ArcBest Corporation (ARCB) Q3 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the ArcBest Third Quarter 2019 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded Friday, November 1, 2019. I would now like to turn the conference over to David Humphrey, Vice President of Investor Relations. Please go ahead.

Welcome to the ArcBest third quarter 2019 earnings conference call. A presentation this morning will be done by Judy McReynolds, Chairman, President and Chief Executive Officer of ArcBest; and David Cobb, Chief Financial Officer of ArcBest. Today, following Judy and David's opening remarks about the third quarter results, I will conduct a question-and-answer period with them by reading submitted questions that we received last night following our earnings release. We appreciate the questions that we received. We will try to answer as many as we can during the remainder of this call. We thank you for joining us today. In order to help you better understand ArcBest 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 filing. In order to provide meaningful comparisons, certain information discussed in this conference call includes non-GAAP financial measures as outline and described in the tables in our earnings press release. We will now begin with Judy.

Thank you, David, and good morning, everyone. In a challenging freight environment, we were pleased to report another positive quarter, a period that was one of the better third quarters for us in historical terms, although below last year's levels. Uncertainty with regard to trade policy and weaker demand in some areas of the economy and industry impacted us, but we were certainly pleased to see ongoing rational pricing and good response to our full supply chain solutions, particularly in managed transportation. The increase in active accounts turning to us for managed solutions gives us confidence in our strategy to produce long-term value by building informed, trusted, innovative relationships with shippers and capacity providers and delivering a best-in-class experience efficiently through their desire channels. Although, these numbers aren't broken out separately, I can tell you that our managed solutions revenues nearly doubled and shipments per day more than doubled, which is very encouraging. The number of active accounts we serve also more than doubled in the quarter, as our capabilities are across the supply chain through both Asset-Based and Asset-Light offerings differentiate us from the competition. Our purposeful transformation as a company has certainly contributed too much of the new business we have added. We hear from customers through internal research and external studies that we are valued for the things that matter most to them. Things like problem resolution, trustworthiness, responsiveness and ease of doing business. These differentiators improved customer retention, which in turn helps us grow our business. We continue to invest in our customer experience through technologies and processes that sharpen our delivery of services and improved customer interactions. The innovations we have pursued in areas like space-based pricing and enhanced web-based interactions, among many others, are examples of initiatives that complement the values driven culture in which our creative problem solvers make a tangible difference every day with customers. As you know, last week, we announced another innovative project that we have undertaken this year. In early 2019, ArcBest Technologies a wholly-owned ArcBest subsidiary, focused on the advancement of supply chain execution technologies began a pilot test program to improve freight handling at ABF. The pilot utilizes patented handling equipment, software and a patented process to load and unload trailers more rapidly and safely with full freight loads pulled out of the trailer onto the facility floor and accessible for multiple points. In the early stages, in a limited number of locations, this pilot provides ABF an opportunity to evaluate the potential for improving safety and working conditions for employees and providing a better experience for customers. Potential benefits include improved transit performance, reduced cargo claims, reduced injuries and workers compensation claims and faster employee training. As a part of this effort, ABF has leased new facilities in the test pilot regions in Indiana that are currently operational, and also at a new Kansas City distribution center location expected to open in mid 2020. Also, as we've previously disclose, the transition of this test pilot program from ArcBest Technologies into ABF's field operations for more extensive and live testing has increased the Asset-Based segment operating costs. With that backdrop, on our evolving story to innovate and serve our customers in the best possible ways, I'll discuss some additional detail on third quarter performance of our service offerings. Our third quarter Asset-Based results reflect lower demand from our customers who are navigating an uncertain economic environment, well generally offering less freight for us to handle. In most cases, our customers remain the same, but they have decelerated their growth throughout this year and our current business levels reflect that fact. The pricing environment remains rational and we continue to have good success in achieving solid levels of increases on our LTL-rated shipments. We are continuing our efforts to offer superior service levels to our customers, while seeking for properly control costs. During the quarter, we experienced some slight reductions in dock and street productivity. In addition, the reductions in shipment and tonnage freight levels we are experiencing are putting pressure on operating margins, as some network costs become were fixed during periods of reduce business levels. However, we have benefited from improved utilization of owned assets that has allowed us to make further progress in reducing the cost of rail, truckload purchase transportation, and city cartage resources throughout the ABF Freight network. As seen in recent quarters, the decline in total tonnage and shipments versus last year's third quarter consisted of a mix of fewer LTL-rated shipments combined with an increase in the number of truckload rated shipments moving in our Asset-Based network. During the recent period where our traditional LTL shipments were not as plentiful, we have added spot truckload shipments to help fill available equipment capacity, which positively contributed to revenue totals and help improve operational cost efficiencies at ABF as I previously mentioned. Going forward, we will continue to monitor overall business levels in order to optimize the positive impact of handling the spot shipments in our network. As David Cobb will detail later in the call, our year-over-year total tonnage trends deteriorated in each month as we move through the third quarter. This was driven by continually lower LTL-rated tonnage trends during those same periods. That lower trend in tonnage, but on a total basis import the LTL-rated business alone has continued in October. The sequential monthly tonnage trends we experienced in the recent third quarter were below historical levels for the team recent 10-year period. Lower LTL weight per shipment reflective of the customer commentary I shared earlier has been another contributing factor to the recent Asset-Based tonnage declines we've experienced. We continue to have success in achieving needed Asset-Based price increases during the recent third quarter. The lower percent increase in revenue per hundredweight that we reported for the quarter was reduced by the increases we had in adding spot truckload rated shipments that generally have lower revenue per pound, especially in the current capacity environment. Then excluding the impact of fuel, which was a year-over-year price headwinds, our pricing on LTL-rated, Asset-Based shipments was solid and very encouraging considering the current shipping environment. We understand the importance of making continual progress on yield management initiatives in order to increase revenues and improve profitability in the face of rising costs. We will strive to move forward with those efforts in the future. Compared to the third quarter last year, fewer shipments combined with reductions in revenue per shipments have contributed to a decrease in third quarter ArcBest Asset-Light revenue. The year-over-year change and market conditions and this year's clinical equipment capacity moving at lower rate continues to impact the revenue and profitability mix in our Asset-Light business. This has especially been the case in our expedite business. The reduction in demand for expedite shipments and the lower revenue charged on handled shipments are the most significant factors contributing to both lower total revenues and operating income in our Asset-Light business. Shipment counts in the truckload brokerage portion of the Asset-Light business increased over last year third quarter that lower revenue per loan contributed to a decline in total brokerage revenue. That what we are paying for truckload capacity in this segment of the business has declined, due to the improvement in available industry capacity. The rate of decrease in average shipment revenue has been more rapid that's contributing to margin compression and lower Asset-Light operating income. As I referenced in my opening remarks, shippers facing the challenges of delivering their products more timely and efficiently are seeking our expertise and optimizing available transportation options in a cost effective manner. Many of our customers are asking us to help bring stability to their supply chain in a very uncertain freight environment. As a result, in the third quarter, we successfully executed on new managed transportation account opportunities that positively contribute to the Asset-Light revenue and profitability. Our managed solutions help positions us with our customers to effectively navigate in any environment. At FleetNet, an increase in preventative maintenance service inter events, which offsets a slight reduction in roadside repairs resulted in total event growth and a higher revenue compared to last year's third quarter. As a result of the revenue growth and the effective cost management, FleetNet's third quarter operating income improved. And now, I'll turn it over to David Cobb for a discussion of the earnings results and operating statistics.

Thank you, Judy, and good morning everyone. Let me begin with some consolidated information. Third quarter 2019 consolidated revenues were $788 million compared to $826 million in last year's third quarter, a per day decrease of 5%. On a GAAP basis, we had third quarter 2019 net income of $0.62 per diluted share, compared to $1.52 per share last year. As details in the GAAP to non-GAAP reconciliation table in yesterday afternoon earnings press release, adjusting third quarter 2019 net income was $1.02 per diluted share, compared to $1.49 per share in the same period last year. As a third quarter 2019, non-GAAP net income reflects the exclusion of costs related to both the freight-handling pilot test program we announced last week, an impairment of equipment due to conversion to electronic logging devices at ABF Freight. We ended the third quarter with unrestricted cash and short-term investments of $308 million. In late September, we admitted our existing credit revolver agreement, which increased the revolver borrowing capacity by $50 million at a relatively low cost and extended the maturity date over two years to October 2024. Combined with the available resources under our amended credit revolver and our receivable securitization agreement, our total liquidity currently equals $561 million. A total debt at the end of the third quarter 2019 of $298 million includes the $7 million balance on our credit revolver, the $40 million borrowed on our receivable securitization and $188 million of notes payable, primarily on equipment for our Asset-Based operation. The composite interest rate on our debt was 3.3%, down slightly from the second quarter. We now except that 2019 total net capital expenditures including financed equipment, to be in estimated range of $160 million $165 million. This is a reduction from our previously stated range of $170 million $180 million. This updated amount includes the majority of the revenue equipment purchases we had planned to make this year including replacement tractors at ABF Freight. The lower estimate versus what we previously provided was primarily due to shifts in the timing of some expenditure into 2020. ArcBest 2019 depreciation and amortization cost on property, plant, and equipment are expected to approximate $107 million. This does not include amortization of intangible assets which are expected to approximate $5 million in 2019. During the third quarter, we continue to return capital to shareholders through the payment of an $0.08 per share quarterly cash dividend and purchased over 33,000 shares of our stock for total price of $900,000. Under our existing repurchase program, we have approximately $16 million of purchase availability remain and full details of our GAAP cash flow are included in our earnings press release. Our Asset-Based third quarter revenue was $566 million and per day decrease of 4% compared to last year. Asset-Based quarterly total tonnage per day decreased 4.6% versus last year's third quarter. Our third quarter by month Asset-Based daily total tonnage versus the same period last year decreased by 1.7% in July, decreased by 4.8% in August, and decreased by 7.5% in September. LTL-rated tonnage declined approximately 12% in September. However, in third quarter truckload rated shipments from the ABF Freight Asset-Based network increased over the prior year with double-digit percentage increases in each month, which has continued through October. In the fourth quarter, we will be comparing back to monthly periods in 2018 and reflected increases in total pounds per day. Third quarter total shipments per day decrease nearly 4%, compared to last year's third quarter. Total weight per shipment declined 1% with the average size about LTL-rated shipment decreasing approximately 6%. Third quarter total build revenue per hundredweight on the Asset-Based shipments was $36.35, an increase of 1.5% compared to last year. The total yield increase percentage we are recording was somewhat reduced by the growth of the truckload rates shipments moving in our Asset-Based network at lower pricing levels than last year. And excluding fuel surcharge, the increase in third quarter build revenue per hundredweight on Asset-Based LTL-rated freight was in the high-single-digits. Year-over-year changes in fuel surcharges have moderated considerably are not providing the positive year-over-year increase in revenue per hundredweight measure that they had in the past. We secured an average 2.9% increase on Asset-Based customer contract renewals and deferred pricing agreements negotiated during the quarter. Despite of the decline an average weight per shipment, total revenue per shipment increased 70 basis points, reflecting the impact of a healthy pricing environment. In early September mid-quarter update, we highlighted higher than expected maintenance and repair costs related to increase repairs on EPA emission standards compliant tractors and ABF Freight city fleet in higher parts costs. These maintenance costs which are included in the fuel, suppliers and expenses line of our Asset-Based income statement did increase on both a sequential and year-over-year basis. So they were offset significantly lower fuel expenses that are also included in that same line on the income statement. As further described in the information we exhibit to our Form 8-K earnings release, we now expect that the previously disclosed technology costs in our Asset-Based business which has been identified as a non-GAAP item were expected to approximate $4 million in fourth quarter 2019, compared to $1 million in fourth quarter of 2018. These costs increased approximately $4 million in third quarter 2019 versus 2018. As previously disclosed and as Judy discussed earlier, these costs related to the pilot test program we are conducting to improve freight handling at ABF Freight. On an adjusted non-GAAP basis, our Asset-Based third quarter operating ratio was 93.2% compared to 91.2% in last year's third quarter. Our total Asset-Light average daily revenue decreased 2% compared to last year's third quarter, reflecting lower revenue in the ArcBest segments and top line revenue growth at FleetNet. Third quarter total Asset-Light operating income was $3.6 million compared to $11.1 million last year. That included a $2 million gain related to the previous sale the ArcBest segment's military moving businesses. On an adjusted non-GAAP basis, Asset-Light operating income was $3.7 million compared to $9.1 million last year. Yesterday afternoon, we filed an 8-K that included our third quarter 2019 earnings release along with an exhibit that provided some additional information about our current quarterly financial results, along with our recent business levels and our future expectations on certain financial metrics. This information should be helpful in modeling expectations for our 2019 financial results. Now, I'll turn it over to Judy for some closing comments.

Thanks, David. Now for the quarterly company highlights which underscore what an outstanding job our people do. In August, ArcBest was once again named as one of the top 100 supply chain partners in 2019 by Supply Chain Brain, and ABF Freight was chosen to receive a 2019 Quest for Quality award by Logistics Management Magazine for the third consecutive year. ABF was also named a 2019 SmartWay High Performer by the U.S. Environmental Protection Agency. This award recognized us as one of the industry's leaders in producing efficient and sustainable supply chain solutions. In September, ArcBest was once again recognized as one of the top 100 truckers by Inbound Logistics. In an industry event that is always exciting for us, ABF sent 11 drivers to the national truck driving championships this summer. These folks, all of whom are driving champions in their respective states represent the very best in our industry. One of these outstanding professionals, Dave Hall, won the 5-axel class at the national competition in Pittsburgh. Dave is a road driver based in Little Rock, who has been a professional truck driver for more than 30 years and he is also a member of the Arkansas Road Team. We're extremely proud of Dave and his accomplishments, and we're pleased to formally honor him in Fort Smith, recently. To conclude our prepared remarks as we go through the final quarter of the year, we remain vigilant on the market conditions in front of us and are committed to growing ArcBest on behalf of stakeholders regardless of the economic environment. So, there is always more work to do and making sure our sales team takes advantage of the growing markets we serve for logistics solutions. Our enhanced market approach adopted in 2017 continues to bear fruit. Customers report to us in surveys and direct conversations that we are doing a better job helping them to do business with us more easily, and our organization is intensifying efforts to make sure our cross-selling accelerates going forward through meaningful conversations, insight and advice. And as I discussed, we are moving ahead very purposely with a number of innovative efforts to better serve customers, including our pilot program to better handle freight, and I look forward to providing updates on those in the future. And now, I'll turn it over to David Humphrey to conduct our question-and-answer session.

Okay, thank you, Judy. And as Judy mentioned, we will now begin the question-and-answer period with David and Judy. To begin, we had similar questions from Chris Wetherbee at Citi and Stephanie Benjamin of SunTrust. LTL tonnage decelerated as the quarter progress. Can you talk about the freight environment and what you were seeing competitively? What do you believe are the primary drivers of the reduced year-over-year tonnage and shipments in third quarter? Are there any particular industries and/or regions driving a larger portion of the declines? Or the declines in tonnage indicative of a weakening fright economy? Judy, you want to take that one?

Sure, I will. Our LTL tonnage declines are really reflective of macro weakness that relates to the industrial manufacturing and capital goods sectors, as well as some business loss that relates to pricing actions we've taken to improve the profitability on those accounts. The September manufacturing PMI was at its lowest level in 10 years and that previous low level was during the great recession. So but for us, the good news is the profitability of our account base has really improved over that same time. Our shipment levels have declined but not at the same level as the LTL tonnage. In this environment, we're seeing our customer's ship smaller sizes and this niche change is a good portion of LTL tonnage decline that we're experiencing. Our customers tell us that they impacted by higher inventory levels, as well as tariffs and other uncertainties that have arisen in their supply chains. And many of our largest accounts have asked us to help bring stability to their supply chains in this very uncertain freight environment, which is a great opportunity for us, as I've mentioned this in my opening remarks related to our managed solutions, and those solutions really help our customers react well in any environment. With respect to the question regarding our competition, we're seeing our competitors act rationally in this environment.

Okay. We had several similar questions on pricing in particular contract pricing. Those questions came from Chris and Stephanie as well as Ravi Shanker of Morgan Stanley, Jason Seidl of Cowen, and Jack Atkins of Stephens. Can you talk about contract renewals in LTL? Can you give your outlook for pricing in the fourth quarter? While pricing is rational with your competitors, what is the general receptiveness of price increases with customers? David, how about taking that one?

I'd say that our recent quarterly increases in our contract and deferred pricing renewals were 3.1% in second quarter and 2.9% in the third quarter. And so far, the fourth quarter, we're seeing similar results. We would expect that to continue in the next year. Of these contract renewals are generally with our larger price sensitive accounts, we really feel good about these increases in the profitability of these accounts. And this is, folks have heard us say we still price customers on account by account and view and based on the value that we provide. So, many of our accounts have complex supply chains and allowing our expertise and options. And that is especially evident I think, during these times. We've achieved some solid yield movement in the last couple of years so that has led to some pushback from customers that took large increases in 2017 and 2018.

Okay. As a follow-up on pricing, Jack asked. Can you talk about revenue per hundredweight trends within the Asset-Based segment, if you exclude the increase in truckload freight? Are you seeing core yield trends decelerate or remain stable relative to second quarter '19 levels?

Thanks Jack for the question. Year-over-year pricing on our LTL-rated business, when we exclude fuel surcharge, has been in this -- the high-single-digits throughout the year and even strengthen sequentially from second to third quarter.

Ken Hoexter of Bank of America Merrill Lynch asked. Since the excess capacity environment in the first quarter has continued to the third quarter, are you seeing increased price competition by any peers? In the last freight downturn, the LTLs were somewhat more immune given consolidation in e-commerce growth. What is your viewpoint now?

Well, I appreciate that question that Ken asked there, and I commented on this a little bit earlier, but we have experienced rational behavior from our Asset-Based LTL competitors. And I agree with you Ken that the LPLs were more immune to price competition in the last down cycle and that is in part due to the consolidation of LPL space and then also e-commerce growth. My current point of view is that we continue to benefit from e-commerce opportunities with our customers in this environment and our e-commerce customers have really shown increasing interest in the solutions we provide. As an example, retail plus is a recent solution that we developed and we co-created with customers, and it's a compliant solution for vendors to help our customers better meet large retailers stringent shipping and delivery requirements. The program provides robust compliance management solutions that enhance our best existing retail logistics services by combining innovative software solutions, again, that were co developed with our customers with enhanced operations processes that were heavily tested whenever we were pilot testing this program. This type of solution really relies on our logistics expertise, our assets and our relationships to improve customer outcomes, which again have been really tremendous and have generated a lot of interest.

Okay. Christian Wetherbee asked us to talk about the steep declines in LTL in the increases in truckload value. He wondered how we are approaching these markets. Has it been an intentional change the strategy and how should we think about the relative margins?

Well, it's a good question Chris. And as mentioned, we've experienced year-over-year declines in our LTL ready shipments so far this year, and that continued into October. So in order to fill the empty capacity that we have available, we have utilized and continue to utilize a greater number of truckload rate shipments which really helped balance our network and reduce line haul costs. Keep in mind that this compares back to the prior year period of tight capacity when we were focused on serving our LTL customers needs. The management of the amount of this spot-quoted truckload rated business is ongoing, and it's a process that we have really used for many years and it's really not a strategy change. Truckload-rated non-UPack business in general is not as profitable as the LTL business. However it can be in certain lanes and again, it helps us balance the network and lower our line haul costs. And then just a profit associated with this truckload rated business. And again, this is a non-UPack piece is really in line with longer term historical levels with the exception of what we experienced last year.

Robbie mentioned that weight per shipment was impacted by growth in truckload spot shipments. Are you actively going after truckload business given the softness and industrial end markets? Do you see weight per shipment turning positive in 2020? If so, would that being material tailwind to OR?

I'll take that, David. We have had a, had less of a decrease in a year-over-year total weight per shipments since the first quarter. And that has been influenced by an increase in our truckload rated shipments. This Judy just talked about. Our profitability certainly moves with changes in weight per shipment as Ravi mentioned, because of our larger shipments generated higher revenue per shipment. This offering more revenue to offset the handling cost of each shipment. What drives our results is the LTL rate per shipment and that has been declining throughout 2019. We mentioned in our October business trend update that our LTL-rated shipment signs was down about 6% in October that was influenced by account mix. Compared to last year, the softness in the industrial manufacturing, capital goods markets that Judy mentioned earlier, tends to suppress our overall weight per shipment because those sectors generally have heavier shipment sizes. And if we saw weight per shipment increase due to the macroeconomic conditions, it would improve our results as Ravi talked about.

Okay. Chris asked, how much did truckload make up of the Asset-Based segment in the third quarter? And where will these proceeds be going in the coming quarters?

Thanks Chris for helping us clarify this because including our U-pack shipments that are truckload rated, our truckload shipments have historically been less than 5% of our total shipments. And that was the case in the third quarter. We would not expect that to really materially change moving forward.

Okay. Dave Ross of Stifel and Ravi ask, what would you need to see for business volumes to grow again? And when do you expect to see that?

Well, David, we are certainly positioned well for growth, but for the rest of this year, we are up against some tonnage growth from last year. But as we move into 2020, our tonnage comparisons from 2019 get easier. Tonnage in the first quarter, for instance, was down 3.1% versus first quarter of 2018 and that included a 5.9% year-over-year decrease in March of 2019, 20s levels. So again, we're well positioned for growth. And I just thought I'd give you that perspective as we enter 2020.

Okay. Can you talk about the year-over-year declines in shipments is comps get more difficult in fourth quarter? So do we expect year-over-year shipment declines? Judy, do you want to take that one as well.

Sure. In the third quarter of 2018, our shipments declined 1%, but in the fourth quarter of 2018, they increase nearly 5%. So yes, as we move into the fourth quarter of 2019, we are facing tougher comparisons. The factors that we believe impacted last year's fourth quarter positive trends included increased shipments driven by the impending tariffs that really accelerated. I think business levels into the fourth quarter of 2018. And then we also had a competitor's work stoppage that was an influence in fourth quarter of 2018. As a result of these comparisons in the weakening industrial manufacturing environment that we've been talking about already on this call. We're experiencing shipping declines and that is really illustrated by the 7% shipment decline that we're seeing in October.

Okay. We had several questions on how would we react, if the operating conditions continue to deteriorate? How much capacity can you cut? And what are some areas you could focus on to reduce cost a lot of a weaker freight environment?

I'll take that one, David. As it pass down cycles, which we've experienced a lot of by the way over the years. We've learned to address our costs and number of areas. We typically attacked and more variable costs first. For example, in the third quarter, we reduced city cartage expense by nearly 25% and our rented equipment costs by over 30%. And if our volumes get worse, we will continue to evaluate the proper balance between labor resources and customer service in order to achieve a more cost efficient combination that benefits our customers and positively contributes to our Asset-Based financial results. And other costs area that will be evaluated as our equipment levels and then we'll also be evaluating our purchase transportation utilization, and we evaluate our network for opportunities to reduce resources in particular in underutilized lanes. The changing profile of our business with a lower LTL wait for shipment does make it more difficult to align costs with revenue levels, while maintaining the service customers expect labor, as we've mentioned the number of times before is typically manage to shipment levels. And as a result of that the revenue per shipment may change at a faster rate than what it costs us to handle each shipment. So, these are some challenging areas for us. We do have a lot of experience with these downturns. And, I just wanted to illustrate for you some of the areas that we typically address there.

Okay. We had several requests for an October business updated and more color on current trends and seasonality relative to what we've seen in the past. David, you want to take that one?

Yes. The supplemental 8-K that we filed yesterday afternoon with our earnings release included our business update for October. You can see the specific details for the month but the decline in average daily, revenue tonnage and shipments versus last year was in the 7% to 9% range. Pricing continues to be good as total revenue per hundredweight increased 2%. And as I mentioned earlier, that included a high single-digit percentage increase in its LTL build revenue per hundredweight excluding the fuel surcharge. Now from a seasonality perspective, October total and LTL tonnage trends are in the bottom third of historical seasonality. As you would expect based on the increase we've recently experienced with truckload rated shipments, and the Asset-Based segment, seasonality was a little better but it is still in the bottom half of past years.

Okay. Several folks asked about historical sequential deterioration in operating ratio from the third quarter, the fourth quarter. Are there any specific items which would make this year better or worse relative to normal seasonality? And Todd Fowler of KeyBanc asked, with Christmas and New Year's falling midweek, would you expect any greater than normal impact from the calendar shift? I'll take this one. In our supplemental 8-K, yesterday, we talked about the fact that our fourth quarter OR has historically increased by approximately 200 basis points versus the third quarter. At this point there are really no significant puts and takes demands and that would impact what we would expect to do OR change relative to history. On Todd's holiday question, we made work day adjustments to both Thursday, December 26th. And Tuesday, December 31st that net to a reduction of half a day to account for the mid week holiday. Okay, moving on, Todd, Stephanie and Chris asked if we could talk about any early signs of returns, or operational improvements related to your technology spend. What areas of the business are you targeting? Can you give us a sense of what the payback or return hurdles are for the investment? Is this using specialized equipment to load and unload trailers or something different?

David, we have a culture of innovation with an eye on the future of our industry, investing in a number of technologies and innovations with the intent to enable a best-in-class experience for our customers, provide efficiencies in our service and operations, and evolve our customers' complex logistics as our customers' complex logistics means expand. And so the question that, Todd, Stephanie and Chris asked is, I think really good and relevant for our discussion of this pilot. Within the ABF freight network. The pilot utilizes patented healing equipment software and a patented process to load and unload trailers more rapidly and safely. And as we mentioned in the 8-K that we saw last week, and in my opening remarks, this pilot has a potential to provide a better experience for employees and customers reduce the amount of time freight is idle. It improves transit performance, reduces cargo planes and injuries and accelerates employee training time. So we will evaluate the pilot and any future expansion on results of these factors. This process being tested was developed by ArcBest Technologies. And we've encouraged some additional costs as a test were transition from our best technologies into ABF field operation for more extensive in my testing. And the costs associated with this pilot include facility costs for handling equipments and software development and modifications and additional personnel costs. And as I mentioned in my opening remarks, and then 8-K filed last week, we are expanding the pilot to a distribution center in Kansas City. We currently expect that that distribution center transition will occur in mid-2020, which will also lead to incremental testing costs. The incremental costs of operating the test as a pilot had been separately identified and reported as non-GAAP to provide clarity of operating performance and not just wrapped financial models. The incremental costs this year are necessary in order to expand our live testing, feedback and ongoing development and a successful. We expect that there would be some future benefits in late 2020 and into 2021 from the broader application of these initiatives into our business. We expect that there will be returns that meet our internal benchmarks, but again, the pilot is being conducted to determine the proof-of-concept.

Okay. We had other similar follow-up questions on the new innovative technology costs. It appears as though you are now backing out technology costs, which you had previously guided us to include in the results. Is this the case? And if so, why are you opting to exclude these items now when it's been practice to include them in prior periods? Can you please provide examples of other transportation companies that also exclude technology investment costs, from there adjusted results?

Well, David, the opening of the Kansas City facility in mid 2020 and the expansion of this pilot to a more significant portion of the Asset-Based network was one of the primary reasons we chose to publicly introduce this now. The Kansas City employee base is an important part of the potential success of this next phase, and we wanted them to be a part of this next step from the beginning. And it's important to remember that we are still in pilot testing format and the proof-of-concept for the entire Asset-Based network has not been confirmed. Because this is a pilot test then evolved new technologies and equipment, it has resulted in the incremental costs beyond our normal operations that are not indicative of normal results as we've been discussing. We would anticipate that a successful and these technologies are implemented that they would become a part of our normal operations and operating costs. We're just not at that stage right now. And we have seen examples of other transportation companies that have handled transformational costs in this way.

Okay, Todd asked is the 4.6 million of cost this quarter representative of the expected quarterly run rate going forward. And what sort of savings would you expect longer term? David, how about you taking that one?

Yes, I will. We disclose the year-to-date costs of the pilot and the non-GAAP tables for earnings press release. And has mentioned in the 8-K to the earnings release, we expect the cost to be $4 million in fourth quarter of 2019. And in comparison to the fourth quarter of 2018 these cost for 1 million and the ABS segment and $1 million in the other segments in 2018 fourth quarter. Now because there are a number of factors that are being evacuated that would also impact the future cause we're not providing progressions beyond as a fourth quarter 2019 at this time. And since the pilot is still in an early stage, there's not much more detail to provide until we do more testing and have time to analyze the results.

Okay, Jack and Ken asked about our removing ELD conversion cost in the non-GAAP reconciliation titles. You also excluded fastest per share and calls related to the changeover to ELDs. None of your other LTL or truckload peers have done this. Why are a ELD cost not viewed as operational, as those are core parts of operations? Dave also said, since you highlighted the ELD conversion, please discuss your experience. Is the fleet running any differently today post implementation? If so what is the biggest difference?

First of all the year the ELD cost that are listed as an adjustment in a non-GAAP tables and earnings release due to the impairment expenses that we incurred associated with our conversion from AOBRDs to meet the upcoming ELD mandate. The hardware and software were previously using were not upgradeable for use in the new ELD application had to be impaired. These are not the implementation costs of ELD application. These identified costs are not related to ongoing operations. Through our new vendor, Samsara, we are upgrading to new hardware that can be used as an ELD device and also as our city dispatch device, so far, we have not made any network changes related to the new use of the ELDs. But the rollout is going as planned and we will be fully compliant well before the federal mandate. Now, the Samsara interface is more efficient for teens and the technology is performing above expectations while creating an improved library experience. So we're pleased with that. And also in our city operation, we've had a good experience as ELDs are helping us in our hours of service compliance.

Does you lower 2019 CapEx reflect a potential step up in 2020 CapEx? Can you give a sense of the magnitude? Below that what I've mentioned it in the supplemental 8-K we released yesterday with our earnings release, we provided an update to our 2019 CapEx guidance lowering the estimated range to $160 million to $165 million of 2019 CapEx due to some projects being completed in 2020. So from that standpoint, 2020 CapEx will be impacted by the reduction we described in 2019's figures. As a reminder, $90 million of the 2019 CapEx is expected for replacement revenue equipment for our Asset-Based operations in most of those tractors that we have currently have in service. As we always do, 2020 CapEx will include replacement tractors at ABF as well. Our normal practices provided estimates of our 2020 CapEx and our fourth quarter earnings release and conference calls. Okay, moving on. We also had a couple of questions about M&A. Dave asked, if the M&A still in the plans? Or is the focus on organically growing the business? Jason asked about current valuation multiples. Are there any tuck-in acquisitions on the horizon?

David, I'll take that one. I think good questions from Dave. And Jason, we continue to review M&A targets. We feel that really adds a lot of benefits to our understanding of options, and we really at this point are more interested in Asset-Light opportunities that could benefit us in terms of scale of our business and/or the technology advancements that could be bought with a Company that we would acquire. But we also see tremendous opportunities for organic expansion for that to really facilitate growth and operational efficiencies in the business. We really have a great opportunity. I think in our markets, we also have a great opportunity with our customers to grow the business. And I can't think of a time, where I've seen more opportunities to utilize technology and innovations to improve the operational efficiency of our business. With respect to the question on valuations, the multiples still seem a little tight as.

Okay. Stephanie asked, if we could provide more color on the improved line haul costs, as well as the drivers of a higher maintenance costs the Asset-Based segment in the quarter?

Well, David, I think the line haul costs have really improved largely due to good mode management, which has helped to reduce our cost per mile. With respect to Stephanie's question on maintenance, they, those costs increase in the third quarter and we highlighted that we were going to be experiencing that cost. I was really driven higher percentage of units with 2010 EPA requirements that have moved into our city operation. I think we have close to 80% now, where we had about 60% of our city units that had -- that EPA compliance engine in them. These units are more costly to maintain, particularly in the lower speed city operations. We've also experienced some tariff impact on parts costs and availability.

Okay. This one came from Ken. Given the, at the LTL market has remained in the mid-90s. Can you restrict the network in any way to gain efficiencies? Perhaps you could detail some of the structural impediments of being a union carrier and how it impacts you? Your work role stopped you from achieving more efficiency or is it just a pay you see?

Well, I think Ken's question is interesting, and we certainly are always looking for ways to improve our assets based business. We're doing a number of things as we previously mentioned, to address the costs and better align those with business levels. But we always have to keep in mind the excellent customer service and experience that we want to provide to our customers. But as I mentioned already, we're constantly evaluating the network to gain efficiencies. We've made several successful changes to the network this year and we're piloting several innovative line haul dock and street optimization projects that are in collaboration with ArcBest Technologies. And since we deployed the enhanced market approach at the beginning of 2017, we really feel like on an overall basis, we better address customer needs. And as we've mentioned already, that helps us in a number of ways. Our company, when we are viewing Asset-Based business, we really are targeting lower 90s ORs and we're making progress toward that. We're encouraged by the fact that we hear from customers, both do internal research and some external studies that were really valued for the things that matter most our customers like problem resolution, trustworthiness, responsiveness and ease of doing business. And I mentioned those because these differentiators really help us with customer retention, which if we can continuously improve customer retention, we're going to in effect, grow our business and improve our profitability, which again these efforts to build the strength in these relationships and be a more comprehensive solution provider for our customers really help us in that way.

Okay. Todd Fowler asked, if we have accrued anything to date for the union profit sharing bonus. David you want to take that one?

Yes. Todd, I can say you that we have some good to point out some details that we provided and exhibit to the 8-K that we released yesterday afternoon with earnings release. So in that, I'll just summarize some of those points but beginning with the payout could be from 1% to 3% of annual earnings for qualifying union employees under this plan. And it's I think it's important to understand that that 1% of ABF Freight's annual union employee earnings would equal about $5 million to $6 million of union bonuses. So our approach to accounting for these calls is that we internally project a payout of this bonus. We would have approved to that expected annual expenses throughout the year, and it will be included in our quarterly results. But since we don't provide a projected operating ratio, we haven't commented on our expectations for paying the unit bonus. Again, I just recommend if your financial models reflect an operating ratio on a GAAP basis that needs the bonus payout ratio, we encourage you to include expenses of the union bonus in your quarterly earnings and annual earnings per share projections of our company. Just as a matter of reference, our GAAP Asset-Based operating ratio in the first nine months of the year was 95.0%.

Okay, have you seen any recent improvement in truckload capacity?

I'd say the truckload capacity has been readily available which is certainly different than 2018 timeframe. And so, the excess market capacity is attracting larger size LTL segments as well as business that not otherwise these heard was our expedite offering. And so we really haven't observed a significant change in available truckload capacity to look where you can see.

Okay. Why there is an asset like purchase transportation costs, not go down more in a loose capacity environment.

The concern there is about kind of margin compression that we're seeing and probably that is due to the higher level of growth and our managed solutions that's typically lower margin business than our other service offerings. And also, we've gotten more truckload shipments at lower rates to fill some owner operator capacity. And as mentioned earlier, we've had growth in our truckload shipments and we're focused on continuing to grow that that service line. For instance, our year-over-year third quarter truckload shipments increased 6.8% on a per day basis.

Okay. Are you saying he needs to build the shipment levels, our revenue for shipment in the Asset-Light segment? Other Asset-Light peers have spoken about stability in the spot market. Are you seeing this?

David I point out that our year-over-year third quarter revenue per day for Asset-Light business declined 3.5% in the third quarter. We mentioned in the supplemental exhibit to the 8-K that are Asset-Light revenue per day declined 6% in October, which indicates some further weakening. But we did continue to be excited about our growth and managed transportation solutions, which are resonating really well with our customers in this environment. And we're positioned well for growth in our truckload and expedited international offerings as Judy talked about earlier.

Okay. And our final question is about the challenges of the current environment. How are you positioning to grow with your customers?

Well, David, we believe that our strategy as a single source logistics provider puts us in a good position regardless of the economic environment. We have strong relationships with many of our customers and we work closely with and understand their challenges and offer logistics solutions that meet their needs in a cost effective manner. So, during these periods of economic slowdown, when our customers are challenged by lower sales and increasing costs, they look to us even more to help them with their supply chains and to maintain an efficient flow of goods with costs as low as possible. And when the environment is weaker, customers are looking for lower cost logistics solutions. And they look to us and help them find those and resolve their supply chain challenges and maintain a high level of service to their customers as their supply chains are being better executed. We see our customers seeking options and are more interested in having these conversations during these times. Again, which is an advantage in the way that we position the Company with more solutions offerings, and I've mentioned our managed solutions one more time before we close out the call.

Okay. Well, that concludes our question-and-answer period. We really appreciate everyone that submitted questions. We felt like we got a wide array of questions that we covered a lot of topics. We appreciate that. We thank you for joining us this morning, and we appreciate your interest and our best. This concludes our conference call. Have a good day.

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