ArcBest - Q3 2014

Transcript

Operator (participant)

Welcome to the ArcBest Corporation third quarter 2014 earnings conference call. We will have a short discussion of third quarter results, and then 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. Michael Newcity, Senior Vice President, Chief Financial Officer, and Chief Information Officer of ArcBest Corporation. We thank you for joining us today. 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.

We will now begin with Mr. Newcity.

Michael Newcity (Chief Innovation Officer and President)

Thank you for joining us this morning. This quarter's results once again reflect continuing progress in our efforts to serve customers across the supply chain. During the typically busy third quarter, we saw an increase in business levels at ABF Freight and continued strong revenue growth in our emerging businesses. Those subsidiaries contributed 28% of total revenue during the quarter, up from 27% last quarter. Here are some details. ArcBest's third quarter 2014 revenue was $711.3 million compared to $623.4 million last year, an increase of 14%. Third quarter 2014 net income was $0.72 per share compared to net income of $0.52 per share last year. Excluding an adjustment for a pension settlement charge of $0.02 per share related to our non-union defined benefit pension plan, third quarter net income was $20.1 million or $0.74 per share.

We expect to incur pension settlement accounting charges in the fourth quarter as well. As a reminder, these are associated with distributions from frozen benefit plans, which result in settlement accounting charges when the lump sum distributions of a plan exceed the plan's annual interest cost. We anticipate fourth quarter charges approximating $2 million on a pre-tax basis. The amount and timing of these charges depend primarily on lump sum distributions from the plan. These charges are non-cash and are the result of accounting rules requiring the write-off of actuarial losses. This morning's reported results were also affected by the two-class method used for calculating earnings per share, which requires the allocation of a portion of dividends and net income to unvested restricted shares in determining per-common share amounts. For the third quarter, this equaled $0.03 per share. This could occur in future periods depending on our financial results.

We ended the third quarter with unrestricted cash and short-term investments of $203 million. Combined with the available resources under our AR securitization agreement, our total liquidity equals $260 million. Our total debt of $126 million includes the remaining $74 million balance on our $100 million five-year term loan associated with the Panther acquisition and $52 million of capital leases and notes payable primarily on ABF Freight revenue equipment. The composite interest rate on all of our debt is 1.8%, the same as what it was at the end of the second quarter. Full details of our GAAP cash flow are included in our earnings press release. For full year 2014, we expect to be at the top end of our previously stated net CapEx range of $90 million-$100 million.

Over a week ago, we announced board approval for an increase of our quarterly cash dividend to $0.06 per share from the previous $0.03 per share, and we continue to have 18.2 million available for stock purchases under a program announced back in July of 2005. ABF Freight reported third quarter revenue of $523 million, a per-day increase of 10.2% compared to last year. ABF Freight's quarterly tonnage per day increased 6.4% compared to last year's third quarter. By month, ABF Freight's 2014 daily tonnage increase versus the same period last year was 5% in July, 7.1% in August, and 7% in September. ABF Freight's third quarter operating ratio was 95.3% compared to 96.3% in the third quarter of 2013. ABF Freight's third quarter 2014 total billed revenue per hundredweight was $29.53, an increase of 3% versus the third quarter of last year.

On a sequential basis compared to this year's second quarter, revenue per hundredweight increased by 2.1%. ABF Freight's total weight per shipment was 1,320 pounds, a reduction of 3.1% compared to last year's third quarter. The decline in this total shipment measure was driven by a reduction in the average size of truckload-rated shipments. The average LTL-rated shipment size increased during the quarter. On a sequential basis, weight per shipment decreased 3%. ABF Freight's average length of haul equaled 1,031 miles, a 1.4% increase over last year's third quarter of 1,017 and 1.2% higher than this year's second quarter figure of 1,019 miles. ABF Freight results for the month of October 2014 versus October 2013 are as follows: ABF Freight's preliminary total tonnage per day increased by approximately 11%. Preliminary daily revenues for ABF Freight increased also by approximately 11% above October 2013 levels.

Total revenue per hundredweight is expected to be flat compared to October 2013. October revenue per hundredweight has been impacted by year-over-year business mix changes in ABF Freight's account base. Without these business mix changes, the level of October revenue per hundredweight increase would have been in the low single digits comparable to third quarter of 2014. As a reminder, the recent historical ABF Freight operating ratio relationship between third quarter and fourth quarter has been an average increase in the fourth quarter operating ratio over the third quarter operating ratio of 3.9 percentage points. In addition, fourth quarter of 2013 had some non-operational items that benefited that quarter's earnings. The ABF collective bargaining agreement, which was implemented November 3, 2013, provided for certain reductions in annual compensated vacation that impacted amounts expensed but not paid in periods prior to fourth quarter 2013.

The reversal of those expenses benefited the quarter $1.4 million after tax or $0.06 per share. The quarter also had a lower tax rate from tax benefit adjustments related to deferred tax asset valuation allowances and to the alternative fuel tax credit. This tax-related adjustment benefited the quarter $900,000 or $0.03 per share. On a combined basis, our emerging businesses continue to display strong revenue growth versus last year's third quarter. The total combined revenue for these businesses in this year's third quarter equaled $199 million, a 23% increase over last year. Total third quarter EBITDA for these businesses equaled $13 million, an increase of 35% compared to $9.7 million in last year's third quarter. Year-to-date EBITDA for our emerging businesses was $31 million compared to $20 million during the same period of 2013.

Panther continued its strong 2014 trends with third quarter revenue of $83 million, an increase of 26% over last year. Panther's third quarter operating profit was $4.1 million compared to $3.1 million during the same period of 2013. Panther's third quarter 2014 EBITDA was $7 million, an increase of 22% compared to EBITDA of $5.8 million during the third quarter of 2013. FleetNet, our emergency and preventive maintenance company, improved its third quarter revenue by 8% versus last year. FleetNet's operating income was slightly below that of last year's third quarter. ABF Logistics reported third quarter revenue of $41 million compared to $29 million last year, an increase of 42%. Versus 2013, their third quarter operating income increased 96%. Our household goods moving services division, ABF Moving, grew third quarter revenues by 16% and increased third quarter operating profit by 80%.

As these businesses find success in meeting the logistics needs of our customers, they are an ever-growing portion of ArcBest total revenue and a positive contributor to our profitability. We continue to experience the benefits of the investments we are making in these companies, and they are important to our success. Now I'll turn it over to Judy.

Judy R. McReynolds (CEO)

Thank you, Michael, and good morning, everyone. We continue to work toward managing resources effectively and improving productivity at ABF Freight amid strong business growth while making it easier for customers who want multiple services from us to have access through a single point of contact. I'm particularly gratified by the strong results at our emerging businesses and the solid EBITDA contributions they continue to make. After two full years as an ArcBest company, Panther continues to expand in the markets it serves thanks to its reputation as one of the top premium logistics providers. Our other emerging businesses are benefiting from the investments that we've made to support their growth. During the traditionally busy third quarter, the strong freight environment impacted industry capacity, contributing to higher revenues and improved profitability at ABF Freight.

The LTL segment of the transportation industry has benefited from additional shipments because of service challenges in the intermodal segment and driver shortages that have limited capacity in this truckload segment. When comparing back to last year's same quarter, this added business at ABF Freight, combined with a lower union cost structure versus third quarter of 2013 and a positive pricing environment, contributed to margin improvement. During a period of strong growth like ABF Freight has recently seen, more emphasis is placed on having the resources necessary to maintain customer service levels and continuing to offer the individualized transportation solutions for which ABF Freight is known. ABF Freight's network is near capacity, and in addition to the new employees we've hired throughout the year, we've utilized more available capacity sources.

These additional costs are primarily reflected in the increases reported in rents and purchased transportation line item of our income statement. Though these increased expenses allowed us to fulfill important service commitments to our customers, they impacted our profitability and the incremental margins on the additional freight that we handled. We're actively addressing the fine balance between efficiently serving our customers and maximizing profitability through cost control and sufficient pricing. The productivity of inexperienced dock employees hired as a result of historical business growth continued to impact ABF Freight's operational results during the third quarter. Since this year's second quarter, actions have actively been taken to drive productivity improvements and to reduce total labor hours to match available freight levels. As a result, sequential quarterly comparisons reflect some improvements. However, ABF Freight's productivity is still below acceptable levels.

In addition to offering increased employee training and performing daily monitoring of this issue by company management, work is successfully being done to improve equipment utilization and trailer loadings, which should directly impact dock, street, and yard productivity. Some additional monitoring tools have recently been implemented and were encouraged by the positive results that have occurred. Third quarter pricing at ABF Freight increased and positively reflected the effects of business growth during a period of tightening industry capacity. As our traditional LTL customers increased their freight levels throughout the quarter, ABF Freight handled fewer truckload-rated shipments in order to dedicate more system resources to LTL Freight. Though fewer truckload shipments moved through the ABF Freight network, they did so at increased rates, thus positively contributing to the improvements in total system pricing metrics.

ABF Freight continues to focus on obtaining adequate price increases on new business and on renewals of existing pricing agreements. On contract and deferred pricing agreements that were negotiated during the quarter, ABF Freight obtained increases averaging 4.8%. This was the second highest level of third quarter increase on these types of accounts in the last 15 years. As demand for our services increases and more resources are required to maintain service levels, we're focused on improving account yields in order to increase profitability. As further evidence of ABF Freight's efforts to improve the average level of account pricing, a previously announced general rate increase of 5.4% was implemented effective today. This increase will positively affect approximately 35% of ABF Freight's business and follows a similar GRI increase that went into effect in late March.

As we normally do during the fourth quarter, ABF Freight will be negotiating pricing on customer agreements that represent approximately 25% of total business. Therefore, we are targeting approximately 60% of ABF Freight's business to have new pricing by year-end. Once again, our emerging businesses experienced strong growth and positive margin contributions during the quarter. The continuing development of each of these companies and their positive contributions to the logistics services we're able to offer our customers strengthen the ArcBest brand and our reputation as an industry leader. Third quarter success at Panther is illustrated by increasing growth and year-over-year improvement in revenue, gross profit, operating income, and EBITDA. As seen in the first half of this year, there continues to be a strong market demand for premium logistics services. For those shippers who require reliable, consistent handling of their most challenging transportation needs, Panther is a trusted partner.

Again this quarter, most all of the markets that Panther services had double-digit increases in revenue and gross profit compared to the same period last year. Panther's third quarter success was the result of business growth associated with both existing shippers as well as new customer relationships. The greatest strength was experienced in the automotive and government markets, but in addition, Panther's manufacturing, life sciences, and 3PL markets positively contributed to the quarter. Panther began experiencing significant improvement during the second half of 2013, with fourth quarter 2013 operating income nearly tripled over the previous year. Along with investments we are making to enhance continued growth in this business, Panther will face a more challenging fourth quarter comparison to the prior year relative to what it's seen during the first three quarters of this year.

In conclusion, regarding Panther, the enthusiasm of the folks there in actively adding new business and seeking to positively respond to the unique needs of customers, it's exciting to observe and should contribute to continued success in the future. Third quarter revenue growth at FleetNet was primarily associated with an increase in business from several new customer relationships and improved pricing in their fleet maintenance market. The number of emergency roadside service events was below that of last year's third quarter due to the changes in customer mix and the continuing effect of unseasonably mild summer weather. Increased investment in personnel and IT systems needed for future business growth contributed to a modest decline in third quarter operating income compared to last year. The services that FleetNet offers help transportation fleets manage costs and adhere to the numerous regulatory standards in the trucking industry.

FleetNet continues to encounter and respond to new business opportunities from customers who are seeking help and guidance with their equipment maintenance challenges. As a result, we expect additional opportunities for future growth at FleetNet, which in some cases will require further upfront sales and IT investments. As I've done all year, ABF Logistics experienced strong increases in total third quarter revenue that resulted from growth in each of its service lines. ABF Logistics truckload brokerage operations had the greatest positive impact on this quarter's results due to continued expansion of its customer base. Those additional customers contributed to double-digit increases in third quarter shipments, revenue per shipment, and gross margin per shipment. We were pleased to see that the operating profit at ABF Logistics nearly doubled over last year's third quarter.

The investments we've made in this company continue to pay positive dividends and allow us to profitably handle the rapid revenue growth they are experiencing. We plan additional investments in the fourth quarter of 2014 and in 2015 for sales and IT in this business as we pursue growth opportunities with both new and existing accounts. Versus last year's third quarter, ABF Moving better positioned itself to handle the peak summer season demand of the household goods moving market. This resulted in year-over-year revenue growth and a significant improvement in operating income. During this busy quarter of the year, which was positively affected by the improved housing market, ABF Moving did a good job of promoting their services and managing their costs. Earlier, Michael provided details of actions we'd recently announced regarding an increase in our quarterly dividend.

We believe this step to improve shareholder returns is warranted based on ArcBest's improved financial position and our positive outlook on our company. An important element of our strategy for the future is to invest in the organic growth of our existing subsidiaries and to identify acquisition opportunities that will enhance our current businesses and allow us to expand the logistics services that we offer our customers. After increasing the dividend to benefit our shareholders, we remain in a strong financial position ready to act on internal and external investment opportunities that will strengthen ArcBest's position in the marketplace. Earlier this month, Roy Slagle retired as President and Chief Executive Officer of ABF Freight. During his 37-year career with ABF Freight, Roy positively impacted almost every area of the company.

His dedication to making ABF Freight a customer-centric company that focuses on unique logistics solutions was evident during his entire time here. His many contributions to our company will benefit us for years to come. We thank him for his service to our company, and we wish him and his wife, Karen, well in the next chapter of their lives. I was pleased to have the opportunity to call upon Tim Thorne to be ABF Freight's new president. Tim has a strong background in field operations and management, having led various ABF facilities of all sizes, as well as serving as a Regional Vice President of Operations in ABF Freight's Pacific Northwest region. Immediately prior to becoming ABF Freight's new president, Tim was the company's Vice President of Linehaul Operations. I have complete confidence in Tim's experience and leadership qualities.

His vision for enhancing ABF Freight's reputation of superior customer service in this rapidly changing logistics environment will benefit our company in the future. I always like to highlight the good things that are going on at our company, and there are several to talk about this quarter as our campaign to highlight the Skill and the Will of our employees garners more good feedback. Continuing its long pattern of recognition for superior industry achievement in the important area of safety, last week ABF Freight became the only seven-time winner of the American Trucking Associations' President's Trophy. The President's Trophy is the transportation industry's most prestigious safety award. Winning this recognition for an unprecedented seventh time reinforces ABF Freight's reputation as an industry standard for safety. Two of ABF Freight's drivers were recently recognized as some of the best in our industry at ATA's National Truck Driving Championships.

Ralph Garcia from New Mexico won second place in the sleeper class. Loren Hatfield from Arkansas won fifth place in the flatbed class. Both Ralph and Loren have competed in the National Driving Championships multiple times in the past. Ralph was a 2013 National Driving Champion and a past winner of the Trucking Industry's Professional Excellence Award. Loren is currently completing a two-year term as America's Road Team Captain, representing the trucking industry throughout the United States. We are privileged to have Ralph and Loren utilizing their superior driving skills to safely represent ABF Freight on our nation's highways. ABF Freight received three recognitions that illustrate its superior standing in the trucking industry and its commitment to sustainability. Earlier this month, ABF Freight received the SmartWay Excellence Award from the Environmental Protection Agency.

This award recognizes ABF Freight as an industry leader in freight supply chain environmental performance and energy efficiency. In recognition of several programs it has initiated as a part of its ongoing commitment to sustainability, ABF Freight earned Green Supply Chain Partner status by Inbound Logistics magazine for the fifth consecutive year. And finally, for the second consecutive year and third time overall, ABF Freight was the recipient of a Quest for Quality Award from Logistics Management magazine. This year, it is being honored for its expedited service offerings. ABF Freight is committed to being a dedicated and dependable partner and industry innovator for all of its customers. Panther was also recently named a preferred supplier for the Bosch Group for 2013-2014 time period, a rare honor that truly underscores the value Panther provides to Bosch and all of its customers.

Just a few weeks ago, both ABF Freight and Panther listed as Top 100 Truckers by Inbound Logistics. These awards are all testimony to the amazing job our people do day in and day out to show their skill and their will to meet and exceed our customer expectations. So once again, you can see that while we still have some work to do at ABF Freight in the areas of cost management, we expect to make progress. Because of the investments we've made and will continue to make and our pursuit of excellence, we are well positioned and growing. We make a commitment to our customers to do the very best for them by giving them more of the services they want and making it increasingly easy for them to do business with our outstanding people. Now I think we're ready for some questions.

Michael Newcity (Chief Innovation Officer and President)

Okay, Mladen, I think we're ready to do some questions.

Judy R. McReynolds (CEO)

Thank you very much. Ladies and gentlemen, if you'd like to register for a question, please press 1 followed by 4 on your telephone keypads. You'll hear a three-tone prompt to acknowledge your request. If you're using a speakerphone, please lift your handset before entering your request. And if your question has already been answered and you'd like to withdraw from the queue, you may press 13. Once again, ladies and gentlemen, to ask a question, please press 14. Our first question comes from a line of Bill Greene. Please go ahead.

William Bill Greene (Global Director of Research)

Yeah, hi, good morning. I wanted to ask a little bit more on pricing. Judy, you mentioned sort of I think you said 60% or so will have new pricing next year. How are customers responding to the GRI? Because we've now gotten quite a few in less than 12 months back to back, so we're starting to get to numbers that I wonder, is this going to cause customers to start to say like, "Well, I've got to find different solutions here." How are they reacting?

David Cobb (CFO)

Well, we really just implemented the latest GRI today. So we don't really have any new news on that other than just the fact that it's been announced and it's being implemented. If you go back to the March GRI, we've seen good results there, consistent with our historical results of retention in that area.

William Bill Greene (Global Director of Research)

Given the pricing dynamic, the new labor contract, the network realignment, all this stuff, do you feel like ArcBest has a good chance in the LTL division of getting back to the historical peaks it's seen in margins, or do you have more work you think you need to do?

David Cobb (CFO)

Well, I think the answer is yes to both. I think we do have the potential to get back closer to historical margins, but we do have a lot more work to do, as evidenced by our commentary on the productivity issues that we continue to face as a company.

William Bill Greene (Global Director of Research)

Okay. Thanks for the time.

David Cobb (CFO)

Thanks.

Judy R. McReynolds (CEO)

Our next question comes in the line of Brad Delco. Please go ahead.

Brad Delco (SVP)

Yeah, good morning, Judy. Good morning, Michael.

Good morning, Brad.

Good morning. Michael, just wanted to touch on the commentary around normal sequential trends from third quarter to fourth quarter. You said typically we're up about 390 basis points. I mean, there's been a lot of changes in the business with the network reorg, with the contract, and then now with the GRI. I mean, is that essentially kind of what you're guiding to, or should we be thinking about the trends could be a little bit different this year because of some of these other items that are going on, including as well the improvement in productivity with the dock workforce?

William Bill Greene (Global Director of Research)

Well, in terms of the first few things you mentioned, in terms of the network and the contract, those are actually in the third quarter. So that's kind of an apples-to-apples comparison when you think about that sequential comparison. I think one thing I'd do is I could point you back to another period in 2010 where we actually had a full GRI then. That was in October 1, 2010. It was about a 5.9% GRI. It might have actually touched a little bit more of the business then. The amount of business that our GRI touches has actually been decreasing over a period of time. And even with that GRI being in the full quarter, there was still about a 120-basis-point increase in the OR. And this GRI is going to be in the last two months of the quarter.

Actually, it's going to be if you look at the kind of the monthly business levels and were to rank those actually in the quarter, it's going to be kind of in the weakest and then the strongest month of the quarter. October is generally your middle month. So it's still going to have an impact in terms of the business levels on the OR.

David Cobb (CFO)

Well, and I think, Brad, one of the things that we're pursuing is improvements in the productivity area. And we're starting to see some good signs there, but we still have a long way to go. And so we're in the situation where we're dealing with growth from existing accounts to a large extent that have I mean, really, it's the greatest growth sequentially in the last 15 years. And so what's happening to us, to some extent, is we're trying to service this business. These are accounts that have been good for us. They have expanded their use of ABF, perhaps because their business is growing. We're giving good service to them, but we're having to do it with more expensive cost structure.

In other words, we're having to use more rented equipment, cartage agents, that sort of thing to make sure that we're meeting the service requirements for that business. And the rail disruption that we've experienced has also been a factor in that as well. So we're trying to improve those things, but we know it's important to give customer service to those customers that do business with us over longer periods of years. And so we have all of that going on as well. So we do expect improvements in those things, but we don't know that that would be dramatic in the fourth quarter relative to the third quarter because we still have so much of that to work through.

Brad Delco (SVP)

Gotcha. Thanks, David.

Judy R. McReynolds (CEO)

Brad, we'll move along.

David Cobb (CFO)

Thanks, Brad.

Judy R. McReynolds (CEO)

All right. Thanks, David. Our next question comes in the line of Christian Wetherbee. Go ahead.

Christian Wetherbee (Managing Director)

Thanks, guys. Good morning.

Judy R. McReynolds (CEO)

Mladen, are you going to ask me any question about sort of?

Brad Delco (SVP)

Yes, sir. Yes, sir, I am.

Judy R. McReynolds (CEO)

Yes, Mr. Humphrey. Mladen, are you there?

Brad Delco (SVP)

Yes, sir, I am.

Judy R. McReynolds (CEO)

Okay. Next question comes in with Chris Wetherbee. Go ahead, Mr. Wetherbee.

Brad Delco (SVP)

Oh, okay. Go ahead. Sorry about that, Chris.

Judy R. McReynolds (CEO)

Did you guys hear me?

Brad Delco (SVP)

Yeah, we got you.

Yeah, we can hear you now.

Christian Wetherbee (Managing Director)

Okay. Sorry about that.

Judy R. McReynolds (CEO)

Sorry about that.

Todd Fowler (managing director)

Question about sort of the network capacity. Judy, I think you mentioned that you're kind of approaching network capacity. As you think about sort of the mix and the volume relative to the pricing, I know there's maybe some mixed effects that are shielding the revenue per 100 weight. As we look out into the fourth quarter and probably more importantly into 2015, how should we think about your approach to the market in the LTL division? Do you start to pull back a little bit on what seems like there's volume growth out there? Do you start to pull back a bit on that and focus a bit more on pricing? I just want to kind of understand the commentary around the capacity of the network a little better.

David Cobb (CFO)

Well, I think what I just described as our situation is relevant here. A lot of the growth that we've seen is from existing accounts. So these are accounts that we've done business with historically that have added business to our network. And so it's a balance of effectively serving those customers. We are doing a lot to try to address the ways that we're providing service to the customers. In other words, we're reducing our use of cartage. We're returning some rented equipment. And we don't anticipate, though, to see much better rail service. So we're still going to be using probably a healthy level of purchased transportation, which right now is expensive. So we've got to manage that to the best of our ability while improving the effectiveness of our newest dock workers. But also, we've got to adequately get paid for that business.

And so we're, as I mentioned in my commentary, we've got the second GRI this year that's going in place. We feel that that's going to address your comment to some extent, but also it's appropriate in the marketplace given the tightness of the industry capacity. And then also, we have an opportunity because of our contract renewals in the fourth quarter to really touch another 25% of that business. Sometimes that all gets finalized by year-end. Some of it floats over into early next year. And then the remaining business we'll be addressing as we move into early 2015.

And so this is a process, but the primary objective here is to make sure that we have customers that are good for us, that we're serving effectively through our cost structure, and that we're getting paid what we should be paid by those customers for the options that we deliver to them, whether it be in our asset-based network or whether it be one of the services that we have on the non-asset side.

Judy R. McReynolds (CEO)

Okay. That's helpful. I guess my follow-up would just be sort of thinking about some of the network adjustments you've been doing post getting the last labor agreement done. Do you feel like there's more progress to be done there, or does the state of the business and sort of the competitive dynamic mean that you kind of hold off on doing anything further from here? I guess I just want to get a rough sense when you think about terminals and infrastructure. Where do you stand on that now?

David Cobb (CFO)

Well, it's a constant process. We're not really in a position to announce any changes at this point, but that doesn't mean that those evaluations are not going on. They're constantly going on. And what we're doing is we're trying to make sure that the ABF rate network is most effective for the customers that we serve. And so there's more to come on that, but we're in a position right now where we're still in the evaluation process. And so we don't have any new news to announce as far as that network goes other than to say that we're constantly looking at it.

Judy R. McReynolds (CEO)

Okay. Thanks very much, Chris.

Christian Wetherbee (Managing Director)

I appreciate it, guys.

David Cobb (CFO)

Thanks, Chris.

Brad Delco (SVP)

Yeah, thanks, Amy.

Judy R. McReynolds (CEO)

Our next question comes in the line of Todd Fowler. Please go ahead.

Todd Fowler (managing director)

Great. Thanks. Good morning. Nice job this quarter. Hey, Judy. Good morning, everybody. I just wanted to follow up, I guess, to start with the October trends. The tonnage sounds like it was pretty strong, up 11%. Revenue per hundredweight was flat. I guess, first, if you could talk about what was going on on the revenue per hundredweight side, and then if you can also talk about how the network responded to that sort of tonnage growth here in October. Was the network able to handle, I mean, that sort of increase that you saw during the month?

David Cobb (CFO)

Well, with respect to the revenue per hundredweight increase, that has been affected by the business mix, if you will, associated with our business. I mean, so if you were to strip out that effect, you would see an increase that was in the low single-digit range there. So the business mix change is an important factor when you look at October. As far as our ability to handle that level of business, I mean, we're continuing to see both progress but also issues with our productivity. I mean, we can look at the people that we hired in the dock area in July, for instance, and we can see a pretty dramatic improvement in their productivity levels. We can see that they've improved somewhere between 35%-40%.

If you look at some of the newer people that we hired, say in September, you're going to have those issues associated with them. One thing that we have observed is that our hiring has reduced over time. The last few months, we're seeing fewer and fewer new people, which should allow those more experienced people to start to really affect those expense trends positively. We have all of that going on in the month of October. To say that we've effectively handled that business level, the answer to that is we would much rather see some greater improvement. To really answer that question, yes.

Todd Fowler (managing director)

Okay. That's helpful commentary. And if I've got time for one more, I was going to ask on Panther. And Judy, you had some comments about the fourth quarter comp, and I know that we've talked a little bit about the sustainability of that business. How do you think about Panther's growth going into 2015? And also, what happens with the operating margins? I mean, you're seeing good top-line growth, and I know that you've got the purchase price amortization going through, but should at some point that be a low 90 OR business, or how do we think about the profitability level? Thanks.

David Cobb (CFO)

Well, I think if you were to factor out the depreciation and amortization levels that they have there, you would see an improvement off of the margins today. I mean, that's why we actually really report the EBITDA numbers. I think that gives you a clearer picture of what Panther's business is. It really depends, Todd, on the business environment that we see in 2015. There are a lot of great things going on at Panther. But in order to really improve dramatically, for instance, off of the 2014 numbers that were so dramatically improved, we're going to have to see a really healthy business environment for them.

I think that some of the drivers of their business, the auto sector and the government sector and manufacturing, those are areas that we need to see some strength in to see the levels of improvement in 2015 that we saw in 2014. But as you know, Todd, from being there, I think Todd's visited there fairly recently, you can appreciate the level of engagement in that team and the new growth that they've experienced through new accounts. And so it's an exciting story.

Judy R. McReynolds (CEO)

Hey, Todd, just a reminder on that deal on Panther, on the purchase price accounting, it's about $2.2-$2.3 million a quarter.

Todd Fowler (managing director)

Okay. Good. Okay. Thanks a lot for the time, guys. I appreciate it, Todd.

David Cobb (CFO)

Thank you.

Judy R. McReynolds (CEO)

Our next question comes in the line of David Ross. Go ahead.

Todd Fowler (managing director)

Yes. Good morning, everyone.

Morning, David.

David Cobb (CFO)

Hi, Dave.

Brad Delco (SVP)

Hey, Dave.

Todd Fowler (managing director)

I wanted to talk about the savings from the contract. A few quarters ago, the talk was about $55-$65 million annual savings just from the new labor deal, which is about $15 million a quarter. Where are you guys on that in terms of tracking as expected? And is that supposed to ramp up more in the future, or what's going on there?

David Cobb (CFO)

Really, we disclosed contract savings of $55 million-$65 million. The initial comment was that that would be realized over about a 24-month period from the original implementation. So by the end of 2015, we're on track to have that run rate, if you will, of contract savings. So it's as we thought it would be in terms of those dollars.

Todd Fowler (managing director)

Because in 3Q, there's only a $7.5 million improvement in operating income. That's half of what was expected just from the labor deal, and there was better volumes and pricing on top of that. So I'm trying to get a sense for how much of that improvement was from the labor deal versus growth in volume and pricing.

David Cobb (CFO)

Well, the thing that you didn't mention, which we've highlighted, is our productivity issues and the market environment that we're doing business in. Again, when you look at the situation that we faced, and I think others faced in our industry in the third quarter, is that in order to continue to give good customer service because of some of the issues that we've seen in terms of rail being an available option for us and just in addressing the growth over a short-term basis from existing accounts, we've had to service that business with more expensive methods. And so we have that issue to work through. We've highlighted it, and we continue to see issues on the productivity side, but we are seeing improvement with the employees that have been with us for several months now.

Todd Fowler (managing director)

Would it be fair to say that the productivity issues might have been a 300 basis point or more headwind in the quarter?

David Cobb (CFO)

Well, we're not going to give guidance on that, all the specifics on that. There's a lot of puts and takes in that figure, but it was definitely significant.

Todd Fowler (managing director)

Okay. Thanks.

Judy R. McReynolds (CEO)

Thanks, Dave.

David Cobb (CFO)

Thanks.

Judy R. McReynolds (CEO)

Our next question comes from the line of Andrew Gordon. Go ahead.

Ken Hoexter (Managing Director and Senior Research Analyst)

Hey. Good morning, guys. Andrew Gordon on for Scott Group.

David Cobb (CFO)

Oh, hi, Andrew.

Brad Delco (SVP)

Hi, Andrew.

Ken Hoexter (Managing Director and Senior Research Analyst)

Hey. How are you? Judy, just one quick follow-up on the pricing front. Regarding the mix change, 3Q saw length of haul coming up, and the release said that there were fewer truckload-related shipments. So can you give any more clarification on why October has seen the tonnage accelerate but still have the negative pricing mix?

David Cobb (CFO)

Well, it's not negative. I think it's basically flat. And again, it's growth with existing accounts and with business that has lower revenue per hundredweight that is a factor in that mix of things. And so if you were to take out the business mix issues, you would see low single-digit pricing increases for October.

Ken Hoexter (Managing Director and Senior Research Analyst)

Okay. One other pricing-related question on the GRI. I think you said that the GRI from March has been sticking pretty well. I'm just curious, with the additional GRI in 4Q, we should be expecting a cumulative increase of both of those GRIs sticking with customers?

David Cobb (CFO)

Well, one thing to remember that is always true, it's not something that I think any of us want in our industry, but it happens. Once a GRI is put in place, I mean, it begins to deteriorate the very next month. And so historically, in our industry, at least for our company specifically, I guess, is we see a quarter-point decline in those increases as you move through. So it ends up being discounting that occurs once you put in a general rate increase. And that's been true in the history of our general rate increases as we've put them in place over the years. And I don't think that we're any different as a company than perhaps those that we compete with out there.

When you say add it to it, you have to recognize that there's always to say that the retention is good. We're comparing it back to a past history where this discounting that I mentioned is occurring. If you think about it, you can't just add the two together and apply that because of that discounting that occurs kind of normally in the process.

Ken Hoexter (Managing Director and Senior Research Analyst)

Sure. Very helpful. Thank you.

Brad Delco (SVP)

Thanks a lot, Andrew.

Judy R. McReynolds (CEO)

Our next question comes in the line of Ken Hoexter. Please go ahead.

Ken Hoexter (Managing Director and Senior Research Analyst)

Great. Good morning.

David Cobb (CFO)

Hey, Ken.

Ken Hoexter (Managing Director and Senior Research Analyst)

Judy, Michael, if we can kind of just jump into the kind of mix shifts there a little bit more, the declines on the truckload, increase on the LTL, is that more profitable freight? Can you maybe delve into that? And is that what's causing the shipments to be up 10% versus your tonnage 6%? And is that trends that we should see continue just because we haven't seen that kind of switch between, I guess, shipments and tonnage in maybe five or six years?

David Cobb (CFO)

Well, I think what we're attempting to do, and I think Michael discussed it in his prepared comments, was we have increased the price on our truckload-rated shipments that are more spot so that we could better service LTL customers. And so that's what you're seeing there. So when we say, "Is that normal?" well, it's not abnormal in this kind of business environment, but it is noteworthy.

Brad Delco (SVP)

Ken, some of that goes along with the fact that the resources you would dedicate to those spot shipments were needed with this growth that we're seeing on the LTL side. So that's part of why we did that and why we've been doing that.

Ken Hoexter (Managing Director and Senior Research Analyst)

Is that because you're now getting these, again, smaller shipments? Is that more profitable? I just want to understand the mix that you were just using it to fill up your network before, and now you want to siphon that off even with the increased prices? I just want to understand the differential in the focus.

Judy R. McReynolds (CEO)

Ken, I think that when you think, I mean, especially in the spot market on that volume business, that's something you want to adjust as you're moving throughout the year. That's more of an adjustment that you're making to improve the overall profitability of the business versus where you have an account that's on a deferred and contract basis, and that's a renewal every year. The volume is something we can kind of pull back or pull forward. And so it's always a decision about individual account profitability and then how that impacts the overall company. And that's what drives those decisions.

Ken Hoexter (Managing Director and Senior Research Analyst)

Okay. And then just one last question. It's just the negative productivity issues, Judy. Is that subsiding? Is that what you were getting at with the decrease? I just want to understand what you're expecting on the fourth quarter because of your, I guess, similar sequential margin target expectation.

David Cobb (CFO)

Well, we're not expecting it to go away as an issue. We've seen some improvement. I think I mentioned earlier, if you look at, for instance, the employees that we hired between March and July, we're seeing a 35%-40% improvement in their productivity. We continue to hire people through the summer. So we've got those people that are going to be improving along that same path, but that they have issues as they've come along. I mean, remember that what we're seeing is the greatest sequential growth that we've seen as a company in 15 years. So that's what we're doing is addressing that growth with this hiring. You have to understand that as you bring people on, it takes a period of time in order to get them fully at the productivity levels of your more experienced people.

Ken Hoexter (Managing Director and Senior Research Analyst)

Sounds great. I appreciate the time. Thank you.

Brad Delco (SVP)

Thank you. Appreciate it.

Judy R. McReynolds (CEO)

Our next question comes in the line of Jason Seidl. Go ahead.

Todd Fowler (managing director)

Hi, Jason.

David Cobb (CFO)

Hi, Jason.

Ken Hoexter (Managing Director and Senior Research Analyst)

Hey, guys.

Brad Delco (SVP)

Hey.

Ken Hoexter (Managing Director and Senior Research Analyst)

Quick question here. I guess this goes back a little bit to your productivity issues. I guess you're expecting them to at least abate in 2015, but how should we expect the impacts to flow through the P&L? Should we start to see that in salaries, wages, and benefits? Should we start to see that trend down a little bit in some of your purchased transportation?

David Cobb (CFO)

Well, you would see better improvement in the areas of rents and purchased transportation line. That includes where we've had to use cartage and rented equipment in order to facilitate customer service during this period of really tight industry capacity. And we've also used that because we have these newer employees that we're bringing on that are less productive. So when we start to see the productivity of those employees improve, we're going to see salaries, wages, and benefits, that line improve.

Brad Delco (SVP)

And Jason.

Ken Hoexter (Managing Director and Senior Research Analyst)

And Judy, also, when we're looking at that from a rail usage perspective, I mean, obviously, we've had some issues on the rail service side, and I'm assuming you've had to move some of that typical rail freight onto the road. Should we also see that maybe improve in the back half of the year as expectations for rail service in 2015 are looking, I guess, a little bit brighter with crossed fingers?

David Cobb (CFO)

Well, I think all that to say, yeah, I would say yes to that as you framed it. We don't know that. But I think your question may be, would we prefer to use rail service in some of the areas where we've had to move things over the road? And the answer to that is yes. And so as soon as we're able to shift it back, particularly in some areas in the Northwest, we would.

Ken Hoexter (Managing Director and Senior Research Analyst)

Okay. My quick follow-up here. Michael, you talked a little bit about the revenue per hundredweight being flat on a year-over-year basis here in October, but that's just in October. I'm assuming you're not expecting it to remain flat, all things being equal, with the GRI coming in here first thing in November.

Judy R. McReynolds (CEO)

That's a very good expectation, especially considering the GRI and what Judy mentioned about touching 60% of the account base by the end of the year.

Ken Hoexter (Managing Director and Senior Research Analyst)

By the end of the year. Okay. Fantastic. Guys, I think that's my cue. I don't want to get yelled at. Thanks.

Judy R. McReynolds (CEO)

Our next question comes in the line of Matt Brooklier. Please go ahead.

Brad Delco (SVP)

Hey, thanks. Good morning. I wanted to ask a question on rents and purchased transportation. I know there's been a couple, but I'm just trying to get a sense for how much of that increase in the quarter was related to you guys running the network a little bit differently, how much of it was attributable to maybe some of the productivity issues that you had that sound like they're getting better, and then how much was a direct result of rail service level issues and having to shift some of that freight off the rails and moving it more expensively via truck?

David Cobb (CFO)

Well, I'll say this. We have used purchased transportation in accordance with what's allowed for the contract in the quarter. We're pleased that we have partners there that are able to do that work with us because we feel like it's helped us with customer service. But when you try to parse through all of the issues that you just mentioned, which you did a good job of summarizing what those issues are, it'd be very difficult to say on a go-forward basis what we expect that to be because one of the reasons why we wanted that option with our union labor contract was so that we could shift things around during these kinds of times where you have capacity sources that are limited. And so I think a couple of data points I'll give you.

We've returned about 1,000 trailers that we've rented, and that was by as of the end of October, that return occurred. That was occurring kind of as we went throughout the third quarter. Also, our cartage shipments have declined by about 56%. So we are making efforts to reduce those costs that could be more effectively served with the equipment that we already have and the people that we already have as they become more productive.

Brad Delco (SVP)

Okay. That's actually very helpful, the two data points. And then as we look from third to fourth quarter, historically, does your use of rail linehaul is it about the same in fourth quarter? Do you guys use rail more? Is it less?

David Cobb (CFO)

Well, if you looked at history, I mean, we kind of operate in a range that is, generally speaking, I want to say 13%-17% or something like that. And we've been on the low end of that range. And we see more rail utilization, if you look back at past years, in the third quarter in particular. So the normal relationship would be that you would see that decline. The difficulty that I have in answering that question is that we haven't used as much rail service as we normally would. So my expectation might be that it might be more flat when you look third to fourth, but it would all be based on what's happening in terms of those options in the marketplace because, again, we're looking for the most cost-effective way to service that customer business.

If there's a chance that utilizing a poor lane won't do that, we're going to shift that over and either do it ourselves or use a purchased transportation provider. And so but again, our history would be the third quarter would be elevated to the fourth. But my expectation would be that would be more flat given the circumstance.

Brad Delco (SVP)

Hey, Matt, we'll move along. I've got a couple more I want to try to get in.

Todd Fowler (managing director)

Sure. Thanks for the time.

Brad Delco (SVP)

Our next question comes from the line of Jeff Kauffman. Go ahead, sir.

Ken Hoexter (Managing Director and Senior Research Analyst)

Thank you very much. Hey, everyone. Congratulations.

David Cobb (CFO)

Hey, Jeff.

Brad Delco (SVP)

Hey, Jeff.

David Cobb (CFO)

Thank you.

Ken Hoexter (Managing Director and Senior Research Analyst)

Okay. David, I got a question to follow up both on CapEx, so don't cut me off after the first one, please.

Brad Delco (SVP)

Hurry, hurry. I got a couple more behind you.

Ken Hoexter (Managing Director and Senior Research Analyst)

I got you. Judy, I think I heard you right, $90 million-$100 million of CapEx 2014?

David Cobb (CFO)

Yes.

Judy R. McReynolds (CEO)

That's right.

Ken Hoexter (Managing Director and Senior Research Analyst)

Okay. If I look at your cash flow statement, though, and I know it's net of financings, you're showing a number probably closer to $30 million year-to-date with the capitalized internal software. Can you help me equate your guidance to what I'm seeing on your cash flow statement?

David Cobb (CFO)

Yeah.

Judy R. McReynolds (CEO)

Yeah. Go ahead.

David Cobb (CFO)

Oh, go ahead, Michael.

Judy R. McReynolds (CEO)

Okay. It's actually $62 million. There's a note there toward the bottom of that cash flow statement that shows what's in finance. It's closer to $62-$63 million. And we've got some revenue equipment that's still coming online that will come into the fourth quarter. We've taken receipt of about 370.

Brad Delco (SVP)

395.

David Cobb (CFO)

390, 390 tractors. We're going to bring in another 55 before the end of the year. So that's going to bump that closer to the $100 million mark before the end of the year.

Ken Hoexter (Managing Director and Senior Research Analyst)

Okay. And the follow-up is, with this kind of growth, you said some of the greatest sequential growth in 15 years and the other divisions growing the way they are. Are we thinking the 2015 CapEx could be higher to help fund this growth?

Judy R. McReynolds (CEO)

We're actually looking at that right now. And obviously, we've seen some capacity constraint in the year. And Judy's talked about the increase in purchased transportation and so forth. Part of that's part of that, I think, what's been missing in discussion a little bit is part of that is being able to deal with backhaul lanes. And we've seen an improvement in loadings in that area. But we're wrapping that up, and we'll have a number for everyone in January.

Ken Hoexter (Managing Director and Senior Research Analyst)

Okay, guys.

Brad Delco (SVP)

Yeah. I'm sorry to get too much in here.

Ken Hoexter (Managing Director and Senior Research Analyst)

Thank you.

Brad Delco (SVP)

Appreciate you, Dave. Thanks.

Judy R. McReynolds (CEO)

Our next question comes from the line of Rob Salmon. Go ahead.

Todd Fowler (managing director)

Hey. Good morning, guys.

Judy R. McReynolds (CEO)

Hey, Rob.

Todd Fowler (managing director)

Morning, Judy. Michael, I think a lot of people have been trying to get to the outlook with regard to kind of Q4 with the Q&A that they've had. You've obviously highlighted kind of a lot of different puts and takes with the productivity and PT headwinds offset by some kind of yield improvements, which have been a bit stronger, as well as very strong sequential growth quarter to date. Could you give us a sense how we should be thinking about incremental margins relative to Q3 as we look out to Q4?

David Cobb (CFO)

Well, I think Michael gave the typical OR relationship between the two quarters. I think that's probably something that would give you a benchmark for where you start. I think that's the best indication that we have. We have a lot of different things moving around here. I'll acknowledge that. But this history that Michael's giving you is a blended history based on a lot of things happening in those years. And so it's a typical situation for us to have a deterioration in the operating ratio in the fourth quarter relative to the third. But that's a factor as well as the other factors that we've laid out on this call that we're dealing with in terms of the GRI, the productivity of our employees, and again, use of purchased transportation, that sort of thing. It sounds like you need an expert at modeling to do that.

Rob, you just may be the guy.

Judy R. McReynolds (CEO)

All right. Thanks, Judy. As we look out to 2015, can you give us a better sense of if these productivity issues, which have been headwinds and kind of constrained the incremental margin in Q3, if those are going to continue or any sort of incremental color you can have related to the hires? It sounded like the recent hires have been kind of coming on nicely. Should this start to abate as we look out to 2015, or should we kind of think about the current run rate as a pretty good run rate looking forward? Yeah, Rob. Judy mentioned the improvement in productivity for the hires that we had in March to July. It was in the 35%-40% range. And we've seen that pace of that hiring come down. I'll give you one data point on that.

When we look at our September hirings are down from August around 30%-35%. And I could say the same for October hirings are down from September around 30%-35%. So those hirings are coming down. We do have that these new hires are improving in productivity. I think the guidance that we gave back in the second quarter is it's going to take about 12 months to get them up to full productivity. And so that's kind of the backdrop there in terms of how that's playing out.

Brad Delco (SVP)

Hey, Rob. We've got one more person in queue. I'm going to try to get them in. I appreciate you.

David Cobb (CFO)

Thanks, Rob.

Judy R. McReynolds (CEO)

Thanks, Rob. Our last question comes from the line of Willard Milby. Go ahead, sir.

Ken Hoexter (Managing Director and Senior Research Analyst)

Hey. Good morning, everyone.

Judy R. McReynolds (CEO)

Good morning.

Ken Hoexter (Managing Director and Senior Research Analyst)

Hey, Will. Real quick question. I think Matt asked the question I was trying to get on, but the last two quarters, you've given the number of miles you've run on outside carrier PT. I was hoping you can give that again.

David Cobb (CFO)

Well, it's 5.8% of our total miles. And that compares to really zero last year in the third quarter.

Brad Delco (SVP)

Yeah. Yeah. That's right. And our rail this quarter was 14.7%, Will.

Ken Hoexter (Managing Director and Senior Research Analyst)

Okay. That's down a good percentage year-over-year as well.

Judy R. McReynolds (CEO)

Yeah. Yeah.

Brad Delco (SVP)

That's quite a bit down from last year. That addresses some of the things Judy was talking about about moving some stuff over.

Ken Hoexter (Managing Director and Senior Research Analyst)

Right. And last housekeeping thing, did you give monthly tonnages throughout the quarter? Can we get those?

Judy R. McReynolds (CEO)

Yeah, I did.

Ken Hoexter (Managing Director and Senior Research Analyst)

Oh, sorry.

David Cobb (CFO)

I think it was up 5% in July and then 7.4 or something like that.

Ken Hoexter (Managing Director and Senior Research Analyst)

That's right. Yeah. Let me give you the exact numbers. 5.0% in July. August was 7.1%. September was 7.0%. The whole quarter, 6.4%. All right. That's it for me. Thanks very much.

David Cobb (CFO)

Okay. Okay. Thank you.

Brad Delco (SVP)

Well, I think that concludes our call. We appreciate you joining ArcBest Corporation, and we will see you next quarter. This ends the call.

Ken Hoexter (Managing Director and Senior Research Analyst)

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation. Have a great rest of the day, everyone.