ArcBest - Q2 2015

Transcript

Operator (participant)

Welcome to the ArcBest Corporation Second Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded Monday, August 3rd, 2015. I'm going to turn the conference over to David Humphrey, Vice President, Investor Relations. Please go ahead, sir.

David Humphrey (VP of Investor Relations)

Welcome to the ArcBest Corporation second quarter 2015 earnings conference call. We will have a short discussion of the second quarter results, and we'll open up for a question-and-answer period. Our presentation this morning will be done by Ms. Judy R. McReynolds, President and Chief Executive Officer of ArcBest Corporation, and Mr. David R. Cobb, Vice President and Chief Financial Officer of ArcBest Corporation. We thank you for joining us this morning. In order to help you better understand ArcBest Corporation and its results, some forward-looking statements could be made during this call. As we all know, forward-looking statements, by their very nature, are subject to uncertainties and risk. For 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 earnings press release and the company's most recent SEC public filings.

In order to provide meaningful comparisons, certain information discussed in this conference call includes non-GAAP financial measures as outlined in the tables in our earnings press release. We will now begin with Ms. McReynolds.

Judy R. McReynolds (President and CEO)

Thank you for joining us this morning. I'm pleased to report improved second quarter 2015 performance from all of our operating companies when compared to last year and the highest second quarter revenue in ArcBest history. Our revenues increased 6% to $696 million, and our earnings per share improved 17%. This improvement results from the hard work performed by our employees to deliver on customers' expectations. In fact, when I attend customer meetings, I frequently hear that based on our long experience with them, they trust us to do the difficult things well. Our customers feel that our expanded service offerings are very attractive options coming from such a trusted partner. We are continuing to invest in our enterprise platform to make sure we have the right people, systems, and processes in place that lead to the answers customers want.

ArcBest's Enterprise Solutions team develops and implements comprehensive solutions for shippers with wide-ranging transportation needs. Oftentimes, these solutions are backed by committed and coordinated capacity options. The Enterprise Solutions team helps grow revenues by removing obstacles for both internal and external customers and streamlines the way we work with those customers. Since we deployed our Enterprise Solutions last year, we've seen account growth, and we've maintained accounts by offering solutions with integrated ArcBest services we would not have been able to provide in the past. ABF Freight's second quarter revenue growth resulted from a combination of increased account pricing and additional tonnage handled during the quarter. ABF's year-over-year total tonnage figures were positive in the first two months of the quarter, while total tonnage handled in June was below last year versus a slightly stronger comparison.

Throughout the second quarter, in order to maintain resources for our traditional LTL customers, we intentionally reduced the amount of volume business we handled. Our LTL business experienced solid year-over-year increases in April and May, while LTL demand moderately increased in June. We're now beginning to compare back to the second half of 2014 when tonnage growth in the LTL portion of our business was very strong. The emphasis we have placed on improving the efficiencies of our freight dock handling are evident versus the same period last year, as second quarter handled bills per dock hour improved 2.9%. It is encouraging to see that the shipments we handled during the quarter increased at twice the rate of dock labor hours.

As I mentioned last quarter, we are focusing on local pickup and delivery productivity improvements as measured in the number of stops our city drivers make each day on their city peddle routes. Though below last year's second quarter, this metric improved 4.7% compared to first quarter. We're also carefully monitoring our use of outside resources in ABF Freight's city operation. Rented city trailers and city tractors used in the second quarter were significantly below last year and below the peak usage that occurred in the third quarter of 2014. ABF Freight continued to benefit from a good LTL pricing environment versus the same period last year, total revenue per hundredweight, including fuel surcharge, increased slightly. Excluding the effects of fuel surcharge, the increase in total pricing yield was in the mid-single digits. Moving through the quarter, sequential pricing reflected increasing strength.

Retention of last year's November GRI was strong and comparable to that of recent previous GRIs. The rate of increase on contract and deferred pricing accounts negotiated during the second quarter was 4.6%. ArcBest continues to evolve as a logistics service provider with the assets and capacity relationships necessary to meet the changing needs of our customers. The opportunity to grow our asset-light services with existing customers continues to be solid. As a result, our asset-light businesses experience good growth and represent nearly 30% of ArcBest's total revenue. During the quarter, ABF Logistics had success in adding new customers, both those who have used other ArcBest services and those who are new to our company. As a result, ABF Logistics was able to continue a pattern of strong top-line growth, primarily driven by the strength in the truckload brokerage services.

Even though brokerage revenue per shipment declined versus last year as a result of lower fuel surcharges and capacity availability in the truckload market, ABF Logistics was able to increase its second quarter revenues by 42%. ABF Logistics' operating income more than doubled versus last year as gross margins improved and operating costs as a percent of revenue were lower due to improved labor efficiencies. We continue to see the positive impact of continuous employee training as well. During the second quarter, Panther was able to gain market share through shipment growth in the midst of a soft truckload market. However, despite handling over 10% more loads compared to the same period last year, Panther experienced a slight decline in second quarter revenues.

This was because of a lower average revenue per load related to available truckload capacity in the market, the effects of lower fuel surcharges, and changes in account mix that reduced Panther's average length of haul. In addition, revenue comparisons were against strong growth in the previous year's second quarter. Panther's revenue in the automotive market grew by double digits, and life science revenues were up slightly during the quarter as well. Panther's second quarter profitability improved over the previous year due to higher shipment gross margins and better cost management. Compared to last year, FleetNet increased second quarter revenues by 10% as a result of a 13% increase in emergency roadside service events and a 7% increase in fleet maintenance events. FleetNet continues to benefit from the addition of new customers and from growth in additional services offered to existing customers.

FleetNet's second quarter operating income increased by 45%, reflecting improved employee productivity and labor efficiencies. ABF Moving produced a revenue increase of 41% over last year and more than tripled its second quarter operating income. Another positive factor during the quarter was a significant increase in its handling of moving shipments for the military and government. ABF Moving's experience in offering a superior level of customer care resulted in improved governmental service ratings that resulted in an award of significantly more shipments than the same period last year. Now I'll turn it over to David to provide the financial highlights for the quarter.

David R. Cobb (VP and CFO)

Good morning, and thank you for your interest in ArcBest. ArcBest earned $0.74 per diluted share in the quarter compared to net income of $0.63 per diluted share last year. Excluding adjustments for pension settlement charges related to our non-union defined benefit pension plan, our second quarter net income was $20.3 million or $0.75 per diluted share compared to similarly adjusted net income of $0.65 in last year's second quarter. In our early June 8-K, we described additional investments of approximately $1-$2 million in enterprise customer solutions we've made to provide for an improved platform for revenue growth and also to enhance our ability to offer ArcBest services across multiple business units. The cost of these investments were included in the other and eliminations line of our segment detail.

We estimate that quarterly cost associated with our enterprise customer solutions initiative during the second half of 2015 will be comparable to the second quarter level. Our second quarter effective tax rate was 39%, which is consistent with the 37%-40% range that we expect for our full year 2015 rate. As we did earlier in the year, during the second quarter, we purchased shares of our stock under a previously authorized stock repurchase program. We bought 99,000 shares of our stock for a total amount of $3.5 million. So far this year, we have purchased 163,000 shares for a total price of $6 million. The remaining amount authorized for repurchase under this program is $12.2 million. ABF Freight reported second quarter revenue of $504 million, a 2% increase compared to last year.

The change from the prior year's second quarter was affected by lower fuel surcharges resulting from the change in fuel prices. ABF Freight's quarterly tonnage per day increased by 1.9% compared to last year's second quarter. Moving through their second quarter, ABF Freight's continued emphasis on achieving account price increases contributed to monthly reductions in year-over-year tonnage changes. These tonnage changes included a 4.8% increase in April, a 2.2% increase in May, and a decrease of 1.1% in June. ABF Freight's total weight per shipment was 1,326 pounds, a 2.5% decrease from last year's second quarter and approximately the same as in the first quarter of 2015. This decrease in total average shipment weight was driven by smaller truckload-rated shipments and, as Judy mentioned, reductions in the amount of volume business we handled versus last year.

The average shipment size in ABF Freight's core LTL business was about the same as it was in last year's second quarter. ABF Freight's average length of haul increased slightly to 1,023 miles compared to 1,019 miles in the second quarter last year and compared to 1,024 in first quarter 2015. ABF Freight's second quarter total billed revenue per hundredweight was $29.04, an increase of 0.4% versus the second quarter last year. Of course, year-over-year comparisons of this yield figure continue to be impacted by lower fuel surcharge revenue related to the reduction in diesel fuel prices compared to last year. On a sequential basis versus first quarter, ABF Freight's total billed revenue per hundredweight increased 3.5%. Adjusted for pension settlement charges, ABF Freight's second quarter operating ratio was 94.3 compared to 95.3 in the prior year.

During the second quarter, ABF Freight's operating ratio benefited from strong margins on the incremental revenue that was added versus the same period last year. On a combined basis, our asset-light logistics businesses increased their second quarter revenue versus last year by 15%. Total combined second quarter revenue for these businesses was $205 million. Second quarter EBITDA for these businesses totaled $13.5 million compared to $10.2 million in the prior year quarter. Combined operating income for the asset-light logistics businesses was $9.7 million versus $6.5 million during the same period last year, an improvement of 48%. We ended the second quarter with unrestricted cash and short-term investments of $246 million. Combined with the available resources under our credit revolver and our receivables securitization agreement, our total liquidity equals $371 million. The accordion features of these two agreements allow for an additional total amount of $100 million.

These capital resources allow us to continue our share buyback program, continue to finance our 6% per share quarterly dividend, reinvest in our companies by executing on this year's CapEx plan and maintain the organic growth of our existing businesses, and act on acquisition opportunities that strengthen the logistics services we offer now and allow us to expand into other areas needed to more fully serve our customers. Our total debt of $161 million includes the $70 million balance on our credit revolver, the $35 million borrowed on our receivable securitization, and $55 million of notes payable in capital leases, primarily on ABF Freight equipment. The composite interest rate on all of our debt is 2.1%. Full details of our GAAP cash flow are included in our earnings press release. Earlier in the year, we provided an estimate of 2015 net capital expenditures totaling approximately $200 million.

This included revenue equipment purchases of $110 million for ABF Freight and Panther and total corporate real estate expenditures originally expected to equal approximately $55 million. While the revenue equipment purchases have shifted to later in the year, based on our current progress on some of this year's real estate projects, we now project our total 2015 net capital expenditures to total approximately $190 million, $10 million less than originally projected. ABF Freight preliminary revenues for July 2015 are below July 2014 by approximately 1%. This is a result of a 1%-2% decrease in tonnage. On a sequential basis, we would normally expect ABF Freight's July daily tonnage to be below June, and the percentage decrease this year is in the normal historical range. On a year-over-year and sequential basis, ABF Freight's total July revenue per hundredweight, including fuel surcharge, increased less than 1%.

Year-over-year comparisons of revenue per hundredweight continue to be affected by decreases in fuel surcharges related to lower diesel fuel costs and changes in profile and business mix. Excluding fuel surcharge, ABF Freight's July revenue per hundredweight increase percentage was in the mid-single digits. The pricing environment continues to be good. The preliminary increase on contract and deferred pricing agreements renewed in July is 4.5%. For the month of July, combined asset-light logistics revenue is expected to increase by approximately 6% versus last year. This figure includes strong double-digit growth at ABF Logistics and ABF Moving related to continued good business trends experienced in the second quarter. Panther's July revenue is expected to decline by approximately 11% versus last year, despite a 1% increase in loads handled.

As we saw in the second quarter, Panther's July revenue trends versus last year are being affected by lower fuel surcharges, the availability of excess capacity in the truckload market, and comparisons back to periods of strong business gains. I'll turn it back over to Judy for some recent news about our company.

Judy R. McReynolds (President and CEO)

Thanks, David. Earlier this week, we added two new members to ArcBest's board, Kathy McElligott and Stephen Gorman. Kathleen is Executive Vice President and Chief Information and Technology Officer of McKesson Corporation, the healthcare services and information technology company that is the largest pharmaceutical distributor in North America. Stephen has served for the last year as CEO of a privately held company called Borden Dairy Company, a fresh milk and value-added dairy based in Dallas. Prior to that, he was the Executive Vice President and Chief Operating Officer of Delta Air Lines from 2008 until 2014. He currently serves on the board of Aeromexico, the largest airline in Mexico.

As we enhance our ability to serve customers with a wide range of logistics services, Kathy, with her IT and supply chain expertise, along with Steve and his strong background in operations and transportation management, are excellent additions to our board of directors. And now, David, I think we're ready to take some questions.

David Humphrey (VP of Investor Relations)

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

Operator (participant)

Thank you. Ladies and gentlemen, if you'd like to register for a question, please press the one followed by the four on your telephone. You will hear a 3-tone pop to acknowledge your request. If your question has been answered and you'd like to withdraw from your registration, please press the one followed by the three. If you're using a speakerphone, please lift your headset before entering your request. One moment, please, for the first question. Our first question comes from the line of Alex Vecchio with Morgan Stanley. Please go ahead.

Alex Vecchio (VP of Equity Research)

Hey there. Good morning, Judy. You gave some good color on July tonnage and yield trends. I know it's tough to forecast tonnage for the rest of the year, but the comps do get a bit tougher in the third quarter and then I think even more so in the fourth quarter. Can you help us kind of think about how we should think about or how you'd think about tonnage in the back half of the year? And is there kind of a risk that it might be negative, and is that maybe not necessarily such a bad thing given the strong pricing you're still getting?

Judy R. McReynolds (President and CEO)

Well, our business levels are good, and we started to see some year-over-year pressure on the comparisons in June. I think July is very similar to what we saw in June. And as we've noted, you've noted, we have the tougher comparisons as we move through the year. What I would expect with what we offer to our customers, if the business environment improves some from where it is today, it's a little soft right now, that we will do well in that environment. I mean, we have a lot to offer. Our customers, as we've talked about, our enterprise platform is going, and that's attractive to our customers. And our offerings in the other business units are attractive on their own.

And so although we don't forecast numbers into the future, and that's primarily because we don't know them, our management team is poised and ready to tackle the environment, whatever it is, and make the best of it.

Alex Vecchio (VP of Equity Research)

Okay, that's helpful. Then just real quick on the OR, I think ABF Freight's OR typically improves 150 basis points roughly sequentially in the third quarter. Can you help us think about puts and takes there? Is there anything to suggest that normal seasonal pattern might not hold in the third quarter?

Judy R. McReynolds (President and CEO)

Well, I think if you looked at it, the longer history would reflect what you just suggested. But something changed, and you saw it last year for the first time. As we entered into our labor contract at the end of 2013, it provides for the increases for our union labor employees to occur on July 1st instead of the April 1st that those increases historically occurred on. And what that does is it really kind of changes the relationship, I think, from second to third and perhaps just on that issue, flattens that relationship out where you would see more consistent operating performance, again, if that was the only issue that was changing. But it's just a timing issue. The increases for those employees now occur on July 1st for their wages and August 1st for their health, welfare, and pensions.

Alex Vecchio (VP of Equity Research)

Okay, that's helpful color. Thanks very much for the time.

Judy R. McReynolds (President and CEO)

Thank you.

Operator (participant)

All right, next question comes from the line of Chris Wetherbee with Citi. Please go ahead.

Chris Wetherbee (Senior Research Analyst)

Hey, thanks. Good morning, guys.

Judy R. McReynolds (President and CEO)

Good morning, Chris.

David R. Cobb (VP and CFO)

Hey, Chris.

Hey, maybe just sticking on tonnage for a second. You mentioned a little bit of restrictions of some of the heavier weight stuff. I just want to get a sense of sort of if that's still sort of ongoing in the second and early third quarter, and maybe if you can parse out sort of what the underlying demand environment looks like relative to some of your sort of specific actions around tonnage.

Judy R. McReynolds (President and CEO)

Well, I would say on the volume shipments that you were speaking of, we're continuing that pattern. We do that as we have LTL shipments and want to make sure that we provide service and better handle those. And we have the ability to increase those volume shipments at weaker times during the year, and we certainly do that. We've done that for many, many years. Our indications, though, on the broader environment perhaps come from our other businesses. Whenever you look at the Market Demand Index, which is a truck stop index, it's certainly weaker than it was last year. Panther has some spot market indexes that they follow. I think there's one that's a Morgan Stanley index that is specific to the spot market. It's in a pretty weak place right now.

And so, on the spot demand or one, and I think that's kind of the realm of things that you were referring to. I think it's a little weak right now. That doesn't mean that that won't change as we move through the quarter. There are indications that the economy could get better, and that's—I mean, so we're not saying that what's happening now is some long-term effect or anything like that. The truth is we don't know. But I hope that gives you some color from our perspective. It's certainly less robust from that volume shipment, I think, availability in the truckload market.

Chris Wetherbee (Senior Research Analyst)

Okay. No, that is helpful color. I appreciate it. And then maybe just following up on the pricing environment a little bit, just want to get a sort of sense of maybe how you think about customers' reactions to the price increases. It sounded like the GRIs are holding. Just wanted to get a sense as we move into the second half of the year. What sort of natural stage should we be looking for, and sort of what are the things that you're looking for to potentially think about a GRI? I'm guessing it's sort of a stronger underlying freight environment, but kind of curious your thoughts. Thanks.

Judy R. McReynolds (President and CEO)

Well, I think your comment about the underlying freight environment is right. I mean, what we're seeing is a strong environment from a pricing perspective. We do expect that there'll be a GRI sometime later this year. We're not certain about the timing, though.

Chris Wetherbee (Senior Research Analyst)

Okay. All right, that's helpful. Thanks for the time. I appreciate it.

David R. Cobb (VP and CFO)

Appreciate it, Chris.

Operator (participant)

All right, next question comes from the line of Ken Hoexter with Bank of America Merrill Lynch. Please go ahead.

Ken Hoexter (Managing Director)

Great. Maybe, Judy, good morning. I just want to follow up on that last comment there on the GRI later this year. Just to confirm, you're still thinking that you can implement one later this year despite what you've commented on a weak freight environment and the business is soft right now? You still think we could see one?

Judy R. McReynolds (President and CEO)

Well, I didn't, I think you missed a little bit of what I was saying. I mean, I think on the LTL side, we're seeing a decent business environment. It's certainly not as robust, I think, as last year. My comments related to the weakness are really in the specific spot market, which wouldn't have any bearing on what you would do on General Rate Increases and that sort of thing. And so I think we may be talking about two different things. But my comment about the General Rate Increase, I feel like that there will be one before the year is up.

Ken Hoexter (Managing Director)

Oh, no, great. I appreciate that clarification. Thank you. Just on Panther, it sounded like the market kind of shifted there with revenues being down a bit, but yet a great job on cost and efficiencies let you really scale the income there. Can you maybe dig into a little bit more about what you did at Panther to get and what you still can do to get that operating ratio even more improved?

Judy R. McReynolds (President and CEO)

Well, I think it's utilization of the owner-operators and better intelligence over the choice of equipment to the specific shipment and making sure that we have the appropriate people that are deployed on the phones, whether it's a sales-oriented thing or an operations-oriented area, that are handling that. And I think that they did a nice job there. You also, on every load, have to do the right things as far as managing the margin on that load. And I think one thing that was encouraging that I haven't yet mentioned is Panther's been able to grow the level of owner-operators that they have. And so that continues to be a positive thing for them as well, so.

Ken Hoexter (Managing Director)

Great. Just a quick one on a number thing. David, was there an acquisition in the quarter? Just on the cash flow.

David R. Cobb (VP and CFO)

No, sir. That was earlier in the year, January.

Judy R. McReynolds (President and CEO)

Yeah, that's the Oklahoma City acquisition of Smart Lines that was really folded into ABF Logistics.

Ken Hoexter (Managing Director)

Wonderful. Thanks for the time.

Judy R. McReynolds (President and CEO)

Thanks.

David R. Cobb (VP and CFO)

Thanks, Ken.

Operator (participant)

All right, next question comes from the line of David Ross with Stifel. Please go ahead.

David Ross (Managing Director)

Yes, good morning, everyone.

Judy R. McReynolds (President and CEO)

Hey, Dave.

David R. Cobb (VP and CFO)

How you doing?

David Ross (Managing Director)

Good. So first, Judy, if you could talk about, I guess, the large customer base you have at ABF Freight and how that's transitioning into growing the asset-light services business. Do you track kind of percentage of LTL customers who use also one or more of the asset-light services like Panther or FleetNet, and how has that been trending, if so?

Judy R. McReynolds (President and CEO)

Yes, we do track that. Something that's really interesting to watch as we've rolled out this enterprise solutions team is the success of it. And we've seen that our revenue has grown, our number of accounts have grown. And what's even further of interest is that the revenue per account is growing. And we also believe that retention of those accounts is better whenever we handle more than one service with them. So we have a lot to go. If you look just purely at the percentage of ABF Freight's account base that transacted business with either ABF Logistics or Panther, that's about 21% versus, say, 18.5% last year. And that's grown a lot from 2010. And so what that tells you is that we're still in the early innings of this.

That is actually sort of a generous view because what we'd like to do is look at accounts that have multiple shipments with each of our companies. We actually internally evaluate it more based on that because we don't want it to be just an every now and then. We want it to be a customer that has routine business with more than one of our companies. But what we found was, in order to make that happen, we needed a group that helped us with the internal obstacles, pushing those aside, making this easy. Many times when we have a discussion with a customer, they say, "I want a single point of contact." Our enterprise solutions group, along with our ABF Freight corporate sales folks, make that happen. It's actually turned out to be a very satisfying thing as far as customers go.

David Ross (Managing Director)

That's great. And then just one question on ABF Freight. Saw an 8% increase in the salary, wages, and benefits line in the quarter, but only a 4.5% growth in shipment count. What was, I guess, the reason for the disconnect there? Was it the kind of wage increase as part of that and?

Judy R. McReynolds (President and CEO)

Well, I mean, I think you're looking at the percentage increase in the dollars, or are you looking as a percentage of revenue?

David Ross (Managing Director)

No, no, no. Just absolute percentage increase.

Judy R. McReynolds (President and CEO)

Well, when you look at that line item, it includes a number of things. It includes healthcare costs. It includes workers' comp claims and that sort of thing. We did have some elevation in both of those areas as well. We continue, as I mentioned in my commentary, to have some issues with our street productivity that we're working on. We've seen some improvement in dock productivity year-over-year, but street productivity, we still have some work to do. We're starting to see that improve sequentially, so we're encouraged by it, but we still have a lot of work to do there. As we see that improve, we'll see that come down and be more in line, I think, with the shipment increases or hopefully less than what we see in the shipment increases. David, did you have anything to add?

David R. Cobb (VP and CFO)

No, I would agree with those comments.

Judy R. McReynolds (President and CEO)

Okay. Thanks, Dave.

David Ross (Managing Director)

Thanks.

Operator (participant)

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

Matt Brooklier (Research Analyst)

Hey, thanks. Good morning. So.

David R. Cobb (VP and CFO)

Hey, Matt.

Matt Brooklier (Research Analyst)

How are you? Question for you. I'm realizing that rail line haul, a decent amount of the total line haul for freight. Curious to hear your thoughts on improving rail service and what does it mean for the network, I guess, from a service level perspective and then also from maybe a cost/profitability perspective.

Judy R. McReynolds (President and CEO)

I think rail service, I think, has improved some, still needs to improve more. We have wanted to better control service, and so we've had some increases in our people cost, if you will, and utilized less purchased transportation, including rail service.

Matt Brooklier (Research Analyst)

Okay. And then this is just kind of a longer-term type question. You have the new labor contract in place. You've had it in place for some time. You've done some work in terms of the terminal consolidation within the network. I'm just curious if there's a longer-term OR target that you have for freight in mind, if that's something you are thinking about, something you'd be willing to share, or maybe that's something you would be willing to share at your investor day later this year.

Judy R. McReynolds (President and CEO)

Yes. I mean, we target our historical average operating ratio for ABF Freight when we talk internally about that. And over longer periods of time, that's certainly what we're trying to accomplish. And that typically would be in the lower 90s range, say a 92 or a 93 OR. But it's possible if the demand environment picks up and if we see the driver shortage impacts that we could see in this industry, that there is even further improvement that could be made with having an excellent LTL network as we have. So we're not going to limit ourselves, but our current discussion is to get back to that historical operating ratio range that we know that we can accomplish and that we have in the past.

Matt Brooklier (Research Analyst)

Okay. Appreciate the time.

David R. Cobb (VP and CFO)

Yep. Thanks a lot, Matt.

Operator (participant)

All right, next question comes from the line of Brad Delco with Stephens. Please go ahead.

Brad Delco (Managing Director and Research Analyst)

Morning, Judy. Good morning, guys.

Judy R. McReynolds (President and CEO)

Hi, Brad.

David R. Cobb (VP and CFO)

Hey, Brad.

Brad Delco (Managing Director and Research Analyst)

Judy, wanted to ask you, just make sure I'm looking at the right information. In your mid-quarter update, I think it through May, you said the commentary was sequential pricing improved 2% from the first quarter, and then it looked like it finished up 3.5. Was there something unique that happened in June, or is that just normal sequential trends that we're just not accustomed to seeing on a monthly basis?

Judy R. McReynolds (President and CEO)

No, I don't think you would necessarily call that normal. But I think it's possible that we made the change to our fuel surcharge, that it was in place for the full second quarter relative to first. That's a possible influence on that, but certainly not the entire story. And I think really it's just an effort to continue in this good pricing environment to gain some ground for the value that we provide to customers.

Brad Delco (Managing Director and Research Analyst)

No, gotcha. Just wanted to make sure the build revenue number wasn't something I was looking at differently versus your reported yield. And then second.

Judy R. McReynolds (President and CEO)

No, no, that's what we would use every time. Yeah, we would use that every time, Brad.

Brad Delco (Managing Director and Research Analyst)

Yep, gotcha. And then second, the good margins that we saw in ABF Logistics, can you kind of break out for us what your contracted volumes are in that business versus your transactional volumes?

Judy R. McReynolds (President and CEO)

Actually, very small. Most of the business that we have there at ABF Logistics is really transactional business. Over time, as that business grows, we will have more longer-term contracts with customers. But we really, to a large extent, have a transactional model there that's in place today. The good news on trying to have a greater mix of that contract business is that we have plenty of business opportunities with customers that we already know that would be willing to do that with us. So really, it's been from the beginning about building the carrier base to gain some scale in that business. And as you gain more scale, it's a better opportunity for you to do those contracts with larger accounts that have more business.

Brad Delco (Managing Director and Research Analyst)

Okay. Well, guys, great. Thanks for the time.

Judy R. McReynolds (President and CEO)

Thank you.

David R. Cobb (VP and CFO)

Thanks, Brad.

Operator (participant)

All right, next question comes from the line of Rob Salmon with Deutsche Bank. Please go ahead.

Rob Salmon (Senior Analyst)

Hey, thanks. Good morning, guys.

Judy R. McReynolds (President and CEO)

Hi, Rob.

Judy, as a follow-up to Brad's question, could you give us a sense with regard to the asset-light growth, how much of that growth you guys are seeing kind of from new customers coming along versus growth from existing? And any sort of incremental color related to the benefits of the enterprise investments you guys are making and how that's kind of translating into the growth at the logistics segment.

Okay. The first question that you asked was really targeted at new versus existing customers. I would suggest to you that the vast majority of our growth is with existing customers, although we do have new customers in there. And I mean, when you're looking at Panther, there is a little bit different mix than when you're looking at ABF Logistics. But for the most part, it's existing customers. And when you look at what we're doing on the enterprise solution side, we're really facilitating growth into those businesses. And so what we're able to do, for instance, is, say, product launch business. We're able to mix the truckload services that can be performed by ABF Logistics with the LTL offering that we have to really gain a better answer from a distribution standpoint for a customer.

So we're able to combine some things among our subsidiaries and then also using third parties when we need to to be able to accomplish things that are specific to a customer need. And so what the enterprise solutions group allows us to do is to manage all those details at the customer's request to make sure that we give them the best answer. But we're also certainly focused on the service offerings that we have with our own companies because those offerings we know are good, that can be committed, and we can count on them giving the good service to the customer.

Rob Salmon (Senior Analyst)

Okay. And I think in the prepared remarks, you had mentioned briefly about for ABF Moving that you guys had won some incremental business from a government or a military offering. Can you give us a sense of how seasonal that is and what sort of line of sight you have with regard to that incremental win?

Judy R. McReynolds (President and CEO)

It is seasonal business. It's moving business, and there's a season for that that typically starts around April and would finish up sometime in September, might go into October from kind of a strength standpoint as you look at the months of the year. The truth is, on that, it's nothing new. It is just a better success with kind of an existing offering that they have. And where you win more business is by having a good quality score, which is a reflection of customer satisfaction. And they just did a phenomenal job of that and were awarded more of that business. But it typically comes during that peak part of your season, and so it's never easy to handle. So the value that we provide to the customer there is at a high level.

But we're excited for the team that they had that much growth and that it was coming because of the quality aspect of their business.

Rob Salmon (Senior Analyst)

Okay. But we should think about that as kind of in line with how the business normally moves and nothing that's kind of consistent at that level throughout the year.

Judy R. McReynolds (President and CEO)

Right. But what is different is that they were awarded more business because of the high-quality level that they were providing their customers.

Rob Salmon (Senior Analyst)

Got it. Appreciate that.

Judy R. McReynolds (President and CEO)

But again, it's opportunities that we have each summer.

Rob Salmon (Senior Analyst)

Okay. Thanks so much.

David R. Cobb (VP and CFO)

Thanks, Rob.

Operator (participant)

All right, next question comes from the line of Jeff Kauffman with Buckingham Research. Please go ahead.

Jeff Kauffman (Director)

Thank you very much. Hey, everyone.

Judy R. McReynolds (President and CEO)

Good morning, Jeff.

David R. Cobb (VP and CFO)

Hey, Jeff.

Jeff Kauffman (Director)

Good morning. I would just wanted to come back for a detailed point here. You were pretty specific about the increases you're getting on your new business signed, on your rep per 100 weight increases, but you were pretty vague about what the rep per 100 weight change was ex-fuel. You said mid-single digits. Do you have a more specific number?

Judy R. McReynolds (President and CEO)

Well, I mean, I think what we would say there is it's consistent with others that you're seeing out there. We like to stay in keeping with providing the total numbers, and there's a lot more that we have to get into in terms of detail if we get specific at a further level. But just think of it as similar figures to what you're seeing from the others that we compete with.

Jeff Kauffman (Director)

Something between 5% and 6%, which should be consistent with what we're seeing elsewhere?

Judy R. McReynolds (President and CEO)

Well, I mean, I'm not going to mid-single digits is our comment.

Jeff Kauffman (Director)

Okay. A couple of other questions. Last year in the fall, there was a lot of hiring of new employees, particularly dock workers, and that was followed by some other actions you've taken. We do have the bump-up in the wage and the healthcare rates coming in the third quarter, but when do we start to anniversary some of this increase in inefficiency that we saw from the new hires last year?

Judy R. McReynolds (President and CEO)

Well, that really began in the, I would say, kind of March, April timeframe in 2014. So we're starting to lap some of that even now, but it continued beyond the second quarter last year.

Jeff Kauffman (Director)

Okay. Yeah, I mean, I remember us discussing it in both the third and fourth quarter calls, so I just kind of was wondering when you so you're starting to see the productivity pick up, but not materially in?

Judy R. McReynolds (President and CEO)

Yes. Well, I mean, our dock productivity is 2.9% better. We've got an issue that we're still working on on the street productivity side, but again, I've commented that we made sequential progress on that, and that's encouraging.

David R. Cobb (VP and CFO)

Yeah, and I would just add the other thing is that this is some of this we have to balance with serving the customers and really improving the service level to our customers. And so we're strategically doing that, not just trying to pull a lever and.

Judy R. McReynolds (President and CEO)

Right. Well, the other thing that I think has been commented on in the past is that we're managing down cartage agents and rented equipment, and you see some of that savings when you look at that line item as well.

David R. Cobb (VP and CFO)

That's right. So you have to balance the whole P&L that we provided.

Jeff Kauffman (Director)

Okay. One final question. We have two bills in Congress trying to get 33-foot pup trailers out there. I think one's attached to the highway bill, the other one to the annual transportation department funding bill. I think the THUD is what they're calling it. If this were to pass, whether it's this fall or end of year, how does it change your thinking, not just about your capital deployment, but what could this mean for you in terms of cost savings, margins, efficiencies, things like that?

Judy R. McReynolds (President and CEO)

Well, really, what we're seeing is the greatest impact being the capacity that's available from a linehaul standpoint. We estimate that that would increase about 18%, but it does cause you to have greater efficiencies from a labor standpoint as well. And so we see that that would be a likely outcome of the implementation of those trailers. But we feel like that that would happen to some extent over time, not all at once. And so the implementation of it would be obviously as soon as you possibly could, but it would be somewhat gradual. But I think it would be beneficial because we continue to we have less of an issue with driver turnover, I think, than others that either we compete with or on the truckload side, but it's still an issue.

Highway congestion is a big issue that needs to be solved, and we feel like that this change would be beneficial in those areas as well. There's a lot of pressure on us from a productivity standpoint, as we just discussed. So this hits on a couple of different marks very well.

Jeff Kauffman (Director)

Okay. Thanks, all.

Judy R. McReynolds (President and CEO)

Thank you.

Operator (participant)

All right, next question comes from the line of Will Milby with BB&T Capital Markets. Please go ahead.

Will Milby (Equity Research)

Hey, good morning, everybody.

Judy R. McReynolds (President and CEO)

Hi, Will.

Will Milby (Equity Research)

Sir, if I missed this in the prepared remarks, did you give year-over-year tonnage by month in the quarter?

David R. Cobb (VP and CFO)

We did.

Will Milby (Equity Research)

Okay. I'll check a transcript on that then. And on the, I guess, the CapEx being slightly reduced this year, is the $95 million-$100 million on D&A still a good number to think about?

David R. Cobb (VP and CFO)

Yeah, Will, it's probably on the lower end of that. But yes, that range is still relevant.

Will Milby (Equity Research)

All right. And last question from me, another housekeeping. Can you give the percent of PT miles that were on truck this quarter? And same question for rail.

David Humphrey (VP of Investor Relations)

Yes. Well, I'll just give you on the rail percentage. It was 13.8%. That compares to 14.1% in the second quarter last year, Will. And then on PT, road PT, 2.7% in second quarter of this year. That compares to 3.2% in second quarter of last year.

Will Milby (Equity Research)

All right. Great. Thanks very much.

Judy R. McReynolds (President and CEO)

Thank you.

David Humphrey (VP of Investor Relations)

Hey, operator, would you please repeat the information for getting to the question queue?

Operator (participant)

Certainly. As a reminder, to register for a question, you may press the 14. All right, next question comes from the line of Jason Seidl with Cowen and Company. Please go ahead.

Jason Seidl (Managing Director)

Yeah, thank you. Good morning, everybody. Hey, Judy. Hi. A lot of your peers are sort of saying the same thing you guys are right now, that the pricing environment's good, and they're sort of saying that that's one of the reasons for the sluggish tonnage demand that we've been seeing sort of fairly up and down, maybe say for somebody like Old Dominion, the LTL industry. Where's this freight going if it's just based on pricing? Have you been able to figure that out? That's sort of the thing that's perplexing me right now.

Judy R. McReynolds (President and CEO)

Well, I don't. I mean, I think when you compare back to last year, I think what I've seen is kind of the overriding theme is that the environment is a little softer. And so I think some of it is just that it's not there. And again, remember that you're comparing back to 2014 that was very strong. And what we've seen happen, though, is there has been some modal shift a little bit where you've seen some of the business that was handled by LTL carriers going back to truckload carriers because they have the capacity and availability to do that, which that tells me that the demand is another, I guess, piece of evidence to point to that the demand hasn't been as strong in 2015 as it was in 2014. There are a lot of discussions that have occurred about planning.

In 2014, there were companies that got into capacity crunches that had difficult times finding capacity when they needed it. And so particularly early in the year, there were lots of discussions about better planning so that that didn't happen again. There also was some discussion about at the end of last year that there were perhaps it was a little stronger at the end of last year because of the port situation, trying to position to be able to not be affected by that port situation. And so I think all of those are factors in this, but it's very difficult to sort through. I do think the one thing that you can come away with is that the companies that we compete with have a better recognition that we provide a value as an industry and that we should be paid for it.

I mean, you can see that in their position, their posture, their numbers, which we welcome. I mean, we welcome that the attitude is there. And so I think that's the positive takeaway for me and for us and our positioning as we carry forward.

Jason Seidl (Managing Director)

If you go back to sort of the last time that, I guess, you guys started seeing a big spike from the truckload sector in demand, you guys really had an issue with ramping up on the hiring, and now you're starting to dig out of that with some improvements in your dock productivity. Going forward, if we see another capacity issue on the truckload side, what can you do differently so we don't sort of see a repeat of what happened last year?

Judy R. McReynolds (President and CEO)

Well, for one thing, I think we would better recognize how to handle it. I think something that happened to us, and I think it happened to others, is to some extent, people were caught off guard by the rapid increase in that spillover, if you will.

I think that you have a memory, and certainly our team would do a good job to draw back from that memory and remember what that felt like, how it affected things, and go into it with a posture that we only want to handle the business that's good for us in the right places and to hire people when it makes sense to hire people and to not use so much in terms of excess resources from rented equipment and cartage and all of that until we know more about the business and whether it's going to be impacting our company positively. I mean, all of those are lessons that you can learn, and certainly, it would be best not to repeat again.

David Humphrey (VP of Investor Relations)

Hey, Jason, I'm going to move on. We got a couple more I want to try to get in.

Jason Seidl (Managing Director)

Appreciate it.

Judy R. McReynolds (President and CEO)

Thanks, Jason.

Jason Seidl (Managing Director)

Appreciate you, man.

Operator (participant)

All right, next question. It comes from the line of Scott Group with Wolfe Research. Please go ahead.

Scott Group (Managing Director)

Hey, thanks. Good morning.

Judy R. McReynolds (President and CEO)

Thanks, Scott.

Scott Group (Managing Director)

One quick thing. I missed the June tonnage number. Can you just give that again?

David Humphrey (VP of Investor Relations)

Yeah, it's Scott. The June number, it was down 1.1%.

Scott Group (Managing Director)

Okay. And you're saying July pretty similar with that?

David Humphrey (VP of Investor Relations)

Mm-hmm.

Scott Group (Managing Director)

Okay. So it's kind of been.

David Humphrey (VP of Investor Relations)

Down 1.1%.

Scott Group (Managing Director)

Yeah. So kind of consistently across the board from the LTLs, we're hearing July is similar with June, if not a little bit better. What's your take on just the demand? Do you see signs of things starting to pick up a little bit again and reaccelerate, or, hey, just one month and don't read anything into that?

Judy R. McReynolds (President and CEO)

Well, I think that's kind of the latter. I kind of feel like what we've seen in July is not necessarily indicative of what we'll see for the entire quarter. July is not a particularly good month to read off of. It just isn't. You've got the holiday in there, and as far as Panther goes, you have the auto plants that have closures. So it's just a difficult month to get a good read off of. But we've reported the numbers. It's consistent with what our historical relationship is, and that's what we know today. From an economic perspective, we have mixed signals, I think. The industrial side's still a little bit weaker. We're hearing strength in housing, and the employment figures look pretty good. But it's really a mixed bag.

I tell our team that we have to navigate the uncertainties, and that's what we continue to have to do. It's not an environment that you can get a clear read on at this point.

Scott Group (Managing Director)

Okay. Judy, your comment about third quarter operating margins holding all else equal, maybe similar with second quarter, I'm assuming that does not assume a GRI in the third quarter. Is that right?

Judy R. McReynolds (President and CEO)

Yeah. Well, what I was commenting about was just the effect of moving the wage increase on our labor union side from April to July and just the impact that that has in the relationship of second to third. So no, I wasn't commenting about anything else.

Scott Group (Managing Director)

Okay. That makes sense. And just last thing. So you talked about getting back to, hopefully, a 92-93 operating ratio. I assume that's a full-year number. So we're going to be somewhere in the 95-96 range, let's assume, this year. What are the moving pieces to get you that other 300-400 basis points of margin? How much do you think that the inefficiencies of the street operations is causing you? And then is the rest of it just leveraged to tonnage growth, or is there something else specific that gets you there?

Judy R. McReynolds (President and CEO)

Well, I think one of the things, and David commented on this earlier, that we've needed is some improvement in service. And that's part of the plan here, is to make sure that we are where we need to be there. But what that gets you is a better ability to grow, talking about the LTL company. And so that's part of what gets you there. The other thing that I expect to be over a little bit longer period of time here is that the demand environment, I think, is going to improve. It's going to recover. And with that, based on everything I'm seeing, will be a healthy pricing environment. And the combination of having good service, greater efficiencies in our operation, the ability to grow, and to gain that at the right price, that's the formula to get you to that place.

And that's what we're driving toward.

Scott Group (Managing Director)

Okay. Guys. Thank you.

David Humphrey (VP of Investor Relations)

I just got to move along.

Judy R. McReynolds (President and CEO)

Thank you.

Scott Group (Managing Director)

All right. Thank you.

David Humphrey (VP of Investor Relations)

Thanks.

Operator (participant)

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

Todd Fowler (Managing Director)

Great. Thanks.

Judy R. McReynolds (President and CEO)

Hi, Todd.

Todd Fowler (Managing Director)

Good morning, everyone. Hi, Judy. Hey, David. Nice quarter, guys. Just, Judy, a little bit more on the growth side. I mean, so understanding that you've got difficult comps in the LTL business in the back half of the year, but how are you thinking about growth for that business longer term? I mean, I know that you've been historically focused on more specialized freight. Do you see any opportunity as you grow the asset-light businesses to feed growth into the LTL network, or does it come back to your answer in the last question that there's some service issues and some other things that you need to really help to drive growth on the LTL side?

Judy R. McReynolds (President and CEO)

No, that's an excellent point, Todd. Yeah, if we're successful with the growth of our asset-light services and utilizing our Enterprise Solutions Group, we will be feeding additional freight into the LTL network. And we expect to be successful. We have a lot of opportunity. Customers are responding well to what we're offering them, and we're able to bring about combinations of things that, in this capacity-constrained world that we live in now, are valuable to customers. And so we're excited about that, and we think that what we're offering is a win for the growth of the segments of ABF Freight, ABF Logistics, and Panther. FleetNet has its own exciting growth story, but the other three will be brought about by doing the things that we've already talked about, utilizing our Enterprise Solutions, and then just providing excellent service in our services that we provide, so.

Todd Fowler (Managing Director)

So where would you say that you're at in the process of seeing the benefits from the Enterprise services? I mean, are you in the just very initial innings of that, and that's something that we're going to see more in the next couple of years, or are you starting to see some of that play out at this point?

Judy R. McReynolds (President and CEO)

We're seeing some of it play out, but I mean, we're in inning maybe two on that. I mean, it's just really early stage, so.

Todd Fowler (Managing Director)

Okay. And then just the last one I had. Is the expectation that there's going to still be elevated costs for the investment in the Enterprise systems into 2016, or is that just in the second half of 2015?

Judy R. McReynolds (President and CEO)

Well, our visibility on it at this point is just for the second half of 2015, but we'll provide more color on that as we go through the year. Like we said, we like what we're seeing so far. The investment is front-ended. I mean, it is something that you have to do. We've got about 40 people working in that area, and we've had to put them in place in order to accomplish that. And so we're going to see how that goes. If we like what we see, we'll continue down that path. But we also reserve the right to change course if, for some reason, we need to do it a little differently. The other thing is we're looking for an acquisition that would be in that arena, and that could help as well, so.

Todd Fowler (Managing Director)

Got it. Okay. Thanks for the time this morning.

David Humphrey (VP of Investor Relations)

Okay. Thanks a lot.

Judy R. McReynolds (President and CEO)

Thank you.

David Humphrey (VP of Investor Relations)

We've got one last question, I think, and we'll take that one, and then we'll conclude.

Operator (participant)

Thank you. Our last question for today comes from the line of Brad Delco with Stephens. Please go ahead.

Brad Delco (Managing Director and Research Analyst)

Hey, thanks for squeezing me in, David. Just wanted one quick question. Judy, can you tell us what the breakout is between your, call it, retail versus industrial customer base in your LTL business and how you think that compares to some of your peers?

Judy R. McReynolds (President and CEO)

Well, we're affected by both of those areas pretty strongly. We have an internal index that we use that correlates well with our tonnage, and where we have actually the highest correlation is in that retail area. But at the same time as I say that, we know that with about a four-month lag or so when the PMI index moves up or down, we're affected by that as well. So we really have a strong presence of both in our tonnage and our customer base.

Brad Delco (Managing Director and Research Analyst)

Okay. But you just don't dissect it, saying 50% retail, 50% industrial, no kind of breakout like that?

Judy R. McReynolds (President and CEO)

Well, we really don't because it's very difficult to do that because, for instance, if you have something that's manufactured moving into a retail location, what is that? So again, we don't have a specific enough breakdown for our own reasons, for business reasons, so we really don't have one in this case as well, so.

Brad Delco (Managing Director and Research Analyst)

Okay. Well, great. Thanks for taking my follow-up.

Judy R. McReynolds (President and CEO)

Yeah, no problem.

Brad Delco (Managing Director and Research Analyst)

Thanks a lot.

David Humphrey (VP of Investor Relations)

Well, I think this concludes our call. We thank you for joining us this morning. We appreciate your interest in ArcBest Corporation, but this concludes our call. Thank you very much.

Operator (participant)

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

David Humphrey (VP of Investor Relations)

Thank you.