ArcBest Corp
NASDAQ:ARCB
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ArcBest Corp
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Greetings, and welcome to the ArcBest Second Quarter ‘23 Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. [Operator Instructions]. As a reminder, this conference is being recorded Friday, July 28, 2023.
I would now like to turn the conference over to David Humphrey, Vice President of Investor Relations. Please go ahead.
Thank you for joining us. On today's call, we’ll provide an update on our business, walk you through the details of our recent second quarter 2023 results, and then answer some questions.
Joining me today for the prepared remarks are Judy McReynolds, Chairman, President and CEO, ArcBest and Matt Beasley, Chief Financial Officer and Treasurer. In addition, Dennis Anderson, Chief Strategy Officer; Seth Runser, President of ABF, Steven Leonard, Chief Commercial Officer and President of Asset-light Logistics, and Christopher Adkins, Vice President of Yield Strategy & management are available to help answer your questions.
To help you better understand our best and our results, some forward-looking statements could be made during this call. Forward looking statements, by their very nature are subject to uncertainties and risk. For more complete discussion of factors that can affect our best future results. Please refer to the forward-looking statements section of our earnings press release on our most recent SEC public filings.
To provide meaningful comparisons certain information discussed in this call includes non-GAAP financial measures is outlined and described in the tables in our earnings press release. Reconciliations of GAAP financial measures to the related non-GAAP measures discussed in this call are also provided in the Additional Information section of the presentation slides.
As a reminder, there's a conference called slide deck that can be found on the ArcBest website arcb.com. In exhibit 99.3, of the 8-K that was filed earlier this morning, or you can follow along on the webcast. We will now begin with Judy.
Good morning. We appreciate you joining us today. Before we begin, I'd like to start with a message to our people. In our 100th year, our business has always come back to you. Thank you for being the heart of our success. No one does it better than our team here at ArcBest we have the best people in the industry.
Every day, our team finds innovative ways to deliver for our customers with their skill, hard work, and resilience. These attributes are why we received the top industry awards year after year, such as being the only 10-time winner of the excellence and cargo claims and loss prevention award and why we consistently exceed industry benchmarks.
Our strong employee relationships were exemplified as we finalized our five-year agreement with the International Brotherhood of Teamsters earlier this month, with overwhelming approval. From the beginning, our goal was to secure a contract that keeps providing our employees with competitive wages and industry leading benefits to ensure we're retaining the best employees in the business and recruiting top talent.
We're pleased to have reached a contract that achieves these goals and sets the stage for future growth and investment. At our best we are constantly thinking about what's ahead. We're celebrating a century in business this year because we are always innovating, providing exceptional value for our customers and remaining resilient and agile while retaining the ability to look at ourselves critically and strive for continuous improvement.
We recognize the importance of operating efficiently and effectively which enables growth and creates value. Earlier this year, we sent an experienced team to some of our ABF service centers to train managers and employees on operational best practices, which resulted in a significant increase in productivity in those locations. And that productivity improvement has continued long after the team departed.
So we're going to do that on a larger scale. We will be pausing the freight handling hardware pilot at our two ABF distribution centers in Kansas City and Salt Lake City and refocusing that implementation team on this best practice work at our largest facilities. Box pilots with customers remain promising and are not affected.
Early box pilot results with some major companies are showing significant efficiency gains, and we see high levels of customer interest in the solution. These pilots will continue and the teams that support external customers are not slowing down. We continue investing back in to the business, into our technology, our solutions and our people. This soft market environment will end and we are making decisions today that benefit us as the market rebounds.
We are investing in technology to support our customers. How people do business is changing. This year we enhanced our digital tools to help customers better manage their business. And later this year, we will provide additional self service capabilities that drive efficiency.
We are investing in our solutions to deliver exceptional value. Our city route optimization work is responsible for over half a million dollars per month in operating income improvement and makes our employees jobs easier. We're in the process of expanding that initiative to improve the pickup process. And importantly, we are investing in our people to drive higher engagement. We have created an industry leading employee experience, which continues to be recognized with awards. These key areas of investment will set us up for success in the future.
Having reached our 100th year anniversary, I have taken the time to reflect on who we are and where we came from. ArcBest is a company that has evolved tremendously. And I am so proud of who we are today. We listen to our people and our customers and then adapt. We have built a breadth of solutions that have positioned us as a strategic partner to our customers, helping them build better supply chains. In today's rapidly changing market environment we are uniquely positioned to serve our customers as a trusted adviser with a full suite of logistics solutions, rather than simply a capacity provider. We have seen clear evidence of that this past week as customers have turned to our best to manage their supply chains through a period of market disruption.
Finally, we are resilient. We don't back down from a challenge. We're in a strong position and only look to grow from here. And now I'll turn it over to Matt to take you through the quarter in greater detail.
Thank you, Judy. And good morning, everyone. Before I cover the quarter’s results, I want to say a quick thanks to our previous CFO, David Cobb, David built a best in class finance team and his support and guidance had been invaluable as I've transitioned into the CFO role. I wish David and his family all the best as he embarks on a well earned retirement later this year.
Second quarter 2023 consolidated revenue from continuing operations was $1.1 billion a 17% per day decrease compared to last year. On a non-GAAP basis consolidated operating income from continuing operations was $50 million, a decrease of 66%. Our adjusted second quarter earnings per diluted share from continuing operations was $1.54.
Turning to the key metrics and our asset base business, second quarter daily revenue decreased 10% compared to last year, while daily shipments and daily tonnage increased 4% and 1% respectively. The decrease in revenue per day reflects a decrease in order frequency and shipment quantities from our core customers during the software market environment and a decrease in fuel surcharge revenues. As you will recall, fuel prices were at record levels during the second quarter of 2022.
As for shipment and tonnage results ABF targeted more consistent business and labor levels during the quarter by utilizing our tech-enabled dynamic LTL rated pricing tool to secure market based profitable shipments to better utilize available network capacity. The 11% Decrease in second quarter build revenue per hundredweight, versus last year reflects the impact of these additional dynamic shipments and lower diesel prices. Because of the strength of ABF pricing on its core business, the addition of transactional LTL shipments at current market rates naturally reduces the total revenue per hundredweight statistic.
Overall pricing remains rational. And we continue to obtain increases on our core LTL rated business, which increased 7% versus the same period last year. Pricing on that core business also increased sequentially compared to the first quarter, and the second quarter marked the 10th consecutive quarter that pricing excluding fuel surcharges on our core LTL rated business increased on a sequential basis.
For asset-based customer contract renewals and deferred pricing agreements negotiated during the second quarter, we secure to 3.1% average increase. The second quarter non-GAAP asset base operating was 92.8% was a year-over-year increase of 830 basis points. And on a sequential basis, versus first quarter, an increase of 50 basis points. It was also a higher OR, than we anticipated when we previewed Q2 last quarter, which was due in part to adding and maintaining resources to serve an expected seasonal uptick in core customer business that didn't materialize as expected.
Delays in the receipt of new equipment also negatively impacted repairs and maintenance expenses. And we also had some other costs that were higher than expected, including workers comp and non-union health care costs that affected comparisons to first quarter. In July ABF, implemented cost savings actions to improve segment profitability. This includes an intense focus on efficiency and productivity, and a reduction in overtime and carnage in purchase transportation spending, as well as a reduction in dynamic shipment levels to target total shipping volumes of approximately 19,500 shipments per day.
In addition, over the past week, the asset base segment has experienced more than a 10% increase in core LTL rated shipments per day when compared to June, 2023, which is handled through reduction in less profitable dynamic shipments. As Judy mentioned, we were pleased to recently reach a new five-year labor agreement, which recognizes the contributions of our employees with pay increases and quality of life enhancements, while supporting growth and investment.
The initial first year wage increase that was effective on July 1st, was approximately 13%. And after the August increase in the hourly health, welfare and pension rates, the combined first year wage and health welfare and pension rate increase will be approximately 9%.
Over the life of the contract, the combined contractual wage and benefit rate increases are approximately 4% on a compound annual basis. Prior to the pandemic, ArcBest asset base operating ratio for the third quarter was typically relatively flat to the second quarter. Although ABF will have additional costs in the third quarter related to his new union contract, we believe that our cost control actions and previously anticipated increases in core business levels should allow us to continue on this historical trend with the possibility for upside. If the increased business levels we've seen over the past week continue throughout the quarter.
In our Asset-Light business total second quarter revenue decreased 25% on a per day basis versus the prior year period. This was primarily due to a lower average revenue per shipment and a soft rate environment. As we mentioned this time last year, higher market rates on committed business combined with solid customer demand resulted in strong asset like revenue growth and record profitability in that business in second quarter 2022 which makes a strong comparison for the current period
2023 second quarter Asset-Light daily shipments increased both year-over-year versus 2022 and sequentially compared to this year's first quarter, primarily because of shipment growth in our truckload business. The current margin pressure resulting from a lower spread between customer rates and capacity rates, compared to historic profit margins last year, was the biggest contributor to the reduced Asset-Light profitability in the most recent quarter.
We provided preliminary Asset-Light business trends for July. 2023 in the Form 8-K exhibit to the press release file this morning, and total revenue for July reflects a year-over-year decrease slightly better than in the second quarter. Double digit Asset-Light shipment growth this month is directly related to continued success and adding truckload shipments. But truckload rates still remained significantly lower than last year.
Net capital expenditures totaled $84 million for the first six months of the year. And we currently expect net capital expenditures in the range of $270 million to $295 million for the full year, which is lower than our previous estimates are class aid tractor orders remain in place, and we currently expect to receive all ordered tractors by the end of the year. Progress continues on the real estate projects we plan at the beginning of 2023. And we currently expect those expenses to be incurred by the end of the year.
The reduction in our full year CapEx range is related to a slight reduction in trailer and other warehouse equipment orders, a slight decrease in some per unit costs and a deferral of some capital to 2024. ArcBest cash balance and total liquidity improved during the quarter and remain at strong levels. As of the end of the second quarter, we had net cash of $108 million, an improvement of $46 million since the end of last year. Total liquidity of approximately $580 million remains at a healthy level and despite rising rates, the composite interest rate and ArcBest outstanding debt at the end of the recent quarter was 3%.
Our solid financial position is strong balance sheet position as well to navigate the current market environment while investing for growth, new equipment purchases, real estate additions and upgrades end to end technology investments, all of which will improve our ability to effectively serve customers while positioning company for the future. We also continue to review external growth opportunities and the return of capital to shareholders while targeting investment grade credit metrics.
Year-to-date through the end of the second quarter, we have returned approximately $41 million of capital to shareholders through share repurchases, based on those share repurchases. $84 million remains available under the current repurchase authorization for future common stock repurchases.
As I step into my new role, I'm excited about our futures. I'm proud of our values driven culture, and confident we have the right strategy to deliver on our mission of connecting and positively impacting the world through solving logistics challenges.
Now I'll turn the call back to Jude.
Thank you, Matt. As we close, I want to reflect again on our strategy and position. We hear from customers that our solutions are relevant, and our partnership is valuable. This is why we continue to see customer growth despite some of the demand decline our industry is experiencing. In a rapidly changing marketplace ArcBest is uniquely positioned to serve our customers.
We have 100 years of experience and a team that challenges the statues-quo. We can meet our customer’s needs across a breadth of transportation modes, move goods on our own assets, and customers are increasingly asking us to help manage key components of their supply chains. We're committed to keeping the global supply chain moving enhancing our position as a leading logistics company and accelerating growth.
That concludes our prepared remarks. David Humphrey, we can now open the call up to questions.
Okay, Dana, I think we're ready for some questions.
Thank you. [Operator Instructions]. Our first question is coming from the line of Stephanie Moore with Jefferies. Please go ahead.
Hi, good morning. Thank you.
Good morning, Stephanie. How are you?
I'm doing well. Okay, Judy and Matt, you commented on core LTL shipments up more than 10% in the last week, could you talk a bit about how your capacity looks like? And your ability to handle an influx in volumes, whether it's from, maybe an industry dynamic or also potential rebound? And in the freight environment? That would be helpful. Thanks.
Yes, Stephanie, we do see the capacity, to increase shipments beyond the level, certainly that we are, so far in July. We can look back to the second quarter and see a higher level close to 21,000 shipments a day, and even into, past periods last year we've hired, we've handled higher shipment levels. We also, with some of the initiatives that we have, I know, we've been on a journey to really improve our hiring and get people into place. And we've done that, and in the past, like in 2022, and 2021, that was a bit of our constraint. And so, we can see our way to growth.
The other thing that we're doing is, our facilities -- we've been addressing certain growth areas, and some of that has been done, like, for instance, we moved into a new Phoenix facility. And we've done some, some other expansion work. But we see that continuing as we go forward, there are several facilities that we're addressing, and, and will have greater capacity as we go forward. So, we feel like we're well positioned and it is evolving daily, what we're experiencing? And, again, we're glad for that, we're glad to be in a position where we can handle that good business, and make sure that it's working well within the network.
Great, thank you. And then just as a follow-up, maybe it's kind of a two-part question with the new union agreement. So, I guess my follow-up would be it sounds like from a labor standpoint, some of the constraints that you saw in 2021, 2022, might not be an issue here as you've kind of prepared or maybe learned your lesson from some of the labor struggles we've seen in the past? And then now with a new union agreement in place, in a pretty good competitive positioning to kind of move forward. So, maybe just as a follow up touch on where you stand on labor, have the availability to meet this capacity or meet this need this influx of volumes?
Stephanie, I'm going to let Seth Runser who's the ABF President respond to that.
Yeah. Good morning, Stephanie. So, when you think about the contract, it really talks about the great relationships we've built with our people. And that's why we saw that overwhelming ratification. But in the contract, we're offering industry leading wages. So, we want people that that are coming to work for us.
They, when we look at just a pipeline of hiring, we feel pretty good. And that's really why we did the dynamic strategy that we had, it was over ordered in order to keep more of our resources in place as we go through some of the softer periods. So, we feel like we're in a pretty good place from a labor standpoint. And also, we're seeing an uptick in applications recently. So, we think we'll be in a good spot labor wise.
All right. Thank you so much.
Thanks, Stephanie.
Thanks, Stephanie.
Our next question is coming from the line of Chris Wetherbee with Citi, please go ahead.
Yeah. Hey, thanks. Good morning, guys. I just wanted to ask a specific question around shipments. Is it 19,500? Where you are? The 10% step up is that the average over the month of July including a lower number earlier in the quarter, I just want to understand sort of, it sounds like you took some company specific actions to maybe reduce that number from June to July, and then maybe there's an uptick, so any qualification that would be helpful?
Yes, I'm going to let Christopher Atkins respond to that, Chris. And then I'll follow up if there's any other thoughts I have. But go ahead, Christopher.
Hi, Chris. Good morning. This is Christopher Adkins. So, in terms of the 19,500 in June, we were handling around 21,000 shipments per day. We made the strategic decision to reduce that shipment count to improve profitable mix for our business. And that mix is handled really, through our dynamic pricing, we're able to scale down that dynamic pricing.
And as the core business is coming on stronger, we're able to scale that back even more to make, to make additional capacity available for that core business. So really, the 19,500 is inclusive of all of our cores with that growth that we've been mentioning, as well as the transactional business.
Well, but I would say, Christopher, that's for the month of July, as we go forward, we'll see what that becomes. I think that our discussion about what we can handle, I think your team is doing a great job along with sales and evaluating good business opportunities for us. And what's good about the dynamic tool is it allows us, to use that lever to, both shift up and shift down, we're awfully glad to be in a position where we have the capacity, we can shift that down. And we can take on better business from our core customers, and really serve them well in this time of disruption.
Okay, that's very helpful. And then I guess, when you think about the dynamic pricing aspect, as the market, as market share shifts, and we potentially see more shipments coming onto the network, does that give you a relatively real time and ability to price that business to make it more appropriate for your network? I guess we want to get a sense of maybe is pricing responding to you're in July to this very sort of real-time improvement in market share? Or does that take a little bit more time? How would that play out?
Yeah, Chris, you got it. This is something that we manage daily or dynamic pricing. This is something that's part of our normal daily business operation. And we've already been increasing prices on that transactional business to make space for but yeah, you got it exactly. It's a daily decision that and we've already experienced price increases in that area.
And well, and I'll add one thing to it, because of the work that we do in our managed team, we're also seeing the market, our competitive landscape respond in a similar way.
Okay, that's very helpful. Thank you for the time.
Thanks, Chris.
Our next question is coming from online of Jordan Alliger with Goldman Sachs, please go ahead.
Yeah, hi, good morning.
Good morning.
In terms of the step up, I mean, presumably a meaningful amount is for right, that's been diverted to you from Yellow, but I'm just curious to, aside from maybe sort of comment on that dynamic that's going on, but then sort of also served from a core demand perspective. Were you seeing any positive signs separate from any diversionary benefits? Thanks,
Steven. I’m going to ask Steven Leonard to respond to that just, just based on what we're seeing from our other core customers, in addition to what we're seeing from the Yellow disruption.
Yeah. So, if you take out kind of the disruption that we're seeing in the demand, that's coming from that and just look at, kind of where business was and what we were seeing seasonally. We are not seeing a drastic change in demand, there are pockets of customers in certain industries that are maybe seeing more demand than others, but in general, nothing game changing from a demand perspective? Yeah, aside from the disruption, which, with those customers, we're well positioned a lot of those customers, we have relationships with them.
And they're coming to us looking for solutions. And with our capability set, a lot of times, we're able to respond in a way that gives them more options than otherwise, we're just looking at our asset base capacity. So, we're in a great position there. And we're seeing that play out. We've had some good examples where customers are coming to us looking for capacity, we're able to optimize that business, use, all of our relationships, and that's really playing out well for our customers.
The next question is coming from the line of Jason Seidl with Cowen, please go ahead.
Thank you, operator, Judy, David team. Good morning.
Good morning.
Wanted to focus a little bit on sort of the free coming into the network and, and how you think that'll evolve over time, if there is a full-fledged bankruptcy that everyone seems to be thinking, Yellow. And what I mean by that is everything's just coming in now. But what you take on today not, might not be what you sort of maintaining your system? So, how do you think about that? How do you think about pricing that freight over time? And then maybe any thoughts on anyone in the industry trying to push through another GRI sometime between now and the end of the year?
Well, Jason, I think we have to be mindful of many things, as we're looking at this business. It's, it's always interesting to us to see the opportunities that arise in certain situations. And what's interesting is, many of the customers, that we're having conversations with daily, or maybe intraday, these are, these are opportunities that we've seen before. Sometimes it's about the lanes that work well with for us, or some other aspect or element of it. And we've got to kind of sort through that and make sure that we feel really good about it being an incrementally good decision for us.
And I think we do that fairly well. We've talked about wanting to be able to look back at that after we've been experiencing that business for some period of time. And maybe perhaps it operates a little bit differently than we thought, and we can revisit that either to respond, where we're doing more of that with the customer, or perhaps even less of that with the customer. We do feel pretty informed, I'd say. And Christopher in terms of GRI. I think our last year, I was in November of last year. I don't know that there's been many discussions about that. And we're typically not a leader.
We typically watch what happens, but would you add anything to that?
That's running generally, the market takes about one year, per year, as Judy mentioned, we took ours last November is something we're constantly evaluating in watching the marketplace and what others are doing in this area?
Good. And a quick follow up, Judy, what lessons did you learn from any prior major bankruptcies in the LTL space? And so, what do you think you can do different this time to be more nimble and agile?
Well, I think our just, our strategic positioning is has put us in a place where we are. What's interesting, is before maybe in a in a past situation, I'm thinking of consolidated freight ways. I think it was back in 2002, or something like that. Yeah, we were a primarily an LTL carrier, then and today, as a logistics company, there are opportunities that we feel comfortable saying yes to, and perhaps that businesses is good for ABF and it works well there. But also, we have a lot of other relationships. I think in our in our list, we have over 80 relationships.
And we are working with them often and we know what works well where. And so being able to say yes, is bigger than just what works well in the asset base network, although that is a great opportunity for us right now, especially with where we were in the second quarter and the weakness in our regular core business, let's just say, but lesson learned, I think, is to be sure that if you're, if you're saying yes, you can see your way to the profitability of that account and making sure that it works well for you. I mean, I was thinking about your question.
There have been times when we've had changes in the market, where we've taken on business, and thought, I'm thinking of some of examples with residential delivery type shipments, or other big volume players that, really what you've got to do is, is get involved with that business, see how it works, and make your decision to go forward with it rather than just saying yes to too much. And regretting that.
Appreciate the color, thanks a ton as always, yes.
Our next question is coming from the line of Jack Atkins with Stephens, please go ahead.
Okay, great. Thanks for taking the questions. And Matt, congrats on your new role. I guess -- Judy, when you kind of think about the knock on effects and opportunities that may be available to you, from an investment perspective, over the next couple quarters with potential assets coming onto the market? Are there parts of the network where you see, maybe opportunities to accelerate investment? If you can maybe pick up an asset here or there in a particular, freight gateway city or something like that? Or how do you think about that, in terms of capital allocation here over the next, call it -- let's say, year?
Yeah, Jack, I'm going to let Seth Runser take a shot at that, and then then come back to that.
Okay, Jack, so we're, yeah, Jack, we're constantly looking at our network in terms of facilities. And we have a long-term real estate plan that we've discussed in the past, Judy mentioned some of the most recent things that have come online, like Phoenix, but we have a long-term plan. So, we have a view on all the properties of where we need additional capacity. And we'll be opportunistic on any capital deployment there.
From the equipment side, we continuously have invested in our fleet, we still have a lot of new tractors coming on this year. But same thing there will be opportunistic if we see opportunities in the upcoming quarter through the end of the year, if we need to either reduce the age of our fleet or flex our fleet up. So, we have a pretty good view on that.
Okay, and we're Jack, and we're well connected with the real estate folks at all the competition. And that really helps us to see what opportunities that are there. But we had a good plan. But I think you always have to keep your ear to the ground and watch what happens. And this could be a unique opportunity. I agree.
Absolutely. Okay. Great. And for my follow up question, there's, I guess, quite a bit of confusion around the potential impact to these multi-employer pension plans from this, last time I checked, Central States was almost fully funded. Would there be any sort of potential risk to your pension expense or costs or liabilities, and I don't know how you want to take that, if you were to see, the other major player within Central States, no longer be able to participate? I just want to clear that up for people, because I think that's a concern. And I just wanted to let you have a chance to address that.
I absolutely appreciate you asking the question. And really, you said it well, with the American rescue plan that was passed, and then, has funded some large dollars into all this use Central States pension plan as example. It is a well-funded plan years ago. And you can imagine why they might do this. But I think that the actuaries for those funds started looking at the potential for insolvencies by some of the participating employers and what impact that would have on the fund. And what -- after doing that, what we learned is that a lot of the success of the fund is dependent on their investment returns, and it has a lot less to do with employer contributions.
And in Yellow’s case, I believe, that their contribution level was much lower, for instance than ours, for instance, ours was $9 an hour versus two, something for them, and the benefit levels had been haircut correspondingly. And so, I feel like there will be an impact -- I certainly feel for those individuals involved in all of this, and I don't mean to just look past that, because it's real, and it's serious. And we we've always wanted and tried to achieve. And I think we've done it to have good solid retirement benefits for our employees. And in this recent round of negotiations, we really felt like that we were in a good place in terms of our contribution level for pension.
And that was kind of where that landed. But we, we don't see any risk, that is really created in a near term way or even a longer term way to our people. And we paid in, as for them, as well as a portion of what we pay is for people who never worked for us. And the good news about that is our people feel really good and solid about their retirement benefits in this labor of this competitive labor environment. That's important and good.
Just to be crystal clear, this will not impact your pension liabilities or your pension expense, it's just to be crystal clear.
All right, right. Our contribution levels are contractually determined, and they are determined with the passing of this latest union contract will not change. And we're told that the pension funds, again, understand that I'm mostly referencing Central Sites, because there's a most discussion about that 50% of our contributions go to them. Our understanding is it's 90. I want to say 97.5 % funded, at this point, and that is not going to be a factor that we have to deal with.
Okay, thank you for the time.
Thanks.
Our next question is coming from the line of Ken Hoexter with Bank of America. Please go ahead.
Great, good morning. Certainly, a seminal moment here in the industry, creating the chaos that I think we all knew was coming. I just want to clarify a few things you went from 21,000 shipments in in the second quarter to 19.05 in July. Is that shedding all of the transactional freight? Is it some – I just want to clarifying an earlier answer is that, can you talk maybe then also after that the volume levels as you exited July?
Yes, Christopher, you want to share that?
Yeah. So, that is not shedding all of our transaction. And we still think it's healthy to have a good portion of that within our core business. And really, it's responsive to how our customers do business with us. So, if they're making individual shipment level decisions, we're meeting them in the channels that they are. So, the 19,500 does still include some of that transactional business. And as we're exiting July, we still been managing to that 19,500 at this point. But like Judy mentioned, we have the ability to scale up and meet our capacity expectations that our customers have for us.
Yeah. And the only caveat to that Ken is, we want to make sure it's good business.
So, so to understand, then you shed the transactional taken on the freight you want, but it's you still haven't expanded. So, to your, I think the first question, Judy was on capacity, you haven't filled up the excess capacity. You've just swapped some, some transactions.
That's right, as of the end of July. But I mean, understand, that's what we're talking about is through July? Well, we're not really speaking to what could happen on the upside, in August or September, because we're making daily decisions about that. And –
But if I understand, I mean, have they fully suspended pickups? I mean, is this transition at the tipping point, in stark terms of you getting the share, you get? Or is there still a lot of tonnage left in the jump ball market?
Well, I, -- I don't know the latter part of the answer to the latter part of your question, but I do know that, the noise has been, that they haven't been picking up. Right. I mean, again, I hate to speak for them, because I know all that's not finally determined, but that's the indication that we have. And we again, we've been having a lot of good conversations with customers that I think, Ken, this is the kind of situation that as it unfolds, I mean, this is a multi-year type effect.
I mean, when you have a company that has handled as many shipments as they have, and they're -- if they're no longer a player, if that's where this ends up, that's a big effect on our markets. We're seeing some of the impact but I think this is going to go on for quite some time and honestly, that's to our advantage because it gives us a better ability to read through and look for what works best for us and for our customer base otherwise.
So, just to clarify that earlier answer. Can you quantify how much work or give a range in terms of that 90 and a half, how much transactional? You can still shed just given it sounds like you said, you made a move to get rid of some of it because of cost issues and other things. So, you were using it to fill in network? So, just to understand free additional capacity, if you choose to get more of that? Can you talk scale?
Yeah, this is Chris. Yeah, we still want to keep some of it. And like Judy said, it changes day-to-day. So, I don't know that we can really give a number there. But each day that varies based on the demand of our core business. So, we're just filling in the rest of the network based on what our targets are for the day. And what our customers needs are.
My last one, if I can get one, Matt, you said the operating ratio. I just want to clarify your comment there. You said it was normally seasonally flat. But with these changes in the network, were you saying you expect? I didn't catch your answer there significant improvement in from that I need to wait or maybe just clarify what you were pointing to?
Sure. No, I appreciate you asking that clarifying question. So, yes, if you look at historically sequential performance, second quarter, third quarter has typically been roughly flat. But, certainly we talked about some of the costs increases that we're experiencing, in the third quarter related to the contract. And so you can think about that, in the neighborhood of 300 to 400 basis points.
And so what we've said is, we should be able to with some expectation that we had, even going back to when we started the quarter for some shift in business mix, towards core published business, that combined with some of the other areas that we talked about around productivity, efficiency, reducing cartridge, purchase, transportation.
All that should put us in a spot where we can still manage to historical expectations, even with some of those increases in costs that we're experiencing in the third quarter. The other part of that comment, though, was if the uptick in core business that we've seen over the past week, if that continues and persists through the quarter, then there is some upside to what we've described in terms of in terms of the AOR expectation for the quarter.
Great. Thanks for time, everybody. Appreciate it.
Thanks. Thanks.
Our next question is coming from the line of Ravi Shankar with Morgan Stanley. Please go ahead.
Great. Thank you everyone. Judy just wanted to confirm again, just be sure that the earlier comments, so you're seeing the 10% Plus increase you've seen recently, that is primarily you think, Yellow-driven, rather than actual cyclical improvement. Just wanted to confirm that.
And also, there's a lot of talk of, if 10% of the industry capacity kind of permanently exits, that raises the floor, kind of pricing for the rest of the industry, which sort of makes sense. But what are some of the kind of constraints on new capacity adds do you think I mean, what’s the risk that the industry, the rest of the industry, kind of backfill that lost capacity in the coming years?
Well, I mean, I certainly think over time, that risk is there, Ravi? I do, but I do think that it would take some time. And, I think you you're as an observer of things, just like I am, it seems like, over time, we've seen a greater discipline in the industry on adding resources, and then also, how to, or maybe the expectation of profitability of business that's run.
But for us, we just have to be sure that as we're adding business, on account basis, it's profitable for us, that it doesn't bottleneck things or create issues in serving our core customers. And we're really very focused on our already existing customers, as much as we are these new opportunities, and we want to make sure that we serve them well.
For us, we like to see things progress over time. Certainly, one-time events or big changes typically are harder to deal with that right now things are kind of progressing in a in a good positive way. And with that costing system that we have that's been in place for 40 years. We have good visibility after maybe a week or two, we can look at the different profile of the freight profitability of the freight, and just make good decisions.
But all of that takes a little bit of time, to be sure. And right now we are making some decisions based on history and what we've known about some of these accounts. But again, one thing we know is that we, we love good core business, but we want it to be that. And so, we're trying to be really good and thoughtful and careful about it.
Great, and maybe as a follow up, and maybe from Matt, kind of with the new labor deal, can you just quantify how much of an apples-to-apples impact the new labor contract has on? Or if you want to use a mid-cycle award or something? And is the main offset from that coming from their productivity initiatives in the contract? Or do you need to get priced to offset that?
Yes, so overall, it's just looking at it on its own, I would say three to 400 basis point impact on, we talked a little bit about kind of the average, increase over the contract. And if you take it on a compound annual basis over the five years, looking at wages and welfare and pension, it's about 4%.
But on an OR basis, it's three to 400 basis points we did talk about, we are intensely focused on efficiency and productivity, we do have a lot of initiatives ongoing on that front, we're redeploying some resources to really further increase that focus. And so -- as we sit here today, and think about, the opportunity that we have to offset that, I think, it comes both from just the expectations that we were already seeing, as our core business was starting to strengthen some.
And then as well as some of these, these changes in efficiency and productivity and scaling the network to the point where we can, be in a more optimal place with carded uses, purchase transportation, overtime rates, things like that.
Yeah, and Ravi you mentioned price. I mean, when you look at that step change, just as you go into July, I mean, the expectation -- my expectation is that we've got to work on the cost side, perhaps a little bit more than we are on the pricing side there initially, because I mean, that's just a lot to feel like that our customers would absorb. But, we do feel like that the contract rate increase over time is reasonable. And we feel like that, that's something that should be manageable through our longer-term pricing actions. But we do have a, I think, an obligation and action plan in place to address the cost side.
And the good news is, Seth mentioned this earlier, we're going to have, our people fully engaged. And we can emphasize the utilization of our people, we've added a lot of new people over the last two years that need to become, even more productive. And the contract allows for us, to hold people accountable. And, some of the software enhancements, the operating software enhancements that we've made, allow us to better see that. So, all those things are going to have to work together to achieve the -- OR ranges that, that we've set out there for ourselves. And we're very focused on doing that.
Understood, thank you.
Thank you, Ravi.
Our next question is coming from the line of Jeff Kauffman with Vertical Research Partners. Please go ahead.
Thank you very much. Hello, everyone. Hey, and congratulations, Matt. I want to -- you've answered this a couple different ways. But I want to go back to growth and market opportunity here if I can, and maybe ask it in a different way. So, you've got a certain amount of freight in your network that is really more transactional in nature, that we're filling in the network plugging holes, so we could always reduce that and replace that with opportunities. But when you think about kind of what the right kind of growth is, I know you throughout this 21,000 per day shipment level but it seems like you could have the opportunity to go above that.
As you think about the right kind of growth for the network. Maybe talk about what you would be willing to flex to for the right kind of business, right kind of customers and is that 21,000 limited based on the existing network? Would you consider bringing in new employees if they became available or new equipment became available, how do you think about how much you're willing to flex, but still not wanting to flex too much to where you're hurting your existing customers or service?
Well, and the reason I use that benchmark is because, that's a good recent benchmark, I think what you see in a situation where we've got a better mix of core customers, is the quality of those shipments would be better, would be improved. But I do hear you and I feel like that we do have an opportunity to go beyond that. I wouldn't think it would be a huge number of shipments beyond that.
But in order for us to, add people and maybe make other types of investments, what I'd say is it would need to be good business. And we can see that, and we do have the ability one thing, and I know you've been around us for a long time, you remember is in the summer, seasonally, whenever we had, back when we had a peak season in the summer, I mean, we haven't had a normal year in a long time.
We wouldn't be able to use rail, and purchase transportation, we could flex up, we could not trade our older equipment, and add a third to the fleet. I mean, we have all those kinds of mechanisms available to us, again, for good business. And certainly, if our opportunities are there for equipment we were hearing from drivers and other employees.
So, we know we're going to have, an opportunity at resources. So, I think we got to just manage through all that look at the quality of the business and make a decision. But those variable levers I mentioned, they're pretty easy to pull if you feel like you're in a good place, and that allows you to grow beyond what I was suggesting.
And to the extent there are opportunities to add good employees and good drivers. How would that work with the union rules? Would it be a straight seniority dovetail and whatever they'd accrued at the other carrier kind of goes right into your list? Or does the new contract, kind of clarify how those types of situations would work if other good employees became available to hire?
Yeah, if other good employees became available, they would have to basically start over on the seniority side, they would potentially maintain their pension credits with Central States or whatever pension fund, but as far as seniority, wage scale, all that type of stuff that would basically be starting fresh, like any other new employee.
Okay, great. Well, thank you, and congratulations.
Yeah, thanks. Appreciate that.
Our next question is coming from the line of Bruce Chan with Stifel. Please go ahead.
Everyone, good morning. And David Cobb and Matt congrats to you both. A lot of really good color on capacity and Yellow so far. So, maybe just to switch gears a little bit. Matt, appreciate the color that you gave on capital allocation and investment priorities. I don't think I heard M&A in there. So, just wanted to ask, especially on the brokerage side, whether you've got any appetite for more M&A in that segment, or is the focus just going to be organic from here now?
Yeah, no, I appreciate that question. So, I would say we talked a little bit about the organic opportunities that we have, certainly, we always are thinking about capital allocation from a big picture approach, which could include filling in some capabilities in our business, on the M&A front. And of course, return of capital to shareholders. I don't know. Dennis, if there's anything that you want to add on that front?
Sure Matt, and hey, Bruce, this is Dennis. Yeah, absolutely. M&A is part of the capital allocation strategy here. And as we've talked, really, we're looking for great generally asset light, business, and things that helped help us grow with our customers. And, we've talked about, different areas, I wouldn't necessarily say it's directly truckload brokerage. We've got a great truckload brokerage operation now in MoLo, but things like manage transportation. We've talked about that before. That could really help us deepen those partnerships with customers is really a focus there on the M&A front these days.
Okay, that's great. Appreciate it.
And Jack, back in queue. Jack?
Okay, great. Great. Yeah, just I guess maybe, just to kind of round it out, no one's asked about the asset light business. And, I know a lot of attentions on what's going on in the LTL world for obvious reasons. But you guys did make some good progress on the quarter taking cost out of the business within the asset light segment.
Just sort of curious if there's maybe some more to go there? How we should maybe be thinking about the profitability trajectory there, over the back half of the year barring some sort of inflection in the freight market one way or the other.
Yeah, hi, Jack, this is Steven. The way we operate there, we're really just trying to manage our cost. In line with the business that we have, we all know, the, the market is challenging right now, from a price perspective. And so, we -- a lot of the indicators that we look at, we feel like we're at or near the bottom, but, when it will turn is still uncertain. And so we're just -- we're focused on again, kind of just managing the cost, along with business lines, nothing major there. But we want to make sure that we keep everything in a good place from that aspect in terms of managing costs, but at the same time, we want to be in a position to grow when the market does turn. And we know that's going to happen. It's just a matter of when.
Makes sense? Thank you.
Thanks.
Okay. Well, I believe that's the last question we've got, Dana. Thank you for your help. And we want to just thank everybody for the interest in ArcBest. So, that concludes our conference call. Thank you a lot.
That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.