Earnings Call Transcript - ARCB Q3 2021

Operator, Operator

Greetings, and welcome to the ArcBest Third Quarter 2021 Earnings Conference Call. I would now like to turn the conference over to David Humphrey, Vice President of Investor Relations. Please go ahead.

David Humphrey, Vice President of Investor Relations

Thank you for joining us today. On today's call, we will walk you through the details of our record third quarter earnings. Our presentation this morning will be done by Judy McReynolds, Chairman, President and CEO of ArcBest; and David Cobb, Chief Financial Officer of ArcBest. Also joining us for the Q&A period will be Daniel Loe, ArcBest President of Asset-Light Logistics and Chief Yield Officer. To help you better understand ArcBest and its results, some forward-looking statements could be made during this call. As we all know, forward-looking statements, by their very nature, are subject to uncertainties and risks. For a more complete discussion of factors that could affect the company's future results, please refer to the forward-looking statements section of the company's press release and the company's most recent SEC public filings. In order to provide meaningful comparisons, certain information discussed in this conference call includes non-GAAP financial measures as outlined and described in the tables in our earnings press release. Reconciliation 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, the slides that Judy and David will be referring to can be found on the ArcBest website, arcb.com and Exhibit 99.3 of the 8-K that was filed earlier this morning or you can follow along with us on the webcast. We will now begin with Judy.

Judy McReynolds, Chairman, President and CEO

Thank you, David, and good morning, everyone. This quarter, we achieved the highest quarterly revenue and operating income in ArcBest history, demonstrating the success of our growth strategy and cost management efforts and validating our strategic vision for the company. These results further strengthen our record-breaking 2021 performance and bolster our leading position as an integrated logistics powerhouse. I'd like to begin by highlighting some key achievements of our record third quarter performance and continuing business momentum. Then David Cobb will take you through the specifics of this quarter's financials in greater detail. And finally, I'll offer a few additional comments before we open it up for some questions. As noted on Slide 4, for the last few years, we've been executing on a 3-point strategy to drive revenue growth and improve profitability. These efforts are clearly paying off as underscored by our profit margin improvements and the increased consistency of our financial performance, the strength we are experiencing in our legacy business, combined with the capabilities we gained with the addition of MoLo, ensure we are well-positioned to continue advancing this strategy, meeting the expectations of our customers and driving growth and creating value for our shareholders and other stakeholders. This quarter, we are proud of the progress we made toward our goal of balancing our revenue mix. Each step of the way, our willingness to listen and our agility allows us to better support customers who often need both asset-based and asset-light solutions. Our asset-based business offers many advantages and resources that allow ArcBest to craft customized solutions using assets we already own and manage. ABF Freight flourishes when utilized alongside solid asset-light services because of the options we're able to provide our customers. These capabilities have been invaluable over the last few years as we have worked to make our customer experience truly seamless across the full breadth of our integrated solutions. To advance the third tenet of this strategy, optimizing our cost structure, we are adopting innovative technologies that help us serve our customers in their preferred channels as an industry-leading digital partner and operate our business in a more intelligent fashion. Our digital capabilities continue to provide us with a significant advantage in streamlining processes, reducing costs and augmenting human expertise. We stay close to our customers and carrier partners to provide them the services and connectivity they need in the way they want to access them. Our efforts to advance our strategy in each of these three areas are instrumental in helping customers drive the economy forward and continuing to unlock incremental value for our shareholders. Turning to Slide 5. Our third quarter performance outpaced our already record-breaking year-to-date revenue and operating income results. For the first time ever, our consolidated quarterly revenue exceeded $1 billion. We delivered strong revenue growth across the organization, as illustrated by the year-over-year double-digit percentage increases in all of our operating segments. Building on this significant momentum, we are growing and expanding as an integrated logistics leader. We added MoLo Solutions to the ArcBest family. We remain laser-focused on serving our customers with customized solutions in the midst of very challenging times. We are responding to tight market demands with agility, expanding our capacity and investing in the right solutions to meet our customers' critical needs at a critical time for their business. We are excited that we can profitably flex growing our company and expanding our offering to better serve our clients, creating new opportunities for employees and value for our shareholders at the same time. Yesterday, we announced our plans to increase the return of capital to ArcBest shareholders by entering into a $100 million accelerated share repurchase program. With the strength of our balance sheet and our ability to generate solid cash flows, utilizing a portion of our cash resources in this way allows us to invest in our stock, which doesn't reflect ArcBest's intrinsic value or our prospects for growth and value creation. Along with our dividend program, enhancing our return of capital in this way illustrates the belief we have in our long-term strategy to grow as an integrated logistics company, meeting the needs of our customers and carrier partners each and every day. Turning to Slide 6. And as I mentioned earlier, yesterday was a monumental day for us in our efforts to best serve our customers across a broad suite of logistics solutions. We successfully closed the previously announced acquisition of MoLo Solutions, a Chicago-based company that is one of the fastest-growing truckload brokerages in America. Importantly, this acquisition moves us significantly closer to delivering on the strategic objectives I just discussed. Bringing our two companies together significantly accelerates our growth by increasing the scale of our truckload brokerage services. Together with MoLo, ArcBest is a top 15 U.S. truckload broker with access to over 70,000 carrier partners, solidifying our position in the $91 billion and growing domestic transportation management market. With the transaction now closed, we are embarking on an exciting new chapter in our company's history, driven forward by the innovative thinking of our people. The reaction of all stakeholders, including those at ArcBest and MoLo has been very positive. We look forward to welcoming members of the MoLo leadership team to create a world-class management team that can bring these two industry leaders together as a people-first integrated logistics powerhouse. As you can see on this slide, the addition of MoLo has already moved us toward a more balanced revenue mix, which better represents customer transportation and logistics spend. The MoLo acquisition is an important step to build and amplify our powerful portfolio of shipping and logistics services, and allow us to continue expanding ArcBest's role in the transportation marketplace. We have an exciting future ahead and we enthusiastically welcome the MoLo team to ArcBest. Moving to Slide 7. We entered this transaction with a strong balance sheet. And after making the closing cash payment and considering our cash investment in the ASR, we remain in a solid financial position. Our cash and total liquidity are at impressive levels, and we are in a reasonable net debt position on a pro-forma basis. Though we are currently dealing with some manufacturing delays, we are continuing our investment plans to expand asset-based capacity to support our growth objectives, as well as our programs to return capital to shareholders through dividends and the accelerated share repurchase program we just announced. With our strong balance sheet and resilient and growing free cash flow, we have the flexibility and firepower to simultaneously invest in organic initiatives and external growth opportunities while accelerating returns to shareholders. And now I'd like to turn it over to David Cobb to let him provide more details on our third quarter results.

David Cobb, Chief Financial Officer

Thank you, Judy, and good morning, everyone. Beginning with some highlights of our financial position. We ended the third quarter with unrestricted cash and short-term investments of $468 million. Our $244 million of debt at the end of the third quarter included $50 million borrowed on our credit revolver and $194 million of notes payable, primarily on equipment for asset-based operation. The composite interest rate on all of our debt was 2.8%. We are encouraged by strong customer demand, the momentum in our business and the solid cash flow generation as evidenced by $389 million of adjusted EBITDA for the trailing 12 months ended September 30, 2021. The operating cash flow, combined with our balance sheet capacity enables us to pursue accretive external growth opportunities like the MoLo transaction, while making value-enhancing organic investments, paying an attractive dividend and enhancing our share repurchase program. Our balanced capital allocation plan advances our growth strategy, building on ArcBest's leading position as an integrated logistics company. Given our prospects for continued growth and value creation, our Board believes the current stock price does not reflect our best intrinsic value. As Judy mentioned earlier, we announced a $100 million accelerated share repurchase program with final settlement expected to be completed in the first quarter of 2022. The $100 million authorization is in addition to the $42 million that remained available under our existing share repurchase program. On Slide 7, we note that on a pro-forma basis, considering our cash and debt position at the end of the third quarter and after deducting the $235 million cash payment associated with the MoLo acquisition and the $100 million accelerated share repurchase program, we would have a net debt position of $111 million, with total liquidity of $373 million, including our available resources under our credit revolver and our receivable securitization agreement. Regarding 2021 full-year net capital expenditures, we now expect them to be in an approximate range of $100 million to $110 million, which is lower than our previous estimates. Our equipment orders remain in place, but as Judy referenced and as we mentioned last quarter, there have been delays in the original build schedules of our asset-based and asset-light revenue equipment related to part shortages and manufacturing disruptions that have continued into early November. As a result, we now expect that a portion of our planned 2021 revenue equipment will not be delivered until 2022. In addition, other elements of our expected 2021 capital expenditures, including some real estate projects, research and development investments and other miscellaneous capital items will also be delayed until next year. Therefore, we expect that approximately $40 million to $50 million of previously planned capital expenditures intended for 2021 will carry over into 2022. As I mentioned earlier, we are committed to increasing our investments in revenue equipment and real estate additions and upgrades above our normal levels to facilitate future growth and to improve the ability to serve our customers. These are priorities, and they offer us the opportunity to generate solid returns in our business. We have a long-term plan for facility investments that include new service centers, expansion of existing facilities, and renovation of others. As a part of our long-term commitment to these growth investments, our preliminary expectation for 2022 capital expenditures is from $225 million to $250 million. We're currently developing those plans, and we will share more details when we announce our fourth quarter and full-year 2021 earnings. On Slide 8, I'll highlight our consolidated information. As Judy mentioned earlier, third quarter 2021 consolidated revenues were $1 billion, reflecting a 28% increase over the prior period. On a non-GAAP basis, consolidated operating income more than doubled to $96 million. Our adjusted third quarter 2021 earnings per diluted share grew 112% to $2.59. The year-to-date effective tax rate that was used to calculate the non-GAAP EPS was 26.8%. And under the current tax laws, we expect our full-year 2021 non-GAAP tax rate to be in the range of 26.5% to 27%. The effective tax rate may be impacted by discrete items that could occur during the remainder of the year. Slide 9 provides highlights of our key metrics in our Asset-Based business. Asset-Based third quarter revenue was $691 million, an average daily increase of 21% compared to last year. The third quarter non-GAAP asset-based operating ratio of 86.7% is a year-over-year improvement of 570 basis points and a sequential improvement of 230 basis points versus the second quarter of 2021. The year-over-year increases in the third quarter tonnage and shipment comparisons were impacted by our deliberate moderation of a number of transactional and U-Pack household good shipments we handled in order to serve core LTL customers. The increase in third quarter total billed revenue per hundredweight on asset-based shipments was impacted by higher fuel surcharges versus last year. Revenue per hundredweight on LTL-rated business, excluding fuel surcharge, reflected a double-digit percentage improvement. We also secured an average 8.6% increase on asset-based customer contract renewals and deferred pricing agreements negotiated during the quarter, which was the highest quarterly increase of any quarter in our history. As you can see on Slide 10, preliminary business trends for October reflect continued strong revenue increases on positive average tonnage and shipments. As we experienced in the third quarter, the October asset-based tonnage and shipment trends have been impacted by fewer U-Pack shipments versus last year, as well as increasingly stronger business level comparisons in the prior year month. We continue to have strong customer demand in our core LTL business. Our core or published LTL tonnage and shipments increased double digits in the third quarter over the prior year third quarter, demonstrating continued growth and advancement of our strategy. In October, the sequential changes in average daily tonnage and shipments with these core customers compared to September were the best of what we have seen during the last 10 years, increasing versus September when there is typically a seasonal decline in these accounts. Additional details on our October 2021 business trends can be found in the Form 8-K exhibit to the press release. On Slide 11, you can see that in total, the revenue in ArcBest Asset-Light businesses increased 39% versus the prior year quarter, reflecting strong demand in our ArcBest segment and improved events and revenue per event in the FleetNet segment. Third quarter Asset-Light operating income was $11.5 million compared to $5.8 million last year. Third quarter 2021 Asset-Light EBITDA was $14.2 million compared to EBITDA of $8.6 million in third quarter 2020. Preliminary asset-light business trends for October have been provided in the Form 8-K exhibit to the press release, which was filed this morning. Solid customer demand for our capacity options continues to be evident as October revenue for Asset-Light ArcBest segment excluding FleetNet increased 39% versus October 2020. And with one less business day this year, that equates to an increase of 46% on a per-day basis. Margins on the net revenue were also running better than the prior-year month. Now I'll turn the call to Judy.

Judy McReynolds, Chairman, President and CEO

Thank you, David. On Slide 12, you'll see that our 2020 ESG report was released in the third quarter. This is our second ESG report, detailing our actions and progress regarding environmental, social, and corporate governance initiatives throughout our business. I take great pride in our people-first approach to COVID-19, highlighting our commitment to our employees every day. The report underscores how our actions are aligned with the ArcBest mission of connecting and positively impacting the world by solving logistics challenges. Moving forward and into the future, we remain committed to responsible operations and long-term value creation for all our stakeholders. This also includes a strong emphasis on key priorities such as sustainable procurement, human rights, ethics, and community engagement. As our report indicates, we made noteworthy progress this year on our ESG journey. This was recognized by the EcoVadis bronze medal awarded to us in March, placing ArcBest's sustainability performance among the top half of all rated companies and industries globally. In April, for the third year in a row, we were honored by Forbes and Statista as one of America's best employers for diversity. At ArcBest, our success is driven by our people, and we are dedicated to fostering a work environment that values diverse backgrounds and ensures everyone feels welcome and appreciated. We publicly announced our diversity, equity, and inclusion initiatives in our inaugural 2019 ESG report and will continue to share our progress in each successive report. On a local scale, in May, we collaborated with Fort Smith Public Schools by investing $1 million in the Peak Innovation Center to support the development of our communities and workforce for future careers. The center will open next year, serving 43,000 students across 22 regional school districts in our area. As we wrap up this segment of today's call, I want to outline some key advantages of our customer-led strategy. We are making significant strides toward becoming a unified provider of integrated asset-based and asset-light services, and we have great momentum. The strength of our results illustrates how our wide range of services sets us apart and emphasizes that they work better together. As shown here, cross-selling our services boosts account revenue and profitability and enhances customer retention. Our research indicates that over 60% of ArcBest customers utilizing our asset-light services also use ABF Freight for LTL services. At ArcBest, we prioritize viewing our business from our customers' perspective. As trusted advisers, we engage directly with them to understand their challenges and develop innovative, customized solutions for their critical supply chain needs. The markets we operate in are substantial, with considerable opportunities available to us. We are placing the right people, resources, and tools in position to ensure our ongoing profitable growth and create value for our shareholders. As we look to the future, we remain open to change and adjustments as needed. We have diligently worked over the past few years to position our company for sustainable long-term growth and value creation. We are pleased with our achievements thus far and the opportunities ahead as we invest more in innovation, technology, and our workforce. Together, as a team, we will continue to innovate daily, anticipating that our efforts will benefit both our customers and our investors. Lastly, from a position of financial strength, we have taken steps to secure our future as an integrated logistics provider while enhancing returns for our shareholders. Our acquisition of MoLo will accelerate our growth by expanding our asset-light business. The ongoing investments in our people, equipment, and real estate within our asset-based business will support future expansion. In addition to our quarterly dividend, the accelerated share repurchase program we announced yesterday increases capital returns for our shareholders. The prudent measures we've adopted in recent years have positioned us for a strong and purposeful future. Thank you for your continued interest and confidence in ArcBest. We are enthusiastic about what lies ahead and look forward to sharing our continued growth and success in the next quarter. That concludes our prepared remarks, David, and we are ready for questions.

David Humphrey, Vice President of Investor Relations

Okay, Sylvana. I think we are ready to take some questions.

Operator, Operator

And our first question comes from Jason Seidl with Cowen.

Jason Seidl, Analyst

Thank you, operator. Judy, David, David, good morning. I wanted to focus a little bit here on sequentially between 3Q and 4Q. I know historically, you guys stepped down on the asset base side and the OR a bit. But as I look at your commentary, you get the best core customer growth, but in your last 10 years, I think it's safe to say the pricing environment has never been better for LTL companies, at least not in my career, which dates back. I don't admit it now, but almost three decades. How should we look at that as we sort of marry up the two as we look to 4Q?

David Cobb, Chief Financial Officer

Yes, Jason, this is David. Historically, we've observed an increase in the operating ratio by about 200 basis points from the third to the fourth quarter. I believe we are witnessing a clear endorsement of our strategy, particularly through the increased retention of accounts as we provide customers with multiple services. This is enhancing our ability to retain customers. As I mentioned, the strength of our core LTL business is evident in October, and if this trend continues, it could lead to positive results not just in the coming quarter but also beyond. We are feeling enthusiastic and optimistic about this trajectory. Regarding your specific question about this year, there are various factors at play, but we are still seeing elevated levels of purchase transportation usage to serve our customers, which we are being compensated for. This trend is likely to persist in the near term as our hiring efforts are taking longer than expected. As such, we will likely maintain a higher level of purchase transportation than usual. Additionally, due to the supply constraints you are aware of, some maintenance costs may be at levels we haven’t experienced in the past. Overall, the business momentum is strong, the pricing environment is favorable, and we are effectively serving our customers. I hope that clarifies things.

Jason Seidl, Analyst

No. No, it does. And my one follow-up is going to be on the share repurchase side. I understand the $100 million share repurchase, but your existing $42 million, how should we look at timing of trying to complete that? Are you guys going to be opportunistic? Or are you going to be aggressive in the marketplace?

David Cobb, Chief Financial Officer

Regarding the $42 million, Jason? That will kick back in once the ASR is complete, which, as I mentioned, matures in the first quarter. And so then that would be along the lines of opportunistic sort of buys at that point. That's right.

Jason Seidl, Analyst

Okay. Perfect. Those are my questions. Guys, appreciate the time and always congrats in the quarter.

David Cobb, Chief Financial Officer

Thanks a lot.

Operator, Operator

And our next question comes from the line of Ken Hoexter with BofA.

Ken Hoexter, Analyst

Great job on the quarter and the ASR. David, or Judy, could you update us on the progress of your innovative technology? What remains to be spent and what still needs to be accomplished? Could you also discuss your goals and what they might mean for your operating ratio? David, regarding the ARAP scaled, is that purely due to the MoLo acquisition, or is there another factor involved?

David Cobb, Chief Financial Officer

Yes. I will address the ARAP. The MoLo acquisition closed yesterday, so it isn’t included in our third-quarter results but will be accounted for in the fourth quarter. The ARAP reflects growth in the business, and you can see both aspects moving together, particularly from year-end on our cash flow statement. Does that clarify things, Ken?

Ken Hoexter, Analyst

Yes. But it seemed like an outsized large gap, but that's fine.

Judy McReynolds, Chairman, President and CEO

Okay. I think, Ken, you were specifically asking about the asset-based business. Is that right with regard to the technology piece?

Ken Hoexter, Analyst

Exactly. Yes.

Judy McReynolds, Chairman, President and CEO

Yes. That's what I thought. Okay. And so we are seeing progress there. And I think as you know, we have our pilot locations for the new mobile platform technology and process. And that's in about three locations, one of those being a distribution center in Kansas City. And so we've been experimenting with a lot of different approaches there and making good progress on the software and narrowing down what the ultimate answer will be. And so as we move into 2022, we are planning for another distributions that are towards the end of 2022, and that's going to be in Salt Lake City, where this technology is deployed. And so what's happening is the operating software, which is all encompassing. It's our operating platform as well as running the flash process, is going to be in a larger number of facilities as we move forward. And we are seeing the benefits of that expansion. It gives us greater visibility on individual shipments. It gives us the ability to do better planning, it's a better claims answer, and it's a better work experience for our workforce, which all of those are really positive. And again, as we narrow down the different scenarios that we're looking at, we expect it to really begin to have some impact on the results. But we've disclosed, I think, what the costs are on a quarter, and then you can see it accumulated over the period. And just suffice it to say that we're positive on it, and we're excited about it, and there's going to be more to come on how all of that impacts the operation. But it's certainly designed to have a positive impact. We have improved the operating performance for ABF pretty drastically over the last five years, I think, probably 750 basis points. And this whole project has really not had the impact yet that it could have. And so it's going to be a contributor to future positive margin expansion as well as what David talked about in terms of the yield environment. And remember, our labor contract goes through the end of June 2023, and it's got an overall 2% increase for wages and benefits in it as well. And so all of that comes together in a pretty good formula for continued improvement at ABF. And then I think David also mentioned the growth potential coming at us, and that's exciting, too.

Ken Hoexter, Analyst

Yes, I was referring to the fact that there still seems to be room for growth from those investments. Also, if I could clarify before my time is up, Dave, regarding the 27% growth per day, you mentioned that MoLo is not included. Could you share your thoughts on what the revenue per day might look like with MoLo factored in for the quarter?

David Cobb, Chief Financial Officer

Yes. I don't have a stat for you, but what we've talked about with MoLo, and Danny is here also, he can maybe add some color if you'd like, but around MoLo. But we talked about MoLo having a 2021 revenue year of around $600 million. So if you think about us capturing a couple of months of that, I mean, that's probably one way to think about revenue added to our fourth quarter. I think that's fair. So I don't know if Dani has any other color to add to that. But...

Daniel Loe, President of Asset-Light Logistics and Chief Yield Officer

No, I agree with David's comments on that. I would think as you think through the year that they had been on a growth trajectory. So when you think of the annual revenue that it would be heavier towards the back end of the year than it was in the front end of the year as you think through your model.

Operator, Operator

Our next question comes from Chris Wetherbee with Citi.

Chris Wetherbee, Analyst

James on for Chris. I wanted to actually utilize revenue for underweight and improved sequentially for at least the past six quarters. Should we expect that to continue to improve? Is there anything from mix perspective that would allow one not do? I mean, given fuel and price seems like condition strong tailwinds. Just wanted to understand the puts and takes on that particularly?

David Humphrey, Vice President of Investor Relations

I'm sorry, but we can hardly hear you. I didn't fully understand the question. Could you please repeat the first part?

Chris Wetherbee, Analyst

Yes. Apologies for that. Is this better? I just wanted to actually touch on revenue per one way it's been improving sequentially. I want to know if there's anything to be thinking of in terms of mix to be aware of that, we should be sort of considering as we model that moving forward over the next few quarters, price is strong, fuel is strong. Just want to know if there's anything to be considered from a mix perspective?

Daniel Loe, President of Asset-Light Logistics and Chief Yield Officer

This is Danny. When considering the revenue trends, the mix is a factor we've observed. However, as Judy and David mentioned, we've experienced significant growth from our core customers. This is the strongest sequential growth we've seen. Looking ahead, it appears that the mix is stabilizing, and I don't anticipate any changes from a mix perspective at this time.

Chris Wetherbee, Analyst

Great. Regarding the pricing environment, you've mentioned overall strength. Is there any freight aspect from an operational perspective that could lead to a significant change? Is the current mix satisfactory, or has pricing work reached completion?

Daniel Loe, President of Asset-Light Logistics and Chief Yield Officer

Yes. I wouldn't target anything specifically. I think we have better visibility and a better understanding of our costs and what our network needs. And so really since 2017 with space-based pricing in 2019, when we introduced Dynamet pricing, we just have better tools and better technology to help us understand what the system needs. And so really our focus is on what the system needs and getting the right price on that freight.

Operator, Operator

Our next question comes from Jack Atkins with Stephens.

Jack Atkins, Analyst

Congratulations on a great quarter. Judy, referring back to your earlier comment about the accelerating momentum in your business, I am curious about the asset-based segment. It seems we might trend towards a double-digit operating margin and a sub-90 operating ratio in 2021. Considering the growth you're experiencing, what are your thoughts on the potential for operating margins and operating ratios in the asset-based business in the coming years? Is aiming for a mid-80s operating ratio now a possibility? I would appreciate any insights you can share on this.

Judy McReynolds, Chairman, President and CEO

It absolutely is. Over the last two quarters, we've seen really good momentum. Looking at a longer timeframe in our asset-based business, there are a few key points. First, the value of our LTL network to customers is significant, especially when combined with our asset-light solutions. We discussed this in our prepared comments, but it truly makes a difference. Growth can often come from a comprehensive approach where we act as an overall solutions provider for a client. This is especially relevant now that we have resources to deploy effectively, providing certainty and functioning well together. With that context, I feel confident in our strategy. Danny, who is on this call, deserves credit here along with his team; we have the best yield managers in the industry. The technology we've implemented gives us visibility into the best strategies and options available. This will help maintain our consistency even as economic conditions change, which is reassuring since we faced challenges in anticipating optimal actions in the past. We've significantly expanded our workforce, hiring a net of 850 people. Our goal is to ensure that these new hires are effectively utilized as we navigate any future changes in the environment. I am optimistic about our capacity to achieve this. In the near term, we have predictable wage and benefit increases, and the overall package we provide our employees is the best in the industry. This combination positions us well for further margin expansion, along with the growth opportunities we have through our comprehensive approach with customers. We are optimistic and excited about the future.

Jack Atkins, Analyst

Okay. Great. That's fantastic to hear. And I guess for my follow-up question, David Cobb, with regard to the capacity expansion plans over the next 12 to 18 months that you guys outlined on the last conference call? Could you maybe update us on your outlook for terminal door growth maybe in '22? I'm just sort of curious, given some of the supply chain challenges that are out there that I think everyone is aware of. How that may be impacted as we think about capacity growth next year?

David Cobb, Chief Financial Officer

Thank you, Jack. We are focused on expanding our capacity and are currently on a strong hiring trajectory, which is essential for us, especially in certain locations. This is a vital aspect of our growth strategy. We have been discussing our plans for fleet expansion that exceed historical levels. However, supply constraints are causing some delays in our equipment deliveries, which we believe will have some impact on our operations. We expect to receive our tractor orders for 2021 by early 2022, and our forecasts for 2022 look positive as well. The situation with trailers is slightly more challenging, but we are still making progress there, seeing it as an opportunity for growth. From a facility perspective, we manage both owned and leased properties, and the supply chain issues are affecting the timelines for some projects, making them longer-term endeavors. The current real estate market poses its own challenges, but we have a five-year plan focusing on targeted locations, including renovations that are more feasible to execute. These renovations will enhance our capacity in various ways, improve energy efficiency, and enhance work-life arrangements for our employees. We aim to increase our annual spending above historical levels, with a target around $50 million. While some of this investment may appear as leases rather than traditional capital expenditures, we anticipate adding mid-single-digit percentage capacity to our existing footprint by the end of 2022. Additionally, productivity improvements may lead to increased revenue per facility. For example, our Kansas City distribution center doesn't necessarily add more doors but enhances throughput capabilities. There are many factors at play, but I hope this provides some clarity, Jack.

Jack Atkins, Analyst

I really appreciate it.

Operator, Operator

Our next question comes from Ravi Shanker with Morgan Stanley.

Ravi Shanker, Analyst

Great. Judy, can you help unpack the expedited business a little bit more? I kind of feel like that's a business that should be really killing it right now and may also be a little bit of a leading indicator on kind of where we are in the cycle and where the industrial environment looks like. So maybe a little more detail there would be right.

Judy McReynolds, Chairman, President and CEO

Sure. Well, and I'll make a couple of comments, and then Danny can, I think, speak to that a little bit in more detail. But we're excited about how we're doing in all parts of our business, as we mentioned. And the expedite is certainly doing very well right now. And it is a great solution to some of our customers' most significant supply chain challenges and just works well in this kind of environment. But we've also got a lot of plans for the sustainability of that and as we move forward. So Danny, you want to make some comments about that?

Daniel Loe, President of Asset-Light Logistics and Chief Yield Officer

I think, Judy, when I think of our expedite business, it's in the asset-light category. But for many of our customers, it's like an asset because of the surety that we can provide the service with those customers. And so in this environment, obviously, there is more demand for it. But I think one thing that we really haven't mentioned there when we think moving forward is that we have some headwind really with the auto industry in that area. And so the strength is really coming from manufacturing. And so it will be interesting as all to returns in the general scheme of things, that will take capacity out of truckload as well. So we're still bullish on expedite. And as Judy said, we're looking at how do we maintain the sustainability of Experis as we go forward.

Ravi Shanker, Analyst

Got it. That makes sense. And maybe a bigger picture follow-up. Judy, it's been a little bit of a banner year for you kind of just given everything that's happened in the macro, the acquisitions, other stuff as well. I think it's about time for another Analyst Day. But short of that, maybe on this call, like what's next for you guys? I mean, where are the big missing pieces, things to build on? Kind of what does ArcBest look like 5 years from now?

Judy McReynolds, Chairman, President and CEO

Thank you for your question. I agree that we should schedule another Analyst Day to re-evaluate our targets, especially in light of our results. I'm looking forward to that opportunity. When we assess our overall business, there is significant potential in what we provide. We operate in markets worth $330 billion, with a $3 billion opportunity among our most loyal customers—much of which comes from the truckload business, making the Molo acquisition a strategic fit. We’re eager to integrate that experienced team into our operations. Our domestic transportation management market is $91 billion and continues to grow, with logistics services expected to increase 10% to 15% annually over the next decade. This presents a wealth of opportunities. Additionally, we are advancing our R&D efforts, particularly with our flash process and mobile platforms, which we aim to deploy within our asset-based business. These innovations will benefit our customers and align with our investments from our innovation accelerator and R&D team. These initiatives may be somewhat related, but largely they serve to enhance our growth potential and operational efficiency. We are excited to have capital available for such investments, with more updates to follow in the coming months into 2022. I'm enthusiastic about these opportunities as well. Thank you.

Operator, Operator

Our next question comes from Scott Group with Wolfe Research.

Scott Group, Analyst

Judy, you talked about, I think, 2% wage inflation next year. Can you just remind us, is that all in, including the benefits? And then I don't think there's any incremental payout to the teamsters if the OR gets better from here, but can you just confirm that?

Judy McReynolds, Chairman, President and CEO

Yes. When we refer to the 2%, that represents the annual wage and health welfare increase. It covers everything related to that. Additionally, as you noted, there is an incentive plan for employees. In our 8-K, we have included the scale for that, and the 3% level applies when the GAAP operating ratio is 93% or below. As conditions improve, there is a corresponding 3% incentive, which is positive.

Scott Group, Analyst

But it doesn't exceed 3%?

Judy McReynolds, Chairman, President and CEO

Yes. I mean that's where the scale ends as far as that percentage. But to point out, when we look at past times that we paid, it's been at 1%. So we're very excited about the benefits that this could provide to our employees.

Scott Group, Analyst

Okay. And then I just want to ask about the tonnage environment. And it sounds like the core LTL business has really good tonnage growth right now. And it strikes me that almost no other place in transportation has much volume growth right now. Do you think there's something about these supply chain issues and disruptions that is uniquely benefiting the LTL volume environment right now?

Judy McReynolds, Chairman, President and CEO

I believe that the LTL networks function effectively in the current environment. This is partly due to the reliability of delivery and pickup of shipments. Additionally, as e-commerce continues to grow within the economy, LTL networks are able to engage in all stages of the delivery process and do so efficiently. This offers us considerable flexibility in serving our customers. We often find ourselves using one part of the network alongside other transportation modes to create comprehensive solutions for our clients. While we are seeing growth, it's important to note that our driver turnover is notably low compared to the broader truckload sector and even relative to other LTL carriers. With retirements considered, it stands at around six. This stability is advantageous for customers seeking reliability, and I think that's a positive aspect to highlight.

Operator, Operator

Our next question comes from Jordan Alliger with Goldman Sachs.

Jordan Alliger, Analyst

Now that MoLo is closed, I’m curious about your thoughts on the current truck brokerage market fundamentals. Additionally, you mentioned during a previous conference call the timing of reaching breakeven and profitability. Could you provide an update on whether you expect to see operating income in the black by the fourth quarter or if breakeven will be achieved before then? Any updates on this would be appreciated.

Daniel Loe, President of Asset-Light Logistics and Chief Yield Officer

Yes, this is Danny. I'll provide a brief update on that. There haven't been any significant changes since our last discussion. We find ourselves at a breakeven point, and our expectation is that by the fourth quarter, we will achieve the run rate that aligns with our target for 2023. Overall, there hasn't been a disruption in the projections. The tender rejection index, which I view as a key indicator of the market, shows that it remains tight, with capacity constrained in that sector. There may be occasional weekly fluctuations, but generally, the trend indicates a consistent situation where demand slightly outstrips capacity in the truckload segment.

Operator, Operator

Our next question comes from Bruce Chan with Stifel.

Bruce Chan, Analyst

Congrats on results here and the good news. David, you talked a little bit about the elevated PT experience just given the tightness in the market right now. And that makes a lot of sense. I wanted to get maybe both of your thoughts here on how you see that trending as MoLo kind of enters the picture? Is there an opportunity to get better on procurement? And what's sort of the pathway for that? And then maybe just a little bit more broadly, when we think about the interaction between all of the pieces, the asset-light expedited and LTL. Is it all purely arm's length? Or is there any preference of priority of capacity to MoLo or loads to Panther, ABF that we should think about?

Daniel Loe, President of Asset-Light Logistics and Chief Yield Officer

Bruce, this is Danny. The key aspect to consider is that we focus on the customer perspective. We aim to make the best decisions for our customers, which ultimately benefits our business lines. As a logistics company, we have the flexibility to choose options that serve our customers well, and typically, these choices also favor ArcBest. Therefore, it's challenging to pinpoint a single priority; the range of options we have allows us to make decisions that are advantageous for both our customers and for us.

Judy McReynolds, Chairman, President and CEO

Yes. I mean I think, Bruce, what's being highlighted there, and this is a decision that we made several years ago is that we are mode-neutral, which means that we do see our business through the eyes of the customer. So we're not trying to force an answer one place or the other. We're trying to identify the best solution for them. And at the time that we made that decision, it was not that easy to make that decision. Today, it's a lot better. We're a lot more equipped, and we're glad we have that in place. But that's the mentality here, and I think it's the right one.

Bruce Chan, Analyst

Got it. Well, that's my point. I appreciate the time.

Operator, Operator

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

Todd Fowler, Analyst

Judy, with the step-up in the profitability in the Asset-Based segment, a big improvement in the OR here this year. How do you think about the ability to show continued improvement going forward? Is this something that some of your peers have talked about the ability to show 100 or 200 basis points of annual improvement? Do you think that the business has shifted now where you can see steady improvements in the OR and kind of remove some of the cyclicality from that segment going forward?

Judy McReynolds, Chairman, President and CEO

Yes, I mentioned this earlier, but I believe that the actions we've taken position us for more consistent growth and reduce our vulnerability to cyclical downturns. This approach isn't limited to our asset-based business; it encompasses our overall strategy. For example, the yield actions we've implemented with space-based pricing and the visibility we have in aligning our operational needs with customer demand for quoted business are significant. These efforts, combined with our focus on expanding our core customer base, are ensuring a steady flow of freight into the asset-based segment as we move ahead. I also believe that our ongoing technology and optimization initiatives will enhance efficiency further. When we increase efficiency and throughput in that segment, we enhance our growth potential. In the short term, we've noticed a need for more personnel, and we've hired the largest number of employees in the company's history, despite experiencing some retirements. Overall, we've added 850 people to the business and will continue to seek more hires. This need for additional staff has been a barrier to our growth, but as we get new employees trained and in place, we expect to see an acceleration in throughput and growth potential. Additionally, David has already mentioned the opportunities we have regarding our equipment and real estate, which provide a strong foundation moving forward.

Todd Fowler, Analyst

Yes. No, it certainly sounds like that you've got everything positioned now going forward, which is really encouraging. So maybe just for a quick follow-up to that point. Does it feel like at this point, the network with doing some actions to supplement with heavier weighted shipments last year, some of the home moving business is kind of all of that kind of where you want it to be. And so when we think about tonnage growth going forward, we're in kind of more of a normal cadence of tonnage growth, kind of core LTL tonnage growth from this point as we move into '22?

Judy McReynolds, Chairman, President and CEO

Yes. I mean I think our view of demand from core customers is that it's good and that it's continuing. And that's into 2022. But to your point, those other two spot market opportunities really help us both as we see imbalance in the system and also as we see seasonal changes in the business. So we're glad to have that as well.

David Humphrey, Vice President of Investor Relations

Yes. And Sylvana, I think we've got time for one more question.

Operator, Operator

Our final question comes from Stephanie Moore with Truist.

Stephanie Moore, Analyst

I wanted to follow up a little bit on the comments Judy, you made actually Jack's question a little bit earlier. You talked about the revenue opportunity from cross-selling LTL and asset-light customers kind of better servicing what that customer needs, which often isn't just one mode of transportation. But is there any associated margin benefit opportunity as well, maybe some cost synergies or just from taking that more holistic approach to providing these services?

Judy McReynolds, Chairman, President and CEO

Stephanie, I would like to point you back to Slide 13 from our presentation, which shows that the profit per account is four times higher for cross-sold accounts. Additionally, revenue per account is five times higher, and our retention rate is nine percentage points higher. These statistics strongly support our approach, and we remain enthusiastic about it. We understand that when we effectively serve a customer in this manner, we are truly partnering with them on their supply chain, gaining insights into what will benefit them. This understanding is crucial for our customer base right now.

David Humphrey, Vice President of Investor Relations

All right. Well, we want to thank everybody for joining us today, and this concludes our call. Thank you very much.

Operator, Operator

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.