Roadrunner Transportation Systems' (RRTS) CEO Mark DiBlasi on Q2 2016 Results - Earnings Call Transcript

Roadrunner Transportation Systems, Inc. (NYSE:RRTS)

Q2 2016 Earnings Conference Call

July 27, 2016 04:30 pm ET

Executives

Mark DiBlasi - President, CEO

Peter Armbruster - VP, CFO, Secretary and Treasurer

Curtis Stoelting - COO

Analysts

Rob Salmon - Deutsche Bank

Ben Hartford - Baird

David Ross - Stifel Nicolaus

Operator

Greetings and welcome to the Roadrunner Transportation Systems 2016 Second Quarter Conference Call. Today's call is being recorded. At this time, I will turn call over to CEO, Mark DiBlasi. Please go ahead, sir.

Mark DiBlasi

Thank you. Good afternoon, everyone. Thanks for joining us today for the second quarter 2016 earnings conference call. With me today is Peter Armbruster, our CFO; and Curt Stoelting, our COO and after some comments from Peter and me, we will open up the call to questions. Before I begin, I'll turn it over to Peter to discuss the Safe Harbor Act.

Peter Armbruster

Thanks Mark. Before we begin, I'd 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 annual 2016 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 risk 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, risk related to one or more significant claims in the cost of maintaining insurance including increased premiums and insurance in excess of prior experience levels. The cost of compliance with liability for violations of or modifications to existing or future governmental regulations. The effect of environmental regulations, our ability to execute our acquisition strategy and integrate acquired companies, competition in the transportation industry, the impact of the current economic environment, our reliance on ICs to provide transportation services to our customers, the unpredictability of and potential fluctuation in the price and availability of fuel and other risk factors set forth in our SEC filings.

Our commentary today will include non-GAAP financial measures, reconciliations between GAAP and non-GAAP financial measures for our reported results can be found in our earnings press release, which we have posted to our website at rrts.com.

Mark DiBlasi

Thanks, Peter. Let me take a few minutes now to briefly discuss the strategic composition of the company for those of you that are not familiar with us, which we believe drives long-term performance and I will also provide some color on the quarter, current trends and strategic initiatives in the business.

Over the course of the past several years we have significantly diversified our transportation service offering into a multi-dimensional fully diversified business providing multiple services that are strategically aligned for cross utilization of assets and cross-selling of services. We now offer full complement of solutions including customized and expedited less than truckload, truck load logistics, break consolidation, inventory management, transportation management solutions, intermodal solutions, on-demand expedited services, international freight forwarding, customs brokerage and comprehensive global supply chain solutions.

We utilized proprietary web enabled technology systems and a broad network of transportation providers comprised of independent contractors, employee drivers and purchase power, serving a very diverse customer base. Although we service large national accounts, we primarily focus on small-to-mid sized shippers. Our business model is scalable and flexible and our cost structure is largely variable and requires minimum investment in transportation equipment and facilities as compared to an asset based companies, which we believe enhances our free cash flow and returns on our invested capital.

We report three business segments, truckload logistics, less-than-truckload and Global Solutions. These segments complement each other by allowing us to offer all services to our broad customer base, by cross-selling each segment services, we have the ability to build density at a more rapid rate, which increases the opportunity for organic growth and enhances the customer relationship.

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 or asset like providers as we expect capacity to continue to tighten in the future. We currently have over 4,400 independent contractors and drivers in our fleet.

This time I would like to give some business comments. I would like to provide you with some details on our second quarter performance which was well below our expectations. Overall market conditions continue to be soft throughout the second quarter and in some parts of our business, we experienced declines in both volumes and rates in Q2, 2016 compared to Q1, 2016 which is current [ph] to historical seasonal patterns.

As a result, we did not achieve the expected increase from our financial results reported in the first quarter. Even though we are in a challenging environment we are extremely disappointed with our results for both the first and second quarter. Curt Stoelting, is now fully assimilated into our business together with me and our other new team members. Curt will be driving the changes necessary to improve performance in the second half of the year.

Our shortfall consensus in the second quarter was approximately $0.15 per share up two-thirds of this shortfall was attributable to our truckload logistics segment. The remainder is primarily attributable to our LTL segment with a slight miss in profits in our global solutions segments due to volumes. With regard to our truckload logistics segment, within truckload logistics our shortfall in Q2 is mostly a result of lower than expected revenues and margins in our OEM and intermodal services operating groups.

Our OEM services groups continue to be negatively impacted by excess capacity in both air and ground expedite. Overall rates did not improve from the historically low first quarter and were down by over 25% compared to the prior year and cause the shortfall approximately $3.5 million in planned profits for the quarter.

Our intermodal services business was impacted by lower than expected volumes, which also resulted in a delay in the start-up of new businesses during the quarter. The reduced volumes led to a shortfall in profitability within this group of approximately $1.2 million compared to plan. Our temperature controlled and brokerage grew for slightly behind their profit plans primarily due to lower margins on back hauls as a result of the continued to be soft [ph] truckload stock market.

We've implemented several initiatives within our truckload logistics segments to address these shortfalls and improve profitability in the back half of this year. In our OEM air and ground expedited group, we have a unique technological offering coupled with dedicated capacity which we are leveraging to achieve a higher capture rate on a loads that best fit into our network. We saw a tightening in capacity in the second half of June with positive impacts on margins.

After the first two weeks of July which are always slow especially with the automotive OEMs, we are encouraged by the current volume and pricing trends we were seeing today. Also with the largest OEM customers that we serve, there are more model changes over scheduled for the second half of 2016. We expect air freight demand to increase as a result in pricing to improve moderately.

In our OEM ground business we have assimilated $75 million worth of annualized new business in the first half and are now driving more efficiency and productivity within our total network. We've also realigned our internal capacity to focus on specific higher margin lanes and secure additional new business wins on specific lanes increasing our tracking utilization and our ground margins.

Expedited ground volumes are picking up as well. Collectively these initiatives at a modest improvement in demand still substantially below normalized levels, we expect to see improved results in our OEM business in the second half of the year.

In our intermodal services group, we've seen a significant increase in new business starts in July and projected starts in August as a result of concentrated sales efforts in the first half of the year. Several key markets such as southern California, Chicago and the Southeast are showing strong sides of growth. We would expect this growth to result in tightening capacity which should translate into better margins as the second half of 2016 progresses.

Our temperature controlled services have been focused on serving our contractual customers, we've indicated that the second half will definitely improve over the past two years demand cycle, we're positioned well to meet these needs. If demand increases significantly, we would expect margins to grow as well.

Although, we do not expect any impact in the second half of 2016 with regard to ELDs, our major customers especially in truckload our all initiating conversations concerning compliance and capacity for 2017. Some have even advised us that they expect their core carriers to be at 100% compliance by mid-year, in other words moving up the [indiscernible] from December to July.

I personally expect this to be positive for our margins in early 2017, as this could create a possible capacity earlier in the year than some anticipate. In our brokerage operation, we have focused on adding new active brokers to our network, we currently have 116 brokerage offices up from 109 last year. We are also focused on maintaining and improving contractual pricing as we believe purchase transportation rates have bottomed and we expect purchase transportation rates to increase in the second half as we are starting to see increased volumes in certain lanes.

Overall in our truckload segment, we saw improvements in volumes, in rates in late June and we are encouraged by the trends we are currently seeing in July. In our LTL segment, we achieved our goal of improving our service consistency while keeping our linehaul cost per mile at a rate consistent with the prior year at $1.25. We expect to this to begin translating into volume growth in second quarter consistent with our historical growth trends.

However revenue from new business awards have been slower than anticipated and is not yet overcome lower shipping volume from existing customers especially in the industrial markets that we serve. Rates in LTL have been steady to slightly up on renewed contracts because of lower than planned revenue levels, we have not yet realized the impact of operational productivity improvements completed in the first half of 2016.

The majority of the profit shortfall in LTL is due to lower than expected revenue and freight mix coupled with negative operating leverage associated with fixed overhead cost. The LTL operating metrics included in our earnings release illustrate how lower tonnage, weight per shipment and number of shipments in the second quarter and first half 2016 compared to the prior year have negatively impacted our current year second quarter and year-to-date results.

We believe that our service reliability, lowest cost offering and consistency combined with operational productivities are the keys to improve revenue and profits in future period. In LTL we are seeing the following improvement trends. New business wins to continue to come online and build revenues as well as sequentially improve tonnage shipments revenue for unrelated [ph] pricing metrics. With regards to those metrics, total revenue although still negative are trending positive from Q1 to Q2 to what we're currently seeing in July.

With regard to revenue, we were negative 11.9 in Q1, negative 8.7 in Q2 and currently in July, we were negative 5.5. So we had a positive trend going. In terms of tonnage, we were negative 13.8 in Q1, negative 12.7 in Q2, and currently in July we are at negative 9%. Shipments we were at negative 8.4 in Q1 to a negative 6.6 in Q2 currently trending at a negative 5.0 in July.

Pricing was 3.8% in Q1, 3.9% in Q2 very stable and we're seeing the same numbers in July. We will see benefits in the second half of 2016 from one of our internal capacity downsizing when we eliminated some of our linehaul employee based linehaul drivers in LTL and that will improve our linehaul performance and cost to mile in the second half of the year.

Pickup and delivery cost improvements implemented in the second quarter from restructuring and rate negotiations. We expect to result in an approximately $5 million annualized savings. We implemented focused initiatives in claims expense and SG&A cost reduction was there in the second quarter and we will have continued cost savings initiatives throughout the rest of 2016.

We also implemented LTL California compliance surcharge in late June of $6 per shipment, which we expect to result in approximately $1.8 million in revenues in margins during the second half of 2016. As stated on previous call, we believe that the benefits from initiatives we've implemented in LTL will build overtime and we expect to see increase sequential improvement in all metrics as I previously indicated including operating income.

The estimated annual bottom-line impact to our key LTL improvement initiatives is between $12 million and $15 million, a significant portion of which will be realized in the second half of this year with a balance into 2017.

With regard to Global Solutions, continues to be a consistent in the overall operation. We continue to see very slow volumes in rates internationally and we have cost control initiatives in place to maintain efficiencies and productivities. Our freight consolidation inventory management operations continues to expand, we added an additional 350,000 square feet of warehouse space in the second quarter bringing our total warehouse space to 2.5 million square feet. We did this in anticipation of new business wins as well as new business wins from new and existing customer.

Overall during the quarter, we incurred $3.1 million of downsizing cost in our truckload and LTL segments, which equated to approximately $0.05 impact in diluted earnings per share. We expect approximately $2.5 million of additional downsizing cost to be incurred and completed in the third quarter.

We continue to operate at a very sluggish demand environment with overall excess capacity throughout the industry. We did see capacity tightening in June and positive trend so far in July. We expect gradual capacity tightening as we move into the second half of 2016, which should result in margin expansions overtime.

At this time, I will turn the call over to Peter.

Peter Armbruster

Thank you, Mark. Given that Mark has already provided color around our operating results. I will talk through some of our other financial metrics. Despite our disappointing operating results, our cash flow remains very strong. Cash provided by operating activities increased over 80% from $7.7 million for the second quarter of 2015 to $14.3 million for the second quarter of 2016. This was accomplished through strong operating cash flow and affective working capital management.

Cash provided by operating activities for the trailing 12 months was a record $93.2 million. Capital expenditures net of proceeds were $1.3 million during the quarter compared to $10.4 million in the second quarter of last year. During the second quarter, we amended our bank agreement to right size required debt covenants at June 30, 2016 our total outstanding debt was $412.3 million and cash and cash equivalence were $7.8 billion.

During the quarter we paid down $9.8 million of bank debt and we are in compliance with all bank covenants. Our bank leverage ratio which includes both outstanding debt and standby letters of credit at the end of Q2 was approximately 4.3 times compared to a maximum of 4.5 times. We expect to reduce this leverage ratio throughout the rest of 2016.

While our focus over the past several years has been on strategic growth and acquisition initiatives to position us for the long-term, our focus throughout 2016 has been on enhancing cash flow from operations to reduce our outstanding debt and improve our leverage ratio.

We've also revised our insurance program, so that overtime standby letters of credit included in our bank leverage ratio will be reduced. Consolidated personal related benefits and other operating expenses increased $14.7 million quarter-over-quarter primarily due to the $6.9 million of personal related benefits and other operating expenses related to our third quarter 2015 Stagecoach acquisition and $3.2 million increase in insurance and claims expense.

Depreciation increased from $5.5 million in the second quarter of 2015 to $7.4 million in the second quarter of 2016. Amortization expense in the second quarter of 2016 was $2.1 million which translates into $0.03 reduction in diluted earnings per share. Our 2016 guidance due to continuing market trends and historically low freight rates primarily in the expedited and spot markets which we no longer expect to improve significantly during the balance of the year. We are lowering our expectations of EBITDA. EBITDA excluding downsizing of $7 million to be approximately $110 million for 2016 and anticipate diluted earnings per share available to common stock holders excluding the impact of downsizing cost to be in the range of $0.70 to $0.85 for 2016.

Our revised guidance assumes that historic seasonal patterns will increase volumes and slightly improve rates and certain end markets during the second half of 2016, that new business rewards will build throughout the year, that cost savings initiatives will benefit results in the second half and that we will not consummate any new acquisitions.

Finally we expect net capital expenditure requirements in 2016 to be in the range of $15 million to $25 million. That concludes our prepared remarks and we will begin our question-and-answer part of the call.

Question-and-Answer Session

Operator

[Operator Instructions] and our first question comes from the line of Rob Salmon with Deutsche Bank. Your line is now open.

Rob Salmon

If I'm looking at the LTL results obviously a tough backdrop despite yield improving sequentially tonnage stepping up. We did see kind of the profitability fall off. I'm curious if you could kind of give us a little bit more color in terms of why we saw the counter seasonal trend with profitability falling off in LTL, maybe give us a sense what was driving that weakness whether it was in the pickup and delivery side, linehaul pressure because the linehaul late [indiscernible] didn't really step up, so I'm scratching my head a little bit at what happened there and how I should be thinking about that segment in back half of the year?

Peter Armbruster

Yes, the primary reason for the sequential decreased between first and second quarter was over $1 million increase in insurance and claims expense between the first and second quarter.

Rob Salmon

And Peter should that drop off, as I look out to the back half of the year or should I and give out kind of elevated insurance and claims, what's contemplated in the guidance there?

Peter Armbruster

Yes that was, somewhat level off, probably about half of that increase would remain and then the rest would just be was more of a one-time shot that hurt the second quarter.

Rob Salmon

Okay, I guess just thinking a little bit bigger picture here obviously it's been a tough year for investors. Have you guys contemplated doing anything more in whether it's potential share buybacks divesting segments as a way of potentially improving the shareholders returns as you guys are thinking about the company and how to create the most value?

Mark DiBlasi

Well, we're open to whatever it takes to improve and our focus has been for the first and second quarter this year is really improving overall operating performance so we really haven't consider buyback or divesting anything.

Rob Salmon

Okay and I guess as I think about that has there been any kind of turn over with regard to any of the operating teams of note that we should we thinking about more recently.

Mark DiBlasi

No we haven't had any turn over, we have added Curt and other few other key personnel within the network. We are currently looking at restructuring some things to make this more efficient in particular in LTL, but we have not lost any of our personnel.

Rob Salmon

Good, I'll leave it there and turn it over to someone else.

Mark DiBlasi

Thanks, Rob.

Operator

And our next question comes from the line of Ben Hartford with Baird. Your line is now open.

Ben Hartford

Peter, just wanted to repeat your sense on the long-term targets with regard to the leverage ratio in the past you talked about sub 2.5 times, is that still the long-term goal?

Peter Armbruster

Yes, that's still the long-term goal.

Ben Hartford

Okay and as you see it from these levels, obviously won't ask in terms of a timeline is to when you think you'll get there but what do you think the most likely pathway to go from the current leverage ratio down to even sub three. I would assume it's executing on EBITDA improvement not only in 2017 and beyond that would be the majority of the driver to drive that leverage ratio down with incremental debt pay down but I'm curious in terms of how you look at that pathway over the next couple of the year to get to that objective.

Peter Armbruster

Yes, again yes. It's a combination of EBITDA and then the pay down of debt, but we would look at the second half of 2017 into 2018.

Ben Hartford

Okay that's a credible target to get near that 2.5 times.

Peter Armbruster

We'll start going below 3 times.

Ben Hartford

Okay, that's helpful. Curt, six months in interested in your view in terms of I guess what you've seen life-to-date, what's some of the opportunity are for the organization and still perhaps what some of the risks are, as it lies and maybe put it into the context of the revised EBITDA target here for 2016. How much risk lies in internal execution versus just simply the macro in your mind?

Curt Stoelting

Well, Ben that's a good question. I can tell you I have a lot of enthusiasm for the business. I think we got a very good management team here and none of us are happy with first half results. And I bet there's a lot of work that we've done that we've already done which we believe will significantly benefit the second half and let me just kind of pave that out for you a little bit. If you look at our guidance, our run rate right now for adjusted EBITDA is about $43 million, so to get to $110 million, we got to do about $66 million in EBITDA in the second half, which is a $23 million improvement.

We have done initiatives to get the majority of that is already our minds done, obviously we got to deliver it. But if you just go through what Mark detailed out in terms of our operational improvements and our confirmed new business that's coming online here that we'll start, we'll see the benefits forward in the second half. On the LTL side, I think in a conservative number for the second half is about $7 million improvement.

I think in truckload the improvement in second half will be about $10 million, so about $6 million of that comes from OEM. Again where Mark detailed out, what we're doing there in terms of higher capture rates on both air and ground continued new business as we brought on the new ground expedite business. We've now had enough history to do drive the analytics and improve the yields better utilize our network and reduce empty miles and then we've also done SG&A reductions in our OEM grouping.

So that's $6 million and then I think again conservatively $2 million improvement in your model and a $2 million improvement in refer and brokerage are again conservative estimates. So that, if you just look at I think what we've done in terms of things that we believe will that are done that will impact the second half were about $17 million that leaves about $5 million to get the rest of that $23 million [indiscernible] and that's really baked in traditional seasonal volume, little bit of rate improvement and little bit of margin improvement.

So we're not projecting a big snap back in rates even though they still are at pretty low levels. We're taking that out of plan I think we've got something here that's very doable. If you look at the $66 million that we're planning to do that's and we hope to do more but at that level in 2017, that compares to last year's second half which was $65.4 million and I wasn't around last year in the second half, but I know that the third quarter was not stellar, so when we kind of asset test this, I think it holds up pretty well from our view knowing that we've already completed a lot of work that we'll start to pay out here as we go into the third quarter.

So that's probably more than you were looking for Ben. But I just wanted to - you gave me an opportunity and I wanted to get that information on the table.

Ben Hartford

Yes, no I think that's really, helpful to investor so. Let me ask you this in that same vein again six months in, I know there's more [indiscernible] on acquisitions and I think probably likely so but as you look at the composition of the portfolio from a fresh set of eyes. Are you satisfied with the pieces in place? Are there some pieces that you would like to add obviously an important element going forward as the ability to really drive synergy across the platform? Do you think that you have enough pieces there or there are still some key holes that you would like to fill overtime?

Curt Stoelting

Ben, you know that's a very good question. I don't have a complete answer for you on that but because I'm still haven't a lot of dialog both you know within our management team and with our board on those great topics. But I'll give you my initial feel that we have plenty to work with here. All the businesses we acquired are good businesses. Some of them I think can be improved with some additional integration where we can work together to expand and do a better job serving our customers and longer term. I think there will be some tuck-in opportunities but you know for now I think we've got plenty to do work with good businesses we have to make them better and obviously, we got to pick up the phase in terms of what we're doing, in terms of generating the profits and paying down debt. You know if you get that down to where, we have a financial flexibility if you're looking at those longer term opportunities. But I'm excited about both what we can do in the short run to improve and we'll have a very, once we do that we'll have a very strong foundation for additional growth for organically and direction in the future.

Ben Hartford

Okay, thanks for that perspective.

Curt Stoelting

You bet.

Operator

And our next question comes from the line of David Ross with Stifel. Your line is now open.

David Ross

Peter you talked about the new leverage ratio max to 4.5 times. So when the covenants were reset how does that look going forward and what's the step down, I guess you know did it go to 4.25 by the end of the year and 4 at some point next year or 3.75?

Peter Armbruster

Yes, so second quarter's was 4.5, third quarter was 4 and then fourth quarter was 3.75 and then it drops down from there 3.5 and then 3.25 for the second quarter of 2017.

David Ross

And do you feel that gives you enough breathing room?

Peter Armbruster

Yes, based on our current guidance that we've given and our plan debt pay downs. We expect to be in compliance with our future debt covenants.

David Ross

And did the banks allow the EBITDA to exclude those downsizing cost?

Peter Armbruster

Yes, they did.

David Ross

Okay then moving over to really the LTL side of things. Insurance has been a big problem for last couple of years in that segment and then there was another problem in 2Q, what's fundamentally wrong with either the operating business model which it doesn't have a focus on safety or something with the insurance and claims agreements either the self-insured retention is too high or premium too high?

Peter Armbruster

Insurance and claims, I mean the LTL really does pretty well. It was more just a one-time expense in Q1 or Q2 going up against a very low Q1 number.

David Ross

I've seem to remember a lot of one-time insurance expenses at couple years though.

Peter Armbruster

Yes periodically in different quarters.

David Ross

But it doesn't seem like a one-time thing, that they're recurring event. Is there any way to smooth that out or you guys have a plan to minimize the volatility in that line?

Peter Armbruster

Yes, I mean safety has always been a focus for the entire organization.

Curt Stoelting

So David, this is Curt. I'm happy to comment a little bit on that and Mark has longer term history. Let me just sort this out to you. There has been a renewed emphasis on our company wide safety program. We reorganized our safety team and added people to our safety team so that we have more boots on the ground with our operating companies and we're putting a real focus on that and so far, the insurance cost generally lags a year. We had a rough year last year to some extent we are paying higher price because of that, this year. But so far this year, knock on wood our experience is been greatly improved. So we're going to keep the pressure on safety throughout the organization and we're also doing some things to improve our control over our insurance which I do believe will take out some of the volatility as we implement some of the programs where we're taking a much more control over how the claims are settled and the process around that.

So I'm optimistic that we'll have less surprises in the insurance area going forward. A; because we'll reduce because we'll be operating safer and two because we'll have better control when we do have situations that need to be dealt with.

Mark DiBlasi

Yes, in addition to that Dave we've looked at as you know we've been, we have had issues in the past and we've been very focused on safety. One of the things that we're piloting right now are drive cams, we currently have some operations within our network that utilize them, those are some of the safest operations, we have. We are in the midst of a pilot program evaluating those to the whole fleet and it looks very promising at this point in time. So we're very optimistic about what initiatives we have in place, but as Curt said there's a long tail sometimes on safety and claims and the reconciling those claims overtime and so we're pretty confident in the changes we've made and paid dividends in the future.

David Ross

As to note, if it was difficult to safety when you're dealing with a bunch of independent contractors and third party that was a company fleet.

Curt Stoelting

Yes, I think again I'm not a trucking guy but I think this is an excuse. I think if we set the tone obviously from the top and we make sure we've got the right people carrying that message throughout the organization and we hold people accountable to that then I don't think it matters. I think we can, I think that can work regardless of what your - how you drag your driver capacity.

Mark DiBlasi

In addition to that, you have to make sure you don't short change your expectations for drivers and independent contractors just because they can drive a truck doesn't necessarily mean they're right individual to come aboard. I can tell you that, our current applicant flow into the company is been at all-time high, but our knock out rate is also at an all-time high. So there's lot drivers out there but there is more drivers today that we will not touch and we'll never touch simply because they just have proven in their past, their experience to be unsafe. So it's a big issue within the industry and we do not intend to lower our criteria or expectations at all.

David Ross

And then Mark you mentioned that the purchase transportation rate, you think have bottomed here, if the cost for mile it should be trending up, is that a headwind for LTL?

Mark DiBlasi

It's a headwind for LTL, it will be a positive for truckload. We're so diverse that in one situation where it's headwind it's going to be a benefit to us in other areas. We try to mitigate that cost and as transportation goes up in LTL. You know then obviously our utilization of independent contractors, our utilization of rail where its service appropriate will go up as well, so we'll be able to offset that cost. A big thing that hurts sometimes, if it goes up very quickly in a very short period of time, which we don't anticipate that this time around but we'll see how that plays out.

David Ross

All right, thank you.

Operator

[Operator Instructions] and our next question is from the line of Scott Group with Wolfe. Your line is now open.

Unidentified Analyst

Good afternoon, it's actually [indiscernible] for Scott Group just a couple of questions from me. I was wondering if you can provide LTL tonnage by month, through the quarter.

Mark DiBlasi

LTL tonnage by month was negative 13.3 in April, negative 12.8 in May, negative 10.1 in June and currently negative 9 in July, that's not a final number obviously.

Unidentified Analyst

Okay and could you just kind of speak to kind of the competitive environment in LTL. It seems like I mean your pricing held up okay, I mean given though weak macro I guess industrial backdrop is there any rate pressure out there?

Mark DiBlasi

Well we see occasional rate pressure in certain pockets maybe on specific lanes, but we've not seen wholesale rate pressure from the competitors and for the last several quarters actually rate have been very stable. We've been in that three to seven to 3.9 range for the last three, four quarters. And our biggest issue in LTL as we do serve an industrial base and our largest vertical is durable goods. Well I just saw the durable goods report come out for June, it was down 4%, the worst that's been in two years. So you know that's just kind of indication of what we're seeing in terms of tonnage in our volume.

So given that the fact that we're improving our trends in tonnage, at least tells me we're doing some things right to bring more freight onto our operation, but in terms of pricing and competitive initiatives I'll be honest as low as tonnage is in the LTL arena today, I'm surprised that we've not seen someone become very aggressive in pricing just to buy tonnage but have not seen that, that's good and encouraging.

Curt Stoelting

Scott, if you don't mind on LTL, let me come back and just reemphasize what Mark has laid out in his previous comments. Again we've made, we've already made significant improvements that are done, they were done in the first half but they, we'll start to see the financial benefit in the second half. And we laid that out in an annualized basis $12 million, to $15 million and I'm confident that we'll see on a conservative basis $7 million in the second half numbers and those are things that are done, things that we've done in pickup and delivery to renegotiate our arrangements or in some case with the carriers, just to make sure we get the best possible value in rates, so that work is done. We've worked hard to improve our claims. So we expect to have lower cost there through operational efficiencies.

We worked hard on linehaul you know as Mark mentioned. We got good control there now, we centralized that, we have the ability to use multi-nodes to hit out service requirements but also hit our cost savings goals there and our efficiency goals. So there's a lot of we've done, we've reduced in a number of areas, we've reduced our SG&A and we are continuing productivity objectives that will go throughout the rest of year. So LTL is a very, even though our performance isn't anywhere where we wanted it to be or frankly it should be, it's a very good business, it's a business that we've got to levers goal to improve.

Ultimately we believe, we will start to see the revenue trends improve, they improved. Again not as fast as we would like in the second quarter and we think they'll continue to improve as we move into the third and fourth quarters and that business will back to historical profit levels. I think sometime by the time we get into 2017, I think that will be performing very well for us. So I think we've got tremendous upside in our LTL segment.

Unidentified Analyst

Got it. Okay and I guess just looking at net revenue margins, it looks like they expanded nicely in the quarter. Just wondering what's the driver between there is, is there kind of, I guess it's just kind of surprising just given the weak kind of freight environment and I guess contract rates, spot rates come bouncing back a little bit in the second quarter just wondering, do you expect that inflect negative at some point or is there switched to more independent operator is going to help kind of alleviate that.

Peter Armbruster

The primary dispute because the switch between employee drivers and purchase power or independent contractor rates, but that net margin revenue line on consolidated basis was a little bit difficult to conclude on.

Unidentified Analyst

Okay.

Curt Stoelting

Yes, I guess that's running across all of our businesses. So yes I mean, we because we are in so many different modes on the transportation side. And it also obviously on a logistic businesses that those flow through there too, so I think it's hard to draw any conclusions on an overall basis on that line item.

Unidentified Analyst

Okay, got it. Thanks for your time guys.

Curt Stoelting

Okay, thank you.

Operator

And I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Mark DiBlasi for any closing remarks.

Mark DiBlasi

Okay, thank you. Well, as we've indicated we did not have a good second quarter. None of us are pleased with that and as we've indicated or try to indicate on this call. We have taken significant action and implemented significant amount of initiatives both on the sales and revenue growth side as well on the cost control side as well on the structural side to improve efficiencies and productivities. We believe we have those in place and we expect to see significant improvement in the second half of this year. With that, I'll end the call. Thank you so much for your time and we'll talk to all of you later.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, you may now disconnect. Everyone have a great day.

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