Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

David Humphrey - Director of IR

Judy R. McReynolds - SVP, CFO and Treasurer

Robert A. Davidson - President and CEO

Analysts

Justin Yagerman - Wachovia Securities

Tom Wadewitz - JP Morgan

Ed Wolfe - Bear Stearns

Tom Albrecht - Stephens Inc

David Ross - Stifel Nicolaus

Ken Hoexter - Merrill Lynch

Arkansas Best Corp. (ABFS) Q3 2007 Earnings Call October 26, 2007 11:00 AM ET

Operator

Good morning my name is Beth and I’ll be your conference operator today. At this time I would like to welcome everyone to the Arkansas Best Corporation's Third Quarter ’07 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s 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's third quarter 2007 earnings conference call. We will have a short discussion of the third quarter results and then we'll open 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 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 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'll now begin with Ms. McReynolds.

Judy R. McReynolds

Thank you for joining us this morning. I'd like to update you on our third quarter results, and then I'll turn it over to Bob for further discussion of the quarter.

Arkansas Best's third quarter 2007 revenues were $480 million, down from last year's figure of $507 million. Our diluted EPS were $0.75 a share versus $1.24 a share last year. Arkansas Best's operating cash flows were $93 million YTD. Our net purchases of property and equipment totaled $69 million.

So far this year we've purchased treasury stock for nearly $5 million and we've paid common stock dividends of $11 million. Our balance of cash and short-term investments was $147 million at the end of September, and this compares to $136 million at the end of June, and $140 million at the end of last year. Full details of our GAAP cash flows are attached to our earnings press release.

Our effective tax rate for the nine months ended in September was 38.1%, which is below the 38.9% rate for the same period last year. The rate is lower because of our tax exempt income from short term investments and life insurance policies, and because we've recorded a tax credit for using alternative fuel. This year's third quarter was the first time we have recognized this fuel tax credit.

Our reduced tax rate improved our third quarter earnings per share by $0.02 a share. We expect our fourth quarter and full year effective tax rate to be in the range of 38% to 38.5%.

We’re planning for further reductions in our 2007 capital expenditures. We now expect the net CapEx range to be between $80 million and $90 million. This is down from the previously reduced range of $95 million to $110 million that we shared with you in the second quarter.

Our current business levels are challenging and we have continued to evaluate our capital needs relative to our business level. Throughout this year we have been reducing the size of ABF's overall equipment fleet by taking advantage of options to sell older excess equipment.

Now I would like to turn it over to Bob for his comments on the quarter.

Robert A. Davidson

Thanks Judy and good morning everyone. ABF Freight System, our largest subsidiary, reported third quarter revenue of $462 million, that's down from last year's third quarter revenue of $494 million. ABF's third quarter operating ratio was a 93.8, that's compared to a 90 even in the third quarter of '06.

As has been the case since October of last year we had a challenging LTL freight environment that continues to impact our operating margins. In addition costs associated with ABF's regional investment, that is approximately a 130 basis points to our OR compared to last year.

Beginning in the fourth quarter the year-over-year operating ratio impact to the RPM should be less as we begin to compare back to periods with similar cost. Finally the combination of higher cost associated with workers comp, clients and lower expenses on third-party casualty claims added nearly 100 basis points to the ABF's operating ratio compared to the third quarter of '06. However on a year-to-date basis and on the last four quarters basis, these costs are in line with previous periods. They are actually below our five year historical average.

ABF's third quarter tonnage declined 5.8% compared to last year. Through this August, those tonnage levels had remained fairly consistent with no improvement, but no further deterioration since we had the initial downturn in October of '06. However, beginning in September and continuing into October, we believe that we see some further weakness in the economy and that's caused a downturn in our tonnage, even comparing back against these year comps and fall of '06.

So far in October, tonnage trends are running below the same period last year by about 4% to 4.5%. As a result, we are taking another look at our expenses. We are going to further reduce cost and we are going to continue to align the size of our network with the amount of business that we see out there.

In the third quarter, ABF's total billed revenue per hundredweight was essentially flat for the same period last year. This we have talked about last quarter changes in freight mix and shipment profile also had an impact on the yield statistics that we've reported.

We are seeing additional shipments from our regional initiative, so our third quarter length of haul declined by 1.8%, and also during the third quarter we increased the number of spot truckload shipments that moved through our network. These shipments helped to improve capacity utilization, but they also contribute to increasing ABF’s average shipment size.

Without the impact of these and other pro forma mix, pure pricing on ABF’s traditional LTL business was up about 2% versus last year's third quarter. And that’s about the same level of increase that we’ve seen through out the year on our contract business.

Regardless of the freight environment in which we’re operating, ABF's is going to offer value by meeting the individual need to our customers and we will keep pricing on a case-by-case basis.

We obviously remain optimistic about the success we're seeing from ABF’s regional performance model, with this operation ABF offers improved next day and second day service throughout the East and two-thirds of the United States. While the addition of these shipments is obviously affected by the existing freight environment, we’re making progress. During the third quarter tonnage transfer these shipments were clearly better than those in ABF’s traditional long haul markets.

Over the long-term, we believe the opportunities to gain significant penetration into the regional business is well worth the initial investment that we're making. Our organic approach to adding regional business minimizes the risk in this important venture.

ABF's, RPM initiative allows us to be competitive in the regional markets on transfer time and cost endpoint and we believe that ABF's superior service and our attention to meeting specific customer requirements will contribute towards growth and success in this important market.

The current freight environment is difficult. Its pretty clearly, but we continue to pursue new initiatives to grow our company and during times like this its specially important to do things correctly and efficiently in order to maintain your existing customer relationships.

We believe we’ve got the best employees in our industry and their success and attention to detail have a positive impact on our reputation in the marketplace and on our ability to deliver a superior product.

As we saw, during the first half of the year ABF team continues to excel in claims free cargo handling. ABF year-to-date claims ratio as a percent of revenue remained 0.7%, that's our lowest level in the last 25 years. We also continued to give excellent transit-time reliability in the marketplace and we think that’s especially important in a freight downturn.

During 2007, in the National Truck Driving Championships, two of ABF’s finest were recognized as best of the best in their respective driving categories. John Hazlett, who operates in ABF's, Vincentown, New Jersey service center, took top honors in the Three-Axle Class. And Scott Harris, in our Albany, New York facility was the National Champion in the Five-Axle Classification.

John Hazlett, also won the ATA award for professional excellence, which recognizes the contestant who most exemplifies the best attributes of a professional truck driver. We think John and Scott are just two of the 15 ABF drivers who competed in the national competition this year, and are good examples of the fine ABF drivers all across the system.

Our consistent record of superior cargo care and drivers who are just the best in the industry are a couple of examples of what distinguishes ABF, and that’s going to help us in the good times and the tough times.

With that I think we are ready to take some questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Justin Yagerman with Wachovia.

Justin Yagerman - Wachovia Securities

Hey, Good Morning guys and Judy.

Judy R. McReynolds

Good morning

Robert A. Davidson

Hello again Justin.

Justin Yagerman - Wachovia Securities

Hi, wanted to get its sense. With talking on more of the spot truckload freight how does fuel surcharge work on that. Did that go on to a regular LTL fuel surcharge system or are you taking that on from brokers where you maybe be getting dinged a little bit on the fuel side?

Robert A. Davidson

No, we do almost no business with brokers. The spot volume business is subject to our normal fuel surcharge at lower weights and at large weights there's a larger fuel surcharge which is competitive with the truck load carriers. Obviously, when we book that business we’re quoting a rate including the fuel surcharge and we try to be competitive when the market plays, so you can say that the bottom-line price is competitive and that probably influences what the fuel surcharge number is but it's on there end we're accessing it.

Justin Yagerman - Wachovia Securities

Okay so on higher weights, to just get it to right its more like a LTL fuel surcharge on the lower weights, it's pretty comparable to what you are getting on typical LTL shipments.

Robert A. Davidson

Justin, if you look at the nominal schedule above a certain size the fuel surcharge percentage actually doubles.

Justin Yagerman - Wachovia Securities

Got it. Okay and just I guess I don’t know if you mentioned this I didn’t catch it. What was your weight per shipment up year-over-year in the quarter or down?

Judy R. McReynolds

It was up 1.2%

Justin Yagerman - Wachovia Securities

Okay, can you talk about the mix and how it's changed I guess now in the quarter between truckload and LTL, how much more truckload freight are you picking up was your tonnage actually up in that year-over-year?

Robert A. Davidson

Well, that would depend upon what definition you have for truckload and LTL. I think it's just fair to say that we had more of the larger spot volume shipments than we did in the third quarter of last year, but pretty consistent what you saw on our second quarter of this year.

Justin Yagerman - Wachovia Securities

Okay, then looking at the RPM rollout. I know you guys obviously saw some OR degradation from that, do you expect that to improve as you start to lap the rollout. But can you talk a little bit about what are you seeing in that market and what the progress is and the brand recognition is starting to feel like out there?

Robert A. Davidson

Well, we are not going to break out specific numbers for you, but I think you tell from the general remarks that we are pleased with our success so far, we're obviously not satisfied, but we are pleased for making a difference. I think it's pretty interesting that we had a good brand as a consistent, reliable, long haul carrier. And we are getting people to think of us as a regional carrier or actually a full service carrier and that process is perceiving it's obviously easier to do that with existing customers. But we are beginning to break that long-haul only distinction.

I was meeting with some of our field executives this week and it's also kind of a interesting story of how this reliable service in the next day market, is actually helping to brand us more favorably on all the products. So, I think ultimately they all work together. We are going to have to sell this business account-at-account and the most difficult shipment to give is the first shipment. That first Olive out of the bottle is hardest, but once customers see that we do really perform like we say we're doing, we’re getting some enthusiastic participation there.

Justin Yagerman - Wachovia Securities

You think you can get this business to breakeven in 2008, even without corporation from the economy?

Robert A. Davidson

I don’t know. We’re spending as you know 100 to 130 basis points and as business grows we obviously will begin to recoup that investment. Answer to that would require me to forecast what’s going to happen not only in overall tonnage, but in the regional market and I don’t think we’re capable of doing that.

Justin Yagerman - Wachovia Securities

Okay, and then a last question. As you move forward pricing comparisons get a little bit easier, just on a year-on-year basis. But it feels like things have gone more competitive. Do you think the revenue per hundredweight from here when you factor in the need for truck load spot business in the rest stays negative at least to the first quarter of next year or how do you think about that kind of on a go forward basis?

Robert A. Davidson

Well, first of all, I don’t feel like pricing is negative. I would love to be getting 3% and 4% rate increases and we're not over the long-haul. We need more than the 2% we're getting. But I think that’s positive if you factor out the change in the length of haul and factor out the affect of these spot volume shipments, which we can eliminate when the LTL tonnage returns. So if you focus on the fact that even in this environment during the third quarter and on a year-to-date basis we got 2.8% rate increase on the most price sensitive customers we have, which are the ones we contract for pricing. Those aren't bad numbers; they are certainly not negative numbers.

Justin Yagerman - Wachovia Securities

I appreciate it, thanks guys.

Robert A. Davidson

Thank you, Justin.

Operator

Your next question is from Tom Wadewitz with JP Morgan

Tom Wadewitz - JP Morgan

Yes, good morning.

Judy R. McReynolds

Hello Tom.

Robert A. Davidson

Good morning Tom.

Tom Wadewitz - JP Morgan

I have one, I guess two different primary questions, want to focus on the first one. You're outlook on tonnage and demand is the things are getting a little bit weaker even then they were already. Does it feel like this is pretty comparable period to the '01, '02 weakness in LTL, and I guess if it is. Does that lead us to believe that you might be operating in another year of margin pressure in 2008?

Robert A. Davidson

Well, certainly the 2001 era, was a tough period. I think we had individual quarter declines were on the order of more, I am thinking like someone just put me a chart here that shows in the fourth quarter of '01 versus fourth quarter of 2000. Our pounds per day were of by 13.6% and we don’t see this environment being that tough, but if you look at full year '01 over full year 2000, our tonnage was off 7.7% which again probably little worsen. That's about the same. I think it’s interesting to at look how are OR deterioration in this current period compares with that period. If you strip out a effect of RPM and if you use workers comp in BIPD on a full year basis, our defect of our negative operating leverage is about half of what it was in the prior period, but we’re not really happy with these results. We think we're doing pretty good job of cost control and account management.

Tom Wadewitz - JP Morgan

So I guess in terms of the way you think the market is going to work and you definitely are showing some good control on the cost side. Is it that the LTL market works such that you would expect to have two years of weakness or I mean is there some chance that you can see a bounce back in a meaningful way in a way, because it looks in '01 and '02 and adds pretty much two years of weakness, it wasn’t like one year followed by quick bounce back?

Robert A. Davidson

Certainly with what happened after 9/11 maybe that was an unusual circumstance that was compounded and this particular cycle the trucking market usually leads the rest of the economy and it would appear that we lead the economy for about 12 months. I think we typically lead by about six months. That little doubt that the trucking industry will rebound before the general economy will, but the question is when will that happen and I don’t have any better insight on that as you do Tom.

Tom Wadewitz - JP Morgan

Sure that's fair enough. In a press release this morning you commented on the Teamster liability for that withdrawal from the pension funds. If that new estimate had increased I think it's about a 30% increase a little over that, with that much of an increase does that put at risk your objective of trying to withdraw from the funds or is that a very manageable increase and what would essentially be converted from a contingent to an [high] balance sheet liability.

Robert A. Davidson

Tom we have been modeling our internal proposals on the basis of the new number. We have been modeling that for some time, because we had expected some change in that range.

Tom Wadewitz - JP Morgan

Okay so that still a central goal of your negotiation would be to withdraw from those plans?

Robert A. Davidson

The withdrawal of UPS Parcel from the central states fund pumps a lot of money in there. We think it reduces the short term risk of the funding deficiency, but it really doesn't change the long term status of the fund and in fact the elimination of a large stable contributor may be introducing some additional uncertainty over the longer time. We have got a real opportunity with our balance sheet to provide comfortable benefits to our employees at more competitive prices, more competitive benefit cost and result of that is a win for the company. It's a win for our employees, and it's a win for customers. So that's the central focus of our ongoing negotiations and honestly we are getting lot of residents in that message from our employees.

Tom Wadewitz - JP Morgan

Okay and you still think that the UPS's success kind of makes it easier for you to follow that path and perhaps have some success in that withdrawal as well.

Robert A. Davidson

Well, I point to the explanations for that withdrawal and I agree with those explanations, they apply to us just they do UPS Parcel.

Tom Wadewitz - JP Morgan

Right, okay great, thank you for the time.

Robert A. Davidson

Thank you, Tom.

Operator

Your next question comes from Ed Wolfe with Bear Stearns.

Ed Wolfe - Bear Stearns

Hi, good morning.

Judy R. McReynolds

Good morning, Ed.

Robert A. Davidson

Hi, Ed.

Ed Wolfe - Bear Stearns

Just a follow up on Tom's question, if I take the middle range and assume that you are successful and you’ve got to pay an $825 million, you've got to fund that. I am guessing you fund that with that and that ratio goes up to near 60% and you’re confident that you can then pay down cash with your cash flows. Is that how to think about?

Robert A. Davidson

Ed, we’ve done a lot of modeling. There are a lot of different scenarios. We’ve honestly got a lot of levers at our disposal. We’re not going to focus too much on that until we get down to seeing what we have to work with and we’re obviously not going to spend a lot of time talking externally about that. But let me just say that withdrawal from the pension plan is something that we can manage and be comfortable in doing so.

Ed Wolfe - Bear Stearns

Okay, and negotiating with the teams just generally is there anything that you’ve learned in the last two or three years rolling out RPM, that you can go to them and say, hey, this is what’s not working and this is what’s working. And is there more flexibility or something to work on that side?

Robert A. Davidson

Ed, that's a pretty good point. We’ve had some informal preliminary discussions with the IBT and we pointed to the fact, in fact I think they pointed out to us that the places where we see business growth and job growth those are places where we're doing things differently. We've approached the regional market with increased flexibility and so in a fairly revolutionary manner. We’ve got some other markets where we’re doing things differently. And those are the places we’re seeing growth and I think that’s a model for what ABF and the IBT can do together. I’ve got no doubt that we can extend the success that we’ve seen in the regional market all across our system. That’s a message that’s pretty clearly.

Ed Wolfe - Bear Stearns

Thanks. Judy, if I just look at 130 basis points and more RPM cost, that backs into like $6.2 million incremental costs year-over-year? What's the absolute amount of extra costs in the quarter?

Judy R. McReynolds

Are you talking about, in the third quarter of '07?

Ed Wolfe - Bear Stearns

Yeah.

Judy R. McReynolds

It was $5.7 million.

Ed Wolfe - Bear Stearns

So I am missing something then if its 6.2 year-over-year, you had a negative 500 impact a year ago?

Judy R. McReynolds

Well, excuse me; I gave you the gross number for the third quarter of '07. It was about $2 million in the third quarter of '06.

Ed Wolfe - Bear Stearns

So it's 57 versus 2?

Judy R. McReynolds

Yeah.

Ed Wolfe - Bear Stearns

Okay, and in fourth quarter of '06, how much was it?

Judy R. McReynolds

Well, let's see. In the fourth quarter of '06 we had about $5 million. And let may say this, in the third quarter of '06, we had about $2 million of incremental costs over the previous period. In the fourth quarter of '06 we had about $5 million and in third quarter of '07 we had about $5.7 million.

Ed Wolfe - Bear Stearns

So the $5.7 million was the absolute expense, it's not the year-over-year or it's the absolute?

Judy R. McReynolds

No, it's the year-over-year expense change.

Ed Wolfe - Bear Stearns

Okay, so what was the absolute number?

Judy R. McReynolds

It would be about $7 million.

Ed Wolfe - Bear Stearns

Okay that's helpful.

Judy R. McReynolds

Okay.

Ed Wolfe - Bear Stearns

Okay, that's all I have got. Thanks a lot I appreciate the time.

Judy R. McReynolds

Okay. Thank you.

Robert A. Davidson

Thank you, Ed.

Operator

Your next question comes from Tom Albrecht with Stephens Incorporated.

Tom Albrecht - Stephens Inc

Hey, Good morning everyone.

Robert A. Davidson

Don’t you move there Tom.

Tom Albrecht - Stephens Inc

Yeah, we have done it a couple times in our career, but not lately. Let me get a couple of facts or questions out of the way, and then I want to go to couple of bigger picture questions. What's the number of workdays for the fourth quarter of '07?

Judy R. McReynolds

Hold on a second, David is getting that for us.

Tom Albrecht - Stephens Inc

Okay, and then can you give me the length of haul, you mentioned the change but kind of fanatical about tracking numbers like that.

Judy R. McReynolds

61 days in the fourth quarter.

Tom Albrecht - Stephens Inc

Okay.

Judy R. McReynolds

And the length of haul change was a decline of about 1.8%.

Tom Albrecht - Stephens Inc

Right, do you have the actual length I guess that's what I am asking?

Robert A. Davidson

It's 1165 in the third quarter of '07.

Tom Albrecht - Stephens Inc

Okay and what was the year ago number?

Robert A. Davidson

1186.

Tom Albrecht - Stephens Inc

Okay and then, alright. Then how about the kind of month-by-month tonnage comps July, August, September; what were the monthly declines that you went through in the quarter?

Judy R. McReynolds

In July and August our tonnage was down about 5% and in September it was down close to 7%.

Tom Albrecht - Stephens Inc

Okay and then on this whole pension discussion here I want to make sure I understand this a little bit. What’s your current cost of debt and if you were to borrow lets say $700 million, because you do have some cash on hand do you have an estimate what your cost of debt might be in that situation.

Judy R. McReynolds

Well, we really don’t. The market is changing so much that I would hesitate to provide that to you. Certainly at higher levels of debt I think that our cost of money would be impacted it would be higher, but we have seen estimates of that, but I would hesitate to give them to you because the market is changing so much.

Tom Albrecht - Stephens Inc

Sure, can you refresh my memory Judy on your average cost of debt right now.

Judy R. McReynolds

Well it's in a little bit above 5%, because we have a really good financing facility with our credit agreement and our incremental margins about LIBOR is not much so we are in a good situation there. But I wouldn’t say that a good benchmark for what you would in a bigger borrowing scenario and again I would hesitate to give that to you because the market is changing so much.

Robert A. Davidson

You also need to keep in mind that those numbers are pre-tax number and on a post-tax basis the numbers get a lot smaller.

Tom Albrecht - Stephens Inc

You mean, in terms of the impact to earnings.

Robert A. Davidson

No on the impact of the borrowings environment.

Tom Albrecht - Stephens Inc

Oh, yeah.

Judy R. McReynolds

Just talking about on the balance sheet, initially you might have some amount that would be like that in the scenario where you withdraw from the old funds, but very quickly you would get the tax benefits back.

Tom Albrecht - Stephens Inc

Right, do you have an estimate, if you were successful in getting out of the central stage fund, how much your annual pension expense, how much lower it might be in a new pension plan that that you establish?

Robert A. Davidson

We do know those numbers, but we are not prepared to disclose them.

Tom Albrecht - Stephens Inc

Okay, I will keep asking.

Judy R. McReynolds

But one thing to remember is that's a part of the negotiation.

Tom Albrecht - Stephens Inc

Right, I can imagine. Then I just want to make sure the 800 to 850, that's a figure that would accomplish all 27 or 28 of the Teamster plans

Judy R. McReynolds

Yeah.

Tom Albrecht - Stephens Inc

And how much of that, approximately is just the Central States 50% or…

Judy R. McReynolds

No, it's about, of the withdrawal numbers about 80%.

Tom Albrecht - Stephens Inc

Okay, and what is the correct number 27 or 28 that you are part of?

Judy R. McReynolds

27.

Tom Albrecht - Stephens Inc

Alright, and then just save the other for later. But 2008 tax rate do you have an estimate on that as a result of the energy tax credit you talked about for the fourth quarter but how our next year?

Judy R. McReynolds

Well. I do think that that would continue to be there, but I don’t have an estimate yet. We'll probably disclose some range on our fourth quarter conference call in January.

Tom Albrecht - Stephens Inc

Alright. And then any chance that a new pension plan that you would establish would actually be a defined contribution, as opposed to a defined benefit or is that like fat chance?

Robert A. Davidson

Those are all subject to negotiations.

Tom Albrecht - Stephens Inc

Okay, and can you talk Bob a little bit even periodically how that would work. I mean, you’ve got a bunch of retirees and money through the Central States plan and yet you set up some sort of a new plan going forward. Who is covered under the old, who’s covered under the new, is there some sort of a wrap around agreement?

Robert A. Davidson

I can appreciate your persistence, but we’re going to talk about elements of that negotiation with anyone other than the IBT.

Tom Albrecht - Stephens Inc

Okay. I know once it all said and done we will get some color on that?

Robert A. Davidson

Exactly.

Tom Albrecht - Stephens Inc

Lastly, is there any reason to believe that you would reach an agreement separate from the labor agreement; I mean one ahead of the other or at this point does it make sense to assume that there will be simultaneous agreements?

Robert A. Davidson

Are you talking about reaching an agreement on the…

Tom Albrecht - Stephens Inc

On the regular [steams] to contract.

Robert A. Davidson

On the benefits issue I suppose to the other provisions…

Tom Albrecht - Stephens Inc

Yeah, I mean are they going to be done hand-in-hand or…

Robert A. Davidson

They are all folded together. We have two goals in our labor negotiations. One is to secure benefits for employees and the other is to develop a contract that allows us to grow business and grow jobs and both of those are folded together. They are part of the same negotiations. So I see us working on those simultaneously and reaching an agreement at the same time.

Tom Albrecht - Stephens Inc

Okay, and then I guess lastly will the Board consider the possibility that your next round of peak earnings potential would be less even though you'd get rid off an open-ended liability. The potential lost market cap, if you are only able to make three bucks next cycle versus four. Is that part of the whole thought processes as well in light of the added interest expense?

Robert A. Davidson

I think that question is way too hypothetical at this point where we are.

Tom Albrecht - Stephens Inc

Okay, that’s all I've got for now. Thank you very much.

Judy R. McReynolds

Thank you, Tom.

Robert A. Davidson

Thank you, Tom

Operator

Your next question comes from David Ross with Stifel Nicolaus

David Ross - Stifel Nicolaus

Good morning, everyone.

Judy R. McReynolds

Good morning David.

Robert A. Davidson

Hi David.

David Ross - Stifel Nicolaus

Last year in the fourth quarter, I remember everyone was a little caught off guard by the lack of peak season and your labor management was suboptimal due to the unexpected flat tonnage that continued in third quarter of ’06. Have you been handling that better this quarter or I guess what should we be expecting in the fourth quarter in terms of labor management?

Robert A. Davidson

I agree with you, your premise David and I think it’s fair to say that we again are not seeing a big season, but you also can assume that we are no longer listening to those who tell us that good times are just around the corner. Not only have, obviously have we reconciled our business to that down turn but we are continuing to look at the amount of tonnage that we have in the fourth quarter and we're making further adjustments based on the 4% to 4.5% decline that we talked about.

David Ross - Stifel Nicolaus

You said that you have been reducing the size of ABF's fleets. By how much is it down year-over-year?

Judy R. McReynolds

Well, we have continued to match our equipment fleet to our tonnage level and I think whenever we close the year we're anticipating having that matched up really well. Yeah, there's various reductions in various categories. But the goal that we have is to make sure that we have it right size with our business level and giving you those percentages like might be a little confusing to you, because we have reduced our rail utilization and that's involved in the mix here but just suffices to say that we have reduced our fleet and we're going to continue to do that so that we have it right-sized with our business levels including the shift away from rail.

David Ross - Stifel Nicolaus

And do you have the percent of rail miles in this quarter versus last quarter?

Judy R. McReynolds

Yes, it was 13.6% this quarter versus about 17% last quarter.

David Ross - Stifel Nicolaus

Okay and then as far as the RPM model is concerned, have you had to be a little bit more aggressive on price in this market to get volume it has never really been your thing, but what we are hearing from other carriers, the regional that were more considered in the long haul can be the best time to try to get into that market?

Robert A. Davidson

We're finding that we need to make sure that our rates are competitive, our base rates are competitive with those players that are in that market and our pricing analysis is more around making sure that we have base rates comparable to those other players in the market. You might imagine our rates historically were based upon the lot of security in those regional lines and now that we have more direct service, a different set of rates are appropriate. But in terms of the effective discount, I believe the effective discount is actually a little lower in that market than it is in the long haul market, and we expect margins that are comparable to our long haul business.

David Ross - Stifel Nicolaus

And last question along more of semantics, where you talk in the release about the price environment being very competitive, yet it’s still being rational. At what point is pricing stopped being very competitive in terms to extremely competitive and irrational. Where do you draw the line? Please give a little more color on your comments, sir?

Robert A. Davidson

Somewhere we have to publish definitions, quantify what those adjectives mean. You probably heard us speak out in the financial community and we’ve talked about an environment, which is much different than the pricing environment was in the 80s and early 90s, and I think those comments apply especially in a freight downturn.

Our company used to operate between 95 and a 100, based upon the business cycle. In the good time we would operate 95, occasionally a little better, and then during downturns like we’re seeing now, we would approach a 100 operating ratio. In the period after the mid-90s, we have operated in a better neighborhood. We can approach a 90 operating ratio in good times and, then you see the kind of numbers we posted this year on what are really disappointing tonnage number. And I think it really speaks to the environment we find ourselves in, which is honestly more rational.

I think I guess I would point to a major carrier who earlier announced a pretty significant cut in their rates through the fuel surcharge mechanism. And I think it probably speaks a lot to the rational environment we have on what didn’t happen. You’ll see that’s had not a lot of apparent effect in the marketplace and not a lot of carriers have jumped on the bandwagon. It’s pretty clear that 15 years ago in this industry that would not have happened. So I think you’ve got a interpret our pricing comments in terms of the fact that our 2.8% increase on contracts and the funds is not a number we’re happy with in the long-term. But in the scheme of things it’s a pretty good number for the environment we find ourselves in.

David Ross - Stifel Nicolaus

Okay. Thank you all very much.

Robert A. Davidson

Thank you, David.

Operator

Your nest question is from Ken Hoexter with Merrill Lynch.

Ken Hoexter - Merrill Lynch

Hi, good morning.

Judy R. McReynolds

Good morning, Ken.

Ken Hoexter - Merrill Lynch

Can you just talk a bit about the -- just one clarification on the Teamster thing if we can jump back to that for a second? Am I right that you want to withdraw from all of them or is there a chance that you would negotiate to just do the Central State?

Robert A. Davidson

We believe that all of the small time player pension plans suffer for the same deficiencies. They’re all at various stages of disrepair Central States being the worst case of that, but all of them are (inaudible) and do not represent an efficient way of delivering good benefits for our employees. And therefore we are going to pursue withdrawal from all of those funds.

Ken Hoexter - Merrill Lynch.

Okay great. Can you, you ran though volume growth this year and I know last year in the fourth year, we kind of deteriorated as you had mentioned earlier can you kind of run through what October, November, December looked like last year?

Robert A. Davidson

Sure, just a…

Judy R. McReynolds

From a tonnage standpoint?

Ken Hoexter - Merrill Lynch.

Yes.

Judy R. McReynolds

Okay, October and November we're down about 7.5% and December was down about 6%.

Ken Hoexter - Merrill Lynch.

Okay

Judy R. McReynolds

Total fourth quarter was down 6.9%

Ken Hoexter - Merrill Lynch.

Okay. And then when you talked about moving more into the truckload, kind of some of the business you would, are you talking about kind of the tonnage, or are you talking about using some of your pumps to go, kind of long-haul. I'm just trying to understand what you mean by supplementing the tonnage by moving into some of the truckload sectors. Is that more just a weight of shipments you're taking?

Robert A. Davidson

Well Ken, our LTL business is what drives the bus if this company is what we focus on. But in periods where we have empty trucks moving on highway, we will go out and find larger shipments that we will try to take away from the truckload sector, and we’ll do so in a way that provides incremental return to us. Now that's a good thing, because it does not disrupt our LTL pricing and our LTL relationship and it provides us an opportunity to supplement. You may recall earlier in '06, we were actually discouraging that traffic, we would raise prices a lot to run it off, because we wanted to protect our service on our LTL product. As we got into the fourth quarter and beyond, we began to re-attract that business and it’s useful in terms of balancing our operation not only from empty miles standpoint but also from a capacity utilization standpoint. But that allows us to provide stability to our LTL customers, but also more closely optimize our overall results. So it is spot business in the true sense of the word.

Ken Hoexter - Merrill Lynch

But your talking about the, not any of the P&D equipment you are talking about the stuff that would be moving between your service centers to carrier freight. If it went one way its more balancing of the loads.

Robert A. Davidson

Yeah, that’s true.

Ken Hoexter - Merrill Lynch

Okay and then lastly if I come over to pricing. I just want to understand kind of I guess in this weakening environment, there is still tons of smaller companies out there with revenues $100 million and less. I think this is just the increased focus of the fewer larger carriers like FedEx, UPS, yourself YRC kind of that are more dominant in the network now than they were 10-15 years ago that’s enabling this kind of continued price increase, because they of the consolidation, or I am just trying to understand why in a freight environment that’s down. Are the smaller companies also not getting more aggressive recognizing that the bankruptcies would just start to creep up faster?

Robert A. Davidson

Well its certainly always been a good bet in this industry, to bet on some of the smaller players going out of business and I expect that this downturn will be more different, I probably may see more of that in the truckload sector than you see in the LTL sector, because our field has already been narrowed pretty close but yeah you’ll see that going on.

But I think there’s probably more than that a real fundamental misunderstanding externally about the nature of this business. It’s viewed as a commodity business where price is all that matters and price is important. But there are a lot of other things that are really important for customers, and I pointed to a few of them and I could point some more. There are very fundamental differences among trucking companies and most of the ones that are left in this industry, honestly are pretty good. We have to think we do some things better than the field, but the whole field is so much better than it used to be, and there are differences among carriers that shippers appreciate and are willing to pay for. You saw that kind of sea change beginning in the mid-90s and it continues through good times and bad.

Ken Hoexter - Merrill Lynch

It’s a great answer, I understand and appreciate that. Judy, just a quick question on the revenue side, do you think you get to a point where you can break out the regional model, or do you think there is too much over lap of the actual assets in network infrastructure that it’s too tough to decide for?

Judy R. McReynolds

We just have a plan to break that out because that is a part of our business, part of our LTL business and we really feel like that you should observe the growth in that business, as you look at our total numbers, and we just had to plan to even from begin to do that. We actually have broken out these costs because we think you have a need to understand what's going on with the expenses, but it’s not our favorite thing to actually have to report on an initiative that isn’t fully flushed out and fully implemented across the whole network and then also, we still have lot of work to do in the sales area and with our customer base, to grow it.

Ken Hoexter - Merrill Lynch

That makes sense, and a quick question, and if I remember if I think overnight when they were public for that, that brief period also had kind of different lines where they had the regional intermediate long haul, and kind of give a percentage of revenues that were attributed to each. Is that something you think you can provide?

Judy R. McReynolds

Well, I think we have said that our business at 800 miles or less is about 44, 45% of our business. Actually the comparison is 45% of our business in the third quarter of '07 compared to 43.7% in the third quarter of '06. So it's ground, and that's a percentage that we have given in past periods. And we can continue to report on that.

Ken Hoexter - Merrill Lynch

All right. Very helpful. Thanks for the time.

Robert A. Davidson

Thank you, Ken.

Operator

Your next question is from Ed Wolfe of Bear Stearns.

Robert A. Davidson

Hi, Ed.

Judy R. McReynolds

Hi, Ed.

Operator

Ed, your line is open. There is no response coming from that line. (Operator Instructions)

Robert A. Davidson

Yes, I think that's probably it then.

Operator

At this time, there are no further questions.

David Humphrey

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

Operator

Thank you for participating in today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Arkansas Best Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts