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ArcBest Corp (NASDAQ:ARCB)
Q4 2019 Earnings Call
Jan 31, 2020, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the ArcBest Fourth 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, January 31st, 2020.

I would now like to turn the conference over to David Humphrey, Vice President of Investor Relations. Please go ahead.

David Humphrey -- Vice President, Investor Relations

Welcome to the ArcBest fourth 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 fourth 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. I'm pleased to talk with you today about our fourth quarter and 2019 performance, particularly as it marks the end of my 10th year as CEO, which provides an opportunity to reflect on how far we have come as an organization.

While the fourth quarter was the most challenging of the year, our overall performance for 2019 was the second best in the last 10 years.

We didn't see the same record-setting conditions last year as those in 2018, but it was still a year full of accomplishments for ArcBest. We achieved good progress on our efforts across the Company to provide an excellent customer experience, to develop our people and to deliver solid financial results.

When I began my role as CEO in 2010, it was a far different situation as we navigated the effects of the financial crisis which hit everyone in our industry, including us, very hard. That year, we reported $1.7 billion in revenues, coming almost exclusively from our LTL business and a $55 million consolidated operating loss.

Fast forward to 2019 when we reached nearly $3 billion in revenue with roughly a third of that generated by our Asset-Light business and $109 million in non-GAAP operating income. Our balance sheet is solid and our cash flow generation strong. We know we have more work to do on the Asset-Light side but I'm proud of our team's evolution and our ability to give customers the breadth of solutions they require across the supply chain.

Our expansion and diversification have not been without their challenges and volatile market conditions, but I am confident we are firmly on the right path for the next decade ahead. By serving and spending time with our customers and by investing in innovative technologies to enable a more informed and actionable view of their logistics needs, we are better able to address their pain points.

An example of this involves a high-end appliance manufacturer with revenue of more than $15 billion. They were an existing client for us running at about $430,000 a month in revenue for deliveries to a big box retail center that they needed damage reduction and guarantee of final mile deliveries that were on time. Specifically for them, we created a managed solution involving a mode optimization of LTL, time critical LTL, truckload and expedite. Thanks to our solution, they began to see reduced damages, creative coordination of specialized deliveries and enhanced reporting and visibility. We ended up basically quadrupling that business to $1.8 million a month in revenue.

In fact it has gone so well that we are now in early stages of helping this high-end manufacturer work with another online retail seller and our experiences show that we will be the right partner once again.

As a result of our expansion and investments in recent years, our managed solutions business is growing. Our cross-sell accounts have become larger in size and are growing faster than single service accounts. And these accounts also have higher rates of retention, which is a more stable foundation for future growth.

The growth in our managed business is also having a positive impact on our Asset-Based business. And in some cases, if we had continued to only provide LTL this business would have been lost to us forever.

Speaking of ABF, we achieved a significant milestone in paying a profit-sharing bonus to all eligible union represented employees at ABF upon reaching a full-year operating ratio of 95.2%. I'm proud of this accomplishment and I thank everyone for their hard work.

And now, I'll discuss some additional detail on the fourth-quarter performance of our service offerings. In the fourth quarter, we continued to offer our Asset-Based customers with a superior level of service in response to their specific transportation needs. The pricing environment was solid and stable during the quarter and allowed us to achieve needed increases in yields, especially on our LTL-rated shipments. But lower demand during a moderating and uncertain economic environment contributed to decreased revenue resulting from reductions in both shipments and tonnage. Lower LTL rated shipment levels have resulted in reductions in productivity metrics in our dock and city operations thus impacting profitability relative to last year's fourth quarter.

Our focus on customer service, while seeking to maintain the proper balance between cost management and our business levels put some pressure on fourth quarter operating margins relative to 2018.

Later in the call David Cobb will detail the monthly tonnage declines that we experienced in the fourth quarter, which has been the case throughout the entire year. Our tonnage declines reflect the overall weakness in the manufacturing and industrial sector of the economy and truckload capacity increases. As a result of the reductions in our LTL business, we've been opportunistic in filling available Asset-Based equipment capacity with both truckload and LTL transactional shipments, utilizing some new systems that offer more timely information on existing opportunity.

Our recent Asset-Based tonnage comparisons with the previous year have improved as a result of these initiatives and in January 2020, we are seeing growth in our tonnage compared to last year. The January business growth has also resulted in improved linehaul metric. As I mentioned in the fourth quarter, we were successful in improving price on our Asset-Based business. Throughout 2019 we compared back to quarters in 2018 that reflected total Asset-Based quarterly price increases in the range of 8% to 10%. Even with those challenging comparisons in each quarter of 2019, we further improved pricing relative to 2018. The pricing environment in January is comparable with previous quarters but the addition of the transactional shipments I mentioned earlier has impacted our revenue per hundredweight metric.

Fewer total shipments and a reduction in average revenue per shipment resulted in a decline in fourth quarter ArcBest Asset-Light revenue versus the prior year. As we have experienced throughout 2019, the most significant impact contributing to lower Asset-Light revenue and operating income was the reduced demand for our expedite services compared to the previous period. In the current demand environment, shippers have a greater number of lower-cost capacity options, thus reducing their need for our expedite services. This translated into a double-digit percent reduction in expedite shipments, combined with a comparable decline in average revenue on these shipments.

We experienced an increase in the truckload brokerage shipments handled in our Asset-Light business during the fourth quarter, but we were challenged by lower average shipment revenue relative to the cost we had to pay for the Asset-Light purchased transportation equipment capacity. Our total PTE cost decreased during the quarter, but not in the same proportion as the decline in average shipment revenue. This combination of factors contributed to significantly reduced Asset-Light operating income.

Growth in our managed transportation services continues to be a positive contributor to our Asset-Light results. As I discussed earlier on the call, our managed solutions resonate with customers and there is a high level of interest in ArcBest coordinating their supply chains in a cost-efficient manner, while maintaining a focus on service and transit reliability. We are certainly adding new customers and shipment activity to our managed services, but we're also finding creative ways to meet the needs of existing customers. Our managed solutions opportunity pipeline continues to grow which is exciting, because we know these solutions are particularly responsive to customers in this environment.

At FleetNet, total events increased during the fourth quarter compared to last year as the increase in the preventative maintenance service event offset a reduction in roadside repair activities. The improvement in fourth quarter operating income was the result of growth in total events and cost efficiency gains from previous technology investments.

During 2019, we continued to take actions to enhance shareholder value. Throughout the year, we paid our $0.08 per share quarterly cash dividend and we bought back over 307,000 shares of our stock for a total price of $9.1 million. Under our existing repurchase programs, we have approximately $13 million of purchase availability going forward.

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. Fourth quarter 2019 consolidated revenues were $717 million compared to $774 million in last year's fourth quarter, a per day decrease of 7%.

On a GAAP basis, we had a fourth quarter 2019 net loss of $0.22 per diluted share due to a previously announced non-cash impairment charge related to Asset-Light. This compared to a $0.57 per share profit last year.

As detailed in the GAAP to non-GAAP reconciliation table in yesterday afternoon's earnings press release, adjusted fourth quarter 2019 net income was $0.56 per diluted share compared to $1.06 per share in the same period last year. ArcBest fourth quarter 2019 effective GAAP tax rate was a benefit of 53.9%, primarily due to the non-cash asset impairment charge and tax credits which were related to use of alternative fuels and related to our research and development activities.

For the full year of 2019 consolidated revenues totaled $3 billion compared to $3.1 billion in 2018, a per day decrease of 3.2%. Full year earnings per share were $1.51 compared to $2.51 in 2018. On a non-GAAP adjusted basis, as outlined in our earnings press release 2019 earnings were $2.88 per diluted share compared to $4.02 in 2018.

In 2019, total net capital expenditures, including equipment finance, equaled to $147 million, which is below previous expectations reflecting shifts in the timing of some expenditures into 2020 as well as higher sale proceeds.

2019 expenditures for revenue equipment totaled $86 million, the majority of which was for replacement of units in ArcBest Asset-Based operations. Depreciation and amortization cost on property, plant and equipment were $108 million. In addition, amortization of intangible assets was $4.4 million in 2019.

For 2020 total net capital expenditures are estimated to range from $135 million to $145 million. This includes revenue equipment purchases of approximately $82 million, primarily replacements for Asset-Based operation. ArcBest depreciation and amortization cost on property, plant and equipment in 2020 are estimated to range from $110 million to $115 million. This expense range does not include amortization of intangible assets which are estimated to approximately be $4 million in 2020.

Our full year 2019 GAAP tax rate was 22.3%, which was positively impacted by the tax credits recognized in the fourth quarter that I previously mentioned. The effective tax rate reconciliation table in our earnings press release shows the reconciliation of GAAP to non-GAAP effective tax rate, which was 25.8% for the full year of 2019.

We currently expect our full-year 2020 non-GAAP tax rate to be in a range of 25% to 26% while the effective rate in any quarter may be impacted by items discrete for that period. We ended the fourth quarter with unrestricted cash and short-term investments of $318 million. Combined with the available resources under our amended credit revolver and our receivable securitization agreement, our total liquidity currently equals $571 million.

Our total debt at the end of the fourth quarter 2019 of $324 million includes a $70 million balance on our credit revolver, $40 million borrowed on our receivables securitization and $214 million of notes payable, primarily on equipment for our Asset-Based operation. The composite interest rate on all of our debt was 3.1%, which was lower than the third quarter. And full details of our GAAP cash flow are included in our earnings press release.

Our Asset-Based fourth quarter revenue was $513 million, a decrease of 6.5% compared to last year. As Judy referenced earlier, Asset-Based quarterly tonnage per day decreased 8.1% versus last year's fourth quarter.

Fourth quarter 2019 by month Asset-Based daily total tonnage versus the same period last year decreased by 9.1% in October, decreased by 11.9% in November and decreased by 2.3% in December. The declines in fourth quarter total tonnage per day were driven by decreases in LTL-rated business.

Just as [Phonetic] Judy described earlier, we increased the level of truckload rated shipments in the ABF Asset-Based network to utilize available equipment capacity. Fourth quarter total shipments per day decreased by 7.3% compared to last year's fourth quarter. Fourth quarter total billed revenue per hundredweight on Asset-Based shipments was $35.62, an increase of 2.1% compared to the fourth quarter of last year.

Excluding fuel surcharge, the increase in fourth quarter billed revenue per hundredweight on Asset-Based LTL rated freight was in the high single digits. We secured an average 4.3% increase on Asset-Based customer contract renewals and deferred pricing agreements that were negotiated during the quarter.

On an adjusted basis, our Asset-Based fourth quarter operating ratio was 95% compared to 93.1% in 2018. For the full year of 2019 ArcBest Asset-Based revenue was $2.1 billion compared to $2.2 billion in 2018, a per day decrease of 1.2%. Asset-Based 2019 total tonnage per day decreased 4.8% compared to the previous year while daily shipments decreased by 2.4%, resulting in a 2.5% decrease in total pounds per shipment.

On an adjusted basis our Asset-Based full-year operating income was $118.8 million compared to $145.6 million in 2018. In total, the revenue in ArcBest Asset-Light businesses decreased 2.8% versus last year's fourth quarter, reflecting a revenue decline in the ArcBest segment partially offset by revenue increase in the FleetNet segment.

On an adjusted basis, fourth quarter Asset-Light operating income was $1.1 million compared to $7.8 million last year. Full year 2019 revenue for the Asset-Light businesses was $950 million compared to $976 million in 2018, a decrease of 2.7%. Full year 2019 adjusted operating income for these businesses was $11.2 million compared to $26.5 million in 2018.

Adjusted full year 2019 Asset-Light EBITDA was $23.8 million compared to adjusted EBITDA of $43.4 million in 2018. Yesterday afternoon we filed an 8-K that included our fourth quarter 2019 earnings release, along with an exhibit that provided some additional information about our current quarterly financial results along with our recent business levels and our future expectations on certain financial metrics. This information should be helpful in modeling expectations for our 2020 financial results.

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

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

To change things up a little bit this quarter, I would like to take a few minutes to talk about our technology innovation so that you can get a little more color on what's going on there. First, however, I will mention just one recent Company highlight in which we were named to the 2020 top 500 list of the Best Employers for Diversity. We came in at number 340 on the list, published by Forbes in partnership with Statista. This is the second consecutive year that ArcBest has appeared on the list. In 2019 we ranked number 484. We are honored to be named to and moving up on the top 500 list.

ArcBest's history is marked by innovations and we further advanced our capabilities in the last few years in order to respond to accelerating change in our industry. One area where we see a lot of potential is in cognitive technologies. We have deployed these kinds of solutions to help shippers submit pickup request to ABF without an agent, to process and categorize inbound customer emails automatically for a quicker response and to check the capacity of a trailer by auto scanning a CCTV feed and then alerting a dock employee of a potential problem. We are in an early stage with many of these technologies that we are enthusiastic about their early success so far.

Another aspect of cognitive technologies is machine learning. We have developed a number of algorithms that are embedded in the applications our employees use and they help them simplify and drive better decision making. We have developed and are utilizing these kinds of solutions in yield management and in our Asset-Light operations where we launched a capacity sourcing tool to optimize the utilization of internal equipment capacity, while reducing the time it takes to secure external equipment capacity in meeting customer requirements.

Recently ArcBest launched an innovation accelerator to encourage new transformative ideas. This accelerator combines employees from across the organization who work closely with executive leadership to identify opportunities for disruptive innovation within our company, as well as evaluate potential external innovation partners. We favor smart and pragmatic investments at ArcBest and I'm pleased with the progress in this area and look forward to what's next.

To conclude our prepared remarks, I'd like to underscore how excited I and our team remain about the market opportunities and growth potential ahead. I attend various meetings throughout the year and I'm always encouraged by the can-do attitude I witness in our people and the strong testimonials I receive from customers about them and the solutions we provide. As we move into 2020 and beyond, we will strive to achieve a best-in-class experience for our customers utilizing the right balance of human and digital interactions that makes their businesses easier to do.

And now, I'll turn it over to David Humphrey to conduct our question-and-answer session.

Questions and Answers:

David Humphrey -- Vice President, Investor Relations

Okay. We will now begin the question-and-answer period with Judy and David. To start off, we had several questions about the tonnage trends that we experienced in late fourth quarter '19 and the improvement as we moved into January. What were the primary drivers behind the improvement that we were seeing. Those similar questions on this topic came from Chris Wetherbee with Citi, Jack Atkins of Stephens, Todd Fowler with KeyBanc, Ken Hoexter with Bank of America, Ravi Shanker of Morgan Stanley and Stephanie Benjamin at SunTrust.

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

Yeah, David, I'll take that. Thank you. And I appreciate everyone's interest and the questions on our Asset-Based tonnage trend. It's our normal practice to use transactional shipments to better utilize fixed resources in seasonally weaker periods. And these shipments improved our December sequential comparisons and resulted in a favorable year-over-year comparison in January.

And as Judy mentioned earlier, we've had recent success in adding heavier transactional LTL rated shipments to better utilize available trailer space that would otherwise be moving empty. This success has resulted in improving our shipment trends by utilizing some new systems that offer more timely information on existing opportunity. These actions really reflect continuation of our focus on customer level profitability while utilizing the transactional market to opportunistically fill the empty capacity in our asset network. So we don't believe the improvement was experienced from demand but more about an intentional action to fill into capacity in the network.

David Humphrey -- Vice President, Investor Relations

Chris Wetherbee ask about what drove the change in build revenue per hundredweight from a 2.1% year-over-year increase in fourth quarter '19 to a decline of 3.5% in January. We also wanted to -- he also wanted to understand the impact of mix in pricing on this change. Then Ken Hoexter wanted to know how we are thinking about the trade-off between pricing and volume in LTL. He pointed out that in fourth quarter '19 pricing was up to spot volume being down pretty significantly and he wanted to know if we are losing market share.

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

Yeah, and that's related to what I just mentioned in that we strategically added more heavier weighted transactional shipments in December and January that help fill into capacity in the network. So the change in revenue per hundredweight is more a reflection of that mix shift. Year-over-year core LTL price is in the mid-single digits and is on top of multi-year solid price increases. So our objective is to offer superior services in the LTL marketplace and in return, we'll continue to focus on securing corresponding pricing for each of our customers.

Our approach is to manage customer level profitability while utilizing the transactional market to fill that empty capacity in our asset network. From our analysis, we believe we are maintaining the market share.

David Humphrey -- Vice President, Investor Relations

We had another question about how long we can sustain elevated growth in truckload rated spot shipments moving in the asset-based network.

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

Yeah, that's really about just us trying to optimize our network with the right balance of truckload rated business and price. And during the extremely tight capacity market in 2018, we had historically low levels of truckload rated spot shipments in the network from about the second half of the year through early 2019. So the comparisons of our truckload rated business volumes become tougher as the year progresses. It really comes down to contribution to the network being the driving decision behind truckload rated business levels.

David Humphrey -- Vice President, Investor Relations

Dave Ross of Stifel ask are 3PLs away for ABF to get back some volume back into the system? Why or why not?

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

Yeah, we have numerous and strategic relationships with 3PLs today and those provide us access to business opportunities and we utilize those opportunities to optimize our network resources that we've been talking about. And we actively pursue business with 3PLs when the opportunity makes sense from a business standpoint.

David Humphrey -- Vice President, Investor Relations

We had several people ask about the current pricing environment for LTL and our pricing outlook for 2020. Pricing continues to moderate on a year-over-year basis. How much of that is driven by comps, more aggressive competition or other factors? And finally, what are your expectations for a potential GRI?

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

David, I'll take that. In our view, the pricing environment remains comparable with recent quarters. And we expect that the pricing environment will remain competitive but rational for 2020. Beginning with our space-based pricing initiatives that we launched in August of 2017, we've really had a 2.5 year period of very solid pricing success that included year-over-year increases of 8% to 10% in 2018 and continued solid increases in 2019, especially on our LTL-rated freight. And with this strong base of increases during this past period, we would expect that our 2020 price increase levels will return to more normal rates of year-over-year increases.

As I just mentioned, our core LTL business continues to be priced solidly but the addition of some transactional shipments that both I talked about earlier and David also did has really impacted our yield metric. In addition to improving our business levels, those transactional shipments are contributing to improved operational metrics, including higher trailer load averages and some reductions in empty miles. And at this point we're evaluating the potential for 2020 GRI for ABF, but we haven't made any final decisions. There are a number of factors that go into our decision every year about whether to implement a GRI, including the market and competitive environment and some solid input from our sales group regarding their discussions with our customers.

David Humphrey -- Vice President, Investor Relations

Okay. Ravi Shanker has stated that our weight per shipment was showing signs of stabilizing on a sequential basis. With easier comps, do you expect weight can begin to be up on a year-over-year basis in 2020? What do you think is a normal weight per shipment?

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

Yeah, in our supplemental exhibit to the earnings release total weight per shipment in January increased 6.5% compared to January 2019 with our -- with the weight per shipment on our LTL-rated shipments increasing 2.5%. We would say our normal weight per shipment is -- runs around 1,000 pounds per shipment.

David Humphrey -- Vice President, Investor Relations

Okay. Next Jason Seidl of Cowen ask what are the monthly contract pricing trends and renewals for the quarter. What are your expectations for pricing in the rest of the quarter and for the full year 2020?

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

Yeah. Although we don't provide monthly information, for the fourth quarter we secured a 4.2% increase with our contract and deferred pricing renewal. January is running at historical first quarter average rates of around 3% to 4%. We expect that the pricing environment will remain competitive but rational this year.

David Humphrey -- Vice President, Investor Relations

Ken pointed out regarding the press release that Judy said returning the Asset-Based business to historic levels has been a stated long-term goal. Given that there has been a bit of fluctuation in the historical margins, could you clarify what margin level she means and is there a timeline to get there?

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

Well, David, I appreciate Ken's question and I think what he was referencing was some discussion that we had about our historic margins in relationship to paying the union incentives. So the contract provisions for paying our union incentives specified a minimum full year 96% operating ratio for making the payment. We were really pleased that our 95.2% OR in 2019 allowed us to pay 1% of union wages to our employees.

But when I talk about historical levels of profitability, I'm really referring to annual asset base operating ratios in the low 90%s. And we certainly have more work to do to consistently attain those profitability levels. But our payment of the union incentive represents a significant step in moving in that direction.

As for when we get to those ORs, I don't really have a specific time frame to give you and that's -- part of that's because of the cyclical nature of our business. So we are certainly working to get there as fast as possible and we do see opportunities for further efficiency gains in our operations.

And then with respect to our Asset-Light business, we are targeting consistent 5% operating margins there.

David Humphrey -- Vice President, Investor Relations

Okay. We had a question about the current demand environment. What are you seeing out there? Are you seeing any signs of normal seasonality coming back? Along those lines, how is January trending for you?

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

The current trends from the normal fall-off after peak have continued in January. Our customers remain somewhat optimistic that seasonality will provide a lift as we move into March. The customers continue to be cautious about their businesses regarding the uncertainty around inventory levels, trade concerns and this year's US presidential elections. But I do believe it's helpful to have trade deals with China and the USMCA approved by the United States. Excess capacity in the market has encouraged our customer base to seek opportunities to optimize their current supply chain models and that has benefited us because many of our largest accounts are working with us to become more efficient, both from a cost and compliance perspective. This is providing opportunities for ArcBest to help solve these complex supply chain needs of our customers.

Yesterday in the 8-K that accompanied our earnings release, we provided an update on January business levels. And our January trends have improved due to some initiatives to fill available capacity in our asset-based network as we've been discussing. Our Asset-Light business so far this year is more challenged as compared to a stronger January in 2019. We're currently experiencing a 3% reduction in revenue while our purchased transportation costs have actually increased about 2%. A portion of this margin compression is market related. And the other part of it really relates to our mix of business.

David Humphrey -- Vice President, Investor Relations

Okay. We had several -- we had questions about the typical sequential change in asset based operating ratio from fourth quarter to first quarter. Are there any items that you believe will impact typical sequential change?

I'll just take that one and I'll point out that in our supplemental 8-K yesterday -- yesterday afternoon, we mentioned that our first quarter OR has historically increased by approximately 400 basis points versus the first quarter. At this point there really are no significant puts or takes to mention that would impact what we would expect in the OR change relative to history.

There could be some items moving each way and some of these are unpredictable, especially weather events in the first quarter and property sales. And as you saw in the fourth quarter, we benefited from a gain on asset sales.

Ken had several questions about employee resources and head count. Given volume declines in the Asset-Based segment, could you discuss ArcBest thinking with regard to headcount and resource needs? Is it possible we could see head count declines commensurate with volume declines? How much available capacity do you currently have given volume declines? Assuming resource cuts are needed and appropriate, could you achieve it through normal employee attrition?

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

Well, we consistently work to match our labor needs to business levels with a combination of attrition and layoffs when necessary. However, during the seasonally weaker periods, we have a challenge and we have to address that challenge by balancing headcount reductions with service levels as our customers expect good service from us.

But in our dock and city operations, we currently have about 150 people on layoffs. And in addition, we have 60 fewer road drivers in the ABF network this month versus last year in January, so January of 2019 level. We are being very strategic with our head count as it relates to our business levels.

And from a line-haul perspective, attrition in the fourth quarter really positioned us well for our current business levels as we start 2020. We've made notable reductions in other areas of variable costs such as rents and purchased transportation. And because we have the flexibility to manage modes, we have initiatives to optimize our head count while also using our rail and purchased transportation partners. And with this flexibility, we're able to provide our best-in-class customer experience, while keeping headcount more in line with our business level.

Another bright spot I'll mention is our deployment of a number of tech and analytics management tools that really allows better visibility of needed manpower adjustments and we're looking forward to having the benefit of those in 2020.

David Humphrey -- Vice President, Investor Relations

The next question was about the level of core cost inflation we should expect for ArcBest Asset-Based segment in 2020.

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

The majority of our Asset-Based labor costs are impacted by the union labor agreement, which includes total annual cost increases that average about 2% per year for the life of the contract. And that is a very manageable cost increase and we appreciate having known labor cost stability for the remainder of the contract through mid-2023. We were very pleased to pay the [Indecipherable] operating ratio incentives at the 1% level since ABF achieved a 95.2% OR in 2019 that Judy mentioned. That amounted to $5.1 million of expense accrued in 2019.

I also mentioned our revenue equipment has cost more in recent years and impacts are estimated 2020 depreciation expense that we disclosed in our supplemental 8-K and largely due to the safety features for technologies like lane departure, warning systems, collision mitigation and cameras.

And as we've mentioned with our long-term perspective, we continue to make technology and process investments in many areas targeted for growth opportunities including the efforts to improve customer experience and also to optimize cost, like Judy just mentioned. Those actions in cost may proceed the timing of the expected benefits.

David Humphrey -- Vice President, Investor Relations

With weight per shipment trend stabilizing and LTL tonnage now flat year-over-year in the Asset-Based business, do you see an opportunity to outperform normal OR seasonality in the first quarter or would you expect to be roughly breakeven in that segment in the first quarter?

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

We don't provide guidance on our expectations for the first quarter. But as noted in the supplemental exhibits in earnings release, we typically see the 400 basis point deterioration from fourth quarter to the first quarter. We are experiencing improvements in weight per shipment and generally larger shipments are beneficial to us. We are also encouraged with additional business which is filling available capacity in our system like we talked about. However, we did have a property gain in the fourth quarter and those events can be lumpy.

David Humphrey -- Vice President, Investor Relations

We had a question about how much of a margin headwind is represented by the union profit-sharing agreement as we move toward our long-term margin goals.

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

Yeah, we provided some additional information about the union operating ratio incentive in our supplemental exhibit. The ABF OR of 95.2%, as we mentioned, plus the bonus expense of about $5.1 million, that's a 1% payout on union wages. But if the profit sharing burdens would increase to 2% of employee wages for an operating ratio of between 93.1% to 95%, then the bonus would increase to 3% of employee wages for an operating ratio of better than a 93%.

David Humphrey -- Vice President, Investor Relations

Considering the fact that insurance is currently a big truckload cost factor, is this a headwind for ABF in 2020?

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

Yeah, while we've seen a modest increase for 2020, it isn't a major headwind for ABF. As was pointed out by the question, the insurance market has tightened this year on the heels of some very large verdicts against transportation carriers. Our understanding is that many carriers have had difficulty placing their coverage needs with insurance companies that are still willing to be in this market.

ABF has a long history of being a safe carrier and we've made substantial investments in technology, in our tractors and in our safety programs like I just mentioned. But as a result of our safety focus and the work of our employees, we've had a very good loss history. So that helps us with insurance renewals. Nevertheless because of the market pricing increase, we will have some incremental cost headwinds somewhere around $2 million.

David Humphrey -- Vice President, Investor Relations

We received several questions about our recently announced technology investments from several analysts, including Jack, Todd, Ravi, Chris and Stephanie. Could you give us an update on the technology investments within your Asset-Based operations? Can you provide an update on the pilot break testing program or freight handling program? In how many locations is it currently being tested?

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

Well, David, thanks for the question. Currently, the primary testing is occurring in two locations in Indiana. The test results of these initial pilots have been positive and we're working to open a facility in Kansas City where a distribution center test is expected to begin in late summer of this year. Testing the process in a distribution center setting will give us a better understanding of the challenges of conducting this operation in a larger, more active service center environment.

It will also help us to determine the proof of concept that will ultimately help us decide if we go forward with implementing it throughout the entire ABF network. There really isn't much more detail to provide at this time until we do this testing and have some time to analyze the results. But we are pleased with the technologies and processes that are being evaluated in the pilot and their potential to provide a better experience for our employees and our customers, reducing the amount of time that freight is idle, improving transit performance, reducing cargo planes and injuries and accelerating the employee training time.

David Humphrey -- Vice President, Investor Relations

Okay. Also regarding the pilot freight handling program they ask at what point could this move from a pilot to an actual application and what impact did that have on your financials. Is there an end point to the spending, or should we assume it persists for the foreseeable future? Can you give us a sense of what the spending level in 2020 will look like?

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

Well, in the third and fourth quarters of 2019, we reported this additional technology spend in the Asset-Based segment and it was approximately $4.5 million in each quarter or a total of $9 million in the second half of 2019. We also expect that these related costs in the first quarter of this year -- that will be approximately $5 million and that's versus $2 million in the first quarter of 2019 in the Asset-Based segment.

At this early stages of pilot, we aren't providing projections beyond the first quarter as there are a number of factors that are being evaluated that would also impact future costs. And moving along during the year, we will provide our expected costs for the next quarter when we report each quarter's earnings.

The transition of the pilot to Kansas City in a distribution center environment later this summer will lead to some incremental testing costs. Our modeling shows though that this project should produce returns that meet our internal benchmarks and these pilot tests are being conducted to further prove this concept and the associated results.

David Humphrey -- Vice President, Investor Relations

Okay. Are you seeing real estate opportunities from large competitor downsizing?

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

In reference to the various LTL company closures occurred -- that occurred throughout 2019, we are always aware of what properties and locations become available. But there really weren't any properties of interest to us and we didn't add any as a result of those closures.

David Humphrey -- Vice President, Investor Relations

Could you provide additional color on the asset sale gain reported in fourth quarter? Do you expect additional asset sales in 2020?

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

The gain that was reported was related to the sale of unused service center at ABF. As this regularly happens, this was a situation where we relocated into a new facility and we were able to sell our former service center. This happens periodically as we buy and sell real estate, but the timing is always typically unpredictable.

We will likely have similar real estate gains at some point during the year, but, like I said, the timing and the financial impacts are unknown this time.

David Humphrey -- Vice President, Investor Relations

Okay. Chris Wetherbee asks about what steps can be taken from a cost reduction standpoint to improve profitability in our ArcBest segment? Should we expect to see revenue per day trends improve further in the remainder of first quarter? And Jack Atkins wondered if there are levers we can pull on the cost side to support or even improve profitability in that segment in 2020? And that business see an improvement in profitability this year, absent a recovery in the freight market?

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

We recognize the need to improve our Asset-Light operating performance and we're focused on the deployment of technologies and cognitive engagement strategies to automate and optimize processes, which should help us increase employee productivity and improve the customer experience. Some examples of automation that we're beginning to utilize are shipment tracking and email management, as well as digital freight matching. And so that the advancements that we've made in our Asset-Light business in 2019 should provide greater operating cost efficiencies in 2020.

Although we do continue the expectation to invest, we feel like there is even further improvements that we could make that should positively impact our performance in 2021 and beyond.

But if you look at this -- the overall cost for our Asset-Light segment, some of those are fixed in nature and really could be better leveraged with greater revenue growth. So we remain focused on gaining that growth through our cross-selling strategy and that's both within our existing customer base where there is a large opportunity, but we can also focus on selling multiple solutions or overall solutions to new customers.

But we have to keep in mind that in order to aggressively grow our Asset-Light service offerings, we have to maintain a high level of service because that's what our customers expect. So we're balancing all of these things to gain an improvement in the growth and the overall results.

But if the freight market remains in recession and customer and carrier rates remain at current levels, it will be difficult to materially improve our margins and operating results in the near term. The costs that we've previously discussed that are associated with the building of ArcBest owner operator and contract carrier capacity should normalize in 2020 so that should help. But as always, we continue to manage head count in our Asset-Light operations to our shipment volumes and we're continuously looking to further improve the efficiencies of our workforce.

David Humphrey -- Vice President, Investor Relations

Can your Asset-Light expedite business get back to the prior margin levels, absent a big capacity carnage?

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

In 2018, we experienced a strong demand environment and tight capacity, which generated tremendous value for customers through their utilization of our ground expedite solution or service offerings. In 2019 we had something different. We experienced a freight recession, excess truckload capacity, which reduced the demand for some ground expedite solutions. And as we began this year, we aren't experiencing much of a change from 2019. But we believe that as the demand environment improves and capacity stabilizes, we would expect the trends for ground expedite volumes and pricing to improve consistent with our past history.

David Humphrey -- Vice President, Investor Relations

Ravi pointed out that comps in the Asset-Light business began to get easier in the first quarter of this year. Do you anticipate year-over-year growth in that business? Are you seeing any heightened competition in any particular pocket of the Asset-Light business?

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

Yeah, I'd say that the Asset-Light result is really a reflection of the recessionary freight environment and excess available capacity. As Judy mentioned, so far in this year we aren't seeing much of a change from that. And as we probably talked about before, a large portion of our business is transactional in nature and with this weaker spot market it's negatively impacted our results. We don't really point to certain regions or customers or lanes that are experiencing an unusual amount of competition. But Judy mentioned this earlier also, our managed solutions and supply chain optimization work with customers are particularly responsive in this environment and we are encouraged by the pipeline of opportunities that we have there.

As noted throughout 2019 our expedite business has been impacted by that excess market capacity and as a result there have been lower tender rejection rates.

David Humphrey -- Vice President, Investor Relations

Again on the Asset-Light side you discussed various market-driven pressures. Could you elaborate? How much of the margin deterioration is a reflection of competitive pressure from brokers undercutting pricing and thereby squeezing margins? How much is normal cyclicality?

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

Well, I would just say that the margin compression in the fourth quarter was really more about tightening capacity and less about other brokers cutting prices. Specifically, we saw this happen between Thanksgiving and Christmas.

David Humphrey -- Vice President, Investor Relations

Okay. What is your appetite for Asset-Light M&A in 2020? Do you have any interest in the assets that XPO has announced it is looking to sell? Are there any segments, geographies or deal sizes that are more attractive to you? How do you view current valuation multiples?

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

While we won't comment on specific target, we continue to review M&A opportunity. We're more interested in Asset-Light opportunities that could benefit us in terms of scale and/or technology advancements and that's really been our focus for some time. More recently, we've been less interested in small tuck-in deals unless there is a potential for some significant outsized tech or other strategic advancement.

We also see tremendous opportunity through organic growth for our Company and as well as some operational efficiencies that could improve our overall results. When we step back and look at valuation multiples, they still seem a little bit high to us.

David Humphrey -- Vice President, Investor Relations

Is there a way to help us quantify the progress you're making cross selling your services? Could you share the percentage of revenue tied to customers that utilize two or more services?

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

Based on the needs of our customers, cross selling continues to be an important component of our strategy with 80% of our customers needing two or more of the solutions that we provide. Currently approximately 38% of our customer base uses us for multiple services. These customers comprise more than 80% of our total revenue. But we know we still have a significant amount of their wallet share available to us and that's within the customers that are already using us for multiple services. So we're encouraged by that opportunity.

For customers that are cross-sold, we see significant jump in revenue per customer, profit per customer and retention versus those customers that are not cross-sold. All of those benefit us. And so, we're really still aggressively pursuing this cross-selling strategy.

David Humphrey -- Vice President, Investor Relations

Okay. Todd Fowler asks, please discuss your e-commerce initiatives. What percentage of your business do you think is e-commerce? How do the margins on this [Indecipherable] compare to overall margins? And what are your expectations for growth in this area going forward?

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

Well, I appreciate, Todd, questions. And -- while it's difficult to quantify the overall percentage of our revenue or margin impacted by e-commerce, our current point of view is that we continue to benefit from e-commerce opportunities within our customers. Our e-commerce customers have shown increasing interest in the solutions we provide and a great example is Retail+, which is a compliance solution for vendors to help them better meet large retailers' stringent shipping and delivery requirements.

We created Retail+ in collaboration with our customers and our tech folks and that these customers that participate are really suppliers to major retailers and we're seeing the demand for our Retail+ services accelerate. This ongoing co-creation program really provides robust compliance management solutions that enhance ArcBest's existing retail logistics services by combining innovative software solutions with enhanced operating processes. This is the type of solution that relies on our logistics expertise, our assets and our relationships to improve these customers' outcome.

We also see e-commerce driving the demand for our managed solutions, especially with the increased complexity and need for flexibility in supply chains to be more responsive to the consumer. Final mile is another area where we see the impact of e-commerce and we've been uniquely positioned to provide value in this area for over a decade. And more broadly, our focus on digital connectivity and information flow with our customers as well as our emphasis on customer experience have really positioned us well in our conversations around the e-commerce business. We see e-commerce as a continuing secular growth story as e-commerce only represents a percentage in the low teens of total retail sales according to the Federal Reserve.

So overall, we see continued growth opportunity for our business that relates to e-commerce in the first mile, middle mile and final mile transportation and in providing managed solutions and these other tailored solutions like I mentioned with Retail+.

David Humphrey -- Vice President, Investor Relations

Stephanie and Ken ask about the macro environment and its impact on our ability to reach our long-term margin goals. What is your outlook for manufacturing and industrial activity in 2020? Do you believe, we've seen the bottom in 2019?

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

Yeah, I'll first point to the Industrial Production Index, which continued to trend downwards throughout 2019 and really ever since September of 2019, this metric has been lower than the prior year. The PMI steadily declined throughout 2019 and was 47.2% in December, and that's the lowest level since June of 2009 when it was about 46.3%, I think. All that indicates contraction in the manufacturing sector. And this is compared to a PMI that was 54.2% in January of 2019, so last year.

PMI is considered a leading indicator in our LTL business. So it's kind of hard to determine if we've reached the bottom of this downturn [Indecipherable]. The current economic environment as well as excess truckload capacity present the challenges to our growth in operating performance. But as Judy mentioned there are a lot of opportunities. We're focused on managing our resources to the level of business we have while keeping in mind that our customers expect that high level of service. I'd just reiterate that we're better positioned today than the last time the freight environment was at this weak level.

Our logistics solutions provide optimized options for customers. And the sophistication level of the average customers increased, we've seen that just time and time again, and there is a desire to evaluate the options to reduce cost out of their supply chains. As we've mentioned, our managed solution growth reflects the value that we provide our customers and our Asset-Based segment also benefits from that managed solutions growth.

David Humphrey -- Vice President, Investor Relations

Okay. How the recent tariff and trade resolutions with Mexico and China impact the business, if at all?

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

Yeah, we expect those resolutions to have a positive impact but it might be a while before we see the effects of that.

David Humphrey -- Vice President, Investor Relations

Okay. And then finally for our last question. We had a question about our strategy for offering a suite of transportation services beyond LTL and about the progress we've made during 2019 in doing that. Judy, do you want to wrap up the call with an answer to that one?

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

And I'd like to say how much I appreciate all the questions that we received really because it's has been beneficial. So with respect to that question, when I took over leadership of ArcBest 10 years ago, our focus was primarily on the LTL services offered by ABF. We really were not fully equipped to address the complete needs of our customers and we struggled during one of the worst economic periods in our century's history. But since that time, we have embarked on a strategy based on listening to the needs of our customers and have developed logistics service capabilities that have allowed us to really partner with them to optimize their supply chain. And now we are a logistics company that offers most any service our customers require. And we focus on meeting their needs by offering an array of these integrated solutions.

And as I described in my introductory comments on the call, we've developed many innovative technologies that make us more efficient and allow our customers to interact with us in the way that they prefer. During 2019, we continued to have solid success. As we've mentioned several times about our managed transportation solutions to our customers, we're excited that our pipeline remains strong and the managed transportation deals we're seeing continues to grow as we see new business flowing in.

But because of the transformation that we've gone through in the last decade, we are really bullish about the future and we believe we're equipped to be successful in any economic environment we encounter. Thank you, David.

David Humphrey -- Vice President, Investor Relations

Okay. Well we appreciate everybody taking the time to send in questions last night. We thank you for joining us this morning and we appreciate your interest in ArcBest. This concludes our call.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

David Humphrey -- Vice President, Investor Relations

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

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

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