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spk08: Greetings and welcome to the ARC Best Second Quarter 23 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded Friday, July 28, 2023. I would now like to turn the conference over to David Humphrey, Vice President of Investor Relations. Please go ahead.
spk09: 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 Artbest, and Matt Beasley, Chief Financial Officer and Treasurer. In addition, Dennis Anderson, Chief Strategy Officer, Seth Runzer, President of ABF, Stephen Leonard, Chief Commercial Officer and President of Asset Light Logistics, and Christopher Adkins, Vice President of Yield Strategy and Management, are available to help answer questions. To help you better understand ARCBEST 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. For a more complete discussion of factors that could affect ARPBEST's future results, please refer to the forward-looking statement section of our earnings press release and our most recent SEC public filing. To provide meaningful comparisons, certain information discussed in this call includes non-GAAP financial measures as outlined and described in the tables in our earnings press release. Reconciliations of the GAAP financial measures to the related non-GAAP measures discussed in this call are also provided in the Additional Information section of the presentation slides. As a reminder, there is a conference call slide deck that can be found on the ARCBEST website, arcb.com, in Exhibit 99.3 of the 8-K that was filed earlier this morning, or you can follow along on the webcast. We will now begin with Judy.
spk01: Good morning. We appreciate you joining us today. Before we begin, I'd like to start with a message to our people. In 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 Artbest. We have the best people in the industry. Every day, our team finds innovative ways to deliver for our customers with their skill, hard work, and resilience. These attributes are why we receive 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 were 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're retaining the best employees in the business and recruiting top talent. We're pleased to have reached a contract that achieves these goals and sets the stage for future growth and investment. At ArcVest, 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 recognize 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 in those locations. And that productivity improvement has continued long after the team departed. So we're going to do that on a larger scale. We will be pausing the 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. Vox pilots with customers remain promising and are not affected. Early Vox 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 efficiency. We are 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 pickup process. And importantly, we are investing in our people to drive high engagement. We've 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. ArcBest 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 advisor with a full suite of logistics solutions. rather than simply a capacity provider. We have seen clear evidence of that this past week as customers have turned to ArcBest to manage their supply chains through 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.
spk13: Thank you, Judy, and good morning, everyone. Before I cover the quarter's results, I want to say a quick thanks to our previous CFO, David Kopp. David built a best-in-class finance team, and his support and guidance have been invaluable as I've transitioned into the CFO role. I wish 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 in 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 decrease in fuel surcharge revenues. As you will 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 LTL-rated pricing tool to secure market-based, profitable shipments to better utilize available network capacity. The 11% decrease in second quarter build 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 LTL shipments at current market rates naturally reduces the total revenue per hundredweight statistic. Overall, pricing remains rational, and we continue to obtain increases on our core LTL-rated business, which increased 7% versus the same period last year, Pricing 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 LTL-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 3.1% average increase. The second quarter non-GAAP asset-based operating rate, 92.8%, was a 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 higher OR than we anticipated when we previewed Q2 last quarter, which was due in part to adding and 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 in purchase transportation spending, as well as a reduction in dynamic shipment levels to target total shipment volumes of approximately 19,500 shipments per day. In addition, over the past week, the asset-based segment has experienced more than a 10% increase in core LTL-rated shipments per day when compared to June 2023, which was handled through a reduction in less profitable dynamic shipments. As Judy mentioned, we were pleased to recently reach a new five-year labor agreement, which recognizes the contributions of our employees with pay increases and quality of life enhancements. while supporting growth and investment. 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-year 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, ARCVEST's 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 have seen over the past week continue throughout the quarter. In 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 in 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 year's 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-light profitability in the most recent quarter. We provided preliminary asset-light business trends for July 2023 in the Form 8K 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-light shipment growth this month is directly related to continued success in adding truckload shipments, but truckload rates still remain significantly lower than last year. Net capital expenditures total $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 8 tractor orders remain in place, and we currently expect to receive all ordered tractors by the end of the year. Progress 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 sum per unit costs, and a deferral of some capital to 2024. ARCBEST's 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 and 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 ARCBEST's 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 back to Judy.
spk01: 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. This is why we continue to see customer growth despite some of the demand decline our industry is experiencing. In a rapidly changing marketplace, ArcBest is uniquely positioned 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, move goods on our own assets, and customers are increasingly asking us to help manage key components of 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.
spk09: Okay, Dana, I think we're ready for some questions.
spk08: Thank you. If you'd like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone 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 one followed by the four. Our first question is coming from the line of Stephanie Moore with Jefferies. Please go ahead. Hi, good morning. Thank you.
spk01: Good morning, Stephanie. How are you?
spk07: I'm doing well. Okay, Judy and Matt, you commented on core LTL 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 volumes, whether it's from you know, maybe an industry dynamic or also a potential rebound in the spray environment. That would be helpful. Thanks.
spk01: Yes, Stephanie, we do see the capacity, you know, to increase 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, close to 21,000 shipments a day. And even into past periods last year, we've handled higher shipment levels. We also, 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. And in the past, like in 2022 and 2021, that was a bit of our constraint. And so we can see our way to... The other thing that we're doing is our facilities, we've been addressing certain growth areas, and some of that has been done. Like, for instance, we moved into a new Phoenix facility, and we've done some other expansion work. But, you know, we see that continuing as we go forward. There are several facilities that we're addressing, and we'll have greater capacity as we go forward. So we feel like we're well positioned, and, you know, And, you know, it is evolving daily, you know, what we're experiencing. And, you know, 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.
spk07: Great. Thank you. And then just as a follow-up, you know, maybe this is kind of a two-part question with the new union agreement. So, I guess my call would be, it sounds like, from a labor standpoint, some of the constraints that you saw in 2021, 2022, you know, might not be an issue here as you've kind of prepared or maybe learned your lesson from some of the labor struggles we've seen in the past. And then now with the new union agreement in place, you know, in a pretty good competitive positioning to kind of move forward. So, maybe just as a follow-up touch on where you stand on labor availability, Tim. meet this capacity, or meet this influx of volume.
spk01: Stephanie, I'm going to let Seth Runzer, who's the ABF president, respond to that.
spk06: 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 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 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-wise.
spk15: All right. Thank you so much. Thanks, Stephanie. Thanks, Stephanie.
spk08: Our next question is coming from the line of Chris Weatherby with Citi. Please go ahead.
spk02: Hey, thanks. Good morning, guys. I just maybe I wanted to ask a specific question around shipments. Is it 19,500 where you are now? There's 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 action to maybe reduce that number from June to July, and then maybe there's an uptick. So any clarification there would be helpful.
spk01: Yes. I'm going to let Christopher Atkins respond to that, Chris, and then, you know, I'll follow up if there's any other thoughts I have. But go ahead, Christopher.
spk12: Hi, Chris. Good morning. This is Christopher Atkins. So in terms of the $19,500, you know, in June we were handling around 21,000 shipments per day. We made the strategic decision to reduce that shipment count to a more profitable mix for our business. And 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 make additional capacity available for that core business. So really the $19,500 is inclusive of all of our cores with that growth that we've been mentioning as well as the transactional business.
spk01: Well, but I would say, Christopher, that's for the month of July. You know, as we go forward, we'll see what that becomes. I mean, 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's good about the dynamic tool is it allows us to use that lever to both shift up and shift down. We're awfully glad to be in a position where we have the capacity, we can shift that down, and we can take on better business from our core customers and really serve them well in this time of disruption.
spk02: Okay, that's very helpful. And then I guess when you think about the dynamic pricing aspect, as market share shifts and we potentially see more shipments coming onto 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 we want to get a sense of maybe is pricing responding here in July to this very sort of real-time improvement in market share, or does that take a little bit more time? How would that play out?
spk12: Yeah, Chris, you got it. This is something that we manage daily, our dynamic pricing. This is something that's 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, and we've already experienced price increases in that area.
spk01: Well, and I'll add one thing to it. Because of the work that we do in our managed team, we're also seeing the markets you know, our competitive landscape respond in a similar way.
spk15: Okay. That's very helpful. Thank you for the time. Thanks, Chris.
spk08: Our next question is coming from the line of Jordan Alliger with Goldman Sachs. Please go ahead.
spk16: Yeah. Hi. Good morning. Hi. In terms of the step-up, I mean, presumably a meaningful amount is freight that's been diverted to you from yellow. I'm just curious, too, aside from maybe sort of comment on that dynamic that's going on, but then sort of also sort of from a core demand perspective, were you seeing any positive signs separate from any diversionary benefits? Thanks.
spk01: Stephen, I'm going to ask Stephen Leonard to respond to that, just based on what we're seeing from our other core customers. in addition to what we're seeing from the yellow disruption?
spk05: Yeah, so, you know, if you take out kind of the disruption that we're seeing and the demand that's coming from that and just look at, you know, kind of where business was and what we were seeing seasonally, we're not seeing a drastic change in demand. There are, you know, pockets of customers in certain industries that are maybe seeing more demand than others, but in general... nothing game-changing from a demand perspective. Aside 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 gives them more options than, you know, otherwise with just looking at our asset-based capacity. So we're in a great position there. And we're seeing that play out. We've had some good examples where, you know, 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.
spk15: Hey, Jordan, you still there? I lost him. Maybe he can get back in the queue.
spk09: Yeah, Jordan, jump back in if you need to later. Dana, let's go ahead and move to the next question.
spk08: The next question is coming from the line of Jason Seidel with Cohen. Please go ahead.
spk18: Thank you, Operator. Judy, David, team, good morning. Good morning. I wanted to focus a little bit on sort of the freight coming into the network and and how you think that will evolve over time if there is a full-fledged bankruptcy that everyone seems to be thinking at yellow. And what I mean by that is everything is just coming in now, but what you take on today might not be what you maintain in 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 GRI sometime between now and the end of the year?
spk01: Well, Jason, I think we have to be mindful of many things as we're looking at this business. It's always interesting to us to see the opportunities that arise in certain situations. And what's interesting is many of the customers that we're having conversations with daily or maybe intraday, these are opportunities that we've seen before. sometimes it's about the lanes that work well with for us or some other aspect or element of it and we've 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 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 it 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 GRI, I think, you know, our last GRI was in November of last year. I don't know that there's been many discussions about that. You know, we're typically not a leader. We typically watch what happens. But would you add anything to that?
spk12: That's right. I think generally the market takes about one GRI per year. As Judy mentioned, we took ours last November. It's something we're constantly evaluating and watching the marketplace on what others are doing in this area.
spk18: Good. And a quick follow-up. Judy, you know, what lessons did you learn today? from any prior major bankruptcies in the LTL space. So what do you think you can do different this time to be more nimble and agile?
spk01: Well, I think just our strategic positioning has put us in a place where we are. What's interesting, you know, is before, maybe in a past situation, I'm thinking of Consolidated Freightways. I think it was back in 2002 or something like that. It was, yeah. You know, Yeah, we were primarily an LTL carrier then. And today, as a logistics company, there are opportunities that we feel comfortable saying yes to. And perhaps that business is good for AVF and it works well there. But also, we have a lot of other relationships. I think in our list, we have over 80 relationships. And we are working with them often, and we know what works well where. And so being able to say yes 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 our regular core business, let's just say. But, you know, a lesson learned, I think, is to be sure that if you're you know, 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 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 residential delivery type shipments or, you know, other big volume players. That, you know, really what you've got to do is get involved with that business, see how it works, and make your decision to go forward with it rather than just saying yes to too much and regretting that.
spk15: Appreciate the color. Thanks for the time as always. Yes.
spk08: Our next question is coming from the line of Jack Atkins with Stevens. Please go ahead.
spk14: Okay, great. Thanks for taking the questions. And, Matt, congrats on your new role. I guess, Judy, when you kind of think about the knock-on effects and the opportunities that may be available to you from an investment perspective over the next couple 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 area you know freight gateway city or something like that uh or you know how do you think about how do you think about that uh in terms of capital allocation here over the next you know call let's say you know year yeah jack i'm gonna let seth runzer uh take a shot at that and then then come back to it okay jack so we're 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
spk06: 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 capital deployment there. From the equipment side, we continuously have invested in our fleet. We still have a lot of new tractors coming on this year, but same thing there. We'll 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 flex our fleet up. So we have a pretty good view on that.
spk01: Okay. And we're, Jack, we're well connected with the real estate folks at all the competition, and that really helps us to see you know, what opportunities there are there. But 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.
spk14: Absolutely. Okay, great. And for my follow-up question, you know, there's, I guess, quite a bit of confusion around the potential impact to, you know, these multi-employer pension plans from this. You know, last time I checked, Central States was almost fully funded. You know, Would there be any sort of potential risk to your pension expense or costs or liabilities? I don't know how you want to take that if you were to see 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 that's a concern, and I just wanted to let you have a chance to address that.
spk01: Well, absolutely. I appreciate you asking the question. And really, you said it well, you know, with the American Rescue Plan that was passed and then, you know, has funded some large dollars into, I'll just use Central States Pension Fund as an example, it is a well-funded plan. Years ago, and you can imagine why they might do this, but I think that the actuaries for those funds started looking at the potential for insolvencies by some of the participating employers and what impact that would have on the fund. After doing that, what we learned is that a lot of the success of the fund is dependent on their investment returns, and it has a lot less to do with employer contributions and You know, in Yellow's case, I believe, you know, that their contribution level was much lower, for instance, than ours. 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. You know, I certainly feel for, you know, those individuals involved in all of this, and I don't mean to, you know, just look past that. Because it's real and it's serious, 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 in this recent round of negotiations, 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 is really created in a near-term way or even, you know, a longer-term way to our people. And we pay in, as you know, for them as well as a portion of what we pay is for people who never work for us. And, you know, and the good news about that is our people feel really good and solid about their retirement benefits in this labor, this competitive labor environment that's important and good.
spk14: But just to be crystal clear, this will not impact your pension liabilities or your pension expense, just to be crystal clear on that. Okay.
spk01: Right. Our contribution levels are contractually determined, and they are determined with the passing of this latest union contract. It will not change. And, you know, we're told that the pension fund, again – understand that I'm mostly referencing central states because there's the most discussion about that. 50% of our contributions go to them. Our understanding is it's 90, I want to say 97 and a half percent funded, you know, at this point. And, you know, that is not going to be a factor that we have to deal with.
spk15: Okay. Thank you for the time. Thanks.
spk08: Our next question is coming from the line of Ken Hector with Bank of America. Please go ahead.
spk04: Great. Good morning. Certainly a seminal moment here in the industry creating the chaos that I think we all knew was coming. I just want to clarify a few things. You went from 21,000 shipments in the second quarter to 19.5 in July. Is that shedding all of the transactional freight? Is it some? I just want to clarify an earlier answer. Is that You know, can you talk maybe then also after that, the volume levels as you exit in July?
spk01: Yes. Christopher, you want to handle that?
spk12: Yeah, so that is not shedding all of our transactional. We still think it's 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 they're making individual shipment-level decisions, we're meeting them in the channels that they are. So the $19,500 does still include some of that transactional business. And as we're exiting July, we've still been managing to that 19,500 at this point. But like Judy mentioned, we have the ability to scale up and meet our capacity expectations that our customers have for us.
spk01: Yeah. And the only caveat to that, Ken, is we want to make sure it's good business.
spk04: So to understand, you've shed the transactional, taken on the freight you want, but you still haven't expanded. So to your, I think the first question, Judy, was on capacity expectations. You haven't filled up the excess capacity. You've just swapped some transaction. That's right. Okay.
spk01: That's right. As of the end of July. But, I mean, understand that's what we're talking about is through July. You know, 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.
spk04: But if I understand, I mean, have they fully suspended pickups? I mean, is this transition – at the tipping point in terms of you getting the share you get, or is there still a lot of tonnage left in the jump ball market?
spk01: Well, I don't know the answer to the latter part of your question, but I do know that the noise has been that they haven't been picking up great. I mean, again, I hate to speak for them because I know all that's not finally determined, But that's the indication that we have. And, again, we've been having a lot of good conversations with customers that I think, you know, Ken, this is the kind of situation that as it unfolds, I mean, this is a multi-year type effect. I mean, when you have a company that has handled as many shipments as they have, and if they're no longer a player, if that's where this ends up, you know, that's a big effect on our markets. 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 and look for what works best for us and for our customer base otherwise.
spk04: So, Seth, just to clarify that earlier answer, can you quantify or give a range in terms of that 19 and a half, how much transactional You can still shed just given it. It sounds like you said you made a move to get rid of some of it because of cost issues and other things. You were using it to fill the network. So just to understand, free additional capacity if you choose to get more of that. Can you talk scale?
spk12: Yeah, this is Christopher. Yeah, we still want to keep some of it. And like Judy said, 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.
spk04: My last one, if I can get one more in. Matt, you said the operating ratio. I just want to clarify your comment there. You said it was normally seasonally flat, but with these changes in the network, were you saying you expect – I didn't catch your answer there – significant improvement from the 92.8, or maybe just clarify what you were pointing to?
spk13: Sure. No, I appreciate you asking that clarifying question. So, yes, if you look at historically the sequential performance, second quarter to third quarter has typically been roughly flat. But, you know, certainly we talked about some of the cost increases that we were experiencing in the third quarter related to the contract. And so, you know, you can think about that in the neighborhood of 300 to 400 basis points. And so what we've said is, you know, we should be able to, with some expectation that we had, Even going back to when we started 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 cartage, purchase transportation, all that should put us in a spot where we can still manage to historical expectations, even with some of those increases in costs 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 what we've described in terms of the OR expectation for the quarter.
spk15: Great. Thanks for the time, everybody. Appreciate it. Thanks. Thanks, Ken.
spk08: Our next question is coming from the line of Ravi Shankar with Morgan Stanley. Please go ahead.
spk10: Great. Thank you, everyone. Judy, just wanted to confirm 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. I just wanted to confirm that. And also, there's a lot of talk of, hey, if 10% of the industry capacity permanently exits, that raises the floor of pricing for the rest of the industry, which sort of makes sense. But what are some of the constraints on new capacity ads, do you think? I mean, what's the risk that the rest of the industry backflows that lost capacity in the coming years?
spk01: Well, I mean, I certainly think over time that risk is there, Robbie. I do. You know, but I do think that it would take some time. And, you know, I think you're an observer of things just like I am. It seems like, you know, over time we've seen a greater discipline in the industry now. you know, on, you know, adding resources and then also, you know, how to or maybe the expectation of profitability of business that's run. But, you know, for us, you know, we we just have to be sure that, you know, as we're adding business on an account basis, it's profitable for us, that it doesn't bottleneck things or create issues in serving our core customers. And we're really very focused on our already existing customers as much as we are these new opportunities, and we want to make sure that we serve them well. For us, we like to see things progress over time. Certainly, one-time events or big changes typically are harder to deal with. But right now, things are kind of progressing in a good, positive way. With the costing system that we have that's been in place for 40 years, we have good visibility after maybe a week or two. We can look at the different profile of the freight, profitability of the freight, and just make good decisions. But all of that takes a little bit of time to be sure. And right now, we are making some decisions based on history and what we've 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.
spk10: 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 impact the new labor contract has on OR? I don't know if you want to use like a mid-cycle OR or something. And is the main offset from that coming from, are there productivity initiatives in the contract, or do you need to get price to offset that?
spk13: Yes. So, you know, overall, just looking at it on its own, I would say 300 to 400 basis point impact. We talked a little bit about of the average increase over the contract and you know if you you take it on a compound annual basis over the five years looking at wages and health welfare and pension it's about four percent but on an or basis it's it's three to four hundred 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 resources to really further increase that focus. And so, you know, as we sit here today and think about, you know, the opportunity that we have to offset that, I think, you know, it comes both from just the expectations that we were already seeing as our core business was starting to strengthen some, and then as well as some of these changes in efficiency and productivity and scaling the network to the point where we can you know, be in a more optimal place with cartage usage, purchase transportation, overtime rates, things like that.
spk01: Yeah, and Robbie, 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've 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 our customers would absorb. But we do feel like that the contract rate increase over time is reasonable. And we feel like that that's something that should be manageable through our longer term pricing actions. But we do have, I think, an obligation and action plan in place to address the cost side. And the good news is, Seth mentioned this earlier, we're going to have you know, our people 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, you know, even more productive. 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 those things are going to have to work together. to achieve, you know, the OR ranges that we've set out there for ourselves, and we're very focused on doing that.
spk15: Understood. Thank you. Thank you, Robbie.
spk08: Our next question is coming from the line of Jeff Cuffman with Vertical Research Partners. Please go ahead.
spk03: Thank you very much. Hello, everyone. Hi, Jeff. Hey, and congratulations, Matt.
spk16: Judy, I want to,
spk03: You've answered this a couple different ways, but I want to go back to growth and market opportunity here, if I can, and 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 the network, plugging holes, so we could 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 21,000 per day shipment 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, you know, what you would be willing to flex to for the right kind of business, right kind of customers. And is that 21,000 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 or service?
spk01: Well, and the reason I use that benchmark is because that's a good recent benchmark. I think what you see is in a situation where we've got a better mix of core customers is the quality of those shipments would be better, would be improved. But I do hear you, and I feel like that we do have an opportunity to go beyond that. I wouldn't think it would be a huge number of shipments beyond that. But in order for us to add value people and maybe make other types of investments, what I'd say is it would need to be good business. And we can see that, and we do have the ability. One thing, and I know you've been around us for a long time, you remember, is in the summer, 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, you know, we would be able to use rail and 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 those kinds of mechanisms available to us, again, for good business. And certainly, you know, if our opportunities are there for equipment, we're hearing from, you know, drivers and other employees So we know we're going to have an opportunity at resources. So I think we've got to just manage through all of that, look at the quality of the business, and make a decision. But those variable levers I mentioned, they're pretty easy to pull if you feel like you're in a good place. And that allows you to grow beyond what I was suggesting.
spk03: 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'd accrued at the other carrier kind of goes right into your list? Or does the new contract kind of clarify how those types of situations would work if other good employees became available to hire?
spk06: Yeah, if other good employees came available, they would have to basically start over on the seniority side. They would potentially maintain their pension credits with central states or whatever pension fund, but as far as seniority, wage scale, all that type of stuff, they would basically be starting fresh like any other new employee.
spk03: Okay, great. Well, thank you and congratulations.
spk01: Thanks, Jeff. Yeah, thanks.
spk15: I appreciate that.
spk08: Our next question is coming from the line of Bruce Chan with Default. Please go ahead.
spk11: Hey, everyone. Good morning. And David Cobb and Matt, congrats to you both. A lot of really good color on capacity and yellow so far, so maybe just to switch gears a little bit. Matt, 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, 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?
spk13: 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 allocation from a big picture approach, which could include filling in some capabilities in our business, you know, on the M&A front. And, of course, return of capital to shareholders. I don't know. Dennis, if there's anything that you want to add on that front.
spk17: Sure, Matt. Hey, Bruce, this is Dennis. Yeah, absolutely. M&A is part of the capital allocation strategy here. As we've talked, really, we're looking for great, generally asset-like business and things that help us grow with our customers. We've talked about different areas. I wouldn't necessarily say it's directly truckload brokerage. We've got a great truckload brokerage operation now in Lolo. But, you know, things like managed transportation, we've talked about that before, that could really help us deepen those partnerships with customers is really the focus there in the M&A front these days.
spk15: Okay, that's great. Appreciate it. Thank you.
spk08: And Jack Adkin is back in queue.
spk15: Okay. Let's see if Jack's.
spk14: Hey, David.
spk15: Hey, there you go.
spk14: Okay, great, great. Yeah, just I guess maybe just to kind of round it out, no one's asked about the asset light business. And, you know, I know a lot of attentions on what's going on in the LTL 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 sort 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, you know, barring some sort of inflection in the freight market one way or the other.
spk05: Yeah. Hey, Jack, this is Steven. You know, 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 You know, 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, you know, and so we're just, you know, 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 that aspect in terms of managing costs, 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.
spk15: Makes sense. Thank you. Thanks.
spk09: Okay. Well, I believe that's the last question we've got. Dina, thank you for your help, and we want to just thank everybody for the interest, our best, and that concludes our conference call. Thank you a lot.
spk08: 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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