ArcBest - Q3 2016
November 3, 2016
Transcript
Operator (participant)
To the ArcBest Corporation Q3 2016 earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone.
If at any time during the conference you need to reach an operator, please press star 0. As a reminder, the conference is being recorded Thursday, November 3, 2016. I would now like to turn the call over to David Humphrey, Vice President of Investor Relations. Please proceed.
David Humphrey (VP of Investor Relations)
Welcome to the ArcBest Corporation Q3 2016 earnings conference call. We will have a short discussion of the Q3 results, and then we'll open up for a question-and-answer period.
Our presentation this morning will be done by Ms. Judy R. McReynolds, Chairman, President, and Chief Executive Officer of ArcBest Corporation, and Mr. David R. Cobb, Vice President, Chief Financial Officer of ArcBest Corporation. We thank you for joining us today. In order to help you better understand ArcBest Corporation and its results, some forward-looking statements could be made during this call.
As we all know, forward-looking statements, by their very nature, are subject to uncertainties and risk. For a more complete discussion of factors that could affect a company's future results, please refer to the forward-looking statements section of a company's earnings press release and the company's most recent SEC public filings.
In order to provide meaningful comparisons, certain information discussed in this conference call includes non-GAAP financial measures as outlined and described in the tables in our earnings press release. We will now begin with Ms. McReynolds.
Judy R. McReynolds (CEO)
Thank you, David, and good morning, everyone. Today we're going to change things up a bit from our normal routine. I'm going to lead off our call with a discussion about our new corporate structure, which we released about an hour ago.
After that, David Cobb will follow up with details about our Q3 earnings, and then we'll take questions on both topics. Earlier today, I communicated to our 13,000 employees the exciting news that we are unifying our company and presenting ourselves as one logistics enterprise with creative problem solvers who deliver integrated logistics solutions.
We will be restructuring the company to offer most logistics services under the ArcBest brand starting next year while continuing to recognize the value in the ABF Freight, Panther, and U-Pack brands.
This realignment includes a unified sales structure under ArcBest, a combination of ABF Logistics, ABF Moving, and Panther into a new asset-light logistics operation, a unified approach to pricing, customer service, marketing, and capacity sourcing, and consolidation of training and quality awareness under ArcBest Human Resources.
As we said in this morning's announcement, the reason we're doing this is to provide the best customer experience possible. Quite simply, our customers are asking for integrated solutions from us and easier access to them. Based on that feedback and our own market research, we feel confident that this is a significant step toward delivering best-in-class customer experience and greater shareholder value.
Last year, at our Investor Day, we shared some findings of that research underlying our strategic direction. You'll recall, at that time, we identified a $266 billion market opportunity for all the supply chain and other services the ArcBest enterprise offers.
Our opportunity includes and is well beyond the $37 billion market for LTL alone. Another $60 billion represents solutions we offer that are outside of the traditional supply chain in moving and vehicle maintenance and repair, and the remainder, about $170 billion, is in the areas of truckload brokerage, warehousing, premium logistics, and that includes ground expedite, ocean and air forwarding, and final mile.
These are all areas of expansion for our company over the last several years through organic growth and acquisition. We are fortunate to have many solid relationships built over years through our excellent LTL services at ABF Freight. We've added to those through the acquisitions of Panther, Smart Lines, Bear Transportation, and most recently, Logistics and Distribution Services, all in the asset-light category.
With this new structure, we are now taking those relationships and best-in-class operating principles and tying them together in practical ways, ways that will help us synchronize our market approach and grow our company.
We've seen many customer success stories over the last few years that show us how providing more services across the supply chain helps grow ABF Freight and the entire company. I shared some of those at our Investor Day, and since then, we have many more. The details about the senior leadership changes we are making are included in the press release, and I'm happy to answer any questions about those later in this call.
But in general, what is happening is where we previously had a different approach in which the important functions of sales, marketing, yield management, customer service, and capacity sourcing were all doing a great job at their own individual operating companies with their own individual leaders, we are now bringing these together under ArcBest leaders reporting directly to me.
This matters because we will now make even more progress in our mission to provide the best possible customer experience with a more unified view of the customer. This structure will enable us to better serve customers, grow revenue, and eliminate duplicative costs and inefficiencies in order to improve margins and overall profitability. Our excellent sales organization is evolving to one team under a leader who has a great deal of experience in cross-selling our logistics services.
Account development is further enabled by this type of approach, which includes unified yield management as our people are incentivized and given all the tools to make sure our customers have the full supply chain solutions they require through the optimal contact in our organization.
By marketing most of these services as ArcBest, we will make it easier for our customers to connect the dots about the full breadth and scope of the logistics solutions we offer, including LTL represented by the ABF brand and ground expedite by the Panther brand.
I think you all realize that our excellent customer service is well known in the industry and appreciated by our customers. By combining the previously separate groups into one unified customer solutions organization, we will seamlessly provide an excellent customer experience.
I also want to spend just a minute talking about capacity sourcing because we feel this new structure will result in powerful changes for us in this important capability. By creating a more unified approach to interactions with the many different third-party carriers we use, there are a lot of scale advantages that we have identified.
This sourcing expertise, especially when combined with the high-quality service offered through our outstanding ABF Freight network, becomes a differentiator for our customers when they seek reliable partners to deliver their important goods.
We believe the combination of our asset-based network with our expanding asset-light relationships is the right model for our customers, especially as capacity constraints become more evident. To wrap up this part of the discussion, you have seen in the release that we are eliminating approximately 130 employees at the company and subsidiaries.
As I told our employees, I recognize that is difficult but necessary for us to take our organization to an enhanced level of customer experience. This improved organizational structure, consolidation of certain systems and facilities, and other cost-savings actions produced an estimated annualized operating expense savings of $15 million generally split evenly between our asset-based and asset-light operations.
We also expect to record a reorganization charge, the majority of which is non-cash, for contract and lease terminations, severance, and adjustments of intangible assets, primarily software, totaling approximately $9 million or $0.22 per diluted share after tax, and that will be recorded in the Q4 of 2016, and an estimated $1 million or $0.03 per diluted share after tax in the Q1 of 2017.
In addition to the new corporate structure news I just shared with you, we have a number of initiatives going on at ABF Freight in an effort to restore historic operating margins to that company. These initiatives are, in addition to our disciplined approach to pricing and the ongoing training our people receive to improve growth and operate productively. Many of these revolve around technology.
For example, we have several planned system upgrades that are underway to help with workload visibility and decision-making, as well as line hall and street optimization tools and new equipment on the docks like handheld devices, tablets, and scanners that replace our older equipment.
There is a great data analytics opportunity through the implementation of ELDs on all road and city equipment as well. We also have continued safety and fuel savings benefits of equipment upgrades and practices.
Those include things like improved engine design, automated manual transmissions, trailer skirts, tractor road speed governed at 63 miles per hour, and review of a potential collision mitigation and lane departure system. Now I'll turn it over to David Cobb for a brief discussion of the earnings results.
David R. Cobb (CFO)
Thank you, Judy, and good morning, everyone. Let me begin with some statistics on ArcBest. Q3 2016 revenues were $714 million compared to $709 million in last year's Q3, a slight increase. Q3 2016 net income was $0.49 per diluted share compared to net income of $0.72 per diluted share last year.
As we saw in the Q2, our reported Q3 results were adversely impacted by increased healthcare cost. Versus the same period in 2015, total corporate healthcare costs increased $3.2 million or approximately $0.08 per share on an after-tax basis.
These higher costs were across all of the ArcBest companies, with the increase on non-union employees at ABF Freight representing $1.7 million. This was associated with increases in the number of health claims filed, as well as a higher average expense for those claims.
As a part of our stock repurchase program, in the Q3 we bought 136,000 shares for a total amount of $2.5 million. We ended the Q3 with unrestricted cash and short-term investments of $190 million.
Combined with the available resources under our credit revolver and our receivable securitization agreement and their associated accordion features, our total liquidity equals $416 million. Our total debt of $238 million includes the $70 million balance on our credit revolver, the $35 million borrowed on our AR securitization, and $133 million of notes payable and capital leases, primarily on ABF Freight equipment.
The composite interest rate on all of our debt is 2.2%. Full details of our GAAP cash flow were included in our earnings press release. So far this year, our net capital expenditures total $100 million, which includes $38 million of net cash expenditures and the $62 million of financed equipment.
We now expect our total 2016 net capital expenditures to be between $140 million and $150 million. ABF Freight reported Q3 revenue of $509 million, a slight decrease compared to last year.
Although ABF Freight continued to gain business from new and existing customers, revenues were negatively impacted by elevated retail customer inventory levels, weakness in industrial production, and excess capacity in the truckload industry, which drives truckload carriers to handle larger-sized LTL shipments.
In addition, lower fuel surcharges versus last year were a contributing factor in the quarter. ABF Freight's quarterly tonnage per day decreased 2.8% compared to last year's Q3, with monthly, year-over-year tonnage changes that included a 3.7% decrease in July, a decrease of 2.1% in August, and a decrease of 2.5% in September.
Daily shipments increased by 1.6% in the Q3 as ABF Freight continued to experience a reduction in total weight per shipment, which declined 4.4% during the quarter. ABF Freight's Q3 operating ratio was 96.5% compared to 94.8% in the prior year. This increase was related to the labor and cartage cost required to handle additional shipments during a period of lower tonnage levels.
The higher healthcare cost I mentioned earlier was also a factor contributing to the rise in our operating ratio. And finally, weaker pricing yields on spot truckload business adversely impacted our operating results versus last year.
As seen throughout 2016, the benefits of ABF Freight's equipment replacement program are contributing positively to improved fleet dependability needed to effectively serve customers and in significant reductions in maintenance and repair costs.
ABF Freight's Q3 total billed revenue per hundredweight was $30.52, an increase of 2.8% compared to last year's Q3. Year-over-year comparisons of this yield figure were positively impacted by changes in shipment profile but negatively impacted by lower fuel surcharge revenue.
Excluding fuel surcharge, Q3 billed revenue per hundredweight on ABF Freight's traditional LTL Freight had a percentage increase in the mid-single digits. Despite an inconsistent freight demand environment, ABF Freight secured an average 2.8% increase on customer contract renewals during the quarter.
In addition, effective in late August, ABF Freight enacted an average 5.25% general rate increase that positively impacts approximately one-third of its business. In total, our asset-light logistics businesses had revenue of $218 million, an increase of 3.2% compared to last year's Q3.
Revenue growth in ArcBest asset-light logistics businesses was the result of increased shipper demand at Panther and the result of acquisitions we have made since Q3 last year. For the month of September following the LDS purchase, asset-light revenue represented 31% of total consolidated revenue, and we expect that percentage to grow as we further develop these businesses.
Q3 combined EBITDA for these businesses equaled $10.5 million compared to $12.1 million in last year's Q3. Customers' desire for Panther's expedited services and the timely transport and superior cargo care it provides resulted in an increase in total loads handled. Higher gross margins and disciplined cost controls contributed to Panther's improved operating results compared to both the same period last year and the previous quarter.
Current market conditions and the revenue effects of lower fuel prices contributed to reductions in both revenue per shipment and operating profit at ABF Logistics. Though improved from the previous quarter due to better gross margins, the integration of a former Bear location continued to impact Q3 results as we discussed last quarter.
In addition, margins on ocean shipments were adversely affected by carrier rate changes resulting from the Hanjin bankruptcy. Changes in customer mix had diminished demand for its services from transportation-related customers, and both emergency roadside and fleet maintenance were the primary factors contributing to FleetNet's lower Q3 revenue and reduced profit margins. A decline in government shipments continued to be the primary reason for ABF Moving's results being below last year.
Under the new corporate structure that we announced this morning, we expect to report our Q4 and full year 2016 financial results as follows. Our asset-based operations, which consist of ABF Freight, and then our asset-light operations made up by two segments: ArcBest, which consist of the current Panther, ABF Logistics, and ABF Moving Services, and then FleetNet.
And finally, other and eliminations. Preliminary results for the month of October 2016 versus October 2015 were as follows. Daily billed revenues increased between 2%-3%. The impact of Hurricane Matthew on October revenue was minimal.
Total tonnage per day was flat compared to last year, with LTL tonnage up in the low single digits compared to easier comps from last October. October tonnage trends are being affected by reductions in our full load spot business.
On a sequential basis versus September, October tonnage trends are about average with history, which is an improvement versus what we saw in the Q3, which are some of the weakest in the last several years. Shipment counts increased between 3% and 4% above last October.
Combined with flat tonnage, we are continuing to see a lower average weight per shipment on a year-over-year basis. On a sequential basis in October, there are signs of stabilization we are seeing in our LTL weight per shipment. Total revenue per hundredweight increased between 2% and 3%, which includes slightly lower fuel surcharges compared to October of last year.
On a combined preliminary basis, October 2016 revenue from our asset-light logistics businesses increased between 10% and 15%. This was impacted by acquisitions made since last year and reflects continued strength in our ground expedite Panther services.
Q4 profitability in these businesses will likely be impacted by continued margin pressure in the ocean shipping market related to the Hanjin bankruptcy. Now I'll turn it over to Judy for some closing comments.
Judy R. McReynolds (CEO)
Thanks, David. On Monday, we announced the retirement of a longtime board member, John Morris. John has faithfully served on the ArcBest board for more than 28 years, and he has been a trusted advisor and steady force during that time.
I thank him for his guidance and counsel over these many years, and I wish him well in his retirement. I'm pleased to welcome two new board members to our board: Mike Hogan and Eduardo Conrado. Mike currently serves as Executive Vice President Strategic Business and Brand Development for GameStop Corporation.
Eduardo is Executive Vice President and Chief Strategy and Innovation Officer of Motorola Solutions, Inc. Both Mike and Eduardo add expertise in marketing and brand strategy as important leaders at their technology-driven enterprises.
Mike's unique experience leading GameStop's successful diversification strategy and transformation, and Eduardo's leadership of Motorola's growth-focused customer experience innovations, IT, and strategy teams, will be valuable to us as we embark on a newly structured path toward customer excellence and efficient delivery of logistics solutions at ArcBest.
To conclude our prepared remarks, I would like to underscore how pleased I am that our new structure will allow us to differentiate our company from our competitors by combining the skill and the will of our employees with a more consistent customer experience across the board.
There's a lot of work ahead, but I know we are more than up to the task, and our leaders are really energized about the opportunities before us. I couldn't be more excited about what's in store for us as we move forward with a renewed sense of purpose and the right structure to achieve all of our goals. And now we're ready to take your questions.
David Humphrey (VP of Investor Relations)
Hey, James. I think we're ready now.
Operator (participant)
Thank you. Ladies and gentlemen, if you'd like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a 3-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3.
If you are using a speakerphone, please lift your handset before entering your request. Again, to register questions by telephone, please press 14. One moment, please, for our first question. Our first question is from the line of Ravi Shanker. Please proceed.
Ravi Shanker (Managing Director and Equity Analyst)
Thanks. Good morning, everyone. So, Judy and David, exciting news indeed. Can you just kind of give us a lot of color on the corporate changes here, but just a few more kind of follow-ups here. Why now? What prompted this? How long will it take for the full benefits, the $15 million, to come through? And does this in any way represent a pivot in your strategy to kind of focus more on kind of shoring up the business and maybe away from M&A a little bit?
Judy R. McReynolds (CEO)
Well, let me answer your last question first. It is exactly on our strategy. It's a continuation of the strategy that we've been working toward, and we're really excited about that. I think it really, in a way, doesn't bear on the decision over M&A other than to say that we're going to continue to be responsive to our customers.
You've seen us act on that through acquisitions. You've also seen us act on that through organic actions. We will continue down that path, elevating our level of customer experience and our seamless delivery based on what we're hearing from our customers and the actions we feel necessary to accomplish that.
But if you think about why now, and just think about the steps that we've been taking really since we bought Panther back in June of 2012, we're just continuing down that path of listening to customers, providing services to them. And as we stepped back and looked at our delivery of our services to customers, we realized that we had an opportunity to make
that simpler and to unify in some important areas like sales and our customer service areas, and then viewing the ArcBest customer on a unified basis as an ArcBest customer rather than in some of the separate silos that we were working from. And we believe that that will help us with achieving excellence, again, in the delivery of those solutions to our customers.In terms of the timing of the benefits, yep.
Yeah, the timing of the benefits. What we've done is we've measured that against the trailing 12 months ended September 30th so that you could see what kind of the value of those benefits is on that basis.
But the actions that we needed to take to have that savings have largely been accomplished or will be by today. And so as we carry forward those actions, other than some of the actions that we mentioned that will be out in January, largely accomplish the result that we've disclosed to you here.
Ravi Shanker (Managing Director and Equity Analyst)
It's not going to take a while for this structure to kind of permeate through the system. You'll start seeing the benefits pretty much right away.
David R. Cobb (CFO)
I think from the cost savings, that's correct. When you think about the systems and the processes, I mean, there's work to be done there to get this fully implemented, and so that'll evolve over time. But the actions taken, again, to get the cost savings are by today.
Judy R. McReynolds (CEO)
Yeah. And Ravi, another just follow-up on that. We actually see that there will be perhaps more opportunity as we carry forward. We get these areas under a leader, and these areas are unified. We think that there's perhaps more opportunity, although we don't know exactly how to measure that and what that will be, but that will occur over time. But those are really beyond the level of the savings that we're disclosing to you today.
Ravi Shanker (Managing Director and Equity Analyst)
Great. If I can just sneak one more in, another good quarter for Panther. Can you just elaborate a little bit more on what's driving the strength there? And also, was Hanjin a net benefit or a net drag for you in the quarter?
Judy R. McReynolds (CEO)
Well, first of all, on Panther, what's driving that? We've talked with the management team there, and we've considered what's happening with customers. And the best answer that I can give you there is their excellence in customer service. Their reliability and their visibility and communication on customer shipments is what's really driving that.
So it really is an exciting time for them. We congratulate that team on another good quarter. And it really is pretty fundamental what is happening there, and it's a good thing. Hanjin is a net negative to us for the quarter because it really did impact the results of ABF Logistics because of, I guess, the spike in prices that occurred on the ocean shipping moves that really
couldn't be passed along effectively to customers if we wanted to be reasonable and retain those relationships. That continues a little bit into the Q4, but it's just something that will take some time for those markets to settle down.
Ravi Shanker (Managing Director and Equity Analyst)
Great. Thank you so much.
David Humphrey (VP of Investor Relations)
Thanks, Ravi. Appreciate it.
Operator (participant)
Our next question is from the line of Chris Wetherbee. Please proceed.
Chris Wetherbee (Equity Analyst)
Hey, great. Thanks. Good morning, guys.
Judy R. McReynolds (CEO)
Hey, Chris.
David R. Cobb (CFO)
Hey, Chris.
Chris Wetherbee (Equity Analyst)
Hey. So I wanted to think about some of the, it sounds like there might be some incremental benefits to this sort of structure that you're putting in place. And I think, Judy, you talked a little bit about sourcing benefits over time. Is that incremental to the $15 million? And maybe how do you think about that opportunity and sort of the timing of it? Just want to get a sense of sort of what else this could kind of open for you in terms of opportunities down the road.
Judy R. McReynolds (CEO)
Well, you're speaking specifically about capacity sourcing. I think that's one area. When we're looking at all of the sources of capacity that we have for the organization, and that's going to be managed out of Medina, a group that has already established excellence in that area, we
really feel like that there will be some good relationships that we can look to there to both be reliable for the service that our customers need but will be able to gain the attention of because we're collecting all of the ways that we spend money with those sources and putting that together and really working with them on that basis. So that's a good thing.
Some of the other areas I think about it, if you just think through the unified sales force and looking at a customer on a combined basis, there's some efficiency that you can gain in that, but you're also communicating so much better with that customer. So what I think it leads to is a better set of opportunities from the customer, more holistically viewing their supply chain with them so that you can learn how best to interact with them, again, with the services that we have to offer or maybe ones that, over time, we need to gain.
And then on the customer service side, we see a great deal of opportunity because we're going to be able to help ourselves with systems and processes that are more seamless and streamlined. And many of those things will be happening at the early part of next year and beyond.
David R. Cobb (CFO)
As Judy mentioned, having streamlined processes and systems, we hope to be more efficient in that. Some of that's to come, so.
Chris Wetherbee (Equity Analyst)
Okay. Just have some work to go here. That's helpful. And then just a follow-up here, switching gears to the LTL side, just wanted to talk a little bit about the pricing dynamic, particularly as we're rolling here through the Q3 and into the Q4. Seems like things picked up maybe a bit.
Obviously, we have a GRI coming in. If you could just talk a little bit about the pricing environment, how it feels right now relative to sort of what's going on from a tonnage perspective, that'd be helpful. Thank you.
Judy R. McReynolds (CEO)
The pricing environment, I would characterize it as fine, okay. When you look at our contract and deferred increase, it was about 2.8%. That's on the lower end of what we've seen over the last few years. So there is a little bit of weakness, but by and large, we're seeing most of the competition focus on rates rather than on market share. I think that speaks well for the months that we have ahead of us.
But we do see some competitive nature on some larger deals and bids, that sort of thing. There's nothing new about that this quarter versus the past two quarters, but we have continued to see that on kind of those larger bids. I think we're generally pleased with where things are, and that includes what we're seeing so far in October.
Chris Wetherbee (Equity Analyst)
Okay. That's helpful. Thanks, Ravi, for the time. I appreciate it.
David Humphrey (VP of Investor Relations)
Thank you.
Chris Wetherbee (Equity Analyst)
Appreciate it.
Operator (participant)
Our next question is from the line of Scott Group. Please proceed.
Scott Group (Senior Analyst and Managing Director)
Hey. Good morning, everyone.
Judy R. McReynolds (CEO)
Morning, Scott.
David Humphrey (VP of Investor Relations)
Hey, Scott. So just one more quick thing on the corporate realignment. Beyond the headcount, what's the next kind of big bucket to get you to the $15 million? And then do you have a sense on how much of the $15 million is going to show up at LTL and then how much at the new asset-light segment?
Judy R. McReynolds (CEO)
Well, we really don't have. We mentioned earlier that we don't have additional actions that we would have to take beyond today to achieve the $15 million. That will already be in place. The split of that is about evenly between our asset-based, which is ABF Freight, and then our asset-light operations.
Scott Group (Senior Analyst and Managing Director)
You're saying you get the $15 million just from the headcount?
David R. Cobb (CFO)
There's some other things, Scott. Headcount is the majority of it, as we mentioned, but other items like consolidating insurance programs, consolidating facilities, and some changes in our software.
Scott Group (Senior Analyst and Managing Director)
Okay. Okay. On Panther, do you have an October revenue growth number? And Judy, I know you kind of talked about, "Hey, this is just Panther's doing well," but it feels like that's an inflection here. We've had some pretty big drops in revenue and earnings and now a pretty nice positive inflection here. So is this a sign to you that things are picking up? I tend to think of Panther as a leading indicator on what's going on in freight.
Judy R. McReynolds (CEO)
Well, I think probably, perhaps more an indication for you on Panther is to look at where we were with load growth. In the Q3, it was up about 7%. Revenue is not the best indicator because of what we've seen on fuel that affected that top line. We saw some improvement in the margins for Panther.
And as you compare the Q3 of 2016 to the Q3 of 2015, but those trends are continuing as we move into October. So we are, again, very pleased. And again, we've seen this. This is the Q2 where we're seeing this improvement, and we're pleased with it. We think it's but again, when we talk to the customers, we're hearing about why. I mean, it really is Panther's performance on service, reliability, and visibility for them.
Scott Group (Senior Analyst and Managing Director)
Okay. If I can just ask one last one. As we think about Q3 to Q4 margin progression for the LTL side, any things to keep in mind relative to normal seasonality, operating days, GRI, kind of middle of Q3? Anything that we should be thinking about, Judy?
Judy R. McReynolds (CEO)
Well, when you think about what impacted us in the Q3, we had some elevated healthcare costs. We saw some, I think, elevated cartage costs and purchased transportation. As we move into Q4, we don't really know what will happen on the healthcare side. So that's going to be a factor potentially.
And we have a lot of initiatives at the company to try to tackle that, to make that better that we believe are working, but it sometimes takes some time to work through. And we're seeing some relief on our cartage costs in the Q4 or so far in October, but they're still elevated above last year.
But other than that, I mean, I think you know kind of the difference. I mean, we put in the general rate increase in the early part of September this year, and last year, it was in the early part of October. So those are all considerations.
David Humphrey (VP of Investor Relations)
Thanks, Scott.
Scott Group (Senior Analyst and Managing Director)
Thank you.
David Humphrey (VP of Investor Relations)
Appreciate it.
Operator (participant)
Our next question is from the line of Matt Brooklier. Please proceed.
Matthew Brooklier (Equity Research Analyst)
Hey, Judy, David. Good morning.
Judy R. McReynolds (CEO)
Good morning, everyone.
Matthew Brooklier (Equity Research Analyst)
Matt, so I just wanted to clarify one thing. The $15 million of targeted savings, that does not include the changes that you're making on the capacity procurement side of things?
Judy R. McReynolds (CEO)
No, it does not.
Matthew Brooklier (Equity Research Analyst)
Okay. So that would be incremental. Is there any way to think about, I guess, what those savings could look like or just provide maybe a little bit more color?
Judy R. McReynolds (CEO)
No. I think we need to get again, these changes take effect January 1st. We need to get that accomplished and then begin to see what we can accomplish there. I mean, we already do utilize the benefits of these relationships among our subsidiaries as they stand today, but we really can't speak to the opportunities that we'll have until we get that group together and we start to work with our capacity partners and we see what we can accomplish.
But we think it's upside that we'll have. And really, the upside is in more than one area. The one that I'm most focused on is capacity sources for our customers because if we're able to accomplish that, we're able to grow revenues.
Matthew Brooklier (Equity Research Analyst)
Okay. And then I think your CapEx guidance for the year that came down a little bit. Could maybe you provide a little bit more details as to what's driving that?
David R. Cobb (CFO)
Right. Yes. It's generally a shift of some expenditures into 2017, primarily on some real estate. And then some of our technology initiatives are being shifted a little bit in terms of timing.
Judy R. McReynolds (CEO)
But our revenue equipment purchases are going to be accomplished in 2016, in 2016. So we're not going to be and those are all replacements anyway.
David R. Cobb (CFO)
That's right. And as we mentioned, we're continuing to see good results out of that investment, so reduction in miles per gallon, so reduced repairs and maintenance, and so benefit there.
Matthew Brooklier (Equity Research Analyst)
Final question, just any thoughts on CapEx for next year?
David R. Cobb (CFO)
Not at this point. We'll enlighten you, I guess, in our January call.
Matthew Brooklier (Equity Research Analyst)
Okay. Appreciate it.
David R. Cobb (CFO)
Take care.
Operator (participant)
Thank you. Our next question is from the line of David Ross. Please proceed.
David Ross (Equity Analyst)
Yes. Good morning, everyone.
Judy R. McReynolds (CEO)
Morning, Dave.
David Humphrey (VP of Investor Relations)
Hey, Dave.
David Ross (Equity Analyst)
Hey. I got a couple of questions on ABF Freight. First, Judy talked about the elevated cartage costs in PT. What was the reason for that? Did you have to use more than normal? Did the costs of what you normally use go up?
Judy R. McReynolds (CEO)
Well, when you look at, for instance, a Q3 relative to a Q2, we always have an increase in our utilization of rail and PT. I mean, that's just the seasonality in our business. But what we did see was an increased use of cartage costs in ABF Freight. One of the things that's difficult about this environment is really manpower planning.
If you think about the kind of some of the variability that we've seen in tonnage and shipments and that sort of thing, in some extent, we're affected by the days of the week that those are occurring. It's more difficult, I think, today or this year than it has been in order to plan that. Although we have good information, it's still difficult. And so what tends to happen is you're being conservative.
This is a weaker year in terms of the business environment, so you're being conservative. When you are in certain locations, if you see business spike, you've got to have a solution because service is what we're trying to deliver to our customers.
So we saw an increased utilization of cartage in that regard. It's really more about the utilization of it, not so much about an excessive kind of rate increase or something there. We have seen some relief of that in October, but still, it's a little bit elevated from what we saw last October.
David Ross (Equity Analyst)
Is that because there's not enough, I guess, ABF drivers on furlough or equipment available?
Judy R. McReynolds (CEO)
It's really not about furloughs or layoffs or anything like that. It's more about just having the right number of people on the days where you see those spikes in certain locations. So it's just a difficult environment because of the variability sometimes in the day of the week, business levels.
And again, when you're working from a place where you're being conservative trying to make sure that you don't have excess costs, that's really what gets you in the position in certain locations sometimes.
David Ross (Equity Analyst)
Then in talking about the power equipment, you mentioned the savings that you got from bringing on the newer tractors, but it sounded like they were just normal replacements. Is there anything that's accelerating the replacements to lower the average fleet age given the margin benefit?
Judy R. McReynolds (CEO)
Yes. Actually, we've done that in the last two years. In our past history, prior to the last two years, we would have bought about 450-500 units. The last two years, we bought 600 in each of those years to do exactly what you just said because we do see the benefits of them, and we want to be sure that we're replacing those older units and taking full advantage of that.
I think in the Q3, our miles per gallon, we're up about 6%-7%, and that's a little bit higher than on a year-to-date basis. So we're seeing even more benefit from that. And we're also seeing good results on the reductions, particularly on the road equipment for savings.
We're still working down the average age of our city fleet. That's being tackled, but there's still quite a bit more to go there. And so we're looking forward to our purchases next year really impacting that. And so we've got some more to go.
David Ross (Equity Analyst)
Dave, appreciate you. Thanks a lot.
Operator (participant)
Our next question is from the line of Ken Hoexter. Please proceed.
Ken Hoexter (Managing Director and Senior Equity Analyst)
Great. Good morning. Sounds like an exciting new plan for you, Judy. Good luck with that.
Judy R. McReynolds (CEO)
Okay. Thank you.
Ravi Shanker (Managing Director and Equity Analyst)
On the lease terminations, can you maybe talk a little bit about that? Or I don't know if that's David's world, but are you combining physical operations? What is getting combined? And while you're on that, maybe throw in what business the 130 employees in, are they too spread out between freight and non-asset?
David R. Cobb (CFO)
Yes. Well, first, on the facilities, you're right. It's combining. As we said, we're trying to consolidate some of these teams. And so when you do that, you have some opportunity for some location consolidation.
And part of that will be a charge to terminate some of those contracts. So you're spot on on that. And then in terms of the other question about the personnel, those are across the various companies as they exist now. That's where the terminations are.
Ken Hoexter (Managing Director and Senior Equity Analyst)
So again, would that be spread evenly between freight, non-asset, if you're telling me the $15 million is spread between the freight and non-asset?
David R. Cobb (CFO)
That's about right. I always think about that.
Judy R. McReynolds (CEO)
Yeah. That's the larger part of the $15 million, Ken, so.
Ken Hoexter (Managing Director and Senior Equity Analyst)
Yeah. It sounded like it. So you noted a lot of potential, I guess, at ABF Freight when you kind of rattled off a bunch of programs you were doing in there. Sounded like some capital investments, technology handhelds.
I just want to know, are these new programs anything different than, Judy, what you talked about at the meeting a little while back? Are you launching new programs to accelerate some cost savings here?
Judy R. McReynolds (CEO)
Well, we do have some additional things that we're doing. The street optimization, for instance, is something that I think probably would add to the list that we talked about on Investor Day.
We see some opportunity to really have better visibility into our operations and the alignment of that with the customer stop-off points. And the planning there should really help us. Also, just continuing down the path of thinking about the benefits of some of the deployment of these technologies. Although we talked about it on Investor Day, many of the things that we talked about are not yet deployed in the operation fully. And so we still have the benefit of them to go.
And for instance, the equipment that we will replace on the dock, the PDAs that we'll replace on the dock, we're going to be putting those in place in the Q4 and into the early part of next year. And what we do on street optimization will probably be an early next year item as well.
And then with the deployment of the ELDs, we've had those in the city for a while, are finalizing putting them on the road equipment. And we do see a benefit of having the data from those.
And again, that whole process is just in its early stages. And as I mentioned, we still have some of our equipment to replace, particularly in the city, to get the benefits of the new technology from the equipment itself.
Ken Hoexter (Managing Director and Senior Equity Analyst)
So this is aiming just to get I mean, when you talk about getting margins back to historical levels, this is not any kind of program to accelerate beyond the $15 million. This is, I guess, just I mean, still improve savings potential, but to make LTL freight more efficient. I don't know. The PDAs, I mean, that sounds like you're just electrifying I mean, is that just electrifying bills of lading, or is that even more advanced? I don't know, putting scales on your equipment.
Judy R. McReynolds (CEO)
Well, what it is, we've had the visibility from PDAs that's now 15-year-old technology for us. What it does is it will enhance our knowledge of the activities that are happening along with those shipments and allows us better costing, better visibility on the time it takes on certain shipments. And so we think that the usability and the visibility that comes from that new technology is really going to create some opportunities for us.
Ken Hoexter (Managing Director and Senior Equity Analyst)
Sounds good. Okay.
Judy R. McReynolds (CEO)
And so again, it's beyond this whole discussion is beyond the $15 million, just to be clear about that. Yeah.
Ken Hoexter (Managing Director and Senior Equity Analyst)
Yeah. Appreciate the time.
David Humphrey (VP of Investor Relations)
Thanks a lot, man.
Ken Hoexter (Managing Director and Senior Equity Analyst)
Oh, go ahead.
David Humphrey (VP of Investor Relations)
Thanks.
Ken Hoexter (Managing Director and Senior Equity Analyst)
Bye.
Operator (participant)
Our next question is from the line of Todd Fowler. Please proceed.
Todd Fowler (Managing Director)
Great. Thanks and good morning.
Judy R. McReynolds (CEO)
Good morning, Todd.
Todd Fowler (Managing Director)
Judy, I think that that's the first time Medina, Ohio, has been mentioned on an earnings call. I'm pretty sure of that.
Judy R. McReynolds (CEO)
It's an important place.
Todd Fowler (Managing Director)
It's a very important place. Exactly. So it's a nice little community. Hey, I just wanted to ask a couple of questions on the expense side in the freight business, the commentary around the healthcare costs this quarter. I guess I'm curious just from a margin impact if you had some sensitivity around that.
And then I'm assuming that those are non-union costs or costs related to something outside of the union contract, and if there's any way you can how do those costs progress, I guess, going forward?
Judy R. McReynolds (CEO)
Well, they are definitely related to our non-union workforce. And so that's certainly the case. And David, do you want to address the cost year-over-year that we're dealing with there?
David R. Cobb (CFO)
Yeah. We were looking at 30% increases year-over-year or north of that, actually, on a per-person basis. So that's resulting from just higher claims levels, including increased hospital visits and length of stays and pharmacy costs.
But as Judy mentioned, we have some initiatives corporate-wide to work on that. Some of those things just take a little more time to get in place. In fact, we feel like we have some best-in-class programs there because we think wellness of our people is an important factor and is a value, a core value for our company. So we're concerned about their well-being. And of course, well employees make for a more productive environment and a good environment, so. Does that help?
Todd Fowler (Managing Director)
No. Yeah, it definitely does. Do you have a quantification, David, from a basis point impact on the margins, maybe year-over-year in the Q3? Yeah.
David R. Cobb (CFO)
As I mentioned, it was a $1.7 million increase for freight and then a $3.2 million increase. This is quarter-over-quarter for the enterprise as a whole. Does that help?
Todd Fowler (Managing Director)
Okay. Yeah. Yeah. I jumped on a little bit late, so I might have missed that. Okay. That helps. And then just on the benefit from the lower fleet age, can you talk a little bit about, I guess, first, the depreciation run rate here in the quarter? Is that what we should expect going forward, or is that continuing to trend up? And then I know that we see some of the benefit in the fuel and expense line item, but where do we see some of the other cost savings or cost benefit from the younger fleet?
David R. Cobb (CFO)
Yeah. We're continuing to replace, as we talked about, this equipment. So we will continue to see probably some increase in depreciation cost. Fuel savings is in the fuel and supplies and expense line, as are the repairs and maintenance during that same line, so.
Judy R. McReynolds (CEO)
Well, and I think, Todd, we've given a depreciation number for the year that it's about $110 million.
David R. Cobb (CFO)
100-105.
Judy R. McReynolds (CEO)
$100 million-$105 million. Sorry about that. $100 million-$105 million, which based on what we know about our equipment, we are adding some not adding. We're replacing some in the Q4. And so that will continue to add to what you've seen in terms of expense on that line item, but it should be within the range that we've set out for the year.
Todd Fowler (Managing Director)
Okay. All of that helps this morning. Thanks for the time, guys.
Judy R. McReynolds (CEO)
Yep. Thank you.
David R. Cobb (CFO)
Thank you. Thanks, Todd.
Operator (participant)
Our next question is from the line of Amit Mehrotra. Please proceed.
Amit Mehrotra (Managing Director and Senior Research Analyst)
Hey. Thanks so much. Good morning, everybody.
Judy R. McReynolds (CEO)
Hey, Amit.
Amit Mehrotra (Managing Director and Senior Research Analyst)
Just on the new corporate structure, I understand the cost opportunity, and that makes sense. But I just imagine that there's a good amount of revenue synergies as well. And just wondering if you could talk about that.
And specifically, I guess, how much, I guess, revenue opportunity do you think has been left on the table, if you will, as a result of the more decentralized structure? And all I'm trying to do is just get a sense of the prospective growth potential for the business just from the realignment. Thanks.
Judy R. McReynolds (CEO)
Good question. We have progressed in our percentage of accounts that do business with more than one of our companies. I mean, that's kind of the way we've characterized that in the past, and it's about 24%. We would like for that to be about 50%.
And we think that based on the market opportunity that's out there, that we can certainly accomplish that. Having a unified sales team and a single view of the customer is really going to help us with seeing that opportunity the best way possible.
And so we've got a system that we're deploying that's actually already deployed at Panther, but it will continue to be deployed for the remainder of our salespeople that creates a lot of visibility on those customer connections.
We really want to capture all the interactions that we're having with a customer so that we can better work with them, partner with them to grow our business as their business grows. And so we feel like the coordination of all that within one sales team is easier for us and more streamlined for us than it is working across the silos that we currently have today.
Amit Mehrotra (Managing Director and Senior Research Analyst)
Right. And do you think the, I mean, the cost payback is obviously immediate. How long do you think some of that incremental revenue growth opportunity would take to be realized after this realignment takes effect?
Judy R. McReynolds (CEO)
Well, I think it will be a number of years for us to realize the full opportunity. But I think what this structure does is accelerate our ability to accomplish that. And some of the things that I'm talking about in terms of systems and visibility and that sort of thing, it will take us a few months as we enter into 2017 to get to that.
We see a lot of potential there. But we do have some work to do on the system side to get everything in terms of that one view of the customer visible and workable for us as a company. But we see that as a great opportunity, so I'm glad you brought that up.
Amit Mehrotra (Managing Director and Senior Research Analyst)
Yep. Thank you for that. Just let me just ask one question on the asset-based side of the business. And I was hoping you could just educate me, actually, a little bit in terms of how the LTL business responds to some tightening on the truckload side and talk about past cycles.
Because the question I have is that if this sort of better truckload fundamentals actually takes hold at some point and there is a spillover into the LTL side of the business, if and when that does occur, can you just talk about sort of the lag time? And is it immediate? How long does that take to actually show up on LTL?
And then when that does happen or if that does happen, given the optimized cost structure or the continued progress you've made on the cost structure, where do you think the incremental margins or the contribution margins can go on the sort of prospective volume growth? Thanks.
Judy R. McReynolds (CEO)
Well, great questions. On the truckload tightening side, I think we would begin to see that as it was happening because we have really seen an impact on our volume quote shipments being weaker as we've gone through this year.
So there would be some immediate benefit there. But as the few months go by after truckload tightens, I think what you see is truckload carriers are less interested in handling larger LTL shipments. They're less interested in stop-offs and appointments. And those are all things that we do very, very well.
And you can clearly see, because of the weight-per-shipment issue that we've had this year, that we've had an impact in that area. And this is something that happens in cycles. It's something that has happened a number of times in my career. And certainly, whenever truckload tightens up, that's a much better answer for us.
It helps us with pricing, profitability on given accounts and on our spot business. We, I think, enjoy a network that works and is resilient in that arena too. I mean, if you think about the value of having 245 locations and city drivers that are out on the street every day picking up shipments, you think about a half-full trailer versus a full trailer.
There's a lot of efficiencies that can come with a better economic environment, better capacity environment. Yet, our network that we deploy each and every day is resilient, and it's there, and it's available for those customers.
So it tends to have a lot of value in that kind of a situation. We're looking forward to that happening. We also think perhaps whatever happens with capacity on the ELD side, as a result of the implementation of that set of rules, is going to benefit us, so.
Amit Mehrotra (Managing Director and Senior Research Analyst)
Amit, thanks a lot.
David R. Cobb (CFO)
Thank you. Bye-bye.
Judy R. McReynolds (CEO)
Yep. Thanks.
David Humphrey (VP of Investor Relations)
Thanks a lot.
Operator (participant)
Our next question is from the line of Jason Seidel. Please proceed.
Jason Seidl (Managing Director)
Oh, hey, everyone. Hope you guys are all well.
Judy R. McReynolds (CEO)
Hi, Dave.
Jason Seidl (Managing Director)
Wanted to focus on two quick things. One, you guys talked a little bit, obviously, that you've been very acquisitive on the non-asset-based side. Is there any way you could break out the acquisitions and talk about organic growth?
Judy R. McReynolds (CEO)
Well, the shipment growth on the organic business was about 14% for the quarter. I'm talking about truckload.
Jason Seidl (Managing Director)
Truckload brokerage.
Judy R. McReynolds (CEO)
Truckload brokerage, logistics. It's in ABF Logistics, those shipments.
Jason Seidl (Managing Director)
Okay. That was that. And I'm assuming because of rates, the revenue is probably much, much lower than that.
David R. Cobb (CFO)
Yes, correct. Revenue per shipment was down probably 5% or so.
Jason Seidl (Managing Director)
Okay. That's fair enough. I guess to help us better understand some of your commentary about October, can you remind us what your monthly comparisons were in the Q4 of last year for tonnage and revenue?
Judy R. McReynolds (CEO)
Yes, they were. Go ahead, David.
David R. Cobb (CFO)
I've got the tonnage. You want it by month, Jason, I guess, October?
Jason Seidl (Managing Director)
By month would be great. Yeah.
David R. Cobb (CFO)
Sure. October last year was down 5.8%. November was down 5.2%. December down 3.6%. So some easier comps. And so for the quarter overall, down 4.8%.
Ken Hoexter (Managing Director and Senior Equity Analyst)
That was tonnage? That was tonnage?
David R. Cobb (CFO)
Tons per day.
David Humphrey (VP of Investor Relations)
Okay. Perfect. Yeah. Jason, that October, November, those were the two worst months of the year last year.
Judy R. McReynolds (CEO)
In terms of year-over-year?
David Humphrey (VP of Investor Relations)
Okay. Perfect. Yeah. Yeah.
David R. Cobb (CFO)
In terms of year-over-year.
David Humphrey (VP of Investor Relations)
In terms of year-over-year decline.
David R. Cobb (CFO)
Yeah. Those numbers, that's what I'm talking about.
Jason Seidl (Managing Director)
Fantastic. That's all I had. I appreciate the time, as always, everyone.
David R. Cobb (CFO)
All right. Thank you.
Judy R. McReynolds (CEO)
Thank you, Jason.
David Humphrey (VP of Investor Relations)
Okay. I think we've got one more in line here, maybe a follow-up.
Operator (participant)
We have a follow-up question from the line of David Ross. Please proceed.
Judy R. McReynolds (CEO)
Okay.
David Ross (Equity Analyst)
Yes. Just a real quick one. Average length of haul in the Q3 versus last year?
David Humphrey (VP of Investor Relations)
Length of haul, how about 1,040? It was 1,025 same time last year, so up about 1.5%.
David Ross (Equity Analyst)
Excellent. Thank you.
Judy R. McReynolds (CEO)
Thanks, Dave.
David Humphrey (VP of Investor Relations)
Okay. Thanks, Dave. Okay. All right. Good deal. Thank you a lot, James. Well, this concludes our call. We appreciate you taking some time to spend with us this morning, and we will see you next time. Thank you very much.
Operator (participant)
Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you.