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Executives

R. David Humphrey - Vice President of Investor Relations & Corporate Communications

Michael E. Newcity - Chief Financial Officer and Vice President

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

Arkansas Best (ABFS) Q1 2013 Earnings Call April 30, 2013 9:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Arkansas Best Corporation First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, April 30, 2013. I would now like to turn the conference over to David Humphrey, Vice President of Investor Relations. Please go ahead, sir.

R. David Humphrey

Welcome to the Arkansas Best Corporation First Quarter 2013 Earnings Conference Call. Our presentation this morning will be done by: Ms. Judy R. McReynolds, President and Chief Executive Officer of Arkansas Best Corporation; and Mr. Michael E. Newcity, Vice President, Chief Financial Officer of Arkansas Best Corporation.

As most of you know, we're in the midst of negotiations with the Teamsters union with a new labor agreement with ABF. Because of the sensitive nature of these discussions and where we are in the process, we will give an update on the current quarter's results, but we will not be taking any questions on this morning's call. We hope you can understand our reasons for doing things a little differently this time. As always, following today's call, we will be available to speak with you to discuss the publicly disclosed information about our first quarter results. We thank you for joining us this morning.

In order to better help you understand Arkansas Best 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 risks. For a more complete discussion of factors that could affect the company's future results, please refer to the forward-looking statements section of the company's earnings press release and the company's most recent SEC public filings.

We will now begin with Mr. Newcity.

Michael E. Newcity

Thank you for joining us this morning. As you saw in the earnings release, Arkansas Best reported an overall net loss in a traditionally weak first quarter despite a strong revenue increase of nearly $80 million year-over-year that included revenue this year from Panther we purchased in June of 2012. Revenue was higher in almost every single business we operate including ABF. Our results also reflected encouraging revenue growth and improved operating results at many of our non-asset-based businesses. These companies continue to develop into an important part of our corporate strategy to serve our customers with a full array of logistics solutions.

Despite revenue and tonnage growth during the first 3 months of the year, however, our largest subsidiary, ABF, experienced first quarter operating losses that resulted from the industry high cost structure and limitations on operational flexibility under the current union labor contract. Union negotiations between ABF and the Teamsters, designed to return ABF to a path of profitability, are ongoing and the expiration of the current labor contract has been extended through the end of May. Later, Judy will give her thoughts and perspective on our recent performance and our opportunities for the future, but now I'd like to cover the details of our results for the first quarter of 2013.

Arkansas Best first quarter 2013 revenue was $520.7 million compared to $440.9 million last year. The first quarter 2013 net loss was $0.52 per share compared to a net loss of $0.71 per share last year. Our effective tax rate for the first quarter was a benefit of 42.5%. As I mentioned last quarter, tax legislation signed in early January of 2013 included language extending the tax credits for use of renewable energy and alternative fuels that previously expired at the end of 2011. The new tax legislation included retroactive fuels credit for all of 2012 that extends through the end of 2013. This year's first quarter includes the full year 2012 fuel tax benefit, as well as the amount of this tax credit actually earned in the first quarter. The full first quarter benefit of the fuel tax credit totaled $1.2 million in the first quarter, with approximately $900,000 of the total associated with 2012.

Moving on to ABF's results for the quarter. ABF reported first quarter revenue of $407 million, a per day increase of 5.2% compared to last year. ABF's quarterly tonnage per day increased by 6.7% compared to last year's first quarter. This included monthly, year-over-year tonnage increases of 6.3% in January, 6.9% in February and 7.2% in March. ABF's first quarter operating ratio was 105.5, the same as in last year's first quarter. ABF's total billed revenue per hundredweight was $26.88 versus $27.52 in last year's first quarter, a decline of 2.3%. As we have seen for sometime now, ABF's yield comparisons have been affected by changes in freight profile and account mix. ABF's total weight per shipment was 1,385 pounds, a 4.1% increase over the first quarter of 2012. ABF's average length of haul was 1,019 miles compared to 1,044 miles last year. This represents a 2.5% decrease in this metric.

In addition, LTL commodity class was down slightly in the quarter. Weight per shipment, length of haul and commodity class are the 3 biggest factors impacting yield changes, and in the first quarter, each of them had a dampening effect on revenue per hundredweight. During this year's first quarter, regional freight, defined as tonnage moving 1,000 miles or less, represented 60.5% of ABF's total tonnage, an increase of over 1% compared with the first quarter of 2012. In the first quarter, ABF's regional business grew over twice as fast as our traditional long haul business.

Through last weekend, for the month of April to date, ABF's total daily tonnage is comparable to the same period last year and somewhat below historical sequential tonnage trends when compared to March. We believe this is primarily related to firmer pricing actions we implemented beginning in mid-February and some slowing that is being reported than the overall economy. Any impact to business levels due to the ongoing labor negotiations has been negligible. April to date, total billed revenue per hundredweight is below last year, a little more than 2%, similar to what we experienced in the first quarter. On a sequential basis compared to March, total April to date yield has improved from the sequential trends we saw in the first quarter. This reflects the mid-quarter pricing actions that I just mentioned and that Judy will discuss shortly.

Revenues at our emerging non-asset-based businesses totaled $114 million, including first quarter revenue at Panther of $53 million. This represents about 22% of Arkansas Best total consolidated revenue. Revenue total for these businesses were highlighted by significant increases at freight brokerage, who's revenue increased by 82% and vehicle roadside and preventive maintenance for the first quarter revenue increased by 45%. Panther experienced a first quarter operating loss related to reduced demand for expedited services and the initial cost impact of investments made to enhance future growth. Panther's results also include $2.6 million of depreciation and amortization with $2.2 million length of the purchase price allocation of intangible assets from the June 2012 acquisition of the company. Each of the other non-asset-based companies had significant improvements in their first quarter operating results compared to last year. On a combined basis in the first quarter, all of our non-asset-based businesses produced EBITDA of $3.4 million versus very slightly negative EBITDA in the first quarter of last year.

ABF's union labor negotiations are in progress, and we don't yet know what the financial impact of its new labor contract will be. Therefore, ABF's 2013 levels of net capital expenditures and depreciation and amortization cost have yet to be finalized. In the next few weeks, as more clarity is gained on potential cost savings associated with ABF's new labor contract, these figures will be made available.

And now I'll turn it over to Judy for her thoughts about our quarter.

Judy R. McReynolds

Thank you, Michael, and good morning, everyone. Our first quarter results generally reflect the same trend that we saw in the second half of 2012. While our emerging non-asset-based businesses continue to grow and generate improving cash levels, ABF had continued losses due to its industry high cost structure. As you know, we are in the final stages of our contract negotiations with the Teamsters, and I'll talk more about that later. Heavy investment in our emerging businesses in 2012 is paying off and improving the way we go to market. We've invested in sales, customer service and information technology, and all of these businesses posted positive EBITDA individually and $3.4 million in total. As Michael noted, revenue from these subsidiaries was 22% of our total first quarter revenues, similar to the fourth quarter of last year.

Chart brokerage and management and our emergency and preventive maintenance businesses saw combined revenue gains of more than $16 million in the quarter, which was very encouraging. First quarter revenues at Panther were impacted by reduced demand for expedited services related to increased availability of industry capacity in the full load market. Demand in the market segment that Panther serves was mixed with strength in life sciences and high value segment, while the biggest weakness was seen in the auto segment. In addition, the government segment was down as declines in spending, particularly by the Defense Department, impacted the availability of those shipments Panther was able to handle.

Throughout the first quarter, Panther made ongoing investments in personnel and resources needed to enhance its ability to meet customer needs. Although these investments contributed to lower first quarter margins, they are expected to benefit Panther and our customers in the future. Panther has many experienced and energetic team members who are pursuing opportunities to grow the business and broaden the customer base. Panther and other Arkansas Best subsidiaries continued to enhance the logistics services they offer by developing interdependent working relationships that benefit customers, while capitalizing on individual company strength.

In the first quarter, our emerging subsidiaries continues their recent success of revenue growth and margin improvement. As Michael mentioned, our freight broker segment increased revenues over 80%, and once again, set a new record for total quarterly revenue. Our emergency and preventive maintenance segment also achieved significant revenue growth, and its first quarter operating margin improved nearly 3 points over the same period last year. Though year-over-year first quarter revenue in Arkansas Best Household Goods Moving Services business was lower, we were pleased to see that the operating margins improved by over 3.5 points. As the economy showed some improvement and comparisons were made back to the first quarter of last year when ABF experienced double-digit tonnage decline, ABF's first quarter 2013 total daily tonnage showed healthy improvement. However, although the amount of business ABF added during the quarter exceeded the amount that departed, the profitability of the new business was lower. In addition, depreciation charges associated with higher cost per equipment reduced profitability.

Changes in ABF's freight profile and account mix continued to be the dominant factor on total pricing statistics. When adjusted for fuel surcharges and these profile and account mix changes, ABF's first quarter pricing on its traditional LTL business declined slightly versus last year. During the quarter, we initially took a more cautious approach to pricing with a focus on account retention. In some cases, we delayed the timing of increases or pricing action or implemented operational improvements before initiating pricing increases. During the seasonally slow period, we thought to fill-in fleet lanes and available equipment capacity with additional freight. As the positive quarterly tonnage trends continued, we were able to strengthen our position throughout the latter part of the quarter to improve pricing on the individual accounts that we analyzed and priced. For example, the average increase we achieved on contracts and deferred pricing accounts during the quarter was 3.1%. That figure improved in each successive months of the quarter.

Our first quarter operating ratio remained unacceptably high and above ABF's historical level. As you know, the bargaining teams have agreed to 2 consecutive extensions of our labor contract, which have been set to expire on March 31. As negotiations continue, we are reminding our employees of the need to lower our costs in order to protect their jobs and retirement. ABF salary and wages and benefits total about 2/3 of revenue. This is simply not in line with the way our competitors operates and we are working to bring that down.

The Teamsters have publicly recognized our need for relief, which is encouraging. The bargaining teams have already achieved tentative agreements on various workload and flexibility issues that in the past have hampered our ability to adapt rapidly and meet customer requirement. At this stage, the bargaining teams have now turned to the economic proposals on wages help and welfare intention. We have proposed initial pay reductions to help lower our wage costs and request the contributions from Teamster employees to their health care coverage just as our nonunion people throughout the company already contribute. On the pension front, we have proposed the uniform contribution rates that would standardize our payments across the 25 plans in which we participate. Contract negotiations are frequently accompanied by a proliferation of rumors, which from time to time, we must address while still respecting the need to let the bargaining teams do their hard work out of the public eye.

On the pension front, we have informed our employees that contrary to some misperceptions, it is not our intention to withdraw from any of the funds, including the Western Conference. In fact, as you know, doing so would trigger a large withdrawal liability that would be counterproductive to our efforts to bring our costs down to the levels necessary to generate profits for our company. Our goals in this contract negotiation are the following: to reduce our overall cost to levels that reflect how the industry has changed while still providing the best paying jobs in the freight industry; to stay in our current pension funds; to ensure our employees have great benefit; to adapt to the changing needs of our customers; and to put ABF on a path of profitability to secure jobs and retirement benefits now and in the future. These goals are well within our reach and we're making progress. Upon reaching a tentative agreement, our employees will be presented with the full details of the contract offer for ratification. It is important that our employees understand that the contract offer that will be presented to them will be the best one that they will receive, and resulted from a great deal of hard work at the table. The bargaining teams have engaged in spirited, difficult and complex discussions for many months, and required 2 contract extensions to date. Our hope is that our employees will vote with the knowledge that despite some necessary changes to our labor contract, ABF continues to be a great place to work and provide for their family. While we work toward a successful outcome, we're also mindful of the competitive realities we face in an industry that has many providers and choices. As we have said previously, we are focused on returning profitability to our ABF operations and will take the necessary actions to ensure that we delivery on that commitment.

And now I want to highlight some positive news at ABF during the recent quarter. In March, we were pleased to learn that for the second consecutive year, ABF driver, Scott Harris, earned the award of New York Driver of the Year from the New York State Motor Truck Association. This is one of many safe driving awards that Scott has earned throughout his career. He is the past winner of the ATA National Championship, and he is the former ATA National Driver of the Year. Scott has driven for ABF for nearly 30 years, and has accumulated more than 30,000 hours and 3 million driving miles without a preventable accident. For the fourth consecutive year, ABF's training department was included as one of the Training Top 125 for excellence in employers' sponsor training and development program as recognized by Training magazine. Almost every week here in our Fort Smith report headquarters, we host a variety of training classes in the areas of operations, sales, leadership, computer skills and the quality process. I always enjoy getting to meet our folks when they're here for training and learning about their experiences and success stories from around the country.

And finally, just last week, for the third time in 4 years, ABF earned the 2013 National LTL Carrier of the Year Award from the National Shippers Strategic Transportation Council. This NASSTRAC award measures 5 key areas of customer service that have always been of major emphasis within ABF. This award is driven by customers and shippers. Both is an important measure of how effectively ABF is serving the logistics marketplace.

In closing, we continue to work to return ABF to profitability and invest in emerging businesses in order to generate positive returns for shareholders. Current negotiations on our new labor agreement, which resumed this week in Kansas City, provide an opportunity to pursue of good paying jobs and protect the retirement benefits of our union employees through a lower cost structure and improved operational flexibility. A new labor contract with lower more competitive cost is a critical element in allowing ABF to effectively compete in our drastically different LTL marketplace. As we have news to share on further progress in the contract negotiations, we will provide that as well as any details of a tentative agreement. Meanwhile, all of our sales and operating teams continue to serve customers in the way they expect from ABF. We are proud of our ongoing records for safety and the contributions of our employees to always improve our standards of superior customer service as we look to grow our existing market segments and expand into new ones. And now I'll turn it back to David for his final remarks. Thanks.

R. David Humphrey

We thank you for joining us this morning, and we appreciate your interest in Arkansas Best Corporation. We will be available for follow-up discussions as needed today. This now concludes our call. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines. Have a great day.

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