ArcBest Corporation

Greetings and welcome to the ARCBEST third quarter 2020 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question and answer session, and at the time, if you have a question, you can press the one followed by the four on your telephone. If at any time to the conference you need to reach an operator, you can press star zero. And as a reminder, this conference is being recorded Tuesday, November 3rd, 2020. I'd now like to turn it over to Mr. David Humphrey, Vice President of Investor Relations. Please go ahead.

Welcome to the ARCBEST third quarter 2020 earnings conference call. Our presentation this morning will be done by Judy McReynolds, Chairman, President, and Chief Executive Officer of ARCBEST, and David Cobb, Chief Financial Officer of ARCBEST. We thank you for joining us today. In order to help you better understand ARCBEST and its results, some forward-looking statements could be made during this call. As we all know, forward-looking statements by their very nature, are subject to uncertainties and risk. For more complete discussion of factors that could affect the company's future results, please refer to the forward-looking statement section of the company's earnings press release and the company's most recent SEC public filings. In order to provide meaningful comparisons, certain information discussed in this conference call includes non-GAAP financial measures as outlined and described in the tables in our earnings press release. We will now begin with Judy.

Good morning, everyone, and thank you for joining us for our third quarter earnings report. At ARC Best, you will hear us talk about our vision, We'll Find a Way, and that appropriately describes what this year has been like for us and what our employees are seeking to accomplish. I'm incredibly proud of our team for fighting through a pandemic, weathering the associated recession and being ready to respond to increased demand as our customers' businesses quickly come back online. 2020 is an extremely unique year and the challenges everyone faced going through the first half of the year sit in contrast to what has played out over the last few months. 2020 is also filled with good examples of customers utilizing our integrated solutions to their advantage. Our transformation into a provider of choice and a leader in the logistics industry is purposeful and also responsive to the complexities faced by our customers. An indication of our effectiveness in serving customer needs is our third quarter in October sequential revenue trends, which are some of the best in our history. We closed out the third quarter with 32% of our revenues from asset light solutions, And on a preliminary basis in October, that percentage further improved to 34%. Our October progress is even more encouraging when you consider that our asset-based business is growing at 9%. We are proud to serve our customers always, but especially during these volatile times. In addition to improving revenue trends, we are encouraged that our third quarter consolidated non-GAAP operating income increased 20% year over year, and 82% sequentially and represents one of the best third quarter performances in our history. The solid execution by our employees is enabled by a number of technology and analytics advancements that increased operational efficiencies and improved responsiveness to customers and carriers in the channels they desire. David and I are looking forward to going through the third quarter results in more detail with you today. During the third quarter, our asset-based segment benefited from sequentially improving economic trends and the resulting positive impact on our customers' businesses. Many of them are returning to more normal shipping patterns, and during the recent quarter, we were able to effectively serve their needs. Although average daily shipments in the ABF network increased sequentially, they decreased versus last year's third quarter. On a year-over-year basis, our higher weight per shipment was driven by several factors. including the improving economy, changes in customer mix, the addition of larger LTL shipments designed to fill available empty capacity in our system, and increased demand for our household goods moving service. At this time, we are not seeing an impact from traditional truckload shipments spilling over into our LTL network as these truckload shipments decline on a year-over-year basis. As we experience during the most severe period of the pandemic, Our e-commerce business was strong in the third quarter compared to the previous year as consumers continue to purchase a variety of products that they receive and use in their homes. Strengthening trends in housing were another positive factor that generated both year-over-year and sequential quarterly increases for UPAC, our Consumer Residential Moving Service. The pricing environment remained solid and rational during the recent quarter. Though our total third quarter asset-based revenue per hundredweight was below the prior year, the decrease was related to shipment and account mix changes and lower fuel surcharge. The increase in shipment size I mentioned earlier was also a factor in reducing our total yield metric, but that was offset by the positive effects of an increase in average revenue per shipment. Our traditional pricing discipline combined with Our evolving use of lane-specific information that helps in adding needed shipments in the right place at the right time forms a solid foundation for our asset-based business that we lean on, especially during uncertain times like we've experienced this year. Our operations team has executed extremely well during a period when we have managed through an entire freight cycle in a matter of only six months. The resulting ups and downs of trying to match labor resources to business levels during such extreme swings in shipment counts has certainly presented its challenges. We had to quickly reduce labor resources in the second quarter and then rapidly increase them as business returned in the third quarter. I am very proud of how well we've maintained year-over-year improvements in most all of the important operational metrics and measures that we closely follow. As customer business levels began to return and the need for transportation services increased during a period of tight carrier capacity in the marketplace, demand for our asset light services contributed to revenue growth and higher operating income. Despite a slight decrease in total average daily shipments during the quarter, greater revenue per shipment, highlighted by increases at expedite, truckload, and manage, drove the top line revenue growth. Because of market conditions, Purchase transportation costs were a higher percentage of revenue, thus pressuring margins. However, efficient cost controls enabled by technology advancement in all other areas of the business resulted in an increase in operating profit. Ground Expedite benefited from higher demand associated with our customers' need for reliable, timely transportation services and from the environment created by challenges they experienced in securing the equipment capacity they must have. Our truckload brokerage was also a positive part of the third quarter revenue growth, but the challenge of matching customer charges with rapidly increasing mileage rates for carrier capacity pressured truckload margins. As many of our customers are emerging from the worst of the pandemic's impact on their businesses, we continue to have opportunities to help them navigate the changing trends in their supply chain and in their need to service their customers in unique ways. As a result, growth in managed transportation services was another positive contributor to asset-light revenue and profit improvements in the recent quarter. The year-over-year revenue growth in our managed business so far this year is significant and is on top of the strong growth we experienced in this area last year. At FleetNet, a reduction in both roadside repair and preventative maintenance events primarily resulting from lower demand contributed to reduce third quarter revenue compared to last year. Reduced event count also contributed to lower operating income during the quarter. Next, I would like to ask David Cobb to go over the earnings results and operating statistics.

Thank you, Judy, and good morning, everyone. Let me begin with some consolidated information. Third quarter 2020 consolidated revenues were $795 million compared to $788 million in last year's third quarter, which was flat on a per-day basis. On a GAAP basis, we had third quarter 2020 net income of $1.11 per diluted share. This compares to $0.62 per share last year. As detailed in the GAAP to non-GAAP reconciliation table in this morning's earnings press release, our adjusted third quarter 2020 net income was a dollar and 22 cents per diluted share compared to a dollar and two cents per share in the same period last year. Our best third quarter 2020 effective gap tax rate was 24.9% and on a non-gap basis the effective tax rate was 26.2%. We currently expect our full year 2020 gap tax rate to be approximately 25% while the effective rate in the fourth quarter may be impacted by items discrete to that period. Full details of our GAAP cash flow for the third quarter are included in our earnings press release. At the end of September, our cash and short-term investments balance totaled $351 million. Our total liquidity, including our cash and borrowing availability under existing facilities, was $644 million. Our financial covenant ratios under our credit facilities improved during the quarter and continue to be in a solid position. You'll recall that in March, as a proactive measure to increase our cash position and to preserve financial flexibility at the beginning of the pandemic, we borrowed an additional $225 million that consisted of $180 million from our credit facility and $45 million from our accounts receivable securitization facility. In July, we repaid the $45 million borrowed under the AR securitization, and in August, we paid back the $180 million on the credit facility. In late September, we paid an additional $40 million that eliminated all of our borrowings under the AR securitization. As a result of these actions, our total debt at the end of the third quarter 2020 was $292 million, which included $70 million on our credit revolver, no borrowings on our AR securitization, and $222 million of notes payable primarily on equipment for our asset-based operation. The composite interest rate on all of our debt was 2.9%. Combined with our cash balances, we ended the third quarter with net cash of $59 million compared to net cash of $41 million at the end of the second quarter, an improvement of $18 million. We made Treasury stock purchases during the third quarter and have repurchased over $5.5 million of our stock so far this year. These purchases, combined with our quarterly dividend, enhance our shareholder returns. Our asset-based third quarter revenue was $562 million compared to $566 million last year, a per-day decrease of 1%. Asset-based quarterly total tonnage per day increased 1.2% over last year's third quarter. By month for third quarter, asset-based daily total tonnage versus the same period last year decreased by 3.9% in July, increased by 3.7% in August, and increased 4.5% in September. Total shipments per day in the third quarter decreased by 3% compared to last year's third quarter. Third quarter total billed revenue per hundredweight on asset-based shipments decreased 1.8% compared to last year and was impacted by freight mix changes and lower fuel surcharges. Excluding fuel surcharge, the percentage decrease of billed revenue per hundredweight on asset-based LTL-rated freight was in the low single digits. On asset-based customer contract renewals and deferred pricing agreements negotiated during the quarter, the average increase was 2.5%. pricing on traditional published LTL-rated business, excluding fuel surcharges, and this piece that does not include transactional LTL-rated shipments, increased by a percentage in the mid-single digits. On an adjusted basis, our asset-based third quarter operating ratio was 92.4%, an 80 basis point improvement versus the 93.2% in 2019's third quarter, and a 200 basis point sequential improvement compared to this year's second quarter. outpacing historical sequential operating racial trends on the significant revenue growth versus second quarter. Earlier this year, in response to a rapid decrease in business levels related to the pandemic, we took decisive actions to reduce costs that included laying off many of our driver and freight handling personnel throughout the ABF freight network. As we moved past the worst of the business declines that occurred in April, we began experiencing rapid sequential monthly business increases, especially during the May through August time period. As a result, we have undergone overall staffing challenges in the asset-based network, particularly in certain specific locations. During the third quarter, in order to maintain customer service levels, we needed to increase our use of outside resources in both line hall and local city pickup and delivery operations, thus increasing purchase transportation expenses. Though we continue to be challenged adding needed resources in some specific locations, we have generally seen success in hiring the people we need. Moving forward, we would expect that customer business levels in our employee resources will continue to stabilize relative to each other and that our use of purchase transportation will moderate accordingly. For October, preliminary asset-based statistics versus last year are as follows. Asset-based build revenue per day increased 9%. Total tonnage per day increased 10%. Total shipments per day increased 1%. The total build revenue per hundredweight decreased approximately 1%. again impacted by lower fuel surcharges and freight mix changes, including the effect of heavier shipments. Excluding fuel surcharge, pricing on traditional published LTL-rated business, which does not include transactional LTL-rated shipments, increased in October 2020 by a percentage in the low single digits compared to October 2019. While total weight per shipment is up 9% in October, reflecting strong demand for our household goods moving business, our LTL-rated weight per shipment increased 11%. This reflects strategic conditions of heavier LTL shipments in certain lanes. The profile change is driving a lower revenue per hundredweight metric in the midst of a rational pricing environment. In recent years, the historical average sequential change in ARCBEST asset-based operating ratio in the fourth quarter versus the third quarter has been an increase of approximately 200 basis points. In total, our daily revenue in our combined asset light businesses increased 5% versus last year's third quarter. reflecting a revenue increase in the ARTBEST segment and lower revenue at FleetNet. The total asset-light business operating income was $5.8 million in the third quarter compared to operating income of $3.6 million last year, with the increase primarily due to increased total business levels, particularly in our expedite business. In addition, operations were more efficient, benefiting from cost controls and use of data and technology. For October, Asset light revenue for the ARTBEST segment, excluding FleetNet, is 31% higher on a preliminary basis compared to the prior year month of October, driven by high demand for our ground expedite and truckload brokerage services resulting from tight equipment availability in the current market. So far in the month, purchase transportation expense is a greater percent of total revenue in the asset light business, which will result in overall margin compression for the month when compared to October a year ago. Regarding our consolidated results, the year-over-year comparison of consolidated operating income was impacted by expense accruals for certain non-union performance-based incentive plans, which were higher by $8.5 million compared to the prior year quarter. The increase is due to improved results, but primarily reflects the timing of recognition as the first half of the year was impacted by the COVID-19 pandemic on operating results. Because of the strong Third quarter results, more incentive costs were appropriately recognized during the third quarter this year compared to historical patterns. We attribute our success during 2020 to the dedication and adaptability of our workforce and the art best culture that unites our people behind a shared set of values. We recognize the sacrifices our employees have made during 2020, both personally and financially, to serve our customers through the pandemic and find a way to solve their changing needs. We have continued to reevaluate our cost savings actions related to the pandemic as the economic recovery has progressed and our financial results have become more certain. This morning, we announced that Art Best will be providing one-time discretionary payments to non-union personnel for the 15% wage reduction incurred by our non-union exempt employees during the second quarter of 2020 and to provide a bonus to non-union hourly employees whose hours were reduced during the same time periods. We recognized $7 million of expense in the third quarter, while $4 million will be accrued in the fourth quarter for these payments. This morning, we filed an 8K that included our third quarter 2020 earnings release, along with an exhibit that provided some additional information about our current quarterly financial results, along with our recent business levels and our future expectations on certain financial metrics. Now, I'll turn it over to Judy for some closing comments.

Thank you, David. What a difference six months has made. As people all over the country make their way to the polls today, I can't help but think about what it means to cast a vote and what an honor it is to be the recipient of one. In a very similar way, shippers and capacity providers do the same thing when they choose to do business with ArcBest. They choose ArcBest because they know they are going to get a good customer experience that includes solutions for all their logistics needs. Regardless of how unique a shipper situation may be, we have access to the right capacity and the will to find a way to get their goods moved wherever they need to be and when they need to be there. The same can be said for our capacity providers who trust us to match them with the loads they want when they want them. This focus on doing what is best for our customers is part of our customer obsession and it is ingrained in the culture we have built here at ArcBest. It is also a driving reason behind why I am so optimistic about what the future holds for this company. Tremendous opportunity exists for us to sustain the momentum of the third quarter and continue to profitably grow our company by deepening our customer relationships, utilizing data and technology in our operations, and integrating innovative solutions in our services. It is the strength and abilities of our workforce and our leadership team that will seize upon this opportunity for growth as we head into 2021. And now I'll turn it over to David Humphrey to conduct our question and answer session.

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

All right. If you'd like to register for a question, you can press the 1 followed by the 4 on your telephone. You'll hear a three-tone prompt to acknowledge your request. If your question gets answered, you wish to withdraw, you can press 13. And again, that's one for the queue up. Our first question is from the line of Jordan Elger from Goldman Sachs. Please go ahead.

Yeah, hi, morning, everyone. Good morning, Jordan. You're doing a good job on the cross side of the equation. I'm just wondering if you could talk a little bit about some of the sustainability controls. I know you have to bring back people, but sort of exclusive of that. And as you look ahead to 2021 and the operating ratio, if one assumes that the bulk of the industrial sector manufacturing recovery still lies ahead, how do you think about margin progression as we look into next year? Or maybe set another way, can we improve upon what you've already done thus far this year?

Well, Jordan, thanks for the question. We certainly always strive to improve upon what we're currently doing, and I think The thing that has been really interesting to watch as we've seen this year unfold is just the flexibility and adaptability of our employees and just the resources that we provide to customer needs in different environments. you know, that's particularly encouraging when you think about what next year holds, because we don't always know what that will be. And that's something that we constantly talk about at the company, just how difficult it is sometimes to know, you know, where things are headed to. But, you know, you commented about what's going on in the manufacturing sector. And we are encouraged by that. I think yesterday's manufacturing PMI index was a a positive and typically, you know, when we look out four to five months, that's impacting our results and that's encouraging. And then also, you know, we've commented on this call about the positives that come with the housing environment improving. And, you know, we are seeing sequentially some good trends on the retail side, although I know, you know, there's going to be some, you know, difficulty with some businesses there. But, You know, the e-commerce trends we're seeing are good as well. And so, you know, we've got all that backdrop going on. And at the same time, I think within the business, you know, we're seeing more opportunity for greater visibility of, you know, just the units of work that our employees are doing and how to better manage that or optimize that. And then the coordination that we see of the needs in the asset-based network or with our carrier partners is, To be able to match that up with the business that we have opportunities for with customers is really at a heightened level, and I'm encouraged by that as well. So, you know, we're constantly working to try to improve, and we see a lot of opportunity to use the foundation that we've laid here to do that as we move forward into the next several months.

Thanks. Just one real quick follow-up. The October strength and tonnage year-over-year, obviously very strong. Typically, though, as we go forward from here, I mean, November, December, I mean, this is not a normal year, so I'm just trying to get a sense for how to think about maybe a progression or is this a typical or atypical progression tonnage from here, November and December?

Well, I'll take the first part, and then David, I think, will have something to add. I mean, you know, the October, when you compare that to September, You know, the trends there for, I think, revenue shipments and tonnage are maybe the best we've had in a long time and maybe ever. And, you know, it's just a really, I think, interesting environment with certain areas strengthening. And, again, some of that is because of the decline that you had in the second quarter, you know, in this pandemic recovery period. But, you know, I'll say that, and then I think David will probably talk about some of the comparisons back to last year.

Yeah, I think if you, you know, we had some generally easier comps, and when you look forward into November and December, November being down, I want to say around 11%. Does that sound right, David?

Yeah. In tonnage.

In tonnage, yeah. Yeah, I'm sorry. So, yeah, it's, you know, there's a lot of, A lot that could happen. Obviously, there's an election going on and then this pandemic. But we're encouraged by the momentum that we're seeing right now. Okay.

Thanks a lot, Jordan. Appreciate it. Thank you. The next question is from Jason Seidel from Cohen. Please go ahead.

Thank you, Operator Judy, David, David. Everyone, good morning. Hi, Jason.

Hi, Jason.

This is kind of piggybacking a little bit of what Jordan said. I mean, Judy, you brought it up. You said this might have been the best October ever. And, you know, if you just look at it on a sequential basis, you never have the same amount of tonnage, total tonnage in 4Q as you did in 3Q. At least my model goes back 20-some years.

Right. I think that would be true.

I'm not saying it. But, you know, you mentioned, I think David mentioned, that the normal sequential move in OR is up 200 points. But, you know... I don't think we're going to see that again based on your tonnage levels and also the fact that I think David mentioned that you accrued $7 million for some of those payments for your employees in 3Q and only $4 million is going to be accrued in 4Q. How should we think about like a logical move on the OR 3Q to 4Q? Because to me, I don't see it being 200 bps worse given current trends.

Well, I appreciate your optimism, Jason.

I'm trying to, guys.

Yeah, yeah. It's encouraging to see, I think, what we're seeing in October from a revenue trend. And, you know, if that momentum continues, I mean, there's something there about that. Because when you think about July, for instance, July revenue per day was down 6% versus last year's July. So we're, you know, we're starting off at a good place. And the revenue per shipment trends are favorable. But, you know, as I mentioned, there's many uncertainties with the economy and the potential COVID impacts and political environment. But, you know, I did, as you pointed out, you were astute to pick up some of those accruals that we have. But by and large, I think we're, you know, we've got some good momentum.

Okay. I was trying to fish out some direct commentary there. I guess... I guess the other thing I want to look at, just conceptually, and you brought up where your purchase transportation is, and I appreciate that. A lot of the brokers that have reported talked about 3Q being sort of the worst quarter they've seen in terms of the speed that the transactional market went against them for a lot of their contractual – excuse me, the spot rate went against them for a lot of their contractual business. And so as Spot sort of levels off and doesn't exactly take the hockey stick up that it did in 3Q, is that going to help margins in that business in 4Q versus 3Q?

In the asset-light business? Yes. I think there's potential for that to occur as we're able to source our capacity as that capacity pricing or as our market pricing to our customers catches up to that capacity pricing. That can happen. That's right.

Yeah, well, the other thing that I was thinking about, though, just, you know, you think about elements that make capacity relax or tighten further. And one of the things that I'm interested in is the vaccine distribution and what impact that has and when that is. And we really don't know. We know that our ground expedite business will likely play a role in that. But just as you were asking that question, I was thinking about what does that do to overall capacity tightness, for instance, in the fourth quarter. And, you know, that's an interesting thing to think about. But, you know, I think what we think about with our asset-light businesses, we're really trying to more, I guess, deeply penetrate the customer relationships that we already have. and gain some business there with new opportunities. And we're at various stages of that with different customers. You know, whenever you've got a mature relationship, you know, perhaps it's one thing. And as you've got a new relationship, it's another. So, you know, as we grow, I think there will continue to be, particularly in truckloads, some pressure on the margins. I think in expedite, there's an opportunity for something better, but some unique things that are coming from this pandemic that that caused me to, uh, yeah, I guess I have cautious optimism about that. It's what I do.

Do you, do you guys have a contract to move the vaccine?

Um, well, uh, no, but you know, we're a source, um, of capacity, you know, for, for that. And we're in conversations with different distributors and customers and, you know, there's still a lot of unknown about the timing and the, and the, uh, the plan. But, you know, I was, uh, I'm mindful of that when I think about our ground expedite business and the readiness for that, and then, again, the overall impact that it could have on capacity.

Well, I think we all want one of these for sure.

Take care of it, guys. Appreciate it.

Thanks a lot, man. See you.

The next question is from the line of Jack Atkins with Stevens. Please go ahead.

Hey, Greg. Good morning, everybody. Thank you for taking my questions. Hey, Jack. Hey, Judy. Hey, Judy. Hey, David. Hey, David. So I guess, Judy, going back to your comments in your prepared remarks about the productivity gains and the investments that you guys have made there in automation to drive improved network efficiency. I mean, when I kind of strip out the $7 million in bonus costs from the third quarter, you guys are kind of getting back to that third quarter 2018 OR at a lower tonnage level. So Can you maybe kind of walk us through where you are in terms of those automation and productivity investments and sort of what's to come in 2021?

Yeah, I mean, I think when we step back and look at the asset-based business and what has transpired, you know, we've been building network optimization software for the last two years. And we completed certain phases of that in the fourth quarter of 19, and we're starting to see that in the numbers, whether it's light lane software or load point planning. Those kinds of projects have really helped us, and we've got more of those in the hopper as we move forward. The interesting thing, too, is just the close work with yield on some of this transactional LTL business. It really has been responsive to customers and the channels they want to do business. But for instance, in the third quarter, it helped us reduce empty miles by about 16%. And it's also helped our city route density. And again, I commented earlier about the productivity improvements, which were to some extent from this, but also I just think our software and our tools to more tightly manage The activities there has helped us. We introduced a mobile dispatch system that was implemented late in 2019, and it's helping us to better communicate with our drivers through messaging and automated alerts, and it's also improving our customer experience. We have really seen some positive impact of those kinds of things. Again, I'm most pleased about the coordination of our yield decisions and addressing customer opportunities while at the same time creating operational efficiency. All that has, again, played out in a year where we've had some extreme ups and downs in business because of the pandemic.

Absolutely. It's really encouraging to see that. So I guess my follow-up question, if I could ask about yield trends. When I look at the commentary on contractual rate renewals, there was a little bit of a deceleration there versus what you saw in the second quarter versus some peers that saw accelerating trends. And obviously, everything we're hearing about capacity in the LTL networks out there is it's very tight. Could you maybe talk about – what you're expecting to see in terms of contractual renewals as we move into the fourth quarter into 2021? Would you expect to see that number accelerate?

Well, I think when we look at what happened in the third quarter, I just remind you of some of the conditions that our customers were in. I mean, we had a lot of businesses that during the second quarter closed or were at a place where they really weren't in normal activity or normal modes of things. And so what we were doing was being patient and waiting for some of the contractual renewals that arose naturally during, say, the second quarter months. And some of those were deferred or pushed out into the later months of the year. And some of these companies are not in a great position themselves. And so all of that is in mind. Plus, I think on top of a lot of actions on our part with CNC and other you know, price improvement actions that we've taken over the years, which I believe have been appropriate to make sure that we're getting paid for the space that's used on a trailer. But, you know, all that's in place. And then you have the environment of the pandemic and what that means to those negotiations. And so I wouldn't take, you know, a lot of instruction from the third quarter's results just by itself. I think you have to look at what we do over longer periods of time. And I think you would agree that we're very disciplined in this area, and I would continue to expect us to be. And we're always reviewing the profitability of our accounts and the opportunities that we have. But we also know what a good long-term customer looks like, and we appreciate having them. And, you know, I think part of that was present as you look at the third quarter result.

Okay, great. Jack, I'm going to move this along. Thanks a lot. Thanks, David. Appreciate it. The next question is from the line of Chris Weatherby from Citi. Please go ahead.

Hey, thanks. Good morning, guys.

Hi, Chris.

So I wanted to touch maybe on the resources and headcount in particular. So, David, I think you mentioned that you're generally able to sort of hire the people you wanted to. I guess maybe getting a little bit more specific for 4Q, can you give us a sense of sort of what you need for the fourth quarter in terms of headcount and maybe how that kind of factors into that sort of historical progression seasonally of OR from 3Q to 4Q?

Well, I think the, you know, as you saw, as I mentioned, we had some elevated PT numbers. to handle. You think about these business volumes that were really volatile in terms of the decline and then the rapid increase. The other interesting thing about the way that business came back is that it's not even across our system. In other words, we have certain geographic locations that have a bigger resource need and bigger business volume return than others. And so when you have that sort of imbalance across the network, you know, it requires us to use some outside resources just to serve our customers and serve areas. And so, you know, and it is, you know, it's easier to find appropriate, you know, people in different places. And certainly the pandemic has put a challenge on, you know, just our normal recruiting efforts, we'll just say.

Well, and to that point, we had, I think, at the highest point, about 1,000 of our labor employees on layoff. And today that number is probably around 100 or so. But to David's point, one of the statistics that we gathered in advance of this call was this. Seventy-two service centers experienced double-digit growth, for allocated weight, and 53 service centers experienced double-digit decline. More than 50% of our locations experienced double-digit year-over-year swings in their business levels. So that's a part of this whole story that's really interesting. And so I think when we're looking to hire, I think it's in a lot of places, but those areas where we've had the declines, not as much. There's not as much of a need there as we move forward. And certainly the business levels are ahead of where the hiring has been in terms of overall employee count. And you see that reflected in our purchase transportation utilization. But a lot of that issue is because of this imbalance issue that we've seen. So we're trying to work through a lot of things here Thank goodness we have the ability to use rail and road power to be able to help us balance. And we'll probably see less of that as time goes on and as we hire. But, you know, it's a process that we have to go through to get more in balance, including our customers getting more in balance.

That's right. And those would be, you know, kind of back to your, I think, your question in terms of incremental costs. Sequentially, it's Those I would view more as offsetting. So as we were able to do that work internally, it may be actually an opportunity for us to lower overall cost per shipment.

Yeah.

Yeah. Okay.

It's certainly more, I think, more stable and more ideal. Yeah.

Hey, Chris, I won't move us along. That's all right. Not a problem. Thanks, man. I appreciate it. See you.

The next question is from David Ross from Stiefel. Please go ahead.

Good morning, everyone. I'll try to avoid the Humphrey hook.

That's right. The clock is ticking.

I know, I know, I know. I want to just talk about the network. Now that it's not a downsizing exercise and tonnage is growing again, where does the facility count stand today, and do you think that you're going to be up or down on number of terminals in 2021?

Well, Dave, I think there's probably relative stability there is what I'd say. I think our current count is maybe 241 facilities, something like that. But, you know, I think there's relative stability there. You know, one of the things when you've been in business for almost 100 years, you know, you really have more of a longer-term perspective on some of these things. And certainly we're going to react if we see sustained business growth that causes us to really invest in those resources. But until we see things, I think, become more settled through this pandemic period and that sort of thing, it's a little bit hard to see what is going to be continuing. But I like being in a growth mode. And we're focused on that, and we have some room to grow, certainly. I think it was mentioned earlier that we're, you know, at lower tonnage levels than we've run through a similar system. And so, but, you know, as I mentioned earlier, with the imbalance of where we've seen growth and where we've seen declines in business, you know, some locations are certainly tighter than others, and that's a part of the equation, too.

So, David, as we look at the 2021, is there – Any need for, I guess, lumpiness in the CapEx? Any preliminary thoughts on facility expansions that may take that CapEx number higher than it otherwise would be, or should it be more of a replacement year with the fleet?

Yeah, and I think that's a good question. We will, as we normally do, provide an update, our CapEx plans for 2021 when we release our fourth quarter results. I guess maybe... think about that in terms of when we started 2020 our original capex plans were estimate was around 135 million to 145 million and so you know at the beginning of the pandemic we lowered that uh from those original plans and our current expectation is around 90 to 95 million for this year so so uh you know i would think think of that in terms of you know we want to to maintain our replacement cycle and revenue equipment. We want to continue our other maintenance items and strategic investments. So probably a higher level than 2020, and maybe a point to gauge would be that estimate that we provided at the beginning of the year is a starting point. But we'll need to finalize those plans and think about that. And as Judy said, there's tightness in certain areas, and real estate is certainly always a consideration as we develop our CapEx plans.

Excellent. Thank you. Thank you, man. We'll see you. The next question is from Ken Hexter with Bank of America. Please go ahead.

Hey, good morning. So just maybe following up on the capacity question from Chris, but if you maybe talk about what capacity you have to absorb that 10% growth in October and if that continues, How do you adjust? I just ask that because Dave noted that PT costs will subside. And then why is truckload down given the tight spot market? Don't you get the flow down from that in these peak times?

Yeah, interesting question. Well, I think whenever we look at some of our labor planning, for instance, our shipments have not moved up as much as the tonnage or the weight is. And so I think that helps us from a resource ability to handle that. And again, we already talked through the elevated purchase transportation, which is a combination of rail and road power that we're utilizing there. And I think that's an interesting thing to think about as we move forward, but I feel like that we can handle that okay. And, you know, remind me of the second part of your question.

The truckload. Oh, yeah, the truckload.

Yeah, it is an interesting thing that we're experiencing here. We're actually seeing, you know, I think an opportunity to have more LTL transactional shipments, which, you know, we are focused on and, you know, bringing on some new relationships and then also servicing some existing ones And, you know, I think it really is more a story of the availability of that than it is the truckload spillover. So we just wanted to be sure to point that out as we're looking at year over year. And we just see that the more optimized answer for us because of the network needs that we have and the empty capacity needs that we needed to fill is was to utilize those LTL transactional shipments, which we feel good about the overall result that that had and how that coordinates well with the published business that we have.

And then real quick for Dave Cobb, your thoughts on data tech investments. Are we seeing that scale if CapEx is staying low here?

Well, I think Ken's question was about the tech investments, the spend on tech investments.

Yes. So we're fully invested there and want to continue to do that. I mean, we're seeing the results, I think, of investments that we've made over the years in our results. And so we continue to invest in both software and hardware items and software And I think that's going to be in our CapEx bill as we plan for 2021.

One thing, Ken, that I would say is that our tech spend as a percentage of revenue we feel like is on par with other companies that we compete with. But what's interesting about it is we feel like that more of our spend goes to what we would call strategic investments rather than just run the business. That's what our comparisons show. We're really happy about that, and we feel like that's a great thing for advancement.

Thanks a lot, Kian. Thank you very much. Thanks, Dave.

The next question is from the line of Scott Group from Wolf Research. Please go ahead.

Hey, thanks. Morning, guys. Hi, Scott. I just want to quickly go back to that last point about truckload spillover. I thought the October update is that TL spot shipments were up double digits. Is that not truckload spillover?

Oh, you're talking about in the asset light piece of the business?

I thought I'm just reading in the double digit percentage increase in truckload rated spot tonnage moving in the asset based network.

Well, that is more of our UPAC business. The UPAC business that we do is truckload rated.

Okay.

So it's not what I think when the thought is about truckload spillover, that's not conceived in that thought is that it would be, you know, UPAC moving business.

Right. That's what's driving that entirely.

Okay. And then, Judy, just a couple of bigger picture questions. If we look over a 10-year period, I think you had never had an OR better than 97 in the LTL business, and now we've got three years in a row, 93 to 94 on OR. What do you think is the right, is there a new range to think about for your LTL margins through a cycle? And then just separately, I saw a presidential memorandum around pensions and just wondering your thoughts there and what a good outcome for you guys.

Yeah. Well, I think that's certainly a part of that OR range. We know for sure, but One of the things that we've noted is that we have had nearly 350 basis point improvement in the operating results for the asset-based business since 2016's recession. I think we would all agree that this period here is certainly more difficult to navigate than what was there in 2016. You know, that is really, I think, noteworthy for us and does, I think, create a new range of thinking on the operating performance for the asset-based business. And, you know, I mentioned earlier some of the visibility and management tools and optimization as well as the coordination with yield strategy in terms of the best business that we could have in the network. And I really think that that's a strong contributor to the improvement there. And, you know, we've always had an opportunity for more consistent results. And I think that's what I'm very focused on is trying to create greater consistency, whether it's quarter to quarter in terms of seasonality in the business or if it's in the cycles. And I think, you know, that's my objective. And I think if we were to accomplish that, I think we could see further improvement in the operating performance for the asset-based business. And then on top of it, it would be more consistent. And, you know, again, technology, analytics advancements, visibility, and then great execution, all of that comes together as a part of that story. Okay.

Thanks a lot, Scott. Appreciate you, man. The next question is from Todd Feller from KeyBank. Please go ahead.

Todd, great. Thanks, and good morning. Good morning, Todd. Hey, good morning, everyone. Just on the thoughts on pricing, and really it kind of dovetails in with what you just talked with Scott about on being more consistent. Because you guys have done just a really good job throughout this cycle in being disciplined with pricing, how do you think about the range of contract renewals over the course of the next cycle? Is it something where maybe it's not as high as what we've seen in the past because you've been more consistent, or is there still the opportunity to go out and get high single or low double-digit contract renewals on some of your freight? And then if you could also just dovetail in some thoughts on a GRI. I know you guys typically don't lead, but is this an environment where We could see a sooner GRI just given some of the freight dynamics. Thanks.

Well, you know, I think when we think about the contractual renewals, you know, I think the – I don't have it in front of me, but the history on that, you know, would show you or tell you that it would be – pretty unusual to be in those high single digits. I think that's pretty unusual. Although, you know, I think we've made a lot of progress over time. And you look at maybe some comparisons that we would have back to pre-2017, the cubic minimum charge action that we took, you know, it would, you know, the improvements that we've had would be pretty dramatic. But, you know, I think that when we look at it, It's a combination of business that's good for us and works well for us in the network as well as being responsive to what customer needs are. I think for the period of time that's upcoming here, I think companies or businesses in general are not in their optimal range of profit margins. I think what's going to be on their minds is that they've got to continue to keep their logistics costs in check and that's one of the reasons why I like our strategy as well as I do because we're able to bring a variety of solutions to a given circumstance and bring that together in a way that perhaps overall reduces logistics costs for our customers but also gives us the payment or the increase level that we need for a given solution. But I do recognize that over longer periods of time, logistics, I think, for our customers is a strategic weapon for them, and I think they're very focused on it, and I think they've seen pretty good size increases, and this year is going to be a very disrupted year for them. So they're going to be focused on trying to get to a better place, and that's, again, why I like our integrated solutions that we bring to bear or that we offer because you know, that creates greater consistency in business from a customer, which we always benefit from, but it also helps us, you know, accomplish both of those goals, one that's really customer-focused and the other that's focused on our improvement in cost and profitability.

Yeah, and I'll just add, Todd, I think you hear it in Judy's voice, just the interest from the customer's perspective, and that's really, you know, our vision and vision the reason why we see a long-term sustainability in our program here.

Yeah, okay, that helps. And then just any thoughts you care to share on a GRI would be great. Thanks.

Yeah, the GRI, yeah, David, do you want to comment about that?

Well, just, you know, as a reminder, you know, we had a 5.9% back in February of, I think around February 20th. It was late February. Of this year, and then... The previous February, early February, we did another one, or did the one before that. Our yield folks are always monitoring the customer relationship side of that, so let's try to determine when it's the right time for a GRI. We're typically not going to be the first in the marketplace to announce one, but at this point we haven't made any decisions about that timing. We'll evaluate, you know, input from our sales group and their discussions with customers and, you know, as Judy mentioned, all the disruption that our customers are experiencing, we want to evaluate that and consider that in all these decisions.

All right. Fair enough. Thanks for the time this morning. Thank you.

Thanks a lot, Todd. All right. The next question is from the line of Stephanie Benjamin with Truist. Please go ahead. Hi. Good morning. Hi, Judy. Hi, David. Hi, David. Hi, Stephanie. Good morning.

Hi, I wanted to talk a little bit about the asset light margin improvement. I think you guys demonstrated some pretty efficient cost controls, you know, particularly given the higher purchase transportation costs. Could you talk a little bit about the sustainability of those cost controls? You know, how we should think about that as we go into the fourth quarter and 2021 and just any efforts you have made to I know a lot of efforts on the asset-based side to improve the margin profile, but would love to hear what's been going on behind the scenes on the asset-light side. Thanks.

I would just say that, you know, I think what you see there is some reflection of our technology and how we're doing a number of things systematically in digital tools that we put in place, Stephanie. And so that's helping us there, and we want to – Our focus is to sort of minimize the transaction costs related to those loads. And so it's good to see that. And we've got a long ways to go there. We've got efforts around just this full back-end, touchless sort of transaction that we want to get to. And we've made some advancements, but we've got some ways to go there, I would say. Again, shipment visibility and just automating that tracking for our customers and carriers and connecting those carriers electronically with our loads. All those initiatives have advanced.

I've got another example that I think is just worth sharing. We're using AI to read e-mails and to categorize e-mails. and that helps us with acting on them quicker. It helps us with the customer experience, but it also, for instance, if it's an email that's directed at a document that's needed, we can deliver that without a human being involved. But, you know, so that's an example of what we're doing that is, you know, I think automation or at a minimum it's enablement of our people, but You know, we still strongly believe in the value of the human involvement in our customer relationships, but we're trying a number of things to enable our people better and to have the more routine be addressed by a technology answer and, you know, where it's more complicated or where the human intervention or involvement is important, we're doing that as well.

Yeah, and just attracting more shipments, that's an area that we're also looking at growing. I mean, we've done some of that, but from just obtaining those customer quotes and booking those through our APIs and through our ARCB.com connection, that's an area that's going to hopefully advance as well.

Our understanding, too, of customers, and the channels they want to do business in is advancing, and we're trying to direct our resources in an appropriate way.

We see a lot of opportunity there for that piece of the business to grow.

Got it. Really appreciate all the color. Thanks so much. Thanks, Stephanie.

Okay, Stephanie. Thanks a lot. Well, listen, that's all the folks that we've got lined up for questions, so I guess that ends our call. We want to thank you for joining us this morning. We appreciate your interest in our best, and this concludes our call. Thanks a lot.

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