ArcBest Corp (ARCB) 2022 Q2 法說會逐字稿

Greetings, and welcome to the ArcBest Second Quarter 2022 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded Friday, July 29, 2022.

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 will walk you through the details of our second quarter 2022 results. Joining me today are Judy McReynolds, Chairman, President and CEO of ArcBest; and David Cobb, Chief Financial Officer of ArcBest; and we'll have additional commentary from Dennis Anderson, ArcBest Chief Customer Officer; and Danny Loe, ArcBest President of Asset-light Logistics and Chief Yield Officer.

To help you better understand ArcBest and its results, some forward-looking statements could be made during this call. Forward-looking statements, by their very nature, are subject to uncertainties and risks. For a more complete discussion of factors that could affect ArcBest's future results, please refer to the forward-looking statements section of our earnings press release and our most recent SEC public filings.

To provide meaningful comparisons, certain information discussed in this call includes non-GAAP financial measures as outlined and described in the tables in our earnings press release. Reconciliations of the 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, our earnings slide deck can be found on the ArcBest website, arcb.com., and exhibit 99.3 of the 8-K that was filed earlier this morning, or they are available as part of the webcast. We will now begin with Judy.

Thank you, and good morning, everyone. It's a remarkable time to be at ArcBest as we celebrate another record quarter driven by the execution of our growth-focused business strategy.

I'd like to begin today's call by recognizing our amazing people and leadership team as we approach our 100-year anniversary next year. It's their dedication and hard work that have helped us deliver superior results while keeping the global economy moving.

We have so much to be proud of this quarter, including revenue growth of 47% and releasing our third annual Environmental, Social and Governance report. The report highlights our company's significant progress and ongoing efforts in building a safer, more sustainable and more inclusive company and world.

Our revenue growth was driven by increasing demand across our business lines and our breadth of integrated solutions that make it easy for customers to choose ArcBest. At the core of our business and strategy is a focus on technology and innovation investments and, importantly, the development of our people. Put together, we are confident we can thrive regardless of the environment and drive long-term value for ArcBest stockholders.

Supply chains are getting more complex, and we are helping our customers navigate these challenges. We are committed to staying ahead of the curve to better serve customers as a trusted provider and partner. Our business results enable us to do that by continuing to reinvest and progress our strategic growth goals.

I would like to highlight 3 specific points this quarter that illustrate how our approach is delivering value for our customers. First, we are hearing from customers that they need more flexibility in their supply chains. Our breadth of solutions enables us to serve them across whatever mode they need without switching service providers. This makes us a unique partner. Customers continue to share positive feedback that our mode-agnostic approach is an important differentiator that helps them keep their supply chains running.

Listening to our customers is our top priority. Deep, trusted relationships with customers enable us to learn more about their business needs and what's happening in their respective markets. These discussions inform how we help them optimize their supply chains in an efficient and cost-effective manner while also helping them prepare for a changing economic environment.

Overall, we are well-positioned in growth markets and highly attuned to our customers' needs. This leads to the increasing demand we are seeing and enables the introduction of new offerings. Strong growth in key services like truckload and managed solutions is proof that we are responsive to our customers' needs and that our strategy is working.

Second, we continue making investments in technology and innovation that differentiate us from competitors. The world is changing faster than ever, and we are working hard to ensure our investments in technology and innovation stay ahead of those changes, both with the way we work and the way customers use our solutions. With our breadth of services and a growing customer base, we have access to more data, enabling us to build better tools that drive value and productivity.

As the supply chain continues to be disrupted, it's never been more important for customers to have better visibility, better transparency and more flexibility. We can identify road blocks, stay agile, pivot and offer more creative approaches to drive our customers' success. Our investments are already paying off by saving customers time and money and earning us more business.

Third, we continue investing in our employees, facilities and technology to enable additional growth. We are committed to being a leading place to work, and we know we need to keep moving forward. Expectations are rising. And with labor shortages and the war for talent, our investments and our culture make ArcBest a place people want to work. In fact, excluding MoLo, who just celebrated their 5-year anniversary, the average combined service of all ArcBest employees is approximately 10 years, and over 1/3 of our employees have been with us for at least that long. Our tools, training and technology enable employees to do their jobs more effectively, easily and faster. Additionally, we continue to expand and update our facilities, which will enable even more growth.

In short, ArcBest is firing on all cylinders, as evidenced by our record financial results this past quarter. As we continued executing our proven successful strategy, our company is poised to continue growing, meeting customer needs and delivering superior and sustainable results for investors even during periods of market volatility and uncertainty.

And now I'll turn it over to David Cobb, who will take you through the specifics of our strong second quarter performance and continuing business momentum.

Thank you, Judy. I'll take this time to share details on our financial performance and provide an update on investments we are making in our long-term growth.

I'll begin by highlighting our consolidated information. We set a quarterly record for revenues of $1.4 billion, an increase of 47% over the prior year, reflecting business and shipment growth in all 3 segments. On a non-GAAP basis versus last year's second quarter, consolidated operating income increased 96% to $151 million.

Our adjusted second quarter 2022 earnings per diluted share grew 112% to $4.30. The effective tax rate that was used to calculate the second quarter 2022 non-GAAP EPS was 26.2%. And under the current tax laws, we expect our full year 2022 non-GAAP tax rate to be in the range of 26% to 27%, and that may be impacted by discrete items that could occur throughout the year.

Asset-based second quarter revenue was $803 million, an increase of 23% compared to last year. The second quarter non-GAAP asset-based operating ratio of 84.5% is a year-over-year improvement of 450 basis points. Second quarter tonnage increased 3.7%, and shipments increased 2%. Total second quarter billed revenue per hundredweight increased 17.7%, including higher fuel surcharges. We secured an average 8% increase on asset-based customer contract renewals and deferred pricing agreements negotiated during the quarter.

The July operating information is preliminary and builds on our first half performance as we benefit from the success of our strategy that's powered by technology and innovation. As ABF continues to improve consistency in business levels, it enables a more efficient network. That's a key element we've been communicating. While we haven't closed out the month yet, daily tonnage in July is running 6% above the prior year month of July. Additional details on our preliminary July 2022 business trends can be found in the 8-K exhibit to the press release.

Moving to our asset-light key metrics. We delivered strong top- and bottom-line results. Second quarter revenue increased 91% versus the prior year period, reflecting demand for logistic services, the addition of MoLo and more events and higher revenue per [event] in the FleetNet segment. Second quarter asset-light non-GAAP operating income increased 210% over last year. Demand for our truckload, managed solutions, expedite and international solutions drove growth in operating margin as favorable market conditions, combined with effective cost control, created greater operating leverage.

Second quarter asset-light EBITDA was $35 million, an increase of 185% versus the same period of 2021. Preliminary asset-light business trends for July 2022 have been provided in the 8-K exhibit to the press release, which was filed this morning. Customer demand drove revenue growth in managed solutions and truckload. In addition, the positive influence of MoLo revenue on year-over-year comparisons is reflected in the preliminary July daily revenue increase of 76%.

Momentum in our business and strong customer demand have enhanced our ability to generate solid cash flows. We ended the second quarter with a net debt position of $22 million. Our total liquidity of $444 million is at a very healthy level. And at the end of the second quarter, the composite interest rate on all of our debt was 2.3%. Net capital expenditures totaled $60 million for the first 6 months of the year. We currently expect net capital expenditures in the range of $240 million to $250 million for the full year, which is lower than our previous estimates.

Our equipment Class 8 tractor orders remain in place, and we currently expect to receive all of them by the end of the year. However, due to ongoing part shortages and manufacturing disruptions, we are now scheduled to receive a portion of the new 28-foot trailers we were expecting this year, with the balance scheduled for delivery in 2023.

We continued progress during the quarter on upgrading and expanding our real estate, with our 2022 real estate CapEx estimated to range between $45 million to $55 million. Our target for expanding shipment capacity by the end of the year is for an increase in the mid-single-digit percentage range. We are continuing our multiyear real estate plans and have advanced projects that are scheduled for completion after 2022.

Our stable operating cash flow, combined with the strength of our balance sheet, ensures that we can simultaneously make investments in our business, pursue value-enhancing M&A opportunities and continue returning capital to shareholders. From a leverage perspective, we will continue targeting investment-grade credit metrics.

As we have described previously, our capital allocation strategy focuses on investments in our business that have steady returns and that enhanced growth. The benefit of these investments has contributed to our financial results. Our team continues to evaluate innovative investments and acquisition opportunities to enhance and accelerate our service offerings.

Returning capital to shareholders remains a priority. Including a portion of our ASR in January, we've acquired over 600,000 shares year-to-date, and we'll continue with dividend and share repurchases while ensuring we are well-positioned for any changes that might occur in the economic environment. We continue to pursue a balanced capital allocation strategy that takes into account all opportunities to enhance shareholder value. We are pleased to deliver another quarter of outstanding top- and bottom-line results and look forward to industry-leading returns as we move through 2022.

Now I'll turn it over to Dennis.

Thanks, David. We are executing well on our customer-led strategy that results in success for our customers and long-term value for all of our stakeholders. We have deep relationships that are built on trust. Customers rely on us to help improve their operations and help them pivot when things change or supply chain disruptions arise. Customers tell us that flexibility, visibility and transparency have never been more important. So that's what we're continuing to prioritize as we invest in our people, technology and solutions.

We are seeing strong demand with a robust pipeline. In fact, we have seen double-digit percentage increases in the number of customers using multiple ArcBest services since the beginning of the year. Shippers are recognizing increasing value in partnering with us, and they are trusting us with more of their supply chain needs because of our strong set of capabilities, our expertise and the easier access to our solutions. This is driving outsized growth in areas like our managed solutions, which increased revenues by over 100% year-over-year in the second quarter of 2022.

The asset-light truckload revenue growth of more than 200% was another highlight for the quarter, which was accelerated by the addition of MoLo. The benefits of more customers using more of our services are clear. This strengthens those relationships, driving greater growth, profitability and retention, which leads to better financial performance and outcomes for our shareholders.

As we previously stated, we have over $5 billion in available market opportunity among our loyal customers, but the broader market opportunity is much, much larger than our existing customer base, and our differentiated value proposition is helping us build new relationships with new customers as well. In summary, we are expanding and deepening our customer relationships. This is allowing us to grow profitably and set the stage for even greater capture of our market opportunity.

And now I'll turn it over to Danny Loe.

Thanks, Dennis. I'll provide an update on the mobile integration, give a high-level overview of what we're seeing on the yield side and provide a few updates on what we're seeing with some key asset-light services, like managed solutions.

The mobile integration is progressing well and has strengthened our position to capture market opportunity. We are on track with our previously stated goals. The MoLo acquisition accelerated our pursuit of a better mix of contractual business that performs better in the current market conditions. In addition, we continue to benefit from the experience of MoLo and matching our carrier capacity to our customer shipments while providing exceptional service.

On the LTL side, we are seeing a very rational pricing environment. As David mentioned, we finished the [second quarter with an] 8% increase on our deferred pricing agreements. In addition, more and more customers are beginning to focus on sustainability as they identify inefficiencies in their supply chain and focus on achieving their own ESG objectives. Our managed solutions offering was built for helping customers navigate those situations. And as Dennis mentioned, we have strong demand for that solution.

Our managed solutions business continues to grow. We've doubled revenue since this time last year and tripled for 2020, and we think there's more opportunity for growth here. Now I'll turn it back over to Judy.

Thanks, Danny. Before we wrap up, I want to call attention to our ESG efforts. We believe it is critical that our business strategy and ESG initiatives align to create a sustainable business model with compelling prospects for long-term success and value creation.

In pursuit of being more transparent this quarter, we released our third ESG report in less than 2 years. This latest report contained our Scope 1 and Scope 2 greenhouse gas emissions as a baseline, consistent with the Task Force on Climate-Related Financial Disclosures. This will give greater transparency into our progress toward being a more sustainable company, which gives our customers the information they need to reach their sustainability goals and, by extension, benefit investors through stickier customer relationships.

In addition, improving network efficiency [greatly] improves environmental sustainability. We're upgrading facilities and looking at our entire system to ensure a more eco-friendly, safe and equitable environment for all.

Finally, we recently announced several additional advancements across the ESG space, including an electric truck pilot at ABF, our commitment to the DOT's Transportation Leaders Against Human Trafficking initiatives, a bronze medal from the sustainability ratings provider at EcoVadis for the second year in a row and being named on the Inbound Logistics 75 Green Supply Chain Partner list.

Overall, we are delivering on our goals and driving growth. We know there's still a lot of work ahead, and we're up for the task.

In closing, the successful execution of our strategy is rooted in an integrated approach that enables us to be a true partner to our customers. Our success has allowed us to accelerate our capital return program and deliver superior returns for shareholders while simultaneously investing in the business and maintaining a strong balance sheet. Our people work hard every day to serve our customers with excellence and create value for our shareholders, and our strong second quarter results reflect those efforts.

This concludes our prepared remarks. David, we can now open the call up to questions.

Okay. Malika, I think we're ready for some questions.

(Operator Instructions) Our first phone question is from the line of Chris Wetherbee with Citi.

Maybe we could start on just sort of the progression of tonnage as we went through the quarter. It's helpful to get that information, including July, so thanks for giving it. So just wanted to get a sense of kind of what you're seeing in terms of potential inflections in demand, particularly in the month of July. Obviously, tonnage was up (technical difficulty). I don't know if this represents a mix change within freight towards something a little bit more heavier weight industrial versus maybe a little bit of softening in consumer. But any kind of color around what you're hearing on demand trends from your customer would be really helpful.

Chris, this is Danny. I think we look at it, Dennis may talk a little bit more about the industry specific, but I think it's a reflection of our model more than anything, is that we have the opportunity to serve our customers regardless of how their demand is changing. And we talked about some disruptions in supply chains and different things. This is just our ability to respond to our customers. And really have visibility into our network and what our network needs, to me, is what's evolved as we've gone through the quarter. Dennis, do you want to cover some industries?

Yes, absolutely. I mean, I mentioned demand is still strong from our customers, and we've got the opportunity to serve them in a whole lot of different ways. Certainly, we have our eyes on the macro, and we see the headlines and talk with our customers about particularly retail inventories, but then also a lot of manufacturing going on in our business, as well. But when we think about our ability to be able to respond to that in a number of ways, we're well-positioned there.

And supply chains are still disrupted. If you look at the constraints that are still out there in terms of labor availability, certainly component availability for manufacturers. Those are 2 of the top things that we hear that are constraining customers. And it creates freight demand even when inventories are high on the retail end. So that would be what we're hearing from our customers in terms of demand.

And then I think as you guys have evolved the asset-light side of the business, including acquisitions, I guess we're trying to get a sense, roughly speaking of kind of what the margin profile of this business can be. Obviously, a very good quarter in the second quarter. Any help on sort of the back half of the year to think about kind of what the margin profile of asset-light might look like?

Chris, this is Danny again. I think I'd point you to our long-term targets. Could there be volatility when you look at that? Probably so, but that hasn't changed what we view our long-term targets for the asset-light business.

Our next question is from the line of Jack Atkins with Stephens Inc.

So I guess, maybe to start, if we could maybe touch on the integration of MoLo? I would love to kind of get a sense for how that's going, what's left to achieve in terms of some of those major milestones, whether it's on sales force integration or whatever that might be. And then I know the initial plan was for MoLo to be accretive by the fourth quarter. Has that been pulled forward? Was MoLo accretive in the 2Q?

Jack, this is Danny. I think we mentioned the progression is going well. There's nothing in the integration from the systems that scares us. We're still really on target there. So we've had some milestones that we've hit throughout the second quarter, puts us in a good shape. There's still some things to do. There's still integration of employees that's going on. So to me, if you think, there was probably some disruption from the integration during the quarter that we looked at. But overall, we're very pleased with how it's progressed and really excited about what MoLo has brought to the services that we can deliver to our customers.

And any comment on the accretion in the quarter, or was it accretive?

Yes. Jack, we're on track. I would just say, in that we've commented previously that we were looking to end the year this year, 2022, to be on that pace for that target earn-out EBITDA rate for 2023. So yes, we feel like we're on pace there.

And I guess maybe one more if I could squeeze it in. We've been seeing a significant amount of innovative technology costs over the course of the last couple of years with these pilot programs for efficiency. Just sort of curious when maybe we're going to see some additional detail, or get some additional details around the traction you're getting there, when we can maybe see those rolled out in a more broad-based way across the network.

Jack, I mean, that's a great question, and we're making good progress. We had the 3 locations that we've had in place for a while. Really, we're on pace for 2 of the 3 to be business as usual for what they're doing. And so that's pretty exciting. We've got our Kansas City distribution center that we're still working towards some things. We made some pretty significant enhancements to the software that got put in recently, very recently in July, in fact. And then we've made some modifications to the mobile platforms that we're using.

One kind of interesting thing is we've got some customers piloting with us using the equipment, and we really like that. I mean, I think that's going to be an interesting thing to study and evaluate as we go through the year. Also, the Salt Lake City facility that we're building will be a facility that utilizes this equipment, technology and process. It should be in operation in early 2023, and that gives us just even more to look at.

But we've had different targets along the way. We've had to make some pretty significant enhancements to the software. And we really are looking forward to what we're going to see later this quarter and this year to really solidify the benefits from that. But lots of good things going on. And again, we really appreciate the customer pilot work that we're doing, as well.

Our next question is from the line of Ken Hoexter with Bank of America.

Just maybe some thoughts as, Judy, you move into this new kind of world of mid to lower 80s operating ratio at the asset-based side. It really starts to show the power of the less-than-truckload network that you haven't seen in over 20, 25 years that I've been looking at it. So how do you start thinking about, one, what is the potential kind of operating level? What do you do with the cash flow? Maybe your thoughts on are there other investments that you've been constrained in making because you didn't have the margins that you now can maybe make some more advancements, given that cash flow?

Well, great comments and thoughts. It is interesting to think about whenever you see the results as they are. We put out long-term targets on our asset-based business, as well. The great news is we're on the upper end of those margins right now, which is pretty exciting, and we still have a lot of work left to do. I mean, we've got some pretty significant optimization projects that we're working on. And one of those is our city route optimization work that we've been piloting and working towards that we think will be rolled out more broadly toward the end of this year. And so there are some technology-oriented margin improvement efforts that go along with that.

And it's really interesting to look at what happens when those are put in place. I mean, I had one example, one of our distribution centers in Atlanta really benefited from this route optimization being put in place and saw an improvement in their street productivity that was over 10%. What you also saw from that facility was greater ability to grow because of the efficiency that was gained. And so I love those kind of examples just that are efficiency-oriented, service-oriented and growth-oriented. And so there's a number of those that we're still working on.

And that's what it does for you. You mentioned the capital that becomes available whenever you have those kind of results. That's what we're doing with the facilities that we have been working on, and there are some, I guess, $45 million to $55 million or so of capital this year that should put us in a growth position of mid-single digits on tonnage. And we're planning to do that same thing over the next few years, as well.

And so the deployment of capital in a business that's returning what ABF is returning right now is a satisfying thing to do because you know that it's going to benefit you and benefit our customers. But we've got several publicly announced expansions that we're working on. 2 noteworthy ones would be in San Bernadino and one in South Chicago, and I've already mentioned the Salt Lake City and Kansas City work that we've done in the past. And so those are examples.

The other thing, and I think David mentioned it, I think we see a balanced effort toward capital allocation. We've got several organic projects and just replacement dollars that we spend that, again, we're more aggressive there because of what we're seeing. We also are always evaluating M&A targets or other types of investments that could enhance the technology and innovations work that we do as well as just an effort and an emphasis on returning capital to shareholders.

So it just puts us in a good spot. Thank you for recognizing that, and we really are happy to be there.

And just one quick, another one for Dave Cobb. Can you talk about the fuel surcharge gains above cost in the quarter? Maybe can you quantify that at all?

Well, just, Ken, just a reminder, certainly fuel surcharge has increased. It's in our revenue per hundredweight metric. And it's not a perfect hedge, I guess, as fuel price moves, but there's obviously a lot of cost within our network that are connected to fuel. And so we appreciate the way that mechanism works in offsetting, for the most part, those costs. And I don't know if, Danny, you may have some other comments.

Yes. I think the other way to look at that is that fuel is in the revenue. It's a component of our pricing program that we have with customers. It shows up as revenue on one side, and it shows up costs on the other side. And the key is, as we go through, we focus on account-level profitability as we go through and review accounts. And so when you have that on the revenue side and you have on the cost side, you can make the decisions that are right based on the profitability of the account. So there's been some callouts to us as part of the overall program that we're working with our customers with.

Our next question is from the line of Todd Fowler with KeyBanc Capital Markets.

And so I guess I wanted to maybe just take a moment to better understand some of the asset-light trends, both in the second quarter and now into July. Revenue was down sequentially, and my guess is that's a function of some of the spot pricing dynamics. But Danny, I think you made a comment about seeing a better mix to contract business. And so I just wanted to make sure we kind of understood what you meant by that.

And purchased transportation as a percent of revenue is up a little bit here in July. And so I'm just kind of curious what you're seeing from a gross margin perspective on asset-light.

Todd, this is Danny. I think, obviously, there is a weak spot market. I don't think you've heard anyone say anything different within that. And so we did have exposure to the spot market, both in the legacy ArcBest truckload business that was there and some in the MoLo business. When we talk about moving to that better mix, there's going to be the right mix of contractual and spot business, and MoLo was more contractual than the legacy business was. And so we like that. We were moving towards that ourselves. And MoLo just put us in a better place, also put us in a better place with their experience and how to manage the market, how to work through the cycles, how to position ourselves. And so, really, that's the key to me.

As you mentioned, the PT is up a little bit. That's probably a reflection of just how the market is moving from the different pieces of that. But with our model, we're just confident that we can navigate through any cycle. We're in a better position, a better platform than we've ever been to work through these cycles.

That's good context, and that helps kind of the progression. Just for a follow-up, David Cobb, I know you've got, [I think], scheduled wage increases coming in here in the third quarter. Is there any impact this year from cost of living adjustments potentially being higher than where they've been historically? I just can't remember how that works with your wage increases.

Just as a reminder, our union contract with that, the annual wage increase went into effect July 1, and then the annual health, welfare and pension increase occurs (inaudible). And so again, as we've talked about, the combination of those increases is about 2% on an annual basis over the prior year on total compensation. Again, add to that our operating ratio incentive, which is accrued throughout the year, and when you talk about the OR levels that we're operating at, that's (technical difficulty) increase to our folks. And so we're glad to have that, and I know they appreciate it, as well.

When you think about just cost in our business, it's certainly impacted by inflation. It's across our network. We've seen higher cost, just like parts and repairs for in equipment rentals, when you think about supply chain disruption and the impact that, that's had on those things and those items. And then, certainly, fuel has been an impact there. The other thing is that we've been hiring and you've seen our publicly announced hiring events, been successful at many of those, but we've added some folks. And so we have a higher proportion of, say, less experienced personnel that we have an opportunity, I would say, there to gain them some more experience. And then also, we've added supervision to kind of add to that level of experience. And so I think there's opportunity in that cost there, too, as we move forward.

Our next question is from the line of Bruce Chan with Stifel.

This is [Matt Milask] on for Bruce. We appreciate the color you provided on MoLo's integration. I guess with regards to growth, we're curious as to how priorities might change, or maybe how the top line outlook could differ here in a potentially slower growth economic environment.

Matt, this is Danny. I would say, as we look at the market, I point back to what one of the things Dennis said. We have $5 billion of opportunity in our current customer base. We're more confident than we've ever been in our ability to deliver exceptional service in the truckload area than we've ever been. And so I think we're in the early stages of trying to capture that opportunity from our customer base. And so, yes, there is a macro component that's out there. You've heard it. It's in the headlines. You've heard competitors talk about it. But I'm still very confident in our ability to capture the market opportunity that's available in our customer base.

And on the pricing side, are you seeing any signs of changes in shipper behavior, specifically any increases in inbound RFPs or RFQ activity?

Matt, are you kind of referencing the truckload area or LTL area, or what's kind of your focus?

Just generally across in all the modes.

Okay. Really, in the LTL space, we're not seeing much. I mean we're, having good conversations with customers. And again, I'll point back to our model. We don't have to have just a price conversation with customers. We have a supply chain conversation with our customers. And so that may mean mode shifting. It's an opportunity for us really to dive into their supply chain, identify inefficiencies. And so some of that may mean a mode shift away from one of our services to another service based on what the customer is trying to achieve right now. But when you have those conversations, what we've seen is, when we're open and work with our customers and provide all the options to them, it feeds every one of our service lines. And so again, I will point back to our model. We're confident in the model that we built and so we're excited about it.

Maybe on the truckload side, just what you're seeing, there's been some conversation, are we still 3-month, 6-month, 12-month annual bids and really in the truckload space. And I'd say what we're seeing, there's probably a shift back to 12 months. Maybe others have seen a little bit more. I think what I've seen is it's really dependent on the customer and what their view of the market is going to do. If they think we're at the trough, they're going to lock in at 12-month rates. If they think that there's a little bit more to go down, they may be looking at 3 or 6 months.

And so yes, you're seeing a little bit more shift to the 12 month. But I think, again, I think it's based on really that customer's viewpoint of where the market is moving.

Yes, Matt, this is Dennis. I would also add, Danny talked about us being better positioned really across any kind of cycle with all the capabilities that we have and think about the conversations that we're having with customers. And back to your question about top line growth, another area that we're excited about is our managed solutions, as well, and that gets us into a more strategic supply chain conversation. And so we are able to talk across all of these modes with customers. And what we're hearing from them is more strategic now. I think if you rewound the clock a few months, where they would be in a more tactical go-to-get-capacity conversation. They're thinking more about how to build more sustainable supply chains, thinking about efficiency, and we're well-positioned. Our sales force is excited about the managed solutions that we offer, the truckload business that we can bring to the table. And so we're very confident in the demand we're seeing there.

Our next question is from the line of Jordan Alliger with Goldman Sachs.

I'm just sort of curious, as you sort of go forward here, and I know demand is still relatively strong, but some concerns about where we're heading in the economy. Are you starting to get any feedback from customers around pricing and [costs] as you go into contract negotiations over the coming quarters? Would the expectation be that things get a little bit tougher on that front?

Jordan, this is Dennis again. I mean, I think we just kind of talked a little bit about this, but the conversation with customers is really about what's going on in their supply chain strategically. We have a whole lot more things to talk about than just price with them. And so I wouldn't say that there's a large discussion about that at this point. It's really about preparing themselves for the future and then setting up their supply chain for greater efficiency.

And we have options to be able to do that. If we're in a price conversation in LTL, for example, we have managed solutions that can help the customer navigate even mode shifting, or mode optimization. So yes, it's a much different, more strategic conversation with them these days.

I'm also just sort of curious. If there is a slowdown at some point, if you're a shipper, you don't need to fill up a full truck, presumably, there isn't really an alternative for LTL. But I'm just curious, is there other options that a shipper could use rather than perhaps more expensive LTL options?

Jordan, as Dennis has mentioned, when you're open to the conversations with the customer about what they're trying to accomplish in their supply chain, our managed solutions could be an inbound consolidation that is doing truckload with a combination of LTL. It could be a pool distribution if they're looking for cost savings, but perhaps the conversation is how long can we hold orders? Can we hold orders for 3 days as compared to 2 days based on what their customers are expecting from them, then we can present many different options.

And the beauty of our model is that we can provide all those options to the customer. And so if the conversation for a customer is how do I lower my costs in this area, we talk about lead time. What are you looking for a lead time? What are your customers expecting and what can you do? And honestly, the environment we're headed into, we talked about a weak spot market. That does present a lot of opportunities for customers to do some mode shifting if they're able to hold LTL for multiple days and deliver a different solution to the customer.

Again, you can't just implement those services. You have to have discussions with customers about what they're trying to accomplish. And that's why we love our position to be able to have those full supply chain conversations with customers.

Our next question is from the line of Ravi Shanker with Morgan Stanley.

This is Christyne McGarvey for Ravi. Maybe I can ask one on kind of competitive landscape here. Over the last couple of years, you've seen arguably some consolidation, or at least some acquisitions that maybe put some competition and better kind of stewards. But we also have heard from peers with a lot of plans to add capacity at least on the real estate or [door] side of things. Judy, how are you guys thinking about the kind of competitive landscape and the capacity picture of the industry as a whole here?

Well, I think what's interesting is to look at that through the lens of a customer. And if you think about the journey that we've been on, really, that we've acted on since 2012 since we bought Panther in 2012, what we've been trying to do is build a company that is responsive really kind of in any environment and with respect to a variety of different alternative needs of customers.

What's been interesting during, I think, the pandemic and then just this very disrupted period that we've been through is that assets matter in the conversation. But to Danny's point, that's never the entire solution that you're talking about. And so it's very fulfilling to us to be in a position where we can really respond to a conversation that has a variety of different twists and turns that it could take, so to speak, to get the customer in a better place from their supply chain cost and efficiencies.

But I think what we look at, we're looking for some kind of an acquisition target. We're looking at the capabilities that we have and evaluating those and then thinking about what the customer is ultimately needing. And we try to think a little bit longer term, 3 to 5 years, but we also see things changing very rapidly. So not only do we stay in touch with kind of traditional M&A channels, we also stay very much in touch with the start-up community and the innovations, potential dollars that you could spend. And we see opportunities in both of those areas, and we stay active.

But I think what you've got to do is stay close to the customer and then close to those opportunities. And then we have 500 tech and innovation people, including an R&D team, that really helps us think about all that and what we can do ourselves and then what we need to go and acquire.

And we're not exactly like any competitor. We think we're differentiated. We think we're unique. But again, what's common for us is always that customer need focus, and that's where we're listening and responding.

And if I could ask one operational question. I think you've been quite successful in the last few years leveraging transactional business on the LTL side to kind of help balance out the network. Just curious for an update on kind of what you're seeing there. Is there a risk if things get a little bit softer here, that that maybe is harder to do and potentially opens up a cost headwind there? Or how should I think about that?

Christyne, this is Danny. I think when we think of that, again, we're pointing back. I think what you talked about the transaction as we walk through that, as that matured into -- it's part of everyday business for us now of how we view the network. We have some of the investments we made in technology and different things. We have better visibility than we've ever had in the assets. Our groups are working better than they ever have today really on a daily basis, to understand what the network needs in that. And so for us, again, I'll point back that what we're seeing from the customer demand side, I don't see that that changes with what we're going through. Some of the things we're doing actually creates more opportunities across the spectrum for us to be able to respond to the network. So hopefully, that answers your question.

Our next question is from the line of Ari Rosa with Credit Suisse.

So Judy, I wanted to ask, it seems like the market doesn't want to give you very much credit for the improvements you've made in your financial results, and perhaps some of that is reflecting concerns around the macro and that sort of thing. But it seems like you guys are saying demand levels are still pretty strong and not quite as concerned about kind of the sustainability of those results.

So I wanted to ask, do you think there's an opportunity to be more aggressive with the buyback, especially given that you're standing at a very attractive balance sheet position with pretty reasonable debt levels? Or would you say that, right now, your bigger concern or bigger priority is really on preparing for any eventual downturn and maybe holding on to more cash than you might otherwise do?

Well, I mean, we really have, I think, a balanced approach, but I do think that we've seen some good opportunities to buy our stock. And we've been aggressive. You saw it earlier this year. We were executing on our ASR and felt like that was the right thing to do. It was a good thing to do, and we've had additional authorization put in place earlier this year that we're working through.

But we have great confidence in this business and our growth potential and the cash flow that will be generated, and we have some other (inaudible) needs that are ones that we think about. But it's more those kinds of thoughts as we step through this than it would be any sort of fear of something that causes us.

Now, we target investment-grade sort of approach (inaudible) debt levels. We want to stay in that kind of a position, but we've still got plenty of room. And we think our stock is undervalued and has been a good buy. And in the second quarter, we took the opportunity to address that. But thank you for the question. And we do think the production of results like we had in this quarter are going to help all of that. And we're glad to have record results.

And just in that context, let me ask a quick follow-up, if I can. So again, what's kind of implied by where your stock is trading, it seems like it implies a fairly high cost of capital. You were talking about M&A, just maybe how you think about what the hurdle rate is for conducting M&A versus directing that cash towards buybacks. It seems like it would probably have to be a pretty high hurdle? Or are you thinking more about kind of what are the additional capabilities that are gained from M&A and not thinking as much about kind of the particular return hurdles on a kind of 1- to 2-year time frame?

Well, yes, if you looked at our long-term targets, we included in there an objective to have returns that exceed the after-tax return of the S&P 500. And that's been a part of our incentive programs for many, many years, decades, in fact. And so we've always thought about any decision that we made, including organic, in that evaluation, but particularly M&A.

But to your point, when you think about a transaction, just for instance, the MoLo transaction. When we look at that, we look at the results we think that could be produced. But we also look at what that can do for our business otherwise. I mean, we have 35,000 active customers. All those customers would have great spend in the truckload area. We felt like the MoLo team, or feel like the MoLo team, and it's proving to be the case, has a capability there that helps us with accessing capacity better. And the confidence that our sales team has as a result of that is proving to be even better.

So we do see specifics in these deals that help us with investments that we've already made getting better, and that's really important when you think about these returns, as well. But it's fun to get to look at this business and how it's changed and how it could change. And we just see lots of opportunities for growth in what we've already invested in, but we also see the opportunity to keep ahead of the game with our offerings.

Our next question is a follow-up from Jack Atkins with Stephens Inc.

I just maybe wanted to circle back to something Ari was asking a moment ago, or maybe following up on that for a moment. But you guys have a fairly extensive real estate portfolio. I think you own over 100 terminals in your LTL network. We've seen some folks look to kind of monetize selected properties, given the strength in the commercial real estate market, and then redeploy that capital back into the business elsewhere?

I know that's probably not ideal, but I'm just sort of maybe curious, given your stock is trading at sub 10x earnings. You're not getting any credit for what you're doing with the business. Would it maybe make sense to monetize some part of that real estate portfolio to maybe be more aggressive, deploying it to other parts of the business or maybe buying back stock. I just wanted to kind of throw that out there and kind of take your temp on that.

Yes. I mean I think what's been important to us is to view that, Jack, over a longer period of time. And it's important to us to own our key facilities. If you get into a situation where you don't, particularly in this kind of a market, you sometimes can find yourself in a vulnerable place over a facility that you really need. In other words, it's in the hands of a landlord that wants to maybe make a different decision than you do. But we have addressed facilities through disposal of those facilities whenever we have shifted our needs, or maybe the city [Centroid] has moved and we've made a different decision. And so we do, at times, have those opportunities.

But I think the kind of the fundamental principle in the asset-based business is, if you can, you want to own your key large facilities, and it's mostly because you want to control your destiny. And then the other thing is if you look at this business, it's returning the dollars that are needed to really say that you've accomplished what you need to do with respect to that, because real estate is a part of that. And so I look at it that way. But I do know what you're saying, and we keep our finger on the pulse of those values and what those opportunities are, as well.

Next question is from the line of Todd Fowler with KeyBanc Capital Markets.

Jack's asked about selling real estate. I'm going to ask you about buying real estate.

It takes a buyer and a seller.

That's right, Judy. That's what makes a market. So I think there were a couple of comments about the planned network expansion facilitating, I think it was like mid-single-digit shipment growth, and I wasn't sure if that was for later this year. Or I guess if you could talk a little bit about the available capacity you have in the network right now.

And then, looking out to your 2025 targets, not looking for guidance, and I understand there's a lot of variability within the market. But would your expectation be that your shipment growth is somewhere in that mid-single-digit range to get to the 2025 targets that you have?

Yes. I mean, well, first of all, it's for later this year, is what we were referencing. And then with what we are going to do from a real estate standpoint in the next 2 years, we feel like we're going to further expand our ability to grow.

We do have growth opportunity in the network today, and that's why it's important to really have a lot of sources of demand, which we do. It's interesting because I think it's the disruption that's gone on and the growth in certain areas of the country and maybe lesser growth in other areas. We're constantly battling balance in the network. And I really feel like so that there's not one answer or could we grow in the network, or do we have capacity. You really have to know more. But again, the beauty of our approach is we do internally know where that is, and we can address it through opportunities that we have with our customers.

But the other thing that is an opportunity, I'd say, and David talked about this earlier, is we've hired a lot of new people, and we need those people to be trained, supervised well and more efficient. And I gave the example. I don't know if you heard it when I was talking about our land distribution center becoming more efficient in street productivity because of a route optimization approach that we're using there, that created growth for that facility, and we saw it. And so we've got those kinds of initiatives and opportunities, too.

But over time, when we look out to 2025 to those long-term targets, we feel like our current plans that are in motion are going to get us there. And the good news is on the margin side, we're hitting the higher end of the margin, which is nice, but we need to do that consistently.

Yes, we've got some visibility right now on the margin side. It's the top line and the other pieces, but you guys have done a really good job here in the last several quarters.

Okay. Well, Malika, I think we're at the end of our time, so I think that will conclude our call.

Thank you. Ladies and gentlemen, that does conclude today's call. We thank you for your participation and ask that you please disconnect your lines. Have a good day.