ArcBest Corp
NASDAQ:ARCB
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ArcBest Corp
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[Starts Abruptly] [Operator Instructions] As a reminder, this conference is being recorded Wednesday, January 31, 2018.
I would now like to turn the conference over to David Humphrey, Vice President of Investor Relations. Please go ahead, sir.
Welcome to the ArcBest Fourth Quarter 2017 Earnings Conference Call. Our presentation this morning will be done by Ms. Judy R. McReynolds, Chairman, President and Chief Executive Officer of ArcBest and Mr. David R. Cobb, Vice President, Chief Financial Officer of ArcBest.
As most of you know, we're approaching the end of ABF Freight's current labor contract with the Teamsters, which expires on March 31, 2018. We are currently in negotiations with the Teamsters on a new contract. Out of respect for this important process, we will give you an update on fourth quarter and full-year results during today's call, but not take any questions following our prepared commentary.
We hope you can understand our reasons for doing things a little differently, while this process takes place. As always, following today's call, we will be available to speak with you to discuss the publicly disclosed information about our fourth quarter and full-year 2017 results.
We thank you for joining us today. In order to help you better understand ArcBest and its results, some forward-looking statements could be made during this call. As we all know, forward-looking statements, by their very nature, are subject to uncertainties and risk. For a more complete discussion of factors that could affect the company's future results, please refer to the forward-looking statements section of the company's earnings press release and the company's most recent SEC public filings. In order to provide meaningful comparisons, certain information discussed in this conference call includes non-GAAP financial measures as outlined and described in the tables in our earnings press release.
We will now begin with Ms. McReynolds.
Thank you, David, and good morning everyone. The fourth quarter capped off a year of significant efforts at ArcBest to approach the market in a more integrated fashion with a broad array of logistic solutions and guaranteed capacity options. We have made good progress on our mission to win a bigger piece of our customers' transportation spend, provide them a best-in-class customer experience, and ensure the value that we provide is appropriately compensated among many other things. I believe we made this progress because our people embrace the new market approach with a commitment to implement the organizational changes on behalf of our customers.
Change of this magnitude is never easy, but the strides we made to work more collaboratively across the organization, in 2017, were significant. The improved economic environment provided a stable backdrop for us to continue executing this strategy. In contrast to 2016, with inconsistent and volatile tonnage swings in the industry, 2017 was marked by confidence in the economy and tighter capacity. To recap where we started, on January 1st, we realigned the company to offer most logistics services under the ArcBest brand. This included a range of activities such as unifying our sales organization and having a unified approach to pricing, customer service, marketing, and capacity sourcing.
In late summer, we began implementing a new space-based pricing initiative for our asset-based offering. With this effort, we began applying appropriate cubic minimum charges for freight in which dimensions are the key factor to be considered. We are pleased with the results to date as this initiative has helped us reset our account base toward greater profitability. I am confident we have the right pricing foundation going forward. And now I'll discuss more details about our service offerings.
In the asset-based business, 2017 yield management activities including the early-August implementation of our space-based CMC pricing program have contributed to positive improvements in our pricing metrics and profitability. David will provide specific details later in the call, but we continued to achieve good results in the level of renewal rates on the deferred and contract pricing agreements that were negotiated during the recent quarter. We have raised prices on new business, and we have set higher margin thresholds for operationally inefficient shipments.
As we sought to appropriately expand prices, we knew we could be at risk of losing some business and customers. Our fourth quarter and January 2018 tonnage and shipment statistics reflect the impact our pricing actions have had on our business levels. The intent of our pricing efforts was to improve our overall profitability. Though we have experienced some freight loss, we continued having success in securing new business that operated at better margins than the business that went away. As freight levels have come down, our operations team has responded by efficiently managing costs by matching system personnel and resources to current business levels. As we move into the New Year we feel that ABF Freight is in a good position to achieve our 2018 growth goals in a manner that maintains the current emphasis on profitability.
As seen throughout the second-half of the year, in response to lower business levels, we continue to manage cost and utilization of assets throughout our asset-based operation. We further improved efficiencies in our line haul network, and reduced those costs versus the same period in 2016. During the fourth quarter and so far in January, we've had success in securing asset-based truckload rated shipments in lanes where we need to fill empty trailers, or to support the capacity requirements of ArcBest's Asset-Light business in fulfilling customer needs.
During the recent fourth quarter the number of ecommerce and non-U-Pack residential delivery shipments handled in our asset-based network was slightly below fourth quarter of 2016, but that comparison is versus a time of significant growth and a high number of these shipments. As a reminder, in the fourth quarter of 2016, these shipments grew 43% versus the fourth quarter of 2015. We continue to serve those shippers in a very meaningful way, however these shipments are now priced better and we believe we are managing operational requirements of them more effectively, though the efficiencies of our local city operation continue to be impacted.
During a period of overall freight reductions in our business, we are carefully managing personnel and resources in order to maintain the high pickup and delivery service levels our customers demand in the ever-changing retail environment. During the fourth quarter, we were able to meet those customer needs while reducing our use of city cartage and local rental equipment. ABF Freight's union, health, welfare, and pension costs did increase relative to the labor hours worked by our union employees.
Since our last earnings report in early November, we have begun negotiations with the Teamsters on the ABF National Master Freight Agreement with the current contract expiring on March 31. As we've told the Teamsters, our goal is to reach an agreement that will ensure ABF competitiveness in the marketplace for many years to come. As of this report, we have made progress on some mutually-agreeable sections of the agreement with the IVT's bargaining team. We will continue to work through the process during the next few months and will report additional detail when appropriate.
During the fourth quarter, ArcBest Asset-Light business experienced revenue growth despite lower shipment counts, driven by significant increases in expedite and truckload revenue per shipments. This resulted from market rate increases in the midst of tighter marketplace capacity. During the fourth quarter, our Asset-Light team was impacted by the challenges of balancing yield per shipment with the ability to cover loads. We experienced increased purchase transportation costs, which in some cases were difficult to adequately pass on to shippers. Therefore, the Asset-Light shipment count was below the same period last year, and net revenue margins declined.
Additional factors also contributed to the year-over-year decline in Asset-Light operating income, including changes in our Asset-Light moving services that David will provide more detail on shortly, additional cost related to contributions made to the employee-defined contribution retirement plans and an increase in bad debt costs associated with customer bankruptcies.
ArcBest expedite services continue to perform well as revenue and net revenue increased versus last year's fourth quarter. Despite handling fewer total shipments, revenue per load increased because of solid customer demand for these services and the longer average length of haul on these shipments. The manufacturing market vertical experienced strong shipment and revenue growth, and was the most significant factor in expedite fourth quarter business strength.
FleetNet's fourth quarter revenue improvement was the result of an increase in total events. Over the full-year, FleetNet produced significant improvement in annual operating income versus 2016, primarily reflecting operating efficiencies.
As we have seen throughout this year, ArcBest non-union healthcare costs decreased, versus the same period last year. In the recent quarter, these costs were over 25% below last year. For all of 2017, these costs decreased approximately 10%. As I've said before, for the last few years we have had a major emphasis on wellness initiatives throughout our company.
We continue to see our employees increase their participation in the wellness programs we offer. There are numerous examples of persons throughout ArcBest who have avoided serious health issues, or minimize the care and medical procedures they needed, because of early detection and the benefits of healthy living. We believe there are additional benefits our employees and our company can gain from our continued focus on these important initiatives.
During 2017, we continue to take actions to enhance shareholder value. Throughout the year, we paid our $0.08 per share quarterly cash dividends and we bought back over 286,000 shares of our stock for a total price of $6 million, and our existing repurchase program, we have approximately $32 million of purchase availability. Later, David will discuss the specific impact of the Tax Reform Act that became law in late December on our financial results.
As a result of the new tax rate, we expect to pay a lower level of taxes. However, because of our lower operating margins and the previous level of accelerated equipment tax depreciation we have been experiencing, the new tax depreciation rules and lower rates have a relatively small impact on ArcBest's cash level in comparison to our capital needs and our plans for reinvestment. For instance, if the new law had applied to 2017, it would have increased our cash by less than $5 million.
And now, I will turn it over to David Cobb for a discussion of the earnings results and operating statistics.
Thank you, Judy, and good morning everyone. Let me begin with some consolidated information.
Fourth quarter 2017 consolidated revenues were $711 million compared to $688 million in last year's fourth quarter, a per day increase of 2.4%. On a GAAP basis, we had fourth quarter 2017 net income of $1.37 per diluted share, compared to net income of $0.06 per diluted share last year. As detailed in the GAAP to non-GAAP reconciliation table in this morning's earnings press release, adjusted fourth quarter 2017 net income was $0.42 per diluted share, compared to $0.28 in the same period of 2016.
Our net income in fourth quarter of 2017 included $1,600,000 pre-tax or $0.04 per share after-tax related to our non-union pension plan, including settlement expenses. Pension expense, including settlement charges for first quarter 2018 is currently estimated to be approximately $2 million to $2.5 million. As a reminder, we estimate cash funding of approximately $10 million and a settlement termination charge of approximately $20 million is expected to occur in the second-half of 2018 due to termination of this plan.
Our net income included an adjustment of $200,000 pre-tax or $0.01 per share after-tax in fourth quarter of 2017 and a pre-tax charge of $10.3 million or $0.24 per share after-tax in fourth quarter of 2016 related to our enhanced market approach. We currently expect to incur approximately $1 million of additional restructuring cost in 2018 related to this realignment.
In this year's fourth quarter, the loss reported in the other eliminations line was $6.5 million including restructuring and pension costs totaling $300,000. The increase from previous quarters reflects modifications to the allocation of shared services, and an increase in incentives associated with an improved total shareholder return relative to a comparable industry peer group.
In the first quarter, we expect the Lawsons line to approximate $5.5 million to $6 million, and for all of the 2018, we expect the Lawsons line to total approximately $20 million. As we have previously discussed, certain investments in ArcBest technology and innovations that are required to be expensed are included here as well.
Interest expense net of interest income was $1.5 million in the fourth quarter. We expect the first quarter of 2018 net interest expense to approximately $1.6 million and the full-year 2018 total interest expense, net of interest income to total approximately $7 million. This net interest expense estimate does not include changes in cash or render value, which are reported in the other net line of our income statement, of which we had income of $900,000 in fourth quarter of 2017. We consider changes in cash or render value to be non-operating at and in therefore excluded from our non-GAAP presentation.
As Judy mentioned, our financial results have also been impacted by the Tax Reform Act that became law in late December. In the recent fourth quarter, we recorded a $24.5 million or $0.92 per share tax benefit due to a reduction of net deferred tax liabilities related to the lower U.S. Federal Corporate Tax rate under the Tax Reform Act. Though this impact of the lower tax rates or deferred tax liabilities was recognized in 2017, the benefit of paying taxes at lower rates on these deferred tax items will be realized over many years in the future. Additional items impacting our effective tax rates are provided on page 10 of our earnings release tables.
Based on our estimate of the impact of this new tax law, we currently expect our full-year 2018 tax rate to be in the approximate range of 26% to 28%. While the effective rate in quarter, particularly the first quarter may be impacted by items discreet to that period.
For the full-year of 2017, consolidated revenues totaled $2.8 billion compared to $2.7 billion in 2016, an increase of 5%. Full-year earnings per diluted share were $2.25 compared to $0.71 in 2016. On a non-GAAP adjusted basis, as outlined in our earnings press release, 2017 earnings were a $1.33 per diluted share compared to $0.92 in 2016.
In 2017, total net capital expenditures, including equipment financed equaled $146 million, which was somewhat below previous expectations. This included $95 million of revenue equipment, majority of which was for ArcBest asset-based operation. Depreciation and amortization costs on property, plant, equipment were $99 million.
For 2018, total net capital expenditures, including equipment expected to be financed are estimated to range from $155 million to $165 million. This includes revenue equipment purchases of approximately $100 million, primarily for ArcBest asset-based operation. Because of ABS rates union labor negotiations are in progress, the timing and actual knot of these capital investments are highly dependent on the outcome of the Union Labor contract. In both 2016 and 2017, we replaced approximately 600 road tractors in our asset-based operation. As a result, there's been an improvement in average fleet age, maintenance cost per mile, and fuel economy.
Our plans for 2018 include replacement of another 600 road tractors and further improvements in the average age and dependability of the asset-based city fleets or transfer of tractors out of the road fleet. As we did in 2017 in the interest of increasing the safety of our drivers, in the motoring public, our new 2018 road tractors will be equipped with enhanced safety technology, including lane departure warning, collision mitigation, in-forward facing, video capturing.
ArcBest depreciation amortization cost on property, plant, and equipment in 2018 are estimated to be in the range of $100 million to $105 million. This does not include amortization of intangible assets, which in 2018 is expected to approximate $5 million. We ended the year with unrestricted cash and short-term investments of $177 million. Combined with the available resources under our credit revolver and our receivables securitization agreement, our total liquidity current equals $369 million. Our total debt at the end of the year of $269 million includes the $70 million balance in our credit revolver, the $45 million dollars borrowed in our receivable securitization and $154 million of notes payable, primarily on equipment for asset-based operation. The composite interest rate on all of our debt is 2.8%. Full details of our GAAP cash flow are included in our earnings press release.
ArcBest reported asset-based fourth quarter revenue of $497 million, a per day increase of 2.3% compared to last year. We had 61.5 working days in fourth quarter 2017, compared to 61 working days in last year's fourth quarter. Our asset-based quarterly tonnage per day declined 4.7% versus last year's fourth quarter. For fourth quarter 2017 by month, asset-based daily tonnage versus the same period last year decreased in October by 3.4%, decreased 3.7% in November, and decreased 7.2% in December.
Fourth quarter total shipments per day decreased 8.1% compared to last year's fourth quarter. This was impacted by the trends Judy mentioned earlier in residential delivery shipments. As we saw with tonnage, the December reduction in shipments was more significant than in October and November. Fourth quarter tonnage in shipment declines were the result of yield management initiatives implemented throughout the year, including the space-based pricing program introduced at the beginning of August.
Total asset-based weight per shipment was £1,250, a 3.7% increase from last year's fourth quarter, and an increase of 4.3% on a sequential basis compared to third quarter of 2017. LTL weight per shipment increased 2% versus last year. Average length of haul on asset-based shipments was 1,046 miles, a slight increase over fourth quarter 2016, and a 1.8% increase over third quarter 2017 length of haul of 1,027 miles. Fourth quarter total billed revenue per hundredweight on asset-based shipments was $32.34, an increase of 7.6% compared to the fourth quarter of last year.
Year-over-year comparisons of this yield figure were positively impacted by improved price levels and higher fuel surcharge. It gains more than offset, but downward pressure from profile changes. On a sequential basis, this yield metric decreased less than 1% related to seasonal changes and business mix, and continued profile changes. Excluding fuel surcharge, the increase in fourth quarter billed revenue per hundredweight and asset-based LTL freight was in the mid single-digits.
We secured an average 6.2% increase on asset-based customer contract renewals and deferred pricing agreements negotiated during the quarter. This was the highest fourth quarter average increase we have secured in the last 16 years. The full-year 2017 average contract and deferred pricing increase of 5.1% was the second highest annual percentage increase in the last 16 years.
For the full-year of 2017, ArcBest asset-based revenue was $2 billion compared to $1.9 billion in 2016, a per day increase of 4.4%. Asset-based 2017 total tonnage per day decreased 2.1%, versus the previous year, while daily shipments were flat, resulting in a 2% reduction in total pounds per shipment. On an adjusted basis, our asset-based full-year operating ratio was 97.2% compared to 98% in 2016.
In total, our Asset-Light businesses had revenue of $222 million, a 5% increase over the last year's fourth quarter. Fourth quarter operating income for the services totaled $5.2 million, compared to an operating loss of $862,000 in the prior year fourth quarter. On an adjusted basis, fourth quarter operating income totaled $5.4 million, and adjusted EBITDA totaled $9.1 million, compared to an adjusted operating income of $7.4 million and adjusted EBITDA of $10.8 million in the prior year fourth quarter. In addition to the items Judy mentioned earlier, our moving business was another factor and favorably impacting your fourth quarter Asset-Light results.
During the quarter, a greater portion of consumer moving loads were handled within the ABF freight network utilizing our own equipment resources. Thus, few of the shipments moved in our Asset-Light network. This was another factor causing declines in Asset-Light revenue, net revenue, and shipment totals. Also in December 2016 and in December 2017, ArcBest completed two transactions that resulted in our exit from a portion of our Asset-Light moving business, including the military moving business. The revenue and net revenue recognized in 2017 related to the divested business that will not continue was $28 million and $5 million respectively.
Cash proceeds from the sales totaled $10 million with $2.8 million received in 2016, $2.5 million in 2017, and $4.7 million expected to be received in 2018. As a result of these sales when compared to the previous year, fourth quarter financial results were impacted by reductions in both revenue and net revenue in shipment levels.
Full-year of 2017 revenue for the Asset-Light businesses was $863 million compared to $803 million in 2016, an increase of 7.4%. Full-year 2017 adjusted operating income for these businesses were $23.6 million, compared to $17.7 million in 2016.
Preliminary asset-based results for the month of January versus January 2017 are as follows. Total daily billed revenues increased approximately 2%. Total tonnage per day decreased approximately 7% with reductions in LTL tonnage related to our ongoing yield management initiatives, and changes in account mix partially offset by January year-on-year growth in our asset-based truckload rated business. Shipment accounts decrease approximately 11% comparable to what we saw in December. During the last week-and-a-half we've seen the January year-over-year decreases in tonnage and shipments narrow compared to the earlier part of the month.
Total revenue per hundredweight increased approximately 9%. This asset-based yield metric is being positively affected by higher fuel surcharges in our asset-based yield initiatives. Total revenue per shipment increased approximately 15%, and total weight per shipment increased approximately 5%. Since the implementation of the current labor contract, the historical average sequential change in ArcBest asset-based operating ratio in the first quarter versus the fourth quarter has been an increase of approximately 400 basis points. We will have 63.5 working days in the first quarter 2018, which is a half day less than we had in first quarter last year and two days than we had in this year's fourth quarter.
On a combined preliminary basis, January 2018 revenue from our asset-light businesses increased approximately 13% versus last year positively impacted by one additional workday in 2018. However, as seen in the fourth quarter, we are experiencing increased Asset-Light revenue per shipment and net revenue compression associated with rising purchase transportation cost and the challenges of adequately passing the amount to our customers.
Now, I'll turn it over to Judy for some closing comments.
Thanks, David. Before we conclude, I would like to offer some additional highlights for the quarter. In October, our U-Pack business celebrated 20 years of residential moving having completed more than 1 million moves since it launched in October of 1997. We are very proud of the U-Pack team and the ABF people across the country who have helped make the moving business so successful.
In November, ABF was recognized for the seventh time with the 2017 Excellence in Claims, Loss & Prevention Award by the American Trucking Associations' Transportation Security Council. This is a truly outstanding achievement as ABF is the only seven-time winner. It speaks to the commitment of our employees to deliver freight damage-free, and is the result of collaboration across many teams.
In December, the Department of Defense Program called the Employer Support of the Guard and Reserve, honored ABF with Pro Patria and above and beyond awards for our support of employees who serve in the National Guard and Reserve. We are proud to support and thank all of our veterans and current reserves for their service.
In conclusion, I will add that ArcBest leadership team is committed to profitable growth with a full recognition that the logistics marketplace continues to undergo rapid change. Our guarantee capacity options and asset-based and Asset-Light set us apart from many other providers and are valued by shippers whether they choose one service offering from us, two or more, or ask us to manage all of their transportation needs.
The growth and cost control efforts we've undertaken in 2017 and continue to implement in 2018 underscore our commitment to ensure that we meet our customer's own evolving needs with the solutions they require, an excellent experience and the trust and advice they expect from us.
And now, I'll turn it over to David for some closing comments.
We want to thank you for joining us this morning, and we appreciate your interest in ArcBest. That concludes our conference call. Thank you very much.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.