Q3 2022 ArcBest Corp Earnings Call
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.
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As a reminder, this conference is being recorded on Tuesday November one 2022, I would now like to turn the conference over to Mr. David Humphrey Vice President of Investor Relations. Please go ahead.
Thank you for joining us on today's call, we'll provide an update on our business walk you through the details of our recent third quarter 2022 results and then answer some questions.
Joining me today on today's call as Judy Mcreynolds, Chairman, President and CEO of Art Best David Cobb, Chief Financial Officer of Art Best Danny LOE Art, Best President of asset light logistics, and cheap yield officer as well as Dennis Anderson Art Best Chief customer Officer.
To help you better understand art best 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.
For a more complete discussion of factors that could affect our best future results. Please refer to the forward looking statements section of our earnings press release, and our most recent SEC public filings.
Provide meaningful comparisons certain information discussed in this call includes non-GAAP financial measures as outlined in described in the tables in our earnings press release.
Reconciliations of the GAAP financial measures to the related non-GAAP financial measures discussed in this call are also provided in the additional information section of the presentation slides.
As a reminder, there is a conference call slide deck that 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 you can follow along on the webcast. We will now begin with Judy.
Thank you and good morning, everyone I want to start by recognizing the hard work and dedication of our leaders and entire team here at art Best who work hard every day to keep the global supply chain moving.
As we look back at the third quarter and forward to next year, our three point growth strategy remains our north star and our grounding in an uncertain environment.
We are confident that aren't mess is well positioned today with a solid foundation to serve customers and create value for shareholders long into the future.
Because of our sustained performance, our strong balance sheet and our disciplined approach to capital allocation, we are positioned better than ever to continue investing back into our people solutions and facilities throughout changing market conditions.
Our people are at the heart of our business and enable our company to stand apart from others in the industry people come to arc best and stay because of our values based culture and we continue to focus our efforts on hiring for the long term.
We are known for leading edge integrated solutions, providing our customers the flexibility they need in their supply chains, we bring our technology and innovative mindset to every partnership building processes and digital capabilities that make it easier and more efficient to do business, we prioritize investments.
In these critical parts of our business to stay ahead and succeed now and in the future.
As we approach our 100th anniversary, we remain focused on improving our facilities and equipment. We have planned and completed facility improvements and expansion. This year to ensure we meet and exceed our customers expectations, while maintaining art best position as a leading place to work we recently.
<unk> opened a new facility in Indiana and will add a new warehouse to our network in early 2023, and Salt Lake City with more to come we have also invested significantly into our fleet and as a result have one of the newest fleets on the road, helping us reduce our emissions and maintenance costs.
This year, we are on track to deliver $5 billion in revenue for the first time in our almost 100 year history and nearly $1 billion increase from last year and what is most exciting is that our growth opportunity remains tremendous with our team working toward achieving our long term financial target of 7%.
$8 billion in revenue by 2025.
A big part of this growth is due to our long standing partnerships with customers and the trust they have in us to find the right solutions to help solve their most complex supply chain challenges, we estimate a cross selling opportunity of over $5 billion per year with current loyal customers.
Perfect example of this came earlier this year with a longtime asset based L. T O customer that was struggling to find capacity, we partnered with them to develop a pool distribution solution, including truckload that help them get equipment capacity they need it.
As a result, our total business with this customer across all solutions increased six times over 2021, and our asset base shipment volumes for this customer increased three times. In addition to this growth we are now exploring and expansion into more at this customer's business units.
Art Best has a rich history of innovation and we continue to see a tremendous opportunity to serve our employees shippers and capacity providers more effectively and efficiently by leveraging technology in fact over half of our top tier technology projects are expected to drive additional.
No business efficiencies as we navigate a changing industry and economic backdrop company leaders have access to advanced reporting tools that help them understand performance and costs better than ever before we are enhancing the utilization of our asset based network with levers like dynamic pricing and we're encouraged by.
The route optimization work that we've mentioned previously with our pilot locations seeing both revenue growth and efficiency gains and now I'll turn it over to David Cobb, who will take you through our financial results and provide an update on investments to facilitate long term growth.
Thank you Judy I'll begin by highlighting our consolidated results, we reported third quarter revenue of $1 4 billion, an increase of 33% over the prior year quarter, reflecting business growth in all segments on a non-GAAP basis versus last year's third quarter consolidated operating income increased 33% to 100.
$31 million, our adjusted third quarter 2022 earnings per diluted share grew 43% to $3 80.
Active tax rate that we used was used to calculate the third quarter 2022, non-GAAP EPS was 26, 3% under the current walls, we expect our fourth quarter non-GAAP tax rate to be comparable to the rate in the third quarter, which may be impacted by discrete items.
Our business generated solid cash flows this year benefiting from strong customer demand for logistics services and a favorable pricing environment. We ended the third quarter in a net cash position of $48 million improving from a net debt position at the end of second quarter.
Our total liquidity of $541 million remains at a very healthy level and the composite interest rate on our debt at the end of the third quarter was two 7%.
Last month, we amended our existing credit revolver agreement extending the term of the facility through October 2027, and improving the terms, including converting it from a secured facility to a senior unsecured facility, which reflects art best strong credit profile. We also moved to a sofa based borrowing rate to prepare for the planned discontinued.
Asian of LIBOR.
In our asset based business.
Third quarter revenue was $792 million, an increase of 16% compared to the prior year quarter.
The third quarter non-GAAP asset based operating ratio of 85.3 is a year over year improvement of 140 basis points. The third quarter results were impacted by gains from property transactions and sales of revenue equipment offset by increased cost in some areas of our business.
We currently expect to receive all planned 2022 tractor purchases by the end of the fourth quarter. However, delays in the timing of tractor deliveries earlier in the year and the accelerated sale of a portion of our tractor fleet resulted in elevated maintenance costs. During the recent quarter, which are in the fuel supplies and expenses line on the asset based income statement.
We sold at a high total cost of ownership, including maintenance expense. However in the current favorable equipment markets are disposition produced gains, but the timing of those sales was earlier than our normal trade cycle contributing to a short term slightly higher average fleet age in.
In addition, parts repairs and maintenance have been impacted by supply constraints and inflationary costs as new replacement equipment is on boarded in late 2022 and into 2023, we expect our equipment maintenance expense to be positively impacted over time.
But we have had overall success throughout the year and our hiring efforts above normal cartage usage in some locations as well as the lower productivity levels of the new employees have added cost in our asset based network. Our team is focused on optimizing cartage uses usage and reducing this expense, which impacts the rents and purchase transportation.
<unk> expense line.
The third quarter tonnage increased four 4% in shipments increased two 8% and total third.
Quarter billed revenue per hundredweight increased 11, 1% and included the impact of higher fuel surcharges.
This price increase percentage compares back to the 17% increase in billed revenue per hundredweight in the prior year third quarter over the third quarter of 2020.
While the month just ended yes.
Yesterday, our initial figures indicate daily tonnage in October was running 4% below the same period last year, while shipments have increased approximately 1% over the prior year period.
Our <unk> rated business drove the revenue and shipment growth, which was partially offset by fewer heavier weighted truckload rated shipments this mix change of lower truckload business and the asset based network reflects our actions to optimize revenue as market conditions change.
On a sequential basis the change from September to October 2022, and our core <unk> rated tonnage and shipments is inline with historical average and weight per shipment is increasing additional.
<unk> on our preliminary October 2020 to business trends can be found in the 8-K exhibit filed this morning.
Moving to asset light third quarter revenue increased 63% versus the prior year period, reflecting the addition of <unk> and more events and higher revenue per event in the fleet segment.
Third quarter asset light non-GAAP operating income increased 61% over last year benefiting from demand for our truckload and managed solutions.
As mentioned last quarter and according to publicized industry information market rates have softened, which are reflected in the lower sequential monthly year over year revenue growth rates.
This effect combined with business mix changes and investments in growth initiatives resulted in a lower level of third quarter operating income compared to this years first and second quarters.
Third quarter asset light EBITDA was $22 million, an increase of 53% versus the same period in 2021.
Preliminary asset light business trends for October 2022. They have also been provided in this morning's 8-K exhibit preliminary October daily revenue increased 40% over the same period last year, we continue to see revenue growth moderate in some margin compression relative to earlier in the year, reflecting market conditions and business mix changes beginning.
Today the prior year comparison will include Mello.
Net capital expenditures totaled $119 million through September and they should be in the range of 200 million to $210 million by the end of the year.
As I mentioned earlier, we currently expect to receive all of our 2022 class eight tractor orders and we continue to make further progress on upgrading and expanding our real estate and we have a multiyear plan for future ABF network investments.
Capital expenditures on some real estate projects. In addition to the revenue equipment that I mentioned earlier have shifted into 2023.
As a result, we expect our 2023 capital allocation for solid return generating investments in the business will be at a higher level than 2022.
We plan to provide more details with our fourth quarter earnings release.
Our cash resources and the strength of our balance sheet. It allowed us to pursue multiple value enhancing capital allocation strategies, including investing in organic growth evaluating M&A opportunities that could potentially enhance our service offerings and returning capital to shareholders through our dividend and an approximately $75 million of year to date share repurchases.
While we are mindful of the changing economic and industry environment, our financial strength and customer focused strategy positions us well.
We continue to pursue a balanced approach to capital allocation, which seeks to enhance shareholder value, while targeting investment grade credit metrics overall.
Overall, we were pleased to deliver another quarter of solid financial results and we are positioned to manage through economic cycles for the long term growth.
Now I'll turn the call to daily.
Thanks, David I'll provide an update on the mobile integration and gave a high level overview of what we're seeing on the yield side.
Today marks one year since we closed the <unk> acquisition.
Over the last 12 months, we have been focused on a successful integration I am pleased with the progress. The team has made including completing our systems integration ahead of schedule.
Are you seeing benefits from our truckload business being a one operational platform and adopting <unk> approach to truckload customer service and carrier management.
As we've mentioned before the mobile acquisition to accelerate our pursuit of an increased mix of contractual business, which performs better in softer industry conditions. Despite.
Despite recent market changes, we're still seeing double digit low growth over the prior year's combined Malo and legacy truckload shipments we continue to be encouraged by our ability to drive better margins through improved bar rates as a result of most care management approach and we remain on track with our previously stated financial goes related to the.
Earn out from the acquisition.
Overall, we have continued to deliver double digit growth in the asset light segment with plenty of opportunity for acceleration based on our continued investments in this business and the market opportunity we see.
Now that all of our truckload team members are working out of one system. The largest parts of the mobile integration are behind us and we are ready to run.
Buying our high demand managed transportation transportation solution with the strengths of <unk> and below gives us more opportunities for growth and margin improvement and we are focused on achieving our long term target of asset light margins from 4% to 6%.
On the asset base side, the pricing environment is rational we finished the third quarter by securing a six 9% increase on our deferred pricing agreements.
Now I'll turn it over to Dennis.
Thank you Danny.
You hear us talk often about our customers because we work to make them the center of our operating model.
We do a lot of listening and what we hear from our customers drives our work.
Over the last few months, we've seen a shift from customers focusing on securing scarce capacity to prioritizing supply chain efficiency.
This echoes what we heard years ago, which led us to build our managed transportation solution, which provides complete freight transportation management services to help our customers continually optimize their supply chains.
And as more customers focus on sustainability to reach their ESG objectives, we're glad to have solutions like this in place to help them.
This relatively new customer solution has tripled revenues since 2019 and has the deal pipeline is stronger than it has ever been all because we listen adapt and grow.
I was recently with one of our customers who uses our managed transportation solution and our visit reminded me how great. It is to be part of their growth story.
A few years ago, they came to us needing LDL services as their business outgrew parcel.
And after a few years of providing LCL service for this customer it became clear their needs we're expanding again.
Because our philosophy is that when our customer wins, we win we took a true partnership approach.
We began working on a managed solution for this customer that allowed them to reduce their supply chain costs by utilizing other modes like truckload.
We then shifted focus to automation having.
Having our 400 person in house technology team is a real differentiator for our customers.
We're at a point now where were auto tendering business and auto routing, which means it's no touch for us for the customer.
Our customer forecast their business to double all without adding any headcount because we've eliminated their need to do data entry.
As their business grows we can continually help them optimize modes and carriers, while looking for ways to make their supply chain more efficient and flexible.
We're proud to have received one of their coveted vendor awards and even prouder that we were the only supply chain partner recognized.
Even though we are one of their youngest tenured suppliers.
We love stories like this because they show our strategy in action.
As a result of this partnership our revenue with this customer has grown almost 50% over the last 12 months and we expect business to double in the next year.
We're absolutely focused on our customers and we provide solutions and technology that help them drive their business forward we.
We enable all of this because we are a people focused organization at heart.
Nothing we do is possible without our great people and it's a testament to our culture that we hire for the long term.
That commitment is evident in the recent recognition of art best buy comparable <unk> in their third quarter 2022 awards for best compensation, and best company Perks and benefits.
These awards are based on employee sentiment and feedback over the last year across more than 70000 companies and they affirm that we're focused on the right ways to reward and grow our people who in turn work to provide excellent customer experiences every day.
Because of our culture, we have a substantial amount of experience throughout our organization.
We see and feel that every day, but it's especially rewarding when it is recognized by others.
And we were so proud to see Judy named last week to the Arkansas business Hall of Fame class of 2023 for her contributions to our industry and the state of Arkansas. Congratulations on this honor Judy now I'll turn it back over to you.
Thank you Dennis I really appreciate that.
Before we conclude I want to mention continued progress with our ESG efforts, we have engaged a third party advisory team to help guide further development of our ESG roadmap, which will detail our three to five year strategy and specific initiatives around emissions reduction and more sustainable operations, we understand the.
Impact our industry has on the environment and our focus on developing solutions that help reduce that impact I also want to recognize a milestone in our D. I journey, we recently announced a partnership with integrate an organization that helps hire and onboard neuron divergent talent.
We're reviewing our recruiting hiring and onboarding procedures to identify ways, we can make those processes more inclusive and we'll be actively working to hire more narrow and distinct talent. These employees can bring a unique perspective to the company's efforts, resulting in creative solutions throughout our organization.
We look forward to providing a more inclusive workplace for all our team members and closing our growth strategy continues to serve our stakeholders well.
Investments in facilities and technology make it easier for our employees to serve as trusted advisors and turn they're able to support and empower our customers in both their day to day supply chain operations and in navigating uncertainty.
While we are proud of what we've accomplished in the last several years, we are not done we're committed to keeping the global supply chain moving delivering on our goals and driving growth that concludes our prepared remarks, David Humphrey. We can now open the call up to questions.
Okay, Frank I think we're ready to take some questions.
Thank you.
If you would like to register a question. Please press the one four on your telephone you will hear a three pronged technology a request. If your question has been answered and you would like to withdraw your registration. Please press the one followed by the <unk> III.
One moment please for the first question.
Our first question comes from Chris Wetherbee with Citigroup. Please proceed.
Hey, Thanks, good morning, guys.
Good morning.
So I guess I wanted to start on cost inflation and get a sense. We've heard from a couple of the competitors that cost inflation ex fuel is kind of running in the 57% to 9%, let's call. It high single digit range I guess I wanted to get a sensitive.
If you felt like that was kind of the right rate for your asset based business and when you think about the pricing environment, particularly as we roll into next year.
Do you think about pricing relative to that cost inflation do you need to do more work with productivity or do you think pricing can kind of offset most or all of that type of inflation.
Yeah, Yeah, Chris Good morning, I'll start.
We'll probably have some comments from others here, but but we do see the inflationary impact across our business in a number of areas certainly fuel is evident impact and that impacts not just diesel fuel costs, but but other.
Pained in tires, and and then really across the board on some things, but that also is a inflation along with fuel costs can be demand.
No.
Reduction from our from the from the consumers, but we see we see.
I mentioned, the repairs and maintenance expense being elevated for us in the quarter.
Some of that has to do with the inflationary cost of that and also the supply chain.
Issues that were there with getting parts delivered but even our vendors outside vendors that head mechanic.
<unk> of labor shortages that impacts that as well so we saw probably in the.
For those kind of items parts and maintenance kind of in that.
Double digit percent increase on a on a part kind of basis increase.
There's opportunity there as I say it around our equipment coming on to improve that.
You mentioned productivity I think certainly that's a big impact.
For us as I've mentioned.
Earlier, we had some new employees coming on and.
For instance in our in our dock operation we've got.
About a third of our employees know that because of the hiring and the retirements, we've got about a third better.
We have experienced that's under 18 months and so as we know that thats.
It can be.
<unk> two.
To gain some improvement there in terms of efficiency, which can drive some cost out of the out of the equation.
Yeah, Chris This is Danny just on top of what David said, yes, we spilled the pressure for cost inflation that there's things we can do we see opportunities that.
For us to control that but ultimately at the end of the day, we have to price our freight to cover the cost of inflation in.
And like I said the environment, so rational and we continue to feel that we can can do that too that there's value in our services, we're providing to our customers and then we can cover the cost of inflation.
Okay. That's helpful. I appreciate it just a quick follow up on that.
The operating ratio I think you noted in the 8-K between <unk> and <unk> typically an increase of 100 to 500 basis points can you just help us with a little bit of color around sort of how you think about that I think you've noted the high and sort of what you experienced during declining economic environment I don't know Ken described this as a declining economic environment or how you're thinking about that range.
Yeah. Thanks.
Evan.
Evidence indicates that the macro environment has softened in all the experts are predicting that it will soften further but.
I'm confident in our strategy and optimistic about the opportunities ahead of us in our ability to manage through economic cycles, I think as Judy mentioned.
At the outset of the call.
We have more tools and data available today improved yield management strategies and technologies to manage our business better. So I think that we're.
<unk> too so really manage through any economic environment better I would just say.
Like I said.
The evidence is pointing to a softer economic environment and our ranges is that in those declining and economic environments. In the past has been on the higher end of that range of or that are that are stated there's always puts and takes in the quarter we have.
Some areas that I pointed out in the third quarter that we've got to work on.
<unk> cartage, including our productivity, including the repairs and maintenance that some of those will take take time to.
Two to improve but certainly on a path to improving that.
Okay. Thank you for the time appreciate it.
Our next.
Our next question comes from Jordan <unk> with Goldman Sachs. Please proceed.
Good morning, I was wondering if you are a little more color given the slowdown we're saying yeah on price I know you say sort of over time it could cover inflation and what are your customers as you sort of talk to them about pricing doing in then.
Maybe put some color, perhaps on the third quarter or what you're seeing in October .
In terms of maybe just the.
Less than truckload yields perhaps looking at things on an ex fuel type of basis. Thank you.
Hey, Jordan.
One thing I'll, just kind of we talked about are deferred.
The six 9% increase in the third quarter is still a very strong. If you go back historically is one of our better quarters with third quarters with six 9%, so theres still confidence that the customers recognize value.
We're not alone and the fact that there is inflationary pressure on costs in this industry and so again.
Our model produces values for our customers and we will continue to rely on the model, but the flip side of that as well too is when you. If you take our integrated approach to logistics.
If customers come to us and they're having supply chain cost increases we're going to go back to managed solutions and talk to them about what we can to reduce that we've been successful for that are in the market when capacity was tight and I'm confident we'll be successful in addressing that market when costs come up and so that's the difference in our model that we have today is that regardless of.
Environment, we're facing we have an answer for our customers.
Okay. Thanks, and then on the asset light side I think you noted that.
Selling prices in the quarter had dropped faster than our cost of transport if I got that right. I mean is that something that you would expect to sort of normalize our balance out in the coming quarters.
Obviously, we do we don't do it as a deflationary market.
Rates are dropping faster.
We also we have a balanced approach with our with our carriers.
Theres different pieces that we can do.
Malo has has has added to its their expertise in navigating this market. We are significantly better than we were in the past of doing this our truckload platform right now we have extreme confidence in.
We know that we.
We can continue to invest for growth and then as the market starts to turn that we're positioned to grow faster than others in that area.
Okay, great. Thank you.
Okay.
Our next question comes from Jack Atkins with Stephens incorporated please proceed.
Hey, great. Good morning, and thank you for taking my questions and Judy just want I want to echo the congratulations on the on the Arkansas business Hall of Fame.
Jack Barry.
I guess, David My first first question David Cobb. My first question is for you could you maybe kind of put a little more color around what's going on with whats the cartage expense within the asset based business and I guess as we sort of think about.
Truckload costs coming down and unemployment.
Dig a little bit of a tailwind there can we maybe kind of think about.
Rents in PT kind of returning to more normalized levels, what's the timeline on that over the next I don't know.
Year year, and a half can you kind of help us think about that.
Yes.
Cartage issue is really.
Well Theres 222 issues. There are two items one is the purchase transportation rail over the road and then the fuel surcharge associated with with those costs.
When you look at that on a year over year basis, those were all inflated as long with.
Our local.
Pickup and delivery cartage usage and that stems from.
Sort of coming out of this hiring challenge that we've had of getting.
Drivers in the right locations.
So that can be they can vary by location, where you have challenges with that so so that's really where the usage of cartage kind of came about and a higher level than we would like.
So we have opportunity there that that cost was.
I'll, just say probably 30%.
Higher year over year and in the Cartage line itself.
Which is which is when you look sequentially.
P T. The over the road has actually declined but the cartage increased sequentially from second to third quarter and kind of the same clip as it did year over year and so.
That's an area that as we bring on drivers and as we've done really well in doing that we have a lot of opportunity to.
Two to reduce that in.
I hesitate to tell you about the timing on that I know, we've already taken some actions here recently, so we should see a reduction in the fourth quarter sequentially, we're doing a lot of work around bringing on.
Particularly military veterans.
<unk> focus on that our team is really focused to help bring in military brings you good disciplined who are.
And drivers as well in developing our own drivers to do that so our R. A T map program, we've talked about before and in our driver development program all of those are contributing to.
Solving this problem that we have and so.
Yes.
Okay. Okay.
That's helpful. David Thank you and I guess for my follow up question.
Judy I'm just curious on the on the technology investments.
And we've been sort of ramping those up over the last few years you know at what point do you think we're going to be a place where we can commercialize some of those and maybe see some of the impacts that I know.
You've been sort of hoping for and investing for across the P&L is that something that could begin to materialize in 'twenty three or is that something that could take longer to show up.
I think it could in some locations and we've mentioned that we have locations, where we're running that equipment and technology in Indiana as well as in Kansas City. We're currently at.
Suffering a little bit from the delays of equipment and on a particular piece of that equipment and.
Cause things to go on a little bit longer than we like to in the pilot in Kansas City, but we should be riding that issue in the fourth quarter and then as we go into next year really seeing.
The protection of all of that work come together and you know we have seen signs of some of the.
The I think key metrics being met that we wanted to early on that relate to some of the efficiencies and we certainly see the improvement for the customer in terms of you know claims and and also where we're seeing the results that we would expect really.
The injuries and that sort of thing as well being eliminated them, but as we as we are.
Go into next year early we're opening up Salt Lake City, which is a warehouse and I'd say another environment, where you know there's smuggle platform our equipment and technology is going to be used.
It will be good to have you know a second distribution center and live with that and so it'll take some time to get the pilot work done in Salt Lake City, but we're applying all the knowledge that we've gained from these other locations into that so we should go faster.
So I'm expecting you know in the middle part of 2023, you know to be able to talk about tangible results in and make some decisions about how we go forward and I think that that will be beneficial certainly internally, but it's also going to be beneficial to all of our investors and other stakeholders as well.
Okay. That's great. Thanks, Thank you very much.
Yeah no problem.
Our next question comes from Jason Seidl with Cowen. Please proceed.
Jason Your line is open. Please proceed with your question.
Sorry about that can everyone hear me now.
Yes, we can good morning, sorry about that good morning, Judy I wanted to extend my congratulations to you as well that is a great honor.
Thank you focus a little bit on.
Some of the weight per shipment trends I mean yours are going up and typically what we see in a slowdown is weight for shipment phasing on the <unk> side has there been is this really more of a mix shift in some of your business getting away from some of those truckload business that you mentioned and then maybe some of the industrial business doing better than some of the more consumer.
Related business.
Hey, Jason This is Barry I think when we look through it.
It goes back to optimization of our asset base network and making the right decisions, we have more tools more visibility than we've ever had before we're able to have daily weekly decisions about what fits into the network.
We talk a little bit about the shift in October that you mentioned within that that wasn't a decision that we just made that plus shift that that was that's what the market is telling us that's when we do it when you talk to the optimization and you talked through the models that people that built it just happens because the market the market rates for truckload were dropping down and we're able to see that we can put more revenue.
Onto our trailers with some of these LDL shipments as compared to the heavier weighted truckload shipments and so.
I don't know that you want to read too much into some of the profile shifts because it's really about what our network needs and what we're doing to optimize it.
That makes a ton of sense and then I wanted to follow up on Judy something you mentioned you talked about.
Now you guys have much more tools at your fingertips to sort of provide the right freight in your network provide the right resources, how should we think about that impacting sort of peak to trough margins. If you will on a positive basis for our best.
Well you know I think you know Danny just talked about one of the main ones, but you know we are clearly focused in the asset based network you know on our published customers our core L. T L customers that we know.
I think a 80% of our customers have been with us for 10 years and that's that's just a great fact, whenever you're trying to evaluate you know what business you can have on a consistent level, but even those customers and that's kind of environment can't predict specifics into their businesses. So.
As we mentioned we have to be both we.
We have to be nimble and flexible and informed and the asset based network in order to know, what's coming and and then on a daily basis, we can supplement that with the business that we gain from some of our quote opportunities and knowing you know information that's.
Related to that which we have especially with some of the technology that we were just talking about earlier, we have that visibility on our.
Our workforce and some of these choices that we make and how long. It takes you know to handle certain shipments and that sort of thing. So we've got that you know as an input as well as the overall.
It kind of typical dimensional work that we do on those shipments.
All of that comes together in a way that allows us to know where we need more freight and we have great opportunities to access that and I think the cause of all that youre going to see a more consistent level of business.
And and as we go into areas, where we have ground. Some capacity, we can take that into account as well and so I just I just feel good about that and also you know I think when you know as much as we know you can evaluate you know that the pricing on that business and the profitability that you're targeting even better.
And you know so it just comes together very well, but let me tell you. This though we still have a lot of opportunity to improve you know when we experienced what we did during the pandemic and and you know some of the the lag on being able to hire as many people as we needed to.
A lot to improve on efficiency commute.
Communications.
No information for both internal needs and for our customers, we have a lot to improve and I'm glad with where we are but I'm also looking forward to that.
Or it sounds like with the improvements that you've made you're in a better position now than you were sort of during the last downturn.
Absolutely well and the other thing Danny mentioned already was just our overall approach with customers you know when you see the world do there is youre going to be more successful and the more information that we have the better we are.
Listen I appreciate the time as always.
Thanks.
Okay.
Our next question comes from Ken <unk> with Bofa. Please proceed.
Hey, great good morning.
So looks like got Judy good morning, Congrats as well.
I think tonnage decline.
At 2%.
Timber and accelerated down 4% October maybe talk about the more muted peak, obviously, we had and maybe thoughts on your pace going forward as you now face some upper single digit comps over the next few months. So maybe I don't know if you or David wanted to chime in on that than you are.
You talked about the in face of that your thoughts on pricing given that pace of volume decline.
Hey, Ken This is Dennis Anderson, I'll start and maybe others can do.
And here you asked the question about muted peak and I think.
Certainly.
You could you could look at what's going on in the retail environment.
You can see the pulling forward of demand.
It happened really as a as a response to last year's challenges.
And so certainly we've seen that in our business, but as we've talked about earlier here.
We've got a diversified customer base across retail across manufacturing.
And supply chain challenges still exist. So while there is there are some macro factors I think that are conspiring to soften demand.
There is still supply chain needs that need to be met and the fact is people need goods moved and we're in the business of moving them and so supply chains are also not getting less complex and so we feel great about having these services to be able to deliver to customers even in a period, where the macro appears to be soft.
Yeah.
Yes, Ken this is Danny.
Just kind of add on to what Dennis is saying you know what I think about that what when you were talking tonnage Scott, it's really about opportunities that we see and so just one thing I want to go back to it as our model just I was recently kind of looking at our three most recent kind of managed wins that we had.
Each of those examples greatly back to IBM and so the more we talk with customers. When we look at the opportunities that are out there. That's that to me is one of the models different than what you've seen in the passes is not just an <unk> asset story, it's a logistics story about talking to our customers and that creates more opportunities both for asset light, but also.
That produces opportunities for you.
<unk> asset part of the business I don't think that we've talked is 60% of our customers that came to us for asset light also use us for asset business and so to me that's just.
Another data point that talks about our model and while we see it being successful.
Great and then just on a different completely different subject. So I guess the answer there Danny is then.
I understand the customers coming back, but if tonnage I just wanted to understand are you going to see even tougher time given the comps are.
Upper single digits.
That likely to sustain our you're giving an outlook in terms of thoughts on that into the full quarter.
Well Ken this is Judy I you know one thing that I'll say that we were encouraged by is when we looked at October to September you know, we had relative stability in our L. T. L. A rated shipments, which that's an indication.
And you know and we also had some some increase in that category of our weight per shipment.
And the other thing I'd say is when we're thinking about the future. We're not we're not giving guidance, we don't give guidance, but you know we have strengthened our pipeline is really pretty encouraging and whether it's in the managed side of things or just the capability set that we've got you know with our truckload.
Offering now and being a year into it you know I'm very encouraged about that and then interestingly I think Mel was a strength in food and beverage is a you know so.
Something that you can point to that that has strength in recessionary type environment. And then you also there are elements of our asset based business you know that our serve they serve service related businesses. One example, I was thinking of in that regard.
To assist our trade show business, it's up a lot.
And so there are some things that are really will help us mitigate maybe some of the retail softness or if there is less a manufacturing industrial activity, although I think that remains to be unseen because theres. So many unfilled orders you know that we deal with that on our equip.
<unk> side that you know I'm thinking that that's going to hang in there and as we look towards 2023, but what we tell our team is despite the economic backdrop, we have a lot of opportunity and we need to go pursue it.
That's helpful.
Question on the other different subject with you kind of keep taking these innovative tech costs for three years now you've now have non union vacation caution there that youre pulling out as one timers I don't understand don't they become opex at some point in terms of ongoing or is that what you were talking about to Jack next year in 2003, it becomes opex as you'll make a decision.
Yeah.
And I know, you're making a general statement there, but you know what we try to do is show you what we feel like the true operating costs or the operating performance of the company is what we don't want to do is end up you know on a call like this talking about those one offs, which tends to happen if you leave them in there.
So our view is to show you what's unusual and so that we can talk about you know the business and how it's performing but certainly you know that's a fair question related to some of our technology and innovation cost and once we have those locations, what we characterize as operational and <unk>.
Other words, they're not being piloted and we're not changing you know they they are the approach that we're using in those facilities, we feel like those need to go in so we've had one of the two of our Indianapolis facilities as considered operational we expect you know in 2023 that the other win liked.
We will be Kansas City is still going to be in pilot again, partly because of some of the equipment delays that we had related to that but you know certainly salt Lake City. If we're opening a new location there and we're using a different approach to pilot you know that will be considered as a non-GAAP .
Item and so we've got a methodology that we're applying to that we're trying to be constructive with what you see in terms of what's operational and and yes. The answer is as those things operationalized they will be folded in.
Great. Thanks for the time appreciate it.
Okay.
Our next question comes from Todd Fowler with Keybanc capital markets. Please proceed.
Great Thanks, and good morning.
Can you help us hey, good morning.
Can you help us think about some of the flexibility that you have if we do enter a more prolonged softer tonnage environment. If it's next year at some point in the future and maybe specifically probably around labor expense I mean, that's the biggest bucket on the asset based side. So yes.
How should we think about maybe the variability you have with variable labor cost or headcount attrition if tonnage trends continued to moderate.
Well I think more so than the labor category.
What David mentioned earlier about how we will more.
I guess better manage our cartage and other rented equipment purchased transportation, that's really kind of the main lever because.
Honestly it has been very difficult to get the right people hired it takes.
A while to get these people trained and to be efficient. So we're gonna be stingy, a little bit about that labor category because of what we've been through and I'm sure that you're hearing other companies say that as well, but setting that aside for a minute. We do have some great opportunities.
And these other areas to better manage costs, because we've had to use those levers because of our suboptimal situation with hiring but in 2022 over the last 12 months. We've hired over 1000 people, we've never hired more people into the company and as David mentioned when you go back to that labor category the big.
<unk> there is greater efficiency gain out of those people that we have hired them and we'll continue to have retirements.
You know on the on the driver workforce, especially we're going to we'll continue to have those so that that is one.
Continuing thing and so maybe one way to think about it is we might be less aggressive in hiring you know in some of these locations that we really don't need people and just by the natural course of things you've ended up in a place that you need to be but you know we've been through lots of scenarios.
Like this I mean this one is no different than the others that it's just the predictability of it is just not there and so you just have to be flexible and nimble and I like our opportunities to use some of our quoted business to help us along the way to optimize the network.
That's a that's an important fact to.
Okay got it that's helpful. I know there was a lot of talk about where <unk> is right now and where it could go so that's helpful context.
For a quick follow up.
Danny LOE can you comment on within the brokerage business, what percentage is contracted versus spot and where do you see that trending going forward and then its 23, a year where asset light is in that 4% to 6% margin range now that you're on one platform and you've got the integration kind of moving where you want it to be.
Thanks.
Yes, Todd this is Jay I'll start with the back you've mentioned in the 4% to six.
We still point to that as our long term financial target for that.
So I won't get into 2023, I'll, just kind of leave you wanted to or the longer go there.
When you look at the spot and contractual business.
Yeah, I'll talk specifically the brokerage I kind of just talk overall that when you look at it.
<unk>.
We were heavier in the contract business than we've been in the past and that's actually kind of shifting as you go through through the cycle that you're in now is that.
I think the cycle that youre seeing now is that more and more shippers that have contractual rates youre seeing the disparity between contract rates and spot rates right now.
Then there's pressure on those shippers to lower costs. So you can see business is kind of a fluid that you see contract go to spot maybe back to contract with a with a lower rate and you haven't seen that completely in the numbers, but that's kind of what youre seeing now so I won't get into the specifics of their contracted spot, but hopefully that gives you a kind of a flavor of overall.
All that Theres, just some fluidity as the shippers are trying to find what is the best choices that they make in the in the current market is the rates are moving.
Yeah, Okay understood. Thanks for the time this morning.
Our next question comes from Scott Group with Wolfe.
Wolfe Research. Please proceed.
Hey, Thanks, Good morning, I wanted to go back on the.
Good morning, Judy I wanted to go back to the sequential <unk> to <unk> commentary because it's been I guess, it's been a decade since the March the fourth quarter has been.
500 basis points worse than <unk> and I went back like last year, you talked about it the normal seasonality being 200 basis points worse. So you changed the sort of the language and I just want like should we really I want to get the model in a good place like you really want us to be thinking about the upper end of that.
Range of closer to that 500 basis point deterioration.
Yeah, Hey, Scott.
I just wanted to give you the history for one right and it's certainly evident that we're in a softer environment and we've got lots of opportunity like I said great.
Great strategy that we're executing on and so but we do have to execute right to achieve that.
And we've got a number of of cost items that I pointed out I don't think we have to go back through that but.
Those are some of those things will.
Will.
It takes some time to improve.
From the third quarter as we move into the fourth quarter and of course, the fourth quarter has just a lower total revenue just given the fewer number of days and so some of your fixed costs don't move obviously as well when you have a lower revenue you know things like depreciation so as we're taking on this depreciation this new equipment.
Our depreciation was a little heavier loaded in the back half of the year in the fourth quarter in particular the.
The maintenance like like I said that that can be reduced as we bring on the equipment, but that's again some of that is kind of a fixed element to it as well and facility cost supervision. Many of those things aren't going to move as quickly as the revenue might.
Lots of puts and takes in any given quarter.
I guess, another benchmark would be the 2015.
Period, we had a G. R. I early in the year and I think the sequential third quarter to fourth quarter or was in the 350 basis point kind of moves so.
That's.
It's just a matter of reference.
So.
Hopefully that helps.
Okay.
And then on the asset light margin I know the sort.
The range is the target is 4% to 6% fell a little bit below that in Q3 do you think we should stay.
Stay below that in the near term in Q4.
You know as we've talked about.
We've made great progress with the Modelo integration and on one operating platform we've got.
We've invested through the year as you can see in our.
Financials.
We were positioned really to grow from here.
And opportunity again execution, we've got the opportunity in front of US we've got to execute it to be more productive really on our I think Danny will agree with me here on this more productive on our brokerage floor and so there's opportunity there but in the near term again, we're looking at this from a long term standpoint.
Combination of both growth.
And margin improvement, but it's but so in the near term we may be pressured by that as market market dynamics will play a part of it on the margins on the gross margin side, but but also our productivity as we were developing this ability to operate at a better level.
So near term.
Overall operating margins could be pressured as we head toward that growth and longer term operating margins.
But you know one thing I'll just add is I really like the combination of the mellow leadership now.
<unk> about how to effectively manage net revenue by you know the carrier acquisition costs in this in this.
Kind of calculation, but also.
The influence that our yield team has over all of that so I think we've got a best in class combination of knowledge there to help us navigate through this and I'm encouraged about that but I agree with David. We are built were built for more business and in the end you know we're looking toward those 'twenty 'twenty five targets just that.
Echo what Judy said, we we know are our four can be more productive than it is today.
We have initiatives to make the floor more productive, but the key is to grow the best way to be more productive as to is to add more ship truckload shipments to the floor.
And so we're focused on that and then again.
We're focused on the long term goals, we would point to 2025, maybe there are short term pressure.
Again, our confidence in our truckload model has never been as strong as of yesterday.
Very helpful. Thank you guys.
Yes.
Our next question comes from Ari Rosa with Credit Suisse. Please proceed.
Hey, good morning, everyone. So I wanted to actually stick on that.
Hi, Judy and congrats as well.
So.
I wanted to stick on the theme of.
You know, what we were talking about there about kind of balancing growth against.
Thinking about margins are one of the things that I've noticed and maybe it's just because you guys put out press releases about this but I see all kinds of hiring events that you guys are doing around the country and you're doing that in a slowing kind of a slowing macro environment. So is.
Is it worse, maybe kind of rethinking how you how youre going about kind of the growth versus margin equation, because it seems like.
The concern for investors with art Vesta has often been around.
Margin deterioration in downturns, and maybe not being able to hold onto these margin gains does it make sense to maybe show that that model can work before refocusing on growth or or is there. A reason that we're not aware of something like the pipeline, which you talked about earlier.
Which maybe suggests that that.
These hiring initiatives actually makes sensor and somehow you have the volume coming online that justifies those hiring initiatives.
Well if you are if you knew what we know which I'll share with you is that we're doing is those hiring initiatives and very targeted locations, where we absolutely do need to add to our that workforce because either we are already experiencing retirements or were aware that there was a <unk>.
Coming retirements in those areas or where we've got an input into there regarding natural turnover rates, but the very important thing to keep in mind. There is they're hiring results in the most efficient cost because you're able to you know work through you know some of these at these other issues.
Cartage for instance is a great example of that so you know we want to give great service to our customers and we want to do it through trained efficient people and we want to do that you know in our overall most cost effective approach that we can and so.
The hiring is just not to add someone on top of what might be a cost structure. That's that's suboptimal in a downturn, it's it's to make that more efficient and more consistent and again a tool or tool set that we have that we really haven't.
I haven't had as much of in the last downturns that we've experienced is the ability to you know add shipments in a targeted way to those locations or those trailers, where we need it and so there is where we're headed toward I think it more consistent place a more sustainable place and one that has efficiency at the top of the law.
List of things that are in mind.
Got it understood and then kind of given the declining volume environment or some pressure on volumes.
Maybe you could talk about how you think about your ability to continue to take price kind of given where service levels are can we see pricing continue to be pretty pretty resilient going into 'twenty three.
Yeah.
You know what we've seen again I'd say the Viva has been rational I think that.
We've seen the industry have extreme pricing discipline as we go through the last pieces of it I think if you think of the macro environment with the whether it's the cost of the inflationary costs, we're seeing the cost for employees in different pieces with that.
From our standpoint.
You have to have the price increases to cover these inflationary costs and so for US. We think that is we'll continue to rely on the value we're providing to our customers again. The flip side is if we have customers that.
That are pushing a price conversation that is not sustainable for our asset part of the business. We have a conversation about their whole supply chain and really what turns out in that cases will go back and we'll work on lowering the cost of their supply chain and that usually results in a different type of business that comes into our asset network, but business that works at the price point.
We're able to offer to them.
Okay makes a lot of sense. Thanks for the time.
Thanks, Sorry, Hey, Frank I think we've got one more time for one more to get in.
Our last question comes from Jeff Kauffman with vertical research partners. Please proceed.
Thank you everybody. Thanks for squeezing me in and Judy that's a fantastic honor congratulations.
Thank you so much Jeff it's good to talk to you today.
On the call.
So a lot of my questions have been answered so I wanted to focus a little bit on asset light because we do anniversary malo today.
And you mentioned the Rev per day was up 40% for this business, but that included an uneven comp with Malo. So I guess two questions number one what did that revenue per day growth look like excluding the impact of Malo in October and.
You did a great job talking about some of the temporary or unusual costs that were negatively impacting L. T. L was there any of that that negatively impacted the asset light this quarter.
Jeff This is Danny.
Haven't provided that that comp with.
Without mono I would point back to that I did mentioned in there that we're seeing double digit shipment growth when you consider the.
Legacy business both businesses in the past.
So.
Your revenue question becomes what's the revenue per shipment are gonna be compared to volume growth and I'm not going to give a forecast on what I think that what happens in that situation I think on the other inflationary pieces that you talked about other ordinary course, I think that when you're in a deflationary environment like this it's tough and on your care management before because you're getting pressure.
Lowering raised at the same time trying to do that so there is some of that built in whereas the trough of that I don't have the answer for you of when the trough is but there are definitely some other inflationary kind of temporary costs in there just because of the current environment that you're in.
That's my one thank you everyone.
Thanks, a lot and we appreciate everybody joining us this morning, and we appreciate your interest in art Best and this concludes our call. Thank you.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect. Your line have a great day everyone.
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