Cost control leads ArcBest Q2 beat; July trends improve

ABF double under American flag

On an earnings call with analysts, management from ArcBest Corp (NASDAQ: ARCB) highlighted their ability to manage costs through the COVID-19 downturn. The impact from a 19% year-over-year revenue decline in the second quarter of 2020 was limited by previous cost actions taken.

The flexibility of its labor contracts allowed the company to better match drivers and workers to a 13% decline in daily shipments within its asset-based segment, which includes less-than-truckload (LTL) operations.

The company also implemented several cost reductions in early April as truck demand began to plummet. The cost initiatives included suspending the company’s 401k match, cutting non-union salaries and board fees by 15% as well as other restrictions. The efforts lowered expenses by $15 million in the period.

Given the sequential improvement throughout the quarter, prompted by tightening supply and demand in the truck market, ArcBest has decided to restore the wage and benefit reductions. The sequential cost increase is expected to be $10 million to $15 million in the third quarter.

On Wednesday, July 29, the Fort Smith, Arkansas-based logistics provider reported adjusted earnings per share (EPS) of $0.67, compared to the break-even consensus estimate and EPS of $1.04 in the second quarter of 2019. The company’s asset-based unit reported a 94.4% operating ratio (OR), 140 basis points worse year-over-year, but management said the OR improved significantly throughout the quarter as freight demand improved.

ArcBest’s key performance indicators

July and pricing trends

So far in July, revenue per day is down only 3% year-over-year. Revenue in the asset-based segment is 7% lower, with tonnage off 5%. LTL tonnage is down in the low-single-digit percentage range while truckload (TL) spot tonnage is down double-digits. ArcBest relies on the spot market during periods of declining demand to stabilize utilization rates on its equipment.

July revenue per hundredweight, or yield, is down approximately 2% on lower fuel surcharges, freight mix changes and a 4% increase in LTL weight per shipment. Yield, excluding fuel, is flat on July LTL shipments.

When asked about current yield trends in the LTL industry, management used words like “positive” and “rational” to describe the pricing environment, but noted “some delays” on contract renewals. Reasons for the delays could be that shippers are uncertain on future capacity needs or think they may receive a better deal if a new round of COVID-19 lockdowns are implemented.

During the second quarter, ArcBest reported a 3.2% year-over-year increase in contractual rate renewals and deferred pricing agreements. LTL yield, excluding fuel, was “slightly positive” with core LTL accounts seeing a high-single-digit increase.

The company’s asset-based OR is usually flat from the second quarter to the third; however the comparison “may not be comparable to historical trends” given uncertainty around COVID-19. Management said revenue was higher compared to normal seasonality in July and the operating metrics are positive, noting they have been able to better manage shipment count to work hours.

The company’s asset-light division reported a 15% year-over-year revenue decline as lower demand from the pandemic weighed on expedited and brokerage transactions. Asset-light shipments excluding managed transportation and results from commercial vehicle maintenance and repair unit, FleetNet, were down 23.4% with revenue per shipment down 2.1%. Declines in the auto and manufacturing sectors were cited as a headwind for expedited freight demand.

July-to-date, the asset-light group, excluding FleetNet, is reporting flat daily revenue with shipments down only 9% compared to July 2019. However, margins have been further compressed as purchased transportation expense is up 3% due to a tightening capacity environment.

ArcBest’s net cash position – debt less cash and short-term investments – improved by $44 million from the end of the first quarter to $41 million. The company is reviewing options for repayment of recent borrowings undertaken in the early stages of the outbreak.

The total net capital expenditures (net capex) guidance range was narrowed by $5 million on the high end to a new range of $95 million to $100 million for 2020. The outlook includes $64 million in revenue equipment purchases.

Shares of ARCB are off less than 1% on the day compared to the S&P 500, which is up nearly 1%.

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