ArcBest Corp (ARCB) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the ArcBest Corporation third-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded Thursday, November 3, 2016.

I would now like to turn the call over to David Humphrey, Vice President of Investor Relations. Please proceed.

Welcome to the ArcBest Corporation third-quarter 2016 earnings conference call. We will have a short discussion of the third-quarter results, and then we'll open it up for a question-and-answer period. Our presentation this morning will be done by Ms. Judy R. McReynolds, Chairman, President and Chief Executive Officer of ArcBest Corporation, and Mr. David R. Cobb, Vice President and Chief Financial Officer of ArcBest Corporation.

We thank you for joining us today. In order to help you better understand ArcBest Corporation and its results, some forward-looking statements could be made during this call. As we all know, forward-looking statements by their very nature are subject to uncertainties and risk. For a more complete discussion of factors that could affect the Company's future results, please refer to the Forward-Looking Statements section of the Company's earnings press release, and the Company's most recent SEC public filings.

In order to provide meaningful comparisons, certain information discussed in this conference call includes non-GAAP financial measures as outlined and described in the tables in our earnings press release.

We will now begin with Ms. McReynolds.

Thank you, David, and good morning, everyone.

Today we're going to change things up a bit from our normal routine. I'm going to lead off our call with a discussion about our new corporate structure, which we released about an hour ago. And after that David Cobb will follow up with the details about our third-quarter earnings. And then we'll take questions on both topics.

Earlier today I communicated to our 13,000 employees the exciting news that we are unifying our company and presenting ourselves as one logistics enterprise, with creative problem solvers who deliver integrated logistics solutions. We will be restructuring the Company to offer most logistics services under the ArcBest brand starting next year, while continuing to recognize the value in the ABF Freight, Panther, and U-Pack brands.

This realignment includes a unified sales structure under ArcBest; a combination of ABF Logistics, ABF Moving, and Panther into a new asset-light logistics operation; a unified approach to pricing, customer service, marketing, and capacity sourcing; and consolidation of training and quality awareness under ArcBest human resources.

As we said in this morning's announcement, the reason we're doing this is to provide the best customer experience possible. Quite simply, our customers are asking for integrated solutions from us and easier access to them. Based on that feedback and our own market research, we feel confident that this is a significant step toward delivering best-in-class customer experience and greater shareholder value.

Last year at our Investor Day we shared some findings of that research underlying our strategic direction. You will recall at that time we identified a $266 billion market opportunity for all of the supply chain and other services the ArcBest enterprise offers.

Our opportunity includes and is well beyond the $37 billion market for LTL alone. Another $60 billion represents solutions we offer that are outside of the traditional supply chain in moving and vehicle maintenance and repair. And the remainder, about $170 billion, is in the areas of truckload brokerage, warehousing, premium logistics -- and that includes ground expedite -- ocean and air forwarding, and final mile. These are all areas of expansion for our company over the last several years through organic growth and acquisition.

We are fortunate to have many solid relationships built over years through our excellent LTL services at ABF Freight. We've added to those through the acquisitions of Panther, Smart Lines, Bear Transportation and, most recently, Logistics & Distribution Services, all in the asset-light category.

With this new structure we are now taking those relationships and best-in-class operating principles and tying them together in practical ways, ways that will help us synchronize our market approach and grow our company.

We've seen many customer success stories over the last few years that show us how providing more services across the supply chain helps grow ABF Freight and the entire company. I shared some of those at our Investor Day and since then we have many more.

The details about the senior leadership changes we are making are included in the press release. And I am happy to answer any questions about those later in this call. But, in general, what is happening is where we previously had a different approach in which the important functions of sales, marketing, yield management, customer service and capacity sourcing were all doing a great job at their own individual operating companies with their own individual leaders, we are now bringing these together under ArcBest leaders reporting directly to me.

This matters, because we will now make even more progress in our mission to provide the best possible customer experience with a more unified view of the customer. The structure will enable us to better serve customers, grow revenue, and eliminate duplicative costs and inefficiencies in order to improve margins and overall profitability.

Our excellent sales organization is evolving to one team, under a leader who has a great deal of experience in cross selling our logistics services. Account development is further enabled by this type of approach, which includes unified yield management as our people are incentivized and given all the tools to make sure our customers have the full supply chain solutions they require through the optimal contact in our organization.

By marketing most of these services as ArcBest we will make it easier for our customers to connect the dots about the full breadth and scope of the logistics solutions we offer, including LTL, represented by the ABF brand, and ground expedite, by the Panther brand.

I think you all realize that our excellent customer service is well known in the industry and appreciated by our customers. By combining the previously separate groups into one unified customer solutions organization, we will seamlessly provide an excellent customer experience.

I also want to spend just a minute talking about capacity sourcing, because we feel this new structure will result in powerful changes for us in this important capability. By creating a more unified approach to interactions with the many different third-party carriers we use, there are a lot of scale advantages that we've identified.

This sourcing expertise, especially when combined with the high quality service offered through our outstanding ABF Freight network, becomes a differentiator for our customers when they seek reliable partners to deliver their important goods. We believe the combination of our asset-based network with our expanding asset-light relationships is the right model for our customers, especially as capacity constraints become more evident.

To wrap up this part of the discussion, you've seen in the release that we are eliminating approximately 130 employees at the company and subsidiaries. As I told our employees, I recognize that is difficult, but necessary for us to take our organization to an enhanced level of customer experience.

This improved organizational structure, consolidation of certain systems and facilities, and other cost savings actions produced an estimated annualized operating expense savings of $15 million, generally split evenly between our asset-based and asset-light operations.

We also expect to record a reorganization charge, the majority of which is noncash, for contract and lease terminations, severance, and adjustments of intangible assets, primarily software, totaling approximately $9 million, or $0.22 per diluted share after tax, and that will be recorded in the fourth quarter of 2016, and an estimated $1 million, or $0.03 per diluted share after tax, in the first quarter of 2017.

In addition to the new corporate structure news I just shared with you, we have a number of initiatives going on at ABF Freight in an effort to restore historic operating margins to that company. These initiatives are in addition to our disciplined approach to pricing and the ongoing training our people receive to improve growth and operate productively.

Many of these revolve around technology. For example, we have several planned system upgrades that are underway to help with workload visibility and decision making, as well as linehaul and street optimization tools and new equipment on the docks, like handheld devices, tablets, and scanners, that replace our older equipment. There is a great data analytics opportunity through the implementation of ELDs on all road and city equipment as well.

We also have continued safety and fuel savings benefits of equipment upgrades and practices. Those include things like improved engine design, automated manual transmissions, trailer skirts, tractor road speed governed at 63 miles per hour, and review of a potential collision mitigation and lane departure system.

And now, I'll turn it over to David Cobb for a brief discussion of the earnings results.

Thank you, Judy, and good morning, everyone.

Let me begin with some statistics on ArcBest. Third-quarter 2016 revenues were $714 million compared to $709 million in last year's third quarter, a slight increase. Third-quarter 2016 net income was $0.49 per diluted share compared to net income of $0.72 per diluted share last year.

As we saw in the second quarter, our reported third-quarter results were adversely impacted by increased healthcare costs. Versus the same period in 2015, total corporate healthcare costs increased $3.2 million, or approximately $0.08 per share on an after-tax basis.

These higher costs were across all of the ArcBest companies, with the increase of nonunion employees at ABF Freight representing $1.7 million. This was associated with increases in the number of health claims filed, as well as a higher average expense for those claims.

As a part of our stock repurchase program, in the third quarter we bought 136,000 shares for a total amount of $2.5 million.

We ended the third quarter with unrestricted cash and short-term investments of $190 million. Combined with the available resources under our credit revolver and our receivables securitization agreement and their associated accordion features, our total liquidity equals $416 million.

Our total debt of $238 million includes the $70 million balance of our credit revolver, the $35 million borrowed on our AR securitization, and $133 million of notes payable and capital leases, primarily on ABF Freight equipment.

The composite interest rate on all of our debt is 2.2%.

Full details of our GAAP cash flow were included in our earnings press release.

So far this year our net capital expenditures total $100 million, which includes $38 million of net cash expenditures and the $62 million of financed equipment. We now expect our total 2016 net capital expenditures to be between $140 million and $150 million.

ABF Freight reported third-quarter revenue of $509 million, a slight decrease compared to last year. Although ABF Freight continued to gain business from new and existing customers, revenues were negatively impacted by elevated retail customer inventory levels, weakness in industrial production, and excess capacity in the truckload industry, which drives truckload carriers to handle more larger-sized LTL shipments. In addition, lower fuel surcharges versus last year were a contributing factor in the quarter.

ABF Freight's quarterly tonnage per day decreased 2.8% compared to last year's third quarter, with monthly year-over-year tonnage changes that included a 3.7% decrease in July, a decrease of 2.1% in August, and a decrease of 2.5% in September.

Daily shipments increased by 1.6% in the third quarter, as ABF Freight continued to experience a reduction in total weight per shipment, which declined 4.4% during the quarter.

ABF Freight's third-quarter operating ratio was 96.5% compared to 94.8% in the prior year. This increase was related to the labor and cartage cost required to handle additional shipments during a period of lower tonnage levels. The higher healthcare costs I mentioned earlier were also a factor contributing to the rise in our operating ratio.

And finally, weaker pricing yields on spot truckload business adversely impacted our operating results versus last year.

As seen throughout 2016, the benefits of ABF Freight's equipment replacement program are contributing positively to improved fleet dependability, leading to effectively-served customers and significant reductions in maintenance and repair costs.

ABF Freight's third-quarter total billed revenue per hundredweight was $30.52, an increase of 2.8% compared to last year's third quarter. Year-over-year comparisons of this yield figure were positively impacted by changes in shipment profile, but negatively impacted by lower fuel surcharge revenue. Excluding fuel surcharge, third-quarter billed revenue per hundredweight from ABF Freight's traditional LTL freight had a percentage increase in the mid-single digits.

Despite an inconsistent freight demand environment, ABF Freight secured an average 2.8% increase on customer contract renewals during the quarter. In addition, effective in late August, ABF Freight enacted an average 5.25% general rate increase that positively impacts approximately one-third of its business.

In total, our asset-light logistics businesses had revenue of $218 million, an increase of 3.2% compared to last year's third quarter. Revenue growth in ArcBest asset-light logistics businesses was a result of increased shipper demand at Panther, and the result of acquisitions we have made since third quarter last year.

For the month of September following the LDS purchase, asset-light revenue represented 31% of total consolidated revenue, and we expect that percentage to grow as we further develop these businesses.

Third-quarter combined EBITDA for these businesses equaled $10.5 million compared to $12.1 million in last year's third quarter. Customers desire for Panther's expedited services and the timely transport and superior cargo care it provides resulted in an increase in total loads handled. Higher gross margins and disciplined cost controls contributed to Panther's improved operating results compared to both the same period last year and the previous quarter.

Current market conditions and the revenue effects of lower fuel prices contributed to reductions in both revenue per shipment and operating profit at ABF Logistics. Though improved from the previous quarter due to better gross margins, the integration of a former Bear location continued to impact third-quarter results, as we discussed last quarter. In addition, margins on ocean shipments were adversely affected by carrier rate changes resulting from the Hanjin bankruptcy.

Changes in customer mix and diminished demand for services from transportation-related customers in both emergency roadside and fleet maintenance were the primary factors contributing to FleetNet's lower third-quarter revenue and reduced profit margins.

A decline in government shipments continued to be a primary reason for ABF Moving's results being below last year.

Under the new corporate structure that we announced this morning, we expect to report our fourth-quarter and full-year 2016 financial results as follows: Our asset-based operations, which consist of ABF Freight; and then our asset-light operations, made up by two segments -- ArcBest, which consists of the current Panther, ABF Logistics, and ABF Moving Services, and then, FleetNet; and then, finally, other and eliminations.

Limited results for the month of October 2016 versus October 2015 were as follows:

Daily billed revenues increased between 2% and 3%. The impact of Hurricane Matthew on October revenue was minimal.

Total tonnage per day was flat compared to last year, with LTL tonnage up in the low-single digits compared to easier comps from last October. October tonnage trends are being affected by reductions in our full-load spot business. On a sequential basis versus September October tonnage trends are about average with history, which is an improvement versus what we saw in the third quarter, which were some of the weakest in the last several years.

Shipping counts increased between 3% and 4% above last October. Combined with flat tonnage, we are continuing to see a lower average weight per shipment on a year-over-year basis. On a sequential basis in October there are signs of stabilization we are seeing in our LTL weight per shipment.

Total revenue per hundredweight increased between 2% and 3%, which includes slightly lower fuel surcharges compared to October of last year.

On a combined preliminary basis, October 2016 revenue from our asset-light logistics businesses increased between 10% and 15%. This was impacted by acquisitions made since last year and reflects continued strength in our ground expedite Panther services.

Fourth-quarter profitability in these businesses will likely be impacted by continuing margin pressure in the ocean shipping market related to the Hanjin bankruptcy.

Now I'll turn it over to Judy for some closing comments.

Thanks, David.

On Monday, we announced the retirement of a longtime Board member, John Morris. John has faithfully served on the ArcBest Board for more than 28 years, and he has been a trusted advisor and steady force during that time. I think him for his guidance and counsel over these many years and I wish him well in his retirement.

I'm pleased to welcome two new Board members to our Board: Mike Hogan and Eduardo Conrado.

Mike currently serves as Executive Vice President, Strategic Business and Brand Development, for GameStop Corporation. Eduardo is Executive Vice President and Chief Strategy and Innovation Officer of Motorola Solutions, Inc.

Both Mike and Eduardo add expertise in marketing and brand strategy as important leaders at their technology-driven enterprises. Mike's unique experience leading GameStop's successful diversification strategy and transformation, and Eduardo's leadership of Motorola's growth focus, customer experience, innovations, IT, and strategy teams will be valuable to us as we embark on a newly structured path toward customer excellence and efficient delivery of logistics solutions at ArcBest.

To conclude our prepared remarks, I would like to underscore how pleased I am that our new structure will allow us to differentiate our company from our competitors by combining the skill and the will of our employees with a more consistent customer experience across the board. There's a lot of work ahead, but I know we are more than up to the task, and our leaders are really energized about the opportunities before us.

I couldn't be more excited about what's in store for us as we move forward with a renewed sense of purpose and the right structure to achieve all of our goals.

And now, we're ready to take your questions.

Thank you. (Operator Instructions) Ravi Shanker.

So, Judy and David, exciting news indeed. Good luck on the corporate changes here. But just a few more kind of follow-ups here. Why now? What prompted this? How long will it take for the full benefit, the $15 million, to come through? And does this in any way represent a pivot in your strategy to kind of focus more on kind of shoring up the business and maybe away from M&A a little bit?

Well, let me answer your last question first. It is exactly on our strategy. It's a continuation of the strategy that we've been working toward and we're really excited about that.

And I think it really in a way doesn't bear on the decision over M&A other than to say that we're going to continue to be responsive to our customers. You've seen us act on that through acquisitions. You've also seen us act on that through organic actions. So we will continue down that path of elevating our customer experience and our seamless delivery based on what we're hearing from our customers and the actions we feel are necessary to accomplish that.

But if you think about why now, and just think about the steps that we've been taking really since we bought Panther back in June of 2012, we're just continuing down that path of listening to customers, providing services to them. And as we stepped back and looked at our delivery of our services to customers, we realized that we had an opportunity to make that simpler and to unify in some important areas like sales and our customer service areas, and in viewing the ArcBest customer on a unified basis, as an ArcBest customer rather than in some of these separate silos that we were working from.

And we believe that that will help us with achieving excellence, again, in the delivery of those solutions to our customers.

Regarding -- in terms of the timing --

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

So there's no -- it's not going to take a while for this structure to kind of permeate through the system. You'll start seeing the benefits pretty much right away.

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

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

Great. If I could just sneak one more in. Another good quarter for Panther. Can you just elaborate a little bit more on what's driving the strength there? And also, was Hanjin a net benefit or a net drag for you in the quarter?

Well, first of all, on Panther what's driving that -- we've talked with the management team there and we've considered what's happening with customers. And the best answer that I can give you there is their excellence in customer service, their reliability, and their visibility and communication on customer shipments is what's really driving that.

So it really is an exciting time for them. We congratulate that team on another good quarter. And it really is pretty fundamental what is happening there, and it's a good thing.

Hanjin is a net negative to us for the quarter, because it really did impact the results of ABF Logistics because of I guess the spike in prices that occurred on the ocean shipping move that really couldn't be passed along effectively to customers if we wanted to be reasonable and retain those relationships. And that continues a little bit into the fourth quarter. But it's just something that will take some time for those markets to settle down.

Great. Thank you so much.

Chris Wetherbee.

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

Well, you're speaking specifically about capacity sourcing. I think that's one area. When we're looking at all the sources of capacity that we have for the organization -- and that's going to be managed out of Medina, a group that has already established excellence in that area. We really feel like that there will be some good relationships that we can look to there to both be reliable for the service that our customers need, but we'll be able to gain the attention of because we're collecting all of the ways that we spend money with those sources and putting that together and really working with them on that basis. So that's a good thing.

Some of the other areas I think about, you know, if you just think through the unified sales force and looking at a customer on a combined basis, there's some efficiency that you can gain in that. But you're also communicating so much better with that customer. So what I think it leads to is a better set of opportunities from the customer, more holistically viewing their supply chain with them, so that you can learn how best to interact with them, again, with the services that we have to offer or maybe ones that over time we need to gain.

And then on the customer service side, we see a great deal of opportunity because we're going to be able to help ourselves with systems and processes that are more seamless and streamlined. And many of those things will be happening at the early part of next year and beyond.

And, as Judy mentioned, have streamlined processes and systems we hope to be more efficient in that. But some of that's to come.

Okay. So there's obviously some work to go here. That's helpful. And then just a follow-up here, switching gear to the LTL side. Just wanted to talk a little bit about the pricing dynamic. Particularly as we're rolling here through the third quarter and into the fourth quarter, seems like things picked up maybe a bit. Obviously we have a GRI coming in. If you could just talk a little bit about the pricing environment, how it feels right now relative to what's going on from a tonnage perspective, that would be helpful. Thank you.

The pricing environment, I would characterize it as fine, okay. When you look at our contract and deferred increase, it was about 2.8%. And that's on the lower end of what we've seen over the last few years. And so there is a little bit of weakness. But by and large we're seeing most -- the competition focus on rates rather than on market share. And I think that speaks well for the months that we have ahead of us.

But we do see some competitive nature on some larger deals and bids, that sort of thing. There's nothing new about that this quarter versus the past two quarters. But we have continued to see that on kind of those larger bids.

But I think we're generally pleased with where things are, and that includes what we're seeing so far in October.

Okay. That's all I need for the time. I appreciate it.

Scott Group.

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

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

So you're saying you get to $15 million just from the headcount.

There's some other things, Scott. Headcount is the majority of it, as we mentioned. But other items, like consolidating insurance programs, consolidating facilities, and some changes in our software.

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

Well, I think probably perhaps more an indication for you on Panther is to look at where we were with load growth. In the third quarter was up about 7%. Revenue is not the best indicator because of what we've seen on fuel that affected that top line. We saw some improvement in the margins for Panther, and as you compare the third quarter of 2016 to the third quarter of 2015. But -- and those trends are continuing as we move into October.

So we are, again, very pleased. And, again, we've seen this -- this is the second quarter where we're seeing this improvement. And we're pleased with it. We think it's -- but, again, when we talk to the customers we're hearing about why. I mean, it really is Panther's performance on service, reliability, and visibility for them.

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

Well, when you think about what impacted us in the third quarter, we had some elevated healthcare costs. We saw some I think elevated cartage costs in purchased transportation. As we move into fourth quarter we don't really know what will happen on the healthcare side. So that's going to be a factor potentially. And we have a lot of initiatives at the Company to try to tackle that to make that better that we believe are working. But those sometimes take some time to work through.

And we're seeing some relief on our cartage costs in the fourth quarter, or so far in October. But they're still elevated above last year.

But other than that, I mean, I think you know kind of the difference. We put in the general rate increase in the early part of September this year, and last year it was in the early part of October. So those are all considerations.

Thank you.

Matt Brooklier.

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

No, it does not.

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

No. I think we need to get -- again, these changes take effect January 1st. We need to get that accomplished and then begin to see what we can accomplish there. I mean, we already do utilize the benefits of these relationships among our subsidiaries as they stand today. But we really can't speak to the opportunities that we'll have until we get that group together and we start to work with our capacity partners and we see what we can accomplish.

But we think it's upside that we'll have. And really the upside is in more than one area. The one that I'm the most focused on is capacity sources for our customers, because if we're able to accomplish that, we're able to grow revenues.

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

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

But our revenue equipment purchases are going to be accomplished in 2016 (inaudible).

Okay.

So we're not really -- and those are all replacements anyway.

That's right. And as we mentioned, we're continuing to see good results out of that investment. So reduction in miles per gallon, so reduced repairs and maintenance -- so benefit there.

And final question -- any thoughts on CapEx for next year?

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

Okay. Appreciate it.

David Ross.

I've got a couple questions on ABF Freight. First, Judy, you talked about the elevated cartage costs in PT. What was the reason for that? Did you have to use more than normal? Did the costs of what you normally use go up?

Well, when you look at, for instance, a third quarter relative to a second quarter, we always have an increase in our utilization of rail and PT. I mean, that's just the seasonality in our business. But what we did see was an increased use of cartage costs in ABF Freight.

One of the things that's difficult about this environment is really manpower planning. If you think about some of the variability that we've seen in tonnage of shipments and that sort of thing -- and to some extent we're affected by the days of the week that those are occurring. It's more difficult I think today or this year than it has been in order to plan that. Although we have good information, it's still difficult.

And so what tends to happen is you're being conservative. This is a weaker year in terms of the business environment, so you're being conservative. And when you are, in certain locations if you see business spike you've got to have a solution, because service is what we're trying to deliver to our customers.

And so we saw an increased utilization of cartage in that regard. It's really more about the utilization of it, not so much about an excess of kind of rate increase or something there.

But we have seen some relief of that in October. But still it's a little bit elevated from what we saw last October.

And is that because there's not enough I guess ABF drivers on furlough or equipment available?

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

And then, in talking about the power equipment, you mentioned the savings that you got from bringing on the newer tractors. But it sounded like they were just normal replacements.

Yes.

Is there any way of accelerating the replacements to lower the average fleet age, given the margin benefit?

Yes. Actually, we've done that in the last two years. In our past history, prior to the last two years, we would have bought about 450, 500 units. In the last two years we bought 600 in each of those years to do exactly what you just said. Because we do see the benefits of them and we want to be sure that we're replacing those older units and taking full advantage of that.

I think in the third quarter our miles per gallon were up about 6% or 7%. And that's a little bit higher than on a year-to-date basis. So we're seeing even more benefit from that.

And we're also seeing good results on the reductions, particularly on the road equipment, for savings. We're still working down the average age of our city fleet. That's being tackled. But there's still quite a bit more to go there. And so we're looking forward to our purchases next year really impacting that. And so we've got some more to go.

Thanks a lot.

Ken Hoexter.

Sounds like an exciting new plan for you, Judy, so good luck with that. On the lease terminations, can you maybe talk a little bit about that? Or I don't know if that's David's role. But are you combining physical operations? What is getting combined? And while you're on that, maybe throw in what business are the 130 employees in? Are they, too, spread out between freight and non-asset?

Yes. Well, first on the facility, you're right. It's combining -- as we said, we're trying to consolidate some of these teams. And so when you do that you have some opportunity for some location consolidation. And part of that will be a charge to terminate some of those contracts. So, you're spot on on that.

And in terms of the other question about the personnel, those are across the various companies as they exist now. That's where the terminations are.

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

That's about right. I would think so.

Yes.

Okay.

That's the larger part of the $15 million, Ken, so.

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

Well, we do have some additional things that we're doing. The street optimization, for instance, is something that I think probably would add to the list that we talked about on Investor Day. We see some opportunity to really have better visibility into our operations and the alignment of that with the customer stop-off points. And the planning there should really help us.

Also, just continuing down the path of thinking about the benefits of some of the deployment of these technologies. Although we talked about it on Investor Day, many of the things that we talked about are not yet deployed in the operation fully. And so we still have the benefit of them to go.

For instance, the equipment that we will replace on the dock, the PDAs that we'll replace on the dock, we're going to be putting those in place in the fourth quarter and into the early part of next year. And what we do on street optimization will probably be a early-next-year item as well.

And then, with the deployment of the ELDs into -- because we've had those in the city for awhile, are finalizing putting them on the road equipment. And we do see a benefit of having the data from those. And, again, that whole process is just in its early stages.

And as I mentioned, we still have some of our equipment to replace, particularly in the city, to get the benefits of the new technology from the equipment itself.

So this is aiming -- I mean, when you talk about getting margins back to historical levels, this is not any kind of program to accelerate beyond the $15 million. This is just -- I mean, still improved savings potential, but to make LTL freight more efficient. I don't know, the PDAs, that sounds like you're just electrifying -- I mean, is that just electronic bills of lading? Or is that even more advanced, I know, to putting scales on your equipment?

Well, what it is -- we've had the visibility from PDAs that's now 15-year-old technology for us. What it does is it will enhance our knowledge of the activities that are happening along with those shipments and allows us better costing, better visibility on the time it takes on certain shipments. And so we think that the usability and the visibility that comes from that new technology is really going to create some opportunities for us.

Sounds good.

And so, again, it's beyond -- this whole discussion is beyond the $15 million, just to be clear about that.

Appreciate the time. Thanks.

Todd Fowler.

I Just wanted to ask a couple questions on the expense side in the freight business. The commentary around the healthcare costs this quarter, I guess I'm curious just from a margin impact if you had some sensitivity around that. And then I'm assuming those are non-union costs or costs related to something outside of the union contract. And if there's any way you can -- how do those costs progress, I guess, going forward?

Well, they are definitely related to our nonunion workforce. And so that's certainly the case. And, David, do you want to address the costs year over year that we're dealing with there?

Yes. We were looking at 30% increases year over year, or north of that actually on a per-person basis. So that's resulting from just higher claims levels and including increased hospital visits and lengths of stays, and pharmacy costs.

But as Judy mentioned, we have some initiatives corporate-wide to work on that. Some of those things just take a little more time to get in place. In fact, we feel like we have some best in class programs there. Because we think wellness of our people is an important factor and is a value, a core value, for our company. So we're concerned about their wellbeing. And of course well employees make for a more product environment and a good environment. Does that help?

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

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

Yes, I jumped on a little bit late, so I might have missed that. Okay, that helps.

And then just on the benefit from the lower fleet age, can you talk a little bit about I guess first the depreciation run rate here in the quarter? Is that what we should expect going forward? Or does that continue to trend up? And then, I know that we see some of the benefit in the fuel and expense line item. But where do we see some of the other cost savings or cost benefit from the younger fleet?

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

And we've given -- I think, Todd, we've given a depreciation number for the year. It's about $110 million.

$100 million to $105 million.

Oh, $100 million to $105 million; sorry about that -- $100 million to $105 million. Which, based on what we know about our equipment, we are adding some -- not adding. We're replacing some in the fourth quarter. And so that will continue to add to what you've seen in terms of expense on that line item. But it should be within the range that we've set out for the year.

Okay. All of that helps this morning. Thanks for the time.

[Amit] (inaudible).

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

Good question. We have progressed in our percentage of accounts that do business with more than one of our companies. I mean, that's kind of the way we've characterized that in the past. It's about 24%. We would like for that to be about 50%. And we think that based on the market opportunity that's out there that we can certainly accomplish that.

Having a unified sales team and a single view of the customer is really going to help us with seeing that opportunity the best way possible. And so we've got a system that we're deploying that's actually already deployed at Panther, but it will continue to be deployed for the remainder of our sales people, that creates a lot of visibility on those customer connections. We really want to capture all the interactions that we're having with the customer so that we can better work with them, partner with them to grow our business as their business grows.

And so we feel like the coordination of all that within one sales team is easier for us and more streamlined for us than it is working across the silos that we currently have today.

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

Well, I think it will be a number of years for us to realize the full opportunity. But I think what this structure does is accelerate our ability to accomplish that.

And some of the things that I'm talking about in terms of systems and visibility and that sort of thing, it will take us a few months as we enter into 2017 to get to that. We see a lot of potential there, but we do have some work to do on the system side to get everything in terms of that one view of the customer visible and workable for us as a company. But we see that as a great opportunity, so I'm glad you brought that up.

Yes. Thank you for that. Just let me just ask one question on the asset-based side of the business. I was hoping you could just educate me actually a little bit in terms of how the LTL business responds to some tightening on the truckload side, and talk about past cycles. Because the question I have is that if this sort of better truckload fundamentals actually takes hold at some point and there is a spillover into the LTL side of the business if and when that does occur, can you just talk about sort of the lag time? And is it immediate or how long does that take to actually show up on LTL?

And then when that does happen, or if that does happen, given the optimized cost structure or the continued progress you've made on the cost structure, where do you think the incremental margins or the contribution margins can go on the sort of prospective OEM growth? Thanks.

Well, it's great questions. On the truckload tightening side, I think we would begin to see that as it was happening, because we have really seen an impact on our volume quote shipments being weaker as we've gone through this year. So there would be some immediate impact there.

But as the few months go by after truckload tightens, I think what you see is truckload carriers are less interested in handling larger LTL shipments. They're less interested in stop-offs and appointments. And those are all things that we do very, very well. And you can clearly see because of the weight-per-shipment issue that we've had this year that we've had an impact in that area.

And this is something that is -- it happens in cycles. It's something that has happened a number of times in my career. And certainly whenever truckload tightens up that's a much better answer for us. And it helps us with pricing, profitability, on given accounts and on our spot business.

And we I think enjoy a network that works and is resilient in that arena, too. If you think about the value of having 245 locations and city drivers that are out on the street every day picking up shipments, you think about a half-full trailer versus a full trailer, there's a lot of efficiencies that can come with a better economic environment and better capacity environment.

And yet our network that we deploy each and every day is resilient and it's there and it's available for those customers. And so it tends to have a lot of value in that kind of a situation. And we're looking forward to that happening.

We also think perhaps whatever happens with capacity on the ELD side as a result of the implementation of that set of rules is going to benefit us.

Thank you.

Jason Seidl.

Wanted to focus on two quick things. One, you talked a little obviously that you've been very acquisitive on the non-asset-based side. Is there any way you could break out the acquisitions and talk about organic growth?

Well, the shipment growth on the organic business was about 14% for the quarter. And I'm talking about truckload.

Truckload brokerage.

Truckload brokerage.

(Inaudible).

Logistics. It's in ABF Logistics, those shipments.

Okay. That was that. And I'm assuming because of rates the revenue was probably much, much lower than that.

Yes.

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

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

Yes. They were -- go ahead, David.

I've got the tonnage. You want it by month, Jason, I guess?

By month would be great, yes.

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

And that was tonnage?

That was tonnage. (Inaudible)

Jason, that October and November, those were the two worst months of the year last year.

Okay.

In terms of year-over-year declines.

In terms of year-over-year declines. Okay.

In terms of year over year, (inaudible) numbers. That's what I'm talking about.

Fantastic. That's all I had. I appreciate the time as always, everyone.

I think we've got one more in line here, maybe a follow-up.

David Ross.

Yes, I just had a real quick one. Average length of haul in the third quarter versus last year?

Length of haul -- how about 1,040. And it was 1,025 same time last year, so up about 1.5%.

Excellent. Thank you.

All right, good deal. Thank you a lot, James. Well, this concludes our call. We appreciate you talking some time to spend with us this morning. And we will see you next time. Thank you very much.

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