Q2 2023 ArcBest Corporation Earnings Call
Yeah.
Yeah.
Greetings and welcome to the Arkansas Best second quarter twenty-three 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.
As a reminder, this conference is being recorded Friday July 28th 2023.
I'd 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 provide an update on our business walk you through the details of our recent second quarter 2023 results and then answer some questions.
Joining me today for the prepared remarks are Judy Mcreynolds, Chairman, President and CEO of our fast and Matt Beasley, Chief Financial Officer and Treasurer.
In addition, Dennis Anderson, Chief Strategy Officer, Seth runs their president of ABF.
Steven Leonard Chief Commercial officer, and President of asset light logistics, and Christopher Atkins, Vice President of yield strategy.
And management are available to help answer your questions.
Help you better understand our best and our results. Some forward looking statements could be made during this call.
Forward looking statements by their very nature are subject to uncertainties and risk.
A more complete discussion of factors that could affect our best future results. Please refer to the forward looking statement 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.
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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, there was a conference call slide deck that can be found on the art best website <unk> Dot com in exhibit 99 point.
Three of the 8-K that was filed earlier this morning or you can follow along on the webcast. We will now begin with Judy.
Good morning, we appreciate you joining us today before we begin I'd like to start with a message to our people and our 100th year. Our business has always come back to you. Thank you for being the heart of our success.
No one does it better than our team here at our best we had the best people in the industry every day, our team find innovative ways to deliver for our customers with their skill hard work and resilience. These attributes are why we received the top industry awards year after year, such as being the only.
10 time winner of the excellence in cargo claims and loss Prevention Award and why we consistently exceed industry benchmarks.
Our strong employee relationships, where exemplified as we finalized our five year agreement with the international Brotherhood of Teamsters earlier this month with overwhelming approval.
From the beginning our goal was to secure a contract that keeps providing our employees with competitive wages and industry, leading benefits to ensure we are retaining the best employees in the business and recruiting top talent.
We're pleased to have reached a contract that achieved these goals and sets the stage for future growth and investment.
At our best we are constantly thinking about what's ahead, we're celebrating a century in business. This year, because we are always innovating, providing exceptional value for our customers and remaining resilient and agile while retaining the ability to look at ourselves critically and strive for continuous improvement.
We.
Now is the importance of operating efficiently and effectively which enables growth and creates value earlier. This year, we sent an experienced team to some of our ABF service centers to train managers and employees on operational best practices, which resulted in a significant increase in productivity.
And those locations and that productivity improvement has continued long after the team departed so we're going to do that on a larger scale will be pausing to freight handling hardware pilot at our two ABF distribution centers in Kansas City, and Salt Lake City, and refocusing that implementation team.
On this best practice work at our largest facilities.
[noise] locks pilots with customers remain promising and are not affected early box pilot results with some major companies are showing significant efficiency gains and we see high levels of customer interest in the solution. These pilots will continue and the teams that support external customers are not slowing down.
We continue investing back into the business into our technology, our solutions and our people. This soft market environment will end and we are making decisions today that benefit us as the market rebounds.
We are investing in technology to support our customers how people do business is changing this year, we enhanced our digital tools to help customers better manage their business and later this year, we will provide additional self service capabilities that drive efficiencies.
We're investing in our solutions to deliver exceptional value our city route optimization work is responsible for over half a million dollars per month in operating income improvement and makes our employees jobs easier.
We're in the process of expanding that initiative to improve the pick up process.
And importantly, we are investing in our people to drive high engagement, we created an industry, leading employee experience, which continues to be recognized with awards.
These key areas of investment will set us up for success in the future.
Having reached our 100 year anniversary I have taken the time to reflect on who we are and where we came from art is a company that has evolved tremendously and I am so proud of who we are today, we listen to our people and our customers and then adapt we have built a breadth of solutions that have.
Positioned us as a strategic partner to our customers, helping them build better supply chains in today's rapidly changing market environment. We are uniquely positioned to serve our customers as a trusted adviser with a full suite of logistics solutions, rather than simply a capacity provider we have seen.
For evidence of that this past week as customers have turned to our best to manage their supply chains to a period of market disruption.
Finally, we are resilient, we don't back down from a challenge we're in a strong position and only look to grow from here and now I'll turn it over to Matt to take you through the quarter in greater detail.
Thank you Judy and good morning, everyone.
Before I cover the quarters results I want to say a quick thanks to our previous CFO , David Kerr, David built a best in class finance team and his support and guidance have been invaluable as I've transitioned into the CFO role.
David and his family all the best as he embarks on a well earned retirement later this year.
Second quarter 2023 consolidated revenue from continuing operations was $1 $1 billion, a 17% per day decrease compared to last year.
On a non-GAAP basis consolidated operating income from continuing operations was $50 million a decrease of 66%.
Our adjusted second quarter earnings per diluted share from continuing operations was $1 54.
Turning to the key metrics on our asset based business second quarter daily revenue decreased 10% compared to last year, while daily shipments and daily tonnage increased 4% and 1% respectively. The decrease in revenue per day reflects a decrease in order frequency and shipment quantities from our core customers during the softer market environment and a deep.
Kris and fuel surcharge revenues.
As Youll recall fuel prices were at record levels during the second quarter of 2022.
As for shipment and tonnage results ABF targeted more consistent business and labor levels during the quarter by utilizing our tech enabled dynamic LTE already pricing tool to secure market based profitable shipments to better utilize available network capacity.
The 11% decrease in second quarter billed revenue per hundredweight versus last year reflects the impact of these additional dynamic shipments and lower diesel prices.
Because of the strength of ABS pricing on its core business. The addition of transactional L. T O shipments at current market rates naturally reduces the total revenue per hundred weight statistics.
Overall pricing remains rational and we continue to obtain increases on our core L. T O graded business, which increased 7% versus the same period last year.
Missing on that core business also increased sequentially compared to the first quarter and the second quarter marked the 10th consecutive quarter that pricing excluding fuel surcharges on our core L. T O rated business increased on a sequential basis.
For asset based customer contract renewals and deferred pricing agreements negotiated during the second quarter, we secured a three 1% average increase.
The second quarter non-GAAP asset based operating ratio 92, 8% was the year over year increase of 830 basis points and on a sequential basis versus first quarter, an increase of 50 basis points.
It was also a high or or than we anticipated when we previewed Q2 last quarter, which was due in part to adding in maintaining resources to serve an expected seasonal uptick in core customer business that didn't materialize as expected.
Delays in the receipt of new equipment also negatively impacted repairs and maintenance expenses and we also had some other costs that were higher than expected, including workers' comp and non union health care costs that affected comparisons to first quarter.
In July ABF implemented cost savings actions to improve segment profitability.
This includes an intense focus on efficiency and productivity and a reduction in overtime and cartage and purchased transportation spending as well as a reduction in dynamic shipment levels to target total shipment volumes of approximately 19500 shipments per day.
In addition over the past week the asset based segment has experienced more than a 10% increase in core <unk> rated shipments per day, when compared to June 2023, which is handled through a reduction in less profitable dynamic shipments.
The initial first year wage increase that was effective on July 1st was approximately 13% and after the August increase in the hourly health welfare and pension rates. The combined first your wage and health welfare and pension rate increase will be approximately 9%.
Over the life of the contract the combined contractual wage and benefit rate increases are approximately 4% on a compound annual basis.
Prior to the pandemic art best asset based operating ratio for the third quarter was typically relatively flat to the second quarter.
Although ABF will have additional costs in the third quarter related to its new Union contract. We believe that our cost control actions and previously anticipated increases in core business levels should allow us to continue on this historical trend with the possibility for upside if the increased business levels, we've seen over the past week continued throughout the quarter.
And our asset light business total second quarter revenue decreased 25% on a per day basis versus the prior year period. This was primarily due to a lower average revenue per shipment and a soft rate environment.
As we mentioned this time last year higher market rates on committed business combined with solid customer demand resulted in strong asset light revenue growth and record profitability in that business in second quarter, 2022, which makes a strong comparison for the current period.
2023 second quarter asset light daily shipments increased both year over year versus 2022 and sequentially compared to this years first quarter, primarily because of shipment growth in our truckload business.
The current margin pressure, resulting from a lower spread between customer rates and capacity rates compared to historic profit margins last year was the biggest contributor to the reduced asset like profitability in the most recent quarter.
We provided preliminary asset light business trends for July 2023, and the form 8-K exhibit to the press release filed this morning and total revenue for July reflects a year over year decrease slightly better than in the second quarter.
Double digit asset like shipment growth. This month is directly related to continued success in adding truckload shipments, but truckload, but truckload rates still remain significantly lower than last year.
Net capital expenditures totaled $84 million for the first six months of the year and we currently expect net capital expenditures in the range of $270 million to $295 million for the full year, which is lower than our previous estimates.
Our class eight tractor orders remain in place and we currently expect to receive all order tractors by the end of the year.
<unk> continues on the real estate projects, we planned at the beginning of 2023 and we currently expect those expenses to be incurred by the end of the year.
The reduction in our full year Capex range is related to a slight reduction in trailer and other warehouse equipment orders a slight decrease in some per unit costs and the deferral of some capital to 2024.
Art best cash balance and total liquidity improved during the quarter and remain at strong levels.
As of the end of the second quarter, we had net cash of $108 million, an improvement of $46 million since the end of last year.
Total liquidity of approximately $580 million remains at a healthy level and despite rising rates the composite interest rate on art best outstanding debt at the end of the recent quarter was 3%.
Our solid financial position and strong balance sheet position us well to navigate the current market environment, while investing for growth through new equipment purchases real estate additions and upgrades and technology investments all of which will improve our ability to effectively serve customers while positioning our company for the future.
We also continue to review external growth opportunities and the return of capital to shareholders, while targeting investment grade credit metrics.
Year to date through the end of the second quarter. We have returned approximately $41 million of capital to shareholders through share repurchases based on those share repurchases $84 million remains available under the current repurchase authorization for future common stock repurchases.
As I step into my new role I'm excited about our future I'm proud of our values driven culture and confident we have the right strategy to deliver on our mission of connecting and positively impacting the world through solving logistics challenges now I'll turn the call to call back to June .
Thank you, Matt as we close I want to reflect again on our strategy and position we hear from customers that our solutions are relevant and our partnership is valuable and this is why we continue to see customer growth. Despite some of the demand decline our industry is experiencing in a rapidly changing marketplace art best is uniquely positioned.
<unk> to serve our customers, we have 100 years of experience and a team that challenges the status quo, we can meet our customers' needs across a breadth of transportation modes, new goods on our own assets and customers are increasingly asking us to help manage key components that their supply chains, we're committed to.
Keeping the global supply chain, moving enhancing our position as a leading logistics company and accelerating growth that concludes our prepared remarks, David Humphrey. We can now open the call up to questions.
Okay Dana.
We're ready for some questions.
Thank you if you'd like to register a question. Please press the one followed by the four on your telephone you'll hear a three Tom prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration. Please press. The one followed by the three once again to register for a question. Please press the <unk>.
One followed by the for our first question is coming from the line of Stephanie more with Jefferies. Please go ahead.
Hi, good morning, Thank you.
Good morning, Stephanie how are you.
I'm doing well, okay. Julien that you commented on a core LTE shipments up more than 10% in the last week could you talk a bit about how your capacity looks like and your ability to handle an influx in volume whether it's from maybe an industry dynamic or also potential rebuy.
And in the freight environment that would be helpful. Thanks.
Yes, Stephanie we do see the capacity you know to increased shipments.
Beyond the level certainly that we are.
So far in July I mean, we can look back to the second quarter and see you know a higher level of close to 21000 shipments a day and even into you know past periods last year, you know we've hired we've handled higher shipment levels.
We also are with some of the initiatives that we have I know we've been on a journey to really improve our hiring and get people into place.
And we've done that in and in the past like in 2020, two and 2021 that was a bit of our constrained and so we can see you know our way to to growth. The other thing that we're doing is.
Our facilities are.
We've been addressing certain growth areas and some of that has been done like for instance, we moved into our new Phoenix facility and we've done some some other expansion work, but you know we see that continuing as we go forward. There are several facilities that we're addressing and will have greater capacity as we go forward.
So we feel like we're well positioned in and you know it is.
Is evolving daily you know what.
What we're experiencing and you know what again, we're glad for that we're glad to be in a position, where we can handle that good business and make sure that it's working well within the network.
Great. Thank you and then just as a follow up you know maybe and maybe it's just kind of a two part question, but the Union agreement. So I guess my follow up would be it sounds like from a labor standpoint, some of the constraints that you saw in Q2.
And in 'twenty, one 'twenty two might not be an issue here as you've kind of prepared or maybe learned your lesson from some of the labor struggles we seen in the past and then now with the New Union agreement in place in a pretty good competitive positioning cut them in Florida. So maybe just as a follow up touch on where you stand on labor availability.
To meet this capacity to meet this influx of volume.
Stephanie I'm, a I'm, a let Seth renter, who is that ABF president respond to that yeah. Good morning, Stephanie. So when you think about the contract it really talks about the great relationships, we've built with our people and that's why we saw that overwhelming ratification, but in the contract we're offering our industry leading wages. So we want.
People that are coming to work for us.
When we look at just the pipeline of hiring we feel pretty good and that's really why we did the dynamic strategy that we had it was ordered in order to keep.
More of our resources in place as we go through some of these softer periods. So we feel like we're in a pretty good place from a labor standpoint, and also we're seeing an uptick in applications recently, so we think we'll be in a good spot labor laws.
Alright, thank you so much.
Thanks, Stephanie Thanks, Stephanie.
Our next question is coming from the line of Chris Wetherbee with Citi. Please go ahead.
Yeah, Hey, thanks, good morning, guys.
I wanted to ask a specific question around shipments is at 19500, where you are now there is a 10% step up is that the average over the month of July including a lower number earlier in the quarter I just want to understand sort of it sounds like you took some company specific actions to maybe reduce that number from June to July and then maybe there was an uptick though.
Any complication there would be helpful.
Yes.
Christopher Atkins.
Respond to that Chris and then I'll follow up if there's any other thoughts I have but go ahead, Christopher Hi, Chris. Good morning. This is Christopher Atkins.
In terms of the 19500 you know in June we were handling around 21000 shipments per day, we made the strategic decision to reduce the shipment count a more profitable mix for our business.
That mix is handled really through our dynamic pricing, we're able to scale down that dynamic pricing and as the core business is coming on stronger we're able to scale that back even more to me to make additional capacity available for that core business. So really the 19500 is inclusive of all of our core with that growth that we've been mentioning as well.
The transactional business, well, but I would say Christopher that's for the month of July .
Whereas as we go forward, we'll see what that becomes I mean, I I think that you know our discussion about what we can handle you know I think your team is doing a great job along with sales and evaluating good business opportunities for us and what what's good about the dynamic tool is it allows US you know T E.
Use that lever too you know about shift up and shipped down we're awfully glad to be in a position where you know we have the capacity we can shift that down and we can take on you know better our business from our core customers and really serve them well in this time of disruption.
Okay, that's very helpful.
And I guess, when you think about the dynamic pricing aspect as the market is market share shifts and we potentially see more shipments coming on to the network does that give you a relatively real time ability to price that business to make it more appropriate for your network I guess you want to get a sense of maybe is pricing responding to your in July to the chair.
Any sort of real time improvement in market share or does that take a little bit more time, how would that play out.
Chris you got it this is something that we manage daily our dynamic pricing and this is something that is part of our normal daily business operation and we've already been increasing prices on that transactional business to make space for it but yeah. You got it exactly it's a daily decision that we've already experienced price increases in that area.
And well I'll add one thing to it because of the work that we do in our managed team. We're also seeing the market you know our competitive landscape respond in a similar way.
Okay. That's very helpful. Thank you for the time.
Thanks, Chris.
Our next question is coming from the line of Jordan Alegar with Goldman Sachs. Please go ahead.
Yeah, Hi, good morning.
Just sort of curious.
Hi in terms of the step up I mean, presumably a meaningful amount is alright, that's been diverted to you from yellow, but I'm just curious to.
Aside from that maybe sort of comment on that dynamic that's going on.
But then sort of also sort of from a core demand perspective, where are you seeing any positive signs separate from any diversionary benefits. Thanks.
Yeah.
Steven I'm going to ask Steven Leonard to respond to that just just based on what we're seeing from our other core customers. In addition to what we're seeing from the yellow disruption yet. So if you take out kind of the disruption that we're seeing in the demand that's coming from that and just look at.
You know kind of kind of where business was in what we were seeing seasonally we were not seen a drastic change in demand there are.
Pockets of customers in certain industries that.
Or maybe seeing more demand than others, but in general no.
Nothing game changing from a demand perspective.
Yes side from the disruption, which you know with those customers, we're well positioned a lot of those customers, we have relationships with them and you know they're coming to us looking for solutions and with our capability set a lot of times, we're able to respond in a way that.
It gives them more options than otherwise with just looking at our asset base capacity. So we're in a great position, there and we're seeing that play out.
We've had some good examples where customers are coming to us looking for capacity, we're able to optimize that business use you know all of our relationships and that's really playing out well for our customers.
Okay.
Oh.
Hi, Jordan you still there.
Okay.
Yes.
Hum level Austin, Yeah, maybe you can get back in the queue at Jordan jumped back to you and if you do need to lighter hi, Dana Let's go and move to the next question.
The next question is coming from the line of Jason Seidl with Cowen. Please go ahead.
Thank you operator are Judy David Jim Good morning.
Good morning, Brian .
Wanted to focus a little bit on sort of the freight coming into the network.
And how you think that will evolve over time, if there is a full fledged bankruptcy there seems to be thinking of yellow and what I mean by that is you know everything is just coming in now, but you know what do you take them on to aid not might.
It might not be what you're sort of maintaining your system. So how do you think about that how do you think about pricing that freight over time, and then maybe any thoughts on anyone in the industry trying to push through another G. A rise sometime between now and the end of the year.
Okay.
Well, Jason I think we have to be mindful of many things as we're looking at this business. It's you know, it's always interesting to us to see the opportunities that arise in certain situations and you know what's interesting is many of the customers that we're having conversations with daily.
Or maybe intra day you know these are these are.
Opportunities that we've seen before at.
Sometimes it's about the lanes that worked well for us.
Or some other aspect or element of it and we got to kind of sort through that and make sure that we feel really good about it being you know an incrementally good decision for us and I think we do that fairly well and you know we've talked about wanting to be able to look back at that after we've been experiencing that business for some period of.
Time, and you know, maybe perhaps that operates a little bit differently than we thought and we can revisit that either you know to respond where we're doing more of that with the customer or perhaps even less of that with the customer.
We do feel pretty informed I'd say and Christopher you know in terms of a G. R. I think you know our last year I was in November of last year, and I don't know that there's been many discussions about that and you know we're typically not a leader we typically watch what happens, but would you add anything to.
That's right I think generally the market takes about one euro per year as Judy mentioned, we took ours last November is something we're constantly evaluating and watching the marketplace of what what others are doing in this area.
And a quick follow up Judy you know what what lessons did you learn from any prior major bankruptcies in the L. T. L space. So what do you think you can do different this time that would be more more nimble and agile.
Okay.
Well I think our just our strategic positioning is has put us in a place where we are what's interesting you know.
Before maybe end up in a past situation I'm thinking of consolidated Freightways I think it was back in 2002 or something like that it wasn't.
Yeah, we we were a primarily in L. T O carrier, then and today as a logistics company. There are opportunities that we feel comfortable saying, yes to and perhaps that businesses is good for ABF in and it worked well there but also you know we have a lot.
Of other relationships I think in our in our lists we have over 80 relationships.
And we are working with them often.
Often in and we know what works, well, where and so being able to say, yes mm is bigger than just what works well in the asset based network. Although that is a great opportunity for US right now, especially with where we were in the second quarter and the weakness in or a regular core business, let's just say.
But you know a lesson learned I think this is to be sure that if you're if you're saying, yes, you can see your way to the profitability of that account and making sure that it works well for you I mean I I was thinking about your question there have been times when we've had changes in the market where you know we've.
Taken on business and thought you know I'm thinking of some of the examples with the residential delivery type shipments or other big volume players that you know really what you've got to do is is get involved with that business see how it works and make your decision to go forward with it rather than just saying yes.
Yes to too much and regretting that.
Yeah.
Appreciate the color thanks for the time as always.
Yes.
Thanks.
Our next question is coming from the line of Jack Atkins with Stephens. Please go ahead.
Okay, great. Thanks for taking the questions and Matt Congrats on your on your new role I guess, you know Judy you know what do you kind of think about the knock on effects of the opportunities that may be available to you from an investment perspective over the next couple of quarters with potential assets coming onto the market.
Are there parts of the network, where you see maybe opportunities to accelerate investment.
If you could maybe pick up an asset here or there in a particular.
No freight gateway city or something like that.
How do you think about how do you think about that in terms of capital allocation here over the next you know call it let's say year.
Yes, Jack I'm going to let Seth runs or take a shot at that and then come back to that.
So were yeah, Jack we're constantly looking at our network in terms of facilities and we have a long term real estate plan that we've discussed in the past.
Judy mentioned some of the most recent things that have come online like Phoenix, but we have a long term plan. So we have a view on all the properties of where we need additional capacity and we'll be opportunistic on any.
Any capital deployment there from the equipment side, we continuously invested in our fleet, we still have a lot of new tractors coming on this year, but the same thing there will be opportunistic if we see opportunities.
In the upcoming quarter through the end of the year, if we need to either reduce the age of our fleet or or flex our fleet up. So we have a pretty good for you want Max Okay. Jack we're well, we're well connected with the real estate folks at all that the competition and that really helps us to see you know what opportunities there are there.
There, but we we had a good plan, but I think you know you always have to keep your ear to the ground and watch what happens and this could be a unique opportunity I agree.
Absolutely, Okay, great and for my follow up question.
There are some I guess quite a bit of confusion around the potential impact.
These multi employer pension plans from this.
The last time I checked central states was almost fully funded.
Would there be any sort of potential risk to your pension.
Expense or costs or liabilities any I don't know how you want to take that if you were to see the the other major player within Central States.
No longer be able to participate I just want to clear that up for people because I think thats a concern and I just wanted to let you have a chance to address that.
Absolutely I appreciate you asking the question and and really you said it well you know with the American rescue plan that was.
Was passed and then you know has funded some large dollars into all the central States pension fund as an example, it is a well funded a plan years ago and you can imagine why they might do this but you know I think that the actuaries for those funds started.
Looking at the potential for you know a insolvencies by some of the participating employers and what impact that would have you know on on the fun and what date after doing that you know what we learned is that a lot of the success of the fund is dependent on their investment returns in it.
A lot less to do you know what.
With our employer contributions and you know and and yellow case I believe you know that their contribution level was much lower for instance in hours for instance, ours was $9 an hour versus two something for them and the benefit levels had been haircut correspondingly and so.
You know I feel like there will be an impact I you know I certainly feel for those individuals involved and all of this and I don't mean to you know just look past that because it's real and it's serious in and we've always wanted and tried to achieve and I think we've done it to have good solid retirement benefits for our employees.
And you know in this recent round of negotiations.
You know we.
We really felt like that we were in a good place in terms of our contribution level for pension and that was kind of where that landed but we don't see any risk that that has really created in a near term way or even a longer term way to our people and we pay.
And as you know for them as well as a portion of what we pay for people who've never worked for us and.
And the good news about that is our people feel really good and solid about their retirement benefits and the flavor of this competitive labor environment, that's important and good.
Just to be Crystal clear this will not impact your.
Your pension liabilities or your pension expense just to be crystal right. Okay right off our contribution levels are can contractually determined and they are determined with the passing of late.
Latest union contract will not change.
And are you now where we're told that the.
The pension fund and I again, I understand that I'm, mostly referencing central states because there's the most discussion about that 50% of our contributions go to them and our understanding is it's 90 I want to say 97, 5% funded.
At this point and you know that is not going to be a factor that we have to deal with okay. Thank you for the time.
Thanks.
Our next question is coming from the line of Ken Hector with Bank of America. Please go ahead.
Great. Good morning, certainly a seminal moment here in the industry, creating the chaos that I think we all knew was coming.
I want to clarify a few things you you went from 21000.
Shipments in.
In the second quarter to 19 and a half in July .
Is that shutting all of the transactional freight is it some of it I just want to clarify on it earlier answer is that can you talk maybe then also after that the volume levels as you exited July .
Yeah.
Yes, Christopher you want to sure.
Yeah. So that that is not shutting all of our transactional we still think its healthy to have a good portion of that within our core business and really it's responsive to how our customers do business with us so if theyre, making individuals shouldn't level decisions. We're meeting them in the channels that they are so the 19500 does still include some of that transactional business.
As we're exiting July we've still been managing to that 19500 at this point, but like Judy mentioned, we have the ability to scale up and meet our capacity our expectations that our customers have for us.
And the only caveat to that Ken is we want to make sure. It's good business.
So so to understand then you shed the transaction I've taken on the freight you want but you still haven't expanded so to your I think the first question Judy was on capacity.
You haven't filled up the excess capacity, you've just swap some brought some transaction last fall for.
Okay, that's right and as of the end of July , but I mean, I understand that's what we're talking about is through July .
We're not really speaking to what could happen on the upside you know in August or September because we're making daily decisions about that and if I understand it.
Have they fully suspended pickups I mean is this transition.
At the tipping point in terms of you getting.
Sure you get or is there still a lot of tonnage left in the jump ball market.
Well.
I you know I.
I don't know the latter part of the answer to the latter part of your question, but I do know that you know the noise has been you know that they they havent been picking up freight I mean again I hate to speak for them because I know all of that is not finally determined but that's the indication that we have.
And we again, we've been having a lot of good conversations with customers that I think you know Ken this is the kind of.
Situations that.
As it unfolds I mean this is a multi year time effect I mean, when you have a company that has handled as many shipments as they have them in there. If if there are no longer a player. If that's where this ends up you know that's that's a big effect on our markets and we're seeing.
You know some of the impact, but I think this is going to go on for quite some time and honestly that's to our advantage because it gives us a better ability to read through them and look for what works best for us and for our customer base otherwise.
So just to clarify that earlier answer can you quantify how much or give a range in terms of that 19, five how much transactional you can still shed just given it sounds like you said you made a move to get rid of some of it because of cost issues and the other thing to see what you were using it to fill the network. So just to understand free.
Free additional capacity if you choose to get more of that can you talk scale.
Yeah. This is Christopher yes, we still want to keep some of it isn't like Judy said it it changes day to day. So I don't know that we can really give a number there but each day that varies based on the demand of our core business. So we're just filling in the rest of the network based on what our targets are for the day and what our customers needs are.
And my last one if I can get one more in Matt you said the operating ratio I just want clarify your comment there you said it was normally seasonally flat.
But with these changes in the network, where you're saying you expect.
I didn't catch your answer there so significant improvement in from the 92, eight or maybe just clarify what you were pointing to.
Sure.
You're asking about clarifying questions. So yes, if you look at historically the sequential performance second quarter third quarter has typically been roughly flat.
But you know certainly.
Certainly we talked about some of the cost increases that we experienced were experiencing in the third quarter related to the contract and so you can think about that in the neighborhood of $3 to 400 basis points and so what we've said and as you know we should be able to with some expectation that we had even going back to when we start.
The quarter for some shift in business mix towards.
Core published business that combined with some of the other areas that we talked about around productivity efficiency, reducing card as purchase transportation you know all that should put us in a spot where we can still manage to historical.
Expectations, even with some of those increases in cost that we're experiencing in the third quarter.
The other part of that comment though was.
If the uptick in core business that we've seen over the past week, if that continues and persists through the quarter. Then there is some upside to two what we've described in terms of in terms of the or expectation for the quarter.
Great. Thanks for the time, everybody I appreciate it.
Thanks Keith.
Our next question is coming from the line of Ravi Shanker with Morgan Stanley . Please go ahead.
Great. Thank you morning, everyone. Judy just wanted to write them again just to be sure that the earlier comment so you're saying the 10% plus increase you've seen recently.
That is primarily you think yellow driven rather than actual cyclical improvement.
Just wanted to confirm that and also there's a lot of talk of Hey, if 10% of the industry capacity kind of permanent exits you know that raises the floor.
Pricing for the rest of the industry was one of them makes sense, but what are some of the kind of constraints on new capacity adds do you think I mean, what's the risk that the industry does the rest of the industry kind of backfill that lost capacity in the coming years.
Well I mean, I I, certainly think over time that risk is there Robby I do you know, but I do think that it would take some time and you know I think you year as an observer of things just like I am It seems like you know over time.
We've seen a greater discipline in the industry you know on you.
You know, adding resources and then also do you know how to or maybe the expectation of profitability of business. That's run, but you know for us.
You know, we just have to be sure that you know as we're adding business on an account basis its profitable for us.
That it doesn't bottleneck things or create issues in serving our core customers and you know.
We're really very focused on you know are already existing customers as much as we are these new opportunities and we wanted to make sure that we serve them well.
For us.
We like to see things progress overtime, you know certainly you know one time events, our big changes typically are harder to deal with but right now things are kind of progressing in them and a good positive way whether that costing system that we have that's been in place for 40 years, we have.
Good visibility after you know maybe a week or two we can look at the the different profile of the fray profitability of the freight and just make good decisions, but at all of that takes a little bit of time to be sure and right. Now you know we are making some decisions based on history and what we do.
Known about some of these accounts.
But again one thing we know is that we love good core business, but we want it to be that and so we're trying to be really good and thoughtful and careful about it.
Yeah.
Great and maybe as a follow up maybe for Matt.
With the new Labor deal can you just quantify how much of an apples to apples in fact, the new labor contracts has on or I don't.
So if you want to use like a mid cycle of water or something.
And is the main offset some of that coming from or their productivity initiatives in the contract or do you need to get price to offset that.
Yes. So you know overall, it's just just looking at it on its own I would say three to 400 basis point impact, we talked a little bit about kind.
The average increase over the contract and you know if you take it on a compound annual basis over the five years looking at wages and health welfare and pension, it's about 4%, but on an or basis. It's three to 400 basis points. We did talk about we.
Are intensely focused on efficiency and productivity, we do have a lot of initiatives ongoing on that front. We're redeploying some some resources to really further increase that focus.
And so you know we as we as we sit here today and think about the.
The opportunity that we have to offset that I think you know it comes both from just the expectations that we were already seeing.
Core business was starting to strengthen some and then as well as some of these these changes inefficiency in productivity and in scaling the network to the point, where we can.
B and a more optimal place with with cartage usage purchase transportation overtime rates things like that.
Yeah, and and Ravi you mentioned price I mean, you know when you look at that step change you know just as you go into July I mean, the expectation my expectation is that we got to work on the cost side, perhaps a little bit more than we are on the pricing side. There initially because I mean, that's just a lot.
To feel like that are you know our customers would absorb but you know we do feel like that the contract rate increase over time is reasonable and we felt like that that that's something that you know it should be manageable to our longer term pricing actions, but we do have I think an.
Asian, an action plan in place to address the cost side and the good news as Seth mentioned this earlier, we're going to have our people are fully engaged and we can emphasize the utilization of our people. We've added a lot of new people over the last two years that need to become even more product.
And the contract allows for US you know to hold people accountable and you know some of the software enhancements. The operating software enhancements that we've made allow us to better see that so you know all of those things are going to have to work together to achieve.
Oh, our ranges that we've set out there for ourselves and we're very focused on doing that.
Yeah.
Understood. Thank you.
Alright, Thank you Robby.
Okay.
Our next question is coming from the line of Jeff Kauffman with vertical research partners. Please go ahead.
Thank you very much Hello, everyone.
Hmm.
Hey, and congratulations Matt.
Thanks, Judy I wonder Okay you.
You've answered this a couple of different ways, but I wanted to go back to growth.
Market opportunity here, if I can.
Maybe ask it in a different way.
So you've got a certain amount of freight in your network that is really more transactional in nature that we're filling in for network plugging holes. So we can always reduce that and replace that with opportunities, but when you think about kind of what the right kind of growth is I know you threw out this 21000 per day <unk>.
<unk> level, but it seems like you could have the opportunity to go above that as you think about the right kind of growth for the network.
Maybe talk about.
What you would be willing to flex to for the right kind of business right kind of customers and is that 21000 limited based on the existing.
Network would you consider bringing in new employees, if they became available or new equipment. If it became available how do you think about how much you're willing to flex.
But still not wanting to flex too much to where you're hurting your existing customers from surface.
Well, you know and the reason I use that benchmark is because you know that's a good recent benchmark I think what you see.
In and are in a situation, where we've got a better mix of core customers is the quality of those shipments would be would be better would be improved but I do hear you and I I feel like that we do have an opportunity to go beyond that.
You know I wouldn't think it would be a huge number of shipments beyond that but in order for us to you know.
Add people and maybe make other types of investments what I'd say is it would it need to be good business and we can see that and we do have the ability once one thing I I know you've been around us for a long time you remember is in the summer Ah seasonally you know whenever we had.
Back when we had a peak season in the summer I mean, we haven't had a normal year in a long time.
Would be able to use rail and purchase transportation, we could flex up we could not trade our older equipment and add a third to the fleet I mean, we have all of those kinds of mechanisms available to us again for good business and certainly you know if.
Our.
Our opportunities are there for equipment, we were hearing from you know drivers and other employees. So we know we're going to have an opportunity at resources. So I think we got to just manage through all of that look at the quality of the business and make a decision that that was variable levers I mentioned.
They're pretty easy to pull if you feel like you're in a good place and that that allows you to grow.
Beyond what I was suggesting.
And to the extent there are opportunities to add good employees and good drivers.
How would that work with the Union rules would it be a straight seniority dovetail and whatever they had accrued at the other carrier kind of goes right into your list or does the new contract are kind of clarify how those types of situations would work if other good employees became available higher.
Yes. It is.
Other good employees came available they would have to basically start over on the seniority side.
Potentially maintain their pension credits with central states or whatever pension fund, but as far as seniority wage scale all of that type of stuff that they would basically be starting fresh look like any other new employees.
Okay, great well, thank you and congratulations thanks, Josh Yeah, Thanks are pretty fixed yet.
Yeah.
Our next question is coming from the line of Bruce Chan with Stifel. Please go ahead.
Everyone. Good morning, and David carbon Matt Congrats to you both a lot of really good color on capacity and in yellow. So far so maybe just to switch gears a little bit.
Matt I appreciate the color that you gave on capital allocation and investment priorities I don't think I heard M&A in there. So just wanted to ask you know, especially on the brokerage side.
Whether you've got any appetite for more M&A in that segment or is the focus just going to be organic from here on out.
Yeah No I appreciate that question. So you know I would say, we talked a little bit about the organic opportunities that we have certainly we always are thinking about capital capital allocation from a big picture approach, which could include filling in some capabilities in our business.
On the M&A front and of course, our return of capital to shareholders I don't know Dennis if theres anything that you want to add on that front sure, Matt and Hey, Bruce This is Dennis.
Absolutely M&A as part of the capital allocation strategy here.
And as we've talked.
Really we're looking for great generally asset light business.
And things that help to help us grow with our customers.
And we've talked about different areas I wouldn't necessarily say, it's directly truckload brokerage we've got we've got a great <unk>.
Couple of brokerage operation now and below.
You know things like managed transportation, we've talked about that before that that could really help us.
Deepen those partnerships with customers is really the focus there on the M&A front these days.
Okay, that's great I appreciate it.
Thank you Matt.
And Jack I guess it was back in queue.
Oh definitely.
Jack.
Hey, David.
Okay, great great. Yeah, just I guess, maybe just to kind of round it out and no one's asked about.
The asset light business, and and you know I know a lot of attentions on on what's going on in the L. T O world for obvious reasons, but you guys did make some good progress in the quarter, taking costs out of the business within the asset light segment I'm just kind of curious if there's maybe some more to go there how we should maybe be thinking about the profitability trajectory. There you know.
Over the back half of the year.
But barring some sort of inflection in the freight market, one way or the other.
Yeah, Hey, Hey, Jack this is Stephen.
You know the way we the way we operate there we are really just trying to manage our cost.
In line with the business that we have we all know the you know the market is challenging right now from a price perspective and so.
You know, we a lot of the indicators that we look at we feel like we're at or near the bottom, but you know when it will turn is still uncertain.
So we're just.
We're focused on again kind of just managing the cost you know along with business lines nothing major there, but we want to make sure that we keep everything in a good place from a from.
From that aspect in terms of managing cost, but at the same time.
We want to be in a position to grow when the market does turn and we know that's going to happen. It's just a matter of when.
Makes sense. Thank you.
Thanks, Okay, well I believe that's the last question we've got data.
Thank you for your help and we wanted to just thank everybody for the interest start best and that concludes our conference call. Thank you a lot.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
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