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ArcBest Corp (NASDAQ:ARCB)
Q3 2019 Earnings Call
Nov 1, 2019, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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.

David Humphrey -- Vice President of Investor Relations

Welcome to the ArcBest third quarter 2019 earnings conference call. Our 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 and we will try to answer as many as we can during the remaining time of this call.

We thank you for joining us today. In order to help you better understand ArcBest and it's 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 more complete discussion of factors that could affect the company's future results, please refer to the forward-looking statement 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 R. McReynolds -- Chairman, President and Chief Executive Officer

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 desired channels. Although these numbers aren't broken out separately. I can tell you that our managed solutions revenue 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 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 to 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 previously disclosed, the transition of this test pilot program from ArcBest technologies into ABF's field operation 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. While 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 to 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 became more fixed during periods of reduced 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 sources 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 these 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, both on a total basis and for 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 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.

Excluding the impact of fuel, which was a year-over-year price headwind, 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 shipment have contributed to a decrease in third quarter ArcBest Asset-Light revenue. The year-over-year change in market conditions and this year's plentiful equipment capacity moving at lower rates 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 revenue and operating income in our Asset-Light business.

Shipment counts in the truckload brokerage portion of the Asset-Light business increased over last year's third quarter. But lower revenue per load contributed to a decline in total brokerage revenue. So 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 in 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 contributed to the Asset-Light revenue and profitability. Our managed solutions help position us with our customers to effectively navigate in any environment.

At FleetNet, an increase in preventative maintenance service center events, which offsets the 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 a 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.

David R. Cobb -- Vice President and Chief Financial Officer

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 detailed in the GAAP to non-GAAP reconciliation table in yesterday afternoon's earnings press release, adjusted third quarter 2019 net income was $1.02 per diluted share, compared to $1.49 per share in the same period last year.

As of third quarter 2019, non-GAAP net income reflects the exclusion of cost related to both the freight handling pilot test program we announced last week and 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 amended our existing credit revolver agreement, which increased our 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. Our total debt at the end of the third quarter 2019 of $298 million includes the $70 million balance on our credit revolver, the $40 million borrowed on our receivable securitization and $188 million of notes payable, primarily on equipment for Asset-Based operation.

The composite interest rate on all of our debt was 3.3%, down slightly from the second quarter. We now expect that 2019 total net capital expenditures, including financed equipment to be in an estimated range of $160 million to $165 million. This is a reduction from our previously stated range of $170 million to $280 million. This updated amount includes the majority of the revenue equipment purchases we had plan 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 expenditures 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 in purchased over 33,000 shares of our stock for a total price of $900,000. Under our existing repurchase program, we have approximately $16 million of purchase availability remaining. And full details of our GAAP cash flow are included in our earnings press release.

Our Asset-Based third quarter revenue was $566 million, a 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. 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 in 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 that 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 of an LTL-rated shipment decreasing approximately 6%. Third quarter total billed revenue per hundredweight on Asset-Based shipments was $36.35, an increase of 1.5% compared to last year. The total yield increased percentage we are reporting was somewhat reduced by the growth of the truckload-rated shipments moving in our Asset-Based network at lower pricing levels than last year.

And excluding fuel surcharge, the increase in third quarter billed 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 and are not providing the positive year-over-year increase in revenue per hundredweight measure that they have in the past. We secured an average 2.9% increase on Asset-Based customer contract renewals and deferred pricing agreements negotiated during the quarter.

In spite of the decline in average weight per shipment, total revenue per shipment increased 70 basis points, reflecting the impact of a healthy pricing environment. In our early September, mid-quarter update, we highlighted higher than expected maintenance and repair cost related to increased repairs on EPA emission standards compliant tractors in ABF Freight city fleet in higher parts cost. These maintenance costs, which are included in the fuel, supplies and expenses line of our Asset-Based income statement, did increase on both a sequential and year-over-year basis, so they were offset by significantly lower fuel expense that are also included in that same line on the income statement.

As further described in the informational exhibit to our Form 8-K earnings release, we now expect that the previously disclosed technology costs in our Asset-Based business, which have been identified as a non-GAAP item are expected to approximate $4 million in fourth quarter 2019, compared to $1 million in fourth quarter 2018. These costs increased approximately $4 million in third quarter 2019 versus 2018.

As previously disclosed, and as Judy discussed earlier, these costs are 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 segment 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 of the ArcBest segments military moving businesses.

On an adjusted non-GAAP basis Asset-Light, operating income was $3.7 million, compared to $9.1 million last year. And 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 in 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.

Judy R. McReynolds -- Chairman, President and Chief Executive Officer

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 US 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-Axle 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 our 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.

Questions and Answers:

David Humphrey -- Vice President of Investor Relations

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 of Citi and Stephanie Benjamin of SunTrust.

LTL tonnage decelerated as the quarter progressed. 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 freight economy.

Judy you want to take that one?

Judy R. McReynolds -- Chairman, President and Chief Executive Officer

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 customers shift smaller sizes, and this mix change is a good portion of the LTL tonnage decline that we're experiencing.

Our customers tell us that they've been 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 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.

David Humphrey -- Vice President of Investor Relations

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?

David R. Cobb -- Vice President and Chief Financial Officer

Okay. Sure. I'd say 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 in the fourth quarter, we are seeing similar results and would expect that to continue into next year. Now these contract renewals are generally with our larger price-sensitive accounts. We really feel good about these increases and the profitability of these accounts. And as folks have heard us say, we still price customers on account-by-account view and based on the value that we provide.

So many of our accounts have complex supply chains and rely on 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 push back from customers that took large increases in 2017 and 2018.

David Humphrey -- Vice President of Investor Relations

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.

David R. Cobb -- Vice President and Chief Financial Officer

Yeah. 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 strengthened sequentially from second to third quarter.

David Humphrey -- Vice President of Investor Relations

Ken Hoexter of Bank of America Merrill Lynch asked, since the excess capacity environment in the first quarter has continued through 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?

Judy R. McReynolds -- Chairman, President and Chief Executive Officer

Well, I appreciate the 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 LTLs were more immune to price competition in the last down cycle and that is in part due to the consolidation of the LTL 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 compliance 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 ArcBest's existing retail logistics services by combining innovative software solutions, again, that we co-developed with our customers with enhanced operations, processes that we're heavily tested whenever we were pilot testing this program. This type of solution really relies on our logistics expertise, our assets and our relationship to improve customer outcomes, which again have been really tremendous and have generated a lot of interest.

David Humphrey -- Vice President of Investor Relations

Okay. Chris Wetherbee asked us to talk about the steep declines in LTL tonnage in the increases in truckload volume? He wondered, how we are approaching these markets. Has there been an intentional change of strategy? And how should we think about the relative margins?

Judy R. McReynolds -- Chairman, President and Chief Executive Officer

Well, it's a good question Chris. And as mentioned, we experienced year-over-year declines in our LTL-rated shipments so far this year and that continued into October. So in order to build the anti-capacity that we have available, we have utilized and continue to utilize a greater number of truckload-rated shipments, which really help 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 the 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 U-Pack 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 the profit associated with this truckload-rated business -- and again, this is the non U-Pack piece is really in line with longer-term historical levels, with the exception of what we experienced last year.

David Humphrey -- Vice President of Investor Relations

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

David R. Cobb -- Vice President and Chief Financial Officer

I'll take that, David. We have had a -- had less of a decrease in the year-over-year total weight per shipment since the first quarter. And that has been influenced by an increase in our truckload-rated shipments as Judy just talked about. Our profitability certainly moves with changes in weight per shipment, as Ravi mentioned. Because our larger shipments generated higher revenue per shipment thus offering more revenue to offset the handling cost of each shipment. What drives our results is the LTL weight per shipment and that has been declining throughout 2019.

We mentioned in our October business trend update that our LTL-rated shipment size was down about 6% in October and 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.

David Humphrey -- Vice President of Investor Relations

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

David R. Cobb -- Vice President and Chief Financial Officer

Yeah. Thanks, Chris for helping us clarify this, because including 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.

David Humphrey -- Vice President of Investor Relations

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

Judy R. McReynolds -- Chairman, President and Chief Executive Officer

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 tonnage levels. So again, we're well positioned for growth. And I just thought I'd give you that perspective as we enter 2020.

David Humphrey -- Vice President of Investor Relations

Okay. Can you talk about the year-over-year declines in shipments? Is comps get more difficult in fourth quarter? Should we expect year-over-year shipment declines?

Judy you want to take that one as well?

Judy R. McReynolds -- Chairman, President and Chief Executive Officer

Sure. In the third quarter of 2018, our shipments declined 1%, but in the fourth quarter of 2018, they increased 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 are experiencing shipment declines and that is really illustrated by the 7% shipment decline that we're seeing in October.

David Humphrey -- Vice President of Investor Relations

Okay. We had several questions on how we 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 in a lot of a weaker freight environment?

Judy R. McReynolds -- Chairman, President and Chief Executive Officer

I'll take that one David. As in past down cycles, which we've experienced a lot of, by the way over the years, we've learned to address our cost in a number of areas. We typically attack the more variable costs first. For example, in the third quarter, we reduced city cartage expense by nearly 25% and our rated equipment costs by over 30%. If our volumes to 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. Another cost area that will be evaluated is our equipment levels and then we'll also be evaluating our purchased transportation utilization, and we evaluate our network for opportunities to reduce resources, in particular in underutilized lanes.

The changing profile of our business with the lower LTL weight per shipment does make it more difficult to align costs with revenue levels, while maintaining the service customers expect. Labor, as we've mentioned a number of times before, it's typically managed 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.

David Humphrey -- Vice President of Investor Relations

Okay. We had several requests for an October business update and more color on current trends and seasonality relative to what we've seen in the past.

David, do you want to take that one?

David R. Cobb -- Vice President and Chief Financial Officer

Yes. The supplemental 8-K that we filed yesterday afternoon with our earnings release, included our business update for October. And 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 billed revenue per hundredweight excluding the fuel surcharge. 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 experience with truckload-rated shipments, the Asset-Based seasonality was a little better, but it is still in the bottom half of past years.

David Humphrey -- Vice President of Investor Relations

Okay. Several folks asked about historical sequential deterioration in operating ratio from the third quarter to 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 mid-week, 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 to mention that would impact what we would expect of the OR change relative to history. On Todd's holiday question, we made workday adjustments to both Thursday, December 26 and Tuesday, December 31 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?

Judy R. McReynolds -- Chairman, President and Chief Executive Officer

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 needs 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 handling 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 filed last week and in my opening remarks, this pilot has the potential to provide a better experience for employees and customers, reduce the amount of time freight is idle, improves transit performance, reduced cargo claims and injuries, and accelerates employee training time. So we will evaluate the pilot and any future expansion on the results of these factors. This process being tested was developed by ArcBest Technologies. And we have incurred some additional costs as a test we are transition from ArcBest Technologies into ABF's field operation for more extensive and live testing. The costs associated with this pilot include facility costs, freight handling equipment, some software development and modifications and additional personnel costs.

And as I mentioned in my opening remarks and in the 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 would also lead to incremental testing costs. The incremental costs of operating the test as a pilot have been separately identified and reported as non-GAAP to provide clarity of operating performance and not disrupt financial models. The incremental costs this year are necessary in order to expand our live testing, feedback, and ongoing development. And if 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.

David Humphrey -- Vice President of Investor Relations

Okay. We had other similar follow-up questions on the new innovative technology cost. It appears as though you are now backing out technology cost which you had previously guiding us -- 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 the practice to include them in prior periods? Can you please provide examples of other other transportation companies that also exclude technology investment cost from their adjusted results?

Judy R. McReynolds -- Chairman, President and Chief Executive Officer

Well, David, the opening of the Kansas City facility in mid-2020 and the expansion of this pilot to a more significant portion of 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. 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 that involves 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 if 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.

David Humphrey -- Vice President of Investor Relations

Okay, Todd asked, is the $4.6 million of costs 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?

David R. Cobb -- Vice President and Chief Financial Officer

Yes, I will. We disclosed the year-to-date cost of the pilot in the non-GAAP tables to the earnings press release. And as mentioned in the 8-K to the earnings release, we expect the cost to be $4 million in the fourth quarter of 2019. And in comparison to the fourth quarter of 2018, these costs were $1 million in the ABF segment and $1 million in the other segment in 2018 fourth quarter. Because there are a number of factors that are being evaluated that would also impact the future cost, we're not providing projections beyond the 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.

David Humphrey -- Vice President of Investor Relations

Okay. Jack and Ken asked about our removing ELD conversion cost in the non-GAAP reconciliation table. You also excluded $0.05 per share in costs related to the changeover to ELDs. None of your other LTL or truckload peers have done this, why are ELD costs not viewed as operational as those are core parts of operations. Dave also said, since you have lot of the ELD conversion, please discuss your experience. Is the fleet running any differently to date post-implementation? If so, what is the biggest difference?

David R. Cobb -- Vice President and Chief Financial Officer

First of all, the ELD costs that were listed as an adjustment in the non-GAAP tables in our earnings release were due to impairment expenses that we incurred associated with our conversion from AOBRDs to meet the upcoming ELD mandate. The hardware and software we were previously using were not upgradable for use in the new ELD application and had to be impaired. These are not implementation cost of ELD application and these identified costs are not related to ongoing operations.

Through our new vendor, Sensera, 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 Sensera interface is more efficient for our teams, and the technology is performing above expectations, while creating an improved driver experience. So we're pleased with that. And also in our city operation, we've had a good experience as ELDs are helping us on our hours of service compliance.

David Humphrey -- Vice President of Investor Relations

Okay. Does your lower 2019 capex reflect a potential step up in 2020 capex? Can you give a sense of the magnitude?

Well , on 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's capex spend will be impacted by the reduction we described in 2019's figure. As a reminder, $90 million of the 2019 capex is expected for replacement revenue equipment for our Asset-Based operation in most of those tractors we currently have in service. As we always do, 2020's capex will include replacement tractors at ABF as well. Our normal practice is to provide an estimate of our 2020 capex in our fourth quarter earnings release and conference call.

Okay. Moving on, we also had a couple of questions about M&A. Dave asked, if M&A is 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?

Judy R. McReynolds -- Chairman, President and Chief Executive Officer

David, I'll take that one. I think good questions from Dave and Jason. We continue to review M&A targets, we feel that, that really adds a lot of benefit to our understanding of options. And we're 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 advancement 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 multiple still seem a little high to us.

David Humphrey -- Vice President of Investor Relations

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

Judy R. McReynolds -- Chairman, President and Chief Executive Officer

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 cost increase in the third quarter and we highlighted that we were going to be experiencing that cost. It was really driven by a 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 EPA compliant engine in them. These units are more costly to maintain particularly in the lower-speed city operation. We've also experienced some tariff impact on parts cost and availability.

David Humphrey -- Vice President of Investor Relations

Okay. This one came from given Ken. Given that the LTL market has remained in the mid-90s, can you reshape 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? Do work rules stop you from achieving more efficiency or is it just a pay issue?

Judy R. McReynolds -- Chairman, President and Chief Executive Officer

Well, I think Ken's question is interesting and we certainly are always looking for ways to improve our Asset-Based business. We're doing a number of things as we previously mentioned to address the cost 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 are 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've deployed the enhanced market approach at the beginning of 2017, we really feel like on an overall basis, we better address the customer needs and as we've mentioned already that helps us in a number of ways.

Our company when we are viewing the 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 through internal research and some external studies that we're really valued for the things that matter most to 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 these -- the strength in these relationships and be a more comprehensive solution provider for our customers really help us in that way.

David Humphrey -- Vice President of Investor Relations

Okay. Todd Fowler asked, if we have accrued anything to date for the union profit sharing bonus.

David, do you want to take that one?

David R. Cobb -- Vice President and Chief Financial Officer

Yes. Todd, I can say that this -- and good to point out some details that we provided in the exhibit to the 8-K that we released yesterday afternoon with our 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 1% of ABF Freights annual union employee earnings would equal about $5 million to $6 million of union bonus expense. So our approach to accounting for these cost is that we internally projected payout of this bonus. We would accrue for that expected annual expense 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 union bonus. And again, I've just recommend, if your financial models reflect an operating ratio on a GAAP basis that meets the bonus payout thresholds, we encourage you to include expenses for the union bonus in your quarterly earnings and annual earnings per share projections of our company. And just as a matter of reference, our GAAP Asset-Based operating ratio in the first nine months of the year was 95%.

David Humphrey -- Vice President of Investor Relations

Okay. Have you seen any recent improvement in truckload capacity?

David R. Cobb -- Vice President and Chief Financial Officer

I would say, the truckload capacity has been readily available, which is certainly different than 2018 time frame. And so, the excess market capacity attracts larger sized LTL shipments, as well as business that might otherwise be served with our expedite offering. And so we really haven't observed a significant change in the available truckload capacity from what we've been seeing.

David Humphrey -- Vice President of Investor Relations

Okay. Why didn't Asset-Light purchase transportation costs not go down more in a loose capacity environment?

David R. Cobb -- Vice President and Chief Financial Officer

From -- the concern there is about, kind of the margin compression that we're seeing, and partly that is due to the higher level of growth in our managed solutions. That's typically lower margin business than our other service offerings. And also, we brought on 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 service line. For instance, our year-over-year third quarter truckload shipments increased 6.8% on a per day basis.

David Humphrey -- Vice President of Investor Relations

Okay. Are you seeing any stability in shipment levels or revenue per shipment in the Asset-Light segment? Other asset-light peers have spoken about stability in the spot market, are you seeing this?

David R. Cobb -- Vice President and Chief Financial Officer

David, I'll 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 our Asset-Light revenue per day declined 6% in October, which indicates some further weakening. But we do continue to be excited about our growth in 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 expedite in international offerings as Judy talked about earlier.

David Humphrey -- Vice President of Investor Relations

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

Judy R. McReynolds -- Chairman, President and Chief Executive Officer

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 them to 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 logistic solutions. And they look to us to help them find those and to solve 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.

David Humphrey -- Vice President of Investor Relations

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 so we covered a lot of topics. We appreciate that. We thank you for joining us this morning and we appreciate your interest in ArcBest.

This concludes our conference call. Have a good day.

Operator

[Operator Closing Remarks]

Duration: 56 minutes

Call participants:

David Humphrey -- Vice President of Investor Relations

Judy R. McReynolds -- Chairman, President and Chief Executive Officer

David R. Cobb -- Vice President and Chief Financial Officer

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