides it said 480 bps. You know, are we getting it close to the point where we're starting to worry about being able to price above sort of your cost inflation, which, you know, everyone's seeing a lot of costs going up right now? And number two, you know, are we fearing that, you know, you could see a drop off in volumes if the economy slows? That could be a detriment to the pricing market as we move throughout the year.
spk13: Yes, Jason, this is Danny. So two things. One, just the levels you talked about, you know, 5.4% in the fourth quarter. If we go back, it's still probably a top 25th percentile for us on increases. It's still a rational market. As far as continuing ahead, yes, we feel confident we can price to cover inflation and also capture value in our service offering as we go forward. I think the other piece is to look back at over the two-year stack of the pricing improvements that we've had. It puts our core business at a really great level, and that takes pressure off of trying to get larger increases if you're just trying to cover the inflationary pieces of it that you go forward. I think your other question with regard to does declining demand put pressure is kind of what I mentioned before. I think we feel confident right now that we have a transactional lever that can keep us, keep our employees active and keep profitable shipments into our business that takes some pressure off of the price on the core business. And again, we will keep it going and we will keep focusing on and pricing above inflation. And we also have the network and the employees so that as demand returns that we're positioned for it. The other piece is we're a logistics company. So as customers come back to us from on a pricing standpoint, if cost is the immediate thing they want to, we're going to have a supply chain discussion with them and talk about our managed operations and what they're trying to accomplish with their business. If it really is to a point that we can't handle that in ABF at the price level they want, we're going to move the business into our managed operation. We'll service the customer and we'll make margin off of it using our logistics partners. And so we're just well positioned no matter which way the customer turns.
spk19: Yeah, that's good color. Wanted to get my next question here on Molo. I guess, Judy, where do you think it is relative to your prior expectations when you guys bought it and then Looking forward, you know, the market is what the market is for brokerage, but are there any levers on the cost side or any things you guys can do to sort of improve the productivity there?
spk01: Well, it has met our expectations in the initial year and a little bit here. We were, you know, the performance last year for all of AssetLight, but in particular, you know, the truckload solution was was good. And, you know, one of the critical areas, or actually two things. One, you know, just the knowledge of the capacity and, you know, buying and, you know, the approach, the business model that was really used there, fully adopted into what we're doing today and successful. And then the opening up of customer opportunities by having a greater truckload solution at scale has really helped us. And, you know, we are on track with the EBITDA targets as we closed out the year, and that's what we had predicted. And so we feel good about that. But, you know, I do hear what you're saying about the current environment. It is certainly depressed, just an absent spot market. And, you know, we're navigating through that. We do have some cost reviews going on to, you know, better position us with costs that are appropriate. I think we've already talked a little bit about the technology areas of advancement, trying to enable our people to be more efficient. And all of that is going to help us as we move forward. But I want to say this, you know, we're focused on those 2025 targets. We want to grow this. And we're going to position ourselves, you know, to be able to grow. And, you know, this environment that we're in right now is not going to last, you know, forever. And we feel like we're in a good position, you know, as we come out of it.
spk19: Thanks, Judy and team. Appreciate the time as always.
spk04: Thank you, Steve. Our next question comes from Jordan Alliger with Goldman Sachs.
spk03: Please proceed.
spk12: Hi, yeah, just on the cost side for the asset base, sir, maybe can you talk to, you know, some of the lines that you may be able to lever as we, in this demand slowdown, are you doing things on headcount, additional stuff on purchase transport, just trying to get a sense for, you know, the ability to maintain your OR over the course of the year, and at least for the start of the year, what could be a softer demand situation? Thanks.
spk17: Yeah, this is David. I'll start off here, and others have something to add, but You know, I mentioned a couple things in the opening comments just about our progression, you know, in the quarter where we made some ground on outside resource utilization. And that comes with, you know, as we mentioned, having that good employee base and we're able to, you know, to do more of that internally, which we like to do. And so, you know, we see opportunity there as we move forward, as we get our team more productive. You know, we did a lot of hiring. in 2022. And so we expect that team to improve in their productivity as we move forward. So that's one area. I think the other area is the repairs and maintenance is one of those items that I called out where we had some elevated costs. Some of that's due to the equipment replacement cycle and timing of that. But some of that's just inflationary cost in the repairs and service side of it that we were seeing. But But, you know, we could make some progress on that as we, you know, have a good CapEx plan in place. And as we bring on some of that equipment, you know, didn't get delivered until late in the year and into 2023. And so, you know, this is our 2022 orders I'm talking about. So that has opportunity there as well. But those are probably some of the, as we move forward, areas where we could see, you know, improvements.
spk12: And on the headcount front, I mean, do you expect it to stay relatively static for now, or what's your thoughts on that?
spk17: Well, I think, you know, that's obviously going to be dictated by our business levels to a certain extent. But, you know, I would say just moving from December to, you know, we've been hiring through the year of 2022, but moving from December to January roughly, you know, kind of flattish right now. And then we're certainly going to monitor that as business levels prove.
spk01: Well, you know, the other thing, David, is naturally we have retirements.
spk00: Right.
spk01: You know, and, you know, that's something that we're focused on and making sure that we have people in the right places. But we, you know, we really have that opportunity as we go. And then our visibility into the network about, you know, the business volumes that we have at given locations has never been better than It's one of the reasons why some of the transactional business that Danny's talked about already works well for us and really provides an opportunity for us to better manage our costs. And, you know, we have a pilot of our city route optimization technology and initial results of that improved productivity by a percent and a half. And also we had 67% reduction in cartage in those locations, and that's better than 25% reduction in some other locations. So, you know, not only do we just have the pure matching of the headcount to the business levels, but we also have this type of work that's going on to optimize as well as the ability to attract, you know, that transactional or quoted business to best serve our needs when we have those in the network.
spk12: Great. Thanks so much.
spk03: Our next question comes from Jack Atkins with Stevens Incorporated. Please proceed.
spk15: Okay, great. Good morning. And David, I'll add my congratulations to the others. Thanks for all the help over the years. So I guess maybe kind of for you on this, David, I mean, as you sort of think about the business here in the first quarter, you know, you guys have really highlighted all the efforts that you've undertaken to make the business more resilient through cycle and make it more dynamic in terms of its operations. I mean, as you sort of think about, as we head into the first quarter, you highlighted in the 8K, I think an average sequential deterioration fourth quarter to first quarter is about 400 basis points. It's greater than that during periods of economic uncertainty. You know, should we think about you guys performing kind of better than you would historically based on, you know, all the items you just flagged in terms of the business processes that you've implemented?
spk17: Yeah, Jack, you know, there's – we give that point of reference, you know, as a historical sort of number, and that's – you know, it would be our intention to try to beat that. We certainly would try to – we think it's achievable to get our cost per shipment kind of in a lower place. And so there's opportunity there. And in those areas that Judy mentioned from technologies and then, as I mentioned, around our stable workforce, certainly the macro, though, is going to dictate a bit of things and have an influence. And so we'll manage carefully through that. But just, you know, it's not about managing quarter to quarter. It's really about staying focused on these longer term growth targets. And, you know, I'm excited about that for the business.
spk15: Okay. Okay. So, you know, just sort of, we'll be interested to watch how that unfolds this year. And then I guess from our follow-up question, you know, as you sort of think about the second half of this year, you have the labor negotiations, you know, I know you don't want to bring the bargaining table to the, to the fourth quarter conference call, but is there anything you can kind of maybe help us kind of think through in terms of Timing, there was another large union employer that reported last week that doesn't feel like they're expecting a significant step up in their expenses related to their new contract. They feel like they're sort of towards the market there and that their business has been sort of keeping up with inflation. Is there anything you can maybe help us think through? Because I know that's a point of concern for investors, just that there could be some labor inflation in the second half of the year. Thank you.
spk01: Well, you know, as we always are, you know, we're prepared, you know, for what's coming in terms of the contract negotiations. I feel like, you know, our team has prepared and planned, you know, and we're in a good place. And, you know, our leaders are regularly in the field with our employees and hear directly from them. um, about what's on their minds. And so we're, we're in a good place. I feel like that, uh, we're, you know, very experienced. Um, I've been through a number of these and, um, you know, they're all, um, different, but, you know, as long as you're prepared and you have the good, uh, uh, approach and intentions and information, you know, typically, uh, we can work our way through this. And, and so, um, you know, it obviously between, uh, you know, now and, uh, You know, the expiration of the contract, there's a lot of work to do, and so we're going to stay focused on that.
spk15: Okay. Would you expect it to be a win-win-win, I think, is the way UPS framed it up? Is that your expectation as well?
spk01: Well, I mean, you know, I'd really rather not comment on that because, you know, it still has yet to be worked through. But, you know, certainly you always want a winning situation, a winning outcome.
spk04: Okay. Thank you. Our next question comes from Scott Group with Wolf Research. Please proceed.
spk11: Hey, guys. This is actually Erin on for Scott. I just wanted to follow up a little bit on the January tonnage comments, the deceleration throughout fourth quarter and then, you know, it's like year-over-year pickup. I'm just curious how that is versus normal seasonality. I know that you said that the December versus January trends are pretty similar, but I'm just curious how that is versus seasonality and what you're kind of expecting seasonally for China throughout the quarter.
spk17: Yeah. I'll just back up a little bit and just talk about fourth quarter, certainly some month-to-month changes. But when you think about sequentially fourth quarter compared to third quarter, it was one of the worst sort of periods in terms of tonnage in kind of our past 10 years. But sequentially versus December, January tonnage and shipments are up about 1% when typically that's a sequential trend that's lower from December to January. So This is, you know, it's hard to comment really about one particular month, but I would say it's trending above normal seasonality. I mean, I think certainly the customer demand environment is similar, though.
spk11: Got it. Okay. And then just quickly on fuel and how should we think about the net impact of fuel, you know, this year? I know that there's some tougher comps. later in the year. I guess, how do you guys think about that in the second half? Could that be a potential headwind by mid-year?
spk17: Yeah, certainly fuel is a big part of the overall revenue that we'll have, and it'll impact the dollars per shipment. We're not sure where the price will go, but as you mentioned, I think the fuel prices in 2020 2022 kind of peaked in the spring. And so, yeah, there's, you know, from this level, it's lower now versus when it was in the spring of last year of 2022. So that'll be a little tougher. But, you know, our fuel surcharge mechanism works really well in terms of, you know, for the customer as well as for us. And so, you know, it just really is You know, there's a lot of impacts of fuel in our business and our cost, and so that fuel surcharge mechanism serves to cover those costs.
spk11: Okay, got it. Again, thank you for the time.
spk04: Thank you. Our next question comes from Todd Fowler with KeyBank Capital Markets.
spk03: Please proceed.
spk05: Hey, great. Thanks, and good morning. So I guess I wanted to ask on the growth plans. I know in the CapEx, you've got, I think it's like 55 to 65 million earmarked for real estate. You know, in this environment, and I know you've talked about, you know, expansion, you know, going back, you know, over the past year or so. But as the environment changes, you know, how much flexibility do you have on expanding out the network at this point? And maybe you can just talk about the cadence and your thoughts around expansion in the environment. Thanks.
spk17: Yeah, I mean, Todd, that real estate plan for 23 is similar to what we did in 2022. And as we've talked about, we haven't invested in that area in a number of years. And it's great to have the cash flow and the great balance sheet that we have to position ourselves in a better way. And so we're looking to be able to to have the capacity to expand our shipment count by the, you know, mid single digits again. And by the end of 2023 with that, from just the capacity that we're adding from a real estate perspective. And so like Judy said, we're positioning ourselves to grow and you know, with every recessionary, you know, freight recession, there is an eventual upturn. And so we want to be positioned for that. And that's what, you know, our plans call for. And we're, you know, taking a measured approach around our CapEx program and replacing equipment in our timely, you know, sort of total cost of ownership perspective on our equipment side. And so, you know, as we said, this is a little heavier year because of some of the spillover from 2022 and some catch-up that we needed to do there. So hopefully that helps.
spk05: Yeah, no, David, it makes sense. And, you know, certainly we appreciate the short-term versus the long-term. You're just kind of thinking about the, you know, the startup costs in that piece of it. But that makes sense. Maybe just for a quick follow-up, Judy, I'll take the bait. I think you teased about it a couple of times with the handling technology that you have and, you know, maybe some more details later in the quarter. But, you know, what are you willing to share with us now? It sounds like maybe, you know, partnering with some customers and having them use that technology. Is that something that would be, you know, a fee-based service or they'd be paying you for that? Or what are you willing to share with us now with the teaser that you put out here today?
spk01: Well, you know, I mean, I think it's the technology and equipment and process that we talked about before. And, you know, not only are we piloting that within the ABF network, but we have opportunities that have presented themselves, you know, with customers outside and within the work that they're doing. And so we're excited about it. And obviously, if it's work that we're going to be doing for a customer, once we work through the pilot, we would eventually be paid for that. And so sometimes, you know, when you're in a pilot scenario, you know, you have to have some flexibility over the things that you do with them. But it's an exciting thing. It will be later in the quarter when we talk more about it. But, you know, it is connected to, again, the technology, equipment, and process that we've referred to before. And so look forward to sharing more.
spk04: All right. Sounds good. We'll stay tuned. Thanks for the time this morning. Thank you. Our next question comes from Ken Hexter with Bank of America.
spk03: Please proceed.
spk07: Hey, great. Good morning, Judy, David, and team. Good morning, Ken. And to David again, thanks for all the discussions over the years, and congrats. Thanks, Ken. Yeah, you got it, Dave. If you could talk about the shift in pure pricing ex-fuel. I mean, I've heard the discussion through the Q&A, but maybe I'm just a little confused here. Seems like you talked about low single digits in the fourth quarter. Now it's double digits in January in the face of what's still tough pricing comps from early 22. Am I missing something there or are you talking about different categories?
spk13: So when we talk about double digits, that's really on that core business that we're talking about. That's the long-term committed price that we've offered to our customers. We may have called it published at some point in the past.
spk01: And it's year over year in January.
spk13: In January, correct.
spk01: Yeah, that's what we're referring to. And then the other piece is just the contracts that renewed in the fourth quarter were at 5% year over year. Yes. So really, it is different. It's different categories, but it's just indications of the strength of the pricing environment is what we're trying to give you, just give you color in a couple different areas on that.
spk07: But then on a revenue per hundredweight, it looks like, you know, if you're low single digits and then you remove, I guess, the comps, are you saying it is holding firm or is it decelerating as you're moving forward into January? Okay.
spk13: So the core business, like we said, we kind of gave those numbers. I think when you look at the overall piece, you get mix involved in that. And so the transactional business that we are bringing on to fill some empty capacity could be at a lower revenue per hundredweight, but like I mentioned, it's profitable. But from a revenue per hundredweight standpoint, you know, it could be that factors into the mix that you're getting to.
spk01: Yeah, Ken, let me try this. On what we call our core customers, that's our regular customers that are shipping. And those are, they have published rates. And so that's what we're referencing there. What Danny just talked about was when, and particularly when those business levels are weaker, you know, and when the network needs to be filled in certain lanes, we are supplementing that with transactional business that comes at the market. And so you can have some differences in the revenue per hundredweight comparisons both because of that and also because of the profile of the freight that's involved. But, you know, I think Danny made the comment earlier, we're seeing the pricing environment be strong and we're not seeing any real change to that.
spk07: That's a really helpful clarification because I think there was some concern on what is going on in the pricing market. Oh, okay. And, Judy, if I could follow up on Jack's question before. I just want to understand the kind of run-through on costs and your expectation now, I guess, for operating ratio. You know, you made a structural move, it seemed like, into the 80s, I think after kind of 20-plus years in the high 90s. How do you view this, maybe, David, with kind of as volumes decelerate, You talked about some of the costs and then the cost leverage you've got. But with a normal historical sequential shift, do we see that bounce back up above that 90 level? And I guess what your thoughts are as we go into 23?
spk17: Yeah, well, just in reference, kind of a short-term comment here and just talking about fourth quarter to first quarter, You think about that 400 basis points, and if you added that to our fourth quarter, that would give you a first quarter that's probably the second best first quarter OR in the past 20 years for ABF, despite it being a weak freight environment. I know that's short term. Like I said, we're building this business for even a longer term. perspective and to operating those long-term targets, operating profit margin targets of 10% to 15% in a more consistent basis. And that's for an annual kind of OR or operating profit margin perspective. And we know that first quarter is typically our weakest quarter of any given year. So, you know, I'd share that with you from a quarter perspective. We're not trying to manage this quarter to quarter. Again, we're trying to build for a longer-term view.
spk07: No, it's helpful. I guess I'm just trying to understand, given that fourth quarter was such a maybe a flattish, you know, seasonal business. And I know you're not typically as retail exposed, but given it was flatter, if that first quarter then becomes, you know, even better than, you know, that seasonal shift becomes a little bit different than normal sequential shifts between 14 and 1Q.
spk01: Well, I mean, I think all of this is really hard to read right now. I mean, I really do. But I think we're better positioned than we've ever been to see, you know, what the opportunities are and where we need to business and help customers, you know, navigate through that and then also benefit ourselves as a result. But it is, you know, it's an interesting environment to try to predict for sure.
spk07: Great. I appreciate the insights and look forward to the progress on the negotiations. Thanks, Judy.
spk01: Thank you.
spk14: Looks like we're going to go over just a few minutes, but I got a couple more that want to ask some questions, so we'll go ahead and proceed.
spk03: Our next question comes from Ari Rosa with Credit Suisse.
spk04: Please proceed.
spk08: Great. Good morning, and I'll just echo everyone else's comments in saying congrats to David on the pending retirement. So one of the things, and we've kind of been talking about it throughout the call, but one of the things I think that was noteworthy was in the context of a challenging volume environment, we saw your shipments. declines less than competitors. It sounds like maybe the reason for that was you were using some of these transactional opportunities to fill empty capacity. I'm just curious, could you kind of confirm whether or not that's the case? And then also, how easy is it to then clear out that business from the network when volume returns or when demand returns?
spk13: Hey, this is Danny. I'm glad that you got our point. Yes, we are using transactional business to fill the empty capacity we have in our network. And again, you know, I want to reiterate this profitable business, as Judy pointed out, is market price business. We are making a shipment by shipment commitment on those. And so is the ability to move that out of our network and bring on additional of the core business is by day, basically, as we see the demand from our customers. We can turn our dials, and we will pull back on some of the transactional business to fulfill the needs of our – demands of our shippers as it comes back in.
spk08: Got it. That's super helpful. And then just – I wanted to ask one, I guess, modeling question perhaps. But you mentioned the profit-sharing bonus that's going to be paid to employees. How does that get reflected in results? Should we expect to step up in compensation expense then in first quarter, or how should we model for that?
spk17: Well, I'll just say that we were glad to be able to pay for 2022 the highest earn out on that bonus or incentive. And so we think that's a good thing for our employees, and we're glad to be able to do that. And typically, when we have those programs, we accrue for those throughout the year as earnings are made in a in a particular quarter relative to the full year. And so that's the way we do that. It's accrued throughout the year is the process.
spk04: Got it. Okay. Very helpful. Thanks for the time.
spk11: Thank you, Erie.
spk03: Our next question comes from Jeff Kaufman with Vertical Research Partners.
spk02: Please proceed. Thank you very much. Well, congratulations. David, going to miss talking to you, so I guess I'll have to ask you a question before you go. Judy and Dave, a more strategic question. So we're at $5.3 billion in revenue. You expressed your confidence in achieving the long-term targets by 2025. I'm just going to assume 2023 may not push that all that much forward. So when I think about 2023 to 2025, We've got to grow revenue 35%, 40% to hit the low end of that range. Organically, I don't know if it gets it there. So can you give us an idea of what types of potentially acquisitive growth would make sense the way you're building the franchise? And then the David part of the question is with the CapEx bump, there's not as much free cash this year, but your balance sheet looks very strong. How high would you go leverage-wise for the right strategic opportunity?
spk01: Okay. Well, you know, we, Jeff, as you've seen us do with the approach that we're using is we'll look for opportunities that add scale to our already existing solutions that we're providing customers. We're constantly listening to customers to see what they need. We have opportunities to advance our tech platform and what we're doing on some of these customer pilots. And we also are always involved in the startup space, looking at disruptive sort of technologies that are going to be either something that could help us you know, better execute and perform or better achieve results on the top line. And then also, you know, to benefit our customers. So we have all those things. We're very active in looking at what comes, you know, onto the market and, you know, excited about how that could, you know, make its way into the results for 2025. But I'll say this, we don't have to have an acquisition as we see it to achieve those. those targets. But again, just like we did with Molo, if you see a company that's out there that has an approach that's advantageous, we're in a position where we can go after that. But we do see robust opportunities to invest organically, which gets you to David's question.
spk17: I'll just say that generally speaking, we would like to stay within investment grade credit metrics. And so you know, that's going to, you know, we had a strong EBITDA we've got, you know, for the year. And, you know, if you were just to go one times that EBITDA, you could, you know, borrow up, you know, another $400 million or so just under our additional, you know, facilities that we have in place. And so with total liquidity of $566 million, you know, at the end of the year, we feel like we're in a good place and, you know, have a good solid capex plan for the year and investing into our business there with good returns. And so we're excited about where we are.
spk02: Well, that's my one and a half questions, so thank you.
spk14: Thanks a lot, Jeff. Hey, Frank, I think we've got time for one more question.
spk03: Our question comes from Bruce Chan with Stifel. Please proceed.
spk09: Hey, good morning, everyone. Just want to follow up on some of the comments around having some of those broader supply chain conversations with your customers and maybe understand a little bit more about how pricing works in the cross-selling process. You gave us a good rundown of all the benefits of cross-selling in the slides. So, you know, I guess thinking about all of those philosophically is there. any inclination to maybe incentivize cross-sold growth or growth in one part of the business versus another? Or is that just an entirely separate RFP and sales process?
spk18: Yeah, thanks, Bruce. This is Dennis. You know, I would say that we look at our customers holistically. And so when we think about what their supply chain needs are, we're not typically going in and prescribing products A specific service for them until we understand their needs. And so as we, you know, as we learn about their needs and their needs shift. And so we get into these conversations about what's going on their supply chain today and what might be happening tomorrow and understanding their pain points. And so, you know, that becomes – then once we identify the need, then we step into the process of understanding, you know, what solution needs to be built and how those need to be priced.
spk13: And so I'll turn it over to Danny in case he has any other – Yeah, just to follow up on what Dennis said, when we think about supply chain, you think about supply chain optimization, really the – What we're seeing in that is if we have the right conversations, we can eliminate costs from the supply chain, which takes pressure off of price. And so there's not a need at that point to kind of, I think you should describe, we were able to lower the overall by taking inefficiencies out of the supply chain. And so customers are excited and that allows us to have the the margin that we need on our business there.
spk18: Yeah. To add to that, Danny, it's, it's an order of magnitude different, uh, having a rate conversation for, for cost reduction for a customer versus changing the way that their supply chain works. And so, um, if you're able to optimize, you know, how they're the frequency and the distribution points, um, that, that they're shipping product, That is a significantly different cost-savings conversation than a rate conversation.
spk10: Okay, now that's helpful, Collin. I guess maybe just to clarify and put it simply, as your business is growing and as your service lines are growing, are you now managing or optimizing more towards an all-in, fully-baked price for customers?
spk13: Bruce, I would say that, you know, kind of as Dennis described, we're having an overall conversation. There's still individual pricing components underneath the structure, but those vary depending on what the solution is to it. So, yes, we think overall holistically with the customer, but then it still drives down to individual components after that.
spk04: Got it. Very clear. Thank you. Thank you.
spk14: Okay. Well, I think that concludes our call. We appreciate everybody being with us this morning. We ask you to disconnect now. Thank you very much.
spk03: That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.
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