Q2 2022 ArcBest Corp Earnings Call
Yeah.
Greetings and welcome to the our best second quarter 2022 earnings conference call. During the presentation. All participants will be in a listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one followed by the four on your telephone.
But 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 29, 2022, I would now like to turn the conference over to David Humphrey Vice President of Investor Relations. Please go ahead.
Thank you for joining us on today's call. We will walk you through the details of our second quarter 2022 results.
Joining me today are Judy Mcreynolds, Chairman, President and CEO of Art, Best and David Cobb, Chief Financial Officer of Arc Best It will have additional commentary from Dennis Anderson Art, Best Chief customer Officer, and Danny LOE Art, Best President of asset light logistics and cheap yield officer.
To help you better understand our bass and its results. Some forward looking statements could be made during this call.
Forward looking statements by their very nature are subject to uncertainties and risk.
For a more complete discussion of factors that could affect <unk> future results. Please refer to the forward looking statements section of our earnings press release, and our most recent SEC public filings.
To provide meaningful comparisons certain information discussed in this call includes non-GAAP financial measures as outlined and described in the tables in our earnings press release.
Reconciliations of the GAAP financial measures to the related non-GAAP measures discussed in this call are also provided in the additional information section of the presentation slides.
As a reminder, minder our earnings slide deck can be found on the art best website <unk> Dot com in exhibit 99.3 of the 8-K that was filed earlier this morning or they are available as part of the webcast.
We will now begin with Judy.
Thank you and good morning, everyone. It's a remarkable time to be at art best as we celebrate another record quarter driven by the execution of our growth focused business strategy I'd like to begin today's call by recognizing our amazing people and leadership team as we approach our 100 year anniversary.
Next year, it's their dedication and hard work that have helped us deliver superior results, while keeping the global economy moving.
We have so much to be proud of this quarter, including revenue growth of 47% and releasing our third annual environmental social and governance report their report highlights our company's significant progress and ongoing efforts in building a safer more sustainable and more inclusive company and world.
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Our revenue growth was driven by increasing demand across our business lines and our breadth of integrated solutions that make it easy for customers to choose art burst at the core of our business and strategy is a focus on technology and innovation investments and importantly, the development of our people.
Put together, we are confident we can thrive regardless of the environment and drive long term value for our best stockholders.
Supply chains are getting more complex and we are helping our customers navigate. These challenges. We are committed to staying ahead of the curve to better serve customers as a trusted provider and partner our business results enable us to do that by continuing to reinvest in progress our strategic growth goals.
I would like to highlight three specific points this quarter that illustrate how our approach is delivering value for our customers.
First we are hearing from customers that they need more flexibility in their supply chains, our breath of solutions enables us to serve them across whatever mode. They need without switching service providers. This makes us a unique partner customers continued to share positive feedback that our mode.
I'll stick approach is an important differentiator that helps them keep their supply chains running listening to our customers is our top priority deep trusted relationships with customers enable us to learn more about their business needs and what's happening in their respective markets. These discussions inform how.
We help them optimize their supply chains in an efficient and cost effective manner, while also helping them prepare for a changing economic environment.
Overall, we are well positioned in growth markets and highly attuned to our customers' needs. This leads to the increasing demand we are seeing and enables the introduction of new offerings strong growth in key services like truckload and managed solutions is proof that we are responsive to our customers' needs.
And that our strategy is working.
Second we continue making investments in technology and innovation that differentiate us from competitors. The world is changing faster than ever and we are working hard to ensure our investments in technology and innovation stay ahead of those changes both with the way we work and the way customers use our solutions.
With our breadth of services and a growing customer base, we have access to more data, enabling us to build better tools that drive value and productivity as a supply chain continues to be disrupted it's never been more important for customers to have better visibility better transparency and more flexibility.
<unk>, we can identify roadblocks stay agile pivot and offer more creative approaches to drive our customer success, our investments are already paying off by saving customers time, and money and earning us more business.
Third we continue investing in our employees facilities and technology to enable additional growth we are committed to being a leading place to work and we know we need to keep moving forward expectations are rising and with labor shortages in the war for talent, our investments and our culture make art best place.
We'll want to work in fact, excluding modelo, who just celebrated their five year anniversary. The average combined service of all art best employees is approximately 10 years and over one third of our employees have been with us for at least that long.
Our tools training and technology enable employees to do their jobs more effectively easily and faster.
Additionally, we continue to expand and update our facilities, which will enable even more growth in short art best is firing on all cylinders as evidenced by our record financial results. This past quarter as we continued executing our proven successful strategy. Our company is poised to continue growing.
In meeting customer needs and delivering superior and sustainable results for investors, even during periods of market volatility and uncertainty and now I'll turn it over to David Cobb, who will take you through the specifics of our strong second quarter performance and continuing business momentum.
Thank you Judy I'll take this time to share details on our financial performance and provide an update on the investments, we're making in our long term growth.
I'll begin by highlighting our consolidated information, we set a quarterly record for revenues of $1 $4 billion, an increase of 47% over the prior year, reflecting business and shipment growth in all three segments.
On a non-GAAP basis versus last year's second quarter consolidated operating income increased 96% to $151 million.
Our adjusted second quarter 2022 earnings per diluted share grew 112% to $4 30.
The effective tax rate that was used to calculate the second quarter 2022, non-GAAP EPS was 26, 2% and under the current tax laws. We expect our full year 2022, non-GAAP tax rate to be in the range of 26% to 27% and that may be impacted by discrete items that could occur throughout the year.
Okay.
Asset based second quarter revenue was $803 million, an increase of 23% compared to last year.
Second quarter non-GAAP asset based operating ratio of 84.5 is a year over year improvement of 450 basis points second.
Second quarter tonnage increased three 7% and shipments increased 2%.
Total second quarter billed revenue per hundredweight increased 17, 7%, including higher fuel surcharges.
We secured an average 8% increase on asset based customer contract renewals and deferred pricing agreements negotiated during the quarter.
The July operating information is preliminary and builds on our first half performance as we benefit from the success of our strategy is powered by technology and innovation.
As a b S continues to improve consistency in business levels. It enables a more efficient network. That's a key element we've been communicating well we haven't closed out the month, yet daily tonnage in July is running 6% above the prior year month of July Adil.
Additional details on our preliminary July 2020 to business trends can be found in the 8-K exhibit to the press release.
Moving to our asset light key metrics, we delivered strong top and Bottomline results second quarter revenue increased 91% versus the prior year period, reflecting demand for logistics services. The addition of <unk> and more events and higher revenue per a bit in the fleet in that sub segment.
Second quarter asset light non-GAAP operating income increased 210% over last year.
Demand for our truckload managed solutions expedite and international solutions drove growth and operating margin as favorable market conditions combined with effective cost control created greater operating leverage.
Second quarter asset light EBITDA was $35 million, an increase of 185% versus the same period of 2021.
Preliminary asset light business trends for July 2022 had been provided in the 8-K exhibit to the press release, which was filed this morning customer demand drove revenue growth in managed solutions and truckload. In addition, the positive influence of MAU low revenue on year over year comparisons as reflected in the preliminary July daily revenue increase of 76%.
Momentum in our business and strong customer demand have enhanced our ability to generate solid cash flows. We ended the second quarter with a net debt position of $22 million or total liquidity of $444 million is at a very healthy level and at the end of the second quarter. The composite interest rate on all of our debt was two 3%.
Net capital expenditures totaled $60 million for the first six months of the year. We currently expect net capital expenditures in the range of 240 million to $250 million for the full year, which is lower than our previous estimates our equipment class eight tractor orders remain in place. We currently expect to receive all of them by the end of the year.
However, due to ongoing part shortages in manufacturing disruptions. We are now scheduled to receive a portion of the new 28 foot trailers, we were expecting this year with a balanced scheduled for delivery in 2023.
We continued to make progress during the quarter on upgrading and expanding our real estate with our 2022 real estate Capex estimated to range between $45 million to $55 million.
Our target for expanding shipment capacity by the end of the year is for an increase in the mid single digit percentage range.
We are continuing our multiyear real estate plans and have advanced projects that are scheduled for completion after 2022.
Our stable operating cash flow combined with the strength of our balance sheet ensures that we can simultaneously make investments in our business pursue value enhancing M&A opportunities and continue returning capital to shareholders from a leverage perspective, we will continue targeting investment grade credit metrics.
As we have described previously our capital allocation strategy focuses on investments in our business that have steady returns.
And that enhanced growth the benefit of these investments has contributed to our financial results. Our team continues to evaluate innovative investments and acquisition opportunities to enhance and accelerate our service offerings.
Returning capital to shareholders remains a priority, including a portion of our ASR in January we've acquired over 600000 shares year to date, and we'll continue with dividend and share repurchases, while ensuring we are well positioned for any changes that might occur in the economic environment.
We continue to pursue a balanced capital allocation strategy that takes into account all opportunities to enhance shareholder value.
We were pleased to deliver another quarter of outstanding top and bottom line results and look forward to industry, leading returns as we move through 2022, now I'll turn it over to Dennis.
Thanks, David we are executing well on our customer led strategy that results and success for our customers and long term value for all of our stakeholders.
We have deep relationships that are built on trust.
Customers rely on us to help improve their operations and help them pivot when things change or supply chain disruptions arise.
Customers tell us that flexibility visibility and transparency has never been more important. So that's what we're continuing to prioritize as we invest in our people technology and solutions.
We are seeing strong demand with a robust pipeline in fact, we have seen double digit percentage increases in the number of customers using multiple art best services since the beginning of the year.
Shippers are recognizing increasing value in partnering with us and they are trusting us with more of their supply chain needs because of our strong set of capabilities, our expertise and the easier access to our solutions.
This is driving outsized growth in areas like our managed solutions, which increased revenues by over 100% year over year in the second quarter of 2022.
The asset light truckload revenue growth of more than 200% was another highlight for the quarter, which was accelerated by the addition of Malo.
The benefits of more customers using more of our services are clear.
This strengthens those relationships driving greater growth profitability and retention, which leads to better financial performance and outcomes for our shareholders.
As we've previously stated we have over $5 billion and available market opportunity among our loyal customers.
But the broader market opportunity is much much larger than our existing customer base and our differentiated value proposition is helping us build new relationships with new customers as well.
In summary, we are expanding and deepening our customer relationships.
This is allowing us to grow profitably and set the stage for even greater capture of our market opportunity.
And now I'll turn it over to Danny LOE.
Thanks Dennis.
I'll provide an update on the mobile integration give a high level overview of what we're seeing on the yield side and provide a few updates on what we're seeing with some key asset light services like managed solutions.
The mobile integration is progressing well and have strengthened our position to capture market opportunity. We are on track with our previously stated goals.
Hello acquisition accelerated our pursuit of a better mix of contractual business that performs better than the current market conditions.
In addition, we continue to benefit from the experience of mellow and matching our carrier capacity to our customer shipments, while providing exceptional service.
On the asset L. T L side, where youre seeing a very rational pricing environment as David mentioned, we finished the second quarter, securing an 8% increase on our deferred pricing agreements.
In addition, more and more customers are beginning to focus on sustainability as they identify inefficiencies in their supply chain and focus on achieving their own ESG objectives are.
Our managed solutions offering was built for helping customers navigate those situations and as Dennis mentioned, we have strong demand for that solution.
Our managed solutions business continues to grow we've doubled revenues as this time last year and tripled for 2020, and we think theres more opportunity for growth here.
Now I'll turn it back over to Judy Thanks, Danny.
Before we wrap up I want to call attention to our ESG efforts. We believe it is critical that our business strategy and ESG initiatives aligned to create a sustainable business model with compelling prospects for long term success and value creation in pursuit of being more transparent this quarter, we released our.
Third ESG report in less than two years. This latest report contained our scope one and scope two greenhouse gas emissions as a baseline consistent with the task force on climate related financial disclosures. This will give greater transparency into our progress toward being a more sustainable company, which gives our.
Customers the information they need to reach their sustainability goals and by extension benefits our investors through stickier customer relationships. In addition, improving network efficiency automatically improves environmental sustainability, we're upgrading facilities and looking at our entire system to ensure a more eco free.
Lee safe, an equitable environment for all.
Finally, we recently announced several additional advancements across the ESG space, including an electric truck pilot at a b F. Our commitment to the D O Ts transportation leaders against human trafficking initiative, a bronze medal from the sustainability ratings provider Echo bought us for the second year in a row.
And being named on the inbound logistics 75 Green supply chain partner list overall, we are delivering on our goals and driving growth.
We know there's still a lot of work ahead, and we're up for the task and.
In closing the successful execution of our strategy is rooted in an integrated approach that enables us to be a true partner to our customers. Our success has allowed us to accelerate our capital return program and deliver superior returns for shareholders, while simultaneously investing in the business and maintaining a strong.
Balance sheet, our people work hard every day to serve our customers with excellence and create value for our shareholders and our strong second quarter results reflect those efforts.
This concludes our prepared remarks are David we can now open the call up to questions. Okay.
Okay, Malaysia, I think we're ready for some questions.
Thank you, ladies and gentlemen on the phone lines. If he would like to register for a question. Please press. The one followed by the four on your telephone you.
You will hear a tone problem technology request. If your question has been answered and he would like to withdraw jewelry registration. Please press. The one followed by the state once again that is one four if you have a question.
Our first phone question is from the line of Chris Wetherbee with Citi. Please go ahead. Your line is now open.
Hey, Thanks, good morning, guys.
So Chris maybe we could start morning, maybe we could start on just sort of the progression of tonnage as we went through the quarter was helpful to get that information, including July so thanks for giving it. So I just wanted to get a sense of kind of what you're seeing in terms of potential inflection in demand, particularly in the month of July obviously tonnage was up 6% but.
That's where kind of flattish I don't know if this represents a mix change within trade towards something a little bit more heavier weight industrial.
Versus maybe a little bit of softening in consumer, but any kind of color around what you're hearing on demand trends from a customer would be really helpful.
Hey, Chris This is Danny I think when we look at it this way talk a little bit more about the industry specific but I think there is a reflection of our model more than anything is that we have the opportunity to serve our customers regardless of how their demand is changing them. We've talked about some disruptions in supply chains and different things. This is <unk>.
Our ability to respond to our customers and really have visibility into our network and what our network needs.
Really.
To me, it's what's evolved as we've gone through the quarter Dennis do you want to cover some industries.
Absolutely I mean, I mentioned demand is still strong from our customers and we've got the opportunity to serve them in a whole lot of different ways.
Certainly we have our eyes on the macro and we see that lines and talk with our customers about particularly retail inventories, but then also.
A lot of manufacturing going on in our in our business as well.
But when you think about our ability to be able to respond to that in a number of ways. We're well positioned there and supply chains are still disrupted if you look at the constraints that are still out there in terms of labor availability.
Certainly component availability for manufacturers. Those are those are two of the top things that we hear that are constraining cut.
Customers in it it creates freight demand even even when inventories are high on the retailer so.
That would be what.
What we're hearing from our customers in terms of demand.
Okay. That's really helpful. I appreciate it and then I think as you guys have evolved the asset light side of the business, including acquisitions I guess, we're trying to get a sense roughly speaking of kind of what the margin profile of this business can be obviously, a very good quarter in the second quarter any help on sort of the back half of the year to think about what kind of what the margin profile of asset.
Might look like.
Chris This is Dan again, I think I'd point, you to our long term targets there could there be volatility and when you looked at that probably so but that hasnt changed what we view our long term targets for the asset light business.
Okay. That's helpful I'll leave it there thanks for the time appreciate it.
Thank you. Our next question is from the line of Jack Atkins with Stephens Inc. Please go ahead. Your line is now open.
Okay, great. Good morning, guys congrats on the great quarter guys.
Thank you.
Good morning, good morning, Judy.
So I guess.
Maybe maybe to start if we could maybe touch on the integration of mellow would love to kind of get a sense for how that's going.
Left to achieve in terms of some of those major milestones, whether it's on salesforce integration or or whatever that might be and then you know I know.
The initial plan was for <unk> to be accretive by the fourth quarter.
Is that has that been pull forward was more accretive than the <unk>.
Hey, Jack this is Danny I think.
We mentioned on the show.
So the progression is going well.
There's nothing in the integration from the systems.
That scares us we're still really one target there. So we've had some milestones that we've hit throughout the second quarter puts us in a good shape. There is still some things to do theres still.
Integration of employees, that's going on so if you are.
To me if you think there was probably some disruption from the integration during during the quarter that we looked at but overall, we're very pleased with how it's progressed and.
Really excited about what mobile has brought to the services that we can deliver to our customers.
Okay, and any comment on the accretion in the quarter.
Or was it a green if you had.
Jack.
We're on track I would just say in that we've commented previously.
We were looking to end the year. This year 2022 to be on that pace for that target earn out EBITDA rate.
For 2023, so we feel like we're on pace there.
Thank you.
Yep.
Great. Thank you David I guess, one maybe one more if I could squeeze it and we've been saying.
Can amount of innovative technology costs over the course of the last couple of years.
With these pilot programs for efficiency, just sort of curious when maybe we're going to see some additional detail or give some additional details around.
The traction you're getting there when we could maybe see those rolled out in a more broad based way across the across the network.
Well, yeah, Jack I mean, that's a great question and we're making good progress.
We had the three locations that we've had in place for a while.
Really we're on pace for two of the three you know too.
To you know being.
Business as usual for what they're doing and so that's pretty exciting we've got our Kansas City distribution center that we're still working towards some things.
We made some pretty significant enhancements to the software that got put in recently very recently in July in fact, and then we've made some modifications to the mobile platforms that were using one kind of interesting thing is we've got some customers piloting with.
US using the equipment and we really like that I mean, I I mean, I think that's going to be an interesting thing to study and evaluate as we go through the year and also are the Salt Lake City facility that we're building will be a facility that utilizes.
This equipment technology and process and it should be in operation in early 'twenty 23, and that gives us just even more to look at but you know we've had a different targets along the way we've had to make some pretty significant enhancements to the software and.
We really are looking forward to what we're going to see later this quarter and this year to really solidify the benefits from that so but lots of good things going on and again, we really appreciate the customer pilot work that we're doing as well.
Great. Thank you.
Yep Yep. Thank you.
Thank you.
Our next question is from the line of Ken <unk> with Bank of America. Please go ahead. Your line is open.
Great.
Morning.
Just maybe some thoughts as Judy you move into this new kind of world.
Mid to low <unk> operating ratio it at the asset base side. It really starts to show the power of the less than truckload network that you haven't seen in over 2025 years that I've been looking at it so what how do you start thinking about one what is the potential.
Operating level, what do you do with the cash flow may be your thoughts on are there other.
<unk> that you've been constrained and making because you didn't have the margins that you now can maybe make some more advancements give.
Given that cash flow.
Well great great.
Comments and thoughts.
It is interesting you know to think about whenever you see the results as they are we put out our long term targets on our asset based business as well the great News is we're on the upper end of those margins right now, which is pretty exciting and we still have a lot of work left to do I mean, we've got.
Some pretty significant optimization projects that we're working on and you know one of those is our city route optimization work that we've been piloting and working toward that we think will be rolled out more broadly towards the end of this year and so there are some technology oriented margin improvement.
Efforts that go along with that and it's really interesting too to look at what happens when those are put in place I mean I had one example.
One of our distribution centers in Atlanta are really benefited from this route optimization being put in place and saw an improvement in their street productivity that was over 10%. What you also saw from that facility was greater ability to grow because of the efficiency that was gained.
And so I love those kinds of examples I'm, just that our air efficiency oriented service oriented and growth oriented and so there's a number of those that we're still working on them and.
That's what it does for you you mentioned the capital.
And that becomes available whenever you have those kinds of results. That's what we're doing with the facilities you know that that we.
Had been working on and there are some some I guess 45 to 55 million or so of capital. This year that should put us in a growth position of mid single digits on tonnage and we're planning to do that same thing over the next few years as well and so you know they they deploy.
Payment of capital in a business that's returning what a b F is returning right now is a satisfying thing to do because you know that it's going to benefit you and benefit our customers, but we've got several of you know publicly announced expansions that we're working on two noteworthy ones would be in San Bernardino and one in south.
Chicago and I've already mentioned, the Salt Lake City, and Kansas City work that we've done in the past and so those are examples the other thing and I think David mentioned that we're doing I.
I think we see a balanced effort toward capital allocation, we've got several organic projects.
Projects and and just replacement dollars that we spend that again were more aggressive there because of what we're seeing are we also are always evaluating M&A targets or other types of investments that could enhance the technology and innovations work that we do.
As well as just a you know a an effort and an emphasis on returning capital to shareholders. So I'm just puts us in a good spot. Thank you for recognizing that and are we really are happy to be there.
And just one quick no one from from desktop.
Can you talk about the fuel surcharge gains above costs in the quarter, maybe can you quantify that at all.
Well just Ken just a reminder.
Certainly fuel surcharges increased its in our revenue per hundredweight metric in <unk>.
It's not a perfect hedge I guess us as fuel price moves, but theres, obviously, a lot of cost within our network that are connected to fuel and so.
We appreciate the way the mechanism works.
Offsetting for the most part those cost.
You may have some other comments.
I think the other way to look at that as fuel as fuel is in the revenue. It's a component of our pricing program that we have with customers. It shows up as revenue on one side and it shows up as calls on the other side and the key is as we go through we focus on account level profitability as we go through and review accounts and so when you have there on the revenue side and you have one.
The cost side. So you can make the decisions that are right based on the profitability of the account so.
Theres been some callouts to us as part of the overall program that we're working with our customers well.
Criteria, Dave Dennis Thank you very much for the time I appreciate it.
Thank you.
Our next question is from the line of Todd Fowler with Keybanc capital markets. Please go ahead. Your line is open.
Great. Thanks, and good morning, So I guess I wanted to maybe just take a moment to better understand some of the asset light trends both in the second quarter and now into July .
Revenue was down sequentially and I guess is that is a function of some of the spot pricing dynamics, but Danny I think you made a comment about seeing a better mix to contract business and so I just wanted to make sure we kind of understood. What you meant by that and then purchase transportation as a percent of revenue was up a little bit here in July and so I'm just kind of curious what you're seeing from a gross.
Margin perspective on asset light. Thanks.
Hi. This is yes. This is Dan I think obviously there is there is a weak spot market I don't think there's you've heard anyone say anything different within that and so we did have exposure to the spot market. Both in the legacy art best truckload business that was there and some in the mobile business. When we talk about moving to that better mix, there's just there's going to be.
The right mix of contractual and spot business MLR was more contractual than than the legacy business was and so we like that we were moving towards that ourselves and mellow just put us in a better place also put us in a better place with their experience in how to manage the market how to work through the cycles, how to position ourselves and so really that's the key to me.
As you mentioned the P. T is up a little bit that's probably a reflection of just how the market's moving from the different pieces of that but with our model. We're just confident that we can navigate through any cycle. We're in a better position a better platform than we've ever been to work through these cycles.
Yeah, Okay. That's good context, and that helps you kind of the progression.
Just for a follow up David Cobb.
I know you've got.
Things scheduled wage increases coming in here in the third quarter is there any impact this year from a cost of living adjustments potentially being higher than where they've been historically I just can't remember how that works with your with your wage increases. Thanks.
Yeah sure Todd.
Just as a reminder, our union contract with that the annual wage increase.
Went into effect July one and then the annual health welfare and pension increase occurs August one.
So again as we've talked about the combination of those increases is about a 2% on an annual basis.
Over the prior year on total compensation again add to that.
Our our operating ratio incentive which is accrued throughout the year and when you think about the award levels that we're operating yet, but that's another 3%.
Of compensation increase to our to our folks and so so we're glad to have that in the newly appreciated as well.
You think about just cost in our business.
It's certainly impacted by inflation.
Across our network.
We've seen higher cost just like.
Parts and repairs for equipment rentals, when you think about <unk>.
Supply chain disruption and the impact that that's had on those things and those items.
And then certainly.
Fuel has been an impact there.
The other thing is that we've been hiring and you you see you've seen our publicly announced hiring events have been successful with many of those.
But we but we've added some folks and so we have a higher proportion of say less experienced personnel that we have an opportunity I would say there too.
Get them gave them some more experience and then.
And also we've we've added supervision to kind of.
Add to that level of experience and so I think there's opportunity in that cost there too.
As we move forward.
Okay. Good I appreciate the thoughts this morning, thanks for the time.
Thank you. Our next question is from the line of Bruce Chan with Stifel. Please go ahead. Your line is now open.
Good morning, Tim This is Matt My Alaska, one for Bruce Congrats on the quarter and thank you for taking my questions.
Great. Thanks, Matt.
We appreciate the color you provided on that.
Asia.
I guess with regards to growth, we're curious as to how our priorities might change or maybe how the top line outlook could differ here.
And a potentially slower growth economic environment.
Hey, Matt This is Dan I would say as we look at the market I point back to what one of the things as Dennis said, we have $5 billion of opportunity in our current customer base.
We're more confident than we've ever been and our ability to deliver exceptional service in the truckload area than we've ever been.
And so I think we're in the early stages of trying to capture that opportunity from our customer base and so yes. There is a macro component that's out there you've heard it said in the headlines you've heard competitors talk about it but I'm still very confident in our ability to capture the market opportunity that's available on our customer base.
Great.
On the pricing side.
Are you seeing any signs of changes in shipper behavior, specifically any increases in inbound rfps or RFP activity.
Matt are you kind of referencing the truckload area or LTR area, which are what kind of judge your focus just just just generally across.
All the modes.
Okay.
You know really in the <unk> space.
Not seeing much I mean, we're having good conversations with customers.
Again, I'll point back to remodel work, we don't have to have just a price conversation with customers. We have a supply chain conversation with our customers and so that made me moat shifting that maybe it's the opportunity for us to really to dive into their supply chain and identify inefficiencies and so some of that may be at a mode shift away from one of our services to another service based on what their customers.
Trying to achieve right now, but when you have those conversations what we've seen is when we're open and work with our customers and provide all the options to them. It feeds every one of our service lines and so again I would point back to our model. We are confident in the model that we built and so we're excited about it maybe.
Maybe on the truckload side, just what Youre seeing there has been some conversation or are we still at three months six months 12 month annual beds in really in the truckload space and I'd say, what we're seeing there is theres, probably a shift back to 12 months, maybe others have seen a little bit more I think what I've seen is it's really dependent on the customer and what their view of the market is going to do if they think.
We're at the trough theyre going to walk in a 12 month rates. If they think that there is a little bit more to go down they might be looking at three or six months and so yes, you're seeing a little bit more shift to the 12 month, but I think again I think it's based on really the.
Customers' viewpoint of where the market is moving yeah. Matt. This is Dennis I would I would also add when you think about Dan you talked about us being better positioned really across any kind of cycle with all the capabilities that we have and I think about the conversations that we're having with customers and back to your question about top line growth another area that we're excited.
As our managed solutions as well and that gets us into a more strategic supply chain conversation and so we are able to talk across all of these modes with customers and what we're hearing from them is more strategic now.
If you rewound the clock a few months, where they would be in a more tactical.
<unk> got to get capacity conversation, they're thinking more about how to build more sustainable supply chain thinking about efficiency.
And we are well positioned our salesforce is excited about the managed solutions that we offer the truckload business that we can bring to the table and so we're very confident in the demand we're seeing there.
That's great color. Thanks, a lot.
Thank you.
Our next question is from the line of Georgia.
Sorry, Jordan <unk> with Goldman Sachs. Please go ahead your line is open.
Yeah, Hi, just sort of curious as you sort of go forward here and I know demand is still relatively strong, but some concerns about where we're heading in the economy are you starting to get.
Any feedback from customers around pricing and costs as you go into contract.
Negotiations over the coming quarters.
Would the expectation be that things get a little bit tougher on that front. Thanks.
Yeah.
Hey, Jordan. This is Dennis again, I mean, I think we just kind of talked a little bit about this but.
The conversation with customers is really about what's going on there and their supply chain strategically.
We have a whole lot more things to talk about than just price with them.
And so.
I wouldn't say that there's a.
A.
Large discussion about that at this point, it's really about preparing themselves for the future and then.
Setting up their supply chain for greater efficiency, and we have options to be able to do that if we're in a if we're enterprise conversation LCL for example.
We have managed solutions that that can help a customer navigate even mode shifting or mode optimization. So.
Yes, it's a much different more strategic conversation within these days.
So just sort of curious.
If there is a slowdown at some point.
If you're a shipper.
You don't need to fill up a full truck presumably.
There isn't really an alternative for LPL, but I'm just curious is there.
Other options at a shipper can use.
Rather than perhaps more expensive LPL option. Thanks.
Jordan.
As mentioned.
What are you are open to the conversations with the customer about what they're trying to accomplish in their supply chain. Our managed solutions. They build a it could be a inbound consolidation that is doing truckload. It with a combination of L. T O. It could be a pool distribution. If they are willing to or if theyre looking for cost savings, perhaps the conversation is how long how long can.
We hold orders can we hold orders for three days as compared to two days based on what their customers are expecting from them.
Then we can present, many different options and the beauty of our model is that we can serve all to provide all those options to the customer and so if the conversation for a customer is how do I lower my my costs. In this area. We talk about lead time, what are you looking from a lead time what are your customers expecting what can you do that honestly the environment, we're headed into who we are.
Talked about a weak spot market that does present, a lot of opportunities for customers to do some moat shifting if they're able to hold LCL for multiple days and deliver a different solution to their customer again, it's you.
You can't just implement those services you have to have discussions with customers about what they're trying to accomplish and that's that's why we love our position is to be able to have those full supply chain conversations with customers.
Thank you.
Thank you. Our next question is from the line of Ravi Shanker with Morgan Stanley . Please go ahead your line is.
Hey, good morning, guys.
Yes.
Christina one.
How are you.
And I can ask one on kind of competitive landscape here.
Couple of years, we've seen.
With some consolidation or at least you know some acquisition, but maybe.
Competition better stewards.
But we also.
From peers with a lot of plans to add capacity at least on the real estate or doors side of thing.
I mean, how are you guys thinking about the kind of competitive landscape.
The picture.
Yeah.
Yes.
Well you know I.
I think what's interesting is.
To look at that through the lens of a customer and if you think about the journey that we've been on really.
That we've acted on since 2012 since we bought Panther and in 2012, you know what we've been trying to do is build up a company that.
Is responsive really kind of in any environment and with respect to you know a variety of different alternative needs of customers.
What's been interesting during I think the pandemic and then just this moat that's very.
Disrupted period that we've been through is that assets matter.
In the conversation, but that's to Dannys point, that's never the entire solution you know that you're talking about and so it's very fulfilling to us to be in a position where we can.
Respond to a conversation that has a variety of different twists and turns that it can take so to speak to get the customer in a better place from their supply chain costs and efficiencies.
But.
What we look at when we're looking for some kind of an acquisition target.
We you know we're looking at the capabilities that we have and evaluating those and then thinking about what the customer is ultimately needing and we try to think a little bit longer term.
Three to five years, but we also see things changing very rapidly so not only do we stay in touch with kind of traditional.
M&A channels, we also stay very much in touch with the startup community and and the innovations.
Potential dollars that you could spin and we see opportunities in both of those areas and we stay active but I think what you've got to do is stay close to the customer and then close to those opportunities and then we have you know 500.
Tech and innovation people and including an R&D team that really helps us think about all of that and what we can do ourselves and then what we need to go and acquire and you know and we're not like exactly like any competitor. We think we're differentiated we think we're unique but again what is common for us is all.
That customer need focus and that's where we're listening and responding.
Got it very helpful and if I could ask one operational.
Question I think you've been quite successful in the last few.
Leveraging transactional business.
On the <unk> side to kind of help balance out the network.
I'm just curious for an update on kind of what youre seeing there.
Risks if things get a little.
Softer here.
Did that maybe it's harder to do and it seems like it opens up a cost headwind there or how should I think about that.
Matt.
Christine This is Danny I think when we think of that again, we're pointing back I think what you talked about the transaction was we walked through that is that matured into this is just part of everyday business for US now of how we view the network. We have some of the vessels, we made in technology and different things, we have better visibility than we've ever had.
And the assets are groups are working better than they ever have today really on a daily basis to understand what the network needs in that and so for us.
Again, I'll point back to that.
What we're seeing from a customer demand side of it I don't see that that changes with what we're going through.
Some of the things we're doing it actually creates more opportunities across the spectrum for us to be able to respond to the network.
So hopefully that answers your question.
Yes, that's helpful.
Thank you.
Thank you. Our next question is from the line of Ari Rosa with Credit Suisse. Please go ahead. Your line is open.
Great Good morning.
Good morning, Judy.
Wanted to ask you know it.
It seems like the market doesn't want to give you a very much credit for the improvements you've made in your financial results and perhaps some of that is reflecting concerns around the macro and that sort of thing, but it seems like you guys are saying demand levels are still pretty strong.
And not quite as concerned about kind of the sustainability of those results. So I wanted to ask do you think theres an opportunity to be more aggressive with the buyback, especially given that you're standing at a very attractive balance sheet position with pretty reasonable debt levels.
Or would you say that right now your bigger concern or a bigger priority is really on preparing for any eventual downturn, maybe holding onto more cash than you might otherwise do.
Well I mean I you know, we really have I think a balanced approach, but I do think that we've seen some good opportunities to buy our stock and and we've been aggressive you saw it earlier this year and we were executing on our ASR and we felt like that was the right thing to do.
It was a good thing to do and we've had additional authorization put in place earlier. This year that we're working through but but you know we have great confidence in this business and our growth potential and the cash flow that will be generated and we have some other business needs.
Now that are ones that we think about but it's more those kinds of thoughts as we step through this then it would be any sort of fear of something that causes us now we target investment grade sort of.
Our approach.
When we think about debt levels, we want to stay in that kind of a position, but we've still got plenty of room and you know we we think our stock is undervalued and has been a goodbye.
And we've been in the second quarter, we took the opportunity to to address that.
So, but thank you for the question and we do think the production of results like we had in this quarter.
Are going to help all of that and we're glad to have record results.
Got it and just in that context, let me ask a quick follow up if I could so again, what's kind of implied by where your stock is trading at it seems like it implies a fairly high cost of capital.
You were talking about M&A, just maybe how you think about what the hurdle rate is for conducting M&A versus directing that cash towards towards buybacks. It seems like it would probably have to be a pretty high hurdle or is that or are you thinking more about kind of what are the additional capabilities that are gained from M&A in <unk>.
Not thinking as much about kind of the particular return hurdles on a kind of one to two year timeframe.
Well, yeah. If you if you looked at our long term targets we put.
We included in there.
And objective to have returns that exceed the after tax return of the S&P 500, and that's been a part of our incentive programs.
For many many years decades in fact, and so we've we've always thought about any decision that we made including organic and that evaluation, but particularly you know M&A, but to your point when I think when you think about eight at transaction you know what I just for instance.
The mellow transaction when we look at that we look at the results. We think that could be produced but we also look at what that can do for our business otherwise I mean, we have you know 35000 active customers.
Most of all of those customers would have great spend in the truckload area, we felt like the Moe low team or feel like the mellow team and it's proving to be the case has a capability there that helps us.
With accessing capacity better and the confidence that our sales team has as a result of that is is proving to be even better. So we do see specifics in these deals that help us with investments that we've already made getting better at.
And that's really important when you think about these returns as well.
But it's.
It's.
It's fun to get to look at this business and how it's changed and how it could change and we just see lots of opportunities for growth in what we've already invested in but we also see the opportunity to keep ahead of the game with our offerings.
Got it okay very helpful and congrats again on the strong quarter.
Thank you.
Yeah.
Thank you. Our next question is from the line of a follow up from Jack Atkins with Stephens Inc. Please go ahead.
Okay, great. Thanks for thanks for taking my follow up question I, just maybe wanted to circle back to something <unk> was asking them how long ago, maybe following up on that for a moment, but you guys have a fairly extensive real estate portfolio I think you own over 100 terminals in your LTE network.
We've seen some.
Folks look to kind of monetize selected properties given the strength in the commercial real estate market.
And then redeploy that capital back into the business elsewhere, I know thats, probably not ideal, but I'm just sort of maybe curious given your stocks trading at sub 10.
10 times earnings you're not getting any credit for.
For what you're doing with the business.
It maybe make sense to monetize some part of that real estate portfolio to maybe be more aggressive.
Deploying it up other parts of the business or maybe buying back stock I just wanted to throw that out there and kind of pick your jump on that.
Yeah, I mean, I think what what's been important to us is to view that Jack over longer periods of time, and it's important to us to own. Our key facilities. You know if you get into a situation where you don't it particularly in this kind of a market you. Some you sometimes can five.
And yourself in a vulnerable place over a facility that you really need in other words, it's in the hands of <unk>.
Landlord that wants to make maybe make a different decision than you do but we have addressed our facilities through disposal of those facilities whenever we have shifted our needs or maybe the the city centroid has moved and we've made a different decision and so.
At times have those opportunities, but I think the kind of the fundamental principle in the asset based business is if you can you want to own you know your your key large facilities and it's mostly because you want to control your destiny and then the other thing is if you look at this business its return.
<unk>.
The dollars that are needed to to really say that you've accomplished what you need to do with respect to that because real estate is a part of that and so I look at it that way.
But I do know, what you're saying and we keep our finger on the pulse of those values and what those opportunities are as well.
Okay, no that totally makes sense and I understand that I just wanted to just take your jump on it. So thanks again for the time really appreciate it.
Thank you.
Yes.
Thank you.
Next question is from the line of Todd Fowler with Keybanc capital markets. Its a follow up. Please go ahead.
Hey, great. Thanks for taking the follow up in Jack's asking about selling selling real estate I'm going to ask you about buying real estate. So.
I think that.
It takes a buyer and a seller.
That's what makes the market. So I think there were a couple of comments about the planned network expansion facilitating I think it was like mid single digit shipment growth and I wasn't sure. If that was for later this year or I guess, if you could talk a little bit about the available capacity that you have in the network right now and then looking out to your 2025 targets not.
For guidance I understand there's a lot of variability within the market, but would your expectation be that you know your shipment growth as you know somewhere in that mid single digit range to get to the 2025 targets that you have.
Yes, I mean, I you know I think well first of all it's for later this year as what we were referencing and then with what we are going to do from a real estate standpoint in the next two years.
We feel like we're going to further expand our ability to grow we do have growth opportunity in the network today.
And and that's why you know it's important to really have a lot of sources of demand, which we do them. They are.
It's interesting because of the I think it's it's the disruption that's gone on in the growth in certain areas of the country and and maybe lesser growth in other areas. We're constantly battling balance in the network.
And.
I really feel like that so.
So that theres not one answer for could we grow in the network or do we have capacity you really have to know more but you know again the beauty of our approaches we do internally know where that is and we can address it through opportunities that we have with our customers.
So, but you know the other thing that is that as an opportunity I'd say and David talked about this earlier as we've hired and a lot of new people.
And we need those people to be trained supervised well and more efficient and I gave the example, I don't know if you heard it when I was talking about our Atlanta distribution center, becoming more efficient in St.
Street productivity because of a route optimization approach that we're using there that creating growth for that for that facility and we saw it and so we've got those kinds of initiatives and opportunities to but you know over time, when we got look out to 2020 five to those long term targets, we feel like our current plans.
Or in motion are going to get us there and the good news is on the margin side, where we're at.
Hitting the higher end of the margin, which is nice, but we need to do that consistently.
Yeah, we've got some visibility right now on the margin side, it's the top line and the other pieces, but you guys have done a really good job here in the last several quarters. So thanks for the time today.
Thank you Todd.
Okay, well, Malaysia, I think we're at the end of our time, so I think that will conclude our call.
Thank you, ladies and gentlemen that does conclude today's call. We thank you for your participation and ask that you. Please disconnect your lines have a good day.
Thank you.
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