Q4 2019 Earnings Call
Greetings and welcome to the Arc Best fourth quarter 2019 earnings conference call. During the presentation, all participants will be in listen only mode. If it anytime during the conference you need to reach an operator. Please press star Zero 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.
Welcome to the art best fourth quarter 220, not team earnings conference call.
Oh presentation. This morning would be done by.
<unk>, Chairman, President and Chief Executive Officer remark best.
I would call Chief financial officer of aren't bad.
Good day follow Judy David's opening remarks about the fourth quarter results I will conduct a question and answer period with a reading submitted questions that we received last night following our earnings release.
I appreciate the questions that we received we will try to answer as many as we can during the remaining time on this call.
Well. Thank you for joining us today in order to help you better understand <unk> best mixed results. Some forward looking statements could be made during this call.
We all know forward looking statements other very nature are subject to uncertainties and risks.
For more complete discussions 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, the company's most recent FCC public filings.
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'll now begin with Judy.
Thank you David and good morning, everyone I'm pleased to talk with you today about our fourth quarter in 2019 performance, particularly as it marked the end of my 10th year as CEO, which provides an opportunity to reflect on how far we have come at as an organization.
While the fourth quarter was the most challenging of the year our overall perform.
And the 19 was the second best in the last 10 years we.
We didn't see the same record flooding conditions last year as those in 2018, but it was still year full of accomplishments for arc that 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.
I began my role as CEO in 2000, and it was a far different situation as we navigated the effects of the financial crisis, which it 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 dollar consolidated operating loss.
Fast forward to 2019, when we reach 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 teams evolution and our ability to give customers the breadth of solutions they require across the supply chain.
Expansion and diversification have not been without their challenges and volatile market condition.
But I am confident we're firmly on the right path for the next decade ahead.
By surveying and spending time with our customers and by investing in innovative technologies to enable a more informed and actionable you have their logistics needs, we're better able to address their pain point.
An example of this involves a high in appliance manufacturer with revenue of more than $15 billion. They weren't existing client for us running at about $430000 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.
Typically for them, we created a managed solution involving mode optimization of LTL time critical LTL truckload and expedite thanks to our solutions they began to see reduce damages creative coordination of specialized deliveries and enhance reporting.
And visibility we ended up basically quadrupling sat business to $1.8 million a month in revenues in fact, it has gone so well that we are now in early stages of helping this high in 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 sold 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 base business and in some cases, if we had continued to only provide LTL. This business wouldn't have been lost to us forever.
Taking a baby, yes, we achieved a significant milestones in paying a profit sharing bonus all eligible union represented employees at ABS 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 continue to offer our asset base 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 yield, especially on our LTL rated shipment.
The lower demand during a moderating and uncertain economic environment contributed to decreased revenue, resulting from reductions in both shipments and tonnage.
Our LTL rated shipment levels have resulted in reductions and productivity metrics in our docking city operations, that's impacting profitability relative to last years fourth quarter.
Our focus on customer service, while seeking to maintain the proper balance between cost management and lower business levels.
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 and filling available asset base equipment capacity with the truckload and LTL transactional shipments.
I think some new systems that offer more timely information on existing opportunity.
Our recent asset base 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 line haul metric.
As I mentioned in the fourth quarter, we were successful in improving price on our asset base business.
Throughout 2019, we compare back two quarters in 2018 that reflected total asset base quarterly price increases in the range of 8% to 10%.
Even with those challenging comparisons in each quarter of 2019, we further improve pricing relative to 2018.
Pricing environment in January is comparable with previous quarters with the addition of the transactional shipments I mentioned earlier has impacted our revenue per hundredweight metrics.
Your 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've 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 periods.
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 Clos, we had to pay for the asset light purchase transportation equipment capacity.
Our total P.T. cost decrease during the quarter, but not in the same proportion as the decline in average shipment revenue. This combination of factors contributed to significantly reduce asset light operating income.
Growth in our managed transportation services continues to be a positive contributor to our asset light result.
As I discussed earlier on the call our managed solutions resonate with customers and there is a high level of interest in Arcbests coordinating their supply chains in a cost efficient manners 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.
Athlete net total events increased during the fourth quarter compared to last year as an increase in the preventative maintenance service event offset a reduction in roadside repair activity.
Movement in fourth quarter operating income was the result of growth in total events and cost efficiency gains from previous technology investments.
During 2019, we continue to take actions to enhance shareholder value throughout the year, we paid our eight cents per share quarterly cash dividends and we bought back over 307000 shares of our stock for a total price of $9.1 million under our existing repurchase program we have approximately.
$13 million, a purchase availability going forward and now I'll turn it over to David called for a discussion of the earnings results and the operating statistics.
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.
Per day decrease and 7%.
The GAAP basis.
Fourth quarter 2019, net loss of 22 cents per diluted share due to the previously announced non cash impairment charge related to asset light.
This compared to a 57 cents per share profit last year.
As detailed in the GAAP to non-GAAP reconciliation table in yesterday afternoon's earnings press release.
Fourth quarter 2019, net income was 56 cents per diluted share compared to a dollar and six cents per share the same period last year.
Or guess fourth quarter 2019, effective GAAP tax rate was the benefits of 53.9% primarily due to the noncash asset impairment charge.
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 Rthree billion dollars compared to $3.1 billion in 2018 per day decrease of 3.2%.
Full year earnings per share $1.51 cents compared to $2.
In 2018.
Only non-GAAP adjusted basis as outlined in earnings press release 2019 earnings.
$2.88 for to share compared to $4 into since 2018.
In 2019, total net capital expenditures, including equipment finance equaled $147 million, which is below previous expectations, reflecting shifts and the timing of some expenditures into 2020 as well as higher still frozen.
2019 expenditures for revenue equipment totaled $86 million, the majority of which was for replacement of units.
Asset base operations.
Depreciation and amortization cost and property plant equipment were $108 million.
Addition, amortization of intangible assets was $4.4 million in 2019.
With 2020 total capital expenditures are estimated to range from $135 million $245 million. This includes revenue equipment purchases of approximately $82 million, formerly replacements for asset based operation.
Our best depreciation and amortization coastal property plant equipment in 2024 estimated to range from $110 million June $15 million.
<unk> expense range does not include amortization of intangible assets were submitted to approximately.
$400 in 2000.
Morning.
Full year 2000.
Hi team.
GAAP tax rate was 22.3 person, which was positively impacted by the tax credits recognized in the fourth quarter that I previously mentioned.
Active tax rate reconciliation table in earnings press release shows a reconciliation of GAAP to non-GAAP effective tax rate, which was 25.8% for the full year 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 period.
We ended the fourth quarter with unrestricted cash and short term investments of $318 million balancing available resources, Indra admitted credit revolver endeavors suitable securitization agreements or total liquidity currently equals button and $71 million.
Total debt at the end of the fourth quarter 2019, $324 million includes 70 million dollar balance or credit revolver.
$40 million borrowed on our receivable securitization in $214 million of notes payable.
Primarily on equipment for asset base operation.
The composite interest rate on all of our debt was 3.1 for soon which was lower than the third quarter.
Details of our GAAP cash flow or included in our earnings press release.
Our asset base fourth quarter revenue was $513 million decrease of 6.5 per cent compared to last year.
As Judy referenced earlier asset base quarterly tonnage per day decreased 8.1% versus last year's fourth quarter.
Fourth quarter 2019 by month.
Based daily total tonnage versus the same period last year decreased by 9.1% in October decreased by 11.9% in November decreased by 2.3%.
The declines in fourth quarter total tonnage per day from driven by decreases in LTL rated business.
This is Judy described earlier, we increased the level of truckload rated shipments of the asset based networks you was available equipment capacity.
Fourth quarter total shipments per day decrease by 7.3% compared to last year's fourth quarter.
Fourth quarter total billed revenue per hundred weight wellness, if they shipments was $35.62 an increase of 2.1% compared to the fourth quarter of last year.
Food and fuel surcharge increases fourth quarter billed revenue per hundred weight on asset base LTL rated freight was in the high single digits, we secured and averaged 4.2% increase on asset base customers contract wins, the deferred pricing agreements that were negotiated during the fourth.
On an adjusted basis, our asset base fourth quarter operating ratio was 95.
This compared to 93.1% in 2018.
For the full year of 2019, Mark This asset base revenue was $2.1 billion compared to $2.2 billion in 2018 per day decrease of 1.2 persons.
Asset base 2019, total tonnage per day decreased 4.8% compared to the previous year, well daily shipments decreased by 2.4 person.
Resulting in a 2.5% decrease in total pounds for shipments.
On an adjusted basis basis, our asset base full year operating income was $118.8 million compared to $145.6 million in 2018.
Total revenue in art this asset light businesses decreased 2.8% versus last year's quarter, reflecting a revenue decline in New York. This segment, partially offset by revenue increase weakness.
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 billion 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 a recent business levels and our future expectations on certain financial measures.
Information should be helpful with model and expectations for 2020 financial results.
Now I'll turn it over to Judy for some closing comments.
To change things up a little bit this quarter I would like to take a few minutes to talk about our technology innovations. 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 live at the best employers for diversity.
We came in at number 340 on the list published by Forbes in partnership with statistic.
This is the second consecutive year that Arcbests has appeared on the list in 2019, we rank number 484, we're honored to be name to and moving up on the top 500 lists.
Yes history is marked by innovations and we further advance 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 technology.
We have deployed these kinds of solutions to help shippers submit pickup request ABF without an agent to processing categorized inbound customer emails automatically for a quicker response.
The check the capacity of a trailer by auto scanning CCTV.
Indeed, and then alerting Doc employee of the potential problems.
We are in early stage with many of these technologies that we're 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 shoes and that 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 law.
Actually 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, Arcbests launched an innovation accelerator to encourage new transformative ideas. This accelerator combines employees from across the organization. We 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 in investments at Arcbests 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 NR team remain about the market opportunities and growth potential ahead.
10, various meetings throughout the year and I'm always encouraged by that can do attitude I witnessed in our people and the strong testimonials I received from customers about them and the solutions we provide.
As we move into 2020 M. 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 have free to conduct our question and answer session.
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 that theme in the improved but as we moved into January.
What were the primary drivers behind the improvements that we're see.
Those similar questions on this topic came from Chris Wetherbee with Citi, Jack Atkins Stephens, Todd Fowler with Keybanc, Ken Hoexter with Bank of America.
Robbing Schenker of Morgan Stanley Stephanie Benjamin Suntrust.
Yes, David I'll take that thinking and appreciate everyone's interest in the questions on our asset base tonnage trends.
Our normal practice to use transactional shipments to better utilize six resources and seasonally weaker period.
These shipments improved our December sequential comparisons and resulted in favorable year over year comparison in January.
This Judy mentioned earlier, we've had recent success, adding heavier transactional LTL rated shipments better utilize available trailer space that would otherwise be moving into.
The success has resulted in improving or shipment trends by utilizing some new systems that offer more timely information on existing opportunities.
These actions are really reflect continuation of our focus on customer level profitability, while utilizing the transactional markets opportunistically still be capacity in our asset network.
We don't believe the improvement in experiences from demand more about an intentional action to fill into capacity in the network.
Chris Wetherbee ask about what drove the change and build revenue per hundred weight by 2.1% year over year increase in fourth quarter team to decline of 3.5% in January. We also wanted to do you also wanted to understand the impact of mix and pricing on this change then you an extra one though.
How we're thinking about the tradeoff between pricing and volume in LTL. He pointed out that in fourth quarter, not getting pricing was up to spot volumes being down pretty significantly. He wanted to know if we are losing market share. Yes, that's related to what I just mentioned that we strategically added more heavier weighted transactional shipments.
In December and January to help fill into capacity in the network.
Change in revenue per hundred weight as more reflection of that mix shift.
Year over year core LTL prices in the mid single digit seasonal is on top of multiyear solid price increases.
So our objective is to offer superior services of the LTL marketplace and in return, we'll continue to focus on securing.
Corresponding pricing for each of our customers.
Approaches to manage customer level profitability, while utilizing the transactional market to fill that he'd be capacity in our asset network.
From our analysis, we believe we're maintaining market share.
We had another question about how long we could sustain elevated growth in truckload rated spot shipments moving in the asset based network, it's really about just.
Just trying to optimize our network for the right balance of truckload rated business and price during the extremely tight capacity market in 2018.
Historically low levels of truckload rated spot shipments in the network from this about the second half of the year through early 2000 and I see.
So the comparisons of our truckload rated business volumes become tougher than just as the year progresses. It really comes down to contribution to the networks being the driving decision behind truckload rated business levels.
David Ross of Stifel ask or Threepl as a wafer EPS to get back some volume back into the system why or why not yet we have numerous and strategic relationships with threepl today and those provide been sexist the business opportunities.
We utilize those opportunities to optimize our network resources.
Like we've been talking about.
Actively pursued business with three deals with an opportunity to make sense from the business standpoint.
We have several people ask about the current processing environment for LTL and our processing outlook for 2020 crossing continues to moderate.
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 GRC.
David I'll take that you the pricing environment remains comparable with recent orders and we expect that the pricing environment will rank remain competitive rational.
For 2020.
Beginning with our space as pricing initiative that we launched in August of 2017, we've really had a two and a half year period, a very solid pricing success that included year over year increases of 8% to 10% at 2018 and continued solid increases in 2019, especially on our.
LTL rated spray.
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 end of year over year increases.
As I just mentioned our core LTL business continues to be fried 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 does transactional shipments are contributing to improved operational metrics, including higher truck trailer load averages and add some reductions and empty mile.
And at this point, we're evaluating add the potential for 2020, GR I for idea, but we havent made any final decisions.
There are number factors that that go into our decision every year about whether to implement a G.R.I., including the market and competitive environment and some solid input from our sales group regarding their discussions with our customers.
Okay, Robby Robbie Schenker stated that our weight per shipment was showing signs of stabilizing on a sequential basis.
These your comps do you expect weight can begin to be up for the year over year basis. In 2020, what do you think is a normal weight per shipment.
In our supplemental exhibit to the earnings release.
Total weight per shipment in January increased 6.5% compared to January 2019.
With the weight per shipment LTL rated shipments increasing 2.5%.
I would say our normal weight per shipment is runs around 1000 pounds for shipments.
Okay next to Jason Sabal of Cowen asks what are the monthly contract pricing trends and renewals for the quarter. What are your expectations for processing in the rest of the quarter and for the full year Twentytwenty, yes, although we don't provide monthly information.
The fourth quarter, we secured a 4.2% increase where their contracts into deferred pricing renewals.
January is running at historical first quarter average rates of around 3% to 4%.
We expect to the pricing environment will remain competitive but rational this year.
Kim pointed out regarding the press release, the Judy said, returning the asset base business to historic levels. It's been a stated long term goal.
Given that theres been a bit of fluctuation in the historical margins could you clarify what margin level. She means is there a timeline to get there.
Well, David I appreciate Kens question and.
I think what he was referencing listen discussion that we had.
About our our historic margins, but in relationship to Tang the union incentive so the contract provisions for paying our union incentive specified a minimum.
Full year 96 operating ratio for making the payment. We were really pleased that are 95 to all our in 2019 allowed us to pay 1% of union wages to our employees.
When I talk about historical levels of profitability, I'm really referring to annual asset base operating ratios in the low ninetys and we certainly have more work to do to consistently attained those profitability levels, but our payment of the union incentive rep represents a significant step in moving in that direction.
As for when we get to those ours I don't really have a specific timeframe to give you and that's part of that's because of the cyclical nature of our business, but 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.
Okay. We had a question about the current demand environment. What are you seeing out there are you seeing any signs of normal normal seasonality coming back along those lines. How is January trending for you.
Well 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.
Customers continue to be cautious about their businesses regarding the uncertainty around inventory levels trade concerns in this year's us presidential elections, but I do believe it's helpful to have trade deals with China and the U.S. LMCA approved.
By the United States.
Excess capacity in the market has encouraged our customer base to see opportunities to optimize their current supply chain models and that as benefited us because many of our largest accounts are working with us to become more efficient both from a cost Incompliance perspective, this is providing opportunity.
These four arcbests 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 base network as we've been discussing.
Our asset light business. So far this year is more challenge as compared to a stronger January in 2019.
We're currently experiencing a 3% reduction in revenue, while our purchase transportation costs of actually increase about 2%.
Worsening of this margin compression is market related and the other part of it really relates to our mix of business.
Okay. We had several we had questions about the typical sequential change in asset based operating ratio for fourth quarter first quarter are there any items that you believe will impact typical sequential change.
Just take that one and I'll point out that in our supplemental light cat yesterday yesterday afternoon, we mentioned that our first quarter or has historically increase by approximately 400 basis points versus the first quarter.
At this point, there really are or no significant puts or takes did mention that would impact what we would expect in the or change relative to history.
There could be some items moving east why in some of these are unpredictable, especially.
Weather events in the first quarter property sales and as you saw in the fourth quarter, we benefited from a gain on asset sales.
Jim had several questions about employee resources in hip sales.
Given volume declines in the asset based segment could you discuss our best thinking with regard to headcount in resource needs is it possible, we could see headcount declines commensurate with volume declines.
How much available capacity do you currently have given volume declines.
Assuming resource cuts are needed inappropriate could you were achieving the normal employee attrition.
Well, we consistently work to match, our labor needs the business levels with the combination of attrition and lay off when necessary. However, during the seasonally weaker period.
We have a challenge and we we have to address that challenge by balancing head count reductions with service level, because our customers expect good service from us.
But in our dock in city operations. We currently have about 150 people on layoff and in addition, we have 60 fewer road drivers and the ABS network. This month versus last year in January So January of 2019th 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 ransom purchased transportation.
And because we have the flexibility to manage mode.
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 inline with our business levels.
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.
The next question was about the level of core cost inflation, we should expect for art best asset based segment in 2020.
The majority of our asset base labor costs are impacted by the Union labor agreements, which includes total annual cost increases that averaged about 2% per year for the life of the contract and that is a very manageable cost increase we appreciate having known labor costs stability for the remainder of the contract through mid 2023.
We were very pleased to pay the union operating ratio incentives at the 1% level CBF achieved 95.2 or 2019 you mentioned.
That amounted to $5.1 million of expense crude in 2019.
He also mentioned our revenue equipment has cost more in recent years in impacts are estimated 2020 depreciation expense that we disclosed in our supplemental 8-K, largely due to the safety features for technologies like Lane departure warning systems collision mitigation in cameras.
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 efforts to improve customer experience and also to optimize cost like what Judy just mentioned.
Those actions and costs May proceed the timing of expected benefits.
With weight per shipment trends stabilizing and LTL tonnage now flat year over year or the asset base business.
I see an opportunity to outperform normal or seasonality in the first quarter, what would you expect to be roughly breakeven in that segment in the first quarter.
We don't provide guidance on our expectations for the first quarter, but and as noted in the supplemental exhibits and earnings release, we typically see the 400 basis points deterioration from fourth quarter first quarter.
We are experiencing improvements in weight per shipment internally.
Larger shipments are beneficial to us. We're also encouraged with additional business, which is filling available capacity in our system once you're talking about.
We did have a property gain in the fourth quarter and those events can be lumpy.
We've 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.
Yeah, we provided some additional information.
About the union operating ratio incentives in our supplemental exhibit.
Yeah, maybe AFFO of 95.2 as we mentioned.
It was a bonus expense of about $5.1 million, it's a 1% payout on you just wages, but if the profit sharing boating.
Would increase 2% employee wages for an operating ratio between 93.1% to 95% in the bonus would increase of 3% of employee wages for an operating ratio.
Better than a 93%.
Considering the fact that insurance is currently a big truckload cost factor is this a headwind for IB F in Twentytwenty.
What we've seen a modest increase for 2020, it isn't a major headwinds rabia will.
As was pointed out by the question insurance market has tightened this year on the heels with some very large verdict 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.
As a long history of being a site carrier and we've made substantial investments in technology in our tractors and safety programs like I just mentioned.
As a result of our safety focus in 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 Evans.
Were around $2 million.
We received several questions about our recently announced technology investments from several analyst, including Jack Pod, Ravi, Chris and Stephanie.
To give us an update on the technology investments within your asset based operations can you provide an update on the pilot break testing program.
Freight handling program.
And how many locations is currently being tested.
Well David Thanks for the question currently the primary testing is occurring in two locations in Indiana.
As result 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.
Also helped us to determine the fruits of concept that will ultimately.
Help us decide if we go forward with implementing it throughout the entire ABF network.
It really isn't much more detail to provide at this time until we do this testing and have some time to analyze the results.
We are pleased with the technologies and processes that are being evaluated 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 claims and injuries and accelerating employee training time.
Okay also regard regarding the pilot freight handling programs. They ask at what point could this moving from a pilot to an actual application and what impact did that have all your financials is there an endpoint to the spending or should we assume that persist for the foreseeable future.
Can you give associates of what the spending level in 2021 looks a lot.
Well in the third and fourth quarters of 2019, we reported this additional technology spend in the asset base segment and it was approximately four and a half million in each quarter or a total of 9 million in the second half of 2019.
We also expect at these related costs in the first quarter of this year.
We 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 stage of the pilot, we aren't providing projections beyond the first quarter. As there are number of factors that are being evaluated that would also impact future cost and moving along during the year. We will provide our expected cost for the next quarter. When we report each quarter's earnings.
And the transition of the pilot to Kansas City, a 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 internally benchmarks.
And these pilot tests are being conducted a further for this concept and the associated results.
Okay are you seeing real estate opportunities for large competitor downsizing.
In reference to the various LTL company closures occurred that occurred throughout 2000, not seen we're always aware of what properties and locations to become available, but there really weren't any properties of interest to us and we didnt add any as a result for those closures.
Could you provide additional color on the asset sale gain reported in fourth quarter do you expect additional asset sales in 2020.
The gain that was reported was related to the sale of unused service center.
It's just regularly happens this was a situation where we relocated into new facility, we were able to fill our formal.
Service Center.
This this.
Happens periodically as we bonds, so real estate, but the timing is always a or typically unpredictable we will likely have similar real estate gains at some point during the year.
Like I said the timing in the financial impacts are unknown is done.
Okay, Chris Wetherbee ask about what steps can be taken from the cost reduction standpoint to improve profitability in our best segment.
Should we expect to see revenue per day trends improve further in the remainder of first quarter.
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.
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 as some examples of automation that were begin.
Turning to utilize our shipment tracking and email management as well as digital freight matching and so that the advancements that we made in our asset light business.
In 2019 should provide greater operating cost efficiencies in 2020, although we do continue to see expectation to invest.
We feel like there's even further improvements that we could make that should positively impact our performance in 2021 and beyond.
But.
Look at this the overall costs for our asset light segment. Some of those are fixed in nature, and really could be better leverage with greater revenue growth. So we remain focused on gaining macros.
Our car 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 for 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.
We're balancing all of these things to gain and 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 cost that we previously discussed are associated with the building of Arcbests owner operator in contract carrier capacity should normalize in 2020, so that should help us, but as always we continue to manage headcount.
In our asset light operations to our shipment volumes and work continuously looking to further improve the efficiencies of our workforce.
To your asset light expedite business get back to the prior margin levels absent a big cat capacity courage.
You know in 2018 weeks versus a strong demand environment and tight capacity, which generated tremendous value for customers through their utilization of our ground expedite solution or service offerings on 2019, we add something different.
Parents are 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 transfer.
Ground expedite volumes and pricing to improve it consistent with our past history.
Ravi pointed out that comps to the asset lot business began to get easier for the first quarter of this year do you anticipate year over year growth for that business are you seeing any heightened competition in any particular pockets of the asset light business.
I'd say that the asset light results really a reflection of the recessionary freight environment and excess available capacity.
I'd mentioned so for this year, we aren't seeing much of a change from that.
And the.
As we probably talked about before a large portion of our businesses transactional in nature.
With this weaker spot market, it's negatively impacted our results.
We don't really point to certain regions are customers are lanes that are experiencing an unusual amount of competition.
But.
You mentioned this earlier also.
Our managed solutions and supply chain optimization work with customers is particularly responsive in this environment. We're encouraged by our pipeline of opportunities that we have there.
As noted throughout 2019 or expedite business has been impacted by that access market capacity.
The.
As a result than lower tend to rejection rates.
Again, all the asset lots side, you discuss various market driven pressures could you elaborate how much of the margin deterioration is reflection of competitive pressure from brokers undercutting processing and thereby squeezing margins how much is normal cyclicality, well I would just say the margin compression in the.
Fourth quarter was really more about tightening capacity and less about other brokers cutting prices specifically, we saw this happened between Thanksgiving and Christmas. Okay. What is your appetite for asset light. The M&A in 2020, you have any interest in the assets that Expo is announced is looking to sell are there any.
Segments geographies or or deal sizes that are more attractive to you how do you view current valuation multiples.
Well, while we won't.
Comment on specific targets.
We continue to review M&A opportunity.
We're more interested and asset light opportunities that could benefit us in terms of scale and or technology advancement and that's really been our focus for some time.
More recently, we've been less interested in small tuck in deals unless there's a potential for some significant outsized stack 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 I still seem a little bit high to us.
Is there a way to help us quantify the progress you'd like you can cross selling your services could you share the percentage of revenue tied to customers that utilize two or more services.
Based on the needs of our customers cross selling continues to be an important component of our strategy with 80% of our customers needing to 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.
See significant job in revenue for customer profit per customer and retention versus those customers that are not cross sold all of those benefit us and so were really still aggressively pursuing this cross selling strategy.
Okay, Todd Feller I ask please discuss your ecommerce initiatives what percentage of your business. You think is E commerce out of the margins on this spray compare to overall margins and what are your expectations for growth in this area going forward.
I appreciate Todd's question 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 ecommerce opportunities within our customers.
Our ecommerce customers have shown increasing interest in the solutions, we provide and a great example is retail plus which is a compliance solution for vendors to help them better me large retailers stringent shipping and delivery requirements.
We created retail pull us in collaboration with our customers and our tech folks.
And that you know they the these customers that participate or really suppliers to major retailers and we're seeing the demand for our retail plus services accelerate.
This ongoing co creation program really provides robust compliance management solutions that enhance arcbests existing retail logistics services by combining innovative software solutions with enhanced operating process.
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 and supply chain to be more responses to the consumer.
Final mile is another area, where we see the impact of E Commerce, and we can 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 E Commerce business.
We see commerce as it continuing secular growth story as E. Commerce only represents unless you know a percentage in the low teens, a 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 flat.
Stephanie Kid ask about the macro environment and its impact on our ability to reach our long term margin goals, what does your outlook for manufacturing and industrial activity in 2000 Teus.
Do you believe we've seen the bottom in 20, not doing well that first point to the industrial production index, which is continued to trend downward throughout 2019 and really ever since September 2019. This metric has been lower than the prior year.
The PMI steadily decline throughout 2019 was 47.2 in December and that's the lowest level since June 2009, when it was.
About 46.3.
All that indicates contraction in the manufacturing sector. This is compared to a PMA that was 54.2 in January of 2000 and I see.
Last year.
The amount is considered a leading indicator in LTL business. So it's it's kind of hard to determine if weve reached the bottom of this downturn.
The current economic environment, as well as excess truckload capacity.
Since the challenges to our growth and operating performance.
But as you know Judy mentioned do other opportunities we're focused on managing a resources to the level of business we have.
Keeping in mind that our customers expect that high level of service.
I'd, just reiterate that we're better positioned to Dave in the last time the freight environment was was this week level.
Our logistic solutions provide optimized options for customers and the sophistication level of the average customers increase we've seen that just time and time again, and there's a desire to evaluate the options.
To reduce costs out of their supply chains.
As we've mentioned our managed solution growth reflects the value that we provide our customers I should they said that also benefits from that managed solution group.
Okay, how to recent tariffs and trade resolutions with Mexico in China impact business. If at all we expect those resolutions to have a positive impact.
Maybe a well before we see the effects of the.
Okay and then finally for our last question. We've had a question about our strategy for offering a suite of transportation services beyond LTL is about the progress. We've made during 20 not team and doing that Judy you want to wrap up the call a good answer to that one and I'd like to say how much I. Appreciate all the questions that we received.
Really has been beneficial.
So with respect to that question when I took over leadership of Arcbests 10 years ago. Our focus was primarily on the LTL services offered by idea. We really were not fully equipped to address a complete needs of our customers and we struggled during one of the worst economic periods in our country history.
Since that time, we have embarked on a strategy based on listening to the needs of our customers and have developed logistic service capabilities that have allowed us to really partner with them.
To optimize their supply chains and now we are a logistics company that offers most any service our customers require and we focus on meeting their needs by offering and array of these integrated solution.
And as I described in my introductory comments on the fall 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 continue 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 were seeing continues to grow.
As we see new business slowing in the cause of the transformation that we've gone through in the last decade, we are really bullish about the future and we believe were equipped to be successful in any economic environment, we encounter.
Okay, well, we appreciate I appreciate everybody taken the time to sit in questions last night, we thank you for joining US. This morning. We appreciate your interest in art Best This concludes our call.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
[music].