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Executives

R. David Humphrey - Vice President of Investor Relations

Michael E. Newcity - Chief Financial Officer and Vice President

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

Arkansas Best (ABFS) Q2 2013 Earnings Call August 9, 2013 9:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Arkansas Best Corporation's Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Friday, August 9, 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's Second 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; Mr. Michael E. Newcity, Vice President, Chief Financial Officer of Arkansas Best Corporation.

As most of you know, ABF's Teamsters employees ratified the ABF National Master Freight Agreement and the majority of the contract supplements on June 27. As we have previously announced, we are in the midst of the voting process on the remaining supplements that require additional action. Because of the sensitive nature of the voting process, today, we will give an update of the current quarter's results, but it will not be taking any questions on this morning's call. We hope you can understand our reasons for doing things this way until the entire labor contract is ratified and implemented.

As always, following today's call, we will be available to speak with you to discuss the publicly disclosed information about our second quarter results. We thank you for joining us today.

In order to help you better 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. This morning, Arkansas Best reported results that continue the trend of the past several quarters. Our second quarter net income was highlighted by continued revenue growth and margin improvement at our non-asset-based businesses and continuing cost pressures at ABF. Despite increases in tonnage and revenue, ABF's second quarter operating profit was somewhat below that of last year, as union wage and benefit cost continued to impact operating results. On a year-to-date basis, ABF's high labor costs were also the reason for operating losses.

Near the end of June, we are pleased that ABF Teamster employees ratified the ABF National Master Freight Agreement in most of its supplemental agreements. Though the new contract cannot be implemented until the remaining supplements are approved, we look forward to future wage and vacation cost savings and improved operational efficiencies associated with the new contract. Later, Judy will give her thoughts and perspective on our recent quarter and what lies ahead in the future. But now, I'd like to cover the details of our results for the second quarter of 2013.

Arkansas Best's second quarter 2013 revenue was $576.9 million compared to $510.5 million last year. Second quarter 2013 net income was $0.18 per share compared to net income of $0.44 per share last year. You will recall that last year's second quarter results included a tax benefit of $0.31 per share related to the reversal of previously established deferred tax asset valuation allowances. In addition, last year's second quarter results also included cost of $0.05 per share related to our acquisition of Panther. Excluding both of those items, Arkansas Best had second quarter 2012 net income of $0.18 per share comparable with this year's second quarter results.

For the first half of 2013, Arkansas Best net loss was $0.33 per share on revenue of $1.1 billion compared to a net loss of $0.25 per share on revenue of $951 million during the first half of 2012. Excluding the tax and transaction items mentioned earlier, Arkansas Best net loss was $0.33 per share in the first 6 months of both years. Our effective tax rate in the second quarter was 38%, a more normal rate than what we generally anticipate for the second half of 2013.

We've previously announced that as of July 1, 2013, we would freeze the accrual of future employee benefits in Arkansas Best nonunion defined benefit pension plan. The changes to the plan were accounted for as a planned curtailment at the end of the second quarter. As a result for Arkansas Best, pension liabilities were reduced by $46 million, equity increased by $28 million and related deferred tax assets were decreased by $18 million. Second quarter nonunion pension expense was not affected by the changes to this plan. Beginning in third quarter 2013, nonunion pension expense will decrease as a result of the planned freeze. However, these savings may be offset in part by discretionary contributions to Arkansas Best's nonunion defined contribution plan.

Moving on to ABF's results for the quarter. ABF reported second quarter revenue of $447 million, a per day increase of approximately 1% compared to last year. ABF's quarterly tonnage per day increased by 1.6% compared to last year's second quarter. This included monthly, year-over-year tonnage increases of 0.3% in April, 2.3% in May and 2.7% in June.

ABF's first quarter operating ratio was 98.8% compared to 98.3% in last year's second quarter. ABF's total billed revenue per hundredweight was $27.79, the same as it was in the second quarter of last year. As we have seen for sometime now, ABF's yield comparisons have been affected by changes in freight profile and account mix.

On a sequential basis, however, billed revenue per hundredweight was up more than 3%. ABF's total weight per shipment was 1,370 pounds or 1% increase over the second quarter of 2012. ABF's average length of haul was 1,017 miles compared to 1,032 miles last year. This represents a 1.5% decrease in this metric.

In addition, LTL commodity class was down in the quarter. Weight per shipment, length of haul and commodity class are the 3 biggest factors impacting yield changes. And in the second quarter, each of them had a dampening effect on revenue per hundredweight.

During this year's second quarter, regional freight, defined as tonnage moving a thousand miles or less, represented 60.9% of ABF's total tonnage, an increase of nearly 1% compared to the second quarter of 2012. In this year's second quarter, ABF's regional business grew nearly 3%, while our traditional long haul business was slightly down.

Preliminary totals indicate that in July, ABF's total daily tonnage increased by 4.7% versus July of 2012. July tonnage was better than historical sequential tonnage trends when compared to June. Preliminarily July total billed revenue per hundredweight at ABF was above last year by over 1%.

Moving on to our emerging businesses. Revenues at our emerging, non-asset-based businesses totaled $131 million, including second quarter revenue at Panther of $60 million. This represents 23% of Arkansas Best total consolidated revenue. Revenue totals for these businesses included a 63% increase in freight brokerage, and a 9% increase in vehicle roadside and preventative maintenance.

Panther had second quarter operating income of $1.5 million. Reduced demand for expedited services and the effects of investments in sales and customer service centers impacted the profitability at Panther. Moving to the second quarter, trends in Panther's business improved each month. Considering the $2.6 million of depreciation and amortization included in this results, much of which is related to purchase price allocation of intangible assets from the June 2012 acquisition of the company, Panther's second quarter '13 EBITDA was $4.1 million.

Each of the other non-asset-based companies improved their second quarter operating income compared to last year on a combined basis in the second quarter, all of our non-asset-based businesses produced EBITDA of $7.1 million versus $2.8 million in the second quarter of last year.

Throughout this year, we said we would have more clarity on ABF's 2013 levels of net capital expenditures and depreciation and amortization, following the resolution of ABF's Union Labor negotiations. As I mentioned earlier, the ABF National Master Freight Agreement has been ratified, and we are awaiting the outcome of the vote on the remaining supplements before implementation of the new contract. Based on our current plans, we anticipate our 2013 net capital expenditures to be approximately $25 million to $30 million. We now expect our 2013 depreciation and amortization of fixed assets to be in the range of $80 million to $85 million.

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 second quarter results reflect success by all of our companies in increasing revenues and generate profits in the midst of an economic environment that remains constrained and choppy. Our emerging non-asset-based businesses are making positive contributions to our financial results, as they experienced continued growth in revenue, operating income and cash generation. ABF was profitable during the quarter, as it typically is during the second quarter, despite its continued high-cost structure. However, year-to-date losses of $17 million at ABF continued to be unacceptable.

In late June, ABF took a significant step forward improving its cost structure and solidifying its long term prospects for success with the ratification of the ABF National Master Freight Agreement by its Teamster employees. We are all looking forward to the conclusion of the lengthy contract process at ABF.

We reached another contract extension that runs through the end of August. For the remaining 6 supplemental agreements, ballots were mailed to affected employees earlier this week and will be counted on August 28. That is similar to the process for the ratification of the National Agreement. We are hopeful that the supplements will be ratified in due course, and in the meantime, it is business as usual at ABF.

First, before discussing ABF's results in more detail, I'll provide additional color on our emerging businesses, which we intend to grow to $1 billion in revenue by 2015. This goal is the result of careful analysis and planning that has taken place over a number of years. We recently announced, internally, the formation of ABF Logistics as an operating segment that now houses our brokerage, intermodal and global shipping businesses, as well as our supply chain solutions, including TMS software and warehousing. A strategic reallocation of strong sales talent to the new ABF logistics units, will enable us to more effectively unleash the growth potential in each of these service offerings. We're excited about the recent changes and you'll be hearing more about that from us in the future.

At Panther, much like we saw in the first quarter, second quarter revenues and margins were impacted by sluggish demand for expedited services that resulted in an excess of available capacity. Demand in the market segments of Panther serves continue to be mixed, but they are improving. Second quarter growth was seen as a result of increased customer commitments in the life sciences and high-value product segments of the business. The stability of automotive supply chains reduced the need for Panther services within that segment. Lower government spending, related to the sequester, resulted in military-based closing on Fridays, and thus fewer available shipments for Panther.

Panther continues to invest in personnel and location that strengthen its ability to offer dependable logistic services to its customers. As previous investments in these areas begin to yield positive results, and the need for additional sources are identified and filled, Panther continues to be a strong partner equipped to meet the needs of the specialized market it serves.

As Michael mentioned, all of the other non-asset-based companies grew revenues and improved their second quarter operating income compared to last year. During this seasonally busy second quarter, operating income in the Household Goods Moving Services segment increased by nearly 5x. Although the pace of our freight brokerage operating income improvement was below that of its revenue increase, it was due to continued investments in personnel, which should yield positive contributions in the future. Our Emergency and Preventative Maintenance business increased second quarter revenues by more than 9% and improved operating income by nearly 17%. The Preventative Maintenance portion of this business is gaining traction.

Extreme weather conditions that are typical in the summertime can have a positive impact on the need for FleetNet services, and we have experienced only some of that so far this summer. We look forward to the continued positive trends in FleetNet business we move into the fall.

ABF's second quarter operating profit was below the same period last year, as moderate improvements in revenue and freight tonnage were offset by higher wage and benefit cost. As the quarter progressed, ABF experienced improving year-over-year tonnage trends and greater stabilization in the customer shipping environment. So ABF's second quarter yields were the same as last year's, these measures continued to be affected by changes in ABF's freight profile and account mix.

As Michael mentioned, the 3 significant freight profile factors impacting total pricing statistics had a diminishing effect. When adjusted for fuel surcharges, and these profile and account mix changes, ABF's second quarter pricing percentage increased within the low-single digits. ABF's second quarter pricing was also positively impacted by a 5.9% increase in its general rates and charges that was effective on May 28.

And now I'd like to highlight some positive news at ABF during the recent quarter. In June, ABF was recognized for the fourth consecutive year for it's excellence in supply chain sustainability. Inbound Logistics magazine cited ABF as one of its Green 75 Supply Chain Partners, in honor of our long tradition of promoting environmental stewardship. A few of ABF's best practices that make a positive contribution to our environment include a strictly followed equipment preventative maintenance program, limiting the maximum speed of ABF's road tractors to 62 miles per hour; engine idle shutdown on unattended equipment; and extensive use of retreaded tires to reduce the number of tire casings entering landfills.

And on another positive note, so far this year, we've had 2 examples of ABF drivers who rescued persons in danger on our nation's highway. I am pleased to tell you that in July, both of these ABF employees were named as Highway Angel by the Truckload Carriers Association. In January, ABF driver, Donald Mackin, of our Brockton, Massachusetts service center responded to an accident during a snowstorm that resulted in a car sliding down an embankment into the woods. Donald called 911 and then rescued the distressed driver from the smoking car and kept him in Donald's warm ABF tractor until the police arrived.

In April, ABF driver, Shelly York, of our North Little Rock, Arkansas service center, helped save young a boy who had fallen on to the roadway from the bed of a moving pickup truck. Shelly put on this flashers and used his truck to protect the boy from oncoming vehicles until the police arrived. Donald and Shelly are just 2 examples of the many professional drivers, who safely and compassionately the present ABF each day on our nation's highways.

As I said earlier, we are all looking forward to fully wrapping up our Teamsters contract for the next 5 years, and realizing the associated cost savings going forward . As we turn our undivided attention to restoring ABF's profitability and growing our merging businesses with the right investment and resource and talent, we are now better positioned than in anytime in our history to meet the end-to-end solutions needs of our customers. While the U.S. economic outlook remains okay, but not great, we know that serving our customers in even better ways, with the right products and services, is the key to our company's a success.

Thank you for your time today and we will be speaking with you again soon.

R. David Humphrey

Okay. That concludes our call. We thank you for joining us this morning. And we appreciate your interest in Arkansas Best Corporation.

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