ArcBest Corporation (NASDAQ:ARCB) Q3 2022 Earnings Conference Call November 1, 2022 9:30 AM ET Company Participants David Humphrey – Vice President-Investor Relations Judy McReynolds – Chairman, President and Chief Executive Officer David Cobb – Chief Financial Officer Danny Loe – President-Asset-light Logistics & Chief Yield Officer Dennis Anderson – Chief Customer Officer Conference Call Participants Chris Wetherbee – Citigroup Jordan Alliger – Goldman Sachs Jack Atkins – Stephens Incorporated Jason Seidl ...

ArcBest Corporation (NASDAQ:ARCB) Q2 2022 Earnings Conference Call July 29, 2022 9:30 AM ET Company Participants David Humphrey - Vice President, Investor Relations Judy McReynolds - Chairman, President & Chief Executive Officer David Cobb - Chief Financial Officer Dennis Anderson - Chief Customer Officer Danny Loe - President, Asset-light Logistics & Chief Yield Officer Conference Call Participants Chris Wetherbee - Citi Jack Atkins - Stephens Ken Hoexter - BOA Todd Fowler - KeyBanc Capital Markets Jordan ...

Financial Data and Key Metrics Changes - ArcBest achieved record revenues of $1.3 billion, a 60% increase year-over-year [16] - Non-GAAP consolidated operating income increased by 166% to $109 million [16] - Adjusted earnings per diluted share grew by 191% to $3.08 [16] Business Line Data and Key Metrics Changes - Asset-Based revenue for Q1 was $705 million, a 26% increase compared to the previous year [17] - Non-GAAP asset-based operating ratio improved by 570 basis points to 87.7% [17] - Asset-Light revenue increased by 115% year-over-year, with non-GAAP operating income up 163% [19] Market Data and Key Metrics Changes - Daily tonnage in the Asset-Based segment increased by 3.6% [17] - Total billed revenue per hundredweight increased by 21%, including higher fuel surcharges [17] - Preliminary April 2022 data showed strong trends in tonnage and shipments, reflecting some of the best year-over-year changes in 11 years [18] Company Strategy and Development Direction - The company continues to focus on a three-point strategy aimed at sustainable value creation, emphasizing investments in people, solutions, and technology [8][10] - The integration of MoLo is progressing well, enhancing customer relationships and operational capacity [13] - Partnerships, such as with Phantom Auto, align with long-term goals and innovation efforts [14] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the strategic direction and growth prospects despite macroeconomic uncertainties [8] - The company is well-positioned to navigate market volatility due to its balanced mix and customer-led strategy [15] - Management highlighted the importance of ongoing investments in technology and employee development to sustain growth [10][12] Other Important Information - The company ended Q1 with $101 million in unrestricted cash and short-term investments, and total liquidity of $303 million [20] - A $100 million accelerated share repurchase was completed, with an additional $17 million purchased in Q1 [21] - The quarterly dividend was increased from $0.08 to $0.12 per share, reflecting confidence in sustainable cash flows [21][22] Q&A Session Summary Question: Volume environment on the LTL side - Management noted that customers are still experiencing labor shortages impacting supply chains, but demand remains strong [36] Question: Sustainability of pricing environment - Management acknowledged that while comps will become more challenging, they are focused on providing value to customers [38] Question: Integration of MoLo and its impact - The integration is progressing well, with improved access to capacity and better service for customers [50] Question: Wage and benefit inflation - Wage and health benefit increases are averaging about 2%, with potential for margin improvement due to pricing exceeding inflation [57][59] Question: Impact of inflation on trucking business - Management highlighted that fuel surcharges are a significant factor, and they are engaging customers in supply chain optimization discussions [78] Question: Technology initiatives for the year - The company is investing significantly in strategic technology initiatives, including city route optimization and dock scheduling [86]

PART I [Business](index=6&type=section&id=Item%201.%20Business) ArcBest is a **$4 billion** logistics company operating three segments, focused on revenue growth, balanced mix, and cost optimization - **ArcBest** is a **$4 billion** logistics company with over **14,000 employees** across more than 250 locations, offering integrated ground, air, and ocean transportation solutions[11](index=11&type=chunk) - Operations are segmented into **Asset-Based** (ABF Freight), **ArcBest** (**asset-light**), and FleetNet, with **ArcBest** and FleetNet forming **Asset-Light** operations[13](index=13&type=chunk) - **ArcBest** acquired **MoLo Solutions, LLC** in November 2021 to expand truckload capacity, integrating its operations into the **ArcBest** segment[14](index=14&type=chunk) - The company's strategy focuses on revenue expansion, balancing **Asset-Based** and **Asset-Light** operations, and cost optimization via technology[19](index=19&type=chunk) [Asset-Based Segment](index=10&type=section&id=Asset-Based%20Segment) The **Asset-Based** segment, ABF Freight, provides LTL services, contributing **62% of 2021 revenues** with a largely unionized workforce - The **Asset-Based** segment, primarily ABF Freight, contributed approximately **62% of total company revenues** in 2021[24](index=24&type=chunk) - ABF Freight is a major LTL carrier with **239 service centers** across North America[25](index=25&type=chunk) - As of December 2021, approximately **82% of segment employees** were unionized, with labor costs representing **46.6% of segment revenues** in 2021[29](index=29&type=chunk) Profit-Sharing Bonus Performance | Year | GAAP Operating Ratio | Bonus Paid | | :--- | :--- | :--- | | 2021 | 89.9% | 3% (Maximum) | | 2020 | 95.3% | Earned | | 2019 | 95.2% | Earned | - The segment is piloting a new freight handling program utilizing patented equipment and software for improved efficiency and safety[28](index=28&type=chunk) [Asset-Light Operations](index=12&type=section&id=Asset-Light%20Operations) **Asset-Light** operations (ArcBest and FleetNet) generated **38% of 2021 revenues**, providing diverse logistics and maintenance services, including truckload brokerage - Combined **Asset-Light** operations (**ArcBest** and FleetNet) accounted for approximately **38% of total company revenues** in 2021[35](index=35&type=chunk) - The **ArcBest** segment provides a comprehensive suite of services, including expedite, truckload brokerage (**MoLo**), international shipping, and managed transportation[38](index=38&type=chunk)[39](index=39&type=chunk)[41](index=41&type=chunk) - The **MoLo acquisition** expanded truckload and dedicated services to a network of over **80,000 approved contract carriers**[41](index=41&type=chunk) - The FleetNet segment offers roadside repair and vehicle maintenance management for commercial fleets across North America[48](index=48&type=chunk) [Competition, Pricing, and Industry Factors](index=16&type=section&id=Competition%2C%20Pricing%2C%20and%20Industry%20Factors) ArcBest faces intense competition in **Asset-Based** and **Asset-Light** markets, with pricing strategies adapting to a **$355 billion** total addressable market - The **Asset-Based** segment competes with major LTL carriers, facing challenges from nonunion carriers with lower fringe benefit costs[49](index=49&type=chunk) - The **ArcBest** segment operates in a fragmented market with approximately **17,000 active brokerage authorities**, competing with major logistics providers[50](index=50&type=chunk) - Approximately **75% of Asset-Based business** uses negotiated pricing, with the company increasingly using space-based pricing to align costs with bulkier freight[54](index=54&type=chunk)[56](index=56&type=chunk) Estimated Total Addressable Market | Market Segment | Potential Revenue | | :--- | :--- | | LTL Market (Asset-Based) | $42 billion | | ArcBest Segment Markets | $270 billion | | FleetNet Segment Market | $43 billion | | **Total** | **$355 billion** | [Technology](index=20&type=section&id=Technology) ArcBest invests heavily in technology via ArcBest Technologies to enhance efficiency, including a **$25 million** investment in Phantom Auto for remote operations - Most technology applications are developed internally by the ArcBest Technologies subsidiary[66](index=66&type=chunk) - In November 2021, **ArcBest** invested **$25 million** in Phantom Auto for remote operation software, planning to pilot remote-enabled forklifts in 2022 to address labor constraints[67](index=67&type=chunk) - The company uses advanced proprietary algorithms and machine-learning cognitive technologies to enhance productivity and simplify workflows[68](index=68&type=chunk) [Human Capital Resources](index=27&type=section&id=Human%20Capital%20Resources) As of December 2021, **ArcBest** employed over **14,000 people**, with **58% unionized**, prioritizing employee development, retention, and DEI initiatives - As of December 2021, the company employed over **14,000 people**, with approximately **58% belonging to labor unions**[93](index=93&type=chunk) - The company maintains strong hiring partnerships with the IBT and military to address the truck driver shortage[96](index=96&type=chunk) - A three-year strategic roadmap for Diversity, Equity, and Inclusion (DEI) was unveiled in December 2021, focusing on workforce, workplace, community, and marketplace initiatives[100](index=100&type=chunk) - In 2021, **55% of new hires** were diverse, and over **85% of management employees** participated in DEI training[98](index=98&type=chunk)[100](index=100&type=chunk) [Risk Factors](index=20&type=section&id=Item%201A.%20Risk%20Factors) The company faces material risks from pandemic impacts, cybersecurity, acquisition integration, competition, supply chain, labor disputes, and underfunded pension plans - The COVID-19 pandemic presents ongoing risks to employee health, operational efficiency, customer demand, and supply chain stability[126](index=126&type=chunk)[127](index=127&type=chunk) - Heavy reliance on IT systems exposes the company to cybersecurity attacks, system failures, and data breaches, potentially leading to operational interruptions and reputational damage[133](index=133&type=chunk)[134](index=134&type=chunk) - Integrating acquisitions like **MoLo** poses risks such as key employee loss, operational and IT synchronization difficulties, and failure to achieve anticipated benefits[154](index=154&type=chunk)[155](index=155&type=chunk)[156](index=156&type=chunk) - The **Asset-Based** segment faces intense competition from nonunion carriers with lower cost structures, with ABF Freight incurring some of the industry's highest benefit contribution rates[167](index=167&type=chunk)[169](index=169&type=chunk) - ABF Freight contributes to several significantly underfunded multiemployer pension plans, where withdrawal could result in material liabilities[183](index=183&type=chunk)[184](index=184&type=chunk) - Reclassification of independent contractor drivers as employees could expose the company to significant liabilities and increased costs for taxes, workers' compensation, and benefits[195](index=195&type=chunk) [Properties](index=35&type=section&id=Item%202.%20Properties) **ArcBest** owns its corporate office; **Asset-Based** operates **239 facilities** (**108 owned**), while **Asset-Light** segments own or lease various offices - The **Asset-Based** segment operates **239 revenue-producing facilities**, with **108 owned** and the rest leased[234](index=234&type=chunk) - The **ArcBest** segment owns a facility in Medina, Ohio, and leases key locations in Sparks, Nevada; Chicago, Illinois; and Plano, Texas[235](index=235&type=chunk) [Legal Proceedings](index=35&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in routine legal actions, which management does not expect to materially impact its financial condition, operations, or cash flows - Pending legal actions, primarily from normal business operations, are not expected to materially affect the company's financial condition or results[236](index=236&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=36&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) **ArcBest** common stock (ARCB) trades on Nasdaq, pays a **$0.08 quarterly dividend**, and initiated a **$100.0 million ASR program** - The company's common stock (ARCB) trades on the Nasdaq Global Select Market, with **24,597,758 shares outstanding** as of February 25, 2022[241](index=241&type=chunk) - A quarterly dividend of **$0.08 per share** was declared on January 28, 2022[241](index=241&type=chunk) - In November 2021, the company executed a **$100.0 million accelerated share repurchase (ASR)** program, purchasing **709,287 shares** in Q4 2021[242](index=242&type=chunk)[243](index=243&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=37&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In 2021, consolidated revenues grew **35.4% to $4.0 billion**, with net income reaching **$213.5 million**, driven by strong demand and the **MoLo acquisition** [Results of Operations](index=37&type=section&id=Results%20of%20Operations) In 2021, consolidated revenues increased **35.4% to $4.0 billion**, with operating income surging to **$281.0 million** and net income reaching **$213.5 million** Consolidated Financial Highlights (2021 vs. 2020) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $3,980.1M | $2,940.2M | +35.4% | | Operating Income | $281.0M | $98.3M | +185.9% | | Net Income | $213.5M | $71.1M | +200.3% | | Diluted EPS | $7.98 | $2.69 | +196.7% | - **Asset-Based** revenues grew **23.0% year-over-year**, driven by a **14.7% increase** in billed revenue per hundredweight and a **7.6% increase** in tonnage per day[253](index=253&type=chunk)[254](index=254&type=chunk) - **Asset-Light** operations revenues increased by **58.0%**, reflecting a **31.0% rise** in revenue per shipment and a **30.6% increase** in shipments per day, bolstered by the **MoLo acquisition**[253](index=253&type=chunk)[254](index=254&type=chunk) - Consolidated 2021 results were impacted by **$6.0 million** in **MoLo acquisition** transaction costs and **$32.8 million** in innovative technology costs[258](index=258&type=chunk)[260](index=260&type=chunk) [Liquidity and Capital Resources](index=56&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity sources include cash from operations and credit facilities, with cash decreasing to **$125.0 million** in 2021 due to the **MoLo acquisition**, debt repayments, and share repurchases - Cash, cash equivalents, and short-term investments decreased by **$244.4 million** to **$125.0 million** at year-end 2021, primarily due to the **$239.4 million MoLo acquisition**, **$71.9 million** in net debt repayments, and **$108.1 million** in share repurchases[372](index=372&type=chunk) - Cash provided by operating activities increased to **$323.5 million** in 2021, up from **$206.0 million** in 2020, driven by higher net income[373](index=373&type=chunk) - As of December 31, 2021, the company had **$200.0 million available** under its revolving credit facility and **$40.0 million** under its A/R securitization program[389](index=389&type=chunk) - Estimated net capital expenditures for 2022 are projected to be between **$270.0 million and $290.0 million**, an increase from historical levels to support growth[388](index=388&type=chunk) [Critical Accounting Policies and Estimates](index=60&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Critical accounting policies involve significant judgment in revenue recognition, credit loss allowances, asset impairment, self-insured claims, and business combinations - Revenue recognition is based on relative transit time, requiring estimates for revenue in transit at period end[413](index=413&type=chunk) - The company is self-insured for workers' compensation and third-party casualty claims, with liabilities based on case reserves and actuarial estimates for IBNR claims[434](index=434&type=chunk)[437](index=437&type=chunk) - Accounting for the **MoLo acquisition** required significant estimates for the fair value of acquired intangible assets (**$76.9 million**), goodwill (**$214.0 million**), and contingent consideration (**$93.7 million**)[423](index=423&type=chunk)[424](index=424&type=chunk) - Goodwill is evaluated for impairment annually, with the 2021 qualitative assessment concluding no impairment[429](index=429&type=chunk)[430](index=430&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=64&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company faces market risks from interest rates, diesel fuel prices, and security volatility, partially mitigated by interest rate swaps and fuel surcharges - The company is exposed to interest rate risk on its variable-rate Credit Facility, partially hedged by interest rate swap agreements with a notional amount of **$50.0 million**[441](index=441&type=chunk)[442](index=442&type=chunk) - The company mitigates market risk from diesel fuel price increases through fuel surcharge revenues, not hedging instruments[456](index=456&type=chunk) - The cash surrender value of variable life insurance policies is subject to market volatility, with **$26.9 million exposed** at year-end 2021, where a **10% change** would impact pre-tax income by **$2.7 million**[455](index=455&type=chunk) [Financial Statements and Supplementary Data](index=67&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the audited consolidated financial statements for 2021, including Balance Sheets, Operations, Cash Flows, and Notes, with Ernst & Young LLP's report [Report of Independent Registered Public Accounting Firm](index=68&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) Ernst & Young LLP issued an unqualified opinion on 2021 financial statements and internal controls, noting critical audit matters for insurance reserves and the **MoLo acquisition** - Ernst & Young LLP provided an unqualified opinion, affirming the fair presentation of financial statements in conformity with U.S. GAAP[461](index=461&type=chunk) - The audit of internal control over financial reporting also received an unqualified opinion, excluding the newly acquired **MoLo Solutions, LLC**[462](index=462&type=chunk)[714](index=714&type=chunk) - Critical Audit Matters identified include insurance reserves due to measurement uncertainty and the **MoLo acquisition** accounting due to judgment in valuing intangible assets, goodwill, and contingent consideration[466](index=466&type=chunk)[469](index=469&type=chunk) [Consolidated Financial Statements](index=70&type=section&id=Consolidated%20Financial%20Statements) Consolidated financial statements show total assets grew to **$2.11 billion** in 2021, revenues reached **$4.0 billion**, and net income was **$213.5 million** Consolidated Balance Sheet Highlights (2021 vs 2020) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $2,112.7M | $1,779.0M | | Goodwill | $300.3M | $88.3M | | Total Liabilities | $1,183.6M | $950.4M | | Total Stockholders' Equity | $929.1M | $828.6M | Consolidated Statement of Operations Highlights (2021) | Metric | 2021 | | :--- | :--- | | Revenues | $3,980.1M | | Operating Income | $281.0M | | Net Income | $213.5M | | Diluted EPS | $7.98 | Consolidated Statement of Cash Flows Highlights (2021) | Cash Flow Activity | 2021 | | :--- | :--- | | Net Cash from Operating | $323.5M | | Net Cash used in Investing | ($303.2M) | | Net Cash used in Financing | ($247.6M) | [Notes to Consolidated Financial Statements](index=75&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail accounting policies, the **MoLo acquisition**, long-term debt, multiemployer pension plans, and segment financial performance - The **MoLo acquisition** on November 1, 2021, had a total purchase consideration of **$333.1 million**, including **$239.4 million** in net cash and **$93.7 million** in contingent consideration, adding **$214.0 million** in goodwill and **$76.9 million** in intangible assets (Note D)[556](index=556&type=chunk)[558](index=558&type=chunk)[560](index=560&type=chunk) - As of December 31, 2021, the company had **$50.0 million outstanding** on its **$250.0 million credit facility** and **$175.5 million** in notes payable (Note H)[594](index=594&type=chunk) - ABF Freight contributes to **25 multiemployer pension plans**, with **56% of 2021 contributions** going to plans in "critical and declining status," including the Central States Pension Plan (Note J)[641](index=641&type=chunk)[645](index=645&type=chunk)[647](index=647&type=chunk) Segment Operating Income (2021) | Segment | Operating Income | | :--- | :--- | | Asset-Based | $260.7M | | ArcBest | $46.4M | | FleetNet | $4.5M | [Controls and Procedures](index=113&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded disclosure controls and procedures were effective as of December 31, 2021, excluding the **MoLo acquisition** from internal control assessment - The Principal Executive Officer and Principal Financial Officer concluded the company's disclosure controls and procedures were effective as of December 31, 2021[704](index=704&type=chunk) - Management's assessment of internal control over financial reporting excluded the newly acquired **MoLo Solutions, LLC**, acquired on November 1, 2021[705](index=705&type=chunk)[711](index=711&type=chunk) PART III [Directors, Executive Officers, Corporate Governance, and Related Matters](index=116&type=section&id=Items%2010-14) Information for Items 10-14, covering directors, executive officers, corporate governance, and compensation, is incorporated by reference from the 2022 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the registrant's Definitive Proxy Statement for the Annual Stockholders' Meeting on April 27, 2022[719](index=719&type=chunk)[720](index=720&type=chunk)[721](index=721&type=chunk) PART IV [Exhibits and Financial Statement Schedules](index=117&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including Schedule II and various corporate documents - This section lists all financial statements, schedules (including Schedule II - Valuation and Qualifying Accounts), and exhibits filed with the report[724](index=724&type=chunk)[725](index=725&type=chunk)

Financial Data and Key Metrics Changes - In Q4 2021, the company achieved the highest quarterly revenue and net income in its nearly 100-year history, with consolidated revenues of $1.2 billion, a 45% increase year-over-year [21] - For the full year 2021, total revenue reached $4 billion, reflecting a 35% increase compared to 2020, and non-GAAP operating income increased by 149% to $318 million [11][21] - Adjusted earnings per diluted share for 2021 were $8.52, a 149% increase over the previous year [21] Business Line Data and Key Metrics Changes - The asset-based business generated $684 million in revenue for Q4 2021, a 23% increase year-over-year, with a non-GAAP operating ratio improvement of 680 basis points to 86.9% [22] - The asset-light segment saw a revenue increase of 80% in Q4 2021 compared to Q4 2020, driven by strong demand and the addition of MoLo Solutions [24] - For the full year 2021, asset-light revenue per day increased by 59% to $1.6 billion, with operating income up 193% to $49 million [25] Market Data and Key Metrics Changes - The company reported a 10.2% average increase on asset-based customer contract renewals in Q4 2021, the highest quarterly increase in its history [22] - Preliminary trends for January 2022 indicated continued strong revenue and pricing increases in the asset-based business, with core LTL tonnage and shipments increasing in the high single digits compared to January 2021 [23][26] Company Strategy and Development Direction - The company aims to grow revenue to between $7 billion and $8 billion over the next four years, with a focus on achieving asset-based operating margins between 10% and 15% [30][31] - Strategic investments in technology and people are prioritized to enhance shareholder value and improve operational efficiencies [15][29] - The acquisition of MoLo Solutions is expected to strengthen the company's position in the domestic transportation management market, which is valued at $91 billion [11] Management's Comments on Operating Environment and Future Outlook - Management highlighted the importance of customer relationships and adaptability in navigating market challenges, emphasizing a commitment to strategic investments in technology [9][10] - The company expressed confidence in its ability to achieve long-term financial targets, driven by customer needs and operational efficiencies [30][31] Other Important Information - The company returned $116 million to shareholders through share repurchases and dividends since the beginning of 2021, with plans to continue this trend in 2022 [12][13] - The company is committed to environmental, social, and corporate governance (ESG) initiatives, including the establishment of dedicated roles to advance its DEI strategy [27][28] Q&A Session Summary Question: What is driving the strong pricing environment and are you seeing this strength continue into 2022? - Management noted a robust pricing environment driven by honest conversations with customers about costs and services, with similar trends observed in January 2022 [34][36] Question: How are you managing the transactional business and its impact on tonnage growth? - Management indicated that the transactional business helps fill network capacity, and they are selectively managing shipments to prioritize core customers, which has positively impacted pricing [38][39] Question: Can you provide insights on the new long-term guidance and assumptions regarding acquisitions? - Management clarified that while acquisitions are considered, the long-term targets are primarily based on executing existing strategies and customer needs [45][46] Question: What are the expectations for capital expenditures and network expansion in 2022? - The company plans to invest between $270 million to $290 million in capital expenditures, with a focus on real estate and facility upgrades to support growth [19][58] Question: What is the plan for electric vehicle investments? - The company is committed to exploring the practical utilization of electric vehicles and has plans to purchase a small number of electric tractors expected to arrive in the second half of the year [70][71]