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Executives

David Humphrey - Director, IR

Robert Davidson - President and CEO

Judy McReynolds - SVP and CFO

Analysts

Jason Fedo

Tom Wadewitz - J.P. Morgan

Jon Langenfeld - Robert W. Baird

Edward Wolfe - Wolfe Research

Justin Yagerman - Wachovia Capital Markets

Ken Hoexter - BAS-ML

Tom Albrecht - Stephens, Inc.

David Ross - Stifel Nicolaus

Art Patfield

Arkansas Best Corp. (ABFS) Q4 2008 Earnings Call January 29, 2009 11:00 AM ET

Operator

Good morning. My name is Klea and I will be your conference operator today. At this time I would like to welcome everyone to the Arkansas Best Corporation Fourth Quarter 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions). Thank you, Mr. Humphrey, you may begin your conference.

David Humphrey

Welcome to the Arkansas Best Corporation fourth quarter 2008 earnings conference call. We will have a short discussion of the fourth quarter results then we will open it up for a question-and-answer period.

Our presentation this morning will be done by Mr. Robert A. Davidson, President and Chief Executive Officer of Arkansas Best Corporation, Ms. Judy R. McReynolds, Senior Vice President, Chief Financial Officer and Treasurer of Arkansas Best Corporation. We thank you for joining us today.

In order to help you better understand Arkansas Best Corporation and its result, some forward-looking statements could be made during this call. As we all know forward-looking statements by their very nature are subject to uncertainties and risk. For more complete discussion of factors that could affect the company's future results please refer to the forward-looking statement section of the company's earnings press release and the company's most recent SEC public filings.

We'll now begin with Ms. McReynolds.

Judy McReynolds

Thank you for joining us this morning. Let me begin by saying that we are not pleased with these results and we are working diligently to correct them. Since ABF first experienced significant tonnage decline, 28 months ago, we have execute extensive tact to future business level to dictate them.

Later Bob will give his thought and perspective on our recent performance and provide more specific details on the actions we have taken to respond to the current recessionary freight environment. But now I would like to cover the details of our results for the fourth quarter and full-year of 2008.

Our fourth quarter 2008 revenue was $391 million representing a decrease of about 14% per day compared to last year. Our next loss for the fourth quarter was $0.44 a share compared to net income of $0.54 a share last year. Our results for the quarter reflect further market losses on the cash surrender value the executive life insurance policies of $0.08 a share.

In addition, our quarterly results were reduced by $0.17 a share as a result of ABF RPM initiative, the comparative bigger for last year was $0.09 a share. For the full-year of 2008 Arkansas Best had revenues of $1.83 billion which is slightly lower than 2007 revenue.

We earned $1.15 a share this year versus $2.26 the share in 2007. Our full-year results reflect cash surrender value market losses at $0.14 a share compared to market gain of $0.07 a share in 2007. As a result of our RPM initiative our full-year 2008 earnings per share figures were reduced by $0.54 a share and our last year’s EPS was reduced by $0.37 a share.

Our effective tax rate for 2008 was 41.6% which is well above the 37.4% rate we had in 2007. The market losses on our life insurance policies had the effect of increasing our tax rate. Also our 2007 tax rate was lower than a typical year because during that period we had investments in tax exempt auction rate security.

We exited those investments in January of 2008. Our non-union pension was impacted by the stock market, declines during 2008. We were fortunate that going into 2008 our plan was over 90% funded on an ABO basis. On two different occasions during 2008 we made voluntary tax deductible contributions to our plan. These contributions total $25 million. Our plans suffered investment losses of approximately $41 million which equate to 23% in losses for the year.

Considering the impact of market losses and the offsetting the impact of our contribution, at the end of 2008 our plan was 83% funded on an accumulated obligation benefit basis. Arkansas Best operating cash flows for 2008 were $105 million including depreciation and amortization of $77 million. Our net purchases of property and equipment totaled $42 million for the year; we did not purchase any treasury stock during 2008. But we continue paying our dividends on common stock of $15 million.

The full details of our get cash flow can be found attached to our press release. We finished 2008 with the strong financial position. At year-end, our cash and short-term investments totaled $219 million. We had minimal debt and our stockholders’ equity of $625 million.

Our cash and short-term investments currently reviewed in government securities funds and FDIC insured certificates of deposits. In 2008, our total pre-tax return on this investment was 2.8%.

And now I will move on to ABF results for the quarter, ABF reported fourth quarter revenues of $375 million which is the decrease of about 14% per day compared to last year. ABF tonnage declined 11.5% per day during the quarter. ABF’s fourth quarter operating ratio was a very disappointing 104.0 compared to the 95.5 in the fourth quarter of last year.

RPM added 1.8 points to our fourth quarter OR, and that compares to close of to a point on the OR in last year’s same quarter. For the full-year ABF reported revenues of $1.76 billion which is slightly less than 2007 revenue. ABF total tonnage per day in 2008 decreased 4.2% versus last year. And ABF full-year 2008 OR was a 97.2 compared to the 95.2 in 2007. RPM added 1.3 points to our 2008 operating ratio compared to the addition of about a point on the OR for 2007.

And now I will turn it over to Bob for his thoughts about our quarter.

David Davidson

Thank you, Judy, and good morning everyone. Our company is poor fourth quarter, results in the fourth quarter and full year reflect the impact of the worse quite recession in my 37 years in this industry. Tonnage declines accelerated throughout this month of the quarter and this decline combined with a very competitive pricing environment definitely heard our results.

Every economic indicators I have seen points to sever decline in almost every sector of our nation’s economy, the ISM manufacturing index, is that a 26 year low, the tonnage weighted industrial production index has been negative for the past two years and its steadily decline throughout 2008, [Hunt] sales we are their lowest point in 17 years and housing starts were the worse they have been since the government began maintaining the records 50 years ago, consumer confidence is also added slowest point, since first recorded in 67.

Nevertheless, the current operating environment is what it is? And no one around here is willing to explain the economy and accept these kind of results. We are committed to making the changes necessary to align the cost of ABF freight heeling network with the available business levels and the making profit on the business that we handle.

Shortly after ABF first experienced dramatic declines in business during the fourth quarter of '06, we will began taking the necessary actions to directly respond to the ongoing recessionary business environment. During month of 2008, how long our business seen to bottom out and we were gaining traction in our regional markets.

However, beginning in September in continuing through December our freight levels took another plunge downward. In response we began to reduce expenses again while maintaining service to our customers. A portion of these actions took place widen the fourth quarter and throughout this January. The reduce costs associated with those changes are just beginning to positively impact to our company.

I would like to just briefly detail, the steps that we have taken. Since the fourth quarter of '06 through the fourth quarter of '08 there is been a cumulative 18% reduction in the number of ABF employees, including approximately 1100 that occurred in the fourth quarter of '08. For the first time since July of 1980 we have reduced employee positions in the corporate office.

Half of our overall employee reductions for the past two years occurred in the fourth quarter of '08. In addition, we have reduced employee count by another 350 this month in January of '09. We regret the impact of these reductions on our employees and the families. Nevertheless, we know that we have an obligation, especially in these unprecedented times to maintain the viability and competitiveness of our company.

Our freight reductions include a 14% decrease in road tractors and 9% decrease in road trailers for planning on additional tractor and trailer reduction later this year. Closure of facilities and consolidation of various service areas throughout the ABF network have improved efficiencies and lower cost and most cases these changes actually improve our transit times to smaller markets.

In January, we realign the structure of ABS field management organization to 10 nationwide regions down from 12 regions, we eliminated four field officer positions, other employee positions and the associated overhead cost.

We instituted health insurance premiums, we have increased medical deductibles for our non-union employees, cost of living and merit pay increases for non-union employees have been eliminated and obviously we have eliminated pay increases and annual incentive payments to the company executives.

And finally companywide travel limitations and controls of other expenses have been initiated or extended. Drilling down ABS fourth quarter results were impacted by several factors. Just as we saw in the fourth quarter of '06 when our freight recession first began, our fourth quarter of '08 business levels fell rapidly. October tonnage levels were worse than those that we experienced in the third quarter and then the pace of November and December freight declines were approximately twice as sever.

As I described earlier, we have continued to reduce our cost structure and response to the rapid price decline, however, these successive reduction in labor and system resources is more difficult unless effective, especially since we are committed to maintaining service levels. In the fourth quarter, our increased operating ratio reflected the fact that we were unable or not willing to the service to reduce costs fast enough to keep up with the pace of declining revenue and freight levels.

Our fourth quarter results were also heard by the yield effect that declining fuel surcharges in ABS limited ability to time needed base right increases. Our build rate for 100 weight in the fourth quarter decreased 3.6% compared to last year, and for the full-year it increased by 3.4% due to the high fuel surcharge levels from mid-March through September.

The fuel surcharge peak at 38.5% in mid-July of '08 and then begin a dramatic and steady decline, overtime lower fuel surcharge level should improve ABS ability to get best freight rate increases, we had limited success, we need broader and more effective results obviously. We did initiate a general rate increase on about 45% of our business on January 5th and the initial results were encouraging.

For the remainder of our business including contracts, the base rate increases typically require individual discussions with the customers and that takes time. In addition, despite the automatic rapid and steady decline in fourth quarter fuel surcharge levels that declining business levels and the competitive pricing environment continue to make it difficult to obtain the needed base-rate increases.

During a sever freight environment like we are experiencing now, it’s a struggle to fully cover annual cost increases with commensurate yield increases and in the fourth quarter, we did that do so. Until the economy improves and industry pricing level strengthen ABF will strive to maintain its traditional superior service and overall value doing so with fewer company resources. We will continue to push for price increases to cover ongoing cost increases and we will probably have to walk away from some business that isn't good for ABF even in this downturn.

During this challenging time, ABF remains firmly committed to its RPM regional freight initiative, the abundant opportunities in the regional freight market remains the most important key to ABS long-term growth especially as a long-haul market weakens in a relative sense. Regional shipments are important sources of new business in the current environment and there is an important component of our full service coverage in the future.

Despite the adverse start-up effect the regional operations having on our margins, we believe that organic deliberate entry into this essential market benefits our customers, employees and shareholders. I always like to mention some positive things going on at ABS, and in 2008 ABF continue to excel in many of the value added areas that always distinguished us in the minds of customers across the country.

During the year ABF further reduced its low cargo claims ratio below that at 2007 and you may remember that 2007 was the best level in over 25 years, we think the LA level was the best level in the last 30 years. ABS ratio of road and city accidents per mile declined again this year would actually dropped by 11.4%, which I think is remarkable. Our costs associated with workers’ compensation third party, casually client were below historical levels and we have had year-over-year reductions steadily in those.

ABS sales in information technology group were externally recognized and awarded best in class. And finally I am proud to say that earlier this month two of ABS finest drivers were named as captains of the 2009 and 2010, America’s road team by the American Trucking Associations. Paul Gattin, an ABF city driver from Arkansas and Ben Saiz, an ABF road driver from Estancia, New Mexico were the latest ABF drivers to receive this support and industry distinction.

These were a few examples of important things that differentiate ABF during this difficult period. There are also tangible evidence that ABF continues to exhibit commercial excellence performed to high standard even in a period of business declines.

Finally, I would like to mention the fact that we have engaged the services of an advisory firm to help us conduct the strategic planning review in order to identify potential acquisition candidates for investment outside of ABF. Economic times like these often present opportunities for companies like ours were strong and stable financial positions and available cash resources.

Our traditional approach to new marketplace opportunities and strategic initiatives is to be diligent and deliberate in identifying and executing on our best available options. And this current process will be no different. We expect it to resolve in an investments that strengthen our value proposition, enhance our solid financial foundation and maximize overall shareholder value.

Now, I would like to Judy finish up with some additional financial information.

Judy McReynolds

I will wrap things up with the few areas to have an impact on our 2009 results and cash flow. We anticipate our 2009 net capital expenditures to be within a range of about $45 million to $50 million including road and city equipment replacements of about $40 million. We expect our 2009 depreciation and amortization to be about $75 million.

With respect to our non-union pension plan were currently considering additional voluntary and tax deductible contributions about $15 million in the first quarter. As a result to the investment losses I mentioned before, our non-union pension plan expense for 2009 it could be twice as much as 2008 pre-tax expense of $10 million.

Just as a reminder, this plan was closed to new participants beginning on January 1, 2006. At that point, we began providing benefits for new participants under a defined contribution plan.

Last item I will mention is our 2009 effective tax rate, we anticipated it will be at least 42% and perhaps higher depending on the pre-tax income levels we experiences in 2009.

And now I think we are ready to take the questions.

Robert Davidson

Klea, I think we are ready to take this questions, I just want to mention that we had some recent issues with getting everybody in so we are going to try to kind of limit everybody about five minutes no more than five minutes. But Klea I think we are ready for that.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Jason Fedo.

Robert Davidson

Good morning, Jason.

Jason Fedo

Good morning. Good morning, everyone. Sorry about that, I had to switch on over to pickup the headset there. Let me go to one of your comments on the acquisitions. You guys talk about it for a little bit, but this is first time I think you have announced that you engaged somebody. Are you strictly looking at LTL assets or might you go beyond the LTL universal look at brokerage operations and what not?

Robert Davidson

We are looking at the broad field of transportation distribution and logistics. We are going try to stay in industries with some adjacencies something that where we can add value. But we have widened at this point.

Jason Fedo

Okay. That’s fair enough. And I apologize because I missed been in your call because another one ran overlapping. Can you give us an update on the tonnage trends to the quarter? And also what you are seeing in January?

Judy McReynolds

Jason, our comments indicated that in October when we first saw the drop it was about a 7% drop. And then November there was an additional drop and December was weaker than November. What we are seeing so far in January, I think we would characterize the slightly weaker than what we saw in December.

Jason Fedo

Slightly weaker than December, okay. But the offset between weather impacts and also proper use your comps in January does that make it about to equal December then?

Robert Davidson

Certainly there have been some weather impacts in January but it's really too soon to see how much. I don’t expect them to be actually material difference in what we were in January of last year. In the fourth quarter weather really didn’t effect this much about the same as towards previous year.

Jason Fedo

So, you are saying net January is underlying just a little bit worse in December?

Robert Davidson

Certainly the tonnage levels are little worse. It might be affected by weather but it's really [efficiently low].

Jason Fedo

Okay, that’s fair enough. Also on the pricing side, have you got any plus in the market type pricing is deteriorated as we move throughout the quarter especially given the tonnage declines that you are seeing?

Robert Davidson

I think it's fair to say that it did deteriorate some during the quarter. There were some positive signs. We were able to get 2.5% in the full quarter on a substantial number of expiring contracts before crossing agreements. As I indicated earlier, the general rate increase affect is about 45% of our business. Went into effect on January 5 and the initial results were good, but outside of those it's competitive class in environment.

Another factor that did affect us and will affect the yield that you look at in addition to the following field surcharges, is the fact that I’ll link the wholesale again and our weight per shipment also increased. And we also had substantial involvement in the spot pro market and some prices had were pretty aggressive. So, all of those affected the color of our yield, but just on a qualitative basis I certainly would agree with the idea that the pricing environment ended the year more competitive than it started.

Jason Fedo

Okay. And on the link to haul, is there are any reasons before falling off because we are seeing as a few other carriers as well.

Robert Davidson

Well, the reason for us is that two things. First of all, I think as I indicated the long haul markets are relatively weaker and the regional markets particularly you see imports falling off. I think more than that you see the fact that we made a substantial investment in the regional market. We have dropped a day of transit times and about 40% of our lines most recently in the two-day markets and that’s starting to have a little bit of traction. So, we are gaining share in that regional market. Naturally closing our link to haul has declined as it's done every quarter since we started the process.

Jason Fedo

Make sense. I appreciate the time as always.

Robert Davidson

You're welcome, Jason.

Operator

Your next question comes from the line of Tom Wadewitz.

Judy McReynolds

Good morning, Tom.

Robert Davidson

Good morning, Tom.

Tom Wadewitz - J.P. Morgan

Good morning, Judy. Hi, Bob. You talked a lot about cost actions its seems they are looking pretty aggressive and it's seems pretty appropriate given the circumstance. But I am wondering if you can give us a little bit of perspective for how to think about the run-rate impact of that? Because it sounds like some of it's spread over the last two years. And also how sufficient that is in offsetting the operating ratio pressure that obviously happening from the weak tonnage and pricing?

Robert Davidson

Sure, Tom. I think you heard me say that about half the reductions we made took place in the fourth quarter and I think it's important to note that they didn’t started beginning of the fourth quarter, they took place during the quarter. So, we did not in the fourth quarter see the full impact of some pretty substantial changes that we have made. And then we also have made some further changes in January.

I think it's also important to note that the fourth quarter includes some severance payments which muted the impact in the fourth quarter, but we will start to get the full impact in the first quarter and going forward. And I think you it's generally out of style not to roll those up as special charges excluding from our results. It's just kind of like we do with substantial costs that we were incurring in our regional market, which is part of our operation and they are in our results suppose we could have posted some better looking numbers by excluding the regional expense, by excluding our restructuring charges by what we have done to reduce our number of regions.

But at the end of the day, it kind of is what it is. And we have made some substantial changes in response to deteriorating environment. And I honestly expect the first quarter to be a tough quarter. We told last time on the call that the fourth quarter was going to be a tough and it was. I think the first quarter is going to be tough quarter also. But we are also going to see some traction from substantial changes we have made.

Tom Wadewitz - J.P. Morgan

Can you give us a kind of directionally what that severance number was?

Robert Davidson

I don’t have a way, it's a quantify. I am not sure it's very meaningful. I could just tell you that you will see more of an impact in the first quarter than you saw in the fourth quarter for all the reason I articulated.

Tom Wadewitz - J.P. Morgan

So, you don’t want to say whether that was a million or couple of million severance.

Robert Davidson

I guess what we could have done is rolled them up as special charges and excluding them, but we didn’t and I don’t have a number for you.

Tom Wadewitz - J.P. Morgan

Okay. Fair enough. If you look at pace of expense reduction and I am going to look at just excluding the supply and expenses line because I know that a lot of that feel, but if we exclude that line it looks like your expenses were down almost 7% operating expenses in fourth quarter. If you look at that in first quarter and let's just say that the tonnage ends up kind of similar year-over-year first was in fourth. Do you think that number will be down a lot more, I mean, is that operating expense ex-fuels that’s down 10% or 12%. This is still not, try to look at the given the cost reductions you were talking about?

Judy McReynolds

Yes Tom, we are always cautious about those kinds of detail whenever you got a changing environment and in addition to that. We really don’t give guidance and we think particularly in this kind of environment that would be really dangerous to do. So, what I would commit to you is we have looked at the cost structure changes that we have needed to make so far and it's a moving target. We could have further deterioration or we can have improvement in business levels and we would have to adjust. And so it would not be meaningful even if we try to estimate that now because things would change.

Tom Wadewitz - J.P. Morgan

I mean is it fair to think that some of these cost items came in later in the quarter so your pace of cost reduction should accelerate.

Judy McReynolds

Absolutely that’s the point I think Bob was trying to make with many of the headcount reductions were really rated towards the second half of the fourth quarter. And because that’s when we saw the additional drop in business and we had to react to it. And then in January there was even more. If you have the same base and you were looking at it in the future sure we will come down more.

Robert Davidson

A more cut job here, so we move on.

Tom Wadewitz - J.P. Morgan

That sounds good. Thanks for the time.

Robert Davidson

Thanks Tom.

Operator

Your next question comes from the line of Jon Langenfeld.

Judy McReynolds

Hi Jon.

Robert Davidson

Good morning, Jon.

Jon Langenfeld - Robert W. Baird

First, on the facility side, you made the comment about taking some of the facilities down and consolidating those. Can you just let me know how many we are looking out there?

Robert Davidson

It was less than 10 and typically what you are doing is you are combining facilities in smaller markets. You reduce some overhead cost, but also what you choose you are actually able to give better service. You have a little longer stand time on your pick-up delivery and that’s not something we have done in response to this environment. Those sort of changes go on all the time, but there were something less than 10 during the quarter.

Jon Langenfeld - Robert W. Baird

What does it take for you to have to meaningfully reduce your capacity? I mean if we are in an environment that drags out for another six months or twelve months or two year's. I mean at some point you look and say we have too much capacity we can’t get an acceptable return at these levels for the foreseeable future. So, let’s reduce our capacity footprint. I mean those conversations or thoughts that you have internally.

Robert Davidson

Obviously we have reduced the capacity in the sense that we have reduced our labor resources, we are reducing our freight size. In terms of terminal capacity that’s really not a meaningful portion of our total cost and those are the sort of resources that you want to maintain for a long time. So, I think the answer to you Jon, is we reduced, we made a lot of our fixed expenses variable and we have drawn our capacity down but at the same time we have substantial flexibility to ramp up this condition warranted.

Jon Langenfeld - Robert W. Baird

And if we were at kind of this new paradigm of the tonnage levels we were at here, and the economy is bad for a couple of years. Can you give the business to the point or you can make a fair return and if we are in this environment for multiple years.

Robert Davidson

Well I think that we are well on our way to doing that in terms of rationalizing. I would point back to when they started in the fourth quarter of '06 and we were surprised when business fell off and stayed off and as you recall during the fourth quarter of '06 we made some pretty aggressive steps during the quarter now it's beginning of the quarter but during the quarter it's a rationalized cost and if you look back at the first quarter of '07 you saw that those things had some traction. I think you have a similar situation here. When we look back to us that around the middle of the year that business has bottomed out and we were gaining share in both long-haul and the regional business and then we had this September, October, November slide we are reacting to that. It’s not going to be rosy in the first quarter, it’s going to be a tough quarter, but we are taking substantial steps to the aggressive environment and I am satisfied with the pace of what we are doing.

Jon Langenfeld - Robert W. Baird

Again I am not thinking about the near-term here, I am just thinking about over multi-year period. Is that something that you would look to intensify other levers I guess that should be able to pull here if you became convinced that this was a multi-year issue?

Robert Davidson

Yeah Jon I like the part of the long-term multi-year view because as you know that’s the way we look at things and while we are going to take some steps to rationalize our cost, we are also going to continue to maintain sort of this, because this too shall pass and this environment will improve and we are going to be there and we want to have a customer reputation for good service, low clients and we are going to maintain the infrastructure to do that. We think that there is a lot of other things we can do in short run to make fix expenses variable, but we are also going to maintain service in our important regional market, for instance regardless of the freight that available.

Jon Langenfeld - Robert W. Baird

Thanks Bob.

Robert Davidson

Thanks Jon.

Operator

Your next question comes from the line of Edward Wolfe.

Robert Davidson

Good morning, Ed.

Edward Wolfe - Wolfe Research

Hi. Good morning. How are you doing?

Judy McReynolds

Good. How are you?

Edward Wolfe - Wolfe Research

Given the worsening demand and pricing and the weaker first quarter seasonally offset by all the measures you are taking. When you look at first quarter overall versus the 104 in the fourth quarter directionally should this be better or same worse how do we weight these things off?

Robert Davidson

Ed that looks suspiciously like (inaudible). We honestly don’t have the visibility to be confident giving you an answer.

Edward Wolfe - Wolfe Research

Okay, but I mean directionally without taking these measures and assuming December and January as you and everybody else has been saying worst than October and November. And fewer operating days and weather and all that, we would be worst than one of four you did not think that’s a fair statement.

Robert Davidson

I am not sure that’s true. I think you can look at, Ed, historical first quarters versus fourth quarters. I will just say that the first quarter of '09 would have been worst have we not taken the steps that we have taken and are taking.

Edward Wolfe - Wolfe Research

I understood. I mean did you just say that first quarter is seasonally should be as good as fourth quarter because I just look at first quarter over the last ten years and the first quarters have ranged from $0.14 to $0.41 and fourth quarters during that period have ranged from $0.36 to $0.90 to $1.15 so it seems like I might be thinking that they are wrong.

Robert Davidson

Ed, I appreciate the question but even carriers that used to give guidance or suspending guidance because of their lack of visibility and we share that view of the future. We don’t know what it’s going to look like. All we are going to do is take steps we are taking to mitigate the impacts of a weak credit environment. I am not in a position to be able to provide you even qualitative guidance.

Edward Wolfe - Wolfe Research

Fair enough. Can you talk a little bit about, you mentioned in the release the non-union pension. Rarely in the union pension, in relation to continued potential liability and withdraw our cost relative to the $825 million a year ago?

Judy McReynolds

Ed, what we know is that just from the information that was released during the year, is that Central States did have significant market loss across the significant amount of asset. We don’t have the end of the year information from them yet and it will be some time before we have it. But the important thing to remember is that this has no impact on the hourly rate that we contribute through the fund or any other multi employer fund? And there was some legislation that was passed at the end of the year that froze their status for instance Central States resident status and the associated rehabilitation plan that they have for a year.

And so it remains to be same what actions would be taken after that. During our contracted period due 2013 we know what we are going to contribute on an hourly basis. We don’t plan to withdraw so the withdrawal liability issues really irrelevant and if the problem is in the hands of the trustees it has been for all this time for them to solve the funding issue they have. And I think back in 2002 they have to take some steps and they will probably take similar steps that certainly we don’t know what's in their minds and can't promise anything but I think they know the responsibility there.

Edward Wolfe - Wolfe Research

Should we get in there when you filed the K?

Judy McReynolds

No, it wouldn’t. I don’t think it would be available to this since we filed our K at the end of February. So, they don’t have even a responsibility to report to you, so sometime at the end of March.

Edward Wolfe - Wolfe Research

Okay. But under the contract it's not your responsibility but it's the teamster or employees of your responsibilities, so they would loose, they would have to pay the if there is increase pension added there, wages and healthcare, but you are saying that's been suspended year?

Judy McReynolds

No, I am not, I am saying, there is a plan the trustees have to work out of their funding issue and that plan stays in place. And that included the increases that we pay in our hourly contribution for the period of the contract and other changes that they made. What I am saying is that they frozen in time because of this legislation.

Edward Wolfe - Wolfe Research

Okay. One last one then I will let someone have it. It seems like up until fourth quarter you guys were talking quite a bit a share from your big long-haul competitor who is not feeling this low financially. This quarter that's changed a bit and obviously demand gotten worse. I mean obviously something must have changed, are they any more aggressive on pricing is that the natural takeaway?

Robert Davidson

Ed, the numbers were marquee, but we got reason to believe, we gain share at least sequentially both in long-haul and regional. Thanks Ed.

Edward Wolfe - Wolfe Research

Thanks for the time. I appreciate it.

Operator

Our next question is from the line of Justin Yagerman.

Justin Yagerman - Wachovia Capital Markets

Hey, good morning.

Judy McReynolds

Good morning, Justin.

Robert Davidson

Good morning, Justin.

Justin Yagerman - Wachovia Capital Markets

Just following up on Ed's question on market share, you got a lot bids out there from everything that we have heard. I was curious how much you are participating in there and then I guess if you got any early indications as shippers maybe less willing to do business with financially riskier player, that maybe you see some market share wins in a bigger way in the first half of this year as people look to a more stable financial players to service their freight?

Robert Davidson

I think there is at least two things going on. One of them is that we are actually in consideration on more bids because of our regional capability. We honestly have now 50 state coverage and that makes us attractive to those shippers who have substantial regional business.

And I think it's fair to say that was a move among some companies, particularly larger companies to diversify their carrier base, seeing several indications of long spending carrier shipper relationships that have come under review and those were desire from shippers to prudently spread their freight across more carriers and we are benefiting some from that.

I think that clearly when people look at these times of uncertainty and they see our substantial balance sheet and frankly our reputation for stability and our ability and willingness to maintain service even in the downtown make us attractive to the large cross-sections of the shipper community actually expect the benefit from, if I didn’t I wouldn’t keep maintaining service but I think it's a positive for us.

Justin Yagerman - Wachovia Capital Markets

You sounded like you said that you have got fifty state coverage and RPM and may be I missed in earlier on in the call. Where are you guys in the rollout of that network and I guess relative to that when you talked about the increased drag on operating ratio in the quarter how much of that would you attribute to the operating leverage in the business versus how much is it incremental because you were may be expanding the footprint of RPM in the quarter.

Robert Davidson

Across the eastern two-thirds of the United State, our RPM is fully mature, we have in place the techniques and facilities and we are running the ones the process is heuristic, we might tweak it from time to time. We pretty much have in place. We did have like 168 lines in the west coast but we deferred action until we see a little firmer environment but in this scheme of thing that not only material to the overall process. So, when I talk about the fact that within one company we now have not only long-hauls but medium-haul and short-haul capability that’s really in place.

Justin Yagerman - Wachovia Capital Markets

Got it. So I guess along side of that that the deterioration in it was the increased drag from RPM was more attributable to the operating leverage of the business and so the expansion of it.

Robert Davidson

Well the fact that we are still running those lines right, Judy has a dollar amount.

Judy McReynolds

Well what I would say is we outlined in the release that we had 1.8 point effect in the fourth quarter of '08 versus about 0.8 in last year, that increase is really a couple of things but mostly one and that is the relative the second phase of the regional operation the two day service in the instance that we made, but it really began on September 15 and then the other thing is when you have weaker revenue levels it’s going to have more of an effect but that’s a minor impact relative to the phase 3 what we call phase three and a half which is our two day enhanced service.

Robert Davidson

We are actually seeing a little bit better load factor in those regional lines as we move through the year which I think is certainly not at what our aspiration level is on load factor but we are making progress.

Justin Yagerman - Wachovia Capital Markets

Okay. (Inaudible) decreased from the teamsters, you guys noted that you frozen wages and actually got rid of some people in the non-union side of your business, but I would imagine you were reluctant to take the kind of steps that your competitor had to in order to secure that wage decrease. As your thought process on that changed at all. Is that something that you may look to address if we have continuation of the current environment, or do you think that show something that you don’t want to go back and start renegotiating on?

Robert Davidson

Justin, you are correct, the IBT agreement not appropriate for our company and we will not be asking our contractual employees to approve that. Nevertheless the agreement leaves us with higher cost than our principal competitor in the midst of worst spread environment now time, so we are discussing our common concerns with the IBT and we are searching for ways to preserve jobs and grow rather than shrink our business but it will not be within in the context that the agreement that were obviously signed.

Justin Yagerman - Wachovia Capital Markets

Fair enough. And I guess one…

David Humphrey

Thanks.

Justin Yagerman - Wachovia Capital Markets

Alright. Thanks.

Operator

Your next question comes from the line of Ken Hoexter.

Ken Hoexter - BAS-ML

Good morning. Hey, Dave, Hey Bob, and Judy. I just want to dug into this advisory firm just the concept just a little bit more. I just want to understand what your aim is? I know you talked a little bit about it, what you might look for but is this kind of use of cash being opportunistic, would this be supplement you look to sell potentially, or is this I just want to make sure when I get to another I guess Carolina example where you end up huge amount of freight board. I guess into mortal like creeper way ended up selling out of it a couple of years later. I just want to see what your thought process is through that?

Robert Davidson

Well, I guess given the fact that we have hired the advisory firm indicates our willingness to do this process carefully and deliberately and with lot of thought. And Ken you know our company and you know that we approach things in a careful manner, I would just point to our entry into the regional business, where we have done it organically and costs us $50 million or $60 million for something that’s actually critical to our future and its not something that’s going to put our company at risk.

This current strategic initiative and review is completely outside of ABF, we are looking honestly we had resources assembled in order to address a multi-employer pension issues in our contract negotiation, we were unsuccessful in doing that and but leave us frankly with a very enviable financial position in this environment, we are in no hurry to take steps to use that money, the money is not burning a hole in our pocket. But at the same time it is not the optimum use of our shareholder resources, we think we can invest those funds and businesses where we can add value and we are going to take a very careful and deliberate approach in examining those alternatives.

Ken Hoexter - BAS-ML

That’s great, good to hear. The CapEx is going up, but you talked about the potential for fleet reductions later in '09. Maybe just wrap up on what your thoughts on driving up CapEx.

Judy McReynolds

Well, its actually not much of the change from what we have for 2008 and we always like to give a range in the event that we have a real estate opportunity that we won’t take advantage of. But it just I think a reflection of really not an increased level of unit count it's more about the continuing price increases that you have to pay for your road tractors and your road trailers. And actually in some cases we are fewer units the last year but there are just a little bit more expensive.

And then also we always like to be realistic upfront with what we anticipate getting on the used equipment sales that we have typically we do better than that. But I think the way I see our '09 expenditure level is very comparative to 2008 and actually from historical comparison much lower than we have had in the past. So, we feel that’s worth it because of our business level and just being conservative and prudent. And we are able to do something that don’t increase the total ownership cost of the company but are the right thing to do in this kind of environment.

Robert Davidson

Again I think. We have seen every year in my history for our actual CapEx that’s the year has been less has been to low end of the range of what we have projected. And that’s typically because of the real estate opportunities. We are always looking for to improve real estate and believe or not everyone wants the tracking terminal in their community. So, we are always open to buy things at the right price but typically we don’t get everything we want.

Ken Hoexter - BAS-ML

Great. One more Dave if I may would just be the last thing is, Bob I don’t know if you mentioned it before but did you breakout the percent of regional versus long-haul moves?

Robert Davidson

We have actually, we were used to talking in terms of 800 miles but now because of our new expanded regional capability we are now breaking that out as a 1000 miles. And in the fourth quarter of '08, 57.1% of our tonnage was less than 1000 miles a year ago in the fourth quarter of '07 that was 56.2%.

Ken Hoexter - BAS-ML

Great. Thanks so much for the time.

Robert Davidson

Thank you, Ken.

Judy McReynolds

Thanks.

Operator

Your next question comes from the line of Tom Albrecht.

Tom Albrecht - Stephens, Inc.

Hi all. Hey Judy, Bob, David everybody. On the headcount changes in that did any of that apply to the RPM or is that all on more the traditional business.

Robert Davidson

Well the RPM is really kind of folded into the whole organization.

Tom Albrecht - Stephens, Inc.

Right.

Robert Davidson

As I told you a couple of quarters ago we really get into the point for just LPL and part of the beauty of the things we are doing is that operation is becoming completely integrated and (inaudible) with rest of our operation. So, I will say that we are achieving productivity increases in both the long-haul and the regional areas as well. So it's just kind of across the board.

Tom Albrecht - Stephens, Inc.

Okay. I did know if you separate because you are able to give us some RPM P&L profitability for a change so, that’s why I asked the question.

Robert Davidson

We probably never do that because again we don’t view the regional as a separate market. We view it as a filling out of our nation-wide LTL service offering.

Tom Albrecht - Stephens, Inc.

Will 10-K have any details on sort of the breakdown between severance cost and other restructuring cost because I think we all feel like we are still guessing, particularly as we look at the first quarter, the possibility of a loss exists but partly because of some of these extraordinary cost items.

Judy McReynolds

Tom we the severance cost Bob mentions that because there were some dollars there. They really weren't material, so they are probably is not going to be much of the discussion or breakout of those. As we don’t here so we don’t have in the 10-K but I think for the point that was be made is the full effect of the wages and fringe benefits associated with those people really wasn't fully reflected in the fourth quarter and will be reflected in the first quarter as well as the additional headcount reduction that were made in January.

We feel like that we need to outline for you the actions that we have taken. We build a better appropriate and in line with the business level but we are also hesitant to try to put a number on that because it’s changing and will change as we go through the first quarter and so we don’t want to really position it as something that is unusual or one-time because it’s an ongoing effort to try to address our business level.

Tom Albrecht - Stephens, Inc.

I know you don’t give guidance but do have an ability to at least tell us guys you need to be modeling a modest loss or we will be back in the black. I know this is a big target to be shooting at here.

Robert Davidson

Yeah Tom I will just say again. Those carriers that used to give you guidance have stopped doing it and there is a reason for that. This is an environment that’s shifting and we would be just extremely reluctant to even give you directional guidance on that.

Tom Albrecht - Stephens, Inc.

Okay. And last question in light of the fleet reduction what were your thoughts as you went through that process because you know there is vulnerable capacity out there and it’s not just located in Kansas City but there is others. If freight were to remain bad enough for long and fall sudden, you might finally have a supply story in the less-than-truckload arena and yet you have taken out supply and might miss the opportunity to take advantage of that. What were the discussions you had internally that lead you to okay, we are going to shrink supply.

Robert Davidson

Well, first of all we have the ability to react quickly. Some of our fleet reductions are held for sale or is part and available and it's available for sale during the year or so. We have the ability to react quickly. I would point back to 2004 when things changed in the truckload business and push the lot of freight our way. When you saw us react really quickly to absorb that business, and we got lot of levers to pull and increasing capacity and I can tell you it's whole lot easier to increase capacity than it is to decrease, and so we are confident that we can take advantage of the environment if there is something significant were to happen and it's also true that our rail usage is running about 10% of our total miles. We could go up to 26% of our total miles in our heart beat. So we just got so many ways to deal with capacity, and we think it’s prudent to take the steps we are taking now knowing that we do have that rubber band capability.

Tom Albrecht - Stephens, Inc.

Thank you, guys.

Operator

Your next question comes from the line of David Ross.

David Ross - Stifel Nicolaus

Good morning everyone.

Judy McReynolds

Hi, David.

Robert Davidson

Hi, David.

David Ross - Stifel Nicolaus

First of all I guess it suppose to be nice to be able to operate for 104 in next couple of years not have to borrow any money from the bank when I know the topic all there?

Robert Davidson

Listen that I would certainly never use a word nice in the same senate as 104. I just want to say it's a tough environment and we are taking this really seriously but financial stability and our experience of our employee team means that we can do so without panic, but we are deliberate we are serious about it.

David Ross - Stifel Nicolaus

And you retain advisory firm but is share buyback still on the table or increase dividends to the use of the cash balance in the near-term or is cash kind of stay where it is, and so there is some strategic option.

Judy McReynolds

David, I think part of the process, that you go through whenever you fully analyze your alternative includes the opportunity to buyback shares or to adjust your dividend level increase your dividend level than and those are certainly point that you evaluate against any other alternative that you have. And we would continue to do that as we have now.

David Ross - Stifel Nicolaus

And then you mentioned that the eastern two-thirds of the RPM is mature now, even tough as environment because it still are relatively small piece of the company with tonnage up year-over-year eastern two-thirds, or is it down?

Robert Davidson

We think we gain share both in the long-haul and the regional, but I think you can look at our overall tonnage declines. And when you look at the statistic I gave you about freight under 1000 miles, I can see, we had losses throughout the country but on a relative sense reasonable stronger.

David Ross - Stifel Nicolaus

Okay, good down but better than marketing. Can you talk a little bit about average age of the road fleet, the PMD fleet now and where the trailer stands?

Judy McReynolds

David, our road tractor fleet is about 22 months old and our trailers are about on average seven years. And so those are in good shape, really in pretty good shape as far as what we try to target.

I have mentioned to you that we said before, our trade cycle for road power can move between three and four years without much of an effect on total ownership costs and so we to have that labor to use and we do use it. And we currently are looking at maybe a slight increase in the average age, but again it doesn’t increase our total ownership cost for the company, and we feel like our trailer fleet is in good shape.

Robert Davidson

One thing that we point out to is that we have reduced our total miles and so probably average age is increasing. What is more important on that equipment is a total miles and it's not recruiting the miles per month as it would have been two year ago.

David Ross - Stifel Nicolaus

Okay, that’s helpful. Also the length of haul you said it was down year-over-year, can you gives us a number of haul for 4Q '08 versus 4Q '07?

Robert Davidson

Sure.

Judy McReynolds

It was 1,124 miles average haul versus the 1,149 last year at 2.2% decline.

David Ross - Stifel Nicolaus

And you mentioned that GRI went into effect January 5 was that 5.5%?

Judy McReynolds

It was 5.79%.

David Ross - Stifel Nicolaus

Alright. The last question I had is when you look at 2008 on the income statement. How much was I guess the gross non-union pension expense versus the gross union pension expense?

Judy McReynolds

You said growth or did you said gross?

David Ross - Stifel Nicolaus

Just a total.

Judy McReynolds

The total. Well, for our non-union pension expense we had a total of about 10 million for 2008. David, are you there?

David Ross - Stifel Nicolaus

Yes I am. Union was few hundred million.

Judy McReynolds

Well, our union pension is going to be, I am going to guess in the $120 million range but we will have that fully disclosed on our 10-K.

David Ross - Stifel Nicolaus

Okay. Thank you very much.

Judy McReynolds

Thanks.

Operator

Our next question comes from the line of [Art Patfield].

Art Patfield

Thank you, good morning everybody.

Judy McReynolds

Hi Art.

Art Patfield

Hey. Just one quick and you may have addressed this, I had to step out for a sec, but Bob if you look at all the cost initiatives you put in place in Q4 in the January. If you had those in place say October 1 of Q4 '08. Can you give us kind of an estimate of how that would have helped out the operating ratio in Q4.

Robert Davidson

No. I am sorry. I don’t have a way to model it for you. What we try to do is to share with you that we made some pretty substantial changes, but I don’t have a way to quantify that for you.

Art Patfield

Okay. I guess the reason for asking the question in that way is to gauge a sense of whether or not the cost cuts that you put in place are based on an assumption that you think things get progressively worse or stabilized here in the next couple months or next couple quarters.

Robert Davidson

Art it's a fair question we have taken the steps in response to the current environment not in anticipation of further declines. If we have further declines for some reason in the first quarter, we will take further steps.

Art Patfield

Great. Thank you, that’s all I have got.

Robert Davidson

Thank you, Art.

Judy McReynolds

Thank you, Art.

David Humphrey

Klea,I don't know if there is anymore. We will take one more if there is.

Operator

Okay. We have a follow-up question from the line of Edward Wolfe.

Edward Wolfe - Wolfe Research

Hello

Robert Davidson

Welcome back, Ed.

Edward Wolfe - Wolfe Research

Hey, thanks, just trying to quantify some of these costs. When we look at the 1400 people that you have taken out, what kinds of people, what makes up the buckets of those 1450 people in the fourth and first quarter?

Judy McReynolds

Ed the vast majority of those are going to be dock workers and drivers.

Edward Wolfe - Wolfe Research

And what’s the good number for a wage and benefit for somebody in those categories.

Judy McReynolds

Well you know the wage on an hourly basis is going to about $23 an hour if I am remembering it right and their fringes are about $13 an hour.

Edward Wolfe - Wolfe Research

So these are union employees.

Judy McReynolds

The vast majority but that’s the vast majority of our employees in the company. Whenever, we have a reduction it’s the point to be relative to the groups involved and those are 70% almost 80% of our employees.

Edward Wolfe - Wolfe Research

But there have also been other reductions in the non-union. I mentioned four officer positions for instance.

Judy McReynolds

And we have some IT positions.

Edward Wolfe - Wolfe Research

Right. So it's a cross section. Okay and is there going to need to be a write-down for some of the equipment at some point.

Judy McReynolds

I am not anticipating that. We still have relatively good markets for selling our equipment. It’s a little faster than it was at the beginning of the year, but we posted gains in the fourth quarter and I don’t anticipate any different results going forward.

Edward Wolfe - Wolfe Research

Well conversely we see some better gains and some casual convent.

Judy McReynolds

Well I am not expecting really material changes in our experience there.

Robert Davidson

We do a pretty good job of setting salvage values on those.

David Humphrey

Thanks Ed.

Judy McReynolds

Bye Ed.

David Humphrey

That ends our call. We thank you for joining us this morning. We appreciate your interest in our Arkansas Best Corporation. Thanks a lot.

Judy McReynolds

Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Arkansas Best Corp., Q4 2008 Earnings Call Transcript
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