ArcBest Corporation (NASDAQ:ARCB)
Q2 2016 Results Earnings Conference Call
July 29, 2016, 09:30 AM ET
David Humphrey - Vice President, Investor Relations
Judy McReynolds - Chairman, President and Chief Executive Officer
David Cobb - Vice President, Chief Financial Officer
Jason Seidl - Cowen and Company
Brad Delco - Stephens Inc.
Christian Wetherbee - Citigroup
Ken Hoexter - Bank of America Merrill Lynch
Todd Fowler - KeyBanc Capital Markets
Matt Brooklier - Longbow Research
John Barnes - RBC Capital Markets
Bob Solomon - Deutsche Bank
Bruce Chan - Stifel Nicolaus
Ravi Shanker - Morgan Stanley
Ladies and gentlemen, thank you for standing by, and welcome to the ArcBest Corporation Second Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Friday, July 29, 2016.
It is now my pleasure to turn the conference over to David Humphrey, Vice President of Investor Relations. Please go ahead.
Welcome to the ArcBest Corporation’s second quarter 2016 earnings conference call. We’ll have a short discussion of the second quarter results and we’ll open up for a question-and-answer period.
Our presentation this morning will be done by Ms. Judy R. McReynolds, Chairman, President and Chief Executive Officer of ArcBest Corporation; and Mr. David R. Cobb, Vice President, Chief Financial Officer of ArcBest Corporation. We thank you for joining us today.
In order to help you better understand ArcBest Corporation and its results, some forward-looking statements could be made during this call. As we all know, forward-looking statements, by their very nature, are subject to uncertainties and risk. For a more complete discussion of factors that could affect the company’s future results, please refer to the forward-looking statements section of the company’s earnings press release and the company’s most recent SEC public filings.
In order to provide meaningful comparisons, certain information discussed in this conference call includes non-GAAP financial measures as outlined and described in the tables in our earnings press release.
We will now begin with Ms. McReynolds.
Thank you, David, and good morning everyone. While the second quarter had its ongoing challenges for the industry and for us, we continued to seek opportunities to grow our existing customer relationships and find new business opportunities. We executed well on providing our customers the full logistics solutions they expect from us, despite an inconsistent operating environment.
As we look forward, we see an ever greater market opportunity. Recent research conducted this year confirms that some of our market opportunities are even bigger than they were in the last few years, particularly in the services offered by our asset-light businesses. This is encouraging news and it underscores the potential for growth in areas we’ve invested.
In the near term, through our efforts to diversify our service offerings and enhance our customers’ experiences, we’re seeing increasing numbers of new customers that come to us looking for expert solutions. So far this year, we’ve grown special project freight that requires consistent success on coordinated deliveries during short business timeframes. We continue to invest in technologies that set us apart from the competition.
I’d like to take a moment to acknowledge the skill and the will our employees bring to their roles in serving our customers each and every day. Thank you.
Now, for some details on each of our businesses. Softness in the industrial and manufacturing sectors continued to impact ABF Freight’s business during the second quarter much as it has throughout 2016, contributing to lower total revenue and tonnage compared to last year. Customers are positive, but cautious about the second half of the year. The ABF sales force feels good about the business we’ve added throughout the year and additional customer opportunities before them.
Though down slightly for the quarter, shipment trends were much better than the level of decline in ABF Freight’s tonnage. The ABF Freight operations team continually evaluates labor levels from both a customer perspective and a cost containment perspective.
Moving through the second quarter, there were some improvements in ABF Freight’s monthly shipment handling metrics, which reflects our emphasis on improving operational efficiencies. However, handling more total shipments with smaller average shipment sizes impacts all aspects of ABF Freight’s dock, street and linehaul operation. As a result, a portion of the decline in the second quarter operating margins was associated with higher costs in these areas relative to the decline in revenues.
We are pleased with the positive results from the new tractors we put into the fleet last year and during the first half of this year. In the second quarter, our fuel economy improved approximately 5%, which was above our expectations. Though the pricing environment is somewhat weaker and more challenging than in recent quarters, ABF Freight continues to gain price increases on negotiated business.
On our contract and deferred pricing renewals, during the quarter, we averaged an increase of 2.9%. This level is below that of recent quarters, but still reflects a reasonable level of increase on our most price sensitive accounts.
More customers are currently taking their freight to market and in those cases the freight carrier participants are very competitive. In those situations, ABF Freight has been successful in retaining existing accounts and gaining new business, both at acceptable pricing levels. We have always realized the necessity of achieving compensatory pricing and timely rate increases from our customers in return for the value we offer as an asset-based supply chain partner. That disciplined pricing emphasis continues during the current period.
The growth in ABF Logistics’ total second quarter revenue was primarily the result of additional business from the Bear Transportation acquisition. Revenue at ABF Logistics’ legacy business increased slightly despite a significant increase of shipments from new and existing customers that was offset by the impact of reduced revenue per shipment due to lower fuel prices, reduced customer rates and general market softness in the early part of the quarter.
Beginning in June, customer demand improved that’s reducing available truckload capacity and increasing purchase transportation costs. The slower pace of increased shipment rates secured by ABF Logistics on both its traditional spot market shipments and on the contractual Bear Transportation business compressed gross margins and contributed to a decline in operating income.
The Bear integration was the primary reason for ABF Logistics’ second quarter operating income decline. The IT and sales integration was substantially completed during the second quarter. The integration involved structure and role changes within sales and operations, along with a conversion to a new software platform, an aggressive integration timeframe that was followed in an effort to align all of the ABF Logistics’ campuses for future growth and to further facilitate cross-selling to ArcBest customers.
As a result, employee productivity and proficiency suffered and profitability declined. Due to recent corrective actions taken earlier this month, ABF Logistics has experienced weekly increases in employee efficiency and we expect continued improvements throughout the remainder of the third quarter.
As seen for the last several quarters, soft market demand relative to available truckload capacity impacted customers’ needs for Panther services throughout much of the recent quarter. Panther’s second quarter revenue declined compared to last year due to these market conditions, along with the impact of flat load growth and an environment where rates charged to our customers have come down more rapidly than the mileage rates Panther paced with capacity suppliers.
The loads Panther handled during the quarter traveled shorter distances and a greater percentage of them moved on straight trucks relative to the percentage decreases moving on cargo vans and larger tractor trailer equipment. All of these factors as well as the revenue impact of lower fuel prices contributed to the revenue decline and reductions in gross margins and operating profitability.
As seen at ABF Logistics, Panther began experiencing improved business trends in June and those have continued into July. Though Panther’s July revenue trend is below last year, the need for expedited services seems to be improving. Recently Panther has been able to charge better prices which are contributing to some margin improvement. It’s too early to know if these positive trends will continue, but we are encouraged by seeing them at Panther and in our brokerage business.
Throughout the period of weak market demand relative to the abundance of truckload carriers, Panther has focused on fleet initiatives to add capacity in all equipment categories. Panther continues to refine and improve its processes for adding new owner operators and maintaining current driver relationships.
During the second quarter, Panther increased the percentage of loads moving on its owner operator fleet compared to those brokered with outside agents. This not only generates higher margins, but further strengthens Panther’s carrier relationships. Even in a weaker market, it’s important for Panther to maintain its capacity resources to respond to upturns in business.
FleetNet’s second quarter revenue was flat compared to last year because of a reduction in event activity in both emergency roadside repair and fleet maintenance services related to slower business levels and changes in its customer mix. The reduction in events put pressure on operating margins as employee cost per event increased.
ABF Moving’s second quarter revenue decline reflects the impact of fewer government shipments, partially offset by an increase in consumer and corporate shipment activity. Reduced government activity contributed to lower gross margins and operating income in that segment.
And now, I’ll turn it over to David to provide the financial highlights for the quarter.
Thank you, Judy, and good morning everyone. ArcBest’s second quarter 2016 revenues were $677 million compared to $696 million in last year’s second quarter, a reduction of 2.8%. The revenue increase at ABF Logistics was associated with its freight brokerage acquisition in December of 2015. Lower business levels and the impact of lower fuel surcharges affected second quarter revenue at most of our businesses.
Second quarter 2016 net income was $0.39 per diluted share compared to net income of $0.74 per share last year. Our reported second quarter results include a few items of note. Versus the same period in 2015, total corporate healthcare cost increased $1.7 million or $0.04 per share. These higher costs were across all of the ArcBest companies, with the increase in nonunion employees at ABF Freight representing $1 million.
Our healthcare costs have been managed well over longer periods of time reflective of our wellness value and several corporate-wide initiatives that have been implemented to improve the health of our employees. However, this quarter’s unusually higher impact is related to increases in the number of health claims filed as well as a higher average expense for those claims.
ABF Freight’s year over year quarterly results were positively impacted by $1.6 million increase in gains on sales of real estate, but that was offset by $1.8 million increase in third-party casualty claims cost associated with an increase in the number and severity of claims versus historical periods.
As part of our stock repurchase program, in the second quarter, we bought 149,387 shares for a total amount of $2.5 million. We ended the second quarter with unrestricted cash and short term investments of $216 million. Combined with the available resources under our credit revolver and our receivable securitization agreement, our total liquidity equals $342 million. The accordion features of these two agreements allow for an additional total amount of $100 million.
Our total debt of $225 million includes a $70 million balance on our credit revolver, the $35 million borrowed on our AR securitization and $120 million on notes payable and capital leases primarily on ABF Freight equipment. The composite interest rate on all of our debt is 2.1%. Full details of our GAAP cash flow are included in our earnings press release.
Earlier in the year, we provided an estimated range for our 2016 net capital expenditures of $170 million to $200 million. This included revenue, equipment purchases of $95 million for ABF Freight, which are being made throughout the year and expected to be completed.
However, based on our current expectations regarding real estate opportunities and other miscellaneous items, we now project our total 2016 net capital expenditures to be between $170 million and $190 million, a $10 million reduction of the upper end of the previous range. So far this year, out net capital expenditures totaled $56 million, which includes $20 million of net cash expenditures and $36 million of financed equipment.
ABF Freight reported second quarter revenue for $487 million, a 4% per day decrease compared to last year. As we’ve seen for the last several quarters, the year over year revenue comparison was impacted by lower fuel surcharges.
ABF Freight’s quarterly tonnage per day decreased 4% compared to last year’s second quarter, with monthly year over year tonnage changes that included a 5.3% decrease in April, a decrease of 4.7% in May and a decrease of 2.1% in June. The number of shipments handled during the quarter decreased slightly by 0.4% on a per day basis. Total weight per shipment during the second quarter decreased 3.6%.
ABF Freight’s second quarter total billed revenue per hundredweight was $29.07, essentially flat with that of last year’s second quarter. The year over year comparisons of this yield figure continue to be impacted by lower fuel surcharge revenue versus last year. Excluding fuel surcharge, second quarter billed revenue per hundredweight on ABF Freight’s traditional LTL freight had a percentage increase in the low single digits.
ABF Freight’s second quarter operating ratio was 96.4% compared to 94.4% in the prior year. As we’ve seen in recent quarters, the year over year comparison of ABF Freight’s operating expenses as a percentage of revenues was impacted by the effect of fuel and the reduction in fuel surcharge revenue.
During periods of changing diesel fuel prices, the fuel surcharge and associated direct diesel fuel costs vary by different degrees. While average fuel costs this quarter were lower than the prior year quarter, diesel prices increased throughout the quarter at a more rapid pace than the fuel surcharge rate which impacted operating margins.
ABF Freight’s contractual wage rate increased 2% effective July 1. Also, next week, on August 1, ABF Freight’s average health, welfare and pension benefits rate will increase by approximately 3%. The increase in the combined union wage and fringe rate is approximately 2.4%, which is generally a more manageable increased rate in the industry particularly when considering healthcare cost.
In total, our asset-light logistics businesses had revenue of $205 million, flat compared to last year’s second quarter, with higher logistics revenue offset by reductions in the other businesses as Judy mentioned. Second quarter combined EBITDA for these businesses equaled $6.8 million compared to $13.5 million in last year’s second quarter.
ABF Logistics experienced revenue growth during the quarter primarily related to the December 15 acquisition of Bear. The legacy portion of ABF Logistics experienced a 19% increase in loads which requires resources to manage. But as Judy described earlier, these incremental loads only added revenue growth of 1% due to reduced revenue per load.
The Bear locations contributed approximately $19 million to ABF Logistics’ second quarter revenue totals. Judy previously provided details on the operational factors resulting from adding the Bear business. The integration of the Bear locations negatively impacted ABF Logistics’ second quarter operating profit by as much as $800,000, but the integration efforts also disrupted productivity in the legacy operations.
Due to corrective actions taken earlier this month that Judy referenced, we should see continued improvements throughout the remainder of the third quarter. So depending on business levels, we expect the Bear business to likely contribute unfavorably to operating results in the third quarter, but be positioned to contribute positively to earnings by the end of the year.
Preliminary ABF Freight results for the month of July 2016 through Wednesday this week versus the same period in July of 2015 were as follows. Preliminary daily billed revenues decreased approximately 2%; preliminary total tonnage per day decreased approximately 4% with LTL tonnage down in the low single digits. July tonnage trends are being affected by significant reductions in our full-load spot business.
Relative to historical trends, July preliminary total tonnage is running below average; July preliminary LTL tonnage is in line with historical trends. Shipment counts increased approximately 1% with last July, while tonnage has declined resulting in a lower weight per shipment.
Preliminary July 2016 total revenue per hundredweight is higher by approximately 2% versus July 2015, despite lower fuel surcharges. Both year over year and sequential comparisons are being positively impacted by the reductions in full-load spot business and by changes in freight profile, including the lower weight per shipment.
Since the implementation of the current labor contract which provides for the union employees wage rates to increase from July 1 and health, welfare and pension on August 1, our sequential change in ABF Freight’s operating ratio in the third quarter versus the second quarter has been roughly flat, ranging from a 10 basis point decrease in 2014 to the increase of 40 basis points in 2015.
Now regarding our asset-light segments, on a combined preliminary basis, so far in July 2016, revenue from our asset-light logistics businesses is running below last year by approximately 5% to 10%. Panther’s preliminary July 2016 revenue versus last year is trending down in the high single digit range; July 2016 for revenue for ABF Logistics is trending up by approximately 30% driven by the Bear acquisition.
FleetNet’s revenue was tracking approximately 15% lower compared to July 2015; ABF Moving’s preliminary July 2016 revenue is below last year by approximately 30%. This is related to reduction in government shipments and associated revenue and will likely continue through the remainder of the year.
As we’ve discussed in the past, our enterprise solutions group works toward combining services offerings across ArcBest in a way that simplifies the experience for our customers. We continue to invest in providing an improved platform for future revenue growth. And as a result, along with other personnel and technology investments associated with improving the ArcBest customer experience, the loss reported in the other and eliminations line is expected to be approximately $4 million per quarter for the remainder of 2016.
Now I’ll turn it over to Judy for some additional comments.
Thank you, David. I wanted to highlight some honors and recognitions we received during the second quarter. Last month, ABF was recognized for the seventh consecutive year for its excellence in supply chain sustainability. Inbound Logistics Magazine cited ABF as one of its Green 75 Supply Chain Partners in honor of our long tradition of promoting environmental stewardship.
A few of ABF’s best practices that make a positive contribution to our environment include a strictly followed equipment preventative maintenance program, limiting the maximum speed of ABF’s road tractors to 63 miles an hour, engine idle shutdown on unintended equipment and extensive use of retreaded tires to reduce the number of tire casings entering landfills.
In May, ArcBest was named to the Forbes list of America’s Best Large Employers for 2016. At the time this award was announced, I said that our employees make us who we are and that their dedication is why customers rely on us for their logistic solutions.
One of those dedicated employees is ABF road driver, Dave Boyer, who was honored last month with the 2016 Governor’s Transportation Safety Award for his lifetime commitment to improving safety on our nation’s highways. Dave has been a professional truck driver for more than 39 years and has 1.9 million accident-free driving miles. He serves as America’s road team captain for ATA. I am so proud to have Dave represent ABF Freight around the country as a leader in transportation safety and as a shining example of the many wonderful people who work for us.
During our Investor Day at the end of last year, you’ve heard from our leaders about the various initiatives we have underway at each of the ArcBest companies. As a bit of an update, we are making progress on our cross-selling goals. During the last 12-month period, we saw nearly 24% of our ABF Freight customer base also using either ABF Logistics or Panther non-LTL services and that is up from 6% in 2011. This growth reflects all the expanded services that we provide our customers and our customers appreciate because they have asked us to give them greater options based on our long history with them.
In addition, we are capturing new business that previously would not have come to us as a direct result of the fuller solutions we now have available. As we work toward a goal of deriving 50% of our revenue from our asset-light logistics services, I am encouraged by the results we’ve seen so far in this area.
And David now I think we’re ready to take some questions.
Okay. Tina, I think we’re ready for some questions.
[Operator Instructions] Our first question comes from Jason Seidl of Cowen.
Just wanted to focus on pricing a little bit because it sounds like and I know everyone’s network is all different, it sounds like you guys are running a little bit below some of the other people that have reported thus far. Judy, could you talk a little bit about going forward in your ability to price above that sort of cost inflation that you’re seeing which I think is at least in your wave size around 2%, it sounds like things are getting better on the expedited side. Do you foresee, if transport starts tightening up a bit, ABF having the ability to price above your current levels?
Certainly, if things tighten up a little bit that would be – that’s something that typically follows. And one of the things that I think we’ve been experiencing and we talked about it in our opening comments is just the level of bid activity that has increased and our participation in that is there, certainly competitive when that happens, but we have been pleased with the outcomes where we’ve retained accounts or are been able to have opportunities for new accounts. And so all of that certainly would reduce in a tightening market, I think, and we would have a better opportunity.
Also some of the greater value options that we have in our businesses with expedited offerings both working within the network and then with exclusive use vehicles that Panther has, those are typically good margin transactions or moves and so that helps you along the way too. But I think we’re doing fine. I mean, July is consistent with where we were in June. We did comment that it’s a little bit weaker. I think that’s been noted, but we’re not seeing anything of great concern, just a little bit of a weakening from what we were experiencing perhaps in the past several quarters.
Judy, you brought up Panther a little bit, has Panther started their discussions for sort of peak season capacity in the expedited side yet? We heard from one of the other peak season providers yesterday in the expedited side that they’re already in negotiations for capacity for peak season with a lot of their customers. I just wondered what Panther is hearing from their customers.
Well, I don’t know that I would note anything unusual. I think they are in the typical conversations, but they – in the month of July, we’re seeing some upticks in activity, a little bit better gross margin and that’s an encouraging sign. We like to have experienced that for more weeks to be able to say that there’s something definitely happening there, but we have been through one of the longest kind of low periods or low periods for that business that really the management team at Panther can remember. And so it would be very encouraging if that would continue and I think it would speak to the broader market opportunities for all of our service lines.
Our next question comes from Brad Delco of Stephens.
Judy or David, in the comment about sort of the normal sequential operating ratio, it seems like there are some puts and takes that are unique to second quarter. One being Good Friday was in first quarter, so that should help second quarter maybe a little bit and then I think kind of like fuel hurt you a little bit. Is there anything else we need to think about when thinking about that relationship between third and second quarter?
Well, I would just point out we did have some unfavorable third-party casualty activity in this second quarter and last year just looking back we were probably below the 10-year historical average somewhat. So depending on how our current trends are, those are sort of activity-driven and they were improving in those areas. It could be higher than last year’s third quarter, so that might impact that sequential move as well.
Brad, I wouldn’t – when you look back at the impact that Good Friday has over a quarter, i.e., it’s really not that impactful. So I think what David said about the normal relationship that we have third to second. Now that we have our contract wage increases, wage increases July 1 and then the health, welfare and pension increases August 1, that’s kind of flattened out what used to be a different relationship whenever you looked at third back to second. But that’s just – we’ve got a couple of years history on that, not a long history. So you have to take that for what it’s worth to.
And that will obviously depend on the environment, the business environment we’re in.
And then real quick, David Cobb, it sounded like David Humphrey had you on the clock when you were going through your asset-light revenue. Can you just repeat what overall asset-light was in real quickly through each of the segments because I couldn’t write those down fast enough?
You’re referring to the July update, is that right?
What I mentioned was that overall running below last year by approximately 5% to 10%. Do you want more?
Yes. Logistics was up 30%, fleet was down 15%, I couldn’t get all of them.
Okay. And Panther, we mentioned running down in the high single digit range and then Moving impacted by lower government shipments which we’ve seen throughout the year down approximately 30%. 2015 for Moving was – that was a record year for them and so...
And this year has been probably perhaps weaker than normal. So we’ve got kind of a difficult comparison there.
And then FleetNet was down 15% and Logistics was up 30%?
You got those right.
I just wanted to make sure I had them.
Our next question comes from Christian Wetherbee of Citigroup.
I wanted to touch a little bit on asset-light profitability and I know you mentioned Bear, an improvement there coming I think in a few quarters, but when you take a step back and think about the opportunities, Judy, I know 30% of revenue you talk about maybe going to 50%, what kind of profitability contribution can you get? We’ve been – the norm maybe a little bit lower the last couple of quarters, just want to get a sense of maybe how you think about it relative to the Freight contribution maybe once you get better penetration numbers?
I think we are behind what our targets would be there by quite a bit because of the integration impact that we had in the quarter and also some of the – and a little bit unfavorable market conditions that we referenced, I think you probably heard those mentioned by others that are in this business. We had an uptick in purchase transportation costs and the rates that customers were paying hadn’t adjusted as much yet. And so that was a challenge for us.
But when you step back and you look at this base of revenue that we will have that is growing and will hopefully have even larger, our idea would be that it would be at least a 5% margin and perhaps opportunities for even something better depending on technology and how it performs for us and some of the things that we’re doing. And what our gap is the things I mentioned for this quarter, but over – if you take a little bit longer term perspective, you’re also seeing an impact of some of our newer employees. We still have a high percentage of those in the business because of the growth of the business and we see a great uptick in their productivity after they’ve been with us particularly two years time.
And so what’s great about this business for us is we have a real clear line of sight on how to address that gap in profitability that we’re seeing and some of it is because of growth, some of it is because of this integration. But at the end of it all, we feel like that we’re going to have a platform with these locations that we have in Fort Smith, Oklahoma City, Plano and Fayetteville now, we’re going to have a platform that really is scalable that works for us and that involves both transactional business and more relationship oriented business. And that’s a very encouraging thing.
We had some difficulty perhaps more than we would have expected in the second quarter, but we were changing a lot of things for the workforce, particularly in Plano and Fayetteville. But we can see some good things happening in July and we’ve got really the ability to see that on a daily basis how it’s moving and improving. And so that’s all encouraging to us.
And then just one quick follow up, when you’re thinking about the July update on the freight side, is it right that weight per shipment maybe is sort of outperforming the tonnage side, so I want to get a sense maybe your dock productivity in July and third quarter if we can see some improvement [indiscernible] these headwinds persisting?
We still have the weight per shipment issue that’s impacting us even in July. David Humphrey and I we’re looking at that just this morning and it’s still there and it’s a difficult one to deal with because your activities are more shipment-oriented and for us, I mean, I guess it’s encouraging that the shipment levels are not down like the tonnage is.
But at the same time, the cost dock, street and even linehaul costs that are associated with handling those shipments, you’re not getting paid as well for them on the top line and so it impacts your margins. That’s still happening, but I’d tell you we’re not defeated by that thought because we’re working in a number of other areas to try to gain productivity either through the use of technology or greater visibility and really just going at this with the expectation that we are going to improve despite this operating condition that we’ve been experiencing.
Our next question comes from Ken Hoexter of Bank of America Merrill Lynch.
Judy, I just have a more maybe general question which is when you think about e-commerce, I just want to understand how is that impacting your core LTL business. Are you seeing increased demand for faster freight and does that mean [a bleeds off] of the network and that’s why you’re accelerating Panther and other stuff? I just want to understand what it means for your core infrastructure?
I think that the LTL network and some of the options that we have actually can serve that business very well. And so we’ve definitely seen an increase in our e-commerce business. Some of this is driven by the recent shift from warehouse fulfillment to drop shipping or vendor fulfillment. In other words, direct to consumer business.
And the second is really an increase in consumers’ interest in this heavy bulky space, getting comfortable with ordering those kinds of items online. And we’ve worked to really expand our delivery options for our retail customers either by using the asset LTL network for linehaul movement so that we can position those shipments at the appropriate final mile distribution point that provides kind of a full spectrum of delivery options and experiences based on typically it’s a retailer’s choice.
So you could see that final mile experience being two uniformed drivers, providing a customized delivery and installing the product on one hand and on the other hand you could see a consumer picking up the product at a local dock. And between these, we have a variety of options for our customers and for the consumers and some of those are involving threshold deliveries and that sort of thing.
So what’s interesting for us is we’re comfortable because of our Moving business and going into residential neighborhoods and dealing with a consumer as a customer. So we know where we can succeed at that and we know where maybe the cost or the price point doesn’t that particularly match up with the expectation of the retailer or the consumer. But we do see that growing and we’ve served that business, I think, well where I guess the expectations of the retailer or the consumer match up with something that we feel like we can do well. But we know what that is very clearly because of our residential experience.
Just a quick one for David, just appreciate that, but you cut your CapEx, any thoughts on what you’re doing with the cash there?
It’s just wanted to give an update of where we were to date on that and we continue to plan to complete our revenue equipment purchases that I outlined. We’re seeing great benefits there, so that will continue.
Ken, we have healthy dividend; we’ve got our share repurchase program that’s been announced and out there; and we continue to look at acquisition targets that can really help us with scale in our businesses. So those are all the different plans I think for any excess cash resource that we might have.
Our next question comes from Todd Fowler of KeyBanc Capital Markets.
Going back a couple of years ago, I think in 2014 when you were growing tonnage, some of the issues was around the employee tenure on the productivity side. Have you caught up on the tenure and is now more of the productivity related to the shipment size or are you still behind the curve a little bit with the tenure of the employees that you have handling the freight?
We’re still a little bit behind, but it’s less of an issue. I think at the end of June that might be 14% and of our dock employees that have less than a year of service. So by comparison, what I have here it goes back to March of 2015 and that was about 23%. So we are making progress there. As we talked about though this weight per shipment continues to provide a challenge really to all of our employees in these different areas.
And so it’s always true in this business that when you get one thing kind of set and moving in the right direction, something else changes on you and that’s just the nature of the business and why we have to have great people. But we are seeing some productivity improvement on the dock. We’re challenged by street productivity still and some of that is this weight per shipment issue and just really just needing a better macroeconomic environment to add more density to our trailers.
I would just add that we’re seriously focused in this area, looking at new technologies. I think we’ve talked about that before that we will enhance this and always looking at the network.
Our visibility on those activities is increasing which helps us with managing on a detailed level.
And then just for a quick follow up, Judy, I know that you’re always in conversations with the unions, can you just help us think about the timing of the contract negotiation as we move into 2017 and maybe how we think about some of that communication externally and what we should be thinking about over the next several quarters along that line?
Well, you’re right to anticipate that. I mean, there is a planning process that goes along with that that it’s something that comes up every five years. We have a team that’s very experienced in that area. Typically, what you would see is those activities ramping up some time in the late fall or late in the year of 2017, but we’re really not speaking to something being scheduled because nothing is at this point. But that’s kind of the norm there.
And I don’t know if you remember this, but in the last contract, we went through that process very smoothly without really any kind of disruption in our operation or anything that was troubling or concerning. And so that’s certainly what we would expect to see this next go around.
I was just looking for that, so a year from now really is when we should start maybe thinking about some of the communication, nothing significant anytime sooner.
Our next question comes from Matt Brooklier of Longbow Research.
I wanted go back to Panther, you gave us an update, you talked to directional improvement that you’re seeing in the business. Trying to get a sense for how much of the improvement is related to, I guess, increased demand, the volume component of it and how much of it is related to improved price, so it could be a little bit of both, but I’m just trying to get a sense of its weighted more towards one or the other?
Well, that’s hard to say with this short little timeframe that we have that we’re looking at in July, but we have seen – our comments I think are related to not as much an uptick in the business activity or the volume activity as it is the pricing side or the margin side. But really in this business one drives the other and so – but it is sometimes in certain sectors or industries that Panther serves. But it is a definite visible uptick that we’re seeing in the first few weeks of July. And again, I mentioned earlier, we would like to have seen that longer before we call that a changing trend, but that’s the observation that we have so far.
So it sounds like things are happening, we just don’t know if they’re going to continue moving forward. And then I guess what are the implications if your expedited business is improving? How much of a potential weight is it with respect to freight, have you gone back historically and looked at Panther volume versus your freight volume?
We haven’t done that, but there is a reason for that. David Humphrey and I were also looking at that over the last couple of days. There’s not a real consistent pattern that we’ve experienced with Panther itself. And so 2014 obviously was a great year. 2015 kind of fell off in the middle of the year and then so far in 2016, we’ve had weakness until just recently.
So even that being something that would predict Panther’s business as you go forward is difficult. So I doubt we would find something there that would be really useful to us on the ABF Freight side, although we do have an expedited product that runs in the LTL network and we’re seeing some better things there, I think, in the month of July relative to what we’ve seen before. So there is something there to note.
Our next question comes from John Barnes, RBC Capital Markets.
So two things: one, I wanted to follow up on the teamster contract negotiations and I know it’s a ways off, but given that both you and YRC kind of went your separate ways in terms of how you negotiated additional agreements with the teamsters outside of the National Master Freight Agreement, is this a scenario where maybe you finally go your own way in terms of just negotiating separately with the teamsters or do you think this will be done on a joint basis industry-wide again because it seems to me like there is just different needs for both of you, right.
I agree. I mean, I think that’s true, but also there’s something maybe more fundamental in that we have our own agreement and our agreement runs through the end of March of 2018. I believe there’s after-hours and so it is a separate process for us.
So you’re not talking about a National Master Freight Agreement any longer? This will be a separate, so you’ll be negotiating with them directly.
I want to be sure that we say this right, but it is called the National Master Freight Agreement, but there is a separate agreement for ABF and a separate agreement that YRC operates under. And there may be agreements, I’m not clear on that, but we’re definitely separate from them in the way that the process works and the negotiations would work.
And occasionally you’ve kind of gotten behind UPS and that’s always kind of maybe [drugged out] the process of finally getting around to LTL, any concern on that?
None that would have revealed itself at this point.
And then one question on Panther; I am encouraged to hear that you’re starting to see some improvement there, some improving trends. I guess when I go back and look at where Panther was when you bought it in 2012, I think in 2011, they were somewhere in that $24 million, $23 million of EBITDA. If I look at the numbers this year, obviously even with the improvement, they’re going to be somewhere significantly less than that. So I guess I’m just asking the question, is there anything about their business today that preclude you from getting it back to where it was when you bought it or is this just a matter of expedited shipping is just not as robust in the current kind of environment and that model is just going to be dependent on whenever the volumes recover?
There is nothing. I mean, in fact I think their potential is greater than it was when we bought it. Some of that is just a connection to the other service offerings that we have, but it’s also the team there has done a good job of expanding the customer opportunities and relationships since we bought the company. And then although it’s in its infancy stage, Mexico for them is an evolving – it’s a market that has similar needs that’s served by the expedited product well and they’ve had quite a bit of focus on that and really established the way that business will be done and so it really is just a growth story on the top line side now for them there.
So I mean what we’re seeing is clearly environment-related and like I mentioned earlier it is this weak or low environment has gone on longer than the Panther management team can remember experiencing. So it is something unusual and hopefully that we’re seeing the end of that and signs of better things to come.
Our next question comes from Bob Solomon of Deutsche Bank.
Earlier in the call, you talked a bit about kind of the performance on the street as well as the dock with regard to productivity. Could you give us some color on the linehaul side? How much third-party capacity at ABF is currently using and opportunities that you see in the second half of the year either to do more internal linehaul or more external linehaul that can potentially help out that side – on the cost side?
Well, I think in the linehaul area in general we’ve seen some slightly better things. I mean, I think we’ve seen some improvement there and we’re encouraged by that. To answer your question on the purchase transportation, in the second quarter the use of that and this does not include rail is nearly 3%. So pretty much in line on average with 2015 and 2014 usage, I’d say, there and that’s actually a really good thing because it helps with balance.
And on the rail side, it looks like the percentage is 12.7% in the second quarter, which is actually low for the second quarter. I think in 2014 it was about 14%; 2015 it was about 14%, if you round the figure; and then 2016 is somewhat lower than that. But again, there’s a reason for that; part of that is just the business levels that we’re dealing with, rail works really well for us as a relief valve for peak season and whenever your business volumes are off a little bit you’re going to use that a little bit less. But all good options, working well and we’re pleased to have those options as a part of the total picture.
I’d just add that our linehaul [over the last year] is really good too and so seeing some of the best metrics there in a while.
That’s interesting, because if I’m looking at the salary, wages and benefits line, the sequential growth was less than the growth in tonnage or shipment count sequentially. Was there anything else that was going on in that line? Based on those numbers, I would have actually expected you guys to have been using more third-party linehaul?
No, there’s not. I mean there’s not anything going on there that’s unusual.
We’re just trying to manage those costs as best we can.
No, it’s showing up. And then I guess my second question is along the lines of Panther. If we do get demand improvement, how should I think about the outlook for Panther? Would this just be an acceleration of load growth or upgraded business mix and load growth really doesn’t move that much, but I see a huge tailwind to top line because you’re getting a higher revenue per shipment.
I would think that if it really improves you’re going to get both, but the differentiator there, you’ve nailed, is the margin improvement. That’s really what will help. But the capacity sources, I think I mentioned in my comments at the beginning that they have done a really good job of expanding the owner operator numbers and continuing to build really good relationships with agents which both are needed. And so their ability to serve business that comes their way is very healthy right now and I think they’ve done a good job of making sure of that.
[Operator Instructions] Our next question comes from Bruce Chan of Stifel.
So if I remember correctly we talked in last quarter’s call about some elevated BIPD and workers’ comp claims and David I think you mentioned that we’re still running a little high on both the number and size of those claims. Can you talk a little bit about what’s going on there? Are those just adverse developments from some of the new folks hired back in 2014 and early 2015 or is there something else at work?
Well, as you pointed out, we were a little higher than our historical average on that in terms of as a percent of revenue and it does relate to some development that we’ve seen in historical years. And so I think we do a good job now of watching this; this is a focus area and so we think we will – we’ve had a reduction recently in terms of accidents per city mile for instance, but it’s an issue that just development of previous years is really what we are experiencing now.
And then just a quick follow up on Ken’s question earlier about the residential deliveries. I know that you’re trimming back a little bit on CapEx, but I’m wondering if you are or if you have been increasing your percentage on liftgate equipment? I know it’s not always easy to drop off a washer and dryer without a liftgate.
That’s a good observation and I think you’re right.
You do need that.
We need a little help with some of that and so we have invested there and that’s right. And this one, we’re really pretty good at the residential delivery as is we’ve done with the household goods over the years.
Also because of doing them, the Moving business, the U-Pack business, I mean we have the ramps and other things that help us with that and we’ve been in that business since 1997.
So you’re right, we’ve invested in some liftgate equipment trailers. We’ve invested in those over the many years and spread them out throughout our company and then we’re adding some this year as well.
So just for my own edification, is that the situation where if you get a residential delivery, you’ll route that specifically to a liftgate truck or swap a liftgate vehicle in for that delivery or how does that usually work?
They do that in their planning, in their city planning, obviously when they realize they need to do that they try to steer that to a piece of equipment and put two or three of those on there at one time. So you’ve got that liftgate for two or three deliveries without having to come back to that facility.
Our next question comes from Ravi Shanker of Morgan Stanley.
A broad question on M&A, obviously things are pretty difficult out there and there isn’t much visibility on macro, I mean does this environment make you want to accelerate or slow down the transformation to getting to 50/50 asset-heavy asset/light business over time?
I think we want to accelerate that because it’s responsive to our customers, so that’s what drives our decision-making there. But we can do that in a variety of ways. I mean, we’re not going to push to make an acquisition just to make the acquisition. We’re very careful and methodical about going through any target and looking to see what it in fact does for our business.
And the cultural match means something to us and sometimes if that means a lot to you, it takes a little bit longer to get these things done. But if we could execute on a plan to get to that 50% with our asset-light businesses as a percentage of the whole revenue, we would do that. But right now, we’re working through our acquisition target list and we also have a number of organic options and approaches that we’re using to ensure that we’re taking advantage of the customers that we already know and that we know have these needs.
And one follow-up on the e-commerce question that was asked earlier, can you remind me what percentage of your revenues comes from e-commerce today?
Well, we don’t disclose that, Ravi. We don’t give insight into some of the sectors of business within ABF Freight really for competitive reasons. And so we’re not being coy about that, we just feel that’s something that we need to protect. But we do a healthy amount of business in this area. We’re very active in it. And again it relates in some ways very closely to the consumer business we do in the Moving business on the residential side.
So let’s speak in relative terms then, so if it’s X percent of revenues today, where does that go in three years? I’m just trying to get an order of magnitude in terms of how big this is going to be an opportunity for you guys.
I mean, I don’t know that we can really fully answer that because again our approach is to be responsive to our customers. But in indication of the direction of this is the number of customer conversations we’re having about it, it’s a lot, we hear about there’s a lot from our customers. And that’s a good thing, but there is this disconnect though. I think you probably hear about it on the price point.
I mean there’s a number of retailers in particular that have talked to me about wanting more of our services in this area, but yet when you get to the point of talking about the details of the pricing, there’s still a disconnect and their focus on what the consumer will pay them, which in many cases you know starts out a conversation about something free. And when we’re involved, it usually is a more complicated thing and it’s definitely not free. But we embrace it and we have some credibility in this area and we’re encouraged by the opportunity and we think that it will only grow.
Yeah, I think this is a real challenge facing the retailers and not so much you guys, but interesting times.
Well, I don’t think we have anybody else in queue and so I think we will conclude the call. We thank you very much for joining us this morning and we appreciate your interest in ArcBest Corporation. We’ll see you next quarter. Thanks a lot.
Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect all lines. Thank you and have a good day.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!