Thank you for standing by. My name is Danica and I will be your conference operator today. At this time, I'd like to welcome everyone to the ArcBest Second Quarter 2024 Earnings Conference Call. Operator Instructions. I would now like to turn the call over to Amy Mendenhall, Vice President, Treasury and Investor Relations. Please go ahead.

Good morning. I'm pleased to be here today with Judy McReynolds, our Chairman and CEO, Seth Runser, our President, and Matt Beasley, Chief Financial Officer. We also have several other members of our executive leadership team available for the Q&A session. Before we begin, please note that some of the comments we'll make today will be forward-looking statements that are subject to risks and uncertainties which are described in the forward-looking section of our earnings press release and SEC filings. To provide meaningful comparisons, we will discuss certain non-GAAP financial measures that are outlined and described in our earnings release. Reconciliations of the GAAP to non-GAAP measures are also provided in the additional information section of the presentation slides. You can find the slides on our website, arcb.com, and Exhibit 99.3 of the 8-K filed earlier this morning, or you can follow along on the webcast. Before I hand the call over to Judy, I would like to thank David Humphrey for his 41 years of dedicated service to ArcBest, including 26 years leading our Investor Relations team. His contributions have been invaluable, and I am personally grateful for his support in making my transition into this role seamless. David is in the room with us today, and we will continue to work together until he retires at the end of the month. I will now turn the call over to Judy.

Thank you, Amy, and congratulations again, David, and good morning, everyone. I'd like to begin by thanking our employees. Your tireless efforts keep the global supply chain moving, and your unwavering commitment to our customers' relentless pursuit of excellence and adaptability in the face of constant change are truly appreciated. Despite navigating a challenging freight cycle, our focus remains on delivering for our customers while advancing our strategic priorities of growth, efficiency, and innovation. Reflecting on past freight cycles, ArcBest is in a much stronger position today thanks to our long-term thinking and disciplined execution of our strategy. Seth and Matt will provide more insights into how we're investing in our people, solutions, and technology to drive results, and I'm pleased with the progress we are making. The strength of our strategy has been reaffirmed as I've spent time with our customers and listened to their needs. They seek efficiencies by leveraging trusted relationships and using multiple modes of transportation. ArcBest's strategy is perfectly aligned to meet their needs, and demand for our services continues to grow. Our sales pipeline is up nearly 40% since January and continues to expand and progress into later stages. Our managed transportation solution, which helps customers optimize their supply chains, had double-digit growth in both demand and revenue. Customer retention is solid. Over 80% of our revenues are from customers we've had relationships with for over 10 years. We are trusted advisors to our customers who value our solutions and utilize our offerings to enhance their supply chains. Additionally, we are implementing programs that benefit our bottom line. In the second quarter, we saw significant efficiency improvements in our asset-based business while delivering the best on-time performance in five years. In a moment, Seth will take you through the initiatives driving these results, and Matt will detail how they've improved our financial performance. All of this work positions ArcBest well for the eventual recovery in freight volumes. Before I hand it over to Seth, I want to highlight our recent announcement that Seth Runser has been promoted to President of ArcBest and Matt Godfrey will succeed him as ABF President. These promotions underscore ArcBest's deliberate focus on talent development and succession planning across our organization. Our results this quarter and the successful initiatives Seth and Matt Godfrey have led demonstrate why I'm so confident these appointments are the right steps for ArcBest. Many of you know Seth. He has been a key leader at ABF for years, delivering eight quarters of record results and overseeing the successful renewal of our five-year union labor agreement. As president, Seth has assumed responsibility for our day-to-day operations and execution of our integrated logistics solutions. Our operational leaders will now report directly to him. After the impressive transformation at ABF under his leadership, we are excited for him to take on this role, where I'm confident his deep knowledge of the business and innovative spirit will help us continue improving performance for the benefits of our employees, customers, and shareholders. I will remain CEO and Chairman of the Board, focused on advancing our long-term strategy, driving innovation, and further developing relationships with customers, shareholders, and employees. Matt Godfrey's promotion is also special to me. In 2015, ArcBest started a Leadership Academy, and Matt was one of the first to graduate from it. His success is a clear example of our commitment to investing in our people, and his achievements underscore the power and effectiveness of our development program. He has been working closely with Seth for many years at ABF and has spearheaded ABF's real estate plans, including long-term facility growth and enhancement plans and transformational projects that enhance operations and drive efficiencies. I have no doubt he will continue building on Seth's progress and he is the right person to lead ABF going forward. And now I'll turn it over to our new president of ArcBest, Seth Runser.

Thank you, Judy and good morning. I want to start by expressing my gratitude for Judy's vision and leadership. I'm excited to serve our customers and employees in this new role, and I'm fully committed to ArcBest’s strategy of accelerating growth, increasing efficiency, and driving innovation. ArcBest’s innovative mindset and integrated solutions uniquely position us to help customers solve their most complex logistics challenges. And as Judy mentioned, our value proposition continues to resonate with customers. Now, let's discuss some of the key initiatives across ArcBest that are driving efficiency gains and delivering results for our customers. Starting with our facility plans, we are progressing well strategically, adding capacity, increasing efficiency, and improving service. Our newest facility opened in June in metro Atlanta, adding city capacity in key markets and freeing up transfer capacity in our network. As expected, we're already seeing productivity improvements up 16% in these locations. We added four facilities from the yellow auction as replacements for current facilities. Two of those opened last month, and we expect the other two to open this quarter after renovations are complete. Additionally, in the fourth quarter, we expect to add 66 more doors in Chicago, with another 40 planned in San Bernardino, California in early 2025. In addition to adding doors, we see a direct line of sight for these projects to significantly improve productivity. You have also heard us speak about our operation experts deployed to our largest facilities, focusing on continual improvement and operational excellence. This team's work has yielded cost savings nearly four times what was projected, and they will continue to move throughout the ABF network this year and into 2025. We are also advancing our innovation and technology projects. We have numerous active projects and a flow of new pilots in progress. Our city route optimization project, which uses AI to map our routes, continues to deliver significant efficiency gains, and we're expanding this project into additional phases. Our investments in innovation are paying off with direct results and value creation for our customers and shareholders. Our customers tell us they need better visibility into their supply chains. As technology has evolved, we're now able to do things that weren't possible just a few years ago. Over the last several months, we've made enhancements to shipment visibility, providing customers with more data about their shipments and expanding visibility to even before the shipment has been picked up. With our large and growing database of shipment data, beginning this month, customers will receive more accurate LTL shipment arrival information. This is another example of how our technology investments are driving real improvements in our service and the value we provide our customers. In Asset-Light, our digital quoting and carrier portal tools are gaining momentum; shipment volumes have increased, and we have maintained our focus on controlling costs. As a result, employee productivity improved over 30% year-over-year. We will continue to leverage technology for future productivity gains. In the third quarter, we will implement carrier payment and invoice auditing solutions from TriumphPay. By leveraging this technology, we expect to reduce manual tasks and improve efficiency, which will allow us to grow with fewer added costs, reduce fraud potential, and improve our carrier partner experience. We believe that innovation will continue to transform our industry and ArcBest is committed to investing in innovation to drive future growth and create value. Now I'll turn it over to Matt to go through the financials in greater detail.

Thank you, Seth and good morning. I'm pleased to report that ArcBest delivered solid financial results for the second quarter of 2024 despite the softer market environment. On a consolidated level, second quarter revenue was $1.1 billion, a slight 2% decrease versus last year. However, our non-GAAP operating income from continuing operations rose by 28% to $64 million. Adjusted earnings per share increased to $1.98, up from $1.54 in the second quarter of 2023. Despite lower revenue and additional costs related to the new labor contract, our Asset-Based business saw a $21 million increase in non-GAAP operating income compared to the same period last year. Our Asset-Light business experienced a $9 million decline in non-GAAP operating income, primarily due to current truckload market conditions. Now let's talk about our two segments in more detail, starting with our Asset-Based business. Second quarter revenue was $713 million, a per-day decrease of 2%. The segment's non-GAAP operating ratio was 89.8%, an improvement of 300 basis points compared to the second quarter of last year and an improvement of 220 basis points from the first quarter of this year. This improvement led to the second-best Asset-Based operating income for the second quarter in our history. Second quarter tonnage per day decreased by 20%, and daily shipments were 5% below prior year levels. To maintain consistent capacity and labor levels in our network during the first half of 2023, we took on more transactional business as market conditions improved in the second half of the year. We reduced transactional shipments in favor of core shipments, resulting in 14% growth in core LTL shipments and an 11% increase in core LTL tonnage on a year-over-year basis for the second quarter. This shift contributed to improved productivity and better financial results. Year-over-year build revenue per hundredweight increased by over 23% in the second quarter, driven by strategic price increases on transactional business and a higher proportion of core business, which has a higher revenue per hundredweight. We secured an average increase of 5.1% on our customer contract renewals and deferred pricing agreements during the second quarter, demonstrating our continued pricing discipline. By optimizing our freight mix, improving productivity, and lowering costs, we offset higher union contract costs, achieving higher operating income despite lower revenue. On page 11 of our conference call slide deck, we illustrate the significant impact of these actions on our second quarter results. Sequentially, compared to the first quarter of 2024, the segment saw low to mid-single digit percentage improvements in revenue tons and shipments per day, revenue per hundredweight, and revenue per shipment. We are now one year beyond several major events, including a competitor's bankruptcy, the start of our new labor contract, and the implementation of our freight mix management and cost savings initiatives. For the trailing twelve months ending June 30, 2024, our non-GAAP operating ratio was 89.5%, an improvement of 840 basis points since 2016, demonstrating the effectiveness of our strategy. The impact from last year's market disruptions began in mid-July 2023 and peaked from August through October. Based on preliminary results, total revenue per day and shipments per day both increased 1% year-over-year in July. We anticipate that daily tonnage levels for third quarter 2024 will be below the prior year as some of the core business increase that began in July 2023 was project-related and some of the increased business has shifted to other providers over the past year. Pricing remains rational, and the strength of our core business allows us to optimize spot prices for transactional business. On July 1, 2024, the contractual wage rate under our union contract increased, and the health, welfare, and pension benefit rate increased on August 1 for a combined rate increase of approximately 2.7%. Historically, the average sequential change in the Asset-Based operating ratio from the second quarter to the third quarter has ranged from flat to 100 basis point improvement. With the current market backdrop and cost outlook for the third quarter, including the previously mentioned contractual wage and benefit increase, we expect the third quarter 2024 operating ratio to be consistent with second quarter 2024. Moving on to our Asset-Light segment, second quarter revenue was $396 million, a daily decrease of approximately 4% year-over-year. While shipments per day increased 13%, revenue per shipment decreased by 15% due to the soft freight market and growth in our managed business, which has smaller shipment sizes and lower revenue per shipment levels. The non-GAAP operating loss of $2.5 million for the quarter was largely due to lower margins in the current truckload market. Compared to the first quarter of 2024, revenue per day was flat, but margins improved due to lower purchased transportation costs which increased in January due to winter weather. Shipments per day decreased slightly as customers using our Asset-Light solutions experienced lower demand in their businesses. Our Asset-Light offerings play an integral role in our overall strategy as customers seek long-term logistics partners for all their transportation needs. Our Asset-Light solutions also allow us to serve a much larger portion of our customers' transportation spend, and there's a tremendous market opportunity for our truckload and managed solutions. In addition, 70% of our Asset-Light customers also use our Asset-Based LTL solutions. Our ability to meet our customer's needs at a price that reflects the value we offer is a key differentiator. Looking at preliminary results for July, revenue per day decreased 10% year-over-year due to lower revenue per shipment. While shipment volumes for our managed solution have increased, this growth has recently moderated due to lower demand from existing customers reflecting current macroeconomic conditions. Additionally, truckload volume has slowed as we strategically reduce less profitable freight. Purchase transportation expense as a percentage of revenue increased sequentially throughout the second quarter and into July as carrier rates rose. These higher costs have reduced margins for our truckload brokerage contract business. We continue to focus on improving productivity and reducing the cost per shipment. However, segment operating profit will remain impacted in the near term by current truckload brokerage market conditions. For the third quarter of 2024, we expect non-GAAP operating loss levels to be consistent with the second quarter of 2024. For the first half of 2024, we returned $37 million to shareholders through share buybacks and dividends. We have a $57 million net cash position and $500 million in available liquidity. Our capital expenditure plan for the year remains in the $325 million to $375 million range. We are proud of our second quarter performance and our solid financial position. As Judy said, we continue to pursue growth, efficiency, and innovation while delivering superior service to our customers and value to our shareholders. With improvements in operating costs and productivity and a continued emphasis on growth initiatives, we are well positioned for the future. Now I'll turn the call back to Judy for some final comments.

Thank you, Matt. Before I wrap up, I want to highlight some of our recent achievements that reflect our commitment to excellence and sustainability. ArcBest has once again been recognized as an Inbound Logistics green supply chain partner in 2024. This honor underscores our legacy of good stewardship and our dedication to helping our customers advance their sustainability efforts. We are also proud to be named one of the best companies to work for by US News and World Report and to be ranked as a best leadership team by Comparably. These awards are a testament to our ongoing efforts to make ArcBest a leading place to work, and we're grateful for the recognition from these publications. Looking ahead, our team remains focused on continuing to deliver profitable growth through operational excellence, disciplined cost management, and ongoing innovation. And that concludes our prepared remarks, and I'll turn it over to the operator for questions.

Yes, thank you. Operator Instructions. Your first question comes from Jason Seidl with TD Cowen. Please go ahead.

Thanks, operator. Judy, Amy, Seth, and the rest of the team, good morning. Just two quick things here. One, if we look at that project business that you mentioned in July of last year, if we exclude that, would your tonnage be projected as positive in 3Q? And then, Judy, just in general, you know, there's a lot of talk right now about a potential recession. You get a good look into the economy as a national carrier. What are your customers telling you?

Hey, Jason, good morning. This is Christopher. I'll just comment on the project business from last year. So last July, like you said, we did bring on some of that just due to the market disruption. That was good business for us. That is definitely part of the story for the tonnage decline year over year. But it's not all of it. Some of it was just us onboarding some of that core business for us that we were there in that time of disruption for our customers. But honestly, some of it went to lower-cost providers that they were able to shift by the end of the year. So third quarter will be challenges from a year-over-year tonnage perspective, but we're still making good decisions in terms of the profitability and freight selection for our business.

Okay. And, yes, and just, just from a weight per shipment perspective, you've seen it just drop from the second quarter into July, just that it's starting to moderate. I would expect that to continue to moderate through the rest of the year?

Judy, overall economy. Sorry, Jason, we missed part of that. If you had to follow up.

No. Yes, I said no. I was asking Judy her thoughts on the overall economy, given that there's a lot of fear of a recession. Since you guys have such a good look into the macro, I was wondering what you…

Yes. Well, Jason, I think that we're certainly affected by those challenges. I think that what we see is that we're kind of working across the bottom here, and we really don't have a crystal ball as to when that will inflict. But, we feel like we're well positioned, really, in any environment to succeed. We've got a pipeline that's increased 40% since the beginning of the year. That really includes opportunities across LTL, truckload, and managed to which we're excited about. And the work that we do with customers in this kind of environment shifts more to looking at cost efficiencies for them. And the way that we've structured the company just really addresses that well. And, so while we don't have a crystal ball, we feel confident in our ability to navigate through the choppy waters as they hopefully settle down and we can move to a more normal environment, but feel like we're well positioned regardless.

Okay. So that lowering weight per shipment is not that much of a cause of concern, then?

Well, it's been there. We've seen that and have navigated pretty well. We saw a nearly 30% improvement in operating income in the second quarter. And that was in the face of some cost challenges and some macro challenges, but was overcome by a lot of great efforts to improve our operation that relate to efficiency efforts as well as the completion of some tier one technology projects that we have.

Our next question comes from Daniel Imbro with Stephens. Please go ahead.

Yes. Hey, good morning, everybody. Thanks for taking our questions. I want to start on the pricing side. I guess looking at the second quarter, revenue per hundredweight, including fuel, was up sequentially, but fuel was down 1Q to 2Q. So I guess, is the right read here that core pricing ex-fuel actually accelerated in your business? And can you just talk about how you're thinking about core pricing trends into the back from the 2Q level?

Sure. Hey, Daniel, this is Christopher. So I would say in terms of just pricing trends, we remain disciplined in making sure that we're getting increases on our core business like we talked about. We got a 5.1% increase in the second quarter on our deferred negotiations. And that's just annual increases that we take on those customers, honestly really proud of that result from our sales and our pricing team to get that just in this challenged freight environment that despite the environment, our customers are recognizing the value that we're providing, and we're able to get good increases. I was looking back over history. That's actually the fourth-best increase over the last 20 years that we've gotten in the second quarter. So really great result. And that's something that will continue through the rest of the year as well. So like you said, there was some progression from first to second. We'll continue to get good increases throughout the rest of the year.

And then if I can follow up, maybe on the back half or outlook. Matt, I think you said or flattish in 3Q? I think cost inflation is moderating a little bit. So I guess if revenue growth is improving and pricing is improving, why wouldn't that get a little bit better? And then can you just remind us what normal seasonality is on or from 3Q to 4Q as we think about that? Thanks.

Yes, absolutely. So, I would say generally revenue levels are fairly consistent from the second quarter to the third quarter. You know, we did talk about a range of zero to 100 basis points of improvement. When we look at things sequentially, just kind of considering the environment and considering the freight mix that we're looking at for the third quarter, we do think that it's. And just considering our cost profile that we're looking at, we know we do have an increase that goes in July 1 for our wage rate on our union contract and then a benefit increase that goes in in August, which are at moderate levels but are still a little bit higher than what seasonality has been outside of last year. And so all those taken into account puts us at currently an expectation of roughly flat. I mean, certainly we had a very strong operational execution quarter in the second quarter. We've talked about just where our efficiency and productivity metrics, service metrics are very strong compared to recent history. And some of those metrics approach the highest in our company's history. And so certainly if we can continue that strong performance and that momentum into the third quarter, I'd say there's some potential for an improvement off of that flat outlook. And then as you're looking from the third quarter to the fourth quarter, typically we do see an increase in operating ratio when you move from the third to the fourth quarter. You know, that has been up to 400 basis points, if you look over the last few years. But I think with the revenue initiatives, with the strong pipeline that we talked about, and with some of the efficiency work and just some of the productivity performance that we've seen in our network, I think we've got a lot better opportunity for a more consistent result from the third quarter to the fourth quarter than we've had in past years.

Our next question comes from Jordan Alliger with Goldman Sachs. Please go ahead.

Oh, hi. Sorry about that. Yes, I just wanted to follow up a little bit on some of the trends that you had put out there for July. I think there was a couple more operating days in July versus a year ago, sort of maybe distort some of the per-day growth? Just curious, is there a way to give some sense for how August and September might look broadly in terms of tons per day or revenue per day, taking into account the norm, the days, I suspect it should start to look better on a year-over-year basis for both those relative to July? But I'm just curious if you have any thoughts on that.

Hey, good morning, Jordan. So I think just the typical seasonality of our business, we see as you all know, July has a holiday in it, and we see that just typically there progression of growth from July to August to September, September being the end of quarter month, tends to be the strongest in the quarter. So we see upside in terms of just tonnage and per day shipments per day as you just move sequentially through the quarter.

Okay. And I guess sort of like, the same thing. We do start to enter a period of tougher comps for the industry. Post a year ago with yellow and now there's a bunch of terminals opening. I know you gave some color around price. It would seem like industry discipline is still pretty strong, but there's been some recently pretty difficult ism readings that came out yesterday, which wasn't particularly good. I mean, how do you think about the industry's ability to sort of take into account these terminal openings and these new orders index, which continues to be pretty soft? And how does the industry keep core pricing firm? Thanks.

Hey, Jordan, it's Seth. We're looking at things sequentially because we think that's a better way to view what's going on with all the market disruption that you mentioned. So when you think about the ten-year history on the shipments to Christopher, what he was talking about, normally they decline from June going into July, and we've actually seen about a half a percent increase as well as tonnage. We've seen that same type of result. Normally we're down about 5%, and we're down only about 2% in July. So when you think about the industry overall in capacity, what's coming in from a real estate standpoint, we still see net terminals and capacity being down from when yellow was in the market. When we look at our investments and what we've been investing in, it's really strategic. I don't think we overspend on our capacity, and we've had this long-term roadmap that we've been working on for many years. So we're investing where we see growth opportunities or productivity improvements. A great example of that was Lithia Springs that we opened. I mentioned in my opening comments, a 16% improvement in productivity almost overnight. So we're really focused on the service improvements because we believe that's what's going to lead to long-term customer value. And we're seeing some amazing numbers there. Continue to win some external awards, but we think by focusing on the customer, that's going to position us well. But I do think industry capacity overall is going to be down over the long term. With this yellow capacity, there's still about half of their facilities not back online.

All right. Our next call comes from Ken Hoexter with Bank of America. Please go ahead.

Good morning and congratulations, Dave, Seth, and Matt on your new roles. Regarding the comment about peers gaining market share, I believe the previous questions touched on price competition. Can you elaborate on how they're being aggressive in capturing that share if it's not through pricing? I think Judy also mentioned that we are transitioning to different pricing providers, so could you compare and contrast the peers taking share?

Ken, this is Christopher again. Just to clarify, that comment was really about the disruption from late last year. So we onboarded some core business in that late July, August time frame. We were able to be there for our customers. And honestly, there are prices that were substantially higher than what Yellow was providing them. And then there were some of those customers that were able to find cheaper options there. But that quickly settled in the second half of last year. I see it at a much more consistent basis now and moving forward.

I would like to follow up on the confusion regarding the transactional volumes. Typically, when a company experiences a decline of over 20% in volumes, it raises concerns. However, your prices have increased by 25%, which suggests strong core performance. Despite a 20% drop in volumes and the capability of your systems to be more variable, what is driving such significant fluctuations in transactional volume, especially given the opportunity for continued transactional activity with more accommodating pricing?

I think it's important to revisit the situation from 2023 when we began noticing weakness in the overall market. We utilized our transactional tonnage to keep our network operational and our employees busy. Throughout the pandemic, it was quite difficult to find qualified CDL employees, which shaped our strategy at that time. We were also in the midst of our contractual negotiations. We began to see challenges affecting Yellow, and our goal was to keep our staff engaged while being mindful of potential issues. Once we clarified our costs after ratifying our contract, along with Yellow's decline, we shifted our focus towards our core business. We aimed to serve core customers that offered better pricing and margins, which allowed us to manage labor more consistently and improve productivity. This mix in our business strategy proved effective, as evidenced by our second quarter, where we generated $21 million more in operating income despite lower top-line revenue and nearly $31 million in added contractual costs. We approach transactional business decisions daily, focusing on maximizing profit while managing network capacity. With our core business in a stable situation following Yellow's decline, I anticipate more consistency moving forward, although it may take until about November to fully realize this due to the ongoing impacts from Yellow and a cyber event later in the year. That's why we prefer to analyze sequential trends, and we are optimistic about the progress we've made.

Can you clarify what percentage is left of the total base that's transactional versus contract or core sorry?

Yes. We don't provide that number, mainly because it changes so often. So the business is primarily core. Transactional business is really to help maintain consistency in the network and allow us to be positioned to when the network does change. When you think about what we did in the first half to what we're doing moving forward, we feel like our mix is in a much better place, and you'll see that.

Our next question comes from Bruce Chan with Stifel. Please go ahead.

Good morning. This is Matt Milask on for Bruce. On the Asset-Light business, can you comment on the mix of spot versus transaction at the moment?

The current mix on the truckload business, I mean, if you think about Asset-Light for us overall, that's several services. But on truckload business, we're roughly in that 60-40 range on contract versus spot. The other thing that's going on in truckload, if you look at kind of what we're doing year-over-year, we're continuing to see improvements in productivity and continuing to work through a strong pipeline of opportunities and really looking to the future and well positioned to grow as the market improves.

Can you walk us through the mechanics of the guide for the brokerage OR being flat, maybe what you're expecting in terms of gross margin compression, if any, and maybe some opportunities to take out some more costs.

Yes. The guidance there is basically attributed to the market conditions and just not seeing a strong indicator of a strong improvement in the second half. We'll continue to work through the opportunities that we mentioned in our pipeline. We also have a good roadmap of efficiency gains that we can see play out as we implement new technology and process. So we will continue to improve efficiency as we move through the rest of the year. But most importantly, we want to be positioned for the market to improve and to take advantage of that and grow as we see the market start to improve.

Great. And lastly, can you remind us of where you are in terms of door capacity utilization? And is there a way to tell what that might be if you wound the transactional spot business down to zero?

Yes. We feel like right now, as far as our excess capacity is what you're asking?

Sure.

Okay. Yes. So we estimate that we have about 15% to 20% excess capacity in our network right now. And that includes people, real estate, and equipment. We've talked about our real estate plan quite a bit. So we feel like we've built up to be able to handle this eventual market swing, and we continuously optimize the network and adjust based on the opportunities that we see to better service our customers. We really have a long-term outlook here. So we don't want to limit our growth potential when the market does turn, and that's why we've made the investments that we're making, we've continued to make throughout our network. So we feel like if the market does turn, we get more core business; we want to grow with that. And we think transactional is a way for us to balance our network better and optimize that daily based on what the freight demand is and what the market prices are. So it's really a daily optimization, and when the market turns, it should benefit us.

Your next question comes from Tom Wadewitz with UBS. Please go ahead.

Good morning. I wanted to ask about the weight per shipment in July, which seems to be lighter compared to June. I'm curious about your perspective on this. Do you think it indicates some softness in the economy, or is it due to a change in the mix? You mentioned that some project business is going away; was that business heavier? I’d appreciate any additional insights you could provide regarding the lighter weight per shipment in July compared to June.

Tom, it's Christopher. I believe it's a combination of factors. The economy is not performing as strongly as we would prefer. We've previously discussed that an increase in weight per shipment indicates a strengthening economy, but we haven't seen that change in our core business yet. From a year-over-year standpoint, the issue primarily relates to mix management, as we are shifting more towards our core business, which generally has a lower weight per shipment compared to the transactional business.

So do you think the July look is representative and stable just in terms of mix of business as well as kind of, I guess, some of the business that had moved away. Is that the right look? Or do you think it's kind of trending further in terms of lighter weight per shipment as you look to August, September, 4Q?

I would say I don't see anything significantly changing within our view right now. Obviously, things could change, but what we've seen from June to July feels consistent. And obviously, moving forward, we'd love to see that improve, but we're still positioned well to respond to whatever the market gives us there.

Our next question comes from Chris Wetherbee with Wells Fargo. Please go ahead.

Hey, thanks. Good morning, guys. I guess maybe I wanted to come back to sort of overall volume and maybe your strategy. So if I look at tons per day down at levels that maybe we haven't seen in quite some time, shipments may be not quite as low but still relatively low outside of maybe 2020. So obviously, improving the mix of the business, profitability hasn't suffered during that dynamic. But I guess, are we at the point where this is the appropriate level of volume? And I know we're in a softer market now. But as market comes back, would you be looking to grow into this? I know you have capacity. I'm just kind of getting a sense of where it is because the numbers are seemingly fairly low but still sort of under some pressure on a year-over-year basis. Just want to get a sense of what the strategy is going forward.

Yes, I think the results in the second quarter reflect our efforts. We are focused on enhancing profitability while maintaining room for growth. As I mentioned earlier, it's better to analyze the sequential numbers, and we are observing improvements in our core weight per shipment. We anticipate that will remain relatively flat sequentially, largely due to market conditions. The initial year of the contractual wage increases was substantial, but we managed to navigate that successfully, as evidenced by our cost productivity efforts. We are optimistic moving forward with a more manageable wage increase of only 2.7% this year for HWP, which will enable us to achieve gains in growth and yield. We recognized that our business would continue to evolve after disruptions, which is why we emphasize looking at sequential history. We expect the environment to remain unpredictable, as indicated by PMI. However, we are encouraged by a 40% increase in our sales pipeline since January, as Judy noted in her opening comments. Over the past five years, our service metrics have been some of the best, demonstrating the value we provide to our customers. Celebrating our 40-year quality anniversary has resonated with our team, contributing to improved customer retention and efficiencies at multi-year highs. This progress enhances our service, increases our growth capacity, and positively impacts our cost measures. We continue to experience these advantages and believe that this momentum will support our ongoing growth while we enhance our core business by optimizing our transactional mix in response to market dynamics.

That's a really helpful answer. I appreciate that. And maybe if I could zoom out the lens a little bit and think about the industry over the next couple of years. So you noted, you have 15% to 20% excess capacity. I guess if I go around sort of the horn of the other public carriers, I think having that much, maybe in some cases, more extra capacity, Yellow kind of down, cut in half from a capacity perspective in the market now. I guess do you see the market dynamics changing at all in terms of the ability to get price or profitable mix improvements as we move forward? Or is it that there is enough growth and maybe there's some freight that's outside of the market that comes back in, in a tighter environment? Just kind of curious how you might see the next sort of cycle play out for the industry?

Yes. I think we're really well positioned for growth. And I think we demonstrated that at the middle of last year when we had similar excess capacity, and we were able to meet the demands of our customers that had that disruption. We were able to onboard that business quickly without really missing a beat from a service standpoint. So really, we're playing the same playbook that we played last year. We have the excess capacity. We still have the transactional lever that we could tamp down even further if needed, as core business grows further. So I feel great about our position to bring on additional growth when it's available.

Our next question comes from Brian Ossenbeck with JPMorgan. Please go ahead.

Hey, good morning. Thanks for taking the question. Let's go back on the service improvements. Just wanted to see what's the feedback from customers so far. I know the Mastio survey is going on again right now, but it's been a focal point of improving that over the last couple of years. So what are customers saying right now? And when do you think you start to see this sort of in either the freight mix or the pricing? Can that start to improve next year if things kind of bounce along the bottom? Or would that really be something you need an upcycle to help monetize if service does continue to improve?

Yes. When considering our service levels, we are committed to excellence. Historically, we have performed very well in the Mastio survey, and we have made significant improvements since the last one was released. We conduct our own internal surveys with customers to assess our Net Promoter Score, and our internal metrics have shown consistent improvement each quarter. We are seeing this reflected in our internal data as well due to enhanced tactical execution and better shipment visibility. In my opening comments, I noted our efforts to enhance this area. By optimizing our processes, we have improved efficiency and throughput, which leads to better service for our customers. We now have greater visibility into network issues. If a problem arises, whether related to labor or something else, we can respond quickly and resolve it before it affects our customers. This capability stems from the extensive data we have and the infrastructure we've developed for network visibility. The real estate plan increases our capacity for customers. With our service metrics reaching a five-year high and ongoing improvements in internal NPS, we believe this will continue to benefit our customers. During the second quarter, I spent a lot of time engaging with customers, and they have expressed how much they appreciate the changes in our service levels. We believe this will translate into long-term value for them.

Yes. Just from a price perspective, yes, obviously, the value prop that Seth is describing plays into that price. And really, we just want to be at a consistent place where our price is outperforming our cost increases through. So we're winning both from a price standpoint and from a cost management standpoint to improve our op income over time. So the value prop is definitely a big play there in terms of just getting the increase and retaining the customers that we have. The other thing I would just comment on is that our price is the highest in the market. So our price is already at a really good place. And so there's an opportunity likely for other carriers to catch up with where we are on a price basis.

Okay. That's helpful. Just to switch to the broader truckload market, it doesn't sound like you're seeing or expecting much of an improvement from that perspective. Just wanted to get maybe a little more commentary on that, what you're seeing here in July and into the typical peak season and just in general, how that would impact some of the truckload spillover freight in ABF and how you might be able to offset some of that on the Asset-Light side?

Yes. I mean, from an overall perspective, we feel like we're at the bottom, but we're not really seeing anything that's just a strong indicator that things are going to improve rapidly. We're, like a lot of others, just feel like we're at the bottom and moving towards a time of improvement. But one of the things that we are confident in is our team, how we're positioned, the MoLo team specifically in the truckload space, we provide a great service. Seth mentioned NPS. That's one of the kind of high points that we have with our truckload service. We see customers continuously telling us that we're doing a great job there and really appreciate the service and value we provide. So we're well-positioned as the market recovers. But like a lot of others, right now, we're just looking for that improvement, but we're not seeing anything that tells us that there's a dramatic improvement coming in the third quarter.

Our next question comes from Stephanie Moore with Jefferies. Please go ahead.

Hi, good morning. I wanted to discuss the cost and productivity initiatives you've mentioned for the second quarter, and I would like to know if you could provide more examples of the actions you're implementing on both the Asset-Based and Asset-Light sides of the business as the year progresses.

Yes, Stephanie. When you think about how many cycles and what we've been through, we have a long history of adapting to challenging environments. And we really go out to the field, listen to our people, get feedback from employees, and that really shapes what we have to do to service our customers better. So we built those tools for better network visibility, labor planning. We invested in those operational experts that I mentioned earlier. They've only been to four of our largest locations so far. So throughout the third quarter, they're going to visit the next three, which are very large distribution centers as well, and we'll continue that throughout the year. We also rolled out city optimization last year. We saw a material benefit from that. We're rolling out the next two phases of that that have been in pilot mode throughout the second quarter. So we think we'll get to operationalize those in the third and fourth. We're also in the process of rolling out new dock software, and that creates better visibility for our people, our customers, and allows us to see, by employee, productivity levels, and we have that implemented at 97 locations, and we think we'll finish that rollout in the first quarter of 2025. I mentioned the productivity improvements in Lithia Springs and what we saw in Olathe in the first quarter. So we'll continue to see productivity as these real estate initiatives come online. We also have a lot of projects in pilot phase right now that we expect will operationalize throughout the back half. So we're really excited about our pipeline of innovation projects and the efficiency gains we're going to see as we move through the back half of the year. That's some of the upside that Matt talked about.

Great. And then just switching gears to the truckload side of the business. I'd love to hear your thoughts on what you're hearing from an overall freight cycle standpoint. I think we've heard of capacity exits for some time now, but really not to the extent that or the magnitude that we would hope to get us out of this. So I'd love to hear your overall thoughts on just capacity exits on the supply side of the equation.

Yes. What we're observing is that capacity is being removed from the market, but it's happening gradually. Without a significant surge in demand, it's taking time to reach the right balance. However, we are noticing capacity leaving the market, which is a step towards achieving a more balanced market. As I mentioned, the progress is just slow.

Our next question comes from Jeff Kauffman with Vertical Research Partners. Please go ahead.

Thank you very much. And best to David Humphrey's and congratulations, Seth and Matt. Really two questions. When we think about the cost per pound versus revenue per pound dynamic, it's been shifted negative because of the big wage increases in the union contract. Now you have the July, August increases. When do we get a chance to offset that with the GRI or an increase in the revenue per pound? And when do we see that relationship flip more to the positive? Do we have to wait for January 1? Is it something that could start to happen in the fourth quarter?

Yes. Jeff, it's Christopher. Just from a GRI perspective, so our last GRI was early October of last year. I think our normal trends are in that 10- to 12-month cycle. So if you kind of do the math there, we're getting up close to that GRI cycle that we would normally have.

Okay. But you haven't made any announcement at this point that's probably still a little ways away, but we don't have to wait for January to see a GRI hopefully.

Yes. If history plays out like it normally does, like I said, 10, 12 months. And yes, we haven't announced anything formally yet, Jeff.

Okay. No, I thought the LTL business looked great. My big question is on the Asset-Light and not to be throwing rocks here, but it doesn't make sense to do business for practice. And it feels like we're doing that with Asset-Light. Now I recognize the difference in the contingent consideration accounted for about $14 million of the swing. So I do understand that that's a little odd. But with Asset-Light so challenged. How are we raising contingent consideration for MoLo and maybe break down what's going on, on the Asset-Light side a little bit because it's not just one business; it's a series of businesses. Why is the loss not getting better in the third quarter? Do we have another contingent consideration headwind that we might be looking at? Or is there an issue with the business that we used to call Panther because there's just no emergency shipments going on? How do we turn the corner on these losses? Because I think all of us would argue these losses are bigger than we ever thought we'd see at the Asset-Light business.

Yes, it's Matt. Let me provide a high-level overview. We believe we are well-positioned in the business. Regarding your questions about contingent consideration, you are correct that we revalue this under accounting standards each quarter. We simulate potential outcomes related to the earnout that was part of our acquisition, which includes some performance metrics. We have noticed changes year-over-year, largely due to approaching the earnout period, which introduces time-value impacts as the payout period nears. However, when discussing the outlook and expectations of being flat from second to third quarter results, we are not factoring in that impact; it's separate from our projections. In terms of business dynamics, we've made significant strides in productivity and efficiency, which you can observe in our results. We're focusing on prioritizing the profitable truckload business and maintaining strong customer relationships. Industry forecasts suggest this business will improve, even if the shift has been slower than expected. With our current customer service and technology efficiency, we are in a strong position. Our managed transportation business is contributing significantly, with notable growth due to continued interest in our solutions. We are engaged in substantial late-stage discussions, and while we are currently in a challenging phase, we believe the business will eventually turn around, and we will be well-prepared for that shift.

Yes, Jeff, this is Judy. I want to discuss the strategic decision to own the asset-light solutions that we have. It's extremely important for our customers to engage with a logistics company that offers solutions like ours, including truckload, ground expedite, and the managed solution that Matt mentioned. During customer conversations, we manage to have the right discussions, which has helped us navigate the market disruptions we've experienced. We're positioned well to handle these challenges, especially since we find ourselves in an unusual market with no spot market due to the current carrier capacity. However, we are ready for when demand improves. We continue to have productive conversations with customers, and when we succeed in these interactions, it translates into shareholder value. This contributes to the narrative of our integrated solution set in the market, which I feel very positive about.

Judy, I've reviewed ten other asset-light divisions this quarter, and yours has the lowest performance in terms of operating margin change. I understand that a lot of this can be attributed to contingent consideration, but historically, your division has performed much better. I'm trying to understand what is causing this decline further.

Yes, I understand your point, Jeff. However, from an operational perspective, we categorize that contingent liability as part of the overall purchase price for the company. If we manage to pay something related to that, it indicates that the results are there. We will have more clarity on this by 2025. We cannot alter how we account for it, but I want to clarify that those dollars shouldn't be considered operational because they are part of the purchase price.

Can I just get one clarification? When you say operating loss should be flat, I think that's what I heard. Are you saying the dollar amount of operating loss? Are you saying the operating margin? Are you saying the revenues? When we say flat 3Q versus 2Q, what specifically is that we're talking about?

Yes. I mean, I think...

Yes. We're discussing the non-GAAP operating loss we incurred. In the second quarter, we experienced a $2.5 million operating loss. We are optimistic about improving that situation, but based on the trends observed in July, we anticipate that we will remain at a similar level as we transition to the third quarter.

Thanks, Jeff. Operator, it looks like we've got one more in the queue, so we can take one more question.

Perfect. Our final question for today comes from Ravi Shanker with Morgan Stanley. Please go ahead.

Great. Thanks for the time. Maybe you're going to switch it up a little bit and follow up on the productivity initiatives. Is there a way to quantify how much of an OR lift we can get from those initiatives alone, irrespective of macro? And also, would you characterize these initiatives as kind of catching up to the rest of the industry? Or are you going to be pulling ahead with industry-leading initiatives here?

Yes. We provide our long-term OR guidance of the 10% to 15% margin, and that's really where we're leaning towards. And we've tried to get there consistently over the past few years. So if you look at, I believe it's Page 12 of the earnings presentation, that 840 basis point improvement we've had over the last few years. So I feel like we've made a step in the right direction on the OR, but we got more work to do, and that's why I'm so excited about Matt's leadership coming into the President role of ABF because he really spearheaded a lot of those efficiency improvements that we saw, the real estate plan we've talked about. So obviously, a lot of things depend on the macro. We need top-line growth, and we've talked about that a lot of others have as well. But we feel like we still have a lot of runway on the efficiency side of things with the amount of projects we have in the hopper. So it's hard to give guidance on what that's going to translate to in terms of OR until we get through some of this pilot phase, but we feel good about our future and where we're going.

Got it. Maybe as a follow-up. I think, Judy, you opened the call by saying that your sales pipeline is up 40%. Is there anything we can read into kind of what that means for what the cycle looks like in the next kind of 6, 9, 12 months? Or is that just long-term statistic?

Well, it's a statistic that covers a span of time, but I wouldn't necessarily characterize it as longer-term, although there are elements of it that are the longer-term sales cycle like the managed part of it. But what's good about what we're seeing is that we're getting into later stages on those opportunities from where they were at the beginning of the year. So what I think when I see that is just about how we'll go into the latter part of the fourth quarter and maybe into 2025. And it's what I've always wanted our team to do, which is to outpace what's going on in the macro, particularly if it's negative, and to really control our own destiny in terms of the growth that we have at the company. And so that's the way I think about it. It is not super long term or anything, though; I think we are replenishing it every day.

I will now turn the call back over to Amy for closing remarks.

Thanks to everyone for joining us today. We appreciate your interest in ArcBest. Have a great day.