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ArcBest Corp (ARCB -6.13%)
Q3Â 2018 Earnings Conference Call
Nov. 02, 2018, 9:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the ArcBest Third Quarter 2018 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 2, 2018.
I would now like to turn the conference over to David Humphrey, Vice President of Investor Relations. Please go ahead, sir.
David Humphrey -- Vice President of Investor Relations
Welcome to the ArcBest Third Quarter 2018 Earnings Conference Call. Our presentation this morning will be done by Judy McReynolds, Chairman, President and Chief Executive Officer of ArcBest and David Cobb, Vice President, Chief Financial Officer of ArcBest.
Today, following Judy and David's opening comments about the third quarter results, I will conduct the question-and-answer period with them -- we 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 and we will try to answer as many as we can during the remaining time of the 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 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 Judy.
Judy McReynolds -- Chairman, President and Chief Executive Officer
Thank you, David, and good morning everyone. In yesterday afternoon's earnings press release, we've reported our third consecutive quarter of strong results for 2018. I am proud of our team for this accomplishment. Since we implemented our enhanced market approach at the beginning of 2017, our team has had a greater ability and incentive to work closely with each other and serve our customers with the best experience possible for all the solutions they require from ArcBest. There is no question that this strategy is paying off for us as we offer something unique in the marketplace with end-to-end solutions, greater ease of doing business with us and people who go above and beyond for our customers.
Our third quarter non-GAAP net income rose 151%. Daily revenue in our asset base business was up 12% and tonnage increased, which was helpful versus previous quarters. On the asset like side, I was encouraged by the net revenue gains as this has been something we've been working to improve. Certainly the continued strong business environment overall is a welcome phenomenon and we are well positioned to help our customers understand the best solution for their needs and access the best capacity sources either from us directly or through our trusted third-party providers. At the same time we do this in a way that provides value for the ArcBest services we offer.
One of the reasons we're able to do this better is because of the technology investments we've made in recent years. We have always had great people with can-do attitude. But when we add on to that, a greater ability for our sales people to see the full scope of interactions with customers from one vantage point, there is an ever-increasing potential to grow our share of wallet, when it comes to total shipping and logistics spend by our customers.
There are other initiatives under way as well. For example, on the asset base side, we are working to improve our city pickup and delivery productivity with enhanced tools for our employees. This involves barcoding tablets -- excuse me barcoding, tablets and scanning equipment that is easy to use and facilitates a more streamlined smoother operation along with greater cost control. On the Asset-Light side, common quoting systems and predictive analytics tools are under development among other projects, which are intended to provide the kind of efficient experience our customers desire in an increasingly digital environment.
Across all of our businesses, we have a strong history in the use of advanced analytics from yield management to the ongoing optimization of freight operations. We believe all the technology initiatives we are working on will provide an opportunity for future growth.
And now I'll discuss more about our service offerings. The continuation of a solid freight environment and positive economic trends benefited ArcBest asset base business through the third quarter. The benefits of yield management strength and tonnage growth contributed to a 400 basis point improvement in ABF Freight's third quarter operating ratio compared to the same period last year, which was one of the best we've had in 12 years. Our space-based pricing program implemented during last year's third quarter has resulted in appropriate price levels and improved profitability on shipments handled throughout the ABF network. As we've experienced tonnage growth versus last year, we have successfully improved pricing on new business opportunities and set higher margin thresholds for operationally inefficient shipments.
Other factors positively impacting our asset base yield levels included the significant retention of the mid-April general rate increase and the impact of greater fuel surcharge revenue. The fuel surcharge levels were up due to the significant increase in fuel costs, excluding this impact, the year-over-year increase in average pricing levels on our base LTL business was in the high single digits.
Renewal rates on the deferred and contract pricing agreements negotiated during the third quarter was the third highest average percentage increase we've secured in the last 19 years. David Cobb will provide specific details on our yield management metrics later in the call. We continue to focus on opportunities to offer more and more of ArcBest logistic services to existing customers in an effort to meet more of their supply chain needs, while improving their experience with ArcBest. Our internal research indicates that we have great opportunities to add new business with customers, who already use one of our services. I am pleased that we are seeing positive results from our efforts.
In the third quarter, we were pleased to once again experience growth in total tonnage levels compared to the same period last year. We consistently grew average total tonnage in each month of the third quarter due to the strength in our LTL business. Truckload rated tonnage in the asset base network declined versus last year. Regarding this truckload rated business, reductions in the number of larger transactional shipments were somewhat offset by an increase in our consumer household goods moving business. The limited availability of equipment capacity in the marketplace, allowed us to secure all of the larger transactional shipments we wanted at significantly higher average prices. However, as we always do during the seasonally busy -- busier summer time period, we carefully manage the number of spot truckload shipments in order to maintain equipment and labor resources to adequately serve our LTL and household goods moving customers.
Due to the number, -- though the number of average daily shipments in our asset base network was slightly below last year's third quarter, we are experiencing improving positive trends in this business metric. Based upon current trends in the fourth quarter, we expect both tonnage and shipments to be positive compared to last year. Cost management and improved operational productivity were important contributors to the improved third quarter profitability of the asset base business. Our operations personnel were able to gain efficiencies in the shipment handling and line-haul transport throughout the ABF Freight network as a result of several efficiency and labor management initiatives. Most every metric we use to measure operational throughput, improved in the quarter. Though we did experience some increases in purchase transportation and local cartage cost, the efficient use of these outside resources, combined with the strength of utilizing our internal equipment and experienced labor force, resulted in lower overall costs in serving our customers.
During the quarter, we took delivery of a large majority of the remaining new ABF Freight replacement road tractors that were ordered for this year. These new tractors contributed to better average fuel economy during the quarter and a reduction in repair and maintenance costs. We also benefited from the safety features of these new tractors that include collision mitigation systems, lane departure alerts and forward-looking cameras in the cab and the truck. New equipment with these enhancements, not only lowers costs and reduces total fuel expense for ArcBest, it also contributes to the safer operation of our equipment on the nation's highways.
Increased revenue per shipment, driven by the ability to charge better rates in a tight capacity market drove our top line asset light revenue despite a reduction in total shipments handled. Total asset-light net revenue increased during the third quarter as net revenue per shipment was higher. So net revenue margins were slightly below the same period last year due to high purchase transportation prices, the level of year-over-year margin reduction was much improved compared to the first half of the year.
Net revenue, margins increased on a sequential basis versus the second quarter. An increase in asset-light length of haul was another positive contributor to the growth in both revenue and net revenue per shipment. The reduction in shipment count was associated with changes in customer mix and the challenges of securing customer loads during a period when truckload equipment capacity at buy rates that allows for reasonable profit is difficult to obtain.
Despite handling fewer shipments during the recent period, we have chosen to maintain our asset-light employee levels in order to uphold our commitment to customer service and because of the need for necessary resources to match loads with available capacity in the current market environment. The strong demand for expedite services and the cargo care and operational priority the shipments require contributed to record third quarter revenue and net revenue totals in this portion of ArcBest asset-light business.
Expedite shipment demand was highlighted by strong growth with customers in the auto, high value products and government markets. In addition, as we've experienced throughout 2018, more and more customers are benefiting from choosing ArcBest managed transportation solutions. This element of our business continues to expand significantly and was a positive contributor to the third quarter increase in asset-light revenue and net revenue. We have the knowledge and expertise to customize an optimum supply chain solution for our customers by utilizing the best combination of ArcBest owned assets as well as those of our carrier partners.
FleetNet's third quarter revenue improvement was the result of strong event growth versus the same period last year and an increase in average repair cost per event. Higher net revenue, combined with successful management of labor and other expenses, contributed to the increase in FleetNet's third quarter operating income. And now, I'll turn it over to David Cobb for a discussion of the earnings results.
David Cobb -- Vice President-Chief Financial Officer
Thank you, Judy and good morning everyone. Let me begin with some consolidated information. Third quarter 2018 consolidated revenues were $826 million compared to $744 million in last year's third quarter, a per day increase of 10.1%. This quarter's consolidated revenue was the highest for any quarter in ArcBest history. On a GAAP basis, we had third quarter 2018 net income of $1.52 per diluted share compared to $0.56 per share last year. As detailed in the GAAP to non-GAAP reconciliation table and yesterday afternoon's earnings press release, adjusted third quarter 2018, net income was $1.44 per diluted share compared to $0.58 in the same period of 2017.
ArcBest third quarter 2018 effective GAAP tax rate was 24.5%, which resulted in a GAAP rate of 18.4% year-to-date in 2018. The effective tax rate reconciliation table on Page nine of our earnings press release, shows the reconciliation of GAAP to non-GAAP effective tax rates. The third quarter and the year-to-date non-GAAP tax rates of 26.6% and 26.7% approximate the rate that we generally expect on normalized fourth quarter earnings, though the effective rate may be impacted by items discrete to that period. We ended the third quarter with unrestricted cash and short-term investments of $253 million. Combined with the available resources under our credit revolver and our receivable securitization agreement, our total liquidity currently equals $446 million.
Our total debt at the end of September of $291 million includes the $70 million balance on the credit revolver, the $45 million borrowed on our receivable securitization, and a $176 million of notes payable, which is primarily on our equipment for asset based operation. The composite interest rate on all of our debt is 3.3%. We now expect the 2018 total net capital expenditures, and this includes financed equipment to be in an estimated range of $145 million to $150 million. This is a reduction from our previously stated range of $155 million to $165 million. This updated amount includes the majority of the revenue equipment purchases we had planned to make this year, including the new replacement tractors at ABF Freight.
The decrease in CapEx from what we previously provided, was primarily due to shifts in the timing of some expenditures into 2019. ArcBest's 2018 depreciation and amortization cost on property, plant and equipment are expected to approximate $105 million, and this does not include amortization of intangible assets, which should approximate $5 million in 2018. Asset-based third quarter revenue was $585 million, a per day increase of 12.2% compared to last year.
We had 63 working days in the third quarter of 2018, compared to 62.5 working days in last year's third quarter. Asset base quarterly tonnage per day increased 1.6% versus last year's third quarter. The third quarter 2018 by month asset based daily tonnage versus the same period last year increased in July by 1.4%, increased by 2.2% in August and increased 1% in September.
Third quarter total shipments per day decreased 1% compared to last year's third quarter. Throughout 2018, year-over-year tonnage and shipment trends have improved in each quarter of the year. Total asset based weight per shipment was 1,230 pounds, a 2.6% increase from last year's third quarter. LTL rated weight per shipment increased 3.3% versus last year. The 10.1% third quarter year-over-year increase in total billed revenue per hundredweight on asset base shipments was positively impacted by improved price levels and higher fuel surcharge which offset some downward pressure from an increase in weight per shipment. On a sequential basis, this yield metric increased 6.2%. Excluding fuel surcharge, the year-over-year increase in third quarter billed revenue per hundredweight on asset based LTL freight was in the mid-single digits. We secured an average 5.3% increase on asset base customer contract renewals and differed pricing agreements that were negotiated during the quarter.
In total, the average daily revenue in ArcBest asset-light businesses increased 8% over last year's third quarter, reflecting revenue growth in both the ArcBest segment and the fleet mix segment. Average daily revenue in the ArcBest segment excluding FleetNet increased 4% over last year's third quarter. Third quarter asset-light operating income totaled $11.1 million compared to last year's operating income of $8.8 million. On an adjusted basis, third quarter asset-light operating income was $9.1 million compared to $8.6 million last year. Adjusted year-to-date 2018 asset-light EBITDA was $32.1 million compared to adjusted EBITDA of $28.8 million in the first nine months of 2017.
Third quarter ArcBest asset-light revenue per shipment increased by 8%, while we handled 7% fewer ArcBest asset-light shipments. I want to point out a change we made this quarter in how we provide supplemental information and other items of interest in modeling our expected results. The 8-K we filed yesterday afternoon that included our third quarter 2018 earnings release also included an exhibit that provided some of the financial items that have previously been provided during the earnings conference call. The information in this new 8-K exhibit provides additional information about our current quarterly financial results, our recent business levels and our future expectations on certain financial metrics.
Now, I'll turn it over to Judy for some closing comments.
Judy McReynolds -- Chairman, President and Chief Executive Officer
Thanks, David. And now for the quarter, company highlights. In early August we were pleased to announce that ABF Freight received a 2018 Quest for Quality Award from Logistics Management magazine in the National LTL category. We announced a few days later that 18 of our ABF drivers qualified to attend the National Truck Driving Championships. To qualify, each one of these professional drivers had to win their safe driving championship for their class and maintain an accident free record for the previous 12 months. It's great to see so many of our top drivers once again represent the industry in our company at these national events.
In September, ArcBest was named one of the 100 great supply chain partners for 2018 by SupplyChainBrain which publishes the annual list featuring a select group of companies whose customers recognize them for providing outstanding solutions and services. Just a few weeks ago, we were very proud to have one of our drivers at ABF, David Boyer represent the American Trucking Associations at the White House with President Trump and Cabinet officials. David was recently named ATA's National Truck Driver of The Year and was honored for this achievement last Sunday at the ATA's Leadership and Awards Luncheon. David is a great example of all the professionalism our drivers use on the job and in their communities every single day. I congratulate David on his visit to the Oval Office and his designation as National Truck Driver of The Year. Outstanding work, David.
To conclude our call, I will underscore how proud I am of our team for collaborating to produce such positive results for the third quarter and year-to-date. We are working to keep this momentum going, and create new opportunities to expand our customer relationships. I believe the indicators we study point to mortgage trends in the shipping and logistics market for the remainder of the year and into 2019.
And now, I'll turn it over to David Humphrey to conduct our question-and-answer session.
Questions and Answers:
David Humphrey -- Vice President of Investor Relations
Okay, thank you Judy, and we will now begin our question-and-answer session. First of all let me note that we had several questions that were directly addressed in our opening remarks or in the 8-K that we filed yesterday afternoon. So I won't read those questions now.
Chris Wetherbee of Citi asked, can you provide an update on your view of the fourth quarter demand environment, is the 2% increase in tonnage in line, better or worse than your expectations given easier comps. And Ravi Shanker of Morgan Stanley asked a similar question, are you seeing any sign of a deceleration in underlying demand over the last few weeks? Can you give us an update on October trends? Judy, would you like to answer that one.
Judy McReynolds -- Chairman, President and Chief Executive Officer
Sure, David. The economic indicators, we watch are in a good place. PMI, while not at peak, remains at a historically high level. Industrial production hit an all-time high in September and has climbed each month for four months in a row. Goods producing jobs were at a nearly 10-year high in September and have increased each month for the last 14 months. Inventory to sales ratio continues to be in a good place and has been trending downward toward the optimum level for freight since late 2016. Most of the fundamentals of the macro economy are sound though housing is a little weak, inflation and interest rates continue to be at long-term low levels. Unemployment is at a very low level.
So based on our expectations, we aren't necessarily going to continue to see new highs among the economic indicators, but it would appear that they will stay elevated relative to long-term history for quite a while longer, perhaps well into 2019. The 2% October increase we experienced in asset based tonnage is in line with sequential trends in our expectations. Asset light revenue per day for October is increasing on a year-over-year basis at a level that is consistent with the third quarter as well.
David Humphrey -- Vice President of Investor Relations
And also I might mention regarding October trends, we provided the typical information we typically do on the recent months in our 8-K that was filed yesterday afternoon.
We had another question from Ravi. In the case of a macro slowdown, how would that affect you as a diversified company. Judy, you want to take that one?
Judy McReynolds -- Chairman, President and Chief Executive Officer
Sure. Appreciate the question, Ravi. Our realigned logistics organization, really provides customers more direct access to multiple solutions and works well in any economic environment. We believe that we have a significant opportunity to provide more of our logistic services to our existing customers. Our customer retention levels are improving as we add solutions to enhance the relationships, which provide stability for them and us.
Also, we are better able to adjust with our customers, as their supply chains are changing. And finally, our robust spot quoting options and our household goods moving business provide flexible business levels and profitable revenue streams.
David Humphrey -- Vice President of Investor Relations
Currently there's a lot of interest in the impact of the trade tariffs on our customers and our business.
Chris Wetherbee asked, are you getting any indication from your customers that there could be some pull forward or activity surrounding tariffs coming at the year end. And then also Jason Seidl of Cowen asked are you all -- at all worried in a pull forward in the front of the tariffs will result in soft first quarter 2019 results. And Judy, you want to take that one as well.
Judy McReynolds -- Chairman, President and Chief Executive Officer
Sure. Many of our customers have brought in excess inventory earlier this year to get ahead of the Phase 1 tariffs and many customers are still bringing in excess inventory to try to get ahead of the Phase 2 tariffs. So it is possible that this situation could impact the first quarter of 2019 business levels.
David Humphrey -- Vice President of Investor Relations
Okay. We received several questions regarding our contract renewal rates in third quarter '18 and what pricing might look like in fourth quarter '18 and on into 2019, as comps get more challenging.
David Cobb, would you like to answer that one.
David Cobb -- Vice President-Chief Financial Officer
Yes, I will. And let me start with the contract renewals in the third quarter, the 5.3% increase on asset base customer contract renewals and deferred pricing agreements that we got during the third quarter was the third highest third quarter percentage increase in the last 19 years, I think as Judy mentioned. About 25% of our contracts renew each quarter, but the third and the fourth quarter typically are little heavier than the other, the first and second quarters.
Moving into fourth quarter, total revenue per hundred weight including fuel increased 9% in October. And as a reminder in fourth quarter 2017, revenue per hundredweight increased 7.6%, which was the highest increase of any quarter last year. So we acknowledge that the comparisons are tougher to overcome going forward. As we said last quarter, we are largely finished with our intentional pricing actions, but we still need to address space-based pricing with some customers.
Overall, we believe the pricing environment is still solid and as we indicated previously, we are still seeing strength in the economy and we provide value capacity options to our customers.
David Humphrey -- Vice President of Investor Relations
Okay. Staying with the pricing topic, Brad Delco with Stephens ask, how has the business mix at ABF changed over the years. Does the GRI still affect about 35% of the business. What's the makeup of the remaining 65% between 3PL and contract business. David, you want to take that one as well.
David Cobb -- Vice President-Chief Financial Officer
Yeah. Appreciate Brad's clarifying question here. The GRI impacts roughly 30% of our revenue, maybe a little higher with the effects of the CMC space based pricing program. Approximately half of our revenue is handled under long-term or contractual pricing programs that are negotiated annually. The remainder is transactional business that we price in the spot market. It's difficult to accurately measure 3PL managed business, but we believe it's less than 10% of our total business.
David Humphrey -- Vice President of Investor Relations
Okay. Matt Brooklier with Buckingham asks, how should we think about price versus tonnage growth in 2019. Judy you want to take that one.
Judy McReynolds -- Chairman, President and Chief Executive Officer
Sure. For the first time in several quarters, we experienced both tonnage growth and price increases. So looking forward, our year-over-year pricing comparisons, we see those as more challenging, but our tonnage comparisons are actually easier. So every day, we ask our sales team to grow business profitably and we see that we have a lot of opportunity with our customers to do just that.
David Humphrey -- Vice President of Investor Relations
Will Milby with Seaport mentioned that our weight per shipment was up in the quarter and that there was, there's kind of been a mixed bag among the public LTLs with their weight per shipment this quarter. He ask us to comment on the mix of the freight that we're seeing.
David, would you like to respond to that.
David Cobb -- Vice President-Chief Financial Officer
Yes, I think it's important to point out that we are seeing a greater portion of our business come from our traditional LTL customers. We believe our pricing actions, including space-based pricing have benefited our overall freight profile.
David Humphrey -- Vice President of Investor Relations
Okay. Next, Matt Brooklier asked a couple of questions about our asset based truckload business; what are management's thoughts on incremental truckload spot capacity availability potentially taking back some freight from the LTL market. And also remind us how much of your total LTL or excuse me truckload revenue is truckload in heavyweight freight.
David, would you like to do that one as well.
David Cobb -- Vice President-Chief Financial Officer
Right. It's hard to say what's happening in the overall marketplace. But for us, during the third quarter, the limited availability of equipment capacity in the marketplace allowed us to secure all the larger transactional shipments that we wanted at significantly higher average prices. Our truckload rated shipments include both our spot truckload and U-Pack business. The spot truckload is less than 5% of total revenue for asset base. I think it's important, though, that -- to point out, to remind people that our asset light service options are positioned to benefit from shifts in spot truckload shipments.
David Humphrey -- Vice President of Investor Relations
Okay. Todd Fowler of KeyBanc and Brad Delco both ask about the leverage that we were seeing in the salaries, wages and benefits line of our asset base business segment and the impact of improved productivity.
David, would you like to handle that one as well.
David Cobb -- Vice President-Chief Financial Officer
Okay. As Judy mentioned in our opening comments, cost management and operational productivity contributed to the improved third quarter results. We are benefiting from technology tools deployed in our linehaul network and our city P&D operation in owner docs. And as was the case last quarter, we experienced some increases in purchase transportation and local cartage costs.
It's important to note that during the third quarter, we put in place, wage and benefit increases under the new IBT contract. With an average annual increase of 2% over the life of the contract, we believe our union contract increases will be less than most competitors will experience over the next five years.
David Humphrey -- Vice President of Investor Relations
We have a question about non-union health cost. David, would you like to answer that one.
David Cobb -- Vice President-Chief Financial Officer
As we've discussed in previous quarters, we continue to have a good story around consolidated non-union healthcare costs, which for the quarter were down $1.2 million, a 12.3% decrease compared to last year and down $5.2 million or 15% year to date. Our continued emphasis on wellness in the agreement with a new healthcare partner, which we entered into last August have contributed to our excellent results.
David Humphrey -- Vice President of Investor Relations
We received a couple of questions about the seasonal sequential OR deterioration from third quarter to fourth quarter. We mentioned in our 8-K from yesterday afternoon that the historical change in operating ratio from the third quarter to the fourth quarter has been about 200 basis points. Although there could be items that could impact the sequential comparison, there wasn't really anything specific that we felt like we wanted to call out.
Next, looking ahead to 2019, Ravi asked if we can continue to sustain OR results that are stronger than historical seasonality. Judy, would you like to handle that one.
Judy McReynolds -- Chairman, President and Chief Executive Officer
Sure, David. We have laid a good foundation for future earnings with our recent asset-based pricing initiatives including space-based pricing and with a number of technology driven productivity gains. We feel good about the finalization of our union contract negotiations and the reasonable level of cost increases that we will have through June of 2023.
We expect our efforts to provide the solutions, our customers need will result in better account retention and also the acquisition of new customers. And we have a tremendous market growth opportunity, especially in the asset light services that we provide.
David Humphrey -- Vice President of Investor Relations
We had several questions related to the labor contract. The first one to ask, could you summarize or quantify the impact of the labor agreement this quarter and what we should expect in fourth quarter?
David Cobb -- Vice President-Chief Financial Officer
Yes, the wage increase was 1.2% effective July 2018. And the health, welfare and pension increase was 2.2%, was effective August 1. The 2% annual combined wage and benefit increase is favorable and represents a lower level of cost inflation which should benefit us for the life of the contract. We did provide some additional information in our 8-K about the labor contract.
David Humphrey -- Vice President of Investor Relations
We had a couple of questions around the profit sharing feature of the labor contract from Chris Wetherbee and Will Milby. Can the asset based OR improve in 2019 with the Teamsters profit sharing bonus and do you think this mechanism can help drive OR improvements?
Judy McReynolds -- Chairman, President and Chief Executive Officer
Well, David, while we don't give guidance, we really believe strongly that this program will work as an incentive to further improve productivity. And we certainly hope to be able to pay this incentive because of our results. And again, we provide a greater detail on the specifics of that bonus program in the 8-K.
David Humphrey -- Vice President of Investor Relations
Okay. and then Todd Fowler asked about the potential Teamsters profit sharing? Could you provide some specifics around the potential dollar amount related to the Teamsters annual profit sharing bonus? Essentially if a 1% bonus is earned, what would be the dollar amount of the salary base be applied to? Will you accrue for this based on our 2019 expectations beginning in January 1? Are there any other additional cost that are effective in 2019 from the union contract?
David Cobb -- Vice President-Chief Financial Officer
Let me take that one, David. The potential bonus would be based on individual employee W-2 earnings for the full year, which would be dependent upon hours worked as a result of business levels. So our union wage is approximately $25 an hour. The expense will be accrued based on the performance of the company and of course the hours worked that factor into wages. If applicable, this bonus would accrue in 2019. As mentioned in the 8-K supplemental information, the ratification bonus is being expansed over the contract and additional vacation is being experienced as it is earned. Accruals for those items began on April 1, 2018, and are expected to total $5.5 million for all of 2019. The vacation expense will increase throughout 2019, as more employees reach their anniversary dates. But as a reminder, all of that is included in the 2% compounded annual growth rate through the end of the contract in June 23.
David Humphrey -- Vice President of Investor Relations
There's been some recent news about UPS Freight in their labor contract, Will Milby asked if business UPS freight handles matches up well with our business. He also wanted to know how we are addressing this potential situation. Dave Ross of Stifel ask, how are you approaching the UPS freight volume that might come your way for just a short period? How do you help customers out without clogging your network or disrupting your lane (ph) balance.
Judy you wanted to take that one?
Judy McReynolds -- Chairman, President and Chief Executive Officer
Sure. We are certainly aware of the potential service disruption at UPS Freight and we are carefully considering appropriate ways to respond. We have available capacity within our network and we continually monitor that so that we can respond to potential market opportunities like this one. But our highest priority is to maintain the service levels we provide to our existing customers and to make sure that we maintain our ability to serve current ArcBest accounts. The resources we have in the asset-based LTL, and then our asset-light business, including truckload and expedite give us options in responding to new business opportunities. But as with any new asset base business, we might add, we evaluate the impact on the network and other capacity sources as well as the overall profitabilities of the account.
David Humphrey -- Vice President of Investor Relations
All right. We had a couple of questions about peak season. How are you preparing for peak season? Do you feel you are adequately staffed currently or have recent additions been made? You seem to handle capacity well on falling tonnage, as tonnage rises do you see any challenges in the network.
Judy McReynolds -- Chairman, President and Chief Executive Officer
In all aspects of our business, really the key to success are great people, matching resources to our business levels, good relationships with reliable third party capacity sources and appropriately pricing the business for the value we provide. We feel that our sales, operations and yield management teams have executed very well this year and we find that we're uniquely positioned with our asset base and asset-light service offerings to serve customers' peak season needs.
With respect to your question regarding staffing, in our asset base business, we generally feel like we're adequately staffed, but we have continued to pursue hiring drivers and dock workers in certain markets, where we're experiencing greater growth.
David Humphrey -- Vice President of Investor Relations
And then regarding e-commerce, what are your e-commerce business expectations for peak season?
Judy McReynolds -- Chairman, President and Chief Executive Officer
We are well positioned with e-commerce customers. We took some yield actions at many of our larger e-commerce customers, which is impacting our shipment counts. But we still maintain a primary position at many of these customers and are confident in our organic growth opportunities though and feel like these offset the declines we've experienced. E-commerce remains a very important part of our customer supply chains. Most of our customers require and therefore their customers really require an omnichannel experience.
As you know we have operated in this space for many years. We are confident in our ability to execute on both our ability to provide a best-in-class digital experience, as well as the best-in-class operational experience to our customers. As buying preferences change, we feel this is an area of strength for ArcBest to deliver confidence with our experience in our sheared capacity options.
David Humphrey -- Vice President of Investor Relations
We had some questions around purchase transportation. First of all, Todd Fowler asked, do you have more opportunity to increase use of third party capacity either rail or truck.
David, you want to take that one?
David Cobb -- Vice President-Chief Financial Officer
Yes. The usage of purchased transportation and rail seasonally fluctuates typically with much less utilized during the first quarter. During the third quarter of 2018, 20% of our linehaul miles will run in the rail and 4% would run using PT. Under our union contract, ABF Freight can utilize rail and purchase transportation, up to 24% of total linehaul miles on an annual basis.
David Humphrey -- Vice President of Investor Relations
Okay and then Brad Delco ask, could you talk about the increase in the rents in PT year-over-year? We'd like to get a sense of how much of the increased cost year-over-year is a function of higher third party fuel versus more third-party linehaul base rates or maybe just more equipment being financed off balance sheet.
David Cobb -- Vice President-Chief Financial Officer
Yeah, the rail and purchase transportation and cartage, all of those provide flexible options to serve customers as our business levels fluctuate. We experienced an increase in these areas, resulting from higher utilization and increased rates including the fuel cost. Fuel contributed approximately one-third of the increase in that line. The rents included in that line are short-term rentals and all financed equipment is shown as debt on our balance sheet.
David Humphrey -- Vice President of Investor Relations
Okay. Regarding your equipment, Dave Ross ask, where is the average fleet age on tractors and trailers and is that expected to come down further?
David, you want to take that one as well?
David Cobb -- Vice President-Chief Financial Officer
Yes. With the investments we've been making in recent years, our fleet is in a good place and we are seeing our total cost of ownership come down. The average age of road tractors are 16 months, and reflects the investments we've made. The new units we've added in recent years, include technologies that are improving safety and performance. We still believe there is some benefit to be gained by reducing our city tractor age and we're making progress on that.
David Humphrey -- Vice President of Investor Relations
Will ask, what's it going to take to improve FleetNet's OR.
David Cobb -- Vice President-Chief Financial Officer
Will, we're making investments in innovations and technology enhancements that should improve the customer experience leading to efficiency and margin improvement in FleetNet's business.
David Humphrey -- Vice President of Investor Relations
Okay. Now moving on to some of the asset-light questions that we received. First, could you dig into more specifics for the growth in asset-light's profitability. Are you getting the customer price increases that have been lacking in recent quarters?
Judy McReynolds -- Chairman, President and Chief Executive Officer
Well, David, as we discussed last quarter, we have a number of important initiatives, we're working on for our asset-light service lines. And one of those initiatives relates to the analytics, we are applying to our customer pricing decisions and fulfillment buy rates. This allows our employees to make better decisions based on several factors including ArcBest capacity options both internal and external. We are experiencing net revenue improvement in some operational efficiencies as a result.
David Humphrey -- Vice President of Investor Relations
And then on a per day basis, ArcBest asset-light revenue was up 2% through August, but finished the quarter up 4%. What drove the strong September increase in revenue? Was it a function of an easier comp because of hurricanes last year or newly awarded business?
David, you want to take that one?
David Cobb -- Vice President-Chief Financial Officer
Yes, glad to. The significant growth in managed transportation services in September was the driver of the strong increase in revenue. Our September revenue comparison was actually more difficult. Since last year, we reported record revenue from an expedited service line related to the hurricanes and also September 2017 had more revenue from our military moving business that was sold in December of 2017.
David Humphrey -- Vice President of Investor Relations
And finally on asset-light, we were asked, what's the growth outlook for ArcBest asset-light from here? Should we think about top line growth moderating and a more mature workforce being able to drive better margins? Or is management still making investments to grow the business that could tip our margins as we look into 2019?
Judy McReynolds -- Chairman, President and Chief Executive Officer
Well, David, our research tells us that we have a $3 billion market opportunity within our existing customer base for asset light services. And as a result, we are still making investments to grow the business, although we are pleased with the margin improvement we experienced this quarter. Some of the examples of investments include common quoting systems, and predictive analytics tools among other projects, which we intend to provide the efficiencies in an increasingly digital environment. Across all of our businesses, we have a strong history in the use of advanced analytics from yield management to the ongoing optimization of our operations.
David Humphrey -- Vice President of Investor Relations
Okay. Dave Ross asks, how does ArcBest Logistics unit access share and benefit from the data gathered by the ABF Freight unit?
Judy McReynolds -- Chairman, President and Chief Executive Officer
Well, that's a good question. We have a single view of customer data and this is a change that we made when we adopted the enhanced market approach in January of 2017. And I have to say this greatly benefits our efforts to better serve our customers with the options that they need.
David Humphrey -- Vice President of Investor Relations
Okay. We were also asked to provide initial thoughts on 2019 CapEx. We are actually working through all that right now, and as we normally do, we will intend to provide those details on our fourth quarter earnings conference call, in earnings release in early 2019.
And then our final question is from Todd Fowler and Jason Seidl, were about strategy and the potential for M&A. They ask us to provide a general strategic update and also are we evaluating acquisitions? If so, what areas are currently most attractive? And finally, are there currently other areas for improved efficiencies in the business currently?
Judy, I'll let you take that last question.
Judy McReynolds -- Chairman, President and Chief Executive Officer
Okay. Sure, David. We believe the strategy that we are currently deploying is really working well and it's allowing us to deepen our customer relationships by providing additional solutions to them. And as we approach new customers with creative solutions, we're able to solve and address their challenges as well. And especially this year, we've seen shipper supply chains be strained and the customers are in the need, or they're really needing the creative and integrated solutions. We're seeing that be in high demand. In many cases, this calls for services provided by our managed transportation team and we're experiencing good growth in this area.
With respect to the question regarding acquisitions, we continue to actively review potential targets and we're really most interested in ones that can bring better technologies and/or scale to our existing services. And we do see improved opportunity in our existing business as well. In other words, we have organic opportunities that really should benefit us and I think we previously discussed those David.
David Humphrey -- Vice President of Investor Relations
Okay. Okay. Well, that was the last question that we received. We appreciate all the questions that you were sending in and that will end our call. We thank you for joining us this morning and we appreciate your interest in ArcBest. We hope you have a good day. Thank you.
Operator
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.
Duration: 46 minutes
Call participants:
David Humphrey -- Vice President of Investor Relations
Judy McReynolds -- Chairman, President and Chief Executive Officer
David Cobb -- Vice President-Chief Financial Officer
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