ArcBest Raises Q2 LTL Margin Forecast 200 Basis Points on Fuel, Rates

Why did ArcBest raise its second-quarter margin forecast?

ArcBest raised the margin forecast for its asset-based unit, which includes less-than-truckload subsidiary ABF Freight, by 200 basis points at both ends of the range Thursday after the market closed. The company now expects the operating ratio (inverse of operating margin) to improve by 600 to 700 basis points sequentially, implying a 90.8% adjusted OR in Q2. That would be 200 bps better year over year. The unit normally sees just 350 bps of sequential margin improvement from the first to the second quarter.

ArcBest attributed the improved outlook to "disciplined execution on pricing initiatives, the impact of recent fuel price movements, and continued progress on cost optimization, network efficiency, and technology driven productivity initiatives," according to a filing with the Securities and Exchange Commission.

Fuel surcharge step function driving margin accretion

Less-than-truckload fuel surcharge mechanisms include a step function as diesel prices rise, typically resulting in margin accretion. Higher diesel prices are driving larger fuel surcharges, positively impacting ArcBest's revenue-based metrics. Revenue per shipment was up 13% year over year through the first two months of the quarter due to both heavier shipment weights and higher fuel prices.

Yield was up 5% but closer to flat excluding fuel surcharges. The company said on the first-quarter call at the end of April that contractual rate increases averaged 6.3% in the period (up 10.3% on a two-year-stacked comp). It also said that truckload rate increases should step up from the low- to mid-single-digit range seen in the first quarter to a low- to mid-double-digit range in the second and third quarters.

Truckload shipments pushing tonnage higher

Revenue per day in May was 9% higher year over year, with tonnage and yield each increasing 5%. May's tonnage growth was driven by a 9% increase in weight per shipment, which was partially offset by a 4% decline in daily shipments. ArcBest said shipment weights are up as more truckload shipments are in the network. Higher shipment weights negatively impact the yield metric.

Tonnage growth accelerated on a two-year-stacked comparison. Tonnage was up 11.3% in May following a 9.7% increase in April. Final asset-based results for April came in modestly better than expected. Revenue per day was up 10.9% year over year versus management's preliminary call for a 9% increase. Both tonnage and yield outperformed expectations.

Manufacturing recovery signaling LTL volume uptick

Industrial activity improved for a fifth consecutive month in May, according to manufacturing data released Monday. The Institute for Supply Management's Manufacturing PMI registered a 54 reading for the month, which was 130 bps higher than April, and the highest reading in four years. A reading above 50 signals expansion, while one below 50 indicates contraction.

The subindex for new orders, an indicator of future activity, registered a 56.8 reading, which was 270 bps higher sequentially. Inflections in ISM data usually lead LTL volumes by a few months. XPO's May tonnage rose 0.5% year over year as daily shipments climbed 3.3%, outpacing the carrier's Q2 flat-growth forecast.

Brokerage unit outlook raised $2 million

ArcBest's asset-light segment, which includes truck brokerage, is now forecast to record adjusted operating income of $3 million to $5 million in the second quarter. The updated guidance is $2 million higher at each end of the range. Quarter-to-date, daily shipments are up 15% year over year (increased managed transportation demand) and revenue per shipment is up 11% (higher fuel costs and truckload rates).

Shares of ArcBest (NASDAQ: ARCB) were up 5.5% in early trading Friday compared to the S&P 500, which was off 0.9%. ArcBest's stock has doubled since the beginning of the year.