ArcBest Corporation (ARCB) Q4 2016 Earnings Report, Transcript and Summary

Welcome to the ArcBest Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded Wednesday, February 8, 2017. 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 Corporation fourth quarter 2016 earnings conference call. We will have a short discussion of the fourth quarter results and then we will open it up for a question and answer period. Our presentation this morning will be done by Ms. Judy McReynolds, Chairman, President and Chief Executive Officer of ArcBest Corporation, Mr. David Cobb, Vice President, Chief Financial Officer of ArcBest Corporation. We thank you for joining us today. In order to help you better understand ArcBest Corporation 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 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 release and in our 8-K filing. We will now begin with Ms. McReynolds.

Thank you, David and good morning, everyone. We're pleased to report improved results from last year's fourth quarter on a non-GAAP basis in total for the Company and with each of our segments. In keeping with the corporate restructuring we announced in November, we will talk about our Company a little differently today and as we go forward in order to reflect the enhanced way we're approaching the market. That is to say, we will provide commentary regarding ArcBest logistics services beginning with our asset-based LTL services provided by ABF and then we will discuss our asset-light service offerings. Throughout the year which was a very volatile one for truck tonnage according to many industry experts, including the American Trucking Associations, we continued to execute on the strategy to ensure that we powerfully position our Company to respond to customers' evolving needs with a full array of logistic services. After many months of analysis and planning in November, we announced an acceleration of this strategy with an enhanced market approach aimed at simplifying our Company and presenting ourselves as one logistics enterprise with creative problem solvers, delivering integrated logistics solutions. To recap, we realigned the Company to offer most logistics services under the ArcBest brand as of January 1, while retaining the inherent value in the ABF Freight, Panther and U-Pack brands. The realignment included a unified sales structure under ArcBest, a combination of ABF Logistics, ABF Moving and Panther into a new, asset-light logistics operation, a unified approach to pricing, customer service, marketing and capacity sourcing and a consolidation of training and quality awareness under ArcBest Human Resources. The reason we undertook this massive effort was to provide the best customer experience possible. Quite simply, our customers have been asking for integrated solutions from us and easier access to them. Although we're just one month into our new operating model, I can say that the customer feedback has been very positive. This is encouraging to all of our people who are fully engaged with a renewed sense of purpose, enabled by the tools and capabilities now available across the entire organization. I can also report to you that the savings we anticipated from the realignment have met our expectations. I'd like to thank our employees for their hard work, dedication and willingness to change on behalf of our customers. And now I'll discuss more details about our service offerings. In the fourth quarter, ArcBest asset-based LTL services offered by ABF Freight experienced higher revenue resulting from increased shipment counts and a continued emphasis on improved pricing in the midst of a stable yield environment. The current industry pricing environment is competitive but rational and ArcBest's traditional focus on providing value in return for a fair price is resulting in good yield management outcomes. The growth of shipments moving through our LTL network continued to exceed the pace of tonnage growth. As a result, average weight per shipment and thus revenue per shipment, decreased versus last year. The increase in shipments combined with our emphasis on superior customer service impacted labor costs and increased our need for using higher levels of local purchase transportation. We experienced a decline in weight per shipment in each quarter of this year. We believe the trend we're experiencing relates to excess truckload capacity and higher growth in residential deliveries of e-commerce shipments and lower growth with our industrial customers that stems from economic weakness. Non-union healthcare costs continued the higher trend we've seen much of this year. As I've discussed before, we embrace total health as one of ArcBest's core values. We have a number of initiatives and programs in place that we expect will contribute to better health for ArcBest's employees and lower future healthcare costs for our Company. Management of various line-haul transportation resources contributed to significant reductions in empty transportation costs. The consistent replacement of tractors and trailers with new units throughout the year delivered lower maintenance and repair costs and improved fuel economy. Our customers trust us because of our traditional emphasis on cargo care. Lower costs in that area were a positive during the recent fourth quarter as well. Fourth quarter growth in ArcBest's asset-light revenue versus last year came from continued market demand for expedited services and additional revenue from previous acquisitions we've made in truckload brokerage and dedicated truckload services. ArcBest's expedited business benefited from increased shipment counts traveling longer distances with a significant increase in shipments moving on the larger tractor trailer equipment versus smaller cargo vans and straight trucks. Truckload results were impacted by flat demand at ArcBest's legacy locations and moderate pricing related to extra industry capacity. As industry truckload demand improved some throughout the quarter, ArcBest's purchase transportation costs also increased. The slower pace of increased shipment rates secured by ArcBest on both its traditional spot market shipments and on contractual business compressed net revenue margins. Compared to healthy business levels in the previous fourth quarter, ArcBest's International Business handled fewer full container shipments that moved at lower prices and lower net revenue margins, thus impacting operating results. As previously discussed last quarter, the ocean shipping market disruption continued to impact margins as we expected. FleetNet's fourth quarter revenue decline came from a reduction in roadside events associated with changes in account mix. However, FleetNet's operating income improved versus last year due to cost reductions, improved labor efficiencies and the addition of new customers. During 2016, we continued to take actions to enhance shareholder value. Throughout the year, we paid our $0.08 per share quarterly cash dividend and we bought back over 485,000 shares of our stock for a total price of $9.5 million. Our strong balance sheet allows us to enrich our shareholders in these ways while further utilizing our resources for investments to grow our enhanced market approach, improve our profits and benefit our customers. And now, I'll turn it over to David Cobb for a brief discussion of the earnings results.

Thank you, Judy and good morning, everyone. Let me begin with some consolidated statistics on ArcBest. Fourth quarter 2016 consolidated revenues were $688 million, compared to $648 million in last year's fourth quarter, an increase of 6.2%. On a GAAP basis, fourth quarter 2016 net income was $0.06 per diluted share, compared to net income of $0.19 per diluted share last year. As detailed in the non-GAAP reconciliation table in this morning's earnings press release, adjusted fourth quarter 2016 earnings per diluted share equaled $0.29, compared to $0.21 in the same period of 2015. The adjustments taken in fourth quarter 2016 included $10.3 million or $0.24 per diluted share, after-tax related to a reorganization charge for impairment of software, contract and lease terminations and severance associated with our enhanced market approach that Judy just discussed. We expect to record additional organization charges throughout 2017, approximating $1 million to $2 million. These charges will be considered reconciling items to our non-GAAP results. Our effective tax rate in the fourth quarter was a benefit rate of 45%. As noted in the reconciliation tables attached to the release, the tax rate was impacted by the restructuring charges and non-taxable insurance proceeds and cash surrender value market gains. Adjusting for the non-GAAP items, the tax provision rate was 34.2%. As we have seen throughout most of this year, our reported fourth quarter results were adversely impacted by increased healthcare costs. Versus the same period in 2015, total corporate healthcare costs increased $3.7 million or $0.09 per share, on an after-tax basis. This included an increase on asset-based, nonunion employees of $2.3 million. This was associated with increases in the number of health claims as well as a higher average expense for those claims. For the full year of 2016, consolidated revenues totaled $2.7 billion compared to $2.67 billion in 2015, an increase of 1%. Full-year earnings per share were $0.71 compared to $1.67 in 2015. On a non-GAAP adjusted-basis as outlined in the earnings press release, 2016 earnings were $0.93 per share, compared to $1.78 per share in 2015. Our effective tax rate for 2016 was 34.1%. The rate was favorably impacted by insurance proceeds and cash surrender value market gains of approximately $2.9 million which are non-taxable and appear in the Other Net Income line of our statement below the operating line. This portion of Other Income has been considered non-GAAP, so our non-GAAP tax rate, as shown in the reconciliation tables, was 38.3%, compared to a similarly adjusted rate of 38.5% in 2015. For 2017, based on current tax law, we expect the tax rate to approximate 41%, excluding the effect of significant discrete items such as changes in cash surrender value of life insurance The increased rate is largely due to the expiration of the alternative fuel credit at December 31, 2016. At this time, prospective renewal of the alternative fuel credit is highly uncertain. We closed 2016 with unrestricted cash and short term investments of $171 million combined with the available resources under our credit revolver and our receivable securitization agreement and their associationed accordion features. Our total liquidity equaled $398 million at the end of the year. Our total debt at year-end of $244 million includes the $70 million balance on our credit revolver, the $35 million borrowed on our receivables securitization and $139 million of notes payable to capital leases, primarily on equipment for asset-based operations. The composite interest rate on all of our debt is 2.3%. Full details of our GAAP cash flow were included in our earnings press release. ArcBest reported asset-based fourth quarter revenue of $482 million, a per day increase of 5.4% compared to last year. In terms of business days, fourth quarter 2016 had 61 days, a half-day less than fourth quarter 2015. Asset-based quarterly tonnage per day increased by 0.9% compared to last year's fourth quarter. For fourth quarter 2016, by month, asset-based daily tonnage versus the same period last year increased slightly in October by 0.2%, increased 2.7% in November and decreased by 0.4% in December. Fourth quarter total shipments per day increased by 6.1% compared to fourth quarter 2015. Total asset-based weight per shipment was 1,205 pounds, a 4.9% decrease from last year's fourth quarter and 1% below the third quarter of 2016. Average length of haul on asset-based shipments increased nearly 3% to 1,043 miles, compared to 1,014 miles in the fourth quarter of last year. Length of haul was comparable to that in the third quarter of 2016. Fourth quarter total billed revenue per hundredweight on asset-based shipments was $30.06, an increase of 3.6% compared to the fourth quarter of last year. Year-over-year comparisons of this yield figure were positively impacted by changes in shipment profile and business mix. Excluding fuel surcharge, fourth quarter billed revenue per hundredweight on asset-based traditional LTL freight had a percentage increase in the mid single-digits. We secured an average 3.8% increase on asset-based customer contract renewals during the quarter. For the full year of 2016, ArcBest asset-based revenue was $1.9 billion, equal to that of 2015. Asset-based 2016 total tonnage per day decreased 1.8% versus the previous year while daily shipments increased 2.3% resulting in a 4% reduction in total pounds per shipment. On an adjusted basis, our asset-based, full-year operating ratio was 98% compared to 96.6% in 2015. In total, our asset-light businesses had revenue of $211 million, a 10.3% increase over last year's fourth quarter. On an adjusted basis, fourth quarter operating income for these businesses totaled $7.5 million and adjusted EBITDA totaled $11.2 million, compared to operating income of $4.3 million and adjusted EBITDA of $7 million in the prior-year quarter. Full-year 2016 revenue for the asset-light businesses was $803 million, compared to $765 million in 2015, an increase of 5%. Full-year 2016 adjusted operating income for these businesses was $17.7 million, compared to $24.8 million in 2015. Preliminary results for the month of January, 2017, versus January, 2016, were as follows. Daily billed revenues increased between 5% and 6% for the asset-based business. Total tonnage per day decreased approximately 1%, with LTL tonnage up slightly. On a sequential basis versus December, January total tonnage trends were about average with history, while LTL tonnage trends a little better than the historical average. Shipment counts increased approximately 7%. Combined with a decrease in tonnage, we're continuing to see a lower average weight per shipment on a year-over-year basis. As, Judy mentioned, we attribute this trend to growth in residential deliveries of e-commerce shipments as well as continued excess capacity in the truckload market. Total revenue per hundredweight increased between 6% and 7%, was positively affected by the changes in freight profile, account mix and higher fuel surcharges. On a historical basis, the average sequential change in ArcBest asset-based operating ratio in the first quarter versus the fourth quarter has been an increase in an approximate range of 350 to 400 basis points. On a combined preliminary basis, January 2017 revenue from our asset-light businesses increased between 5% and 7%. This is impacted by acquisitions made late last year. For 2017, the loss reported in the Other and Eliminations line is expected to approximate $4 million per quarter. Our 2017 interest expense, net of interest income, is expected to total approximately $4.5 million for the year, generally occurring in similar amounts each quarter. This net interest expense estimate does not include changes in cash rendered value which are reported the Other Net line of our income statement. We consider changes in cash render value to be nonoperating items and therefore excluded from our non-GAAP presentation. I'll conclude with some details about our CapEx. In 2016, ArcBest's net capital expenditures totaled $143 million, including approximately $91 million of revenue equipment for ArcBest's asset-based operation. Depreciation and amortization costs on fixed assets equaled $99 million. Amortization of intangibles equaled another $4 million. For 2017, net capital expenditures are estimated to range between $145 million and $170 million. This includes revenue equipment purchases of $94 million, primarily for road tractors and road and city trailers in our asset-based business and some trailers in our expedited and dedicated truckload businesses. In both 2015 at 2016, we replaced approximately 600 new road tractors in our asset-based operation. As a result, there has been a very significant improvement in average fleet age, maintenance cost per mile and fuel economy. Our plans for 2017 include replacement of another 600 road tractors and further improvements in the average age and dependability of the asset-based city fleet through transfer of tractors out of the road fleet. Our new road tractors will be equipped with enhanced safety technology, including lane departure warning, collision mitigation and forward facing video capture. ArcBest depreciation and amortization cost on fixed assets in 2017 are expected to be in a range of $105 million to $115 million. Now turn it over to Judy for some closing comments.

Thank you, David. Last month, two ArcBest asset-based drivers were named as Captains of the American Trucking Association's 2017-2018 America's Road Team. The recognition of drivers Steve Smalley and Tim Melody, gave our Company 2 persons on this year's prestigious Industry Safety Team. Steve has been a professional truck driver for 33 years and Tim has been a driver in our industry for 27 years. Between them, they have driven approximately 5.5 million accident-free miles. They continue a proud tradition at ArcBest as we've been represented on every America's Road Team since 1991. In November, ArcBest carrier, ABF Freight earned the American Trucking Association's Excellence In Security award, given for exceptional security practices for a record eighth time and for the second year in a row. Our Company's strong emphasis on the quality process combined with ongoing employee training and results assessment offers a strong foundation for our success in this important area. In summary, 2016 was a year that included a number of challenges for our team due to a variety of factors. I'm pleased to say that our employees responded well to marketplace changes with the implementation of an enhanced market approach to better serve customers. As we turn the page to 2017, we're cautiously optimistic and, although our shipment trends in January are favorable, the environment continues to be challenging. But there are a number of possible catalysts on the horizon. Those catalysts include potential changes to tax policy and regulatory relief as well as increases in infrastructure spending, just to name a few. And we've been watching various shipping indicators that are showing some improvement in January over 2016, but remain below 2014 and 2015 levels thus far. In addition, while it is generally expected that the late December, 2017 ELD Mandate will result in less capacity in the industry, the true impact won't be known for some time. So, all of these factors represent potential impacts that we're mindful of while also working hard to capitalize on the tremendous opportunity in front of us with our customers. Thanks to organic growth, acquisitions and refinement of our go-to-market strategy we now have more and better solutions to serve them. As David just discussed, we're also moving forward with appropriate increased capital investments to make sure we have the best customer experience possible. And one example of that already beginning to bear fruit is our newly updated ArcBest website which consolidates all of the online tools we have at one domain. So far, we've gotten good customer feedback on the upgraded website and there will be additional customer experience enhancements to come. And, David, I think we're ready to take some questions press.

Okay, Christy, I think we're ready to do that.

[Operator Instructions]. Our first question comes from the line of Brad Delco with Stephens, Inc. Please go ahead.

The first question, Judy, I'm trying to think about the changes we're seeing in some of these LPL metrics with declining weight per shipment and you mentioned an increase in e-commerce or potentially home deliveries. Can you help us think about the balance between the changes we saw in yields which actually looked very good, understanding that, that was helped by lower weight per shipment? And how that also translates into driver productivity? Because I guess the question really is, how do you really manage price when you are probably getting hit with some of the productivity measurements with lower weight per shipment?

Well, as you describe it, that's certainly true. It's always a challenge to make sure that if you are encountering difficulties or additional cost in some of the deliveries that you're able to capture that through good price improvement. The good thing for us is that we measure our accounts' profitability on an account-by-account basis so that we can see what's happening to us and it might take a month or a couple of months, to really fully understand what's happening. If you have difficulty with an account. But you certainly can see it and you can go back and adjust as you need to, certainly if the terms of your agreement with a customer allow for that. But you are right on when you say that it is more cost intensive to deliver residential deliveries. The good thing for us is we've been doing through our U-Pack business for about 20 years so we know the costs that are incurred when you go into a neighborhood. We know the additional time or any of the difficulties. We also have people in our call centers that know how to manage that process. And that's helpful, I think both to our operation and to the customer side of things. And so when I think about expanding our presence with e-commerce or having more e-commerce shipments in our network, we certainly have the experience to be able to handle that. But you're right. If you do encounter, for instance, a strong uptick in that business which we did in the fourth quarter, you do have some, at times, additional costs that you incur to handle that business and that needs to be recognized in your pricing and adjusted so that they count as profitable as you'd need for it to be.

And just as a quick follow-up, can you give us a ballpark of what percentage of your business is residential deliveries at this point?

Well, we don't get into that. We've never really given those percentages because of the business that we've always done in the household goods moving market. And so, a way to think about it is that we do have a higher percentage of that than some that we compete with.

Our next question comes from the line of Chris Wetherbee with Citi. Please go ahead.

I wanted to ask a little bit about the typical seasonality from an OR perspective as we move into 2017. You have made some structural changes from a cost perspective and just aligning the businesses. So I just wanted to think about how that might impact that sequential or that you always, hopefully, give us each quarter. And should we start to see some benefits here really zeroing in on the first quarter? With freight up and looks on the LTL side and pricing positive, can we start to expect first quarter where we're profitable from an operating income perspective on the LTL side or on the asset-based side. I'm just trying to get a sense of how all those dynamics play out going forward.

I think the typical relationship on the asset-based side is about 3.5 to 4 points of increase in the operating ratio when you move from fourth quarter of a year to a first quarter. And so, good question on the realignment of our costs. One thing that I'll point out to you is we did that as of November, the beginning of November, so in the fourth quarter, we really have two full months of those cost adjustments included in our numbers. And as you move into the first quarter, you're going to have three months of those. So is the impact of that truly material? I think there is an effect there, but it may not be overwhelming when you think about the normal relationship from fourth to first. One of the reasons for that increase is just what happens in the marketplace. It really is marketplace effects, it's also our customers' business levels and when we look back at the long period of history, we typically have that relationship. If you did the math, that would produce a loss for us on the asset-based side in the first quarter and certainly we're trying to achieve something different than that. But we're not forecasting. We're not giving you guidance on that. I'm just telling you that we have, as a goal for the Company, to not lose money ever in any quarter. So I hope that's helpful.

It is. And it's worth a shot to try to pin you down with that first quarter number but I appreciate that. And then maybe just a question on the pricing side. So I think you mentioned asset-based contract renewals in the 3.8% range. Just curious, when you think about 2017 and the pricing dynamic and you put in this residential delivery dynamic that you highlighted and maybe just the overall freight market, how do you see that cadence of pricing playing out? Maybe not specifically, but just directionally. As we go forward, can we get a reacceleration of pricing in 2017 or is it holding the line and looking for tonnage recovery to potentially drive upside later in the year?

Well, I think you have to have the tonnage recovery in order to get something that's dramatically different than where we're today. But as you look back over 2016 and what we reported thus far for 2017, we're characterizing the environment as one that is stable. Just to give you a little bit of color on that, we have been seeing some customers go to market and those -- usually the negotiations when there is a bid involved are more competitive. So that speaks to the issue that we also described which is that there continues to be some excess capacity out there. And as it stands now, we're seeing the overriding result be okay or stable, but you do have those pockets of competitiveness and aggressiveness when you're dealing with bids. So I think the catalyst for change for that is probably a better manufacturing industrial result and then just overall better economic activity from consumers. But it's going to be interesting. I hope this year is better than some. It seems like the last two or three years, we've talked about the second half being so much better and then been somewhat disappointed by that. So hopefully this is the year.

Our next question comes from the line of Jason Seidl with Cowen. Please go ahead.

I want to jump back a little bit to the home delivery and try to get a handle on just how much that could grow to you and is there any network redesign that you might have to take if that does? Also, what's your average weight-per-shipment in the home delivery versus your regular?

It's much less. It's much less. To give you an example, you're -- if in a home delivery, typically we're dealing with what's characterized as heavy, bulky items. So it might be, the weight-per-shipment might be 300 pounds rather than something that is over 1000 pounds. And it's -- what you doing is you're taking that shipment, a lot of times direct from the vendor to the consumer's home.

Jason, if you think about it, our average total weight per shipment is about 1,200 pounds. So that gives you some perspective. And as Judy points out, it's stuff you're taking to a home as well.

Right. And in terms of any network redesign, are you going to have to get additional equipment? So maybe more or smaller 10 tons with lift gates or something like that?

Well, we have been increasing the percentage that we have of lift gates in our city operation. Right now, it's about 30% and we have got to finalize our plans for 2017 on the trailer purchases to see if that moves higher but I would expect that it would. And that is some of the equipment that is -- helps you facilitate the delivery of that kind of a shipment. Now, in the network, we're not seeing or discussing any major network redesign. But we're looking at optimization tools and systems to help us with navigating the delivery of more appointment-shipments because of the windows and the disruption that, that can give you in your normal city operation. But that's just some -- a couple of examples of what we're doing.

Okay. That's helpful. My next topic real quick on your Northeast operations, obviously have a competitor starting to come into the Northeast. What does that do to the dynamic in the Northeast? Do you foresee any pricing pressures up there? Or do you think that it's going to be a rational player?

Well, I think if you -- I think you probably were on Saia's call. It didn't sound to me like that they were going to be going in with an aggressive pricing posture and so that's favorable. Outside of that, I really can't speak to what they'll do. But they are a good competitor and that's in addition of a good competitor in an area where we have freight. And so I would expect there to be an effect from that. But again, if we're doing the right things for our customers, providing value, we feel like we tie together solutions in a way that our customers really appreciate and ties them to us. And so we'll, as we have, win that business based on the value that we provide or keep that business on the value we provide. And we have always had good competitors.

Our next question comes from the line of Matt Brooklier with Longbow Research. Please go ahead.

So I wanted to ask a question about your expedited business. You called out in the release that you had seen further demand improvement. I'm just curious if you were able to maybe quantify, talk to the volume growth in that business relative to earlier this year? And then one follow-up on that.

Well, in the release statistics that we gave, we put in some information on the expedite side. So shipments per day were up nearly 5% for the quarter and then 4% for the year.

Okay.

That's the new stats we added at the back of the press release.

There's a lot of pages there, we know.

There are. There are a lot of pages and it sounds like that 5%, that number has been moving upward as the year has progressed?

Yes. Well, the second half of the year was clearly a higher level of shipments than the first half.

Okay. And then the follow-up question. Can you talk to the types of the customers who are using more expedited product? Can you talk to the industries, the end markets, just trying to get a feel for where we're starting to see customers willing to pay up a little bit more to get their volume moved?

Well, it's interesting whenever I look at the verticals or the markets that are served by our expedite service offerings, probably the strongest growth and margin improvement is in the manufacturing markets, high-value products. But across the board, we saw better revenue levels, net revenue levels and shipment growth. So it's been -- the second half of the year, we were very pleased with from that business standpoint, so --

Our next question comes from the line of Todd Fowler with KeyBanc Capital Markets. Please go ahead.

For a point of clarification on the January tonnage number, the down 1%. Was that a company-wide number? And I think you made some comments about LTL being a little bit better, maybe being positive. Could you just go over that piece again?

Sure, yes. Tonnage for the asset-based business declined 1%. With LTL, we just gave a little color on that being up slightly.

Todd, that's the asset-based only.

And then, Judy, can you just talk little bit about purchase transportation? And from some of the comments earlier in the call and within the release, it sounds like that -- the shipment side is having some impact on various operating expenses but I'm a little bit surprised that purchase trends would be impacted by that. Can you just give us some thoughts on what's going on with that line item and thoughts on the impact of that going forward as well?

Well, there's a couple of things, I'd say, that are going on there. One of those is an opportunity that we've had in the utilization of rail that has really benefited our Company from an efficiency standpoint. But nevertheless, when you're looking at that line item, it is higher in terms of the cost because of miles that we had on the rail were 15.8% versus about 13.8% last year in the fourth quarter. So that's just better line-haul management. As another statistic there on the line-haul side is that our empty miles were down almost 18%. And so that's -- we had a good result from the line-haul standpoint in the fourth quarter. But back to your question that related to the e-commerce and the other purchase transportation side. We did see an increase in our utilization of local cartage and what's interesting about that is it's concentrated into a small number of our facilities. And it just so happens that those facilities were affected by this greater number of shipments that I would characterize as e-commerce shipments that required ultimate residential delivery. And what is difficult, particularly when you have a challenging year like we've had is the manpower side. So again, it's not that we can't hire people, it's just we're trying to manage the business closely with the right number of people for the business levels we have. So if in certain facilities, we're hit with a large increase in business over a short amount time, a relief valve for that is to go to local cartage and -- but I think one of the first questions I answered on the call was, how do you recover that in pricing if you -- and I think it's just, again, once you see that and if you have to address that going back to the account-by-account profitability and looking at the situation for that customer. But maybe first what you do is you go to that customer and see if you can to a little bit better planning with them over how that's going impact you because the ultimate right answer is that you're able to hire the right number of people so that you can have them ready and able to handle the shipments when you get them.

Okay. So there's a lot going on in that line item. You're getting the benefit from increased rail and better efficiencies and there's going to be some offsets in the salaries line. But then there's also the mix shift that is also moving through there and that's the piece about -- to Brad's earlier question and getting the cost right with the mix that you have?

Right. But again, keep in mind that what I said to Brad which is, we have a lot of experience in this area. This is not something -- the e-commerce business that we have from the U-Pack moving business, that gives us a lot of knowledge and visibility over the costs of going into a neighborhood. But as I mentioned, when you get hit with a lot at once, you do have to utilize variable resources at times to help you get those deliveries done.

Yes, the challenge is in the planning and the people management from that standpoint.

Our next question comes from the line of David Ross with Stifel Nicolaus. Please go ahead.

I wanted to talk a little bit about CapEx first and especially, David, you talk about $143 million but you're only showing about $60 million of net CapEx in the cash-flow statement. I assume the difference is due to some capitalization of operating leases that you took on for the new equipment. Is there something else there?

No, it's -- you're close. It's equipment notes. We financed about $83 million of the revenue equipment with equipment notes and so that's shown down below non-cash investing activities on the cash flow statement progress

Yes, look at the very bottom of the cash flow statement, Dave.

And as you look, for next year, those equipment notes versus just buying the tractors and trailers outright, what has been the swing factor? Why did you go the equipment note route versus buying them? And is that changing at all this year due to increased interest rates?

We're anticipating probably financing a similar amount in 2017 of the revenue equipment with equipment notes. That's been a very attractive interest rate. As I mentioned on the call, that our -- total interest rate is 2.3%. So we're pleased with that.

So the equipment notes also show up under the long term debt on the balance sheet?

That's correct. At least in its current run.

So would the rate on that debt be higher or lower than the average 2.3%?

No, it's lower. Equipment notes --

Either right at or lower.

It's all around that same range.

And then, Judy, just a question on the re-org. You talked about the -- we saw the changes that there is a more unified approach to pricing, sourcing and other lines, does that mean that -- just so I understand it better, pricing used to be decentralized and now it's centralized or sourcing and other used to be decentralizing and it's centralized? And is that across all the units or just within -- for each segment?

Appreciate the question. What we had was a pricing function at ABF Logistics, at Panther, one, with the moving business and then we had also had ABF Freight. What we're saying is that we've put that -- those groups together and streamlined them. And so we've always, on the asset-based side, we've always had centralized pricing. And meaning that it's in Fort Smith, Arkansas, that's where the pricing decisions are made. And that's been the case for many, many years. And all the years that I've been here which is almost 20. So really what we're talking about is the unification of those pricing teams into one which we see a lot of benefit of that because it allows you to see all of the different market pricing effects in each of the service lines. Which informs you on everything that you do. And so we've really enjoyed just the short amount time that, that team's been together. And it also ensures that if you've got a customer with a multi-service need, that you're consistent with them. And that you're making the right total decision with them over the business that you're doing with them. So again, we're excited about it. We're seen a lot of benefits.

Yes, because sales is also consolidated so they don't have to get multiple pricing people, right? They just go to -- they are selling all the products.

One group.

They go to one pricing department that prices all the products and then relays back to sales.

Right.

David, just one follow up. I just want to make sure, in case you're trying to model interest expense, I did give some guidance, I know it was long-winded in the script, but I gave some guidance around our net interest being $4.5 million for the year. So just in case you're looking for that.

Yes. No, I got it. Thank you.

Our next question comes from the line of Amit Mehrotra with Deutsche Bank. Please go ahead.

I just want to go back to the weight-per-shipment dynamic for a moment. Is this a longer term strategic initiative to go after this residential or e-commerce base? Or is it more of a seasonal factor? Or you just saw more peak season e-commerce demand and the nature of your customer base? Just want to think about the upcoming quarters and weight-per-shipment trends on the asset-base side.

We're targeting business growth and so it really is not focused on that segment in particular but these are customers that we do business with. And they have needs that are adapting and changing. And so we're capable in those areas I mentioned because of our experience with residential deliveries. And so we do a good job with it and I think when you do a good job, you get more. And so I do think that there is a seasonal element to it, but we have this type of business all year long. It's just more of it in that seasonal fourth quarter peak.

Some of this is occurring because we're able to provide multiple services to these customers and so they appreciate that aspect of our logistics Company.

Okay. So you could potentially have just some type of competitive advantage over some other LTL -- pure LTL carriers?

Well, we certainly have a lot of experience in this area.

And then I wanted to just ask about your comment around the competitive pricing environment. Is that something that's changed more recently? Or is it still consistent with what you've seen throughout the rest of the year?

I would say that fourth quarter was consistent. What I described has really been the environment for, I would say, many months. Maybe many quarters.

Okay. And has that continued month-to-date or quarter-to-date?

Yes, we really haven't -- it is a short window to be looking at but we really haven't seen much change.

Okay. And then just last, if I can, is there anyway to quantify the progress you have made so far in the restructuring process? And maybe just give us an update on timing and some of the buckets for the remainder of the plan?

What I'll say is that we're on course with the level of savings that we disclosed when we first announced this. So we disclosed that we would have $15 million of savings on the -- that's pretax on the operating line. And through two months, we feel like that, that's on track and really consistent with what we'd described when we first announced it. The areas of savings are in software, lease space and with people cost. Our employee costs are reduced.

Our next question comes from the line of Scott Group with Wolfe Research. Please go ahead.

So just wanted to follow up on the last point. So, Judy, of the $15 million, if I'm hearing you right, it's about half and half between LTL and asset-light. And you think you got about 2/3 of it in for both segments in the fourth quarter?

2/3 of a relatively -- of a quarter, right?

Sure.

Basically two months of that, on an annualized basis. And again, that's a -- essentially what we did when we took action to reduce our cost structure on an annualized basis by $15 million. And so that all took place, as we said, effective November, 1st of November.

Okay. Did you give weight-per-shipment for January?

Yes. Well effectively, we did because we gave that the tonnage level is down 1% and shipment levels are up about 6%, I think.

Okay. I know you've talked about at the past couple of quarters but I'm still a little confused. When you talk about your -- when you say traditional LTL freight, what are you excluding? You are excluding truckload. Are you also excluding all of this home delivery business as well?

No. That's -- much of that is LTL freight and so -- I tell you what the distinction is there is how the business is quoted. If it's a volume quote or a quote that's based on linear feet, it is excluded from that. And if it's a traditional LTL shipment quoted as an LTL-rated shipment, it's included. So that's what we mean when we say that.

The large, large majority of our total, Scott, is the LTL. And that's -- we're just pulling that out to say, here's what our typical LTL is doing.

Okay. So then what I'm really trying to ask is, though, if you look at revenue per hundredweight was up 4%, weight-per-shipment was down 5%. I'm confused how we get to pricing in mid single-digits, right? If weight-per-shipment is such a help, I would think that underlying pricing feels more like low single-digits right now.

Well, there's a number of factors that are involved in that. You're -- I hate to say this to you but you're over-simplifying that because there's a lot that's going on in there with business mix, profile, the freight, density. There's just a number of factors there that impact that besides just weight-per-shipment. Actually, weight-per-shipment is not one of the main factors that actually effects revenue per hundredweight. It is a factor. You have to know more and that's why you hear, on some of these call transcripts I've read through, there is a lot of discussion about what revenue per hundredweight means and it is -- it is a proxy but sometimes flawed.

Not the most perfect.

Right. Because there's just a lot of moving parts involved. But that's why we give you that mid single-digits to give you an indication of our thoughts about a pure pricing figure that excludes the profile and try to help you with direction.

Okay. I think that makes sense. And then one last just really quick thing. On the home delivery business, do you have any additional labor flexibility on that, relative to some of the more traditional B2B LTL?

Well, if there are requirements that don't work within our network, yes. We would. And we have the ability, as we've talked about earlier in the call, to use forms of purchased transportation which includes local cartage and so, yes. I would say we do. So we can do both is probably the best way to think about that.

Our next question comes from the line of Ravi Shankar with Morgan Stanley. Please go ahead.

A couple of questions here and then another one on the e-commerce home delivery business. It's no surprise to me that you're going after that business, given that it is one of the fastest-growing parts of e-commerce, but we're also hearing the same refrain from other companies as well. So I'm wondering if you expect that business to get significantly more competitive in the coming years and if you already seeing some of that competition? And also the follow up to that, what's the path to improving the returns in that business? Is it primarily raising price over time? Or is it going to be from reducing cost and improving your asset utilization over time?

Well, I think to answer your last question, it's really both because I think there are things that were in our sights on improved efficiency. I talked about our street optimization project, really trying to better plan and work with the customer so that you're more informed. That's another way. And many customers are very open and welcoming of that discussion, that conversation. And then ultimately, if those things are in place and you're still having issues with the cost, then the only lever left to pull is to go back on the pricing side and adjust it there. Hopefully, you were successful in your work with the customer on that. From a competitive standpoint, I think it will be slow only because I think that it does require a high level of expertise and management, something that we done, as I mentioned, for 20 years in the moving business. That gives us some information and some skill sets as well as just insight and that takes time to develop. And so I think we perhaps have a better opportunity of having an efficient or cost-effective answer there just because of our knowledge. But at the same time, there is still a large disconnect in what the consumer is willing to pay and what it costs you to go into a neighborhood and deliver a shipment. And that has to be reconciled over time. I would think that, that is a factor that plays into how many of our competitors will be interested in that business.

And just one last one, I think you mentioned that the ocean disruption that you saw in the third quarter continued in the fourth quarter. How long do you expect that to continue?

Well, what we're speaking to is just the market getting back to a place where the rates that you're able to charge a customer and then what you're having to pay for the cost of that shipping get back into a balance. That's what we were seeing in both the third and the fourth quarter is if you've got relationships with customers that you want to maintain, you see spikes in the shipping costs. You have to make a decision about whether and when that cost gets passed along to the customer. And so I think it will probably take a little while longer but that's a crazy market for me to make any predictions of. And so what I can commit to you is that we have really good people that work in that area for our Company. They know how to manage it. They know how to get the right answer for the customer and also make money. And we're continuing down that path, attempting to resolve that in our operating model.

Our next question comes from the line of Ken Hoexter with Merrill Lynch. Please go ahead.

And, David, thank you for squeezing me in. Just let me start off with the progression of volumes through the quarter on tonnage. And then you're looking to hopefully make a profit in the first quarter. You've got a really easy volume comp in March. Can you talk about your thoughts of the state of the market now on demand?

Well, I think we've talked about, on our prepared comments, that we're continuing with a challenging environment. Obviously, in January so far, tonnage is down a little bit, maybe close to 1% on the asset-based side. When we look on the asset-light side, you're still seeing evidence of some excess capacity. One thing that we're hopeful about is the manufacturing PMI, I think the recent measurement of that was a 56? That's really strong, typically. When we see that measurement, in about four to five months, we start to see an improvement in our business. And is so again, something that we haven't quite seen yet but that we're hopeful for and we're certainly, as a Company, ready for. Now, on the monthly progression of the tonnage, I'll let David give that to you.

Ken, I mentioned, in October tonnage was up 0.2%, November was up 2.7% and then down 0.4% in December. That's year-over-year comparable months.

And I think it's already been said but I'll say it again, I think the January relationship to the fourth quarter or December, is kind of middle of the road. So we're not seeing anything that is much different than what we would expect in terms of January tonnage levels.

And another thing too, Ken, the year-over-year tonnage comps are a lot easier beginning in March, if you're --

Yes, he mentioned that. He's right about that.

And then lastly, I'll wrap up on the cost program. That was great insight and follow up there on the progression of it, but now that you've combined the businesses, David, I know you said you were on track but do you see the opening up for potential additional savings now that you've combined? Is there anything that's gone favorably that you see the additional to maybe accelerate some of the changes that you started with?

Well, in terms of the cost savings, like I said, we're on track there. We think there's other benefits to be had and efficiencies as we move forward. Again, we're just into it. So we think there's progress to be made. We're excited about it. Our teams are enthused and they see opportunities. But there is really no additional definition around cost savings that we're able to provide at this point.

Thanks, Ken. Well, I believe that concludes our call. We thank you for joining us this morning and we appreciate your interest in ArcBest Corporation. That concludes our call.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.