Weak demand is expected to again pressure ArcBest’s margins in the fourth quarter, potentially pushing its asset-based unit to near-breakeven operating results and post-pandemic lows.
The Arkansas-based transportation and logistics provider beat third-quarter expectations on Wednesday and said it is hopeful it can pull enough cost out of the network to stem margin downside.
ArcBest (NASDAQ: ARCB) reported adjusted earnings per share of $1.46 on Wednesday ahead of the market open. The result was 9 cents better than the consensus estimate but 18 cents lower year over year. Consolidated revenue of $1.05 billion was slightly ahead of expectations.
The company’s asset-based unit, which includes less-than-truckload subsidiary ABF Freight, saw volumes increase in the quarter but incremental costs to onboard the recent wins weighed on the margin. (Tonnage turned negative y/y in October, lagging normal seasonal trends.)
Shipments per day increased 4% y/y in the third quarter, but weight per shipment fell 2%, producing a 2% increase in tonnage. ABF saw more freight from core customers, but overall weakness in the manufacturing and housing sectors pushed shipment weights lower. The third quarter had an easy comp (tonnage was down 11% y/y in the 2024 third quarter.)
On a y/y comparison, tonnage stepped higher as the quarter progressed, up 1.3% in July, 2.4% in August and 3.3% in September. However, October tonnage came in 1% lower y/y on an easy comp to October 2024 (down 9%), somewhat surprising given the company’s recent efforts to win share among core LTL shippers. October shipments were down 5% from September, 200 basis points below the normal sequential change rate.
ABF was not alone in seeing weaker volumes in October as other carriers voiced similar trends during their third-quarter reports.
The Purchasing Managers’ Index (PMI) – an indicator of manufacturing activity – slid 40 bps in October to 48.7, remaining in negative territory for 34 of the past 36 months. (A reading above 50 signals expansion while one below 50 indicates contraction.) The index’s demand indicators improved, with the new orders subindex increasing by 50 bps, though still remaining negative at 49.4.
ArcBest expects tonnage to be up slightly y/y in the fourth quarter.
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Third-quarter yield was down 1% y/y with and without fuel surcharges. (The yield metric was up against a plus-7% comp from last year.) October yield was flat y/y.
The company said the pricing environment remains rational but noted elevated bid activity. Contract renewals were up 4.5% in the period (9.1% higher on a two-year-stacked comparison). ABF implemented a 5.9% general rate increase across multiple tariff codes on Aug. 4, one month earlier than last year’s GRI.
Asset-based revenue of $727 million was 2% higher y/y in the period.
Adjusted cost per shipment was down 1.2% but revenue per shipment was off 3%, producing a 180-bp negative spread. Lighter shipment weights were a headwind as were elevated costs – labor and benefits (50 bps higher as a percentage of revenue), purchased transportation (80 bps higher) and depreciation and amortization (100 bps higher).
The asset-based segment reported a 92.5% adjusted operating ratio (inverse of operating margin), 150 bps worse y/y but 30 bps better sequentially. The result came in better than management’s revised guidance (flat to 50 bps worse sequentially), which was lowered in an intraquarter update. It originally called for 70 bps of sequential OR improvement in the quarter.
The unit normally sees 100 to 200 bps of sequential margin deterioration in the fourth quarter, but management is guiding to 400 bps of degradation this year due to the challenging freight market. The guide implies a 96.5% adjusted OR, which would be 450 bps worse y/y.
Extrapolating this trend into the first quarter, which typically experiences sequential erosion of 350 to 400 bps (excluding Covid-related volatility, with a 10-year average deterioration of 250 bps), suggests the unit will operate near breakeven in the 2026 first quarter. Management sounded hopeful to outperform that level, given recent cost cuts.
At its September investor day, the company guided to a long-term OR target of 87% to 90% by 2028, which assumes a positive 80-bp spread between revenue per shipment and cost per shipment.
Asset-light unit to see seasonal weakness in Q4
The asset-light segment, which includes truck brokerage, reported adjusted operating income of $1.6 million, a second straight operating profit after seven consecutive losses.
The unit reported record volumes in the third quarter, as shipments per day increased 3% y/y. (Shipments per employee reached a record level, up 33% y/y.) Revenue per shipment was down 11% y/y, pushing total revenue 8% lower to $356 million.
October revenue per day was down 9% y/y.
The company is calling for an adjusted operating loss of $1 million to $3 million in the unit in the fourth quarter.
Shares of ARCB were up 0.3% at 2:10 p.m. EST on Wednesday compared to the S&P 500, which was up 0.8%.
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