Greetings, and welcome to the ArcBest Fourth Quarter 2022 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded on Friday, February 03, 2023. I would now like to turn the conference over to Mr. David Humphrey, Vice President of Investor Relations. Please go ahead.

Thank you for joining us. On today's call, we will provide an update on our business, walk you through the details of our recent fourth quarter and full-year 2022 results, and then answer some questions. Joining me today are Judy McReynolds, Chairman, President and CEO of ArcBest; David Cobb, Chief Financial Officer of ArcBest; Danny Loe, ArcBest President of Asset-light Logistics, and Chief Yield Officer; as well as Dennis Anderson, ArcBest Chief Customer Officer. To help you understand ArcBest and its results, some forward-looking statements could be made during this call. Forward-looking statements, by their very nature, are subject to uncertainties and risk. For a more complete discussion of factors that could affect ArcBest's future results, please refer to the forward-looking statements section of our earnings press release and our most recent SEC public filings. To provide meaningful comparisons, certain information discussed in this call includes non-GAAP financial measures as outlined and described in the tables in our earnings press release. Reconciliations of the GAAP financial measures to the related non-GAAP measures discussed in this call are also provided in the additional information section of the presentation slides. As a reminder, there is a conference call slide deck that can be found on the ArcBest website. We will now begin with Judy.

Good morning, thank you all for joining us. I would like to begin by acknowledging a few tremendous milestones for ArcBest. First, we exceeded $5 billion in annual revenue for the first time in company history, with year-over-year revenue growth of $1.3 billion. We also achieved the highest earnings per share in our company's history. These important accomplishments could not have happened without the hard work and dedication of the entire ArcBest team. The other important milestone I want to highlight is a celebration, 2023 marks our hundredth anniversary. ArcBest has flourished over the past century, and we are positioned to continue driving this momentum forward into the next century. The road to 100 years has been paved with resilience, flexibility, innovative thinking, cutting-edge solutions, and a commitment to our core values. We know who we are, and because we have stayed true to our values and focused on our strengths, we've been able to innovate and successfully navigate enormous amounts of change. Nothing intimidates us. We have a saying, 'We'll find a way,' which means we'll stop at nothing to get the job done well. I'm incredibly proud of what we've accomplished together. Our results remain strong, as does our growth opportunity, regardless of the obstacles facing our industry. We are on track to achieve our long-term financial target of $7 billion to $8 billion in revenue by 2025, and will continue to manage the business in the short-term as market conditions evolve. As we've shown time and again, we are a company that thinks ahead and plans for the long-term. We continue to strengthen our competitive edge through our diverse portfolio. The breadth of modes we offer our customers allows us to make the most personalized and strategic decisions for them; decisions that will help them grow. In fact, I recently connected with a customer whose supply chain we started managing last year. They initially saw ArcBest as an LTL company, but after learning about our additional solutions, they selected ArcBest as their logistics partner. Within a fairly short amount of time, we developed a deep partnership, managing their transportation, and creating exceptional value for them. As a result, we're expecting double-digit growth with this customer in 2023. It is deep, trusted customer relationships like this that have and will continue to contribute to our success in any operating environment. Throughout 2022, we continued our strategic investments in technology and innovation. Innovation isn't just a buzzword for ArcBest; it's embedded throughout our long-term plans, and in the way that we approach our daily work. We started and completed numerous technology projects in 2022, which allow us to run our business with more precision, better identify issues, and quickly address the root causes with a tailored solution. Looking ahead, we are advancing our use of technology to strengthen our business and better serve our customers. We bring our innovative mindset to every partnership, building processes and digital capabilities that make it easier and more efficient to do business. We prioritize investments in these critical parts of our business to stay ahead and succeed now and in the future. Building on that, you've heard us reference an innovation investment we've made which includes patented handling equipment, software, and a patented process to load and unload trailers. In addition to being used in parts of our network, we are currently piloting this program in several customer locations. We're encouraged by the early value it's delivering, and we have several large customers already interested in broader deployments of this solution. We believe it has the potential to be an industry game changer, and look forward to sharing more later this quarter. Of course, none of our innovation or our results this year and over the past 100 years would have been possible without the great people who work hard every day to solve logistics challenges for our customers; a sincere thank you to the ArcBest team. And now, I'll turn it over to David who will take you through the quarter and the year in greater detail.

Thank you, Judy, and good morning, everyone. I will start by emphasizing our consolidated results. In the fourth quarter of 2022, our consolidated revenues reached $1.2 billion, marking a 5% increase compared to the previous year. On a non-GAAP basis, consolidated operating income fell 19% to $83 million. Our adjusted earnings per diluted share for the fourth quarter was $2.45. Throughout 2022, our consolidated revenues totaled $5.3 billion, a 34% rise over 2021. Non-GAAP consolidated operating income was $473 million, reflecting a year-over-year increase of 49%. Adjusted earnings for 2022 amounted to $13.66 per diluted share, which represents a 60% increase compared to 2021. The effective tax rate used to compute the fourth quarter non-GAAP EPS was 26.3%. According to current tax laws, we anticipate our 2023 non-GAAP tax rate will fall between 26% and 27%, although this could be influenced by discrete items during the year. We are pleased to report that our strong business momentum this year has generated solid cash flow, with our 2022 EBITDA totaling $572 million. ArcBest’s cash balance and total liquidity remain robust, with a net cash position of $61 million at the end of 2022, an improvement of $13 million since the third quarter. Our total liquidity stands at a healthy $566 million. Despite rising interest rates, the composite interest rate on our outstanding debt at year-end was just below 3%. ArcBest’s solid balance sheet and the operating cash flow generated in 2022 have enabled us to invest in the business through new equipment, real estate enhancements, and technology innovations, all aimed at strengthening our competitive edge and improving customer service. We continuously assess external growth opportunities and are pleased to have returned capital to shareholders through increased share repurchases and a quarterly cash dividend, which the Board raised by 50% in April 2022. We will continue our balanced approach to capital allocation, focusing on investment-grade metrics while prioritizing capital returns to shareholders through repurchases and dividends, and considering M&A opportunities as they arise. In the current environment with declining business levels, we are particularly focused on effectively managing personnel, equipment, and other resources to ensure superior customer service while keeping costs in check and improving profit margins. Regarding key metrics in our Asset-Based business, fourth quarter revenue was $711 million, reflecting an average daily increase of 5% compared to last year. The fourth quarter non-GAAP Asset-Based operating ratio was 88.6, representing a year-over-year increase of 170 basis points. As noted in the previous quarter, inflationary costs and delays in obtaining replacement equipment have led to higher repairs and maintenance expenses, which are reflected in the Asset-Based line for fuel, supplies, and related costs. Additionally, we made progress in optimizing our use of external resources, with decreased purchase transportation as a percentage of revenue. Fourth quarter tonnage per day fell by 5.5%, while daily shipments rose by 1%. Total fourth quarter build revenue per hundredweight increased by 9.3%, including fuel surcharges. We achieved an average 5.4% increase on Asset-Based customer contract renewals and deferred pricing agreements negotiated during the quarter. In 2022, total Asset-Based revenue reached $3 billion, a daily increase of 17%, marking the highest ever for ABF. Total tonnage and shipments each grew by approximately 2%. Total revenue per hundredweight increased by 14.5%, with an average 7.3% increase on customer contracts and deferred pricing agreements renewed throughout the year. The full-year non-GAAP operating ratio was 86.4%, showing a year-over-year improvement of 240 basis points, and an impressive 1,150 basis points over the past six years. Looking at January trends, the slowdown in the general economy has affected customer order quantities and shipment sizes compared to January 2022. On a preliminary basis, our January 2023 Asset-Based tonnage grew by 1%, while shipments increased by 7% year-over-year. For further details regarding our January 2023 trends, please consult our Form 8-K exhibit to the press release. In the ArcBest Asset-Light business, total fourth quarter revenue was $572 million, reflecting a 7% daily increase over the fourth quarter of 2021, aided by a complete quarter of MoLo operations in 2022 compared to just two months in last year's results; however, this was offset by a decline in customer shipping volumes, lower market rates, and shifts in business mix. In the FleetNet segment, both events and revenue per event rose compared to the prior-year period. For all of 2022, Asset-Light revenue surged by 60% over 2021 to reach $2.5 billion, driven by a full year of MoLo operations and strong demand for our logistics services, especially in the first half of 2022. Fourth quarter Asset-Light non-GAAP operating income was $11 million, totaling $90 million for the full year of 2022, which is an 82% increase compared to the previous year. The fourth quarter Asset-Light EBITDA was $13 million, and total for 2022 was a significant year-over-year increase. We detailed preliminary asset-light business trends for January 2023 in the Form 8-K exhibit filed with the press release this morning. Current trends in the Asset-Light segment remain softer as a result of the recent demand slowdown. In 2022, net capital expenditures, including financed equipment purchases, amounted to $211 million, with $93 million spent on revenue equipment, the majority attributed to ArcBest’s Asset-Based operations. Depreciation and amortization costs for our property, plant, and equipment were $127 million, while amortization of tangible assets was $13 million. Once again, we faced challenges from manufacturing delays and parts shortages. Consequently, we had to reduce some trailer orders within our Asset-Based fleet, and several real estate projects were delayed into 2023. For 2023, we project total net capital expenditures of between $300 million and $325 million, including approximately $175 million for equipment purchases, with most allocated to ArcBest's Asset-Based operations. Our investment plans for 2023 reflect not only a catch-up on certain 2022 projects but also increased investments in equipment to support our growth plans going forward. We estimate 2023 depreciation and amortization costs to be around $130 million. This estimate excludes tangible asset amortization, which is expected to be approximately $30 million for 2023, mainly tied to purchase accounting amortization related to the MoLo acquisition. We are thrilled with our financial performance in 2022. Our strong commitment to effectively meeting customer needs positions us well to navigate market challenges while focusing on our strategy for long-term growth and sustained profitability. Now, I'll turn the call over to Danny.

Thanks, David. Good morning, everyone. I'll provide an update on the asset-light side of the business and give a high-level overview on yield. We continue to see benefits from an improved truckload offering as well as benefits from the MoLo acquisition. The timing of that acquisition has been particularly favorable as it brought us more contractual business and better procurement in the spot market. While truckload spot rates declined sharply in the fourth quarter, we still grew shipments, which is a testament to the strength of our truckload solution. We continue to focus on profitable shipment growth in pursuit of our long-term financial targets despite market pressures that impacted us in the fourth quarter. Shorter term, we are also focused on what we can control. And part of that is managing cost. We continue to invest in our existing team with a focus on employee productivity. Additionally, we have better capacity capabilities and are continuing to benefit from MoLo's career management approach. On the asset-based side, pricing has also remained rational. Our focus continues to be on profitable growth and effective cost control. We estimated our general rate increase in early November. We will price appropriately to reflect our high-quality service offering. As we entered our 100th year, we continue and evolve to better serve our customers which positions us well in any market environment. We have diversified our solutions and worked diligently to integrate them so customers have seamless access to our services. We are streamlining our business from the initial interactions with our customers to the day-to-day execution and are seeing the benefits of this strategic work. We have built additional revenue streams through solutions like dynamic pricing and U-Pack, which supplement our published LTL business and allow us to flex based on customer needs and market dynamics. In times like these, we strategically use these tools to fill empty capacity with profitable transactional shipments, which up to this point has enabled us to avoid furloughs or layoffs and provide a more sustainable service offering, while being better positioned for profitable growth toward our long-term targets. In short, a big win for ArcBest, our employees, and our customers. There is debate in our industry about a technology-centered versus a human-centered approach. We believe the key is having a blend of both, using technology to improve efficiency for employees while giving our customers the choice and the ability to seamlessly switch from technology-driven solutions to human-driven ones based on their needs at that moment. We are pleased with the progress we have made, and the feedback we have received from our customers. Having productive employees is critical. We are pleased with the productivity improvements we are seeing with having all of our truckload employees on the same operational platform. With the hundred years of experience, we are uniquely positioned to help our customers find the best solutions for their supply chain needs. Taking a broader logistics partnership has benefited both segments of our business. It has enabled ABF to have a better selection of freight with the ability to choose shipments that fit best within that network. It has allowed us to say yes to customers who move freight another way but want ArcBest to coordinate and centralize the logistics experience. We began a pilot that would expand brokered LTL to transactional shippers. Through this, we learned some important lessons. As a result of our close relationships, we were able to gather valuable feedback from customers and our LTL carrier partners and learned that there were some places that experience could be much more efficient. Using our internal tech team and leveraging our 100 years of experience in the LTL industry, we quickly stood up a proprietary system to address the inefficiencies identified. While this project is still in the pilot phase, we are encouraged by the early results, and look forward to expanding the pilot to serve more customers. Now I'll turn it over to Dennis.

Thank you, Danny, and good morning, everyone. Our focus remains on creating value for our customers, and we have taken important steps to help us advance this goal, including strengthening our organizational alignment and collaboration, and making strategic investments in technology. We have tightened coordination across our sales, marketing, operations, and service teams, which enables us to be more productive and efficient while providing a more seamless experience for customers. You hear us talk a lot about our customers. We are celebrating our 100th anniversary this year because they continue to trust us to solve their logistics challenges. When they win, we win. We strive to make decisions with a customer-focused mindset. Of course, that means having a superior service offering that they value, but it also means serving them efficiently. Technology is a big part of making that happen. Over the last few years, we have been diligently working to build systems to give our customers a best-in-class experience. We view this as an investment that strengthens every point on the customer journey. Providing a best-in-class experience throughout that journey starts by giving our employees the tools they need. We work with a disciplined approach to improve system and process efficiency. An example of this is our city route optimization project, which has already been rolled out to about a third of our service centers, which handled nearly half of the freight in the ABF network. This deploys advanced analytics to dramatically reduce the amount of time it takes our people to plan pickup and delivery routes so that they can focus more on managing the operation in real time. Locations using this technology were 80% more effective at reducing cartage in the fourth quarter. This is just one example of how we are relentlessly pursuing better, more efficient ways of doing business. Customers also want better supply chain visibility. Based on their feedback, we began building a platform to enhance that visibility across all of our solutions. This is no small feat given our breadth of mode options and capacity sources. But we know it's important for our customer success and an opportunity to enhance our value proposition for them. We will begin testing with customers later this year. Additionally, we just launched a redesigned website at arcb.com, and we'll be rolling out enhancements there throughout the year improving the site's functionality and enhancing the user experience. Our customer needs drive our strategy and innovation investments. We're in a strong position both to listen to and act on customer feedback. The pilots we've been running with our customers to transform the way they handle freight are providing encouraging results. We're excited to share more with you about that solution later this quarter. In short, innovative technology is an important driver of growth and efficiency for our company and an important differentiator for ArcBest with our customers. Despite the softening occurring in our industry and the economy, designing and running efficient and effective supply chains have never been more critical. The opportunity for us is as significant as it has ever been. Shippers have largely shifted their focus from just securing capacity to improving supply chain efficiency. We're in prime position to capitalize on that opportunity as our integrated solutions and our managed transportation offering, in particular, are designed just for that. Additionally, our customer pipeline is robust. We're closing more and larger deals, and more customers are using more than one of our solutions. Customer retention remained strong. With our diversification across multiple industries, we are positioned better than ever before to perform through any cycle. It's not uncommon to have customers who change companies, even take us with them as their logistics provider. Just recently, I was talking with a customer who did this. They had used us to manage their transportation at their prior company. But when they joined a new organization, the solution they needed help with the most was truckload. So, that's where we started. Hearing these stories from customers is a testament to the deep relationships we have with them as we partner to build the best supply chain for their business. I am very proud of what our entire team accomplished this past year. Our long-term focus on customer value creation, our breadth of integrated solutions, the expertise of our people, and our tech-savvy and innovative spirit mean that we are poised to capture the large market opportunity ahead of us and reach our long-term financial targets regardless of the environment. Now, Judy, I'll turn it back over to you.

Thank you, Dennis. Before we conclude, I first want to take a moment and thank David Cobb for his contributions to ArcBest. David recently announced that he will be retiring later this year, and we are actively working to identify his successor. When David joined the organization 17 years ago, we had $1.9 billion in revenue, and 97% of our revenues came from the Asset-Based side of our business. David has worked alongside me and other leaders every step of the way to help transform ArcBest into the integrated logistics company it is today. He has led with integrity and skill, helping us navigate many changes. Working with David has been a pleasure. We will miss working with David when he leaves in October, but wish him the best in his retirement. As we close, I want to reflect one last time on our strategy and position. Supply chains have never been more critical or complex. We regularly revisit our strategy to make sure it's sound and that we're executing well against it. When customers needed capacity, we were positioned to serve them and grow with our own assets and a network of over 95,000 carrier partners. Now, with customers looking for efficiency, we are well-positioned to deliver. We have an incredibly talented group of employees who are experts in our field, including a nearly 500-person in-house technology team building and implementing systems to make us and our customers' businesses more efficient. Our breadth of solutions and our innovative mindset allow us to build flexible, resilient supply chains. While there are some macroeconomic headwinds, ArcBest has demonstrated resilience throughout its history. We are ready for what's ahead both this year and beyond. I'm going to close by thanking our current and past employees, our customers, partners, and shareholders for helping us reach our 100th anniversary. Thank you for the opportunity to serve you. We are proud of what we've accomplished, but we are just getting started. We're committed to keeping the global supply chain moving, delivering on our goals, and driving growth as we look forward to our next 100 years. That concludes our prepared remarks. David Humphrey, we can now open the call up to questions.

Okay, Frank, I think we're ready for some questions.

Thank you. Our first question comes from Chris Wetherbee with Citigroup. Please proceed.

Hey, thanks. Good morning, everybody.

Good morning, Chris.

I guess I wanted to start on demand trends and what you guys are seeing in the Asset-Based business. So, if we look at the monthly tonnage, it looks like it decelerated a bit over the course of the quarter. But then the January number, I think, was plus 1. So, maybe it looks like a little bit of a reversal of that. So, I don't necessarily want to get too hung up on any one given month, but wanted to get a sense of what you're feeling in terms of rounding the corner on 2022 and coming into 2023, in terms of customer demand in LTL?

Hey, Chris, this is Dennis. First of all, we did see a deceleration as the quarter progressed. Certainly in a weakening environment, retail led that. But, of course, we have seen some softening, as the quarter progressed, in manufacturing as well. Really, as we progressed into January, where the trends are similar, I mean when you look at the year-over-year number. But the demand environment feels very similar to where it ended the fourth quarter, and certainly I'll let Danny comment if he has any other things to add.

No, I think what Dennis said is consistent. It's broad-based. Dennis mentioned that retail is leading, but we felt leanness across the board. A great representation of our situation is with our managed customers. We have a very high retention rate and can hardly recall the last time we lost a customer in that area. However, we have seen a deceleration in top-line revenue, which indicates our customers aren't shipping as much within that business due to the overall supply chain dynamics. I believe this reflects what we observed across all of our operations during the fourth quarter and into January at this point.

Yes, that trend is consistent across Asset-Based and Asset-Light. Customer retention is still terrific, but the customers, in general, are shipping less across the board.

Okay, yes, that's helpful color. And just a follow-up on pricing, so I noticed in the 8-K you mentioned that the increases ex fuel, in January, are coming in on the LTL side in the double digits, kind of getting a sense just what your feel is about the sustainability of that level of pricing power? And I know comps clearly have something to do with that as well as the year progresses. But wanted to get a sense of how you're sizing up the sustainability of really good pricing power in the LTL business as we move through some of this softer tonnage environment over the next several months or maybe several quarters?

Sure. This is Danny again. The pricing environment is still rational. We really haven't seen any weaknesses in that area. It's obviously not the same as last year, but if you look at our increases in the fourth quarter on deferred contracts and what we're seeing in January with the revenue per hundredweight, we are confident that we can continue to price and exceed inflation as we move forward. The trends in our actual business give us strength and enhance our confidence in the core business and what we can achieve with pricing levels. However, I would again say that it is consistent with what we've observed from the fourth quarter into the first quarter so far.

Okay, thanks very much for the time this morning. Appreciate it.

Thanks, Chris.

Our next question comes from Ravi Shanker with Morgan Stanley. Please proceed.

Thanks for everyone. Congrats, David, and congrats to everyone, wish best with the 100th anniversary. I think this is the perfect catalyst to host another Analyst Day and give us some limited edition swag, but that's just me.

We have some good swag.

Yes, that will serve as a good catalyst. To follow up on the previous question, how do you view the relationship between tonnage growth and pricing? At what point do you consider whether pricing becomes too high, prompting you to reduce it to increase volumes and improve operating leverage? A bit of context on that process would be appreciated.

Sure. Ravi, this is Danny again. I'll start, and maybe Dennis may have some more. We are seeking the right balance, but I think the key to that is we have more visibility than we've ever had. We're able to make decisions. My yield team meets with the operations team with ABF really every week, but really conversations going on every day. We're able to make decisions about what we want into our network. Again, having the ability to have the core business, that committed long-term business and then fill in where we're having capacity with transactional is really unique and gives us an advantage in how we approach the marketplace. One of the biggest things that we're able to do, we mentioned that we haven't had a need to furlough or lay off employees. That puts us in great position for our long-term targets. If the market turns with that, we can move from transactional to core business as our customers' demand comes back, and they approach us. That business is at a higher revenue per hundredweight than the transactional business, but the transactional business is profitable and puts us in a great position right now. That's really how we're thinking about it. We kind of adjust as the market goes. So, the flexibility is key there, that as the market dynamics change we're able to bend and flex to the right answer for our company.

Hey, Ravi, this is Dennis. Just adding there, when you look at what our pipeline looks like for LTL business, that's strengthened. We have more opportunity really than we've seen in a long time to grow that demand base. We think about where we're positioned as an integrated logistics company, we're seeing more opportunities and able to manage, as Danny talked about, what business we really can take and want in the Asset-Based business. We have the capability with that integrated logistics approach to be able to really optimize that answer for us.

Got it, that makes sense. And maybe as a follow-up, can you just parse some of the differences in the outlook you are seeing out there between your retail customers and your industrial end customers? I think there's some expectation that retail customers might see normalization fairly soon, but industrials might take longer. A, can you remind us of your mix of the two of them, and also what the outlook difference might be between them?

Yes, certainly. The manufacturing is still the leading part of our customer base, and it's about a little over a third of our customer base. Retail follows behind that. In the retail industry, we're seeing some normalization of inventory levels. Certainly, what we're hearing from most of our customers is that they're back either at or near pre-pandemic levels, but that does vary to some extent within the retail space, by the type of retailer. We see some different trends within that. On the manufacturing side of things, certainly, as I mentioned, that's lagged a little bit, the retail weakness. We saw retail weakness probably a little bit before we saw the manufacturing weakness that showed up early as the fourth quarter progressed. That's really what we're seeing there.

Sounds good. Thank you, everyone.

Thank you.

Our next question comes from Jason Seidl with Cowen. Please proceed.

Thank you, operator. Hey, Judy. Hey, team, good morning. David, congratulations.

Thank you, Jason.

Thank you very much, Jason.

Oh, you're so welcome, David. Well deserved, sir. Want to go to pricing a little bit here. We're still seeing, I think, what you would call a good and rational marketplace. But you did see some sequential drop in terms of your contract renewals. I think in your slides, it said 480 basis points. Are we getting close to the point where we're starting to worry about being able to price above your cost inflation, which everyone's seeing a lot of cost going up right now? And number two, are we fearing that you could see a drop-off in volumes if the economy slows, that could be a detriment to the pricing market as you move throughout the year?

Yes, Jason, this is Danny. So, regarding the levels we've discussed, 5.4% in the fourth quarter is still likely in the top 25th percentile for us in terms of increases. The market remains rational. As we move forward, we are confident that we can adjust our pricing to keep up with inflation while also adding value to our service offerings. Additionally, looking back at the pricing improvements we've made over the past two years, our core business is in a strong position. This alleviates some pressure from needing to implement larger increases just to cope with inflation. Regarding your question about declining demand, we currently believe we have the transactional leverage to maintain employee activity and profitable shipments, which helps us manage pricing in our core business. We will continue to focus on pricing above inflation. We also have the necessary network and workforce to be ready when demand returns. Being a logistics company, when customers approach us regarding pricing, we will engage them in a discussion about their supply chain and our managed operations. If we cannot meet their desired price at ABF, we'll transition the business to our managed operation, ensure we service the customer, and still generate a margin through our logistics partners. We are well positioned to adapt regardless of how the customer approaches us.

Well, that's good color. Wanted to get my next question here on MoLo, I guess, Judy, where do you think it is relative to your prior expectations when you guys bought it? Looking forward, the market is what the market is for brokerage. Are there any other levers on the cost side or any things you guys can do to sort of improve the productivity there?

It has met our expectations in the initial year and a bit more. The performance last year for all of Asset-Light, particularly in the truckload solution, was good. Two critical aspects contributed to this success: the knowledge of capacity and buying, and the effective business model that we adopted. This has opened up customer opportunities by scaling our truckload solution, which has been beneficial. We are on track with our EBITDA targets as we finish out the year, which aligns with our predictions, and we feel positive about that. However, I understand your concerns regarding the current environment, which is indeed depressed due to an absent spot market. We are navigating through these challenges and conducting cost reviews to ensure we are positioned with appropriate costs. We've also discussed advancements in technology to enhance our team's efficiency, which will support us moving forward. I want to emphasize that we are focused on our targets for 2025 and aim to achieve growth. We are preparing ourselves to grow, and we believe this current environment will not last indefinitely. We feel confident about our position as we emerge from it.

Thanks, Judy and team, appreciate the time, as always.

Thank you.

Our next question comes from Jordan Alliger with Goldman Sachs. Please proceed.

Hi. Could you discuss the cost aspects of your Asset-Based services? In light of the current demand slowdown, are you making adjustments to your headcount or considering other measures related to transportation costs? I'm trying to understand how you plan to maintain your operating ratio throughout the year, especially at the beginning, given the potentially softer demand. Thank you.

Yes, this is David. I'll begin and others can chime in. I mentioned a few points in my opening remarks regarding our progress this quarter, particularly in enhancing outside resource utilization. This improvement is supported by our strong employee base, enabling us to increase internal operations, which is something we prefer. We anticipate further opportunities in this area as our team becomes more productive. After significant hiring in 2022, we expect our team's productivity to rise going forward. Another point to address is repairs and maintenance, which has seen some elevated costs. Some of this is related to the equipment replacement cycle and its timing, while other aspects stem from inflationary pressures in repairs and service. We're optimistic about making progress in this area due to our solid capital expenditure plan and the delayed delivery of some equipment, which came at the end of the year and into 2023. This pertains to our 2022 orders. There are opportunities for improvement in these areas as we move ahead.

And on the headcount front, I mean do you expect it to stay relatively static for now or what's your thoughts on that?

I think the hiring decisions will largely depend on our business levels to some degree. However, I would say that moving from December to January, our headcount has remained relatively stable. We will definitely keep an eye on this as our business levels begin to improve.

The other thing, David, is, naturally, we have retirements.

Right.

We really have that opportunity as we go. Our visibility into the network about the business volumes that we have at given locations has never been better. It's one of the reasons why some of the transactional business, Danny talked about already, works well for us. Really provides an opportunity for us to better manage our costs, and we have a pilot of our city route optimization technology, and initial results of that improved productivity by 1.5% and also, we had a 67% reduction in cartage in those locations, and that's better than 25% reduction in some other locations. Not only do we just have the pure matching of the headcount to the business levels, we also have this type of work that's going on to optimize as well as the ability to attract that transactional or quoted business to best serve our needs when we have those in the network.

Great, thanks so much.

Our next question comes from Jack Atkins with Stephens Incorporated. Please proceed.

Okay, great. Good morning. And David, I'll add my congratulations to the others. Thanks for all the help over here. As you think about the business here in the first quarter, you guys have really highlighted all the efforts that you've undertaken to make the business more resilient through cycles and make it more dynamic in terms of its operations. As you think about, as we hit the first quarter, you highlighted in the 8-K, I think an average, sequential deterioration from fourth quarter to first quarter about 400 basis points, it's greater than that during periods of economic uncertainty, should we think about you guys performing better than you would historically, based on all the items you just flagged in terms of the business processes that you've implemented?

Yes, Jack. There's we give that point of reference as a historical sort of number. That would be our intention to try to beat that, we certainly would try to, we think it's achievable to get our cost per shipment in a lower place. So there's opportunity there. In those areas, Judy mentioned from technologies, as I mentioned, our stable workforce. Certainly, the macro though is going to dictate a bit of things, and have an influence. We'll manage carefully through that, but it's not about managing quarter-to-quarter, it's about staying focused on these longer-term growth targets. I'm excited about that for the business.

Okay. So, just sort of assure to watch how that unfolds this year. As a follow-up question, as you think about the second half of this year, you have the labor negotiations, I know you don't want to bring the bargaining table to the fourth-quarter conference call, but is there anything you can kind of maybe help us think through in terms of timing? There was another large union employer that reported last week, that doesn't feel like they're expecting a significant step-up in their expenses related to their new contract. They feel like they've sort of kept pace with the market there, and that their business has been sort of keeping up with inflation. Is there anything you can maybe help us think through because I know that's a point of concern for investors, just that there could be some labor inflation in the second half of the year? Thank you.

We're prepared for what's coming in terms of the contract negotiations. I feel like our team has prepared and planned, and we're in a good place. Our leaders are regularly in the field with our employees and hear directly from them about what's on their minds. We're in a good position. I feel like we're very experienced, I've been through a number of these, and they're all different, but as long as you're prepared, and you have the good approach, and intentions and information, typically we can work our way through this. Between now and the expiration of the contract, there’s a lot of work to do, so we're going to stay focused on that.

Okay, would you expect it to be a win-win-win? I think is what UPS framed it up? Is that your expectation as well?

Well, I mean, I'd rather not comment on that because it still has yet to be worked through. But certainly, you always want a winning situation and a winning outcome.

Our next question comes from Scott Group with Wolfe Research. Please proceed.

Hey, guys, this is actually Erin on for Scott. I just wanted to follow up a little bit on the January tonnage comments, the deceleration throughout fourth quarter. I'm just curious how that is versus normal seasonality. I know that you said that the December versus January trends are pretty similar. But I'm just curious how that is versus seasonality and what you're kind of expecting seasonally throughout the quarter?

Yes, let me provide some context. In the fourth quarter, there were certainly some month-to-month changes. However, when you compare the fourth quarter to the third quarter, it was one of the worst periods in terms of tonnage in the past 10 years. Nonetheless, when looking at January compared to December, tonnage and shipments are up about 1%, which is typically a lower trend from December to January. It's challenging to comment on just one month, but the trend appears to be above normal seasonality. The customer demand environment remains similar.

Got it, okay. And then just quickly on fuel and how should we think about the net impact of fuel this year? I know that there's some tougher comps later in the year. I guess how do you guys think about that in the second half, could that be potential headwind by mid-year?

Yes, certainly fuel is a big part of the overall revenue that we'll have and it'll impact the dollars per shipment. We're not sure where the price will go. But as you mentioned, fuel prices in 2022 kind of peaked in the spring. There'll be, from this level, a tougher comp. Our fuel surcharge mechanism works really well in terms of for the customer as well as for us. There are a lot of impacts of fuel in our business and cost. That fuel surcharge mechanism serves to cover those costs.

Okay, got it. Again, thank you for the time.

Thank you.

Our next question comes from Todd Fowler with KeyBanc Capital Markets. Please proceed.

Hey, great. Thanks and good morning. I wanted to ask on the growth plans, I know in the CapEx, you've got I think it's like $55 million to $65 million earmarked for real estate, in this environment, I know you've talked about expansion going back over the past year or so, but as the environment changes, how much flexibility do you have on expanding out the network at this point, and maybe could you just talk about the cadence and your thoughts around expansion in the environments? Thanks.

Yes, I mean, Todd, that real estate plan for '23 is similar to what we did in 2022. As we've talked about, we haven't invested in that area in a number of years, and it's great to have the cash flow and the great balance sheet that we have to position ourselves in a better way. We're looking to be able to have the capacity to expand our shipment count by the mid-single-digits again by the end of 2023, from just the capacity that we're adding from a real estate perspective. As Judy said, we're positioning ourselves to grow. With every recessionary freight recession, there is an eventual upturn. We want to be positioned for that, and that's what our plans call for and we're taking a measured approach around our CapEx program and replacing equipment in our timely sort of total cost of ownership perspective on our equipment side.

Yes, David it makes sense and certainly we appreciate the short-term versus the long-term, you're just kind of thinking about the startup costs in that piece of it. But that makes sense. Maybe just for a quick follow-up, Judy, I'll take the bait. I think you teased about it a couple of times with the handling technology that you have and maybe some more details later in the quarter. But what are you willing to share with us now, it sounds like maybe partnering with some customers and having them use that technology, is that something that would be a fee-based service or they'd be paying you for that or what are you willing to share with us now with the teaser that you put out here today?

The technology and equipment and process we discussed before. Not only are we piloting that within the ABF network, but we have opportunities that have presented themselves with customers outside and within the work that they're doing. We're excited about it. If it's work that we're going to be doing for a customer, once we work through the pilot, we would eventually be paid for that. Sometimes in a pilot scenario, you have to have flexibility over the things that you do with them. It's an exciting thing. It will be later in the quarter when we talk more about it. It connects to the technology, equipment, and process that we've referred to before. Look forward to sharing more.

All right, sounds good. Well, stay tuned. Thanks for the time this morning.

Thank you.

Our next question comes from Ken Hoexter with Bank of America. Please proceed.

Hey, great. Good morning, Judy, David, and team and David again, thanks for all the discussions over the years and congrats.

Yes, Ken.

I guess you could talk about the shift in pure pricing ex-fuel. I mean I've heard the discussion through the Q&A. But maybe I'm just a little confused here. It seems like you talked about low-single-digits in the fourth quarter. Now it's double-digits in January in the face of what's still tough pricing comps from early '22. Am I missing something there or are you talking about different categories?

So, when we talk about double digits that's really on that core business that we're talking about. That's the long-term committed price we've offered to our customers. It’s year-over-year in January, that's what we're referring to. The contracts that renewed in the fourth quarter were at 5% year-over-year. Really, it is different categories, but just indications of the strength of the pricing environment is what we're trying to give you, just give you color in a couple of different areas on that.

That's a really helpful clarification because I think there was some concern on what's going on in the pricing market. Judy, if I could follow up on Jack's questions before I just want to understand the kind of run through on costs and your expectation now I guess for operating ratio; you made a structural move, it seemed like into the 80s, I think after kind of 20 plus years in the high 90s. How do you view this? Maybe David with kind of, as volumes decelerate, you talked about some of the costs and then the cost of leverage you've got, but with a sequential, normal historical sequential shift, do we see that bounce back up above that 90 level and I guess what your thoughts are as we go into '23?

In short-term, kind of a short-term comment here, just talking about fourth quarter to first quarter. You think about that 400 basis points and if you added that to our fourth quarter, that would give you a first quarter, that's probably the second-best first quarter in the past 20 years for ABF, despite it being a weak freight environment. We're building this business for an even longer-term perspective and to operate in those long-term targets, operating profit margin targets of 10% to 15% in a more consistent basis for an annual kind of operating profit margin perspective. First quarter is typically our weakest quarter of any given year. So, I'd share that with you from a quarter perspective; we're not trying to manage this quarter-to-quarter again, we're trying to build for longer-term view.

Okay, okay, so just sort of assure to watch how that unfolds this year. Then as a follow-up question, as you think about the second half of this year, you have the labor negotiations. I know you don't want to bring the bargaining table to the fourth-quarter conference call, but is there anything you can maybe help us think through in terms of timing? There was another large union employer that reported last week, that doesn't feel like they're expecting a significant step-up in their expenses related to their new contract, they feel like they've sort of kept pace with the market there, and that their business has been sort of keeping up with inflation. Is there anything you can maybe help us think through because I know that's a point of concern for investors, just that there could be some labor inflation in the second half of the year?

We're prepared for what's coming in terms of the contract negotiations. I feel like our team has prepared and planned, and we're in a good place. Our leaders are regularly in the field with our employees and hear directly from them about what's on their minds. We're in a good place, I feel like we're very experienced, I've been through a number of these, and they're all different, but as long as you're prepared, and you have the good approach, and intentions and information, typically we can work our way through this. Between now and the expiration of the contract, a lot of work to do, so we're going to stay focused on that.

Okay, would you expect it to be a win-win-win? I think is what UPS framed it up? Is that your expectation?

I mean, I'd rather not comment on that because it still has yet to be worked through. Certainly, you always want a winning situation and winning outcome.

Our next question comes from Scott Group with Wolfe Research. Please proceed.

Hey, guys, this is actually Erin on for Scott. I just wanted to follow up a little bit on the January tonnage comments, the deceleration throughout fourth quarter. I'm just curious how that is versus normal seasonality. I know that you said that the December versus January trends are pretty similar. But I'm just curious how that is versus seasonality and what you're kind of expecting seasonally throughout the quarter?

I'll provide some context. When looking at the fourth quarter, we did see some month-to-month changes. Comparatively, the fourth quarter was one of the weakest periods in the past decade in terms of tonnage. However, if we look at the sequential data, tonnage and shipments from December to January have increased by about 1%. Typically, we expect a decline from December to January. It's challenging to evaluate just one month, but I would say we are seeing trends that are above what we would consider normal seasonality. The customer demand remains consistent.

Got it, okay. And then just quickly on fuel and how should we think about the net impact of fuel this year? I know that there are some tougher comps later in the year. How do you think about that in the second half, could that be a potential headwind by mid-year?

Yes, certainly fuel is a big part of the overall revenue that we'll have and it'll impact the dollars per shipment. We're not sure where the price will go. But as you mentioned, fuel prices in 2022 kind of peaked in the spring. There'll be, from this level, a tougher comp. Our fuel surcharge mechanism works really well in terms of for the customer as well as for us. There are a lot of impacts of fuel in our business and cost. That fuel surcharge mechanism serves to cover those costs.

Okay, got it. Again, thank you for the time.

Thank you.

Our next question comes from Todd Fowler with KeyBanc Capital Markets. Please proceed.

Hey, great. Thanks and good morning. I wanted to ask on the growth plans, I know in the CapEx, you've got I think it's like $55 million to $65 million earmarked for real estate, in this environment. I know you've talked about expansion going back over the past year or so, but as the environment changes, how much flexibility do you have on expanding out the network at this point, and maybe could you just talk about the cadence and your thoughts around expansion in the environments? Thanks.

Yes, I mean, Todd, that real estate plan for '23 is similar to what we did in 2022. As we've talked about, we haven't invested in that area in a number of years, and it's great to have the cash flow and the great balance sheet that we have to position ourselves in a better way. We're looking to be able to have the capacity to expand our shipment count by the mid-single-digits again by the end of 2023, from just the capacity that we're adding from a real estate perspective. As Judy said, we're positioning ourselves to grow. With every recessionary freight recession, there is an eventual upturn. We want to be positioned for that, and that's what our plans call for and we're taking a measured approach around our CapEx program and replacing equipment in our timely sort of total cost of ownership perspective on our equipment side.

Yes, David it makes sense and certainly we appreciate the short-term versus the long-term, you're just kind of thinking about the startup costs in that piece of it. But that makes sense. Maybe just for a quick follow-up, Judy, I'll take the bait. I think you teased about it a couple of times with the handling technology that you have and maybe some more details later in the quarter. What are you willing to share with us now, it sounds like maybe partnering with some customers and having them use that technology, is that something that would be a fee-based service or they'd be paying you for that or what are you willing to share with us now with the teaser that you put out here today?

The technology and equipment and process we discussed before. Not only are we piloting that within the ABF network, but we have opportunities that have presented themselves with customers outside and within the work that they're doing. We're excited about it. If it's work that we're going to be doing for a customer, once we work through the pilot, we would eventually be paid for that. Sometimes in a pilot scenario, you have to have flexibility over the things that you do with them. It's an exciting thing. It will be later in the quarter when we talk more about it. It connects to the technology, equipment, and process that we've referred to before. Look forward to sharing more.

All right, sounds good. Well, stay tuned. Thanks for the time this morning.

Thank you.

Our next question comes from Ken Hoexter with Bank of America. Please proceed.

Hey, great. Good morning, Judy, David, and team and David again, thanks for all the discussions over the years and congrats.

Yes, Ken.

Yes, you could talk about the shift in pure pricing ex-fuel. I mean I've heard the discussion through the Q&A. But maybe I'm just a little confused here. It seems like you talked about low-single-digits in the fourth quarter. Now it's double-digits in January in the face of what's still tough pricing comps from early '22. Am I missing something there or are you talking about different categories?

So, when we talk about double digits that's really on that core business that we're talking about. That's the long-term committed price we've offered to our customers and it’s year-over-year in January, that's what we're referring to. The contracts that renewed in the fourth quarter were at 5% year-over-year. Really, it is different categories, but just indications of the strength of the pricing environment is what we're trying to give you, just give you color in a couple of different areas on that.

That's a really helpful clarification because I think there was some concern on what's going on in the pricing market. Judy, if I could follow up on Jack's questions before I just want to understand the kind of run through on costs and your expectation now I guess for operating ratio; you made a structural move, it seemed like into the 80s, I think after kind of 20 plus years in the high 90s. How do you view this? Maybe David with kind of, as volumes decelerate, you talked about some of the costs and then the cost of leverage you've got, but with a sequential, normal historical sequential shift, do we see that bounce back up above the 90 level and I guess what your thoughts are as we go into '23?

In the short-term, we’re just trying to manage these costs effectively. We're encouraged with the innovation that we have in-house and our ability to create efficiencies. We're looking closely at all of our resources to ensure that we remain competitive, and strong we believe that the investments we're making now will help position us to achieve our long-term goals despite temporary fluctuations.