ArcBest - Q2 2017

Transcript

Operator (participant)

Welcome to the ArcBest Second Quarter 2017 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 Friday, July 28, 2017. I would now like to turn the conference over to David Humphrey, Vice President of Investor Relations. Please go ahead, sir.

David Humphrey (VP of Investor Relations)

Welcome to the ArcBest Second Quarter 2017 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, Chairman, President, and Chief Executive Officer of ArcBest, Mr. David R. Cobb, Vice President, Chief Financial Officer of ArcBest. We thank you for joining us today. In order 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 earnings press release and the company's most recent SEC public filings. In order to provide meaningful comparisons, certain information discussed in this conference call includes non-GAAP financial measures as outlined and described in the tables in our earnings press release. We will now begin with Ms. McReynolds.

Judy McReynolds (Chairman, President, and CEO)

Thank you, David, and good morning, everyone. We were pleased to report improved second quarter results. Economic strength, shipment growth, and improved pricing for less than truckload services underpinned the quarter, leading to both revenue and profitability growth. Demand for expedited services was also notably strong. As a logistics company, our strategy to capture more of the total transportation and logistics market through full supply chain solutions and a more simplified customer experience is indeed bearing fruit. By offering both asset-based and asset-light solutions, we either have or can secure the right kind of capacity, depending on what our customers require at any given time. This matters to our customers and puts us in a position to win business that we previously could not access, and to do so profitably. While this strategy has been in place for some time, I feel confident that the investments we've made in technology, in people, and in solidifying strong relationships with our customers and providers are paying off. At the same time, we continue to monitor costs across the organization and reduce those whenever appropriate.

As far as the overall economy, we expected to see some improvement in the operating environment in the spring and summer, and that certainly has occurred. Activity in the manufacturing sector improved, and in our industry, from our perspective, the truckload market tightened as the quarter progressed. After much analysis of our changing freight profile, on June 30, we announced that we will apply space-based pricing for less-than-truckload shipments with cubic minimum charges. This is designed to ensure that we're appropriately compensated for cube-dominant shipments that have proliferated across our network. Many of you have asked us if this is directly related to a growing e-commerce phenomenon, as we noted that we have seen a large increase in residential deliveries this year. That is one factor we considered, but another significant trend is the overall growth and ongoing profile shift of bulkier shipments across the entire supply chain. In addition, many shipping and logistics solutions now include unique requirements. So the need for this logical, complementary pricing to the standard weight-based classification system is, in fact, quite broad.

As we noted in our press release, we currently capture dimensional data on more than 90% of the freight shipped in our asset-based network. By August 1, the effective date for this pricing initiative, static dimensioners will be installed at the majority of our asset-based distribution centers in order to obtain dimensions on the remaining shipments and to validate the dimensional data we currently have. We believe this dimensional pricing initiative will more adequately compensate ArcBest for the value we offer our customers when handling these kinds of shipments. The effects of our January 1 reorganization also gained momentum. The cost savings associated with our enhanced market approach are in line with our original expectations. Our financial flexibility, one of the pillars we outlined to you in our Investor Day that makes us well-positioned for growth, also remains solid. Earlier this month, we completed the amendment and extension of our credit agreement for another five years with our current lender group.

The new agreement increases the amount of revolving credit facility to $200 million from $150 million, and raises the revolver accordion to $100 million from $75 million. This is in addition to this year's amendment and extension of our receivable securitization through April 2020. We value the solid relationships we have with our lender group and appreciate their confidence in the ArcBest management team and in our ability to execute on behalf of shareholders. And now I'll discuss more details about our service offerings. Second quarter revenue for ArcBest asset-based LTL services improved versus last year, related to increases in shipment count, better yields, and higher average revenue per shipment. The increase in revenue per hundredweight resulted from an emphasis on pricing initiatives during the quarter, designed to improve account profitability across our asset-based network.

This pricing metric benefited from a year-over-year increase in fuel surcharge and shipment profile changes, including reductions in average weight per shipment. The recent pricing environment improved some from previous quarters. We have experienced good retention of our May 22 LTL General Rate Increase, and we continue to have success in securing out-of-cycle price increases on accounts not meeting our profitability thresholds. We are having success in adding new business at pricing levels that are satisfactory to us, and we have set higher margin thresholds for operationally inefficient shipments. During the second quarter, we continued to experience asset-based shipment growth that exceeded the rate of increase in freight tonnage. The significant growth in e-commerce and non U-Pack residential delivery shipments that began late last year continued in the most recent quarter. This contributed to the year-over-year reduction in total weight per shipment that we experienced.

The handling of these smaller shipments continues to impact dock and street delivery expense, and additional cartage costs were incurred in order to meet our service commitments. As we work to improve shipment handling productivity in our asset-based network, we're also making progress on IT investments that will improve network efficiencies and reduce handling costs. These include replacement of handheld and tablet technology utilized by our touch labor employees, as well as upgrades to our dock, street, and line haul optimization systems. During the quarter, expenses related to our asset-based line haul operation continued to trend lower, as this area benefited from reductions in total line miles and empty miles, and improvements in trailer load factor. Reversing a trend we've seen in recent quarters, non-union asset-based healthcare costs decreased during the second quarter versus the same period last year by over 10%. As I've discussed in the past, we have a strong corporate commitment to health programs, emphasizing education, healthy lifestyles, prevention, periodic screenings, and regular physician visits.

It is good to see the benefits of those initiatives begin to reveal themselves. During the second quarter, ArcBest's asset-light business experienced revenue growth and significant improvement in operating income. This was primarily related to strong demand for expedite services and incremental business associated with our dedicated truckload services that ArcBest acquired last September. Net revenue margins in this business were down slightly compared to last year's second quarter, lower by only 40 basis points. We were pleased with the minimal decline in this profitability measure relative to what many of our peer companies have reported. On a sequential basis, compared to first quarter, asset-light net revenue margins improved 50 basis points. The growth in our expedite business was a result of an increase in shipments, combined with greater average shipment revenue. Customer demand for expedite service was particularly high in the automotive and manufacturing market verticals. Our dedicated business benefited from an improved operating environment and positive customer outlooks.

Our dedicated truckload offering is an important element of the asset-light services we offer our customers. Slightly lower revenue for ArcBest truckload services was driven by reduced shipment counts, offset by a double-digit increase in truckload revenue per shipment, related to increases in revenue per mile and length of haul. Improved truckload market conditions are positively contributing to increases in shipment revenue, and we continue to capitalize on opportunities for offering more of these services to our account base. Though not at the level of last year's second quarter, when we experienced positive market conditions, the net revenue margin percent on ArcBest international business increased sequentially for the third quarter in a row on flat revenue. Versus last year, FleetNet's reduced second quarter revenue was driven by fewer total events associated with less roadside activity and changes in customer mix. Despite the decline in revenue, second quarter operating income improved as a result of higher net revenue per event and improved labor efficiencies. Now I'll turn it over to David Cobb for a discussion of the earnings results.

David Cobb (CFO)

Thank you, Judy, and good morning, everyone. Let me begin with some consolidated statistics on ArcBest. Second quarter 2017 consolidated revenues were $720 million, compared to $676 million in last year's second quarter, an increase of 6.5%. On a GAAP basis, we had second quarter 2017 net income of $0.60 per diluted share, compared to net income of $0.39 per diluted share last year. As detailed in the non-GAAP reconciliation table in this morning's earnings release, adjusted second quarter 2017 net income was $0.57 per share, compared to $0.38 in the same period of 2016. The adjustments taken in second quarter 2017 included $300 thousand pre-tax, or $0.01 per share after tax, related to our enhanced market approach that was implemented beginning in January. During the second half of 2017, we currently expect to incur approximately $1 million of additional restructuring costs related to our corporate reorganization. Our non-GAAP net income also included an adjustment of $1.2 million, or $0.04 per share, related to a tax benefit we received for the vesting of share-based compensation.

We are now required to recognize the tax changes on these restricted stock awards when they vest or when they are settled. For us, that typically occurs in the second quarter. ArcBest's second quarter effective tax rate was 34.6%, which included the tax benefit associated with the share-based compensation. This morning's earnings release shows a tax rate reconciliation that results in second quarter and year-to-date non-GAAP tax rates of 40%-41%, which is in the full year range we expect in 2017 under the current tax laws. Judy previously mentioned the reduction in asset-based non-union healthcare costs. On a corporate-wide basis, second quarter healthcare costs were below the same period last year by approximately $1.4 million, as claim frequency was lower, despite a slight increase in average cost per claim. As a part of our stock repurchase program, in the second quarter, we bought 195,000 shares for a total amount of $3.6 million. Under our existing repurchase program, we have approximately $34 million of purchase availability. Earlier in the year, we provided an estimated range for our 2017 net capital expenditures of $145 million-$170 million.

Based on what we spent through the first half of the year and our expectations for the remainder of the year, we are narrowing that range to $150 million-$165 million. So far this year, our net capital expenditures total $63 million, which includes $24 million of net cash expenditures and $39 million of financed equipment. We have been on an accelerated schedule of taking delivery of the new asset-based tractors we are purchasing this year. We expect to complete the delivery of those new tractors shortly and look forward to the positive contributions they will make in reducing average fleet age, improving fuel economy, economy, and lowering equipment maintenance costs. We ended the second quarter with unrestricted cash and short-term investments of $157 million. Combined with available resources under our recently amended credit revolver, our amended receivable securitization agreement, and their associated accordion features, our total liquidity currently equals $473 million.

Our total debt at the end of the second quarter of $257 million includes the $70 million balance on our credit revolver, the $45 million borrowed on our receivable securitization, and $142 million of notes payable and capital leases, primarily on equipment for our asset-based operation. The composite interest rate on all of our debt was 2.5%, and full details of our GAAP cash flow are included in our earnings press release. ArcBest reported asset-based second quarter revenue of $515 million, a per day increase of 6.7% compared to last year. We had 63.5 working days in second quarter 2017 compared to 64 working days in last year's second quarter. Asset-based quarterly tonnage per day was flat compared to last year's second quarter. For second quarter 2017 by month, asset-based daily tonnage versus the same period last year increased in April by 0.7%, increased 0.5% in May, and decreased by 1% in June. June LTL tonnage was positive, and the decline in total tonnage was associated with deliberate reductions we made to the asset-based truckload rated spot shipments that we handled.

Second quarter total shipments per day increased at a slower pace than in recent quarters. They were up by 4.4% compared to second quarter 2016. Total asset-based weight per shipment was 1,226 pounds, a 4.1% decrease from last year's second quarter, and up 1.5% sequentially compared to first quarter of 2017. Average length of haul on asset-based shipments increased 2% to 1,038 miles compared to 1,018 miles in the second quarter of last year. On a sequential basis versus first quarter, length of haul was up a little less than 1%. Second quarter total billed revenue per hundredweight on asset-based shipments was $30.84, an increase of 6.1% compared to the second quarter of last year. Year-over-year comparisons of this yield figure were positively impacted by higher fuel surcharges and changes in shipment profile and business mix. Excluding fuel surcharge, second quarter billed revenue per hundredweight on asset-based LTL freight had a percentage increase in the mid-single digits. We secured an average 3.5% increase on asset-based customer contract renewals during the quarter.

That average increase was 60 basis points higher than last year's second quarter and lower on a sequential basis. In total, our asset-light businesses had revenue of $212 million, an 8.3% increase over last year's second quarter. On an adjusted basis, second quarter operating income for these services totaled $6.7 million, and adjusted EBITDA totaled $10.2 million compared to an adjusted operating income of $2.8 million and adjusted EBITDA of $6.5 million in the prior year quarter. As we normally do, we are reporting July statistics for our total asset-based business. Those metrics are dampened somewhat by intentional reductions we have made in our asset-based truckload-rated business. During the summer, our asset-based moving business seasonally increases. We purposefully manage these truckload-rated consumer moving shipments to maintain the appropriate level of ABF Freight equipment capacity required to adequately serve our traditional LTL customers. Also, the recent success we've had in improving line haul efficiency and lowering our line haul empty costs has reduced our need for asset-based truckload-rated spot business.

Our strategic reduction of both of these types of truckload-rated shipments is impacting the July statistics on our total business trends. Just want to clarify that the trends in our July LTL business are positive and reflect stronger growth than indicated by the following statistics for our total asset-based business. Based on month-to-date data results versus last year, we currently expect full month July business levels to be as follows, total daily billed revenues to increase approximately 3%. The percentage increase in LTL daily billed revenue is expected to be in the high single digits, while asset-based truckload rated revenue is expected to be down significantly by double digits. Total tonnage per day to decrease approximately 3%, with a percentage of LTL tonnage increasing in the low single digits. On a sequential basis versus June, July LTL tonnage trends are above the historical average. Shipment counts to increase approximately 4%. The recent trend we've seen for several quarters of our average weight per shipment declining on a year-over-year basis continues, but at a more moderate level on an LTL basis.

July LTL weight per shipment is expected to be down in the low single digits. July's average weight per shipment on all asset-based business declined further because of the impact of the changes in asset-based truckload-rated shipments. Total revenue per hundredweight to increase approximately 6%. This asset-based yield metric is being positively affected by slightly higher fuel surcharges and changes in freight profile and account mix. Since the implementation of the current labor contract, which provides for the union employees' wage rates to increase on July 1, and health, welfare, and pension on August 1, our sequential change in ABF Freight's operating ratio in the third quarter versus the second quarter has been roughly flat, ranging from a 10 basis point decrease in 2014 to an increase of 40 basis points in 2015. Based on month-to-date results, we currently expect July 2017 revenue for our asset-light businesses to increase by approximately 13% versus last year.

Growth in the logistics portion of the asset-light business is being driven by increased demand for expedite services and dedicated truckload revenue in this year due to the LDS acquisition in September 2016. In July, FleetNet is experiencing slight year-over-year revenue declines as they move past comparisons against the impact of changes in customer mix during last year's second quarter. Consistent with the first two quarters of this year, the quarterly loss reported in other and eliminations line for the remainder of 2017 is expected to approximate $4 million. This includes the technology and innovations investments we have previously discussed. As mentioned last quarter, our 2017 interest expense, net of interest income, is expected to total approximately $4.5 million for the year.

This net interest expense estimate does not include changes in cash surrender value, which are reported in the other line, other net line of our income statement, which we had income of $400,000 in the recent quarter. We consider changes in cash surrender value to be non-operating items, and therefore excluded from our non-GAAP presentation. Now I'll turn it over to Judy for some closing comments.

Judy McReynolds (Chairman, President, and CEO)

Thank you, David. As we look to the second half of the year, we are encouraged that the operating environment should remain favorable based on various indicators we track. We continue to have a number of initiatives that we're working on to ensure an excellent customer experience, cost control, and adaptability to the evolving market. Our sales team has been unified under the ArcBest organization, and after six months of this optimized structure, we're receiving positive feedback from customers about the trusted advisor relationships we provide to help solve their complex supply chain issues. By unifying all of our asset-light solutions under one umbrella, we have also made it easier for customers and our people to understand the full scope of logistics solutions available at ArcBest. There were also a number of highlights in the quarter worth mentioning.

In April, we announced that we moved up three spots to number 18 on Transport Topics' Top Brokerage Firms of 2017. Also in April, 4 of our ABF service centers earned the President's Quality Award for their achievements in 2016, Grand Island, Nebraska, Long Beach, California, Waco, Texas, and Little Rock, Arkansas. We congratulate the people at each of these locations for their hard work and dedication to excellent customer service, embodying the skill and the will every day. In June, we announced that we'd moved up 26 spots on the Fortune 1000, the annual ranking by Fortune Magazine of the 1,000 largest U.S. companies. David, I think we're ready to take some questions now.

David Humphrey (VP of Investor Relations)

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

Operator (participant)

Thank you. Ladies and gentlemen, if you would like to register your question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you're using a speakerphone, please leave your handset before entering your request. One moment, please, for our first question. The first question comes from the line of Amit Mehrotra with Deutsche Bank. Please proceed.

Amit Mehrotra (US Transportation and Shipping Lead Analsyt)

Hi, everyone. Thanks so much for taking my questions. Happy Friday.

David Humphrey (VP of Investor Relations)

Hi, Amit.

Amit Mehrotra (US Transportation and Shipping Lead Analsyt)

I guess very happy Friday. I wanna ask about pricing, but I'd like to start with tonnage and shipment trends, if that's okay. The shipment growth was great. I just would have thought maybe with the acceleration we saw in industrial production, we would have seen some follow-through on tonnage. If you could just talk about that, maybe the mix between e-commerce and the traditional industrial freight and maybe what we could expect. And then in terms of the relationship between the two, if you can just also help us on how that shifting mix of lower weight per shipment can impact the companies or your ability to sort of absorb the fixed costs in the business. Thank you.

Judy McReynolds (Chairman, President, and CEO)

Thanks. Well, if you look at our business, you know, on a shipment growth basis, you know, we've seen some, I think, I think some pretty good trends. As you mentioned, contributing to that is growth in some e-commerce shipments. Also, this residential delivery issue that we identified in the first quarter actually started maybe last November or December, you know, is continuing to impact our results. We had an over 40% increase in residential deliveries, not related to our moving business, in the second quarter as well. And, you know, so with our mix of customers right now, we're continuing to see, you know, our growth in smaller shipments. And again, we don't necessarily think that that is bad.

We just need to be sure that we're working through that with our customers and identifying situations where we need to improve the value that we're receiving. And so we've been taking some actions, you know, including our action that we're gonna be putting in place that we're referring to as Cubic Minimum Charges, the CMC, on August first, to address that. You know, if you, I mean, we've observed, you know, the tonnage trends that we've seen from some of the competitors. Certainly ours is, you know, less of an increase than that. But we really feel good about the pipeline for new accounts. Our business activity is good. The conversations that we're having with customers is good. I think it just speaks to the different mix of business that we have right now. You know, that is certainly being addressed, you know, from a value and pricing standpoint to the extent that it needs to be.

Amit Mehrotra (US Transportation and Shipping Lead Analsyt)

Okay, that's really helpful. And just one follow-up on the pricing front. A couple things. One is that I'm just trying to understand the yield obviously is very strong, and you talked about the pricing impact on that. But my understanding is when the weight per shipment comes down, the yield can kind of optically look higher. So I'm just trying to decipher in the quarter kind of the same-store pricing, if you will, and what that mix impact was. And then as you guys institute this new pricing strategy, you know, which sounds really good and makes a lot of sense, can you just talk to us about, you know, how much of that new strategy will be applied, you know, across the entire freight that you guys handle? Just get a sense of what the effective impact of that would be, you know, based on customers' different pricing options that the customers have. Thank you.

Judy McReynolds (Chairman, President, and CEO)

Yes, I mean, we feel good about the, what I would characterize as the pure pricing increase that we received on the LTL shipments. I think, David, it's mid-single digits is what we would characterize that as. And so, you can also look to our deferred pricing increases, which I think about 3.5% which is a year-over-year comparison, and that's an indication on our most price-sensitive accounts. So, just outside some of the actions that we've taken, you know, we feel good about where we're landing there. You know, when you look toward August first and this space-based pricing that we're putting into place, you know, we're in the process of having conversations with the customers that are affected by that.

You know, our sales teams are very well educated on the topic, going out and having good conversations. You know, some customers have a greater portion of their shipments that are affected by this change. Others have less of an effect. And so it's, you know, something that we're going to be monitoring, and we're gonna be watching it unfold. Suffice it to say that we're taking this initiative because we do believe that it will improve our revenue and our profitability. But we're gonna, you know, we're gonna see how this unfolds in August and as we go through the rest of the year. And we're very encouraged by the conversations that we're having with customers so far.

Amit Mehrotra (US Transportation and Shipping Lead Analsyt)

Great. That's all I had. Have a great weekend, everybody. Thank you so much.

Judy McReynolds (Chairman, President, and CEO)

Thank you.

David Humphrey (VP of Investor Relations)

Thanks, Rob. I'm mute, excuse me.

Operator (participant)

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

Diane Huang (Software Development Manager)

Hi, this is Diane on for Ravi Shanker. Thanks for taking my question.

David Humphrey (VP of Investor Relations)

Hey, Diane.

Diane Huang (Software Development Manager)

Hi. So it looks like your revenue growth decelerated from your May to date update, and it sounds like that's mostly a result from your choice to reduce the TL business. So I was just wondering, when did you make this decision? Was it sometime in June?

Judy McReynolds (Chairman, President, and CEO)

Well, it did. You know, it was, I think, during the month of June that we accelerated, you know, our efforts to reduce those shipments. And so you do see some effect of that in June, particularly towards the end of June.

Diane Huang (Software Development Manager)

Okay, got it. So this will continue to impact your asset-based results for the rest of the year?

Judy McReynolds (Chairman, President, and CEO)

Well, no, not necessarily. What we're reporting on at this point is just what we're seeing in July. And again, one element of this relates to our U-Pack moving shipments, and that's a seasonal business that really is concentrated, you know, in the summer months. And so, you know, it's also the case that, based on how we approach that, you know, we can encourage additional shipments, or we can purposely manage those down. And so it's definitely not a permanent decision, definitely not.

Diane Huang (Software Development Manager)

Okay. Okay, great. Thanks for the clarification. Our second question is, what has the recent customer feedback been on your dim weight pricing initiative?

Judy McReynolds (Chairman, President, and CEO)

It's actually gone well. We've had our sales teams out having conversations with customers. You know, they are working through these items with them, directly with them. And some of the customers have actually expressed appreciation for the simplicity of the CMC rate table and the fact that it will help ensure accurate quotes in order to avoid kind of our weighing and research folks coming in after the fact and adjusting the pricing based on what actually that shipment the profile was. So anyway, we're working through this. Another area that is coming up is customers that use TMS systems wanting to make sure that you know these changes are adequately reflected in those systems. And to the extent that there's difficulty there. We're able to work through what you call an API, interface, an application programming interface is what API stands for, and that really can be utilized in helping with this transition while they're getting their TMS system updated. So, you know, that's something that's come up in some of the articles that I've seen written, and, you know, we just have more than one way to address that in the meantime, so.

Diane Huang (Software Development Manager)

Okay, great. Thank you. That's all from us.

Judy McReynolds (Chairman, President, and CEO)

Thank you.

David Humphrey (VP of Investor Relations)

Thanks, Diane.

Operator (participant)

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

Chris Wetherbee (Senior Research Analyst of Transportation and Shipping)

Hey, thanks. Good morning, guys.

Judy McReynolds (Chairman, President, and CEO)

Good morning, Chris.

Chris Wetherbee (Senior Research Analyst of Transportation and Shipping)

Hey, I wanted to ask a little bit more about the pricing initiative. I guess it starts on August first, and you know, maybe if we could you know, put some numbers around what you think the impact might be to the overall asset-based business, and then you know, also thinking about it in the context of the sequential OR improvement. David, I think you mentioned sort of typically about flattish from 2Q to 3Q, you're gonna have maybe a couple of months of this dynamic change in that third quarter. Just kind of curious how that might have an impact, that historical standard?

Judy McReynolds (Chairman, President, and CEO)

Well, you know, as we've said a couple different times, when we announced it, and then I think I've mentioned it already, we wouldn't be taking this action if we didn't think it was gonna positively affect our revenue and our profitability. But we're actually not taking that a step further and giving any kind of guidance surrounding it because it's a situation where you're going through individual conversations with customers about how this impacts them. And although we've we feel very strongly about this initiative and that it should be deployed within these accounts, we want to allow the implementation of it, and we'd like to see the results come in.

And then I think it will be more obvious how that actually affects our numbers. You know, the OR that you mentioned between second and third quarter, you know, as David mentioned, is typically flattish or in the last two years anyway, and those two years are really the best comparison because we had a union contract change to apply our wage increase on July first rather than April. So, you know, that's just historical information that we provide to you. But, David, I don't know if you wanna mention.

Chris Wetherbee (Senior Research Analyst of Transportation and Shipping)

Yeah, sure.

Judy McReynolds (Chairman, President, and CEO)

A few of the other items that perhaps people should be keeping in mind relative to that.

David Cobb (CFO)

Right. I think this is a good opportunity to kind of highlight some of those things. And one of those is the fewer working days in that we will have in the third quarter. We will have 62.5 working days in the third quarter of this year versus the 63.5 that we had in this year's second quarter. So that's, you know, an impact there as you have less revenue for the quarter as a whole to cover normal costs. Also, Judy mentioned the wage increase that's effective July 1. This year, this is the last year of our five-year contract, and the rate increase this year on wages is 2.5% versus in previous years, that was 2%.

You know, there's other things that could impact. I think, Chris, you mentioned the CMC, and you know, we're expecting that to be a positive impact to our business overall. Other yield initiatives that we're doing, that are reflective in our second quarter results, for instance, you know, could be a positive impact as well. So I think there's, you know, the several gives and takes to that sequential comparison to weigh in all this. The timing of the GRI is, I guess, the last one that I would offer. You know, just in this year, we had a GRI. Along with the other yield initiatives that we did, we had a GRI in May, the 22nd effective date, and so the timing can somewhat impact that as well.

Chris Wetherbee (Senior Research Analyst of Transportation and Shipping)

Okay. That's helpful to lay out all those dynamics. Thank you. The other sort of follow-up I'd have, which is, you know, going back to some of the restructuring efforts you took towards the end of last year, you know, taking implementation beginning of this year, just get a sense of maybe sort of the progress on the second quarter, you know, how much of that sort of benefit you're, is beginning to be realized. I think you mentioned $15 million, you know, previously. Just wanna get it for the full year, trying to get a sense of maybe how that kind of played out in the second quarter and how to think about that in the back half?

Judy McReynolds (Chairman, President, and CEO)

Well, there was about $10 million or so of that that really related to, I think, kind of the wage and benefit side of things, and, perhaps the other five related to, write-offs of different systems and that sort of thing. And so when I step back and think about that and look at the second quarter, I think it's, the second quarter contained its representative part of that annual savings, is what I'd say. We're actually pleased with how that's gone, and it certainly contributed to the results that you see for both the asset-light business and the asset-based business.

Chris Wetherbee (Senior Research Analyst of Transportation and Shipping)

Okay, so proportional is the way to think about that, probably for the rest of the year, too, I guess?

Judy McReynolds (Chairman, President, and CEO)

Yeah. Yeah.

David Cobb (CFO)

Yeah. I think the other thing to remember, keep in mind, is that we put some of those cost savings in place at the beginning of November. And so those were. In other words, it's not. You have to consider that when you get back to the fourth quarter in terms of your modeling.

Chris Wetherbee (Senior Research Analyst of Transportation and Shipping)

Perfect. Thanks for the time this morning. Appreciate it.

Judy McReynolds (Chairman, President, and CEO)

Thank you.

David Cobb (CFO)

Thanks, Chris.

Operator (participant)

Our next question comes from the line of Brad Delco with Stephens Inc. Please proceed.

Brad Delco (Transportation Research Analyst)

Hey, Judy. Good morning, David.

Judy McReynolds (Chairman, President, and CEO)

Good morning, Brad.

David Cobb (CFO)

Hey, Brad.

Brad Delco (Transportation Research Analyst)

David, you talked about the July tonnage, and I know there was for the total asset base and then for LTL specifically, and you made a comment about seeing sequential trends from June to July. Can you just talk about that in more detail? I think there's a little concern in the market that things have slowed down in July, despite some decent economic data points. I just wanna make sure that it's clear what really you're seeing in the business today.

David Cobb (CFO)

Yeah, no, I think that's right. I understand what you're referring to. And for us, I mean, July on our LTL rated business, sequentially from June, was actually you know, on the better end of the historical averages. And so, you know, and that that's moderate. So, you know, I don't know if there's-

Brad Delco (Transportation Research Analyst)

But you can't give a number or put it into context. Sequentially, it's usually up or down a percent, and it was actually, X or Y.

David Humphrey (VP of Investor Relations)

Brad, this is David. I'll tell you what we do is, the guy that looks at it for us, he looks, goes back in history several years and just looking at kinda where it ranks in that area, it's above average. So, you know, we've had more historical months that had less of an increase than what we're seeing. So that's what the basis of that comment.

Brad Delco (Transportation Research Analyst)

Okay. And then maybe, Judy, you know, good improvement on the asset-light side here. Just curious what you think, is this sort of momentum that's building and we should expect? I know you guys don't provide guidance, but sequential improvements in, I guess, FleetNet, it sounds like, you know, things are getting better, but also on, on our, the ArcBest side as well, in the back half of the year. And is it, is it mostly related to tightening truckload capacity, or what other factors should we attribute to, things picking up or maybe slowing down?

Judy McReynolds (Chairman, President, and CEO)

Well, one thing, and this is just specific to the second quarter that I'll mention, is our visibility on what's happening in the markets is pretty good because we have the asset-based, you know, what's going on there. We have kind of the volume truckload business that we see the market trends on, and then we have the expedite business that we can see what the activity there, and then just the truckload brokerage business as well. And then now we're adding the dedicated, you know, markets to that. And so what that does for us, from a, let's just call it a yield management basis, is it really is informative and enables us, you know, to consider how best to approach the market. You know, we had conversations about the tightening of the capacity toward the end of June, and we reacted to that earlier in the month of June, and I think that allowed us to have less of a margin compression than some of the asset-light competitors that we have out there.

And again, it's. I think it stems from the different services that we offer and our insight into what's happening, you know, with those markets and the availability and capacity. And so. And that's something I think that perhaps is unique to our company. You know, so we're gonna be keeping that in mind. You know, the only other thing I'd say is, you know, we need to make more progress on our truckload growth, because within our customer base, there is a vast opportunity there, and we need to take advantage of that. So what I'm hopeful of is that as we go through the rest of the year, you know, the market's clearly tightened at the end of June, maybe it's a little less tight in the month of July, but if it continues down that path and we start to see, you know, the contractual business that you know is renewing renew at a higher price level, you know, that's gonna help.

That's gonna continue to help, these, these, services that we're offering, be, you know, of, the appropriate value, let's just say, for the services that we're offering. The only other thing I'd say, though, is that as we went through the kinda second half of last year, we did have some healthy expedite business trends, and we're gonna be comparing back against those. Now, I hope, that, that we're gonna continue to do well, against that, and certainly, our team is engaged and, and ready to, to, make that happen. But I just point that out as a, as a comparison.

David Humphrey (VP of Investor Relations)

Thanks a lot, Brad.

Brad Delco (Transportation Research Analyst)

Thank you, guys.

Judy McReynolds (Chairman, President, and CEO)

Thanks.

Brad Delco (Transportation Research Analyst)

Appreciate it.

Operator (participant)

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

Todd Fowler (Equity Research Analyst of Transportation and Logistics Companies)

Great. Thanks. Good morning.

Judy McReynolds (Chairman, President, and CEO)

Hi, Todd.

David Cobb (CFO)

Hi, Todd.

Todd Fowler (Equity Research Analyst of Transportation and Logistics Companies)

Good morning, guys. Judy, can you go back over the decision around the truck- to handle less truckload-rated spot business? It sounds like I think I understand the impact on the tonnage trends late in the quarter and then into July. But just strategically, I mean, seasonally, you'd have the moving business pick up. What are the other impacts in the model, and how does that help maybe the margin profile? Or what does that do for the business? If you can just walk through that, that could be helpful.

Judy McReynolds (Chairman, President, and CEO)

Sure. You know, we have the ability to encourage spot truckload business, and we've talked about that on a number of these calls, and with you know, you and other investors in the past. What is a part of that is our U-Pack moving business, and I think David outlined that that's a seasonal business, and really, the opportunity is greatest during the summer months. And so, for the 20 years that we've had that business, that plus the truckload business that we have, we've always thought through and managed, particularly in the summer months, because you have to ensure that you have capacity for your regular good LTL customers. You want to be sure that it doesn't disrupt the service that you're providing them. So as we're seeing some of the LTL trends continue to improve, you know, we've seen that improvement as we've kind of marched through this year, we want to be sure that we have the capacity, you know, to serve those customers.

So we're making decisions to reduce the spot volume business that we have. And again, we commented that that includes our moving business. But as we start to see available capacity in that that can service those shipments, we can go right back to encouraging those actually very quickly. And we're just balancing what works best for us from a service and I think revenue growth and profitability, perhaps more profitability than revenue growth in that case. Does that make sense?

Todd Fowler (Equity Research Analyst of Transportation and Logistics Companies)

It does. And so at a high level, basically, you're saying that the LTL market is firming up, and you just wanna make sure that you've got line haul capacity in your network to handle, you know, the additional LTL business that you're seeing?

Judy McReynolds (Chairman, President, and CEO)

Well, it's in addition to line haul capacity. It's also the city pickup and delivery capacity. Because as we've mentioned, we've had an increase in non U-Pack residential shipment. We also have to consider that as well. And so you wanna be sure that you're, you know, you're able to deliver on the promises that you're making to customers, and it just, that's a factor in addition to the ones that you mentioned.

Todd Fowler (Equity Research Analyst of Transportation and Logistics Companies)

Okay.

David Cobb (CFO)

Todd, one other thing to add to that is that we have had great success in our line haul team reducing schedules. And when you do that, that takes some of that need for backhaul where you have to buy that in the spot market. And as we, this interplays into our logistics asset-light, you know, the tightening margin compression that we talked about over there on that side, that's where you would buy this, and that would be more expensive. And so, you know, we were pleased to see the reductions there.

Judy McReynolds (Chairman, President, and CEO)

Yeah, I think we had about a 7% or 8% reduction in empty miles. So that, again, that's a good thing.

Todd Fowler (Equity Research Analyst of Transportation and Logistics Companies)

Okay. Yeah, this all helps. That kind of ties all of it together. David, if you let me ask just one more quickly. Judy, when you think about the sales realignment and kind of where you're at in the process, what are some of the main metrics that we can see externally from the initiatives that you've done, and maybe to kind of benchmark the progress that you're having from the realigned sales force and kind of the opportunities from cross-selling across the businesses?

Judy McReynolds (Chairman, President, and CEO)

Well, what we've tried, David, David and I have tried to work through this in a way that we, you know, we're developing information that's helpful to you for you to see it. First of all, just some commentary on that change. We really feel good about the change. It's unified our sales force. It's coordinated them much better. We have a customer experience management system that everyone is working with. It's allowing us to see opportunities, to manage those opportunities. And, you know, we're continuing to have great stories about business that has entered the company historically in one place, say LTL or ground expedite, that is able to be expanded, you know, through discussions with customers about the solutions that they need.

But having all of the people aligned and coordinated has been a positive thing. You know, when we look at the percentage of accounts that are cross-sold, you know, we've seen a continual march up, you know, in that percentage. Say, go back to 2012, you know, it was about a 30% figure from percentage of accounts that are cross-sold, and as we close out the second quarter, it's 37% of our accounts. And so what that says to me is we're making progress, but we still have a lot of upside to go. And then the percentage of revenue from that secondary cross-sell group has also elevated. So back in 2012, that was less than 10%, and now it's almost 13%. And again, we're just getting started on many of our efforts to really bring about that big customer opportunity that we've outlined for you in the past.

Todd Fowler (Equity Research Analyst of Transportation and Logistics Companies)

That's helpful. Those are some good numbers. Thanks for sharing those.

David Cobb (CFO)

Okay. Thanks a lot.

Todd Fowler (Equity Research Analyst of Transportation and Logistics Companies)

Have a good weekend. Thanks again.

Judy McReynolds (Chairman, President, and CEO)

Thank you.

Todd Fowler (Equity Research Analyst of Transportation and Logistics Companies)

Okay, thank you.

David Humphrey (VP of Investor Relations)

Hey, I wanna manage the rest of this time because we've got a call of competitor right next to us. So just please keep that in mind as we come down to the end of the half hour.

Operator (participant)

Thank you. Our next question comes from the line of David Ross with Stifel. Please proceed.

David Ross (Group Head and Managing Director of Transportation Research)

Yes, good morning, everyone.

Judy McReynolds (Chairman, President, and CEO)

Hi, Dave.

David Cobb (CFO)

Good morning.

David Ross (Group Head and Managing Director of Transportation Research)

David, I will keep it to one question.

David Humphrey (VP of Investor Relations)

Good deal.

David Ross (Group Head and Managing Director of Transportation Research)

With the new administration in Washington, a lot of moving parts, nobody's really sure what's coming out of there, what are you seeing or hearing, Judy, in terms of pension reform and anything that's being considered right now that could be helpful for ABF?

Judy McReynolds (Chairman, President, and CEO)

Well, there's some discussion about that, you know, it's more, at this point, discussion. The, you know, there's a UPS proposal that really is attempting, it's not a bill, but it's a proposal that it's attempting to address the Central States problem specifically. It includes proposals like a low interest, long-term federal government loan to troubled pension plans to cover their cash flow shortages. You know, the Central States, you know, is probably what they're targeting when they're trying to do that. But, you know, the thing that we're doing is we're involved in the discussions, we're following what's happening here, but it's an extremely complex problem, with the potential to really harm thousands of retirees. What our issue has been is that we've paid every dollar that we were contractually obligated to pay. And, you know, we're concerned about the retirees that work for our company actually seeing those benefits because of the situation that Central States is in. But, the one, I think, thing to keep in mind about all of that is, there's a lot of eyes on it. There's a lot of discussions about it. There was a recent insolvent fund, I think it's 707, Local 707 fund.

And, you know, the 707 fund reality is that, the benefits for those workers are actually haircut back in an extreme level. and so, you know, the outcome there is, I think a, it telegraphs what could happen with these funds if they're allowed to go insolvent. And so it's a vested interest that we have in making sure that, you know, that our people are considered in that, and that we know what the effects are back on the company. But I, you know, I can't say that I know how those are going to do, because they haven't been introduced as bills, and we haven't been able to see anything really kind of making its way through the process. But I can tell you that, you know, we're in a position where we're involved, and we're paying what we should pay according to the contract. You know, again, we're gonna support proposals that we think help the situation.

David Ross (Group Head and Managing Director of Transportation Research)

Are you more or less optimistic than you were a year ago about this?

Judy McReynolds (Chairman, President, and CEO)

You know, I don't, I don't really know how to answer that. You know, sometimes when there is a need, a great need to get things done, that's when it gets done. As we know, we've seen some really, really important things not make their way through. And so, you know, I think, I think having pressure on the situation may help that. But I, you know, I would say, really, I'm about the same as I was a year ago, but that's more about just the difficulty in getting, getting these things through Congress or some other process in Washington.

David Ross (Group Head and Managing Director of Transportation Research)

Excellent. Thanks.

Judy McReynolds (Chairman, President, and CEO)

Yep.

David Humphrey (VP of Investor Relations)

Thanks, Dave.

Operator (participant)

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

Rob Salmon (Lead Analyst of Arrival Group and Fortress Transportation and Infrastructure)

Hey, good morning. It's Rob Salmon on for Scott.

Judy McReynolds (Chairman, President, and CEO)

Hey, Rob.

David Cobb (CFO)

Rob.

Rob Salmon (Lead Analyst of Arrival Group and Fortress Transportation and Infrastructure)

Hey, good. With the new Cubic Minimum Charges that you guys recently announced, can you give us a sense as to what percentage of business this is gonna impact across ABF's ABF Freight network? And, you know, how should we be thinking about kind of the overarching impact of the increased price?

Judy McReynolds (Chairman, President, and CEO)

Well, as I've mentioned a couple times, you know, on this call, and I think when we announced it, you know, we're entering into this approach because we feel like it helps us, you know, to recover the value for the services that we're providing. Because it does that, we think it's going to positively affect our revenue and our profitability, but we're really not going a step further in saying what the impact will be. And that's because we've got conversations that we're working through, you know, with our customers, and it's a process. And so, Rob, you know, that's where we're gonna leave the discussion on that, so.

Rob Salmon (Lead Analyst of Arrival Group and Fortress Transportation and Infrastructure)

Initially, will this impact all contractual prices? Like, in any contractual arrangement, will that initially hit it, or we have to wait until the contract cycles through?

Judy McReynolds (Chairman, President, and CEO)

Well, again, there's a variety of answers to that question, but you know, it is the approach that we're going to use. And so, you know, we're very intentional about that. And so. But there, you know, there is a time period that it takes to work through these things.

Rob Salmon (Lead Analyst of Arrival Group and Fortress Transportation and Infrastructure)

Okay. And then, as a follow-up, with regard to purchased transportation, we didn't see much inflation in the purchased transportation and rental, rentals line expense this quarter, and I think it may be related to some of the initiatives that you guys have embarked upon. But could you give us a sense of, of what, if any, cost inflation you experience on the truckload side as a result of that market being a little bit tighter, and what you're doing differently to, to mitigate that potential, cost inflation looking forward, if the market is really tightening here?

Judy McReynolds (Chairman, President, and CEO)

Well, you know, we. The business, the purchased transportation on the asset-based side, is that what you're referring to, or are you referring to it in general of, in the asset-light side as well?

Rob Salmon (Lead Analyst of Arrival Group and Fortress Transportation and Infrastructure)

Asset-based, but.

Judy McReynolds (Chairman, President, and CEO)

Okay, okay. Well, let me answer that, and then, and then we'll, we'll talk more. But, you know, on the asset-based side, this is about 3%, you know, of, that we have that relates to purchased transportation outside of rail. And so it's, it's actually pretty small. And so we do really, I wouldn't characterize anything that we saw there as unusual. And in fact, we're using that to actually help us with the overall management of line haul, which again, reduced empty miles by 7%. And so we're using it effectively, and, and I think when I step back and I look at what's happening there, I'm, I'm more encouraged by how we're using it than concerned about any, any issue related to the rates there. And again, because it's so small, I don't think that that's an issue that that's really gonna be material for you or for us. You know, and then I think on the asset light side, you know, we talked about the margin impact that we had.

We had about a 40 basis point impact whenever you looked year-over-year, and then we had a sequential improvement in our net revenue margins. And so, you know, again, because of the amount of spot business versus contractual business that we have there, I think we have the flexibility to address those increases through pricing to some extent, you know, in the marketplace with the shippers. But I think as things get even tighter, we have perhaps more flexibility to address that because of our mix of spot and contractual business, and even some of our contractual business on the asset-light side, we have the ability to spot quote some of those shipments. So hope that helps.

David Humphrey (VP of Investor Relations)

Hey, Rob, we're going to try to get a couple more in here.

Rob Salmon (Lead Analyst of Arrival Group and Fortress Transportation and Infrastructure)

Appreciate it.

Judy McReynolds (Chairman, President, and CEO)

Okay, thanks.

David Humphrey (VP of Investor Relations)

Before the end of the time.

Operator (participant)

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

Jason Seidl (Airfreight and Surface Transportation Research Analyst)

Thanks, operator. Good morning, guys. I'll try to be quick.

Judy McReynolds (Chairman, President, and CEO)

Hi, Jason.

David Humphrey (VP of Investor Relations)

Thanks.

Jason Seidl (Airfreight and Surface Transportation Research Analyst)

Two quick ones. Number one, Judy, you were talking about sort of that, that home delivery product and how you think that the margins can get better as, as you guys just increase some productivity around it. Can you talk a little bit about pricing that product? And, and do you think there's sort of a learning curve for ABFS? That's number one. Number two, could you talk about your line haul service, and are you seeing rates go up for substitute truckload? And also, could you speak to, if you've seen any service disruptions on the rail side? Thanks.

Judy McReynolds (Chairman, President, and CEO)

Okay. You know, the, on the home delivery, we have a lot of experience going into neighborhoods because of our 20 years of experience with our U-Pack business. So, you know, we're always learning, but I think we, we're up on that learning curve perhaps more than others because of the work that we've always done, you know, in, in these residential deliveries. You know, on the, the line haul question, the cost, purchase transportation cost, that's a good question. Rob, just asked that question, and what I said was, it's a relatively small part of our asset-based spend. It's like 3% or less, and, it actually helps us with efficiencies in that business. So I'm not very concerned there about inflation, you know, really affecting, you know, overall our numbers. On the rail disruption side, I was reading about that last night, but I, we haven't really seen, you know, anything that's been a material impact on us, from that standpoint. So but I did see, you know, some commentary about what you're referring to, and, you know, I may ask more questions about that later today.

Jason Seidl (Airfreight and Surface Transportation Research Analyst)

Okay. Appreciate the thoughts.

Judy McReynolds (Chairman, President, and CEO)

Thanks.

David Humphrey (VP of Investor Relations)

Thanks, Jason. Caroline, I think we got time for one more question.

Operator (participant)

Our next question comes from the line of Ari Rosa with Bank of America Merrill Lynch. Please go ahead.

Ari Rosa (Equity Research Analyst of of Industrial and Transportation Stocks)

Hey, good morning, guys. Thanks for squeezing me in.

Judy McReynolds (Chairman, President, and CEO)

No problem.

Ari Rosa (Equity Research Analyst of of Industrial and Transportation Stocks)

Wanted to understand, so thinking about this, dim weight initiative, could you talk about what's the cost associated with implementing dimensioners? And then also address what challenges maybe or any pushback customers might experience, particularly smaller customers. Our understanding is, sometimes dimensional pricing can be a little bit of a challenge for them. So just kind of wanted to hear how you guys are addressing that, and then what are the costs for ArcBest associated with that?

Judy McReynolds (Chairman, President, and CEO)

Great questions. We're not gonna provide, we don't feel like we should provide, you know, the specific costs of our dimensioners, but just understand, it's a, I think, in the relative sense, it's a modest cost for, especially for the benefit that you gain for it. And, you know, I'll just address specifically the small customer. You know, our drivers have been dimensioning freight for many, many years. And so if a customer doesn't have dimensions on their freight, our driver is going to be dimensioning that freight, for them. And in addition to that, we're we can verify that with the static dimensioners that we'll have at our distribution center. So that all works.

And the other thing I mentioned, if they're on a TMS system, you know, they, we have another strategy that allows us to work with them to do API calls to get that information for them. And so there's a number of different ways to work through this. We really feel like it's appropriate, it's simpler, and the customers that have really gotten their sleeves rolled up with us on it have appreciated the simplicity of it. So, yep.

Ari Rosa (Equity Research Analyst of of Industrial and Transportation Stocks)

Okay, terrific. That's, that's great. And then, I, I don't know if I can squeeze one more in, but let me try.

David Humphrey (VP of Investor Relations)

Go right ahead.

Ari Rosa (Equity Research Analyst of of Industrial and Transportation Stocks)

Just, so it seems like you guys are having a little bit of a shift in terms of your thinking on pricing, and obviously the pricing initiatives seem to be paying off pretty nicely here. Are you targeting anything in terms of incremental margins on the LTL side? And how should we think about maybe modeling that going forward?

Judy McReynolds (Chairman, President, and CEO)

Well, although we did have good incremental margins as you moved into second quarter versus first, we don't target incremental margins on a company or a service line basis like that. What we do is we manage account profitability, and we are working through accounts that we're not getting the value that we are offering in terms of the handling, you know, of those shipments, and we're working through those. We've had several different initiatives, you know, this year, and the largest is this Cubic Minimum Charge initiative to really again recover more fully the value that we're providing the customer. And again, we think it's more appropriate for those customers and many of the conversations that we've had with them have recognized that, so.

Ari Rosa (Equity Research Analyst of of Industrial and Transportation Stocks)

Okay, terrific. Thank you for the time.

Judy McReynolds (Chairman, President, and CEO)

Thank you.

David Humphrey (VP of Investor Relations)

Thanks, Ari. All right. Well, Caroline, I think we're done, and I want to thank everybody for joining us this morning. We appreciate your interest in ArcBest. That concludes our call.

Operator (participant)

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