Earnings Call Transcript
ARCBEST CORP /DE/ (ARCB)
Earnings Call Transcript - ARCB Q2 2023
Operator, Operator
Greetings, and welcome to the ArcBest Second Quarter ‘23 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. 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.
David Humphrey, VP of Investor Relations
Thank you for joining us. On today's call, we’ll provide an update on our business, walk you through the details of our recent second quarter 2023 results, and then answer some questions. Joining me today for the prepared remarks are Judy McReynolds, Chairman, President and CEO, ArcBest, and Matt Beasley, Chief Financial Officer and Treasurer. In addition, Dennis Anderson, Chief Strategy Officer; Seth Runser, President of ABF; Steven Leonard, Chief Commercial Officer and President of Asset-light Logistics; and Christopher Adkins, Vice President of Yield Strategy & Management are available to help answer your questions. To help you better understand our results, some forward-looking statements could be made during this call. Forward-looking statements, by their very nature, are subject to uncertainties and risks. For a more complete discussion of factors that can affect our future results, please refer to the forward-looking statements section of our earnings press release on our most recent SEC public filings. 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 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's 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.
Judy McReynolds, Chairman, President and CEO
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 ArcBest; 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 received the top industry awards year after year, such as being the only 10-time winner of the excellence in cargo claims and loss prevention award, and why we consistently exceed industry benchmarks. Our strong employee relationships 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 continues 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 ArcBest, 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. 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. Box pilots with customers remain promising and are not affected. Early box pilot results with some major companies are showing significant efficiency gains, and we see high levels of customer interest in the solution. These pilots will continue, and the teams that support external customers are not slowing down. We continue investing back in to 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. 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. Importantly, we are investing in our people to drive higher engagement. We have 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 100th 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 adviser 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.
Matt Beasley, CFO
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 Cobb. David built a best-in-class finance team, and his support and guidance had 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% year-over-year 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 were $1.54. Turning to the key metrics of 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 billed revenue per hundredweight versus last year reflects the impact of these additional dynamic shipments and lower diesel prices. Because of the strength of ABF 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 ratio was 92.8%, which is a year-over-year increase of 830 basis points. On a sequential basis, versus the first quarter, it was 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. We also had some other costs that were higher than expected, including workers' comp and non-union healthcare costs that affected comparisons to the first quarter. In July, ABF implemented cost savings actions to improve segment profitability. This includes an intense focus on efficiency and productivity, a reduction in overtime, and curtailing purchase transportation spending, as well as a reduction in dynamic shipment levels to target total shipping 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 is 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%. 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, ArcBest'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've 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 and a soft rate environment. As we mentioned this time last year, higher market rates on committed business combined with solid customer demand resulted in strong Asset-Light revenue growth and record profitability in that business in second quarter 2022, which makes a strong comparison for the current period. 2023's 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 8-K exhibit to the press release filed this morning, and total revenue for July reflects a year-over-year decrease slightly better than in the second quarter. Double-digit Asset-Light shipment growth this month is directly related to continued success in adding truckload shipments. However, truckload rates still remain significantly lower than last year. Net capital expenditures totaled $84 million for the first six months of the year, and we currently expect net capital expenditures in the range of $270 million to $295 million for the full year, which is lower than our previous estimates as class A 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 some 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, an improvement of $46 million since the end of last year. Total liquidity of approximately $580 million remains at a healthy level, and despite rising rates, the composite interest rate on ArcBest outstanding debt at the end of the recent quarter was 3%. Our solid financial position and strong balance sheet will help us navigate the current market environment while investing for growth, new equipment purchases, real estate additions, and upgrades, and end-to-end technology investments, all of which will improve our ability to effectively serve customers while positioning the 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.
Judy McReynolds, Chairman, President and CEO
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 customer’s 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.
David Humphrey, VP of Investor Relations
Okay, Dana, I think we're ready for some questions.
Operator, Operator
Thank you. Our first question is coming from the line of Stephanie Moore with Jefferies. Please go ahead.
Stephanie Moore, Analyst
Hi, good morning. Thank you.
Judy McReynolds, Chairman, President and CEO
Good morning, Stephanie. How are you?
Stephanie Moore, Analyst
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, maybe an industry dynamic or also potential rebound? And in the freight environment? That would be helpful. Thanks.
Judy McReynolds, Chairman, President and CEO
Yes, Stephanie, we are confident in our ability to increase shipments beyond what we've seen in July. Looking back at the second quarter, we were able to handle nearly 21,000 shipments per day. Last year, we also hired to accommodate higher shipment levels. We have been focused on improving our hiring processes to ensure we have the right people in place, which we successfully did in 2022 and 2021, despite it being a constraint at times. We are optimistic about our growth potential. Additionally, we are evaluating our facilities to support specific growth areas. For example, we recently moved into a new facility in Phoenix and have carried out expansions. We expect this to continue as we move forward; several facilities are being addressed, and we will have increased capacity as we progress. We believe we are well-positioned, and our situation is evolving daily. We are pleased to be in a position to manage this increased business and ensure it operates smoothly within our network.
Stephanie Moore, Analyst
Great, thank you. And then just as a follow-up, maybe it's kind of a two-part question with the new union agreement. So, I guess my follow-up would be it sounds like from a labor standpoint, some of the constraints that you saw in 2021 and 2022 might not be an issue here as you've prepared or maybe learned your lesson from some of the labor struggles we've seen in the past? And then now with a new union agreement in place, 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 and the availability to meet this capacity or meet this need for an influx of volumes?
Judy McReynolds, Chairman, President and CEO
Stephanie, I'm going to let Seth Runser, who is the ABF President, respond to that.
Seth Runser, ABF President
Yeah. Good morning, Stephanie. When you think about the contract, it really talks about the great relationships we've built with our people. That's why we saw that overwhelming ratification. In the contract, we're offering industry-leading wages, so we want people that are coming to work for us. We feel pretty good about our pipeline of hiring. That’s really why we did the dynamic strategy; it was over-ordered to keep more of our resources in place as we go through some of the softer periods. So, we feel like we're in a pretty good place from a labor standpoint, and we're seeing an uptick in applications recently. So, we think we'll be in a good spot, labor-wise.
Stephanie Moore, Analyst
All right. Thank you so much.
Judy McReynolds, Chairman, President and CEO
Thanks, Stephanie.
Seth Runser, ABF President
Thanks, Stephanie.
Operator, Operator
Our next question is coming from the line of Chris Wetherbee with Citi, please go ahead.
Chris Wetherbee, Analyst
Yeah. Hey, thanks. Good morning, guys. I just wanted to ask a specific question around shipments. Is it 19,500? Where you are? The 10% step up is that the average over the month of July, including a lower number earlier in the quarter? I just want to understand sort of, it sounds like you took some company-specific actions to maybe reduce that number from June to July, and then maybe there's an uptick, so any qualification that would be helpful?
Judy McReynolds, Chairman, President and CEO
Yes, I'm going to let Christopher Adkins respond to that, Chris. And then I'll follow up if there are any other thoughts I have. But go ahead, Christopher.
Christopher Adkins, VP of Yield Strategy & Management
Hi, Chris. Good morning. This is Christopher Adkins. In terms of the 19,500 in June, we were handling around 21,000 shipments per day. We made the strategic decision to reduce that shipment count to improve the profitable mix for our business. That mix is handled really through our dynamic pricing, which allows us to scale down. As the core business comes 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 we've been mentioning, as well as the transactional business.
Judy McReynolds, Chairman, President and CEO
But I would say, Christopher, that's for the month of July. As we go forward, we'll see what that becomes. I think that our discussion about what we can handle; your team is doing a great job along with sales in evaluating good business opportunities for us. What’s good about the dynamic tool is it allows us to shift up and down. We're glad to be in a position where we have the capacity; we can shift it down and take on better business from our core customers and really serve them well during this time of disruption.
Chris Wetherbee, Analyst
Okay, that's very helpful. And then I guess, when you think about the dynamic pricing aspect, as the market, 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 to you're 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?
Christopher Adkins, VP of Yield Strategy & Management
Yeah, Chris, you got it. This is something that we manage daily; our dynamic pricing is part of our normal daily business operation. We've already been increasing prices on that transactional business to make space for it. Yeah, you got it exactly. It's a daily decision, and we've already experienced price increases in that area.
Judy McReynolds, Chairman, President and CEO
And I'll add one thing to it; because of the work that we do in our managed team, we're also seeing the market and our competitive landscape respond in a similar way.
Chris Wetherbee, Analyst
Okay, that's very helpful. Thank you for the time.
Judy McReynolds, Chairman, President and CEO
Thanks, Chris.
Operator, Operator
Our next question is coming from the line of Jordan Alliger with Goldman Sachs, please go ahead.
Jordan Alliger, Analyst
Yeah, hi, good morning.
Judy McReynolds, Chairman, President and CEO
Good morning.
Jordan Alliger, Analyst
In terms of the step up, I mean, presumably a meaningful amount is for right, that's been diverted to you from Yellow, but I'm just curious to aside from maybe sort of comment on that dynamic that's going on, but then sort of also served from a core demand perspective. Were you seeing any positive signs separate from any diversionary benefits? Thanks.
Judy McReynolds, Chairman, President and CEO
Steven, I’m going to ask Steven 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.
Steven Leonard, Chief Commercial Officer and President of Asset-Light Logistics
Yeah. So, if you take out the disruption that we're seeing in the demand coming from that and just look at where business was and what we were seeing seasonally, we are not seeing a drastic change in demand. There are 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, we are well-positioned for those customers. We have relationships with them, and they're coming to us looking for solutions. With our capability set, we can respond in a way that gives them more options than otherwise, just looking at our asset-based capacity. So, we're in a great position there, and we've seen that play out. We've had some good examples where customers are coming to us looking for capacity; we're able to optimize that business and utilize all of our relationships.
Operator, Operator
The next question is coming from the line of Jason Seidl with Cowen, please go ahead.
Jason Seidl, Analyst
Thank you, operator. Judy, David, team. Good morning.
Judy McReynolds, Chairman, President and CEO
Good morning.
Jason Seidl, Analyst
Wanted to focus a little bit on sort of the freight coming into the network and how you think that'll evolve over time if there is a full-fledged bankruptcy that everyone seems to be thinking, Yellow. What I mean by that is everything is coming in now. But what you take on today might not be what you maintain in your system. 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?
Judy McReynolds, Chairman, President and CEO
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. 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 for us; we've got to sort through that and ensure that we feel really good about it being an incrementally good decision for us. I think we do that fairly well. We've talked about wanting to look back at that after we've been experiencing that business for some time and perhaps it operates a little bit differently than we thought; we can revisit that either to respond to doing more of that with the customer or perhaps even less. We do feel pretty informed, and, Christopher, in terms of GRI, I think our last year was in November of last year. I don't know that there have been many discussions about that; we typically watch what happens.
Christopher Adkins, VP of Yield Strategy & Management
That's running generally; the market takes about one year per year. As Judy mentioned, we took ours last November, which is something we're constantly evaluating in watching the marketplace and what others are doing in this area.
Jason Seidl, Analyst
Good. And a quick follow-up, Judy, what lessons did you learn from any prior major bankruptcies in the LTL space? And what do you think you can do differently this time to be more nimble and agile?
Judy McReynolds, Chairman, President and CEO
Well, I think our strategic positioning has put us in a place where we are. What's interesting is, before, maybe in a past situation, I'm thinking of Consolidated Freightways; it was back in 2002 or something like that. We were primarily an LTL carrier, then today, as a logistics company there are opportunities that we feel comfortable saying yes to, and perhaps that business could be good for ABF; it works well there. But also, we have a lot of other relationships. I think we have over 80 relationships, and we're working with them often, and we know what works well where. 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. A lesson learned is to ensure that if you're saying yes, you can see your way to the profitability of that account to make sure it works well for you. There have been times when we've had changes in the market, where we've taken on business and thought, I'm thinking of some examples with residential delivery type shipments or other big volume players, that, really, what you've got to do is get involved with that business, see how it works, and make your decision to proceed with it rather than just saying yes to too much and regretting that.
Jason Seidl, Analyst
Appreciate the color, thanks a ton as always.
Operator, Operator
Our next question is coming from the line of Jack Atkins with Stephens, please go ahead.
Jack Atkins, Analyst
Thank you for answering the questions. Matt, congratulations on your new position. Judy, when considering the potential impacts and investment opportunities in the upcoming quarters with assets likely entering the market, do you see specific areas within the network where there could be chances to boost investment? Could you identify particular freight gateway cities or similar assets that might be attractive? How do you plan to approach capital allocation over the next year?
Judy McReynolds, Chairman, President and CEO
Yeah, Jack, I'm going to let Seth Runser take a shot at that, and then come back to that.
Seth Runser, ABF President
Okay, Jack, so we’re constantly looking at our network in terms of facilities and we have a long-term real estate plan that we've discussed in the past. Judy mentioned some of the most recent things that have come online, like Phoenix, but we have a long-term plan. 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 invest in our fleet; we still have a lot of new tractors coming on this year. But the same thing there will be opportunistic if we see opportunities in the upcoming quarter through the end of the year, if we need to either reduce the age of our fleet or flex our fleet up. So, we have a pretty good view there.
Judy McReynolds, Chairman, President and CEO
Okay, and we're, Jack, well connected with the real estate folks at all the competition, and that really helps us to see what opportunities are out there. We have a good plan, but I think you always have to keep your ear to the ground and watch what happens. This could be a unique opportunity. I agree.
Jack Atkins, Analyst
Absolutely. Okay, great. And for my follow-up question, there's quite a bit of confusion around the potential impact to these multi-employer pension plans from this. Last time I checked, Central States was almost fully funded. Would there be any sort of potential risk to your pension expense or costs or liabilities? I just wanted 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.
Judy McReynolds, Chairman, President and CEO
I appreciate your question. You accurately highlighted the American Rescue Plan, which has allocated significant funds, using the Central States pension plan as an example. This plan was well-funded in the past. It's understandable why they might take these actions. The actuaries for those funds began examining the potential for insolvencies from some participating employers and the impact on the fund. We discovered that much of the fund's success relies on investment returns rather than employer contributions. For instance, Yellow’s contribution level was much lower than ours; ours was $9 an hour compared to theirs, resulting in a corresponding reduction in benefit levels. I believe there will be an impact, and I genuinely empathize with those affected as it's a serious matter. We've consistently aimed to provide strong retirement benefits for our employees, and during our recent negotiations, we felt confident about our contribution level for pensions. As a result, we don't foresee any immediate or long-term risk affecting our employees. We have made contributions, and part of that amount goes toward individuals who never worked for us. The positive aspect is that our employees feel secure about their retirement benefits, which is crucial in this competitive labor market.
Jack Atkins, Analyst
Just to be crystal clear, this will not impact your pension liabilities or your pension expense; it's just to be clear.
Judy McReynolds, Chairman, President and CEO
Right. Our contribution levels are contractually determined, and they are determined with the passing of this latest union contract and will not change. We're told that the pension funds, again, referencing Central States, which has seen most discussion, are approximately 97.5% funded at this point, and that is not going to be a factor we have to deal with.
Jack Atkins, Analyst
Okay, thank you for the time.
Judy McReynolds, Chairman, President and CEO
Thanks.
Operator, Operator
Our next question is coming from the line of Ken Hoexter with Bank of America. Please go ahead.
Ken Hoexter, Analyst
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 19,500 in July. Is that shedding all of the transactional freight? Is it some – I just want to clarify an earlier answer; can you talk maybe then also after that the volume levels as you exited July?
Judy McReynolds, Chairman, President and CEO
Yes, Christopher, you want to share that?
Christopher Adkins, VP of Yield Strategy & Management
Yeah. That is not shedding all of our transactional freight. We still think it's healthy to have a good portion of that within our core business. It's responsive to how our customers do business with us. The 19,500 does still include some of that transactional business. As we're exiting July, we’ve still managed 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.
Judy McReynolds, Chairman, President and CEO
Yeah. And the only caveat to that, Ken, is we want to make sure it's good business.
Ken Hoexter, Analyst
So, to understand, then you've shed the transactional, taking on the freight you want, but you still haven't expanded. In your, I think the first question, Judy was on capacity; you haven't filled up the excess capacity. You've just swapped some transactions.
Judy McReynolds, Chairman, President and CEO
That's right as of the end of July. But I mean, understand, that's what we're discussing is through July? We're not really speaking to what could happen on the upside in August or September because we're making daily decisions about that.
Ken Hoexter, Analyst
But to understand, have they fully suspended pickups? I mean, is this transition at the tipping point in stark terms of you getting the share you get? Or is there still a lot of tonnage left in the jump-ball market?
Judy McReynolds, Chairman, President and CEO
I don't know the latter part of your question, but I do know the noise has been that they haven't been picking up. Right. I hate to speak for them because I know all that's not finally determined, but that's the indication that we have. We've been having a lot of good conversations with customers. I think this is the kind of situation that as it unfolds, this is a multi-year type effect. 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, that's a big effect on our markets. We're seeing some impact, but 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 our customer base.
Ken Hoexter, Analyst
So, just to clarify that earlier answer. Can you quantify how much work or give a range in terms of that 19,500? How much transactional can you still shed just given it sounds like you said you made a move to get rid of some of it because of cost issues and other things? So, you were using it to fill in the network? Can you talk scale?
Christopher Adkins, VP of Yield Strategy & Management
Yeah, this is Chris. We still want to keep some of it. As Judy said, it changes day-to-day. 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. We are just filling in the rest of the network based on what our targets are for the day and what our customers' needs are.
Matt Beasley, CFO
Sure, I appreciate you asking that clarifying question. So, yes, if you look at historical sequential performance, second quarter, third quarter has typically been roughly flat. But, we talked about some of the cost increases that we're experiencing in the third quarter related to the contract. You can think about that in the neighborhood of 300 to 400 basis points. We should be able to follow with some expectation that we had, even going back to when we started the quarter for some shift in business mix toward core published business. That combined with some other areas we talked about around productivity, efficiency, and reducing usage and transportation should put us in a spot where we can still manage to historical expectations, even with some of those increases in costs we're experiencing in the third quarter.
Ken Hoexter, Analyst
Great. Thanks for your time, everybody. Appreciate it.
Christopher Adkins, VP of Yield Strategy & Management
Thanks.
Operator, Operator
Our next question is coming from the line of Ravi Shankar with Morgan Stanley. Please go ahead.
Ravi Shankar, Analyst
Great. Thank you, everyone. Judy just wanted to confirm again, just be sure that the earlier comments, so you're seeing the 10% plus increase you've seen recently, that is primarily you think, Yellow-driven, rather than actual cyclical improvement. Just wanted to confirm that. And also, there's a lot of talk of if 10% of the industry capacity kind of permanently exits, that raises the floor, kind of pricing for the rest of the industry, which sort of makes sense. But what are some of the kind of constraints on new capacity adds do you think? I mean, what’s the risk that the industry, the rest of the industry, can backfill that lost capacity in the coming years?
Judy McReynolds, Chairman, President and CEO
I think, over time, that risk is there, Ravi, but I believe it would take some time. You’re an observer of things, just like I am. It seems like over time, we've seen greater discipline in the industry on adding resources and the expectation of profitability of business that’s run. But for us, we just have to ensure that as we're adding business, on account basis, it’s profitable for us; it doesn't bottleneck things or create issues in serving our core customers. We're really focused on our existing customers as much as we are on these new opportunities, and we want to ensure that we serve them well. We like to see things progress over time; certainly, one-time events or big changes are typically harder to deal with. Right now, things are progressing positively with our costing system that's been in place for 40 years. We have good visibility after a week or two; we can look at the different profile andjust make good decisions. All of that takes time, but we are making some decisions based on our history and what we've known about some accounts. One thing we know is we love good core business, but we want it to be that. We are trying to be thoughtful about it.
Ravi Shankar, Analyst
Great, and maybe as a follow-up, and maybe from Matt, kind of with the new labor deal, can you just quantify how much of an apples-to-apples impact the new labor contract has? Or if you want to use a mid-cycle award or something? And is the main offset from that coming from the productivity initiatives in the contract? Or do you need to get priced to offset that?
Matt Beasley, CFO
Yes, so overall, looking at it on its own, I would say a three to 400 basis point impact. We talked a little about the average increase over the contract. If you take it on a compound annual basis over the five years, looking at wages and welfare and pension, it's about 4%. However, on an OR basis, it's three to 400 basis points. We did talk about our intense focus on efficiency and productivity; we do have a lot of initiatives ongoing on that front, redeploying some resources to further increase that focus. As we sit here today, thinking about the opportunity we have to offset that, it comes from the expectations we were already seeing, as our core business starts to strengthen some, along with some of these changes in efficiency and productivity and scaling the network to the point where we can be in a more optimal place with carded usage, transportation, overtime rates, and things like that.
Judy McReynolds, Chairman, President and CEO
Yeah, and Ravi, you mentioned price; when you look at that step change as you go into July, the 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 our customers would absorb. We feel like that the contract rate increase over time is reasonable and manageable through our longer-term pricing actions. But we do have a plan in place to address the cost side, and the good news is, as Seth mentioned earlier, we'll have our people fully engaged. We can emphasize the utilization of our people. We’ve added a lot of new people over the last two years that need to become even more productive. The contract allows us to hold people accountable, and some of the software enhancements we've made allow us to see that better. All those things will have to work together to achieve the OR ranges we've set for ourselves. We're very focused on doing that.
Ravi Shankar, Analyst
Understood, thank you.
Judy McReynolds, Chairman, President and CEO
Thank you, Ravi.
Operator, Operator
Our next question is coming from the line of Jeff Kauffman with Vertical Research Partners. Please go ahead.
Jeff Kauffman, Analyst
Thank you very much. Hello, everyone, and congratulations, Matt. I want to revisit the topic of growth and market opportunity, but from a different angle. You have a certain amount of freight in your network that operates on a more transactional basis, helping to fill in gaps in the network. This means you could potentially reduce that and substitute it with more fruitful opportunities. While you mentioned a target of 21,000 shipments per day, it appears there might be potential to exceed that. When considering the ideal type of growth for the network, please discuss how flexible you are willing to be for the right business, and whether the 21,000 target is constrained by the current network. Would you contemplate hiring new employees or acquiring new equipment if the opportunity arose? How do you balance your willingness to be flexible while ensuring you don't overextend and jeopardize the service to your existing customers?
Judy McReynolds, Chairman, President and CEO
The reason I use that benchmark is that it's a good recent benchmark. I think what you see in a situation where we've got a better mix of core customers is that the quality of those shipments would be improved. I do hear you; I feel we have an opportunity to go beyond that. I wouldn't think it would be a huge number of shipments beyond that, but for us to add people and make other types of investments, it would need to be good business. We can see that we have the ability; remember in the summer, seasonally, we haven’t had a normal year in a long time where we could use rail and transportation. We could flex up—we could not trade our older equipment and add a third to the fleet. I mean, we've got all those kinds of mechanisms available to us; again, for good business. If we have opportunities for equipment, we’re hearing from drivers and other employees, so we know we're going to have opportunities at resources. We need to just manage that based on the quality of the business and make decisions. Those variable levers I mentioned are pretty easy to pull if you feel like you're in a good position, and that allows you to grow beyond what I was suggesting.
Jeff Kauffman, Analyst
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?
Matt Beasley, CFO
If other good employees became available, they would have to 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, that would basically be starting fresh like any other new employee.
Jeff Kauffman, Analyst
Okay, great. Well, thank you, and congratulations.
Judy McReynolds, Chairman, President and CEO
Yeah, thanks. Appreciate that.
Operator, Operator
Our next question is coming from the line of Bruce Chan with Stifel. Please go ahead.
Bruce Chan, Analyst
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, switching 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, I 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?
Matt Beasley, CFO
I would say we talked a little about the organic opportunities. Certainly, we're always thinking about capital allocation from a big picture approach, which could include filling in some capabilities in our business, on the M&A front. And of course, return of capital to shareholders. Dennis, if there's anything you want to add on that front?
Dennis Anderson, Chief Strategy Officer
Sure, Matt, and hey, Bruce, this is Dennis. Yeah, absolutely; M&A is part of the capital allocation strategy here. As we've talked, we're looking for great, generally asset-light 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 MoLo, but things like managed transportation have been discussed before that could really help us deepen those partnerships with customers—that's really a focus for M&A these days.
Bruce Chan, Analyst
Okay, that's great. Appreciate it.
David Humphrey, VP of Investor Relations
And Jack, back in queue. Jack?
Bruce Chan, Analyst
Okay, great. Great. Yeah, just I guess maybe, just to kind of round it out, no one’s asked about the asset-light business. I know a lot of attention's on what's going on in the LTL world for obvious reasons. But you guys did make some good progress in the quarter taking cost out of the business within the asset-light segment. Just curious if there's maybe more to go there? How we should think about the profitability trajectory there over the back half of the year barring some sort of inflection in the freight market one way or the other.
Steven Leonard, Chief Commercial Officer and President of Asset-Light Logistics
Yeah, hi, Jack, this is Steven. The way we operate there, we're trying to manage our costs in line with the business we have. We all know the market is challenging right now from a price perspective. A lot of the indicators we look at suggest we're at or near the bottom, but when it will turn remains uncertain. We're focused on managing our costs along with business lines but want to be positioned to grow when the market does turn. We know that's going to happen; it's just a matter of when.
Judy McReynolds, Chairman, President and CEO
Thanks.
David Humphrey, VP of Investor Relations
Okay, well, I believe that's the last question we've got, Dana. Thank you for your help. We want to thank everybody for the interest in ArcBest. So, that concludes our conference call. Thank you.
Operator, Operator
That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.