ArcBest Corp (ARCB) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the third-quarter 2015 ArcBest earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded, Friday, October 30, 2015. I would now like to turn the conference over to David Humphrey, Vice President of Investor Relations. Please go ahead, sir.

Welcome to the ArcBest Corporation third-quarter 2015 earnings conference call.

We will have a short discussion on the third-quarter results, and we will open up for a question and answer period. Our presentation this morning will be done by Ms. Judy R. McReynolds, President and Chief Executive Officer of ArcBest Corporation; and Mr. David R. Cobb, Vice President, Chief Financial Officer of ArcBest Corporation. We thank you for joining us today.

In order to help you better understand ArcBest Corporation and its results, some forward-looking statements could be made during this call. As we all know, forward-looking statements, by their very nature, are subject to uncertainties and risks. For a more complete discussion of factors that could affect the Company's future results, please refer to the forward-looking statements section of the Company's earnings press release and the Company's most recent SEC public filings. In order to provide meaningful comparisons, certain information discussed in this conference call includes non-GAAP financial measures as outlined in the tables in our earnings press release.

We will now begin with Ms. McReynolds.

Thank you so much for joining us this morning.

Throughout the quarter, we provided our customers the high-quality service they expect and effective solutions that span their supply chain needs. Despite the general economic weakness and lower fuel surcharges, the pricing environment remained favorable and I was pleased to see ABF Freight trim its operating ratio and improve dock handling metrics. I will talk more about that later.

The double-digit increases in revenue at ABF Logistics, ABF Moving and FleetNet America were also encouraging. Although Panther experienced low growth, their revenues were impacted by available spot truck load capacity, lower fuel surcharges and mix changes from regular accounts. Last year, Panther recorded record results with an increase in load growth of 19%.

As we've discussed on prior calls, ArcBest Enterprise Solutions team develops and implements comprehensive solutions for shippers with wide-ranging transportation needs. I'm encouraged by the progress made by this team, which works across our organization to find the best answer for our customers who have multiple needs from the ArcBest subsidiaries.

The investments we're making in this arena allow for greater ease of doing business with us, which we know is a key to our success. By helping our expensive base of ABF and Panther customers more easily access our services, our entire business benefits.

ABF Freight's third-quarter revenue declined due to lower tonnage levels versus a strong growth period last year and the impact of lower fuel surcharge revenue associated with declining diesel fuel prices. Despite the weakness associated with a slowing economic environment, ABF Freight focused on a high level of customer service and solid pricing to improve its third-quarter operating results versus last year.

ABF Freight worked toward increased freight handling efficiencies and reducing the need for outside operational resources through better utilization of company drivers and equipment. During last year's third quarter, tonnage growth in ABF Freight's total business increased over 6%, and weight in ABF's core LTL business grew at a double-digit rate.

In this year's third quarter, ABF Freight increased the number of shipments it handled, but tonnage totals were below 2014 in each month of the quarter. Despite a decline in weight per shipment, ABF Freight was able to increase operating income by over 7% during a period of reduced revenue.

As I previously mentioned, ABF Freight showed continued improvement in important dock handling metrics that reflect the operational focus being placed on labor efficiencies. Handle bills per dock hour improved 2.9% over last year.

We continue to focus on improving our local pickup and delivery operation. Despite a moderate decline in sequential stops per city driver, shipments per customer stop showed improvement on both a year-over-year and a sequential basis, reflecting greater efficiencies when ABF Freight's city drivers are at our customers' facilities. Our focus on better loadings of outbound line haul trailers is reflected in the modest improvement of system load average figures.

ABF Freight succeeded in controlling city tractor and trailer rentals in its use of cartage. In addition, the need for outside rail and truckload services to supplement ABF's line haul operation was reduced, and we did a better job of managing empty equipment costs.

During the third quarter, ABF Freight was successful in maintaining price discipline and achieving increased rates. Despite the effects of significantly lower fuel surcharges versus last year, ABF Freight's total third-quarter revenue per hundredweight increased slightly. Excluding the effects of fuel surcharges, the increase in total pricing yield was in the mid-single digits.

The strength of both of these pricing statistics versus last year was consistent with what we saw in the second quarter. The rate of increase on contract and deferred pricing accounts negotiated during the third quarter was 4.9%, which represented the second highest third-quarter level in the last 16 years. For the first nine months of this year, ABF also secured an average increase of 4.9% on these price-sensitive accounts, the second highest year-to-date increase level in the last 16 years. Also, ABF implemented a general rate increase of 4.9% on October 5.

ArcBest's asset-light businesses continue to evolve as an important part of the services we offer to customers. Our ability to utilize owned assets in combination with dependable third-party resources increases the options we have in developing unique logistic solutions.

The investments we've made in these businesses are resulting in profitable growth and deepening customer relationships as additional services are being offered. In both the third quarter and on a year-to-date basis, these businesses represented 29% of ArcBest total revenue.

ABF Logistics experienced double-digit revenue growth and a 69% increase in third-quarter operating income as a result of business growth in active transportation brokerage accounts and continued success in offering its services to existing ABF customers. A 56% increase in brokerage shipments contributed to improved cost efficiencies and better utilization of resources.

Employees hired in the last year are gaining more job experience and proficiency and contributing to improved financial results. Despite a dramatic reduction in the demand for capacity in the marketplace, ABF Logistics was able to improve third-quarter gross margins over last year.

ABF Moving's third-quarter revenue increased 22% over last year as additional shipments from the summer moving activity and a change in mix that included a greater portion of government shipments positively impacted business levels. Third-quarter revenue was also positively impacted by new customers utilizing ABF Moving's corporate relocation services. ABF Moving's operating income, which was slightly less than last year, was impacted by the increase in government shipments, which tend to have lower margins.

FleetNet's third-quarter revenue improvement was the result of a 22% increase in emergency roadside events, driven by new customers, and a 4% increase in fleet maintenance events associated with existing customers. FleetNet improved its third-quarter operating income by 29% due to improved labor productivity associated with this period of higher call volumes.

Panther's third-quarter revenue and operating income declined when compared to the record period of business growth that it experienced in the third quarter of 2014. Versus last year, the current truckload environment has dramatically slowed due to weaker demand.

Despite the industry environment, Panther continued its two-year trend of increasing the number of loads it handled each quarter, adding over 5% of loads in this year's third quarter. The decline in Panther's third-quarter total revenue was related to several factors, including reductions in available revenue per load associated with weaker demand, the impact of reduced fuel surcharge revenue and a reduction in the average length of haul related to changes in shipment mix.

Though revenue in most markets served by Panther declined versus last year's third quarter, revenue in the high-value products market grew nearly 7%. The reduction in Panther's operating income was related to relaxed market conditions and changes in the mix of Panther's equipment types needed by its customers.

Later, David will discuss the recent actions we took to improve shareholder returns by raising our dividend level and by extending the amount of our share repurchase program. Our strong financial position and our market opportunities allow us to consider many options for profitably growing our Company through organic investments in our existing businesses and potential acquisition opportunities that broaden the scale of our logistics services.

We also seek to directly enrich our value to shareholders. Our quarterly dividend increase and the extension of our share repurchase program illustrates our commitment to doing that.

We believe our future is bright and opportunities for further progress are available to us. Following these recent actions, we continue to have the financial resources to execute on those opportunities in a manner that will strengthen ArcBest's value for both customers and shareholders.

I always like to highlight good things that are going on at ArcBest, and there are a few to talk about this quarter. In late July, a training program jointly operated by ABF Freight, the Teamsters Union and the US Army to help soldiers transition to civilian careers as ABF truck drivers graduated its first class trained at Fort Riley, Kansas.

Known as the Teamsters Military Assistance Program, this program began at Fort Sill, Oklahoma where five classes have already graduated. Fort Carson, Colorado will soon become the third military location to offer this training. This is a win-win for ABF Freight and for those men and women who have proudly served our country through their military service.

Two ABF Freight drivers were recently recognized as some of the best in our industry at ATA's National Truck Driving Championships. Loren Hatfield from Arkansas won second place in the straight truck class. David Hall also from Arkansas took second place in the 4-axle class. Both Loren and David have competed in the National Driving Championships multiple times in the past. We are privileged to have Loren and David as a part of our company because they represent ABF Freight knowledgeably and safely on our nation's highways.

For the third consecutive year, both ABF Freight and Panther received a Quest for Quality award from Logistics Management magazine. ABF Freight was honored in the national LTL carrier category, and Panther was recognized in the expedited category.

The quality process has been a cornerstone of our success for many years. Having both ABF Freight and Panther win this award is a symbolic testament to our history of striving to meet the specific requirements of our customers.

At last week's American Trucking Association's National Convention in Philadelphia, ABF road driver Ralph Garcia was awarded the Mike Russell Trucking Image award for his contributions toward generating positive awareness of the trucking industry. Ralph is a former ATA America's Road Team captain, a 2013 national driving champion and a past winner of the Trucking Industry's Professional Excellence award. His commitment to safe driving has resulted in over 3.5 million accident-free miles. Ralph has been a wonderful ambassador for ABF Freight and the trucking industry for many years, and we are proud to have him represent us.

And now I will turn it over to David to provide the financial highlights for the quarter.

Good morning, and thank you for your interest in ArcBest.

ArcBest's revenue was $709.4 million, a slight decrease compared to third quarter last year. ArcBest's third-quarter operating income was $33.4 million, a 2% increase over $32.9 million in the third quarter of 2014. ArcBest earned $0.72 per diluted share, equal to third quarter last year. Excluding adjustments for pension settlement charges related to our non union-defined benefit pension plan, our third-quarter net income was $19.6 million or $0.74 per diluted share. Last year's third-quarter net income was also $0.74 per diluted share on a similarly adjusted.

However, versus last year, this quarter's earnings per share was impacted by $0.03 due to a reduction of cash renter value of life insurance policies. A portion of the investments in these insurance policies are in equity and fixed income securities and therefore are subject to market volatility. These non taxable changes in value appear in the other net income line of our income statement, which is below operating income.

Third-quarter investments in our ongoing enterprise solutions initiative were approximately $1 million. The work of this group of employees enhances our ability to seamlessly offer our customers multiple services throughout ArcBest's subsidiaries. The cost of these investments are included in the other and eliminations line of our segment detail. We expect similar quarterly costs associated with our enterprise solution activity in the future.

ArcBest's third-quarter effective tax rate was 40%. Our year-to-date effective 2015 tax rate is 39.5%, in the upper portion of the 37% to 40% range that we expect for full-year 2015.

In the third quarter, we continued to purchase shares of our stock under a previously authorized stock repurchase program. We bought 128,953 shares of ArcBest stock for a total amount of $4 million. So far this year, we have purchased 292,000 shares for a total price of $10 million. ABF Freight reported third-quarter revenue of $511 million, a 2% decrease compare to last year. The change from last year's third quarter was impacted by lower fuel surcharges associated with a reduction in fuel prices.

Total shipments increased by 1% compared to third quarter 2014. ABF Freight's quarterly tonnage per day declined by 2.5% compare to last year's third quarter. By month, ABF Freight's 2015 daily tonnage declined versus the same period last year by 1.1% in July, 3.3% in August and 3.1% in September.

With a progressively tougher tonnage comp versus 2014, combined with the soft freight environment, ABF Freight's tonnage per day declined 2.9% from the second quarter to the third quarter. While there have been a couple sequential declines in the past 10 years, ABF Freight's tonnage historically has increased about 1.5% from second to third quarter.

ABF Freight's total weight per shipment was 1,274 pounds, a 3.5% decrease from last year's third quarter and 4% below the second quarter of 2015. This decrease in total average shipment size was impacted by the ability for shippers to utilize truckload options to move large LTL shipments during the current period of ample truckload capacity. The reduction in average shipment size in ABF Freight's core LTL business comparable to that for all shipments ABF Freight handled during the third quarter.

ABF Freight's average length of haul decreased moderately to 1,025 miles compared to 1,031 miles in the third quarter of last year. Length of haul was slightly higher than in the second quarter of 2015.

ABF Freight's third-quarter total build revenue per hundredweight was $29.68, an increase of 0.5% versus the third quarter of last year. Year-over-year comparisons of this yield figure continue to be impacted by lower fuel surcharge revenue related to the reduction in diesel fuel prices versus last year. On a sequential basis, compared to second quarter, when fuel surcharge changes were minimal, ABF Freight's total billed revenue per hundredweight increased 2.2%.

As a reminder, the ABF Freight's union labor agreement calls for annual wage increases on July 1 of each year, which is a 2% increase this year. Contribution rates to the union health, welfare and pension plans are adjusted on August 1, and the average increase was approximately 3.5%. These rate increases along with handling increased shipments impacted the sequential operating ratio comparison to the second quarter.

ABF Freight also experienced an increase in third-party casualty claims and cargo claims that were higher than the historical average, which together negatively impacted the year-over-year operating ratio comparison by 40 basis points. Adjusted only for the pension settlement charges -- the non union pension settlement charges, ABF Freight's third-quarter operating ratio was 94.7%, compared to 95.2% in the prior year, managing an improvement in lower tonnage and higher shipment levels.

On a combined basis, our asset-light logistics businesses increased their third-quarter revenue versus last year by 6%. Combined third-quarter revenue for these businesses was $211 million. This total asset-light logistics revenue figure was significantly impacted by the reduction in Panther's third-quarter revenue versus last year. Excluding Panther, ArcBest's remaining asset-light businesses had a combined increase in third-quarter 2015 revenue versus last year of over 18%.

Third-quarter EBITDA for these businesses totaled $12.1 million, compared to $13 million in the prior-year quarter. Combine operating income for the asset-light logistics businesses was $8.5 million versus $9.2 million during the same period last year.

We ended the third quarter with unrestricted cash and short-term investments of $261 million, combined with available resources under our credit revolver and our receivables securitization agreement, our total liquidity equals $387 million. And, again, the according features of those two agreements allow for an total additional amount of $100 million.

As Judy mentioned, we recently announced two enhancements to shareholder value. Last week, the ArcBest board extended our share repurchase program, making a total of $50 million available for purchases of ArcBest common stock.

We also announced a 33% increase of our quarterly cash dividend to $0.08 per share from the previous $0.06 per share. Our strong financial position allows us to benefit our customers through organic and strategic investments that broaden the scale of services we offer, while at the same time returning capital to shareholders.

Our total debt of $192 million includes the $70 million balance on our credit revolver, the $35 million borrowed on our receivables securitization and $87 million of notes payable in capital leases, primarily on ABF Freight equipment. The composite interest rate on all of our debt is 2%. Full details of our GAAP cash flow are included in our earnings press release.

We previously estimated 2015 net capital expenditures to total approximately $190 million, including revenue equipment purchases of $110 for ABF Freight and Panther. We expect to complete the revenue equipment purchases in our original plan, which are predominantly replacements, but due to changes in the timing and priority of some projects, this year's real estate expenditures will be below earlier expectations. As a result, we now estimate our total 2015 net capital expenditures to be approximately $160 million.

While the month is not yet complete, ABF Freight projected revenues for October 2015 are estimated to be below October 2014 by 3% to 4%. Current projections for the month show total tonnage decreasing by 5% to 6% versus last year's October when total tonnage per day increased over 11%. However, shipment counts are trending to be flat with October of last year.

On a sequential basis, we would normally expect ABF Freight's October daily tonnage to be below September's, and the percentage decrease this year is a little worse than the normal historical range. On a year-over-year and sequential basis, ABF Freight's total October revenue per hundredweight including revenue fuel surcharge is projected to increase approximately 2%.

Year-over-year comparisons of revenue per hundredweight are affected by general rate increases, decreases in fuel surcharges related to lower diesel fuel costs and changes in profile and business mix. For example, October total weight per shipment is currently expected to decline approximately 6% versus the same period last year and decline about 3% versus September.

Total October billed revenue per hundredweight, excluding fuel surcharge is expected to increase in the mid to high single digits. The change in this October's revenue per hundredweight is impacted by the timing of our last two general rate increases, one in early November of 2014 and the other in the early part of this month. Starting next month, the year-over-year comparison will only reflect the most recent general rate increase.

As experienced throughout this year, Panther's October revenue trends versus last year are being affected by comparisons back to a period of strong business growth, the availability of excess capacity in the spot truckload market and lower fuel surcharges. As a result, Panther's October revenue is trending lower by approximately 14% versus last year despite a projected 5% increase in loads handled. While experiencing lower revenue per load, Panther's October gross shipment margins are showing slight improvement compared to last year.

On a combined basis, revenue at our other asset-light logistics companies is running above last year's October by approximately 5% on double-digit increases in business activity. Fuel prices have had a significant impact on the year-over-year comparisons throughout the year, and while fuel prices and related fuel surcharges have progressively declined each quarter of the year, the significant drop in fuel prices and related surcharges began in mid to late December of 2014.

Thank you for your time.

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

Thank you.

(Operator Instructions)

And our first question comes from Alex Vecchio with Morgan Stanley. Please proceed with your question.

Good morning. Thanks for taking my question.

Good morning.

Good morning. I guess I wanted to follow up on the pricing environment. Naturally, we've been hearing a little bit of mixed messages from some carriers versus others in terms of increasing competitiveness out there on price. Can you -- it sounds like you're not seeing it, but can you maybe elaborate to the extent you may be seeing some competitors getting more aggressive, or are you just simply not seeing what some of the other carriers have talked about?

Well, I think our results we're pleased with for the quarter and into October, and so that's something I think that is noteworthy here. When you look at the marketplace, I think it's also noteworthy that in the third quarter, our most price-sensitive business, contract and deferred pricing renewals was the best -- I guess it was the second best for year to date in 16 years, but in the third quarter just mirrored that. So that's really one of our best indications as to the environment that we're dealing with.

I think some comments on some of the other calls related to there's always someone in a given situation that's trying to gain business. That's true most all the time. And so I think really what we're focused on is our ability to execute the value that we provide and our ability to bring about results in this area, and we continue to focus on providing that value and gaining those increases as a result of that.

Okay. That's helpful. And then just my follow-up here on the OR, I think historically ABF Freight's OR has typically eroded between 300 and 400 basis points in the fourth quarter sequentially.

Can you maybe talk to some of the puts and takes this fourth quarter which might suggest whether that's this time will be stronger or weaker than normal seasonality? Thank you.

Thank you. We don't give guidance, but we do reflect on history, and -- you just articulated what the history is very well. I think that it's difficult to really pull together all the puts and takes because the environment continues to change. We do have the general rate increase that we put in October 5 last year -- it was in early November when we did that.

But on the other side of things, the business environment seems to be a little weaker in October, for instance, than it was even in the third quarter. And so those are really two things that I would mention to you. And we continue to pursue good growth opportunities, to see good growth opportunities in all of our businesses, and that's something that we're going to continue focusing on and try to bring about.

Thanks a lot. Thank you.

Our next question comes from Chris Wetherbee with Citi. Please proceed with your question.

Hey, thanks. Good morning, guys.

Good morning, Chris.

David, I just wanted to come back to some of the comments you made about pricing. I want to make sure I caught all of them and were clear on some of the changes going on in the fourth quarter.

If you could give us a little bit of color maybe about the double GRI dynamic. I think you were suggesting that October revenue provided ex-fuel was up mid single digits to high single digits. I don't know if you can give us some color on how much the GRI might impact that sequentially, if you think about it, but just a little bit of color there would be great.

Yes. Just back to the -- revenue per hundredweight is projected to increase about 2% on a sequential basis. And, yes, with the GRI on October 5 of this year, and we had November 3 of 2014 GRI.

So when you're looking at October, it is reflective, really, of those two GRIs on a year-over-year basis for just the month alone. So once we get into November, I guess what I was trying to say is that you will be -- November, the month of November will be reflective of just the one GRI that we put in place in October of this year.

Okay.

Does that help?

Yes. No, that's helpful. I was curious if you could give us some rough sense on magnitude, but I'm not sure you're able to give us that level of detail.

Yes. I mean, really it's difficult to do that because you're talking about GRIs that were in place in November of last year. And then we had the adjustment that we made to the fuel surcharge in early 2015. And sorting through the details of all of that is difficult, but we do know that the retention of those things has been good.

That's great. And a quick follow-up. Just thinking about some of the comments before about heavier weight shipments and potential TL competition, I guess I'm just curious if you're seeing a truckload coming into LTL a little bit on the higher end or how that dynamic is playing out in the third quarter, then maybe early on here in the fourth quarter. Thank you.

Yes. I mean, I think your question is valid because we did see a lot of capacity constraints that were in place last year that caused the larger shipments, some LTL and some in the case of full truckload shipments that we handled. When you see the environment weaker, typically those can move back because truckload carriers are willing to handle them through the stopoffs and that sort of thing that are somewhat less efficient for them. And so we're seeing what we normally see when these environment dynamics are in place.

You also -- I mean, this -- I guess the inventory-to-sales ratios and what's happening there is playing into what we're seeing now as well. We think as that resolves itself and we think as we get a little busier here perhaps later in the fourth quarter, we're going to see some better trends on the LTL side, on the weight per shipment.

But we can't -- we don't have a crystal ball, can't say that for sure. But probably the biggest factor on weight per shipment is just the available capacity on the truckload side.

That's great. Thank you very much, guys.

Thank you.

Our next question comes from Brad Delco with Stephens Inc. Please proceed with your question.

Good morning, Judy, good morning, guys.

Good morning, Brad.

Hey, Judy, could you talk about -- I mean, I think you're one of the few LTLs that have announced and implemented the GRI. And just in the backdrop of the maybe more squishy economic environment we're in, do we have enough data yet to know how that GRI is sticking? Can you comment on that?

Our indications are that we're doing just fine with it, that it's progressing in a comparative to other past GRIs just well and just fine. In line is what I'd say.

Okay. Good. Encouraging. And then second, I guess because everyone seems to be fairly hyper focused on the direction of economic activity, can you maybe just talk about what flexibility or actions you've taken in this weaker demand environment? And then what maybe the contract may allow you to do if we were to see a more prolonged slowdown in economic activity versus what we saw in the prior cycle?

Yes, Brad. We've taken some actions as of the end of October. And some of these occurred I guess in early September, but we've reduced our head count by about 150 people. About 100 of those were in September, and the other 50 were laid off in the second half of October. But probably the bigger point here is that we do have the flexibility to adjust our head count as we see shipment levels change.

The interesting thing that we've experienced, and I think you've heard others talk about it is we've continued to see shipments be up slightly, even though we're experiencing some of these tonnage declines. And so this weight per shipment issue is a real issue, and really is more difficult to deal with because of the need to service those shipments. And so that's certainly something that we're focused on. But we have good information about where we are, and we have the flexibility in the contract to address that and to deal with that.

Great, thank you.

Yes.

Appreciate it, Brad. Thanks.

Our next question comes from Ken Hoexter with Bank of America Merrill Lynch. Please proceed with your question.

Hey, good morning, David and Judy. On the claims increase, you threw in there when you were going over the review claims seemed to take a step up. Is there something going on in performance, is there something on the cost side you can step back and look at? Maybe just talk a little bit about the cost side for a second?

Well, certainly there is something to address there, it was really two-fold. One was in the third-party casualty side, and that happens at times. I don't really see that as something that is systemic or anything like that. It's just the comparison and just what happened to us. We're always striving to be safe and improving our safety metrics and that sort of thing.

On the cargo care side, some of what we deal with on the freight profile has played into that, and so we have a greater focus on those accounts that have the difficult freight to deal with. And we're pursuing discussions with them and doing things ourselves to ensure that we're improving there.

So what is the claims ratio now?

For -- I think for this quarter it was 0.8% --

That's right, 0.8%.

0.8% of revenue. That's actually relatively high for us, and so we're very interested and fully capable of bringing that back down. But we did have some issues, as David pointed out in this quarter, and we have a greater focus in that area than ever in order to try to right that.

Wonderful. Same thing on the Panther side, so the operating ratio increases. Is that just a factor of the lack of demand on the expedited platform, or is anything else within -- on the cost side of Panther, or, again, is that just the demand side?

It really -- it's interesting because it is the demand side, but at the same time, they have load growth. So it's interesting what we're dealing with there.

If you look at the market demand index, which is an indicator of their just market environment, it's been off more than -- I think now probably more than 50%. It's off about 48% or so, I think, toward the end of the third quarter relative to last year. And I was looking just this morning at the most recent data points there, and it's a little bit even weaker in October, and so that certainly affects their revenue per load. Their also top line is affected by fuel surcharges. They're doing okay on the margin line, but because they have that load growth, we continue to service that business as well.

I think I talked about this on the ABF Freight side. It's also true on the Panther side. And what we've seen is more cargo van and straight truck business and less 53-foot trailer business. And so from a profitability standpoint, that's actually -- it depresses profitability a little bit for Panther. Again, we've got growth, it's just in different areas, and it's just a different mix.

Thanks for the comments.

Appreciate it.

Thanks, Dave.

Our next question comes from David Ross with Stifel. Please proceed with your question.

Good morning, everyone.

Good morning.

Judy, you talked about the better job you all were doing in managing empties and cutting back on PT in the quarter. Are you using ABF Logistics to do that, or is that just your LTL team I guess better balancing lanes?

It's our LTL team just handling those things better. I mean, we have the ability to use up to I guess 6% for the year in purchased transportation. So you can actually have a little bit higher than that in some quarters if you're lower in others. But it's really just the ABF Freight team executing better on managing empties and better utilizing purchased transportation in rail appropriately and then our own equipment and resources on the line haul side.

And is there any thoughts to or reason not to maybe use ABF Logistics to fill some of the back haul lanes as you are running your own assets?

Well, I think you -- we coordinate customer requests there, and we do it very effectively. And the ABF customer has full truckload needs and they also have LTL needs. And so we coordinate all that activity to achieve the customer's desire there.

And then just on the equipment side real quick, you mentioned -- or I guess CapEx in general, but you mentioned some real estate was pushed out probably into 2016. Do you have any preliminary thoughts on CapEx directionally in 2016 versus 2015? Is it going to be you think more than the $160 million this year or a little less, about the same?

We will disclose our 2016 plans in the fourth-quarter conference call. Preliminarily, I'd just say that we expect to continue our revenue equipment purchases that we've outlined this year, probably something on a similar magnitude into 2016. But we will give more guidance in the future.

Excellent. Thank you.

Thanks a lot, Dave.

Our next question comes from Matt Brooklier with Longbow Research.

David, Judy, good morning.

Hey, Matt.

Hey, did you guys talk to where contract rates are resetting at currently? I know we talked about the GRI, but just where contract rates are trending currently?

Are you talking about the -- you're talking about union contract rates, or salary -- I mean --

On the pricing side.

Oh, on the pricing side. I'm sorry. 4.9% was for the third-quarter figure.

Okay.

Matt, she mentioned the fact that that's as good as we got in 16, second best in 16 years even on a year-to-date basis it's the same way. It's one of the best we've done.

I guess a little surprising given the fact that we're in a weaker macro environment. Just curious to hear your thoughts as to why you're able to I guess achieve this type of pricing and doing a lot better than you have historically.

Well, I think as we provide greater value to our customers, particularly in these multi-service situations, I mean, it just makes the conversation better whenever you come to the time for discussion of rates.

Okay. And then maybe if you could just talk to -- some of the seasonal freight that you do move and if you have a sense for what the fourth quarter could look like, what you're hearing from your shippers in terms of any of the seasonal freight you typically move this time of year and how that compares to last year.

Yes. I'm really not hearing about anything that's different from last year other than we do and have noted this inventory-to-sales ratio issue. We're -- I think our customers are continuing to work through that issue and have -- continue to mention it.

I was with a number of our sales folks earlier this week, and asked a lot of questions of them about how things are going, what they're hearing and that sort of thing. And they're seeing our business opportunities be good. There's a lot of good discussions going on out there, and we continue to have opportunities.

Again, it matters to customers that we have multiple ways of dealing with their issues because we're seeing just an increasingly complex set of options that are needed whenever you're dealing with a customer supply chain and when speed to market is really what's on their minds. So we're not hearing a lot of negative out there, but we do have a heavy influence on our business of the industrial side. And I think that's what you're seeing in both the overall weakness in the market and to some extent in our numbers.

Okay. Appreciate the time.

Okay. Thanks a lot. Hey, Kelly, would you announce just how someone needs to get into the queue if they want to get in the queue?

Certainly.

(Operator Instructions)

Okay. Thanks a lot.

No problem, sir. And our next question comes from Jason Seidl with Cowen. Please proceed with your question.

Thank you. Good morning, everyone.

Hi, good morning.

Hey, Jason.

Could we just talk a little bit about Panther? I think we all know they have very tough comparisons in 4Q, but when you think about next year as we start it, is 1Q going to be a more normalized comp for Panther?

I would say so. As we move into next year -- what I'm hesitating about is it seems like first quarters for Panther are never normal, and that's because of what happens with the weather.

That can be a good thing for them, or at times if things happen a certain way, it can also hurt them. So -- but without trying to forecast the weather, I mean it should be a more normal comparison.

Okay. And just a quick follow-up, Ken was talking about some of the insurance stuff. I noticed last year you guys had a pretty decent spike on insurance on a year-over-year basis. I'm assuming we're not going to see the same trend sequentially this year?

Again, we can't say for sure because what that is is us adjusting our self insurance reserves to the actuarial analysis that we do, and so we haven't done that work fully yet. We will be, and once we go through that, we will know,. But we're not seeing anything that's really concerning there either on the workers' comp or the third-party casualty side.

Okay. That's good to know. I appreciate your time, guys. Thanks.

Okay.

Our next question comes from Scott Group from Wolfe Research. Please proceed with your question.

Hey, thanks. Good morning, guys.

Hi, Scott.

Good morning, Scott.

So, Judy, it's good to see margin improvement given the tonnage declines. With October tonnage declines getting worse, do you think that's still an outcome that we can expect in the fourth quarter of margin improvement?

Well, we don't give guidance on the fourth quarter. I mean, as we talked about earlier in the call, our history shows that our fourth-quarter operating ratio for ABF Freight increases by about 3.5 points or so on average. And so that's the history.

But we're not going to give guidance. If we're at conferences during the quarter, we will give updates on where we are from a tonnage standpoint and typically as we do. But other than that, we will have to wait and see how it turns out.

Outside of the earlier GRI, are there any other factors to think about with that 3.5 points of margin?

Well, just the only thing I'd say there is that I think it's been noted that in October the business levels are a little bit weaker, and that certainly plays in to the end result.

The other thing I might add is that as we pointed out in our prepared remarks, wait for shipments in October is even lower than what we saw in the third quarter.

Down about 6%.

Right.

And that's deteriorated by about 3 percentage points I think from September. So that's interesting. Again, there's a lot of -- when you look at it, you need to be looking at it sequentially because last year, the comparisons are so -- last year was so strong, the comparisons are really masking what you're looking at in terms of percentage decline.

Okay. And just last question, can you talk about how much of your business is 3PL and if you're seeing any different tonnage trends better or worse with the 3PLs? And maybe just along those lines, if you're seeing better or worse tonnage trends long haul versus regional?

Scott, it's a roughly about 5% of our total business is what we do with 3PLs. And I'm not aware that we're seeing anything, any trends any different from them versus anybody else.

And then on the long haul regional?

We're really -- I don't see that we're seeing a great change in there. We continue to have about 60% of our business that's in regional, and that's, actually, fairly consistent every quarter this year.

Okay.

We're going to move along.

Thank you, guys, appreciate it.

Our next question comes from Todd Fowler with KeyBanc Capital Markets. Please proceed with your question.

Great, thanks. Good morning, everyone.

Good morning, Todd.

Hi, guys. Judy, I guess going back to the comments on the head count reduction, was that mostly labor related on the freight side, or was that something across the corporate organization? And then can you just go through the timing of when that would have come through the numbers?

It sounded like some of that was in October so it wouldn't have been in the third quarter numbers, but a portion of that maybe was during September. Just trying to get a sense of maybe the impact of that as we move sequentially into the fourth quarter.

Yes, it was on the labor side within ABF Freight, and it was in the month of September, which I think was -- again, during the month of September. So not for the entire month of September, there were 100 people that we had to lay off, and then in October there were 50 more. So that's what we've done to date, and that's the timing.

Okay.

Yes. I was just --

Sorry, David, go ahead.

We adjust our head counts with business levels or shipment levels largely, so --

Yes. And that's helpful because I think we're trying to think about the sequential progression, and I just wanted to make sure we had a sense of when that could be coming through the numbers as well.

So just for my follow-up, Judy, you made the comments about you're doing a better job with the -- on the purchased transportation side. When I look at that as a percent of revenue, it's still maybe 100 to 200 basis points higher than where it was prior to the new contract.

Do you still have additional opportunity to drive that down, or where are you at maybe with use of rail with the rail service? I'm just trying to think about where that can go as a percent of revenue more into 2016 or longer term versus just into the fourth quarter. Thanks.

We have some opportunity to drive that down, but I think it's healthy for us to have a decent level of purchased transportation, utilization of rail, and then also the truckload carriers that we're able to use with ABF Freight contract. And that's because it helps us with balance, and the total cost can be in a better place with that in the mix.

The other thing that it allows us to do is it allows us to address peak season or peak volumes with the utilization of those options. And so it allows us to not have to carry as much owned equipment all through the year because we don't have a need for it in really the first quarter and perhaps as much in the fourth quarter. So it's a good option to have those things.

We did see -- the -- I guess to back up for a minute, where the opportunity was was really on rented equipment, and the use of cartage agents. That's where we've really seen some great benefit, just better managing our own trailer pools and the activities in our city pickup and delivery operation. Those are areas where we continue to have even more opportunity, but where we've seen the greatest benefit.

Okay. So maybe not just focus on that, but think about that with salaries and with D&A for the total cost comment that you made.

Yes, yes. That is a way to think about it.

There's a whole balance involved there, yep.

Okay. Thanks for the time.

Thanks.

Our next question comes from John Barnes with RBC Capital Markets. Please proceed with your question.

Hey, good morning. Thanks for taking my question.

Hi, John.

Judy, on your comments around the inventory to sales issue, can you maybe break that down a little bit in your customer interactions between maybe retail versus industrial? And do you have any feel just based on those conversations, is it higher in one sector than another? Just maybe a little color there?

Yes. That's more coming from the retail side.

Okay. So that's -- are you concerned at all then that as they have to grind through that inventory issue, are you seeing maybe a slower start or a delayed start to the peak, or are you concerned at all it may be -- what you normally see in a peak is maybe a little less peakish this time?

Well, I think there has been an impact of that. I mean, I think our business levels are slower because of that, and we've had that mentioned to us, and then you see the factual result in the statistics that are available. So I do think that it's a factor.

I -- it's hard for me to predict when that runoff occurs. We've been dealing with this issue for several months now, so you would think that it would be something that would be worked through fairly soon. And I've heard the comment that things will become, quote, more normal, when we've worked through that. But, again, it's a retail comment, and I'm hopeful that we work through that fairly soon.

Okay. And then going back to Jason's question on Panther --

Yes.

And just the comps going into the new year, understanding Panther is a customer base, historic customer base, they've been involved in the auto business in a pretty healthy manner. Are you concerned at all that -- auto production right now is at fairly robust levels. There's some questions as to the sustainability of that.

Just given what you're already experiencing with Panther maybe seeing some weakness along with the general economy, are you concerned at all that if you start to see a rollover in maybe the pockets that are doing well, does that -- even on an easier comp, does that still mean you're looking at maybe a little bit more sluggish tonnage growth there than you would expect normally?

Well, we could -- certainly in a case where the auto industry cools, it could have an impact, would definitely have an impact. But the good thing about where we are with Panther versus years ago, and this goes back to pre ArcBest ownership of Panther, is that the auto business I think makes up about 20% of their total business, something like that, where it used to be much higher. And so they have good influence in other areas, healthcare and some good retail areas, the government business.

High-value product line was actually an increase over the third quarter of last year.

So they're more -- I guess the Company is more diversified than it once was. The other thing that's interesting about Panther, it is somewhat auto related, but it's an additional market opportunity for them is Mexico. They're starting to do more in Mexico, and I would say even if the auto business is a little weaker, not having been a significant player in Mexico really helps us with business opportunity. And we're building a lot of good relationships there, starting to see some things happen, and that will be I think a slow progression up. But I think over time, that will be a factor in their business, and I'm excited about that and encouraged by what we've seen so far.

I think the other exciting thing is the addition of new accounts. So what you're seeing is continued penetration of our overall ArcBest customer account base, and just opportunities are there for that.

Very good. Thanks. Thanks for that color. Appreciate it.

Our next question comes from Jeff Kauffman with Buckingham Research. Please proceed with your question.

Good morning, Jeff.

Sorry. Had you on mute. Good morning. Congratulations.

Thank you, Jeff.

Some pretty strong results in a tough environment. I have a question off the board here, it looks like the Senate and the House are passing a funding bill to the president that he's likely to sign. Assuming this also funds the transportation, housing and urban development, which would include a provision for 33-foot trailers, am I accurate in this? And what have --

I believe so, yes.

So what does this mean for you and that $200 million of cash sitting on the balance sheet?

Well I mean, it certainly would be helpful to us to have the 33-foot trailer option available to us. We're excited about that if that were to go through.

But we -- it's my view, and I think it's shared by our equipment folks and our operations folks that that would be more of a progression into our fleet rather than an upfront replace and purchase all new 33-foot trailers. We don't see ourselves doing that, and we see it's something that we're going to take advantage of over time.

Okay. So you would just switch from 28-foot orders that you got planned into 33s, I'd assume?

Yes. And we have the flexibility to do that built in.

Okay. And have you thought at all about what a 33 could potentially mean in terms of productivity or P&L or anything like that?

Well I think, again, it would improve productivity, but it's going to be a progression into our fleet. So we really haven't quantified that for -- we've looked at some numbers and thought about that a lot ourselves, but we're not really going to be disclosing something until we see what happens and we see how that can progress into our fleet.

Okay.

Yes. I'm going to move us along. I've got a couple more in here, about to run out of time.

Absolutely.

Thanks for understanding that.

Our next question comes from Rob Salmon with Deutsche Bank. Please proceed with your question.

Hey, good morning, guys, and thanks.

Good morning, Rob.

I guess Judy, back to the seasonality questions which have been going on earlier, if I think about the third quarter, insurance and claims you guys noted was elevated at ABF Freight. Is there any reason why it would remain at that 1.6% just due to flow-through from the third quarter, or should I think about something more of a normalized 1.2% as I look out to the fourth quarter?

Well Rob, we -- we don't give guidance on the fourth quarter, and so that one line item, it would be even more granular to do that. Until we go through -- I mentioned this earlier, until we go through the entire process that we do with our actuaries on our insurance reserves, we won't know. But we're not seeing anything that's troubling to us at this point.

And so -- and, again, we're working on the cargo claim side to get that back to more normal place, but sometimes that takes a little bit of time. So anyway, that's really the additional color that I can give you on that.

Rob, I'm going to move this along, if you don't mind. Just want to try to get everybody a chance.

All right. Thanks.

Thanks, Rob.

Thanks.

Our next question comes from Art Hatfield with Raymond James. Please proceed with your question.

Thanks, Dave, for slipping me in there. Just one quick question. So much has been dealt with. Obviously, as you know, one of your competitors has been acquired by a termed, I guess non asset-based company.

Can you talk to maybe any changes you've seen? Has there been anything in the marketplace that has caused some freight to maybe displace from that competitor?

I don't believe we've seen anything yet that would be material, Art, but we have had some discussions about some business opportunities and we're encouraged by those. But we will wait and see how that plays out. I think we're in early stages on the impact of that.

Great. Thanks. That's all I got today.

Thanks, Art.

And our final question comes from Thom Albrecht with BB&T. Please proceed with your question.

Well, thank you. Just a big picture question. I understand the push into asset-light, the possibility to drive an improved return on capital and lessen your cyclical nature over the long term.

But I'm just wondering, Panther is probably about the most cyclical asset-light company you could buy relative to what else is going on. I mean, what do you think about that relative to a brokerage, IMC offering? I mean, does it really deliver what you had hoped for in the big scheme?

It does, but it's more about the customer solution side of things. So when we're looking at our customer base and understanding the needs in that customer base, we see a great opportunity for coordinated expedited solutions for customers. And Panther fits right into that. And it's working well for us in those conversations. So to have that integrated is a really good thing from a customer delivery of solutions standpoint.

I agree with you that it's cyclical, but when you look at where the company went, even -- this is prior to our ownership, even in 2009 -- it wasn't a terrible place. I mean, I still -- they still produced decent results, and we're not nearly where we were back then.

And so when we step back and we look at how the company is doing, especially if you look on a two-year basis, last year was probably unusual. This year is unusual. But if we look at it on a two-year basis, we're doing really well with that.

But the other point that you made I also agree with, and that is to the extent that we can add scale to our brokerage business, for instance, that's going to be something that really, I think, helps us with, more consistency in the results and really helps the issue that you point out. So -- but, again, we see all of these service offerings really helping us with the solutions that we can provide to customers, and that's really the exciting thing for us.

But, I do understand the frustration of the cyclicality and the unpredictability. I think we're seeing two extremes, last year and this year. If we could ever get to a more normal situation, I think we'd all be much more satisfied.

Okay. Thank you.

Thanks a lot, Tom.

Sure.

Thanks, Tom.

All right. Well, I believe this concludes our call. We appreciate your interest in ArcBest Corporation, and we will talk to you in the future. Thank you very much.

Ladies and gentlemen, that does include the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great weekend, everyone.

Thanks a lot.