Roadrunner Transportation Systems' (RRTS) CEO Mark DiBlasi on Q2 2014 Results - Earnings Call Transcript

Roadrunner Transportation Systems, Inc. (NYSE:RRTS)

Q2 2014 Earnings Conference Call

July 30, 2014 4:30 pm ET

Executives

Mark DiBlasi - President and CEO

Peter Armbruster - VP, CFO, Secretary and Treasurer

Analysts

Benjamin Hartford - Robert W. Baird

David Ross - Stifel Nicolaus

Todd Fowler - KeyBanc Capital Markets

Arthur Hatfield - Raymond James

Scott Group - Wolfe Trahan

Robert Salmon - Deutsche Bank

William Greene - Morgan Stanley

Nate Brochmann - William Blair

Operator

Greetings, and welcome to the Roadrunner Transportation Systems' 2014 Second Quarter Conference Call. Today's call is being recorded. At this time, I will turn the call over to President and CEO, Mark DiBlasi. Please go ahead, sir.

Mark DiBlasi

Thank you. Good afternoon, everyone. Thanks for joining us today for our second quarter 2014 earnings conference call. With me today is Peter Armbruster, our CFO, and after some comments from Peter and myself, we will open up the call to questions. But before we begin, I will turn the call over to Peter to discuss the Safe Harbor Act. Peter?

Peter Armbruster

Thanks Mark. Before we begin, I would like to remind everyone that a number of statements made today will be forward-looking statements that relate to future events or performance including our third quarter 2014 guidance. These statements reflect our current expectations and we do not undertake to update or revise these forward-looking statements, even if experience or future changes make it clear that any projected results expressed or implied in these or other statements will not be realized.

Please be cautioned that these statements involve risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from the forward-looking statements. These risks and uncertainties include, but are not limited to, risks related to the integration of acquired companies; competition in the transportation industry; the impact of current economic environment; our dependence upon purchased power; the unpredictability of and potential fluctuation in the price and availability of fuel; the effects of governmental and environmental regulations; insurance in excess of our prior experienced level; and other risk factors set forth in our SEC filings.

Mark DiBlasi

Okay, thanks Peter. We'll take a few minutes to briefly discuss the strategic composition of our Company for those of you who may not be familiar with us, which we believe drives long-term performance, and then I'll provide some color on the quarter, current trends, and strategic initiatives within the business.

Our asset-light business model is well positioned for continued market share gains. We provide a one-stop solution to meet each customer’s individual needs. We offer a full complement of solutions including customized and expedited LTL less-than-truckload freight, truckload logistics, freight consolidation, inventory management, transportation management solutions, intermodal solutions, expedited services, international freight forwarding, customs brokerage and comprehensive global supply chain solutions.

We utilize proprietary web-enabled technology systems in a broad network of transportation providers comprised of both independent contractors and purchased power to serve a very diverse customer base. Although we do service large national accounts, we primarily focus on small to mid-size shippers. Our business model is scalable and flexible and our cost structure is variable and requires minimal investment in transportation equipment and facilities, which enhances our free cash flow and returns on our invested capital and assets.

We report in three business segments; truckload logistics, less-than-truckload, and transportation management solutions. These segments complement each other by allowing us to offer all services across our full customer base, and by cross-selling each segment's services, we are able to build density at a more rapid rate and expand our operations into new geographic regions.

We control a significant amount of capacity in our network by utilizing independent contractors and smaller carriers where we represent a substantial portion of their business. We believe this provides us with a strategic advantage over other non-asset-based providers as we expect capacity to continue to tighten in the future. We are not a freight broker, we are in fact a relatively large carrier, we currently have over 3,900 drivers in our fleet.

In terms of the overall business comments, we were pleased with our second quarter results for revenue and operating income in our truckload and TMS segments, which had record revenue and record operating income quarters. Our truckload segment surpassed its previous record quarter by revenue by 19% and its previous record quarter for operating income by 34.2%. Our TMS segment surpassed its previous record quarter for revenues by 44.5% and its previous record quarter for operating income by 31.4%.

Our LTL business is undergoing a transition phase and shift in freight mix that impacted our LTL operating results for the first half of 2014, however we are confident that the changes in leadership transition that we underwent in LTL has set the stage for long-term growth in this core segment. Overall, organic and acquisition growth led to a total of 38.6% increase in second quarter 2014 revenues and a 15.7% improvement in EBITDA.

Revenues for truckload, our largest revenue segment, grew by $69.6 million or 43.1% during the second quarter of 2014 from the previous year. Incremental revenues from our 2013 and 2014 acquisitions accounted for $48.9 million of the increase with the remaining $20.7 million representing a 12.8% organic growth. The positive impact of our recent truckload acquisitions and organic revenue growth led to a 41.5% increase in truckload operating income quarter-over-quarter.

LTL revenues grew by $3.6 million or 2.5% during the second quarter of 2014 from the prior year. Our LTL operating ratio did deteriorate from 91.9 in the second quarter of 2013 to 94.7 in the second quarter of this year. The primary factors contributing to the increased LTL operation ratio were, increased purchased power rates, a shift in business to non-metro area delivery zones which incur a higher delivery cost for us, and increased insurance and claims expense in the second quarter of 2014 compared to the second quarter of 2013.

Our increased purchased power costs were due to the increased cost on the spot market as well as contractual rates and to some degree due to the fact that we were able to use rail less to move loads simply because of the rail deterioration in on-time service. Another factor to understand is we did purge, and we will talk about this in a few moments, we did purged several high claims accounts in our LTL network in the first quarter and we felt the impact of that lost business fully in the second quarter.

TMS revenue grew by $54.9 million or 203% during the second quarter from the prior year, primarily as a result of our acquisitions of Adrian Carriers, Marisol International and Unitrans International. The positive impact of our recent TMS acquisitions led to a 53.5% increase in TMS operating income quarter-over-quarter.

With regard to our truckload segment, truckload has grown significantly as indicated by the numbers I just shared with all of you. We are especially pleased with the organic growth results of 12.8%, complementing our growth through acquisition. We have consistently proven our ability to grow operations post-acquisition. Our truckload operating ratio remained the same at 93.0% in the quarter despite the increased insurance and claims expense in the second quarter of 2014 as compared to the second quarter of 2013. However, we improved sequentially by 80 basis points from the first quarter of this year. Looking forward, we continue to see substantial growth opportunities both organically and acquisition related in our truckload logistics segment.

In our LTL segment, of our three operating segments, LTL was the most challenged in the second quarter. Revenue growth was up 2.5% as I indicated earlier. Tonnage was only up 0.4% for the quarter and by a month per bid day basis tonnage was up 1.1% in April, down 0.4% in May and up 0.7% in June for a total of positive 0.4% for the quarter, keeping in mind that we did purged significant amount of freight in the first quarter that equated to about 2% of our total tonnage due to that purge.

Based on initiatives I will discuss in a few moments, tonnage has rebounded in July to approximately 4% growth July over July of last year. And as I said, tonnage was impacted by our initiatives to reduce high cargo claims account as previously reported. This initiative was fully implemented by the end of the first quarter and the impact was evident in full for the second quarter. And as I said moments ago, the impact was equivalent to 2% in each of the monthly tonnage figures I just gave.

Revenue per hundred weight excluding fuel in LTL was up 2.7%, including fuel it was up 2.8%. Weight per shipment was down 0.6%, pricing was stable in the 3% to 4% range, closer to 4% than it was to 3%, length of haul was consistent with the first-quarter report I gave being down 4% year-over-year, and our linehaul cost per mile excluding fuel was $1.28, up $0.02 from the first quarter at $1.26 and up $0.05 per mile from last year's second quarter at $1.23, and again due to the higher purchased transportation costs and less rail usage due to the service issues that the rail has experienced.

The operating ratio deteriorated as I said to 91.9% versus 94.7% this year, and again primary factors contributing to the increase were increased linehaul cost per mile and purchased power rates as I just mentioned, a shift in freight resulting in an increase in non-metro delivery zones with higher delivery costs, we've had more of our freight go to non-metros versus metro zones which incur a larger cost to the Company to provide the service, and then of course increased insurance and claims expense in the second quarter, as we've discussed in the two previous earnings calls we baked into the second quarter a certain amount of cost for insurance and that played out as anticipated.

The first half of 2014 has been a transition time for our LTL network. We have reorganized the business including the hiring of a new LTL segment President and Executive Vice President of Sales. Additionally, we've strengthened our safety and risk management departments, cost and sales initiatives have been implemented, we are seeing positive results early in the third quarter. With the reorganization completed and fresh initiatives underway, we are optimistic about LTL's future improvement in revenue and operating ratios as we move into the latter half of 2014 and 2015 and we also anticipate less headwind from the insurance overlap compared to last year.

In our TMS segment, TMS revenues grew by $54.9 million or as I said earlier 203% during the second quarter, primarily due to the acquisitions of Adrian, Marisol and Unitrans. This growth resulted in a 53.5% increase in operating income year-over-year and a 75.2% increase sequentially from the first quarter of 2014. The operating ratio improved sequentially from the first quarter by 130 basis points as well.

Overall, we continue to take advantage of increased cross-selling and growth opportunities across all of our operating segments. Revenue from customers using multiple services is now at 45.2% of our total corporate revenues, up sequentially from 42.4% in last quarter. In addition to this, we have completely enhanced the leadership of all operating segments and sales components within our Company in line with our industry-leading growth.

As indicated in recent press releases, we now have a single president for each of our operating segments, LTL, truckload and TMS, as well as very experienced Vice President of Pricing with extensive background in both LTL and truckload pricing, and comprehensive sales management coverage for the whole enterprise. This was accomplished in the first half of 2014 through internal promotions and a series of outside hires of highly qualified and experienced leaders from the industry. We are already experiencing the positive benefits and momentum in each operating segment as well as in safety, risk management and pricing.

With regard to third quarter trends, from our point of view the economy is still in a slow growth mode, however much better now at the beginning of the third quarter than it was at the beginning of the second quarter. Capacity is very tight and that is determined by the availability of drivers. We've been successful at recruiting and retaining drivers, in our case independent contractors, throughout the past year. We have added 575 drivers to our fleet over the past year and our turnover ratio continues to be half of what the industry average is.

We continue to see strong growth in our truckload segment in the mid-teens in terms of organic growth as well as through the acquisitions we acquired. Truckload pricing is at the high single-digit range right now, in the 8% to 10% range.

LTL tonnage as I mentioned earlier is up significantly over June at 4% due to many of our sales initiatives. LTL pricing continues to stay in the 3% to 4% range. Our LTL cost per mile as I reported just a few moments ago for the quarter was at $1.28, it's now trending in July at $1.27, so we've seen that plateau and then drop-down by $0.01. We also have added over 100 independent contractors in our LTL network over the past eight weeks and we are starting to see the rail service improve which enables us to take advantage of the rail with more of our dispatches.

With regard to our TMS business, it was up significantly in July, consistent with our second quarter growth, primarily due to the recent acquisitions that we've already mentioned.

With regard to acquisitions, at the beginning of the third quarter we made an acquisition bringing the total to three so far this year in 2014. We acquired Integrated Services or ISI on July 21. ISI is a regional logistics provider focused on warehousing and transportation primarily in the automotive industry and this ties in very nicely with our existing truckload segment servicing the automotive industry.

In addition to that acquisition, our pipeline is extremely strong and our activity level is very high as we are in various phases of diligence on several acquisitions. We have developed a strong reputation in our industry as a preferred buyer due to our successful track record and acquisition profile. We continue to remain very disciplined in the acquisitions that we bring onboard with regard to our acquisition profile and that profile again is, each acquisition opportunity must meet our core acquisition criteria which includes continuing to build critical mass from a geographic standpoint in each of our businesses, continuing to broaden our capacity to more efficiently utilize our network across all of our operating segments, continue to seek companies with complementary service offerings or new service offerings, and with similar business models that bring additional value to our customer base, and that we can effectively cross-sell within our suite of services, and finally we only seek companies with management teams that will fit with us culturally and that are immediately accretive.

We made six acquisitions in 2013, we have closed three so far in 2014, bringing the total number of acquisitions by this management team to 31 in total, 21 of which have been acquired in the past three years. Our differentiated strategy and our strong reputation in the transportation community as well as our proven ability to smoothly integrate each acquired company are large factors as to why our pipeline remains at such a high level.

In summary, the momentum of our business continues to be positive and we continue to strategically position our Company for long-term growth. Through a combination of organic and acquisition growth we improved revenues in the second quarter by 38.6%, an increase of $128.3 million. We restructured the management team and added the expertise to manage our industry-leading growth company well into the future. We continue to prove that our low-cost high-quality business model and our comprehensive portfolio of service of transportation solutions provide a competitive advantage which enables profitable growth and value creation to our shareholders.

At this time, I will turn it over to Peter to provide more color to all of you.

Peter Armbruster

Thank you, Mark. I'll begin by summarizing our second quarter results by operating segment. Truckload revenues including fuel increased 43.1% to $230.8 million for the second quarter of 2014 from $161.2 million for the second quarter of 2013. The improvement was primarily due to increased load growth, increased utilization of Roadrunner's truckload brokerage agent network and the acquisitions of Wando Trucking, G.W. Palmer Logistics and Rich Logistics. For the second quarter of 2014, these acquisitions collectively contributed incremental truckload revenues of $48.9 million.

Truckload operating income was $16.1 million or 93% operating ratio for the second quarter of 2014 compared to $11.4 million or 93.0 operating ratio for the second quarter of 2013. Second quarter of 2014 truckload operating income was negatively impacted by $1.4 million increase in insurance and claims expense over the prior year.

LTL revenues including fuel increased 2.5% to $150.2 million for the second quarter of 2014 from $146.5 million for the second quarter of 2013. LTL operating income was $7.9 million or 94.7% operating ratio for the second quarter of 2014 compared to $11.8 million or 91.9% operating ratio for the second quarter of 2013. The second quarter of 2014 operating income was negatively impacted by a 1.5% increase in purchased transportation cost as a percentage of revenue and a $1.4 million increase in insurance and claims expense over the prior year quarter. The increased purchased transportation costs were primarily due to increased purchased power rates and a shift in business to non-metro area delivery zones with higher delivery cost.

Within TMS, revenues increased to $81.8 million from $27 million in the prior-year due to our acquisitions of Adrian Carriers, Marisol International and Unitrans. TMS operating income increased to $6.1 million from $4.0 million in second quarter of 2013.

Our corporate expenses excluding transaction cost increased $2.4 million in the second quarter of 2013 to $3.1 million for the second quarter of 2014. The increase was primarily due to additions to our corporate-wide integrated sales team, IT cost to further develop our IT platforms and the addition of other key management personnel to execute our overall integrated growth strategy.

On a consolidated basis including inter-Company eliminations and corporate expenses, revenues increased by $128.3 million to 38.6% – or 38.6% to $460.2 million during the second quarter of 2014. Depreciation and amortization increased from $3.8 million in the second quarter of 2013 to $5.7 million in the second quarter of 2014. Amortization of acquisition intangibles accounted for $0.5 million of the increase.

Consolidated other operating expenses excluding transaction cost increased from $75.5 million in the second quarter of 2013 to $112.2 million in the second quarter of 2014. In addition to the items discussed above, the acquisitions in our truckload and TMS segments contributed to a majority of the increase. Consolidated operating income excluding transaction expenses for the quarter was $27 million for the second quarter compared to $24.7 million for the second quarter of 2013.

Second quarter 2014 net income available to common stockholders was $14.8 million compared to $14.0 million in the prior-year. Second quarter diluted income per share available to common stockholders was $0.38 compared to $0.37 in the same quarter last year. Our August 2013 stock offering increased the weighted average diluted shares outstanding for the three months ended June 30, 2014 by 1.5 million shares and impacted diluted income per share by $0.01 from the prior year quarter.

For the quarter, our cash flow from operations was $10.9 million, contingent earnout payments were $4.8 million and net capital expenditures was $8 million. We would expect full-year 2014 net capital expenditures to be between $28 million and $30 million.

At June 30, 2014, we had $166.3 million in term debt outstanding and $144.9 million outstanding on our revolver. Earlier this month we increased our bank facility by $184 million. The amended bank facility provides a $200 million term loan and a revolver with $350 million capacity. Our cash on hand and availability on our revolver in excess of $200 million will allow us to fund near and medium-term growth initiatives.

Third quarter 2014 guidance. We anticipate our revenues for the third quarter will be in the range of $455 million to $480 million, representing an increase of 25% to 32% from the third quarter of 2013. We expect diluted income per share available to common stockholders to be between $0.37 and $0.41 per share compared with diluted income per share available to common stockholders of $0.35 in the third quarter of 2013.

That concludes our prepared remarks and we'll begin our question and answer part of the call.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ben Hartford with Robert W. Baird. Please proceed.

Benjamin Hartford - Robert W. Baird

I guess jump in and just talk about the LTL segment and specifically the increase in purchased transportation costs during the quarter, and I guess listening to your prepared, let me know if I have this correct, it sounds like insurance and claims was elevated but you had planned for that came within expectations and if there was a negative variance, it came from mix which you had discussed plus the rail service which led to some outside hire that was greater than expected, is that a fair characterization of what happened in the LTL segment from a PT perspective during the quarter?

Mark DiBlasi

Yes, as I said a combination of increased carrier cost, purchased transportation costs as well as the lack of the ability to use the rail to the extent we always have. The rail percentage dropped about 4% to 5% of our dispatch loads in rail, on the lanes that we utilize it for is very cost-effective, but because of the service that business went away. Now that service is coming back or has come back in several lanes, so we are now using the rail in July at a greater rate than we were in the past and we've seen stabilization in the purchased transportation costs which is translated into that $0.01 improvement from the second quarter to where we're at today.

In conjunction with that is the additional independent contractors that we've added into our LTL network. So those are obviously a lower cost than purchased transportation providers. In addition to that, the purge of those high claims accounts has changed the freight mix somewhat and that had an impact on it as well.

Benjamin Hartford - Robert W. Baird

Right, so if I could address you to one of those, I guess the mix from I guess away from some of the metro addresses, can you talk a little bit about what drove that, is it something specific to the second quarter, should it normalize and do you expect this negative mix to be with you for some time?

Mark DiBlasi

I think I'll tell you what we'll see is, we're going to see pricing improvements on those specific lanes which will offset that increased costs. We'll also see pricing improvements across the board on our shipper base that will increase or negate the increased costs to us going forward. We have a very aggressive – now keep in mind that when we implement the GRI in April, that only impacts those accounts as they come due for review, and they come due for review pretty consistently several hundred per quarter. So it's not like you get the immediate impact of the rate increase until the year cycles through. So having this be the first quarter of that rate increase, we're now into the second quarter and we're seeing better rates across our customer base which translates into improving the ratio of those margins as the cost increased but the pricing improved as well as we go deeper into the year.

Benjamin Hartford - Robert W. Baird

So the mix will say with you but you're getting appropriate price increases it sounds like?

Mark DiBlasi

That's exactly right.

Benjamin Hartford - Robert W. Baird

Okay, was that mix change in conjunction with or due to the purged business that you had called during the first quarter?

Mark DiBlasi

To a certain degree because some of that business that we purged was going to metro points, so the percent of non-metro increased just because the percent of metro decreased. But we've also seen an increase in our non-metro business as we continue to expand our customer base throughout the system, we've seen more and more freight going into less metro areas, which it's much more cost-effective and efficient to deliver multiple shipments in a tighter geographic area than it is in a broader geographic area. Again we will address that through lane based specific strategic pricing going forward.

Benjamin Hartford - Robert W. Baird

Okay. Can you talk about during the second quarter within the LTL segment, what the mix of IC handled freight was relative to outside third-party capacity, what it was this quarter relative to maybe a year ago and how you see that trending in the second half of the year?

Mark DiBlasi

Last year, these are approximate numbers they are not exact numbers, we saw IC-handled shipments in second quarter of last year in the 53% to 55% in terms of total dispatch, to today it's about 50%, 48% to 50% of our total dispatches. So the ability to utilize our – even though we've increased and have more independent contractors in LTL today than we ever have and we are dispatching more of our loads in LTL with ICs than we ever had in terms of the total number, the actual percentage has dropped year-over-year because of the growth of our overall business. So we are focusing on adding those independent contractors to the LTL network. As I indicated, we've added 100 ICs in the past eight weeks which is pretty significant.

Benjamin Hartford - Robert W. Baird

Okay. One more then I'll turn it over to somebody else. You had mentioned in the prepared remarks about expecting LTL margin improvement in the back half of 2014 and into 2015, I'm assuming that – can you talk about when you say you're expecting improvement in the second half of the year, is that year-over-year? I assume that's sequential but is it also year-over-year improvement?

Mark DiBlasi

Yes, it's year-over-year improvement and sequential and that will be a factor of improving our linehaul cost and improving the pricing going forward.

Peter Armbruster

Yes, more sequential improvement.

Benjamin Hartford - Robert W. Baird

Okay, so less so year-over-year improvement but certainly sequential improvement, is that right?

Peter Armbruster

That's right.

Benjamin Hartford - Robert W. Baird

So I mean just the pace of EBIT margin improvement in the segment, you've talked in the past about this being a double-digit margin, obviously fundamentals are healthy, you've got some reorganizational changes taking place from an operational perspective, but where are you in terms of your confidence of this business being a double-digit margin business, how quickly do you think that you can get there based on the trends that you're seeing externally and the changes that you're making internally?

Mark DiBlasi

I'll tell you we're very confident that we can get it to double-digit. I can't give you a specific timeline at this point but I can tell you with the restructuring and the management team that we've put in place and transitioned over the course of the first half of this year and the momentum we've build up within sales over the first half of this year, we're very optimistic as to where that's going to take us into the third and the fourth quarter. And it's going to be a ramp-up procedure, it's not going to happen overnight but we have restructured, brought on some very, very qualified leadership and we expect that to really pay dividends as the second half of this year unfolds and in particular into 2015.

Operator

Your next question comes from the line of David Ross with Stifel Nicolaus. Please proceed.

David Ross - Stifel Nicolaus

I guess just keeping with LTL for a second before getting to the other segments, you talked about the inter-operators you added in the quarter, everybody else is having a hard time finding drivers, so where are those operators coming from, are you growing any of those yourself, picking them off from somewhere else, I guess why are you guys having more success than some?

Mark DiBlasi

I'll tell you, Dave, we've always had a lot of success in recruiting independent contractors. We've put 100 in LTL but we added 575 in the past year, and I believe last year we've added the most drivers of any carrier, according to Transport Topics and then this year I think we were number three or number four based on the report that came out a week or two ago. So as a company, we've been extremely successful in adding drivers and in our case independent contractors, and there's several reasons for that.

One of the reasons is, we recruit across – we recruit centrally for all of our operating segments. So we have one recruiting team that knows and understands the needs of all of our operations that run trucks. We recruit through those and it gives us the ability to provide a lot of options to independent contractors. They can come onboard and run over the road in LTL, run over the road in truckload, run over the road in intermodal, they can be at home at night in LTL, they can be at home at night in intermodal, they can run specific lanes of traffic, specific geographic locations, very, very flexible in how we can present to or the options that we present to the independent contractors.

In addition to that, we do pay in the top-tier, we're very competitive on our rates in all those operating segments. We treat them like independent businessman which is what they are and we've been managing and working with independent contractors for over 30 years. There is a huge difference between managing and working with and partnering with independent contractors than there is working with and managing employee drivers. We think we're very good at that because of our experience in doing so. And we give them miles they need to be successful.

So they come onboard with us and they stick because they're successful, and up until just a few years ago we didn't even have recruiters because most of the independent contractors that we got abroad onboard came by word-of-mouth. So we still have a very strong reputation in the industry as the kind of company that an independent contractor would want to contract with and that benefits us in recruiting and then also in retention of those contractors.

David Ross - Stifel Nicolaus

And do you found yourself having to spend more money on those recruiters in the past 6 to 12 months or has the effort stayed really the same and you guys just keep having success?

Mark DiBlasi

No, there's increased cost. We've ramped up our advertising, we've ramped up our – we've added a couple of recruiters in the past year. I think we have a total of about eight recruiters right now, we used to have six. So, yes, our cost in terms of recruiting has gone up, not significantly but it's gone up, and that's due to as you know the capacity in the industry today is all dependent upon drivers and the fact that every carrier that I know of has unseated trucks. So the driver is a premium commodity and in our case an independent contractor. We don't bring onboard employee drivers. So again, we've been very successful in being able to recruit independent contractors and retain them, which is the key, and we expect to continue that. We've been able to do that for years and years and years.

David Ross - Stifel Nicolaus

And then, Peter, a question on the insurance and claims item, because that was one of the expenses in P&L in LTL this quarter, was that due to more accidents that came up in the second quarter, a lingering impact from prior quarter claims and was cargo claims one of the things besides just accidents that caused it?

Peter Armbruster

It was a combination of auto liability actions during the quarter, cargo claims, but more auto liability accidents than cargo claims.

David Ross - Stifel Nicolaus

With all else equal, does a lot of liability claims should be relatively one-time in nature and there's nothing to prevent 3Q from trending lower if you have a better safety quarter?

Peter Armbruster

Correct.

Mark DiBlasi

And then just overall for the year, as we go into the second half of the year, we'll be going up against much higher insurance and claim expenses than we incurred in the third and fourth quarter of last year.

David Ross - Stifel Nicolaus

And then last question just on the TMS segment, $35 million of revenues added through acquisitions in that segment but only $2 million of EBIT seem to come with that. Can you talk about why there was such a low margin component there and how that should improve going forward?

Mark DiBlasi

Again, a lot of that is in the acquisition of the international components. We haven't had those in-house. We've had Marisol for just under a year and we've had Unitrans only since March. So transactional cost in terms of – and getting them up to speed, getting the cross-selling initiatives in the works, we're very, very, very positive on what they brought to our Company in terms of our ability to cross-sell international into our domestic customers and vice versa. So we expect that to take off pretty significantly as we go forward.

Peter Armbruster

The business that we acquired had a higher operating ratio than our existing business, plus there was amortization related to customer list included in those results also.

Mark DiBlasi

Our TMS component has really migrated and transitioned to something much different than it was a year ago. I mean it used to be 5% or 6% of our revenues, today it's 18%, 19% of our revenues. We would expect that to continue to grow. Truckload today is 50% of our revenues, LTL is number two at about 32% of our revenues. So we have significantly reshape the face of the Company in terms of the growth engines within the Company and TMS and truckload right now are those growth engines, but we anticipate significant growth in LTL as we capitalize on the initiatives we have in the works right now.

Operator

Your next question comes from the line of Todd Fowler with KeyBanc Capital Markets. Please proceed.

Todd Fowler - KeyBanc Capital Markets

I guess to start a question on the guidance for the third quarter, I haven't had a chance to go through our model in detail but when I look at the revenue range that you've given and the earnings per share range, on the surface it does seem to imply a significant improvement in operating margins sequentially and I listened to the comments and it sounds like that there are some things in place that should help the margins. Is the message that it's going to take time to see this in the third quarter as more stabilization of some of these trends and then some more benefit in the fourth quarter I guess, how do we think about the sequential progression with revenue and earnings per share and margins going into the third quarter?

Peter Armbruster

The guidance was based pretty much on consistent margins that we incurred during the second quarter.

Mark DiBlasi

I would tell you, Todd, that we expect – we were pretty pleased with how truckload and TMS performed. We were not pleased with LTL but we knew that we had the higher cost in purchased power, we knew we had the claims cost. You take those two things, you're talking about $0.04. So that's a big difference between $0.38 and $0.42. So I would say we're somewhat conservative going into the third quarter with regard to LTL, but as I stated in the last 30 minutes or so, we're very optimistic about where we can get to or where we expect to get to. It may not all happen in the third quarter but we're going to get there as we move forward.

Todd Fowler - KeyBanc Capital Markets

And that's what I was trying to do, Mark, I was trying to reconcile kind of your comments with how the guidance comes together and that makes sense. One other question then on the linehaul piece. The $1.27 that you have, I guess that would be here into July. Is there a seasonal component of that where the linehaul rates would come down in a month like July and that would start to maybe ramp up as we move through the quarter? I seem to remember on the first quarter call you talked about the linehaul rates coming down and it seems like that they ramped up significantly. I guess how should we think about linehaul on a full quarter basis versus what you just talked about for July?

Mark DiBlasi

If you go back and you look a trends over the course of last three years, second quarter is generally our best quarter of the year in terms of lower linehaul cost, and that was reflected last year. Last year in the first quarter we were $1.24, second quarter was $1.23 and then the third and the fourth quarter we were $1.24 again, and then $1.26 in the first quarter and then $1.28 this second quarter here. So now we're seeing again $0.01 decline in our current cost.

There's a little bit of seasonality there because you have July which has the 4th of July but that's consistent year in and year out. So we generally see a lower drop. It will remain to be seen how August and September pan out. Again, keep in mind that this year is a little bit different because there is no excess capacity out there and everyone has unseated trucks. So pricing could stay very aggressive.

On our own truckload side, I think I indicated that our pricing in truckload is 8% to 10%. That's pretty significant increase. Now our increased cost to us last year from $1.23 to $1.28 was 4%. Last year in the third quarter it was $1.24. I don't believe that we will see our cost go up above $1.28 in the third quarter but that could change depending on the capacity and what's happening with the economy going into latter part of August and into all of September.

Todd Fowler - KeyBanc Capital Markets

Sure, okay, that makes sense.

Mark DiBlasi

But also let me make sure you understand, we'll have another three months worth of pricing that came due for review in this quarter that we will negotiate the increased pricing to our customers, in addition to the ability to utilize the rail more and the continued effort to bring more independent contractors onboard on the LTL segment. Those will mitigate that cost and pricing will improve the top line revenue to offset that margin.

Todd Fowler - KeyBanc Capital Markets

Okay. I think that that helps. And then on the truckload side, Mark, to your point about seeing the high single-digit increase in pricing, when I think about your model and I think you made the comment earlier, I mean you're not a brokerage model, we think about you having some leverage to the higher rates and obviously the 93% OR in the truckload segment is a good operating ratio especially given your model, but I guess how do we think about some of the leverage that you would have in a high single-digit pricing environment and kind of dropping more of that to the bottom line or seeing more margin improvement from where you were in the second quarter?

Mark DiBlasi

Keep in mind that we matched last year's OR and against much more difficult headwind with regards to insurance costs. So if you take out those insurance costs, our OR is even better. In addition to that, that 8% to 10% improvement in pricing is contractual pricing. Keep in mind we don't play in the spot market a lot, we have a little bit of brokerage, a little bit of spot market, but nothing to move the needle. That increased pricing is with our contractual business, primarily in our refrigerated group. So we're very optimistic about our ability to maintain that and drive that going forward, and again that with lower insurance costs anticipated going into the second half, we would expect that OR to improve or those margins to improve as we maintain or maybe even improve pricing, dependent upon what's going on in the industry and with regard to capacity come the latter portion of this quarter.

Todd Fowler - KeyBanc Capital Markets

Okay, yes that makes sense on the insurance piece. And then my last question then, Peter, what do you have or what are you thinking about for insurance in the third quarter? Is it still going to be elevated year-over-year or does it start to normalize given the more difficult comps?

Peter Armbruster

Overall for the second half of the year, it begins to normalize consistent with last year. We had a big bump in the fourth quarter last year and a slight increase during the third quarter last year also.

Operator

Your next question comes from the line of Art Hatfield with Raymond James. Please proceed.

Arthur Hatfield - Raymond James

Peter, a follow-up on that insurance comment, are you referring to the fact that you're modeling insurance to be flat year-over-year in Q3 and Q4?

Peter Armbruster

Yes, in a combined basis, correct.

Arthur Hatfield - Raymond James

Okay, good. I had a lot of questions, obviously a lot of questions about particularly your LTL cost today and I think most have got answered, but just a quick question on the driver situation. Mark, you said your costs are up to recruit, attract and retain, are you doing anything on the sign-up bonus front that we kind of hear in the industry, are you trying to do anything like that or do anything unusual from a retention perspective financially to keep guys around?

Mark DiBlasi

No, we've not done anything unusual. We've always had referral bonuses, we've had sign-on bonuses, we have not increased those at all, those have remained the same. Obviously there are companies out there that have much higher turnover than us that generally generate or have started to generate higher sign-on bonuses. If that becomes a competitive disadvantage to us, we would have to review that, but again, our strength is the reputation we have with bringing on independent contractors, it's not that one-time sign-on bonus, it's the ability to work with the company for the long-term and not be bouncing around between companies. So we've not done anything out of the ordinary to increase our ability to recruit.

Arthur Hatfield - Raymond James

And for your sign-on bonuses, what kind of time comment are you asking for from the driver or IC?

Mark DiBlasi

We generally incent them to be onboard with us for at least 90 days. If you can retain that driver for 90 days, they generally stick with you. The turnover occurs, at least from our perspective, in the first 30 days.

Arthur Hatfield - Raymond James

Okay, good. All my other questions have been answers.

Operator

Your next question comes from the line of Scott Group with Wolfe Research. Please proceed.

Scott Group - Wolfe Trahan

So one of the things I'm still not so clear on, so I'm going to try and ask it again, you talked about calling some LTL business, low-margin business…

Mark DiBlasi

Scott, it was high claims business not low margin business.

Scott Group - Wolfe Trahan

Okay, high claims. Was it high yielding business in terms of revenue per hundredweight?

Mark DiBlasi

It was good business if you didn't have the claims involved. It was high claims, several high claim accounts that we called out on purpose.

Scott Group - Wolfe Trahan

Okay. I guess what I was going to ask is, with the GRI, how come the revenue per hundredweight wasn't better. You're saying it's mix that is impacting that.

Mark DiBlasi

Right.

Scott Group - Wolfe Trahan

Okay. I always thought that one of the great things about the model was that when capacity got tight, you can ramp up the use of the independent contractors. I am not sure why they came down in the quarter versus a year ago. I would have thought that you were to ramp them up.

Mark DiBlasi

We have, we've added 100 contractors in the last eight weeks.

Scott Group - Wolfe Trahan

Okay. So where do you think that mix is now in the third quarter?

Mark DiBlasi

Right now it's about 50-50 in terms of dispatch loads with ICs versus purchased power, and our goal would be to get somewhere around 55% to 60%.

Scott Group - Wolfe Trahan

Do you think you can get there in the third quarter or a little bit longer?

Mark DiBlasi

No, it'd be longer than the third quarter. I mean as we continue to grow – we had 2.5% revenue growth and pretty weak tonnage growth, but you throw in the purged amount, we grew 2.5% to 3%. And keep in mind also, I know some other carriers have grown their tonnage pretty significantly but a lot of those are regional type companies that picked up a lot of business on the Vitran deal. We didn't pickup anything on that because we're a long-haul carrier. So that didn't impact us at all. So we didn't benefit from that at all.

Scott Group - Wolfe Trahan

Okay. On the insurance side, so it's been elevated as you point out for three quarters. What's changing why that's going to start coming down?

Peter Armbruster

The numbers will be consistent where we were last year, just the level where – considering the premium increases and just the level of accidents.

Mark DiBlasi

They turn level with, usually the comps get easier because they started going up a year ago.

Peter Armbruster

Correct.

Mark DiBlasi

But in addition to that, we're seeing our frequency because of the restructuring or safety department, our risk management, we're seeing the frequency of our accidents reduce, and we currently have one of the best frequencies in the industry but they've even reduced beyond that. We're also taking more control of our risk with regard to risk management and how we're dealing with and managing existing claims and future accidents or future crashes.

So we went through that restructuring, we've talked about this now for three quarters about what we were going to do, what we are going to implement, we've done that, we've brought on in restructured safety, we brought on key expertise in terms of safety at the beginning of the year, we're seeing the benefits of that. We brought on our risk management manager here in the past several months. We're seeing significant benefit from that.

So all those initiatives are now starting to pay forward and against higher comps from last year. Barring any major accidents we should see an improvement year-over-year during the third and the fourth quarter.

Peter Armbruster

Yes, our insurance and claims cost in the second half of last year were more than 50% what we incurred in the first half of last year. So we would expect that to level out going through here in the third and fourth quarter.

Scott Group - Wolfe Trahan

Got you, that makes sense. Peter, can you tell us what you're modeling for your LTL operating ratio in the third quarter n the guidance?

Peter Armbruster

What was the question?

Scott Group - Wolfe Trahan

What are you assuming for your LTL operating ratio in your third quarter guidance?

Peter Armbruster

Very close with a slight improvement from where we were in the second quarter.

Scott Group - Wolfe Trahan

Okay, and then just last question, YRC feels a lot more stable right now. How do you think that's impacting your tonnage, your pricing ability? I know in the past you've been a beneficiary of some of their issues. How do you think then just being more stable is impacting you?

Mark DiBlasi

I don't know if it's specific to YRC, I will tell you that from what we've observed, pricing has been very – pretty disciplined within the industry. We've seen 3% to 4% pricing, pretty stable for the last two quarters now. I anticipate that that's going to go up because of capacity constraints. I think the majority of shippers out there today understand that they don't live in the same world they did a year ago or for sure two or three years ago, which is enabling us to get better pricing for the services we provide.

I believe, and again I'm not speaking specifically to YRC, it's just to the LTL industry in general and then with regard to pricing, I think that's going to stay disciplined and it would be up to us to sell the value-add that we bring to an account and grow that business. Again we purposely called out 2% of our tonnage from what we were doing. That 2% of high claims tonnage went to our competitors. It didn't stop shipping, it went to another competitor. So those companies picked up that business. So that's my view on it.

Again, I won't specifically say it's a YRC issue, we take market share from – sell our value-add against any LTL competitors out there whether they'd be public or private, and again, we focus on the long-haul, we're not in the regional market. So there's a big differentiation there between us and a lot of the LTLs.

Operator

Your next question comes from the line of Rob Salmon with Deutsche Bank. Please proceed.

Robert Salmon - Deutsche Bank

With regard to the third quarter outlook, I just want to make sure I'm kind of hearing you guys right with regard to the guidance. It sounds like qualitatively you're seeing some improvement in terms of the linehaul costs on a per mile basis with your LTL network but in terms of what you're incorporating in guidance basically a stabilization of current trends. Am I thinking about that there's some conservatism baked in there or is there something else that's playing out with regard to your third quarter outlook?

Mark DiBlasi

There's some conservatism baked in there.

Peter Armbruster

Yes, a very slight improvement that we're showing in the margins in the guidance.

Robert Salmon - Deutsche Bank

Okay, that's helpful. Just as I'm kind of thinking about the different puts and takes there, with regard to the refrigerated rate increases which you guys were talking to kind of in the 8% to 10% range, can you give us a sense of how much of that flow through in the second quarter and what sort of incremental pricing we'll see coming from a contractual renewal basis that's going to be coming into the third just given how the bid season played out for you guys?

Mark DiBlasi

I can tell you that a lot of that pricing happened throughout the second quarter, so we didn't see the full impact of it in the second quarter, we will in the third quarter with those accounts that we negotiated higher rates with, but we do have a fair amount of our truckload business that isn't necessarily heavily weighted in the first quarter or the first half of the year in terms of pricing. So we will see additional negotiations taking place with our customer base to raise their rates as we go forward. Again, that will be dependent upon how capacity is slowing which I think is going to be very, very tight. So we're pretty optimistic in our ability to continue to maintain that type pricing level in our truckload segment going forward.

Robert Salmon - Deutsche Bank

And should I think about that kind of roughly 50% of that flow-through in the second quarter or was it a little less, a little more?

Mark DiBlasi

I guess probably somewhere in the…

Peter Armbruster

It's a little bit less, because we do share with the independent contractors on some of that.

Robert Salmon - Deutsche Bank

That's helpful. And in terms of the independent contractors that you guys brought on to the overall Company, what was accrued in terms of the sign-on bonus for the second quarter or if there's any sort of variance on a year-over-year basis, that would be helpful?

Peter Armbruster

The additional recruiting type cost for ICs probably added in the second quarter to both LTL and truckload anywhere from $3 million to $0.5 million for the quarter.

Robert Salmon - Deutsche Bank

Okay, that's helpful. And I'm assuming we should be thinking about that sort of expense in the third quarter as well given your objectives to get back to that kind of 55% to 60% range?

Peter Armbruster

Yes, that's reflected in the guidance.

Operator

Your next question comes from the line of Bill Greene with Morgan Stanley. Please proceed.

William Greene - Morgan Stanley

Mark, I was wondering if you can chat a little bit about the kind of environment that you think is kind of optimal. We saw your model worked so well in the downturn and I think a lot of us were all thinking that we're getting to the kind of environment where you guys are really going to start knocking the ball out of the park, and you didn't quite get there this quarter and the guidance doesn't suggest you will in the third quarter. So what do we need to see in the environment where your model just comes together in a way that the growth that we've seen from you in the past really starts to come back in a big way?

Mark DiBlasi

I would tell you that the current environment – in a robust environment, we will be extremely successful in a robust environment. The reason we haven't seen that in the first half of this year has to do with the purging of accounts, the linehaul cost that went up, our ability to offset that linehaul cost with pricing which we will continue to do going forward, but more importantly, I will tell you that because of the restructuring that we went through in the first half of this year and then getting that new management team up to speed in the third quarter of this year, had we not done that restructuring, had we had the management team in place prior to 2014, I think we'd be rocking and rolling right now.

So I think that business model itself will play out extremely well as we move into tighter capacity times and much more robust economic times. And I think we lost a little bit of our momentum at the end of 2014. We've gained that back in the first half. We went through a very exhaustive search for several of these key personnel that we brought onboard, we did promote two from within but we brought three or four, five actually, vice presidents and above, into key positions within the Company and we wanted to make sure that we did it right and we brought on very, very high quality personnel and that's exactly what we did.

So we're very, very pleased with the management team we have now and what we think that management team can generate going forward. Had we had them in place earlier, we'd be a little further along than we are now, but I think that transition was from our perspective kind of a speed bump for us, and now the road is wide open.

William Greene - Morgan Stanley

And the changes that you expect them to implement, it's really going to help bring down the costs or is it really more about growth, I'm not quite sure what exactly they're going to change and when?

Mark DiBlasi

It's two-pronged, it's of several initiatives to reduce the cost, improve service as well as to grow revenues.

William Greene - Morgan Stanley

Okay. And then can you remind us how long are your average contracts across the business or you could do it by segment if easier?

Mark DiBlasi

They are annual contracts in both truckload and LTL.

William Greene - Morgan Stanley

Okay, so if we're in an environment where things are tightening, so they are gradually getting tighter each quarter, wouldn't you sort of always be a little bit behind, like not so much as a broker is behind, but it's going to be time before you can pass along the rate increase but of course a lot of your linehaul rates would start to see that tighter market reflected in them, is that not the right way to think about it?

Mark DiBlasi

Yes, you're going to see a tighter – you're going to see the linehaul cost go up a little sooner than you are able to pass that cost onto your shipper base, but over time as those rates go up and as you negotiate those contracts as they come due, so we really had a half of a quarter that we were negotiating the new rates in the second quarter, actually two-thirds, May and June. Now we have all the accounts coming due in July, August and September that we're now out there raising the rates on, and that will translate into additional revenue to offset that increased purchased transportation cost that we got immediately in the second quarter.

William Greene - Morgan Stanley

Right, okay, alright, good. And then the last question, if I remember correctly, last year you guys were opening up a bunch of new service centers and I think, I don't remember the exact timing of when we're going to lap that, but presumably that's another headwind. Can you remind us the timing of when we're going to start to lap that as a headwind?

Mark DiBlasi

We opened up 10 total throughout the year last year, and they are pretty consistent about every couple of months or so. So we've only lapped a few of those openings through the first half of this year, probably about half of them. I think we have three more to lap. I think there's only – no, maybe there's four more to lap between now and the end of the year.

William Greene - Morgan Stanley

And is this material to the results, when you lap them do we see a big jump then in the OR or improvement?

Mark DiBlasi

The ones that we're lapping now are the smallest terminals we have. So they're really not material at all.

William Greene - Morgan Stanley

Okay, fair enough. Okay, great. Thank you for the time.

Operator

Your next question comes from the line of Nate Brochmann with William Blair. Please proceed.

Nate Brochmann - William Blair

Ironically, I'd like to delve a little bit into some Bill's questions a little bit more, and I clearly appreciate how important leadership is to companies and obviously when you have a transition there's always going to be a little bit of a speed bump as you said, but underlying going into all this, you had some pretty decent profitability improvement, things were kind of humming in terms of the underlying operations in the LTL, why all of a sudden did that create maybe even more little bit of a speed bump? And I guess the important thing is, going forward what you're doing to fix it and there's no doubt that that's where the focus should be, but I'm trying to understand a little bit why maybe some of the underlying operations got a little loose in just terms of the day-to-day there.

Mark DiBlasi

To put it in dollar terms, Nate, it didn't get loose, what it was we had a $0.05 increase in linehaul cost from last year to this year in the second quarter. That $0.05 is worth $0.02 to $0.03 earnings per share, okay. So that's the difference between a $0.38 and a $0.41 just in those linehaul costs, and we're confident that pricing will all offset that in time but it's going to take us a little time to offset that. That was the fact that we purged out some large accounts with high claims with a significant amount of revenue that went away and we're still seeing those claims, I mean claims have a nine-month tail-on.

So we purged the revenue in the second quarter but in the second quarter we still received claims from those accounts and are still receiving claims today. Now that will filter through and we won't have that headwind towards the latter stages of this quarter. So in just pure numbers, I'm talking $0.03 just in linehaul cost alone, that's a huge impact.

Nate Brochmann - William Blair

Okay, that's fair. And then also along with Bill's question, in terms of just understanding the pricing a little bit, I get that they are annual contracts and they come up when they come up, but if things are moving so rapidly, which they have had and obviously it's had a big impact on results in the second quarter, at what point do you stop renegotiating contracts even if they are not up for renewal or don't you ever really do that in terms of making sure you're maintaining profitability?

Mark DiBlasi

I think we would look at that dependent upon the account. There's no reason to not pursue that, dependent upon the markets we're in. If capacity gets so tight, the bottom line is carriers are going to provide their capacity to the best paying customers, and even though we might have a contract in place with a customer, we may not have any equipment for them, and that's the way all companies look at it. They're going to provide the equipment to the best paying customer. So we don't guarantee capacity to anyone.

Nate Brochmann - William Blair

And I mean are we on the verge of that, I mean because I mean obviously things are getting tight, I mean it's not like crazy, crazy tight, but it seems, again I get that the [indiscernible] on this has kind of just started and we haven't been in this environment for a long time, so you got to react to that, so I get there is a little catch-up to that, but I mean it seems like there's certainly an opportunity to do that given what some of the others in the industry are saying and starting to experience?

Mark DiBlasi

I think what we're seeing, and this is my opinion, that we are just at the early stages of this tightening of capacity and the capacity is going to get much tighter over the course of the next few years. And that being said, pricing is going to get much more aggressive.

Nate Brochmann - William Blair

Okay. And then just last question, and again along with Bill's question, but on the new service centers, if we go back to the first quarter, one of the issues was we just didn't quite have the density flowing through those. Where are we in terms of getting the density through some of newer terminals in terms of just looking forward in terms of profitability improvement?

Mark DiBlasi

The density is improved consistently month in and month out. We continue to every month in those new facilities generate record levels for those facilities each month. To the point where density has become very nice in certain ones, we still have a little bit of headwinds in some of the smaller ones, but really as I told Bill earlier, it's really immaterial. Now that was an issue back last year in the fourth quarter. When we open up all those terminals, it's really a non-issue now.

Operator

This concludes today's question-and-answer session. I would now like to turn the call over to Mark DiBlasi for any closing remarks.

Mark DiBlasi

Thank you. All of you know that obviously Roadrunner has – the vision for Roadrunner many years ago was to take a one-dimensional company that did long-haul LTL only and make it a multi-dimensional full-service provider. We've done that. To the point where this – all the conversation we just had, all the questions we just had focused on LTL and rightfully so because LTL was our poorest performer in the second quarter, but TMS and truckload exceeded expectations, exceeded our models, exceeded your models pretty significantly in the second quarter.

So we have been able to create a very, very strong multi-dimensional company that has three very effective operating segments, the largest now being truckload logistics, then LTL, then TMS. None of them – we're no longer relying on any one business segment or any one industry market, we really have diversified and created a very, very effective transportation service provider, and we're very confident in our ability to move LTL up to the levels and improve upon levels that we've experienced in the past going forward. So, once we get LTL clicking like TMS and truckload are clicking right now, I think you'll see a very, very significant improvement in the earnings going forward.

So with that said, I appreciate all your time and your conversation and we'll talk to you all later. Thanks.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. To you all, have a great day.

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