ArcBest Corporation (ARCB) Q3 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the ArcBest Corporation Third Quarter ‘16 Earnings Call. [Operator Instructions] As a reminder, the conference is being recorded Thursday, November 3, 2016. I would now like to turn the call over to David Humphrey, Vice President of Investor Relations. Please proceed.

Welcome to the ArcBest Corporation third quarter 2016 earnings conference call. We will have a short discussion of the third quarter results and then we will 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 risks. 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. Today, we are going to change things up a bit from our normal routine. I am going to lead off our call with a discussion about our new corporate structure which we released about an hour ago. And after that, David Cobb will follow up with details about our third quarter earnings and then we will take questions on both topics. Earlier today, I communicated to our 13,000 employees the exciting news that we are unifying our company and presenting ourselves as one logistics enterprise with creative problem solvers who deliver integrated logistic solutions. We will be restructuring the company to offer most logistics services under the ArcBest brand starting next year, while continuing to recognize the value in the ABF Freight, Panther and U-Pack brands. This realignment includes a unified sales structure under ArcBest, a combination of ABF Logistics, ABF Moving and Panther into a new asset-light logistics operation, a unified approach to pricing customer service, marketing and capacity sourcing and consolidation of training and quality awareness under ArcBest Human Resources. As we have said in this morning’s announcement, the reason we are doing this is to provide the best customer experience possible. Quite simply, our customers are asking for integrated solutions from us and easier access to them. Based on that feedback and our own market research, we feel confident that this is a significant step toward delivering best-in-class customer experience and greater shareholder value. Last year, at our Investor Day, we shared some findings of that research underlying our strategic direction. You will recall at that time we identified a $266 billion market opportunity for all of the supply chain and other services the ArcBest enterprise offers. Our opportunity includes and is well beyond the $37 billion market for LTL alone. Another $60 billion represents solutions we offer that are outside of the traditional supply chain in moving and vehicle maintenance and repair and the remainder about $170 billion is in the areas of truckload brokerage, warehousing, premium logistics and that includes ground expedite, ocean and air-forwarding and final mile. These are all areas of expansion for our company over the last several years through organic growth and acquisitions. We are fortunate to have many solid relationships built over years through our excellent LTL services at ABF Freight. We have added to those through the acquisitions of Panther, Smart Lines, Bear Transportation and most recently Logistics & Distribution Services, all in the asset-light category. With this new structure, we are now taking those relationships and best-in-class operating principles and tying them together in practical ways. Ways that will help us synchronize our market approach and grow our company. We have seen many customer success stories over the last few years that show us help providing more services across the supply chain, help to grow ABF Freight in the entire company. I shared some of those at our Investor Day and since then we have many more. The details about the senior leadership changes we are making are included in the press release. And I am happy to answer any questions about those later in the call. But in general what is happening is where we previously had a different approach in which the important functions of sales, marketing, yield management, customer service and capacity sourcing were all doing a great job at their own individual operating companies with their own individual leaders, we are now brining these together under our best leaders reporting directly to me. This matters because we will now make even more progress in our mission to provide the best possible customer experience with a more unified view of the customer. This structure will enable us to better serve customers, grow revenue and eliminate duplicative costs and inefficiencies in order to improve margins and overall profitability. Our excellent sales organization is evolving to one team under a leader who has a great deal of experience in cross-selling our logistic services. Account development is further enabled by this type of approach, which includes unified yield management as our people are incentivized and given all the tools to make sure our customers have the full supply chain solutions they require due to the optimal contact in our organization. By marketing most of these services as our best, we will make it easier for our customers to connect the dots about the full breadth and scope of the logistics solutions we offer including LTL represented by the ABF brand and ground expedite by the Panther brand. I think you all realized that our excellent customer service is well known in the industry and appreciated by our customers. By combining the previously separate groups into one unified customer solutions organization, we will seamlessly provide an excellent customer experience. I also want to spend just a minute talking about capacity sourcing, because we feel this new structure will result in powerful changes for us in this important capability. By creating a more unified approach to interactions with the many different third-party carriers we use there are a lot of scale advantages that we have identified. This sourcing expertise especially when combined with the high quality service offered through our outstanding ABF Freight network becomes a differentiator for our customers when they seek reliable partners to deliver their important goods. We believe the combination of our asset base network with our expanding asset wide relationships is the right model for our customers especially as capacity constraints become more evident. To wrap up this part of the discussion, you have seen in the release that we are eliminating approximately 130 employees at the company and subsidiaries. As I told, our employees, I have recognized that is difficult, but necessary for us to take our organization to an enhanced level of customer experience. This improved organizational structure, consolidation of certain systems and facilities and other cost savings actions produce an estimated annualized operating expense savings of $15 million generally split evenly between our asset base and asset live operations. We also expect to report a reorganization charge, the majority of which is non-cash for contract and lease terminations, severance and adjustments of intangible assets primarily software totaling approximately $9 million or $0.22 per diluted share after tax and that will be recorded in the fourth quarter of 2016 and an estimated $1 million or $0.03 per diluted share after tax in the first quarter of 2017. In addition to the new corporate structure news I just shared with you, we have a number of initiatives going on at ABF Freight in an effort to restore historic operating margins to that company. These initiatives are in addition to our disciplined approach to pricing and the ongoing training our people receive to improve growth and operate productively. Many of these revolve around technology. For example, we have several planned system upgrades that are underway to help with workload visibility and decision making as well as line haul and street optimization tools and new equipment on the docks like handheld devices, tablets and scanners that replace our older equipment. There is a great data analytics opportunity through the implementation of ELDs on all road and city equipment as well. We also have continued safety and fuel savings benefits of equipment upgrades and practices. Those include things like improved engine design, automated manual transmissions, trailer skirts, tractor road speed governed at 63 miles per hour and review of a potential collision mitigation and lane departure systems. And now, I will turn it over to David Cobb for a brief discussion of the earnings results.

Thank you, Judy and good morning everyone. Let me begin with some statistics on ArcBest. Third quarter 2016 revenues were $714 million compared to $709 million in last year’s third quarter, a slight increase. Third quarter 2016 net income was $0.49 per diluted share compared to net income of $0.72 per diluted share last year. As we saw in the second quarter, our reported third quarter results were adversely impacted by increased healthcare cost. Versus the same period in 2015, total corporate healthcare cost increased $3.2 million or approximately $0.08 per share on an after-tax basis. These higher costs were across all of the ArcBest companies with the increase on nonunion employees at ABF Freight representing $1.7 million. This was associated with increases in the number of health claims filed as well as the higher average expense for those claims. As a part of our stock repurchase program in the third quarter, we bought 136,000 shares for a total amount of $2.5 million. We ended the third quarter with unrestricted cash and short-term investments of $190 million. Combined with the available resources under our credit revolver in our receivable securitization agreement and our associated accordion features, our total liquidity equals $416 million. Our total debt of $238 million includes the $70 million balance in our credit revolver, the $35 million borrowed in our AR securitization and $133 million of notes payable in capital leases, primarily on ABF Freight equipment. The composite interest rate on all of our debt is 2.2%. Full details of our GAAP cash flow were included in our earnings press release. So far this year, our net capital expenditures totaled $100 million which includes $38 million of net cash expenditures and the $62 million of financed equipment. We now expect our total 2016 net capital expenditures to be between $140 million and $150 million. ABF Freight reported third quarter revenue of $509 million, a slight decrease compared to last year. Although ABF Freight continued to gain business from new and existing customers, revenues were negatively impacted by elevated retail customer inventory levels, weakness in industrial production and excess capacity in the truckload industry, which drives truckload carriers to handle more larger-sized LTL shipments. In addition, lower fuel surcharges versus last year were a contributing factor in the quarter. ABF Freight’s quarterly tonnage per day decreased 2.8% compared to last year’s third quarter with monthly year-over-year tonnage changes that included a 3.7% decrease in July, a decrease of 2.1% in August and a decrease of 2.5% in September. Daily shipments increased by 1.6% in the third quarter as ABF Freight continued to experience a reduction in total wafer shipment, which declined 4.4% during the quarter. ABF Freight’s third quarter operating ratio was 96.5% compared to 94.8% in the prior year. This increase was related to the labor and cartage cost required to handle additional shipments during a period of lower tonnage levels. The higher healthcare cost I mentioned earlier was also a factor contributing to the rise in our operating ratios. And finally, weaker pricing yields on spot truckload business adversely impacted our operating results versus last year. As seen throughout 2016, the benefits of ABF Freight’s equipment replacement program are contributing positively to improve fleet dependability needed to effectively serve customers and in significant reductions in maintenance and repair cost. ABF Freight’s third quarter total billed revenue per hundredweight was $30.52, an increase of 2.8% compared to last year’s third quarter. Year-over-year comparisons of this yield figure were positively impacted by changes in shipment profile, but negatively impacted by lower fuel surcharge revenue. Excluding fuel surcharge, third quarter billed revenue per hundredweight on ABF Freight’s traditional LTL freight had a percentage increase in the mid single-digits. Despite an inconsistent freight demand environment, ABF Freight secured an average 2.8% increase on customer contract renewals during the quarter. In addition, effective in late August, ABF Freight enacted an average 5.25% general rate increase that positively impacts approximately one-third of its business. In total, our asset-light logistics businesses had revenue of $218 million, an increase of 3.2% compared to last year’s third quarter. Revenue growth in ArcBest and asset-light logistics businesses was a result of increased shipper demand at Panther and the result of acquisitions we have made since third quarter last year. For the month of September following the LDS purchase, asset-light revenue represented 31% of total consolidated revenue and we expect that percentage to grow as we further develop these businesses. Third quarter combined EBITDA for these businesses equaled $10.5 million compared to $12.1 million in last year’s third quarter. Customers desire for Panther’s expedited services and the timely transport and superior cargo carrier provides – resulted in an increase in total loads handled. Higher gross margins and disciplined cost controls contributed the Panther’s improved operating results compared to both the same period last year and the previous quarter. Current market conditions and the revenue effects of lower fuel prices contributed to reductions in both revenue per shipment and operating profit at ABF Logistics. Though improved from the previous quarter due to better gross margins, the integration of a former Bear location continued to impact third quarter results as we discussed last quarter. In addition, margins on ocean shipments were adversely affected by carrier rate changes resulting from the Hanjin bankruptcy. Changes in customer mix diminished demand for its services from transportation related customers in both emergency road side and fleet maintenance were the primary factors contributing to FleetNet’s lower third quarter revenue and reduced profit margins. A decline in government shipments continued to be the primary reason for ABF Moving’s results being below last year. Under the new corporate structure that we announced this morning, we expect to report our fourth quarter and full year 2016 financial results as follows. Our asset based operations which consist of ABF Freight and then our asset-light operations made up by two segments ArcBest which consist of the current Panther, ABF Logistics and ABF Moving services and then FleetNet. And finally other and eliminations, preliminary results for the month of October 2016 versus October 2015 were as follows. Daily billed revenues increased between 2% and 3%. The impact of Hurricane Matthew on October revenue was minimal. Total tonnage per day was flat compared to last year with LTL tonnage up in the low single-digits compared to easier comps from last October. October tonnage trends are being affected by reductions in our full load spot business. On a sequential basis versus September, October tonnage trends are about average with history which is an improvement versus what we saw in the third quarter which are some of the weakest in the last several years. Shipment counts increased between 3% and 4% above last October combined with slight tonnage we are continuing to see a lower average weight per shipment on a year-over-year basis. On a sequential basis in October, there are signs of stabilization we are seeing in our LTL weight per shipment. Total revenue per hundredweight increased between 2% and 3% which includes slightly lower fuel surcharges compared to October of last year. On a combined preliminary basis, October 2016 revenue from our asset-light logistics businesses increased between 10% and 15%. This was impacted by acquisitions made since last year and reflects continued strength in our ground expedite Panther services. Fourth quarter profitability in these businesses will likely be impacted by continuing margin pressure in the ocean shipping market related to the Hanjin bankruptcy. I will now turn it over to Judy for some closing comments.

Thanks David. On Monday, we announced the retirement of a long time Board Member, John Morris. John has faithfully served on the ArcBest Board for more than 28 years and he has been a trust advisor and steady force during that time. I thank him for his guidance and counsel over these many years and I wish him well in his retirement. I am pleased to welcome two new Board Members to our Board Michael Hogan and Eduardo Conrado. Mike currently serves as Executive Vice President, Strategic Business and Brand Development for GameStop Corporation. Eduardo is Executive Vice President and Chief Strategy and Innovation Officer of Motorola Solutions Inc. Both Mike and Eduardo add expertise in marketing and brand strategy as important leaders at their technology driven enterprises. Mike’s unique experience leading GameStop’s successful diversification strategy and transformation and Eduardo’s leadership of Motorola’s growth focused customer experience innovations, IT and strategy teams will be valuable to us as we embark on a newly structured path towards customer excellence and efficient delivery of logistics solutions at ArcBest. To conclude our prepared remarks I would like to underscore how pleased I am that our new structure will allow us to differentiate our company from our competitors by combining the skill and the will of our employees with a more consistent customer experience across the board. There is a lot of work ahead, but I know we are more than up to the task and our leaders are really energized about the opportunities before us. I couldn’t be more excited about what’s in store for us as we move forward with a renewed sense of purpose and the right structure to achieve all of our goals. And now, we are ready to take your questions.

James, I think we are ready now.

Thank you. [Operator Instructions] And our first question is from the line of Ravi Shanker. Please proceed.

Thanks. Good morning, everyone. So Judy, Dave, exciting news indeed. Can you just kind of give us a lot of color on the corporate changes here, but just a few more kind of follow-ups here? Why now, what prompted this, how long will it take for the full benefits the $15 million to come through? And does this in anyway represent a pivot in your strategy to kind of focus more on kind of shoring up the business and maybe away from M&A a little bit?

Well, let me answer your last question first. It is exactly on our strategy. It’s a continuation of the strategy that we have been working toward and we are really excited about that. And I think it really in a way doesn’t bear on the decision over M&A other than to say that we are going to continue to be responsive to our customers and you have seen us act on that through acquisitions. You have also seen us act on that through organic actions. And so we will continue down that path of elevating our level of customer experience and our seamless delivery based on what we are hearing from our customers and the actions we feel necessary to accomplish that. But if you think about why now, we just think about the steps that we have been taking really since we bought Panther back in June of 2012, we are just continuing down that path of listening to customers, providing services to them. And as we step back and looked at our delivery of our services to customers, we have realized that we had an opportunity to make that simpler and to unify in some important areas like sales and our customer service areas and then viewing the ArcBest customer on a unified basis as an ArcBest customer rather than in some of the separate silos that we were working from and we believe that, that will help us with achieving excellence again in the delivery of those solutions to our customers. And then…

Got it. In terms of the timing of the benefits, yes?

Yes, the timing of the benefits, what we have done is we have measured that against the trailing 12 months ended September 30. So, as you could see what the kind of the value of those benefits is on that basis, but the actions that we needed to take to have that savings have largely been accomplished or will be by today. And so as we carry forward those actions other than some of the actions that we mentioned that will be out in January largely accomplish the results that we have disclosed here.

So, there is no – it’s not going to take a while for this structure to kind of permeate through the system you just start seeing the benefits pretty much right away?

I think from the cost savings that’s correct. When you think about the systems and the processes, I mean, there is work to be done there to get this fully implemented. And so that will evolve over time, but the actions taken again to get the cost savings are about today.

Yes. Ravi, another just follow-up on that, we actually see that there will be perhaps more opportunity. As we carry forward, we get these areas under a leader and these areas are unified. We think that there is perhaps more opportunity although we don’t know exactly how to measure that and what that will be, but that will occur over time, but those are really beyond the level of the savings that we are disclosing to you today.

Great. If I can just sneak one more in, another good quarter for Panther, can you just elaborate a little bit more on what’s driving the strength there and also was Hanjin a net benefit or a net drag for you in the quarter?

Well, first of all on Panther, what’s driving that, we have talked with the management team there and we have considered what’s happening with customers. And the best answer that I can give you there is their excellence in customer service, their reliability and their visibility and communication on customer shipments is what’s really driving that. So it really is an exciting time for them. We congratulate that team on another good quarter. And it really is pretty fundamental what is happening there and it’s a good thing. Hanjin is a net negative to us for the quarter, because it really did impact the results of ABF Logistics because of the – I guess the spike in prices that occurred on the ocean shipping moves that really couldn’t be passed along effectively to customers if we wanted to be reasonable and retain those relationships. And so – and that continues a little bit into the fourth quarter. But it’s just something that will take some time for those markets to settle down.

Great. Thank you so much.

Thanks Ravi. I appreciate it.

Our next question is from the line of Chris Wetherbee. Please proceed.

Hi, great. Thanks. Good morning guys.

Hi Chris.

Good morning Chris.

So wanted to think about some of the – it sounds like there might be some incremental benefits to this sort of structure that you are putting in place and I think Judy you talked a little bit about sourcing benefits over time, is that incremental for the $15 million and maybe how do you think about that opportunity and sort of the timing of this, just want to get a sense of sort of what else this could kind of open for you in terms of opportunities down the road?

Well, what it – you are speaking specifically about capacity sourcing, I think that’s one area. When we are looking at all of the sources of capacity that we have for the organization and that’s going to be managed out on Medina, a group that has already established excellence in that area. We really feel like that there will be some good relationships that we can look to there to both be reliable for the service that our customers need that will be – we will be able to gain the attention of because we are collecting all of the ways that we spend money with those sources and putting that together and really working with them on that basis. So that’s a good thing. Some of the other areas I think about if you know if you just think through the unified sales force and looking at a customer on a combined basis there is some efficiency that you can gain in that. But you are also communicating so much better with that customer. So what I think it leads to is better set of opportunities from the customer, more holistically viewing their supply chain with them, so that you can learn how best to interact with him. Again, with the services that we have to offer or maybe ones that over time we need to gain. And then on the customer service side, we see a great deal of opportunity because we are going to be able to help ourselves with systems and processes that are more seamless and streamlined. And many of those things will be happening at the early part of next year and beyond.

And as Judy mentioned being – having streamlined processes and systems, we hope to be more efficient in that. So – but some of that’s to be – to come, so.

Okay, just have additional market to go here, that’s helpful. And then just a follow-up here, switching gears to the LTL side just wanted to talk a little bit about the pricing dynamic particularly as we are rolling here through the third quarter and into the fourth quarter it seems like things picked up maybe a bit, obviously we have a GRI coming in. If you could just talk a little bit about the pricing environment how it feels right now relative to sort of what’s going on from a tonnage perspective? That would be helpful. Thank you.

The pricing environment, I would characterize it as fine, okay. When you look at our contract and deferred increase, it was about 2.8%. And that’s on the lower end of what we have seen over the last few years. And so there is a little bit of weakness, but by and large we are seeing most – the competition focused on rates rather than on market share. And I think that speaks well for the months that we have ahead of us. But we do see some competitive nature on some larger deals and bids that sort of thing. There is nothing new about that this quarter versus the past two quarters, but we have continued to see that on kind of those larger bids, but I think we are generally pleased with where things are and that includes what we are seeing so far in October.

Okay, that’s helpful. Thanks for the time. I appreciate it.

Appreciate it.

Our next question is from the line of Scott Group. Please proceed.

Hey, good morning everyone.

Good morning, Scott.

Hi, Scott. Good morning.

So, just one more quick thing on the corporate realignment, beyond the headcount, what’s the next kind of big bucket to get you to this $15 million? And then do you have a sense on how much of the $15 million is going to show up at LTL and then how much at the new asset-light segment?

Well, we really don’t have – we mentioned earlier that we don’t have additional actions that we would have to take beyond today to achieve the $15 million. That will already be in place. And the split of that is about evenly between our asset base, which is ABF Freight and then our asset-light operations.

So, you are saying you get the $15 million just from the headcount.

There are some other things, Scott. And the headcount is the majority of it as we mentioned, but other items like consolidating insurance programs, consolidating facilities and some changes in our software.

Okay, okay. On Panther, do you have October revenue growth number and Judy, I know you kind of talked about hey, this is – Panther is doing well, but it feels like that’s an inflection here. We have had some pretty big drops in revenue and earnings and now pretty nice positive inflection here. So, is this a sign to you that things are picking up, I tend to think of Panther as a leading indicator on what’s going on in freight?

Well, I think probably perhaps more an indication for you on Panther is to look at where we were with load growth in the third quarter was up about 7%. Revenue was not the best indicator because of what we have seen on fuel that affected that top line. We saw some improvement in the margins for Panther. And as you compare the third quarter of ‘16 to the third quarter of ‘15 but those trends are continuing as we move into October. So, we are again very pleased and again we have seen this. This is the second quarter where we are seeing this improvement and we are pleased with it. We think it’s – but again, when we talk to the customers, we are hearing about why, I mean it really is Panther’s performance on service, reliability and visibility for them.

Okay. And if I can just ask one last one, so as we think about third quarter to fourth quarter margin progression for the LTL side, any things to keep in mind relative to normal seasonality operating days, GRI kind of middle of the third quarter, anything that we should be thinking about, Judy?

Well, when you think about what impacted us in the third quarter, we had some elevated healthcare costs. We saw some I think elevated cartage costs and purchase transportation. As we move into fourth quarter, we don’t really know what will happen on the healthcare side. So, that’s going to be a factor potentially and we have a lot of initiatives at the company to try to tackle that to make that better that we believe are working, but those sometimes take some time to work through. And we are seeing some relief on our cartage costs in the fourth quarter or so far in October, but they are still elevated above last year. But other than that, I mean, I think you know kind of the difference, I mean we have put in the general rate increase in the early part of September this year and last year it was in the early part of October. So, those are all considerations.

Thanks, Scott.

Thank you.

Appreciate it.

Our next question is from the line of Matt Brooklier. Please proceed.

Hey, Judy, David. Good morning.

Good morning.

So, I just wanted to clarify one thing, the $15 million of targeted savings that does not include the changes that you are making on the capacity procurement side of things?

No, it does not.

Okay. So that would be incremental, is there any way to think about I guess what those savings could look like or just to provide maybe a little bit more color?

No, I think we need to get – again, lease changes take effect January 1. We need to get that accomplished and then begin to see what we can accomplish there. I mean we already do utilize the benefits of these relationships among our subsidiaries as they stand today. But we just – we really can’t speak to the opportunities that we will have until we get that group together and we start to work with our capacity partners and we see what we can accomplish. But we think its upside that we will have and really the upside is in more than one area. The one that I am most focused on is capacity sources for our customers, because if we are able to accomplish that we are able to grow revenues.

Okay. And then I think your CapEx guidance for the year, that came down a little bit, could – maybe can you provide a little bit more details as to what’s driving that?

Right. Yes, it’s generally a shift of some expenditures into 2017 primarily on some real estate and then some of our technology initiatives are being shifted a little bit in terms of timing.

But our revenue equipment purchases are going to be accomplished in ‘16 – in 2016, so we are not going to be.

Okay.

And those are all replacements anyway.

That’s right. And we have – as we have mentioned we will continue to seeing good results out of that investment, so I think a reduction in miles per gallon, reduced repairs and maintenance and so a benefit there.

And final question, just any thoughts on CapEx for next year?

Not at this point. We will enlighten you I guess in our January call.

Okay. I appreciate it. Thank you.

Thank you.

Our next question is from the line of David Ross. Please proceed.

Yes. Good morning everyone.

Good morning Dave.

Hi, Dave.

Hey. I got a couple of questions on ABF Freight, first Judy, you talked about the elevated cartage costs and PT, what was the reason for that, did you have to use more than normal, did the costs of which you normally use go up?

Well, when you look at for instance the third quarter relative to the second quarter we always have an increase in our utilization of rail and PT. I mean that’s just the seasonality in our business. So, what we did see was an increased use of cartage costs in ABF Freight. One other things that’s difficult about this environment is really manpower planning. If you think about the kind of some of the variability that we have seen in tonnage and shipments and that sort of thing and to some extent we are affected by the days of the weeks that those are occurring. It’s more difficult, I think today or this year than it has been in order to plan that although we have good information, it’s still difficult. And so what tends to happen is you are being conservative, this is a weaker year in terms of the business environment, so you are being conservative. And when you are in certain locations if you see business spike, you got to have a solution because service is what we are trying to deliver to our customers. And so we saw an increased utilization of cartage in that regard, it’s really more about the utilization of it not so much about in excess of kind of rate increase or something there. But we have seen some relief of that in October, but still it’s a little bit elevated from what we saw last October.

And is that because there is not enough because ABF driver is on furlough or equipment available?

It’s really not about furloughs or layoffs or anything like that, it’s more about just having the right number of people on the days where you see those spikes in certain locations. So it’s just a – again it’s just a difficult environment because of the variability some times in the day of the week business levels. And again when you are working from a place where you are being conservative trying to make sure that you don’t have excess cost that’s really what gets you in the position in certain locations sometimes.

And then in talking about the power equipment, I mentioned the savings that you got from bringing on the newer tractors, but it sounded like there were just normal replacements? Is there anything accelerating the replacements to lower the average fleet age given the margin benefits?

Yes. Actually, we have done that in the last two years. And our past history prior to last two years we would have bought about 450, 500 units last 2 years, we bought 600 in each of those years to do exactly what you just said, because we do see the benefits of them and we want to be sure that we are replacing those older units and taking full advantage of that. I think in the third quarter, our miles per gallon were up about 6% or 7% and that’s a little bit higher than on a year-to-date basis. So, we are seeing even more benefit from that and we are also seeing good results on the reductions, particularly on the road equipment for savings. We are still working down the average age of our city fleet. That’s being tackled, but there is still quite a bit more to go there. And so, we are looking forward to our purchases next year really impacting that and so we have got some more to go.

Yes, I appreciate it. Thanks a lot.

Our next question is from the line of Ken Hoexter. Please proceed.

Great. Good morning. And it sounds like an exciting new plan for you, Judy. So, good luck with that.

Okay, thank you, Ken.

On the lease terminations, can you maybe talk a little bit about that or I don’t know if that’s David’s world, but are you combining physical operations, what is getting combined and while you are on that, maybe throw in what business the 130 employees and are they too spread out between freight and non-asset?

Yes. Well, first on the facility, you are right, it’s combining. As we say we are trying to consolidate some of these teams. And so when you do that, you have some opportunity for some location consolidation. And part of that is will be a charge to terminate some of those contracts. So, you are spot on, on that. And then in terms of the other question about the personnel, those are across the various companies as they exist now that’s where the terminations are.

So, again, would that be spread evenly between freight and non-asset if you are telling me that $15 million is spread between the freight and non-asset?

That’s about right.

Okay.

Yes, that’s the larger part of the $15 million, Ken, so…

Yes, I like it. So, you noted a lot of potential as I guess at ABF Freight when you kind of rattled off a bunch of programs you were doing and they are sounding like some capital investments technology and else? Just want to know what – are these new programs anything different than Judy what you talked about at the meeting little while back. Are there – are you launching new programs to accelerate some cost savings here?

Well, we do have some additional things that we are doing. The Street optimization for instance is something that I think probably would add to the list that we talked about on Investor Day. We see some opportunities to really have better visibility into our operations and the alignment of that with the customer stop-off points. And the planning there should really help us. Also just continuing down the path of thinking about the benefits of some of the deployment of these technologies, although we talked about it on Investor Day, many of the things that we talked about are not yet deployed in the operation fully and so we still have the benefit of them to go. And for instance, the equipment that we will replace on the dock, the PDAs that will replace on the dock those are going to be putting – we are going to be putting those in place in the fourth quarter and into the early part of next year. And what we do on Street optimization will probably be early next year item as well. And so – and then with the deployment of the ELDs into the – we have had those in the city for a while are finalizing putting them on the road equipment and we do see a benefit of having the data from those. And those again – that whole process is just in its early stages. And as I mentioned, we still have some of our equipment to replace, particularly in the city to get the benefits of the new technologies from the equipment itself.

So this is aiming just I mean when you talk about getting margins back to historical levels, this is not any kind of program to accelerate beyond the $50 million, this is I guess just I mean still improved savings potential, but to make LTL freight more efficient, I don’t the PDAs I mean that sounds like you are just electrifying I mean is that just electrifying bills or is that even more advanced putting scales on your equipment?

Well, what it is we have had the visibility from PDAs that’s now 15-year old technology for us. What it does is that will enhance our knowledge of the activities that are happening along with those shipments and allows us better costing, better visibility on the time it takes on sort of shipments. And so we think that the usability and the visibility that comes from that new technology is really going to create some opportunities for us. And so it’s again its beyond – this whole discussion is beyond the $50 million just to be clear about that.

Thanks. I appreciate it.

Our next question is from the line of Todd Fowler. Please proceed.

Great. Thanks and good morning.

Good morning Todd.

Judy, I think that’s the first time Medina, Ohio has been mentioned on an earnings call, I am pretty sure.

It’s an important place.

It’s a very important place, exactly. So it’s a nice little community. Hey, I just wanted to ask you a couple of questions on the expense side, i.e. in the freight business, the commentary around the healthcare costs this quarter, I guess I am curious just from a margin impact if you had some sensitivity around that and then I am assuming that – those are nonunion costs or costs related to something outside of the union contract and if there is anyway you can, how do those costs progress I guess going forward?

Well, they are definitely related to our non-union workforce and though that’s certainly the case and David do you want to address the costs year-over-year that we are dealing with there?

Yes. We were looking at 30% increases year-over-year or north of that actually and on a per person basis, so that’s resulting from higher claims levels and including increased hospital visits and length of stays and pharmacy costs. But as Judy mentioned we have some initiatives corporate wide to work on that. Some of those things just take a little more time to get in place in fact we feel like we have some best in class programs there. And because we think wellness of our people is an important factor and is a value, core value for our company. So, we are concerned about their well being and of course well employees make for a more productive environment and good environment. Did that help?

Yes. It definitely does, do you have a quantification David from like a basis point impact on the margins maybe year-over-year in the third quarter?

Yes. I have mentioned it was $1.7 million increase for freight and then $3.2 million increase this is quarter-over-quarter for the enterprise as a whole. Did that help?

Yes. I jumped on a little bit late, so I might have missed that. Okay, that’s helps. And then just on the benefit from the lower fleet age, can you talk a little bit about I guess first the depreciation run rate here in the quarter, is that what we should expect going forward or is that continuing to trend up. And then I know that we see some of the benefit in the fuel and expense line item, but where do we see some of the other cost savings or cost benefit from the younger fleet?

Yes. We would – we are continuing to replace as we talked about this equipment. So we will continue to see probably some increase in depreciation costs. Fuel savings is in the fuel – supplies and expense line as are the repairs and maintenance were in that same line, so.

Well, and we have given – I think Todd we have given a depreciation number for the year that it’s about $110 million.

$100 million to $105 million.

$100 million to $105 million, sorry about that – $ 100 million to $105 million, which based on what we know about our equipment. We are adding some and not adding. We are replacing some in the fourth quarter and so that will continue to add to what you have seen in terms of expense on that line item, but it should be within the range that we have set out for the year.

Okay, all that helps this morning. Thanks for the time guys.

Yes, thank you.

Thanks, Todd.

Our next question is from the line of Amit Malhotra [ph]. Please proceed.

Hey, thanks so much. Good morning, everybody.

Good morning, Amit.

Just on the new corporate structure, I understand the cost opportunity and that makes sense, but I just imagine that there is a good amount of revenue synergies as well and just wondering if you could talk about that and specifically I guess how much I guess revenue opportunity do you think has been left on the table if you will as a result of the more decentralized structure. All I am trying to do is just get a sense of the perspective growth potential for the business just from the realignment? Thanks.

Good question. We have progressed in our percentage of accounts that do business with more than one of our companies. I mean, that’s kind of the way we characterized that in the past and it’s about 24%. We would like for that to be about 50% and we think that based on the market opportunity that’s out there that we can certainly accomplish that. Having a unified sales team and a single view of the customer is really going to help us. We are seeing that opportunity the best way possible. And so we have got a system that we are deploying – that’s actually already deployed at Panther, but it will continue to be deployed for the remainder of our sales people that creates a lot of visibility on those customer connections. We really want to capture all the interactions that we are having with the customer so that we can better work with them, partner with them to grow our business as their business grows. And so we feel like the coordination of all that within one sales team is easier for us and more streamlined for us than it is working across the silos that we currently have today.

Right. And do you think I mean the cost payback is obviously immediate, how long do you think some of that incremental revenue growth opportunity would take to be realized after this realignment takes effect?

Well, I think it will be a number of years for us to realize the full opportunity that I think what this structure does is accelerate our ability to accomplish that. And some of the things that I am talking about in terms of systems and visibility and that sort of thing, it will take us a few months as we enter into 2017 to get to that. We see a lot of potential there, but we do have some work to do on the system side to get everything in terms of that one view of the customer visible and workable for us as a company, but we see that as a great opportunity. So, I am glad you brought that up.

Yes, thank you for that. Just let me just ask one question on the asset base side of the business and I was hoping you could just educate me actually a little bit in terms of how the LTL business responds to some tightening on the truckload side and talk about past cycles, because the question I have is that if this sort of better truckload fundamentals actually takes hold at some point and there is a spillover into the LTL side of the business if and when that does occur? Can you just talk about sort of the lag time and is it immediate how long does that take to actually show up on LTL? And then when that does happen or if that does happen given the optimized cost structure or the continued progress you made on the cost structure, where do you think the incremental margins or the contribution margins can go on the sort of perspective volume growth? Thanks.

Well, it’s great questions. On the truckload tightening side, we would – I think we would begin to see that as it was happening, because we have really seen an impact on our volume quote shipments being weaker as we have gone through this year. So, there would be some immediate benefit there. But as the months – few months go by after truckload tightens, I think what you see is truckload carriers are less interested in handling larger LTL shipments. They are less interested in stop-offs and appointments and those are all things that we do very, very well. And you can clearly see because of the weight per shipment issue that we have had this year that we have had an impact in that area and this is something that it happens in cycles. It’s something that has happened a number of times in my career and certainly whenever truckload tightens up that’s a better – much better answer for us and it helps us with pricing profitability on given accounts and on our spot business. And we, I think enjoy a network that works and is resilient in that arena too. I mean if you think about the value of having 245 locations and city drivers that are out on the street every day picking up shipments, you think about half full trailer versus a full trailer. There is a lot of efficiencies that can come with a better economic environment, better capacity environment. And our network that we deploy each and every day is resilient and it’s there and it’s available for those customers. And so it tends to have a lot of value in that kind of a situation. And we are looking forward to that happening. We also think perhaps whatever happens with capacity on the ELD side as a result of the implementation of that set of rules is going to benefit us, so.

Thank you. Bye-bye.

Thanks a lot.

Our next question is from the line of Jason Seidl. Please proceed.

Hey everyone. I hope you guys are all well.

Hi Jason.

I wanted to focus – hello. I wanted to focus on two quick things, one you guys talked a little bit obviously that you have been very acquisitive on the non-asset base side, is there anyway you could breakout the acquisitions and talk about organic growth?

Well, the shipment growth on the organic business was about 14% for the quarter. And I am talking about truck load.

Truck load brokerage.

Truck load brokerage, logistics, it’s in ABF Logistics those shipments.

Okay. And I am assuming because of rates the revenue is probably much, much lower than that?

That’s correct. Revenue per shipment was down probably 5% or so.

Okay, and that’s fair enough. And I guess to help us better understand some of your commentary about October, can you remind us what your monthly comparisons were in the fourth quarter of last year for tonnage revenue?

Yes, they were – go ahead David.

I have got it you made 5 months Jason I guess…

5 months, that will be great, yes.

Sure. October last year was down 5.8%, November was down 5.2%, December down 3.6%, so some easier comps and so for the quarter overall down 4.9%.

And that was tonnage?

Yes, Jason that October and November, those were the two worst months of the year last year. Just in terms of year-over-year.

In terms of year-over-year declines, okay.

Numbers is what I am talking about.

Fantastic, that’s all I had. I appreciate the time as always everyone.

Thank you, Jason.

Thank you.

Okay. I think we got one more in line here or might be a follow-up.

We have a follow-up question from the line of David Ross. Please proceed.

Yes. Just a real quick one, average length of haul in the third quarter versus last year?

Length of haul about 1,040 and it was 1,045 same time last year, so up about 1.5%.

Excellent. Thank you.

Thanks Dave.

Alright. Thanks Dave.

Okay, well, alright, good deal. Thank you a lot James. Well, this concludes our call. We appreciate you taking some time to spend with us this morning and we will see you next time. Thank you very much.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you.