Q3 2019 Earnings Call
Greetings and welcome to the our best third quarter 2019 earnings Conference call.
During the presentation, all participants will be in a listen only mode.
But anytime during the conference you need to reach an operator, Please press star zero.
As a reminder, this conference is being recorded Friday November 1st 2019.
I'd now like to turn the conference over to David Humphrey Vice President of Investor Relations. Please go ahead.
Welcome to the art Best third quarter 2000, not seen earnings conference call.
Oh presentation. This morning, we'd gotten guy you didn't rentals, chairman, President and Chief Executive Officer <unk> Best.
David Cob, Chief Financial Officer, along.
Do they follow GT Davids opening remarks about the third quarter results I will conduct a question and answer period with the am I reading submitted questions that we received last night following aren't release.
We appreciate the questions that we received we will try to answer as many as we can during the remaining time of this call.
We thank you for joining us today.
Order to help you want better understand our best and its results. Some forward looking statements could be made during this call.
As we all know forward looking statements other very nature are subject to uncertainties and risks.
For more complete discussion of factors that could affect the company's future results. Please refer to the forward looking statements section of the company's earnings press release in the company's most recent FCC public filings.
In order to provide meaningful comparisons certain information discussed in this conference call includes non-GAAP financial measures as outlined in described in the tables in our earnings press release, we will now begin with Judy.
Thank you David and good morning, everyone.
In a challenging rate 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 years levels.
Uncertainty with regard to trade policy and weaker demand in some areas of economy in industry impacted us.
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 pretty its long term value my building informed trusted innovative relationships with shippers and capacity providers and delivering a best in class experience efficiently through their desire channels.
Although these numbers aren't broken out separately I can tell you that our managed solutions 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 three both asset base and asset light offerings different.
It's 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 of them things like problem resolution trustworthiness responsiveness and ease of doing business. These differentiators improve customer retention, which in turn helps us grow our business.
We continue to invest in our customer experience through technologies and processes that sharpened our delivery of services and improves customer interactions.
The innovations we have pursued in areas like space based pricing and enhance 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 ABS.
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 ABS and 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 reduce cargo claims reduce injuries and workers compensation claims and faster employee training.
As a part of this effort ABS has leased new facilities and 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 ABS field operation for more extensive and live testing has increased the asset base 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 base results reflect lower demand from our customers, who are navigating and uncertain economic environment, well generally offering less freight for us to handle.
In most cases, our customers remain the same but they had decelerated their growth throughout this year and our current business levels reflect that fact.
The pricing environment remains rational and we continue to had 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 dollar.
In Street productivity. In addition, the reductions in shipment and tonnage freight levels. We are experiencing are putting pressure on operating margins as some network cost become more fixed during periods of reduce business levels.
However, we have benefited from improved utilization of owned assets that has allowed us to make further progress in reducing the costs of rail truckload purchase transportation and city cartage resources throughout the idea freight network.
As seen in recent quarters the decline in total tonnage and shipments versus last years third quarter consisted of a mixed up you were LTL rated shipments combined with an increase in the number of truckload rated shipments moving in our asset base 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 ABS 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.
[noise] 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 10 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 base tonnage declines we've experienced.
We continue to have success in achieving needed asset base price increases during the recent third quarter.
The lower percentage increase in revenue per hundred weight that we reported for the quarter was reduced by the increases we had and adding spot truckload rated shipments that generally have lower revenue per pound, especially in the current capacity environment.
When excluding the impact of fuel, which was a year over year price headwinds our pricing on LTL rated asset base shipments was solid and very encouraging considering the current shipping environment. We understand the importance of making continued progress on yield management initiatives in order to increase revenues and improved.
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.
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 exabyte 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.
Jim accounts in the truckload brokerage portion of the asked a light business increased over last year's third quarter, but lower revenue per load contributed to a decline in total brokerage revenue.
But 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 a decrease in average shipment revenue has been more rapid that's contributing to margin compression and lower asset light operating income.
As I referenced in my opening remarks shippers facing the challenges of delivering their products more timely and efficiently are seeking our expertise and optimizing available transportation options in a cost effective manner.
Many of our customers are asking us to help bring stability to their supply chain in a very uncertain freight environment.
As a result in the third quarter, we successfully executed on new managed transportation account opportunities that positively contributed to the asset light revenue and profitability.
Our managed solutions help position.
US with our customers to effectively navigate in any environment.
Athlete net an increase in preventative maintenance service in or events, which offsets the slight reduction in roadside repairs resulted in total living growth and a higher revenue compared to last year's third quarter.
As a result of their revenue growth and the effective cost management Fleetnets third quarter operating income improved and now I'll turn it over to David Cobb for a discussion of the earnings results and operating statistics. Thank you Judy and good morning, everyone. Let me begin with some consolidated information.
Third quarter 2019, consolidated revenues were $788 million compared to $826 million in last year's third quarter.
<unk> decreased 5%.
Well the gap bases, we had third quarter 2019, net income 62 cents per diluted share compared to $1.52 cents per share last year.
Detailed in the GAAP to non-GAAP reconciliation table initially they afternoons earnings press release.
Adjusted third quarter 2019, net income was $1.10 cents per diluted share compared to $1.49 cents groups or in the same period last year.
As a third quarter 2019, non-GAAP net income reflects the exclusion of cost related to both the freight handling pilot test program.
Just last week.
An impairment of equipment due to conversion to electronic logging devices and they'd be a free.
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 the over two years.
<unk> 2024.
Combined with the available resources under admitted minted credit revolver receivable securitization agreement or total liquidity currently equals $561 million.
Total debt at the end of third quarter 2019 of $298 million includes the 7 million dollar balance on every credit revolver.
$40 million borrowed on a receivable securitization and $188 million of notes payable primarily on equipment for asset based operation.
The composite interest rate them over that was 3.3% no slightly from the second quarter.
We now expect the 2019 total net capital expenditures, including finest equipment to be an estimated range of $160 million doesn't $65 million.
This is a reduction from our previously stated range of $170 million $289 million submitted amount includes the majority of the revenue equipment purchases, we had planned to make this year, including replacement tractors that they'd be afraid.
The lower estimate versus what we previously provided was primarily due to shifts in the timing of some expenditures into 2020.
Our best 2019, depreciation and amortization cost and property plant and equipment are expected to approximate $107 million. This does not include amortization of intangible assets, which are expected to approximately $5 million in 2019.
During the third quarter, we continued to return capital to shareholders through the payment of an ATM for sure quarterly cash dividends and purchase over 333000 shares of our stock for total price of 90000 $900000.
Under our existing repurchase program, we have approximately $60 million of purchases, though there will be remaining.
The full details of our GAAP cash flow are included in our earnings press release.
Our asset based third quarter revenue was $566 million per day decrease of 4% compared to last year.
That's it base quarterly total tonnage per day decreased 4.6% versus last year's third quarter.
Third quarter by month asset base daily total tonnage versus the same period last year decreased by 1.7% in July decreased by 4.8% in August .
Decreased by 7.5% in September .
LTL rated tonnage declined approximately 12% in September .
However, in third quarter truckload rated shipments in the be afraid asset base 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 mostly periods in 2018 reflected increases in total pounds per day.
Third quarter total shipments per day decreased nearly 4% compared to last year's third quarter.
Total weight per shipment declined 1% with the average size, but LTL weight per shipment decreasing approximately 6%.
Third quarter total billed revenue per hundred weight on that said they've shipments was $36.35 an increase of 1.5 per cent compared to last year.
The total yield increase percentage, we are reporting with somewhat reduced by the growth of the truckload rated shipments moving in our asset base network at lower pricing levels than last year.
Excluding fuel surcharge the increase in third quarter billed revenue per hundred weight.
Yes, it based LTL rated the freight was into 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 hundred weight measure that they have in the past.
We secured an average 2.9% increase on asset base 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.
No early September quarter update we highlighted how about at higher than expected maintenance and repair cost.
Related to increased repairs and EPA emission standards compliant tractors and they'd be afraid city fleets in higher parts calls.
He's maintenance costs, which are included in the fuel supplies and expenses line of our asset base income statement.
Did increase on both a sequential and year over year basis.
Well they were offset by significantly lower fuel expense that are also included in that same line on the income statement.
This further described in the information exhibit through a form 8-K earnings release, we now expect that the previously disclosed technology costs in our asset base business, which had been identified it as a non-GAAP items are expected to approximately $4 million in fourth quarter 2019, compared to $1 million and fourth quarter 2018. These costs increased approximately.
$4 million in third quarter 2019 versus 2018.
As previously disclosed that as Julie Judy discussed earlier these costs related to the pilot test program, we are conducting to improve freight handling they'd be afraid.
On an adjusted non-GAAP basis, our asset base third quarter operating ratio was 93.2 per cent compared to 91.2% in last years third quarter.
Our total asset like average daily revenue decreased 2% compared to last year's third quarter, reflecting lower revenue in New York bus segment and topline revenue growth glove weakness.
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 or this segment's military moving business.
On an adjusted non-GAAP basis asset light operating income was $3.7 million compared to $9.1 million last year.
Yesterday afternoon, we filed an 8-K that included our third quarter 2019 earnings release, along with an exhibit that provided some additional information about our current quarterly financial results.
With a recent business levels in our future expectations on certain financial metrics.
This information should be helpful. In modeling your expectations for 2019 financial results.
Now I'll turn it over to Judy for some closing comments.
Thanks, David now for the quarterly company highlights, which underscore what an outstanding job our people do.
In August Arcbest was once again named as one of the top 100 supply chain partners in 2019 by supply chain brain and maybe a freight was chosen to receive a 2019 quest for quality award by logistics.
Magazine for the third consecutive year.
B.F. was also named 2019, Smartway hi performer by the U.S. Environmental Protection Agency. This award recognized us as one of the industry's leaders and 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 A.B.F. sent 11 drivers to the National truck driving championships. This summer.
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, when the five axle class at the National competition in Pittsburgh, Dave is a row driver based in little rock.
Who has been a professional truck driver for more than 30 years and he has 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 arcbests on behalf of our stakeholders, regardless of the economic environment, though there is always more work to do and making sure. Our sales team takes advantage of the growing markets we serve for logistics.
<unk> are enhanced market approach adopted in 2017 continues to bear fruit.
Summers report to us and surveys indirect conversations that we're doing a better job, helping them to do business with us more easily and our organization is intensifying efforts to make sure are cross selling accelerates going forward through meaningful conversations inside and advice.
And as I discussed we are moving ahead very purposely with a number of innovative efforts to better serve customers, including our pilot program to better handle freight and I look forward to providing updates on those in the future.
And now I'll turn it over to David Humphrey to conduct our question and answer session.
Okay. Thank you Judean, there's Judy Mitch and we will now begin the question, it's a period with David and Judy.
To begin we had similar questions from Chris whether it be Obsity and Stephanie Benjamin Suntrust <unk> decelerated, there's a quarter progressed can you talk about the fried environment and what you were seeing competitively what do you believe are the primary drivers of the reduced you're over your tonnage and shipments.
And third quarter.
Are there any particular industries indoor regents driving a larger portion of the declines or the declines intended indicative of a weakening bright economy, Judy you want to take that one.
Sure I will our L.T.L. tonnage declines 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 <unk>.
During P.M. I 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.
Are shipment levels have declined but not at the same level as the L.T.L. tonnage in this environment, we're seeing our customers shift smaller sizes and this mix change is a good portion of the L.T.L. tonnage decline that we're experiencing.
Our customers tell us that they've been impacted by higher inventory levels as well as terrorists 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 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.
Okay. We had several similar questions. So processing in particular contract pricing those questions came from criticism, Stephanie as well as Ravi Shankar <unk> Morgan Stanley , Jason subtle of cow and Jack <unk> Stevens can you talk about contract renewal isn't able to Yale can you give your outlook for.
<unk> in the fourth quarter, well processing is rational with your competitors what is the general receptiveness across increases with customers.
How about taking that one okay sure.
I'd say, a a recent quarterly increases in their contract into for pricing renewals were.
The 0.1% and second quarter, and 2.9% and the third quarter.
So far and the fourth quarter, we're seeing similar results and would expect.
Continue into next year.
Oh these contract renewals are generally with our larger price sensitive accounts.
We feel good about these increases and the possibility these accounts.
As a you know folks of her to say, we still price customers on account, but account yeah view in based on the value that we provide.
So many of our accounts of complex supply chains and rely on our expertise options and that is especially evident up during these these times.
We've you know we've achieved some solid you'd movement in the last couple of years. So that has led to some push back from customers that took large increases in 2072 dozen 18.
Okay as a follow up <unk> Jack Jack ask can you talk about revenue for a hunger right trends within the U.S. It by segments. If you exclude the increase in truckload freight are you seeing core yield trends decelerate remain stable relative.
Second quarter not team levels, yeah. Thanks, Jag for the question, but.
Over your pricing on our L.P.L. rated business, excluding fuel surcharge has been in this the high single digits throughout the year and even strengthen sequentially from second or third quarter.
Kim mixture of bank of America barrel, let's ask so see excess capacity environment of the first quarter has continued through the third quarter or you seek increase price competition by any peers.
The last write down touring the L.T. bills were somewhat more immune given consolidation in E. Commerce Grove, what is your viewpoint now.
Well I appreciate the question that can't ask there and I commented on this a little bit earlier, but we have experience rational behavior from our asset base LTL competitors.
And I agree with you can that the L.T.L. is warm or immune to price competition in the last down cycle and that isn't part due to the consolidation of 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 in by.
Firemen and R.E. commerce customers that 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 <unk>.
Science management solutions that enhance arcbests existing retail logistics services by combining innovative software solutions again that were codevelop with our customers with enhance operations processes that were heavily tested whenever we were pilot testing. This program this type of solution.
Really relies on our logistics expertise, our assets and our relationships to improve customer outcomes, which again have been really tremendous and and have generated a lot of interest.
Okay, Chris whether B.S. us to talk about the steep declines the L.P.L. tonnage increases in truckload volume.
He wondered how where you're approaching these markets has there been an intentional change of strategy in how should we think about the relative margins.
Well, it's a a good question, Chris and as mentioned we've experienced year over here declines in our L.T.L. ready to shipments so far this year and that continued into October .
So in order to build the empty capacity that we have available we have utilizing continue to utilize a greater number a truckload rated shipments, which really helped balance our network and reduce line hall cost keep in mind that this compares back to the prior year period of time capacity. When we were focused on serving our L.T.L. <unk>.
Summers 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 you pack business in general is not as profitable as the L.T.O. business.
However, it can be in certain lanes and again it helps us balance the network and lower our line Hall costs.
And then just the profit associated with this truckload rated business and again. This is the non you pack piece is really in line with Longerterm historical levels with the exception of what we what you experience last year.
Robbie Bitch in that way for shipment was impacted by growth in truckloads spot shipments are you actively going after truckload business given the softness in industrial in markets.
See wait for ship maternity positive in 2020, you so would that be a material tailwind to a war.
Take the the the you know we have had a had less of a decrease in a year over your total late for shipment since the first quarter.
That has been influenced by an increase in our truckload rated shipments.
Is Judy just talked about our profit Billy certainly moves we'd changes and wait for shipment is roughly mentions because our larger shipments generated higher revenue for shipment. This offer more revenue to offset the handling cost of each of them.
What jobs <unk> ill to you wait for shipment and that has been declining throughout 2019.
Mentioned in October business turned up the bit or L.P.O. rated shipments and was was down about 6% in October that was influenced by account mix.
The last year, the softness in the industrial manufacturing capital goods markets Gee, you mentioned earlier tends to suppress or overall wait for shipment because those sectors.
Generally have heavier shipment sizes and if we saw wait for shipment increase due to the macro economic conditions. It would improve our results is probably talk to them.
Okay, Chris ask how much did truckload makeup of the asset base segment in the third quarter.
Well this percentage be going in come in the coming course.
Yeah.
Chris for openness clarify this because I'm, including are you pack shipments that are truckload rated r. truckload shipments of historically been less than 5% of our total shipments and that was the case and the third quarter, we would not expect that to really materially change moving forward.
Okay, Dave <unk>, Robbie ask what would you need to see for business volumes to grow again in when do you expect to see that.
Well you know David we are certainly positioned well for growth, but for the rest of this year, we're up against and tonnage growth from last year.
But as we move into 2020, our tendency comparisons from 2019 get easier tonnage in the first quarter Francis 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 position for growth and just thought I'd give you that perspective as we enter 2020.
Okay can you talk about the year over year declines in shipments is cops get more difficult at fourth quarter should we expect your over your ship the declines Judy you want to take that one as well sure you know in the third quarter of 2018 are shipments declined 1%, but in the fourth quarter of 2018 they increase.
Nearly 5% so yes, as we move into the fourth quarter of 2019, we are facing tepper comparisons.
The factors that we believe impacted last year's fourth quarter positive trends included increase 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 competitors work stoppage that was an influence in fourth quarter.
Of 2018.
As a result of these comparisons in the end the weakening industrial manufacturing environment that we've been talking about already on this call. We're experiencing shipment declines and that is really illustrated by the seven per cent shipment decline that we're seeing in October .
Okay. We had several questions on how we would read how would we react it'd be operating conditions continued to deteriorate how much capacity can you could and what are some areas you could focus on to reduce cost a lot of a weaker Freud environment.
I'll I'll take that one David as in pass down cycles, you know, which we've experienced a lot of by the way over the years, we've learned to address our costs and the number of areas. We typically attack them more variable costs for <unk> for example, in the third quarter, we reduce city cartridge expense by nearly 25% and are ready.
Into equipment costs by over 30%.
If our volumes get worse, we will continue to evaluate the proper balance between Labour resources in customer service in order achieve a more cost efficient combination that benefits our customers and positively contributes to our asset base financial results. Another cost area that will be evaluated as our equipment levels and then we'll also be.
You waiting are purchased transportation utilization and we evaluate our network for opportunities to reduce resources in particular in under utilize lanes.
The changing profile of our business with the lower L.T.L. wait for shipment does make it more difficult to align costs with revenue levels, while maintaining the service customers expect a labor as we mentioned the number of times before it's typically managed to shipment levels and as a result of that the remedy for shipment may change.
Faster rate than what it costs us to handle each shipments. So you know these are some challenging areas for us we do have a lot of experience with these downturns.
And you know I've just just wanted to illustrate for you some of the areas that we we typically address there.
Okay. We had several requests for until October business updated more color or current trends and seasonality relative to what we've seen in the past David you want to take that one yes.
Mentally k. that we've yesterday afternoon with the earnings relief included our business update for October .
And you can see the specific details for the month, but the decline an average daily revenue tonnage and shipments versus last year.
Was in the 79% range.
Continues to be good as total revenue per hundred wait increased 2%.
And earlier that included a high single digit percentage increase is guilty ill build revenue.
If you will serve George.
Seasonality perspective October total in hand ill to yield tonnage trends are in the bottom third of historical seasonality.
As you would expect based on the increase we've recently experienced with truckload braided shipments.
Yes. It they said seasonality was was a little better but it is still in the bottom half a past years.
Okay. Several folks asked about historical <unk> sure I've seen in operating right show from third quarter the fourth quarter.
Are there any specific items, which would make this year better or worse relative to normal seasonality.
Todd Feller of key bike ask.
With Christmas and new years falling mid week would you expect any greater than the normal impact from the calendar shift I'll take this one in our supplemental eight k. yesterday, we talked about the fact that our fourth quarter or is historically increase by approximately 200 basis points versus the third quarter. If his point, they're really no significant puts in.
<unk> would impact what we would expect of your change relative to history.
On towards a holiday question, we might work they adjustments to both Thursday December the 26.
<unk> December 31st <unk> admit to a reduction of half a day to account for the <unk> did we call value.
Okay, moving on Todd Stephanie and Chris ask if we could talk about any early signs of returns or operational improvements related to your technology expand what areas of the business are you targeting can you give us a sense of what the payback or return horribles or for the investment is this.
Using specialized equipment to load and unload trailers or something different.
David we have a 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.
As our customers complex logistics needs expand and so the question that you know Todd Stephanie and Chris ask is is I think really good and relevant you know for our discussion of of this pilot within the A.B.F. rape network. The pilot utilizes patented handling equipment software.
Patented process to load and unload trailers more rapidly and safely and as we mentioned in the eight 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 rate is idle if <unk>.
Moves transit performance reduce 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 with developed by Arcbest technologies and we have encouraged some additional costs as a tests were transition from.
Mark Best technologies into H.B.S. field operations for more extensive alive testing.
The costs associated with this pilot include facility costs are afraid hailing equipment, some software development and modifications and additional personnel costs and as I mentioned in my opening remarks and in the eight K. five last week, we are expanding the pilot to a distribution center in Kansas City.
We <unk>, 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 that operating the tests as a pilot had been separately identified and reported as non gap to provide clarity of the 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 ended 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 a determined to proof of concept.
Okay. We had other similar follow up questions on the new innovative technology calls it appears as though you are now backing out technology costs, which you had previously God. He goes guided us to include the results.
It's the case and if so why are you opting to exclude these items now when it's been practice to include them in prior periods can you. Please provide examples of other other transportation companies that also exclude technology investment costs from their adjusted results.
Well, David the opening of the Kansas City facility in mid 2020, and the expansion of this pilot to a more significant portion of the asset base network was one of the primary reasons. We chose to penalty introduced this now the Kansas City employee base is an important part of the potential successor. 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 base network has not been confirmed.
Because this is a pilot tests than evolves new technologies and equipment. It has resulted in the incremental costs beyond our normal operations that are not indicative of normal results as as we've been discussing we would anticipate that of successful and these technologies are implemented that they would be.
<unk> part of our normal operations and operating costs, we're just not at that stage right now and we have seen examples of other transportation companies that have handled transformational costs in this way.
Okay taught to ask is the 4.6 million of cost this quarter representative representative of the expected quarterly run right going forward and what sort of savings would you expect longer term David how about you taking <unk>, we disclose the year did they call for the pilot in the Nonjet tables.
Earnings are means press release in as mentioned in the eight k. to the earnings release, we expect the costs to be $4 million in fourth quarter of 2019.
And in comparison to the fourth quarter of 2018. These costs were a 1 million and.
Maybe a segment in $1 million in the other segment.
2018 fourth quarter.
Because there are a number of factors that are being evaluated that would also impact the future cause we're not providing projections beyond the fourth quarter of 2000 a 19.
This time.
And then since the pilot is still in an early stage, there's not much more detail to provide until we do more testing and have time to analyze the results.
Okay, Jack and Q. and ask about our removing you'll be conversion costs in the non gap reconciliation table.
You also excluded five cents per share in costs related to the change over to you oldies none of your other LTL or truckload peers have done this why or you'll be cost not viewed as operational as those or core parts of operations. Dave also said since you highlighted the L.D. conversion.
Discuss your experience is the fleet running any differently today post implementation. If so what is the biggest difference you know first first of all the yield you know the cost of are listed as an adjustment in the non get tables and orange alerts were due to impairment expenses that we encourage associated with or conversion familial B.R.D.
To meet the upcoming you'll do mandate.
Hardware and software were previously using we're not upgradable for use in the new you know the application had to be impaired. These are not implementation costs.
The application these identified costs are not related ongoing operations.
Through our new vendor some Sarah we're upgrading to new hardware that can be uses and you'll be device and also as our city dispatched device.
So far we have not made any network changes related to the new use would be oldies, but the real out as going as planned and we will be fully compliant well before the federal mandate.
Well the sensor interfaces is more efficient for teens and the technology is forming above expectations, well, creating an improved driver experience.
We're pleased with that.
And also in our city operation we've had a good experiences E.L.D.'s are helping us on our hours of service compliance.
Okay does your lower 2000, not to Encap x. reflected potential step up in 2020, Champix can you give a sense of the magnitude.
That what I've mentioned it into supplemental eight K., we released yesterday with our earnings release, we've provided update to our 2019 cap X. Guy that's lowering the estimated range to 160 million to 160 <unk>.
Projects being completed in 2020, so from that standpoint, 2020, skeptics being will be impacted by the reduction. We described in 2019 Speaker as a reminder, 90 million of the 20 not team <unk> is expected for replacement revenue equipment for R.S. It based operation in most of those.
Tractors, we we have currently having service as we always do 20 twenties cap X. will include replacement tractors at I.B.F. as well.
Normal practice is to provide an estimate of our 2020 cap x. in our fourth quarter earnings release and conference call.
Okay moving along we also had a couple of questions about human day, Dave asking him in a is still in the plans are is the focus on her own organically growing the business Jason ask about current evaluation multiples are there any tolkien acquisitions on the horizon.
David I'll take that one you know I think good questions from from Dave and Jason. We we continue to review M., an a. targets, we feel that that really adds a lot of benefit, but you know tar understanding of options and we really at this point are more interested and ask.
Lied opportunities that could benefit us in terms of scale of our business and or the 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.
<unk> innovations to improve the operational efficiency of our business.
With respect to the question on valuations them multiple still seem a little high to us.
Okay, Stephanie ask if we could provide more color only improve line hall calls as well as the drivers of the higher maintenance costs for the asset base segment in the quarter.
Well, David I think the line hall costs have really improve largely due to Ah good mode management, which has helped to reduce our costs per mile with respect to seventies question on maintenance you know they those costs increase in the third quarter and we highlighted that we were going to be experiencing that costs.
US it was really a driven by a higher percentage of units with 2010 E.P.A. requirements that have moved into our city operation I think we have close to 80 per cent now where we had about 60% of of our city units that had that EPA compliant Ah 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 costs and availability.
Okay. This one kid came from Kenya, given that <unk> that the Oldfield market has remained in the mid nineties.
Reshape the network of anyway to getting deficiencies, perhaps you could details some of the structural impediments of being a union carrier and how it impacts you you work rules stop you from achieving more efficiency or is it just to pay issue.
Well you know I think cans question is interesting you know and and we certainly are always looking for ways to improve our asset base business.
We're doing a number of things as as we previously mentioned to address the the costs and better aligned those a business levels, but we always have to keep in mind, the excellent customer service and experience that we want to provide to our customers.
But as I mentioned already we're constantly evaluating the network to gain efficiencies. We've made several successful changes to the network. This year and we're we're piloting several innovative line Hall dock and street optimization projects that are in collaboration with Arcbests technologies and.
Since we've deployed they enhance market approach at the beginning of 2017, we really feel like on an overall bases, we'd better addressed customer needs and you know as we mentioned already that helps us.
In a number of ways you know our company when when we are viewing the asset base business, we really are targeting lower nineties, Oh ours, and we're making progress toward that we're encouraged by the fact that we hear from customers you know both through internal.
Research and some extra Arnold studies that were really valued for the things that matter most our customers like problem resolution trustworthiness responsiveness and ease of doing business and I mentioned those because these differentiators really help us with customer retention, which if we can it continuously improve customer retention.
We're going to in effect grow our business and improve our profitability, which you know 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.
Okay taught fellow ask if we have accrued anything today for the Union profit sharing bonus David you want to take that one yes.
I can say the abyss good to to put out some some details that we provided in exhibit to the the k. that would <unk> least just released yesterday afternoon with her earnings release.
So we met you know we have they'll just summarize some of those points but.
But beginning with but you know it could be from one person at the 3% of annual earnings for qualifying Union employees under this plan.
I think it's important to understand that that 1% of a. be afraid annual Union employee earnings would equal about $5 million to $6 million of union bonus expense.
Approach to accounting for these calls is that we and terminally projected pay out of his bones, we would accrue.
Expected annual experience throughout the year and it will be included in a quarterly results.
But since we we don't provide a projected operating ratio we haven't commented on our expectations for paying bonuses.
You know just recommended if your furniture models reflect an operating ratio on a gap basis that meets the bonus pay out for a shows we encourage you to include expenses for the Union bonuses and your quarterly earnings annual earnings per share projections of our company.
And just as a matter of reference our gap, but as it based operating ratio first nine months a year was 95.0%.
Okay have you seen any recent improvement in truckload capacity.
I would say the truck load capacity has been readily available which is certainly different then the 2018 for him and so you know they access market capacity it attracts larger sized LTL shipments as well as a business that might otherwise be served with our expedite offerings and so we have we really haven't.
Observed significant change and available truckload capacity from what we've been seen.
Okay, why didn't s. it like purchase transportation costs, not go down more in a loose capacity environment.
But from the.
The concern there is about the kind of the margin compression that we're seeing in in hardly that's due to the the higher level of growth in our manage solutions. That's typically lower margin businessman or other service offerings and also we brought on more truckload shipments at lower rates fulfill some owner operator capacity.
And and as mentioned earlier, we've we've had growth in a truckload shipments and we're focused on continuing to grow.
That service learning.
For instance are your over your third quarter truckload shipments increased 6.8% on a per day basis.
Okay are you see Guinea stability and shipment levels revenue for shipment in the AD fit like segment other asset lot peers have spoken about stability in the spot market are you seeing lists.
David up point out that are you over your third quarter revenue per day for us it like business decline, 3.5% in the third quarter.
We mentioned in the sub middle a exhibit the V.A.K. that are asset light revenue per day decline, 6% in October which indicates some further weakening.
But we do continue to be excited better growth and manage transportation solutions, which resonating really will with our customers in this environment and you know we're position will for growth in our truck load and X. without an international offerings. You know is Judy talked about earlier.
Okay. In our final question is about the challenges of the current environment How're you position to grow with your customers.
Well, David we believed that our strategy has a single source logistics provider puts us in a good position regardless of the economic environment, we have strong relationships as many of our customers and we work closely with them to understand their challenges an 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 costs logistics 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 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 are are managed solutions one more time before we close out the call.
Okay, well that concludes our question answer period, we really appreciate every one that submitted questions. We felt like we got a a a wide array of questions that we covered a lot of topics. We appreciate that we thank you for joining us. This morning, and we appreciate your interest in our best This concludes our conference call have a good day.
Thank you that does conclude the conference call for today, we thank you for your participation and I say you. Please disconnect Caroline.