Operator: Okay. Your next question is from the line of Stephanie Moore with Jefferies.
Stephanie Moore: I guess, just to echo what everyone else is saying. David, congratulations. I know we will all miss you. So — but congratulations, very well deserved.
David Humphrey: Thanks a lot, Stephanie.
Stephanie Moore: Maybe going back to a prior question on disservice here. I wanted to — I appreciate kind of citing the on-time performance and some of the other metrics that you provided in the deck and noted today. I think if we look at what many of us view from a third-party service provider, I think it showed some movement in 2023. Clearly, 2023 was an abnormal year for the LTL environment in general. So maybe if you could just comment a little bit on what you think drove some of that movement, maybe a little bit lower than you had been in the past and areas that you might address what might be measured in that survey when clearly, there are some good pauses on the other side of it, too. So maybe just any additional color there would be helpful.
Dennis Anderson: Stephanie, it’s Dennis. Certainly, I understand the movement that you’re talking about kind of in the third-party a few things. And last year certainly was not the result that we would have hoped for externally from that perspective. But when we look at what’s going on to improve the service levels. I mean, Seth has talked about this morning, just the investment that’s going into the network, the work that’s going on from a service quality and compliance perspective, it’s a significant gain that we see there in that asset-based network in terms of service, especially since those survey results from last year. And so if we’re working on those optimization projects we talked about in that asset-based network, certainly, customer communication enhancements.
I mean, we rolled out at the beginning of this year, more visibility for our customers online, so them being able to see free pickup for instance, what’s going on with their shipments. So the visibility is one of those things. So we take that customer feedback and we turn that into what we needed to go improve. And so we’ve been working on the things that we’ve been hearing from customers to improve that service. And so we’re confident in what we’re seeing in some of these awards and then just the on-time performance that you mentioned. And certainly, there’s a slide in our dec from today that just talks about some of that feedback that we’ve received some of the initiatives we’ve been working on to improve that service as well.
Stephanie Moore: Got it. No, that’s helpful. And then maybe just as a follow-up. I think we’re obviously very much focused on in the near term and what’s been a worse freight environment than we’ve expected here. But I’d love to get your thoughts in terms of how you’re positioned when this freight cycle eventually turns. You’ve talked a lot about capacity investments and expansion there, which I think positions you very well. So maybe from the labor equipment, some of these other aspects that you feel like your — how you’re positioned today in terms of the ability to react once freight starts to move in our direction a little bit?
Seth Runser: Yes. Stephanie, this is Seth. I feel like from a labor standpoint, we’re positioned really well. We’re able to flex our labor up and down with some of those tools we invested in, and we have good visibility in what we even need 6 months from now based off the demand with those predictive analytics tools that we’ve invested in. So I feel good from a labor standpoint with the new contract, our starting wage is in a better spot, more market competitive, and we just see a lower turnover rate with our employees. As I look at just industry stats, we have some of the leading industry stats on turnover. So we have experienced people who know our customers’ freight. So feel good from a labor standpoint. Our equipment, we’ve continued to invest in the fleet.
In my opening comments, I said we had one of the newest fleets on the road. We have more equipment coming on. That’s starting to be delivered as we speak. So we feel like we’re pretty good there. We can hold on to some of the older stuff if we see demand come on or we can optimize and get rid of those high-cost units, and we’ve been doing a good balance as we move through this year. And then really from real estate, we’ve been executing on that long-term plan since 2021. We’ve added capacity in strategic markets where we see growth or productivity improvements. And we’re also seeing service improvements in the OTA example. So I feel like we’re positioned well across the board. And really, when I think about capacity of all the things I just mentioned, it also comes down to efficiency.
And you saw in our actual presentation, we’re seeing some of the best efficiency numbers in 3 years because of our investments. So we feel pretty good, the more efficient you are, the more capacity you have for growth. So…
Operator: Your next question is from the line of Jeff Kauffman with Vertical Research Partners.
Jeff Kauffman: David, wishing you all the best in retirement. I may have to sneak down there and make sure Amy understands Calico County would be…
David Humphrey: We can do that.
Jeff Kauffman: Well, you are one of the best. I will miss working with you. So congratulations.
David Humphrey: Thanks Jeff.
Jeff Kauffman: I’d like to turn to the expense side, and I’d like to focus a little bit on labor costs. On a year-on-year basis, it was only up 3%. But if I look at it as a percent of revenue, it’s up almost 400 basis points. If I look at it on a per pound basis, it’s up almost 25%. I know some of that’s tonnage being down the way it is. Can you help us understand the labor cost increase, how much of that was increase in cost per person versus maybe employment change and productivity? And then as we turn the page on the first year of the new contract, how does that labor cost inflation in year 1 compared to year 2?
Seth Runser: Yes, I’ll answer that question, Jeff. This is Seth. So when you look at our contract in year 1, we had about a 13% increase in wages on year 1 and then 7% increase in HWP cost. As we lap that and get into July, our wages will go up about 2.5% and and then HWP will be in August at about 2.9%. So we get to a lot more normalized rates, not just for the second year, but also every year moving forward, we had to get over that first year headwind. So we did a lot of productivity things like reducing some of our external resources like Cartage, PT, rail, rentals, things like that. So the cost increase that we dealt with in the first quarter was about $29 million from the contract, and we were able to pretty much wipe that out with the efficiency improvements that we saw.
So we’re going to continue to do that. What you saw in the third quarter, fourth quarter and now first, you’ll see that continue throughout the year. And we have a lot of optimization projects in our pipeline. So we feel like just a lot of things in pilot right now, like city route optimization, in the next 2 phases and then rolling out the different doc software and labor tools. We feel like we’re going to continue to optimize our cost structure while being positioned for future growth.
Jeff Kauffman: So to take 10 steps back if your renewal rate on contracts is about 5%, 5.5%. And I’m not trying to balance this transactional versus contract mix issue here. And your labor costs go from consuming 600 basis points of revenue to 100 basis points of revenue, we should see a pretty meaningful margin flow-through to the LTL business would be the idea, correct?
Judy McReynolds: Yes.
Seth Runser: I say those are the same trends…
Jeff Kauffman: I’m not a math genius, but I’m just trying to put some numbers Wonderful. — congratulations. I know there’s a lot of moving parts, so it’s kind of tough to see what’s going on here. But the LTL results look great. And David, I wish you well.
David Humphrey: Thanks a lot, Jeff. We’ve got a couple more. We may go over a few minutes, but we’ll try to get a couple more in real quick.
Operator: Your next question is from the line of Bruce Chan with Stifel.
Andrew Cox: This is Andrew on for Bruce. We also want to echo the comments to you, Dave. Congratulations. So I just wanted to kind of —
David Humphrey: Thank you.
Andrew Cox: Yes, no problem. So we’re in an environment here where the #3 player has exited. In our opinion, manufacturing is at least stable and recovering and consumer demand seems to be still okay. So we’re kind of wondering what the disconnect with the continued decline in volume over what should be an easier comp from last year in 1Q and especially in 2Q. What levers do you guys have to be able to drive some volume into the network.
Judy McReynolds: Well, I’ll take a shot at that. But I mean I feel like that the move on the manufacturing PMI, which is an indicator for us, was modest after 16 months of decline. And what we’ve seen over time is that when that moves, it’s typically 4 to 6 months before we see the impact of it. So that’s one piece of information. And then the other that I would consider is just the state of excess capacity on the full load side. I mean I think that, that’s had an impact on the heavier LTL shipments. And we don’t know to what degree, but we do have examples that we’ve handled ourselves in our managed group where we’ve done some mode shifting for the benefit of the customer’s cost efficiency. So I think those are 2 factors that are at issue here whenever you’re looking at weight per shipment levels and perhaps thinking about it going forward.
Matt Beasley: Yes. And I’d just say — Andrew, this is Matt. — that I’d just say the year-over-year comparisons, a big part of that, too, is just our focus on the optimization of mix for a better productivity and a better profit outcome.
Operator: Your next question is a follow-up from the of Jason Seidl with TD Cowen.
