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Executives

David Humphrey – Director of IR

Judy McReynolds – SVP, CFO and Treasurer

Robert Davidson – President and CEO

Analysts

Tom Wadewitz – JP Morgan

Ken Hoexter – Merrill Lynch

Tom Albrecht – Stephens, Inc.

David Ross – Stifel Nicolaus

Justin Yagerman – Wachovia Securities

Ed Wolfe – Wolfe Research

Arkansas Best Corporation (ABFS) Q2 2008 Earnings Call Transcript July 23, 2008 12:00 PM ET

Operator

Good afternoon. My name is Tabita. I will be your conference operator today. At this time, I would like to welcome everyone to the Arkansas Best Corporation second 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)

At this time, I would now like to turn the call over to Mr. David Humphrey, Director of Investor Relations. Please go ahead, sir.

David Humphrey

Welcome to the Arkansas Best Corporation's second quarter 2008 earnings conference call. We'll have a short discussion of the second quarter results, 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, and 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 you 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 on 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, David. I'd like to update you on some of the details of our company's second quarter results and then I'll turn it over to Bob for his comments. I'll start with the total company results.

Our second quarter 2008 revenues were $499 million, a per day increase of 6.7% over last year's figure of $464 million. Our diluted earnings per share for the quarter were $0.64 a share compared to $0.78 a share last year. Our second quarter results were impacted by two noteworthy items. First, we are comparing back against a quarter where we had very favorable workers' compensation experience. This year's workers' compensation cost, although in line with historical averages, are about $0.07 a share higher than last year's cost. Second, we were impacted by the market performance of investments associated with life insurance policies we maintain on certain company executives. These policies are invested much like pension plan assets would be invested. The impact of this change in cash surrender values was about $0.04 a share when compared to the same period in 2007. Changes in cash surrender value of life insurance are shown below the operating line in the Other Net Expense.

When you look at our results on a year-to-date basis, the net impact of the differences I mentioned is less than issue. We are $0.98 a share compared to $0.97 a share in the first six months of last year. Arkansas Best's operating cash flows were 59 million year-to-date. Net purchases of property and equipment totaled 3 million and so far this year, we've paid common stock dividends of 8 million. Our balance of cash and short-term investments grew to 225 million at the end of June. This compares to 197 million at the end of March. If you'd like more full details of our GAAP cash flows, this information is included in our earnings press release.

We previously discussed our 2008 net capital expenditures being in the range of 60 to 70 million. At this point, it looks like we'll be at the lower end of this range. We continue to have the flexibility to upsize our purchase plans if business levels dictate the need to do so. We are proud of the fact that our company's financial position remains strong and this strength continues to provide us with opportunities of flexibility.

Moving on to ABF, our largest subsidiary reported second quarter revenues of 480 million, a per day increase of 6.1% over last year's second quarter. ABF's daily average tonnage for the quarter was essentially flat to slightly positive compared to last year. Through last weekend, July's total tonnage per day was down about 1 %. ABF's second quarter operating ratio was 94.7 versus the 93.2 during the same period last year and on a year-to-date basis, ABF's OR is the same as last year, a 95.8 in each period.

And now I'll turn it over to Bob for his comments.

Bob Davidson

Thanks, Judy, and hello everyone. A softer LTL freight environment continued in the second quarter. We really haven't seen much of a change, either up or down, in tonnage levels since the fourth quarter of 2006. During the period, ABF has maintained its focus on the things that have always made us attractive in the market place, providing and enhancing excellent service, addressing the specific needs of our customers and handling freight carefully and safely.

Across the business cycle, ABF has been able to scale its labor and equipment resources to match ongoing freight levels without harming service levels and ABF did a nice job in this area, actually improving operational productivity in the first and second quarter while improving service levels.

Compared to last year, ABF's second quarter operating ratio was impacted by energy-related costs, and by the workers compensation comparison that Judy mentioned. The increasing cost of diesel fuel and the rise in other energy-related costs are having an effect on ABF's cost structure. The supplies and expenses line of our reported financial statement increased nearly 34% in the second quarter, reflecting the cost of the fuel and oil that goes into our trucks. In addition, fuel surcharges we pay on rail and (inaudible) movement have increased at a high rate and as you might expect, we've also seen some significant increases in the cost of fork lift, propane in our utility expenses and even in sales solicitation expense.

As with the general economy, energy prices were affecting our costs across the income statement. This year's workers compensation cost, although in line with our 5- and 10-year experience, were higher than the very favorable numbers that we had in the second quarter of last year. The difference in these costs raised ABF's OR in the current quarter by about a half a point. I'm pleased to report that year-to-date these costs are below our 5- and 10-year averages and we're pleased with the overall trend in workers compensation cost.

Finally, our continuing investment in our exciting regional initiative hurt our second quarter OR by 70 basis points and that's an improvement over the impact in prior quarters. ABF's build revenue per hundred weight in the second quarter increased by 6% over last year. Obviously the biggest factor driving this increase was the additional fuel surcharge related to the higher fuel-related cost. The higher fuel surcharge was partially offset by ongoing changes in freight profile and customer mix, continued success in our regional freight initiative, reduced ABF's second quarter length of haul by 2.2 %. Total average weight per shipment increased by 4.2%, in part related to an increase in spot price truckload shipments that helped us better utilize ABF' system resources.

Shipment density also increased in the quarter and all of these factors have a dampening impact on the nominal revenue per hundred weight. Nevertheless the LTL market place remains competitive especially with soft tonnage levels. We believe that fuel surcharges covering our additional energy-related cost, but the record fuel surcharge levels do affect the overall yield that we get from the customer. In addition, tonnage losses of other carriers may have heightened the competitive pricing environment.

Even at this point in the business cycle, ABF has maintained a solid pricing discipline in line with the value that we offer. In a number of important ways, ABF offers superior transportation services and we believe that our customers recognize the overall value of doing business with us and each month of the second quarter, ABF consistently secured acceptable rate increases from customers operating under contracts and deferred pricing agreements. In total for the second quarter, we secured an average increase of 3.8% on these price sensitive accounts.

Each quarter I like to highlight some of the positive things that are going on at ABF that are benefiting our customers and employees and shareholders and during the second quarter, the ABF team made further improvement in our industry leading cargo care. ABF's second quarter cargo claims ratio as a percent of revenue was 0.63% which is better than we had in this year's first quarter and also lower than last year's figure which was ABF's best in over 25 years. These best in class results are no accident. They illustrate the many benefits of ABF's continuing long-term focus on and successful implementation of the quality process. Every person at ABF understands the principles of quality that include doing things right the first time and the need for identification and elimination of the root causes of error. It's always good when we're recognized by the trucking industry for our superior record of excellence in these areas.

In late April, for the fourth time, ABF received the American Trucking Association's Excellence in Claims Prevention Award. This is the only national award of its kind in the trucking industry and in eight years that it has been awarded since 2001, ABF has won it four times.

In the second quarter, ABF continued to improve on a great record as one of the safest carriers on the nation's highways. ABF's city and road accident rates measured by the DOT recordable accidents per million miles decreased by a remarkable 25% from the second quarter of '07. These numbers are also substantially below our 5- and 10-year averages. These results benefit the health and safety of the ABF team and the general public and we're obviously very proud of our safe driving experience.

During the remainder of the third quarter, additional enhancements in ABF's regional infrastructure will be implemented throughout the eastern two-thirds of the United States. The operational changes being made will result in transit time improvements in over 23,000 station to station lanes. That's between 20 and 25% of our network. These revolutionary service improvements will allow ABF to compete effectively in both the regional and the national market.

Last year, ABF established a highly effective regional line haul network to complement a very efficient long haul model. It’s not easy to do both within the same company, but ABF successfully demonstrated that it can walk and chew gum by improving regional transit times while maintaining and even enhancing the superior service in other areas of our business. To put the current improvements in perspective, the changes in 2007, reduced the transit times in about 6,000 next day lanes. The ongoing changes leverage those previous investments allowing us to make almost four times as many lane improvements with only a very modest increase in start up cost.

On the zip to zip basis, we're reducing transit times by at least a day in over 4 million lanes. Based upon our experience so far in the regional market, we are very excited about our prospects going forward.

And with that, I think we're ready to take questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Tom Wadewitz with JP Morgan.

Tom Wadewitz – JP Morgan

Good afternoon.

Judy McReynolds

Hi, Tom.

Bob Davidson

Good morning, Tom.

Tom Wadewitz – JP Morgan

Morning for you, I guess, right? Let's see. I wanted to ask you a little bit more on fuel. I don't know if I missed this at the beginning of the call, but did you – you mentioned higher fuel prices as a headwind, do you have any way of framing what you think the net impact was in terms of increase in surcharge revenue versus increase in expense? I guess it's something in the first quarter it sounded like you thought you we're pretty well protected on that by your surcharge, I'm wondering why? What would have happened in the second quarter?

Bob Davidson

I don't think there's any difference there, Tom. I think we're just acknowledging that the costs are going up and not just in the supplies and expenses line where you find diesel fuel and oil. We're seeing it just like every other company in the world I guess. We're seeing those costs filter their way throughout the rest of the income statement. All in, we think we're covering those costs, although as we have talked about over a number of quarters, some of those comparisons get murky. We think we're covering all the costs, but also we think that their impacting our customers, there is some industrywide elasticity involved and we think that it probably affects us in other yield areas as well.

Tom Wadewitz – JP Morgan

Okay, so there's not – it's not like you're coming up on some issues with caps on some of your surcharges or other ways that fuels becoming more of a headwind for you? It’s not really a change in terms of your positioning versus where you've been. It's just I guess maybe – it creeps in, in certain areas I suppose. I'm trying to get a sense of whether there's a change or not, it sounds like there isn't.

Bob Davidson

The line was up 34% and when something is up that much, it's just something that jumps out at you and we felt like we should talk about. We have some fuel surcharge caps where probably we have fewer than those of other carriers and we're addressing those on a case by case basis.

Tom Wadewitz – JP Morgan

Okay, fair enough. You had some noise on the workers' comp item the last two quarters. Do you have something that you can have visibility towards second half and how that might affect the margin performance or is it just difficult to predict?

Bob Davidson

I think you're right, Tom, about it being noise. It's obvious that ABF doesn't smooth these costs. We true them up, we reconcile them each quarter, and that's why when you look at those, it's probably more helpful to look at them over a longer period of time. If you take just the first half of this year, the numbers look pretty good. I think Judy maybe has some comment about what happened in the third quarter last year.

Judy McReynolds

Yes, Tom. We had last year's third quarter coming up. We were affected by about a point of an increase in last year's OR as a result of some experience issues we had then and we commented in our release last year that the first half of the year had been good, so looking at it over a longer term, again, we were in line with our historical averages which – that was just a conversation that Bob and I have had whenever we talked about the volatility in this line item. It is correct and exactly the right thing to do to true it up at the end of every quarter and you've got reflected your experience but really, you can have some volatility in looking at it over the longer term is a better way to look at it and when you look at our year-to-date results this year, we're below last year and then also below our 5- and 10-year averages which all of that bodes well for the future, but we can't comment on any individual quarter because we just can't predict the future in this area.

Bob Davidson

Just to give you additional color on that, this year's workers' comp number was 180 basis points, last year it was 130 basis points, but if you look at the current quarter at 180 basis points, that's just about what the 5- and 10-year averages are and our year-to-date experience is 150 basis points, so I like the trend. If you throw in BiNPD [ph] and there you get a similar story and in an environment where a lot of carriers are showing worse results in these areas, ABF continues to make improvement basically because of the superior caliber of our driver force.

Tom Wadewitz – JP Morgan

Right, okay. And then it sounds like it's notable, that it's a better and easier comparison in the third quarter on the workers' comp. One more question, I'll pass along to someone else. Bob, do you have any thoughts on the pricing environment, where it is today? It seems like maybe things were potentially decelerating, getting a little worse in the March, April timeframe, but yet, as the quarter progressed that maybe the pricing in LTL was stable but still competitive. What's your outlook? You think same, still pretty stable in second half or are you concerned that they get a little bit worse? What are your thoughts on the pricing environment?

Bob Davidson

I think if I look at maybe the last four quarters, they've seemed to be pretty similar environment. We did have a general rate increase that took place in the first quarter that was like seven weeks earlier than the previous year, so there was some noise associated with that, but overall, and everybody recognizes that there's a freight downturn. It's competitive, but as I've said before, although this environment is lasting longer than previous downturns, perhaps not as severe, so it's competitive out there and you've got some carriers who've had large percentage losses and their trying to take some business based on price and with some success, but we've lost a few large accounts on the basis of price, but we've picked up some other business as well. I think what’s kind of interesting time is that the lost accounts we had were not profitable, but they had higher than average revenue per hundred weight. At the end of the day, you got to look at your productivity improvements and you got to add that to your yield gains and they have to be more than your cost increases and for us, at least, on a year-to-date basis this has been true for us.

Tom Wadewitz – JP Morgan

Right, okay, great. Well thank you for the time.

Bob Davidson

Thank you, Tom.

Operator

Your next question comes from the line of Ken Hoexter with Merrill Lynch.

Ken Hoexter – Merrill Lynch

Good morning, Bob and Judy. If I take a look on the pricing, I'm trying to figure out, your revenues were much stronger than what we had anticipated, but obviously the operating income missed by a bit, so I'm trying to take a look at what happened with pure pricing, pass the fuel surcharge and obviously you've changed how your billed stats are all inclusive and you don't break them up, but if I take a look at your surcharge, it seems to have jumped from about 19% to 35% on a year-over-year basis, or about a 16 point change. So that then indicates that if your billed pricing was up 6%, your pure pricing would have been down about 9%. I want to understand, is that kind of in line with what you're seeing then?

Bob Davidson

No, Ken, and I think if we'd had a 9% pure yield decline, I think we probably would have noticed that. We don't break those numbers out and I think partly because there are so many moving parts. I would point to the 2.2% decline in length of haul. I would point to a 4.2% increase in average shipment size. Those are pretty big numbers and they carry a lot of weight. Increasingly, at the end of the day, revenue is what it is, yield is what it is and you just kind of cover your cost.

Ken Hoexter – Merrill Lynch

So, do you think your ability – so then just looking at the fuel expense, you were relating before I think in your opening comments, you believe you did offset all of the increased fuel costs?

Bob Davidson

We think we did and also the energy-related, cost increases throughout the rest of the income statement were – again, it's pretty murky because you don't know where all those are, but we think we're doing a good job of offsetting what was a fairly significant increase in energy-related costs, how it affects our customers and as I indicated, there is some elasticity there, perhaps, (inaudible) as well so I think it's having effect on us like it's having effect on the rest of the economy.

Ken Hoexter – Merrill Lynch

Let me jump over to the expenses if I can for a second. Judy, when you were talking about the workers' comp shifts, I think that's in the salaries and wages line.

Judy McReynolds

Yes.

Ken Hoexter – Merrill Lynch

On the rents and purchased transportation line, after the restatements that you did, if I go back and readjust first and second quarter, it looks like first quarter actually – last quarter went down on rents and purchased transportation, this quarter went up. Just wondering, are you seeing decreased efficiencies? Are you using the rail more? What is causing that, that shift?

Judy McReynolds

Ken, our rail utilization was really similar quarter to quarter and in fact we used rail 11.4% of our miles this year versus 11.8% last year. What we've seen is rail fuel surcharges really increased and that's what's driving the majority of the increase in that line item, is rail fuel surcharges.

Ken Hoexter – Merrill Lynch

Okay.

Judy McReynolds

There are a few other things that are in that line item where we used third-party transportation on a limited basis or something like that, but that's what's driving the increase in that line item.

Ken Hoexter – Merrill Lynch

Okay.

Judy McReynolds

On a year-to-date basis, our rail utilization was actually down and so that helped offset some of the rail fuel surcharges issues on a year-to-date basis.

Ken Hoexter – Merrill Lynch

Okay.

Bob Davidson

I think I'd point out that we're not seeing inefficiencies there. In fact, our load factors are actually improving.

Ken Hoexter – Merrill Lynch

Okay. Just real quickly then, the fuel is within – your direct fuel is within supplies and expenses?

Judy McReynolds

Yes.

Ken Hoexter – Merrill Lynch

Any way to break that out, what percent of that is, is it mostly fuel or are there other significant…

Judy McReynolds

It's mostly fuel, but it also includes our repairs and maintenance expenses and we haven't given the detail of that in the past.

Ken Hoexter – Merrill Lynch

Yes, I know that. All right, thank you very much for the time. Appreciate it.

Judy McReynolds

Thank you, Ken.

Bob Davidson

Bye, Ken.

Operator

Your next question comes from the line of Tom Albrecht of Stephens, Inc.

Tom Albrecht – Stephens, Inc.

Hi, Judy, Bob, everyone.

Judy McReynolds

Hi, Tom.

Tom Albrecht – Stephens, Inc.

Let me get my factual questions out of the way and then go on a couple of other things. Your average length of haul, you mentioned was down 2.2%, but do you have the actual numbers?

Judy McReynolds

It was 1,134.

Tom Albrecht – Stephens, Inc.

And that was what? 1160?

Judy McReynolds

Yes, last year.

Tom Albrecht – Stephens, Inc.

Yes.

Judy McReynolds

Yes.

Tom Albrecht – Stephens, Inc.

All right and then any comments on your shipments per DSY hour or total pounds per hour?

Judy McReynolds

It increased pounds per hour basis 4.9%.

Tom Albrecht – Stephens, Inc.

Okay.

Bob Davidson

And shipments per hour were up about 1%.

Judy McReynolds

0.8. Yes.

Tom Albrecht – Stephens, Inc.

Okay. And load factor? You used to give that out, but I don't think gave it.

Judy McReynolds

I can tell you pounds per total mile were up 2.2%.

Bob Davidson

That's a number that really doesn't mean a lot anymore because as we'd entered the regional market in a big way, you don't attempt to have load factor and thus predict our lines, so we're really running two line haul operations and we look at them separately and kind of a composite number like that is probably worse than meaningless.

Tom Albrecht – Stephens, Inc.

That makes sense. And then percentage of business tonnage under 800 miles?

Judy McReynolds

45.5%.

Tom Albrecht – Stephens, Inc.

There you go. Alright and, you know, on the April 1st new teamster's contract, I want to make sure I understand this. I know it’s about a 3.8% increase in salaries, wages, and benefits annually. But, am I incorrect in remembering that the benefits part of that does not begin till August?

Bob Davidson

You’re correct. The nominal wage increase on April 1st was 2.2%. August 1st, the benefit – increase on the benefit is 8.1% and that’s a basic number and it will be different because of differences in employee profile, but those are good working numbers for you.

Tom Albrecht – Stephens, Inc.

Okay. I appreciate that. So I just want to make I understand you on the PT, the predominance of the $4.5 million increase in purchased transport was the higher fuel surcharges in the rail world?

Judy McReynolds

Yes.

Tom Albrecht – Stephens, Inc.

Okay. And I assume at this juncture, you have not taken advantage that much to put 4% of your miles on truck load. Right?

Bob Davidson

No, we have not.

Tom Albrecht – Stephens, Inc.

Okay. And then, just kind of thinking through some of the additional flexibilities with the new contract, part timers, utility workers, etc., I realize that you’re kind of doing two things. One, you’re trying to speed up transit times ultimately as the year goes along but wouldn't there have been an element to that that just sort of kicked in April 1st and should have been a benefit to you on the salaries and wages side?

Bob Davidson

Well, we keep in mind that, that we were already employing a lot of those techniques under what used to be called the premium service employee. So, in April, those employees became utility employees and were basically doing what they were. Now, later this month and on into August, we’ll be wrapping up in a big way but our interest here is not so much in cutting cost as it is in dramatically improving our service and in fact, on the startup basis, we’ll be spending a little bit more money nothing like what we, what had last year. Eventually, as tonnage levels improve particularly in the regional lanes, and as we get our people off of the layoff, which we certainly want to do, we will begin to see some unit cost improvements but the instance for now, for us, even in a down turn is to dramatically improve our service levels and we are really focused on that.

Tom Albrecht – Stephens, Inc.

Okay. And then, Judy, you mentioned there was about a $0.04 adverse impact due to the loss or surrender cash value policies on insurance?

Judy McReynolds

Yeah.

Tom Albrecht – Stephens, Inc.

So that line item that was like 18,000 versus 800,000 a year ago?

Judy McReynolds

Yes.

Tom Albrecht – Stephens, Inc.

And so, was that a death or a retirement?

Judy McReynolds

Well, if policies that we maintain on company executive and we have about somewhere between 17 million and 20 million invested on those and the investment is much like a pension plan. Investment portfolio would be where you have perhaps 60% in equities, 40% fixed income. And what happened in the month of June was that the markets were off 10%. These policies, the value of them, were affected 5% which is a shift in the number of the change and the number that you see there. The other thing to know is that, these are, the increases in these policies are not taxable and the premiums are not deductable. So when you see a change in that line item, that’s an as per tax number. So, it’s just a large change and I thought it was, you know, worth mentioning since it was forced into share.

Tom Albrecht – Stephens, Inc.

Yeah, most certainly.

Judy McReynolds

And you know, on a life today basis, you know, this program has been good for us. Part of this program we inherited from the Carolina acquisition and you know, we have continued it since that time. So, it has been around a long time. But, you know, anyway there’s time that you have negative effects and, you know, we just thought it was large enough to point out.

Tom Albrecht – Stephens, Inc.

Okay, yes. That’s something else. Alright, so it’s just one or two other things. How much, at this point in the cycle your shipments were down 3.1%, that was on a 4.4% decline in the second quarter a year ago, there’s shipments then there’s tonnage. Just negative on top of negative, does that adversely impact your productivity or at least keep you from realizing the kind of gains that you would like?

Bob Davidson

Well, obviously it didn’t since even on the shipment basis; we had improvement in shipment based productivity. I think it’s important when you’re looking at shipment to consider it was a cross correlation between our shorter length to haul and higher shipment sizes. So, as we move more into the regional market, you’ll see that kind of effect and also, I think this is kind of interesting to look at the larger shipments, truckload kind of shipments that we had during the quarter. We’ve been really kind of surprised by our success in attracting those kind of shipments even as we continue to raise prices in the stock market, and I think that may point to a firming up in the truckload sector. If that’s true, that’s prospectively good news for us. As you probably know, the truck load sector is the see a recovery a little before the LTL sector which sees recovery a little before the general economy. So, perhaps, the increase in those kinds of shipments is a harbinger of things to come.

Tom Albrecht – Stephens, Inc.

Okay, and I think my last question, you’re within the ABF Freight System, your salaries, wages, and benefits were up about $6.8 million. You mentioned the worker’s comp was 50 basis points which I guess was about $2.5 million pretax but that still leaves you with about $4.3 million. And I was surprised that, that was higher because the last four quarters had been flat year over year or even down a little bit. Was that just execution on your part thinking volumes were going to be maybe a little bit better or was that just an impact of the higher wage cost with contract?

Bob Davidson

Part of that may have been that, but we also, for our nonunion employees, gave down a salary, cost of living, and merit increases as well, and that’s probably part of that number.

Tom Albrecht – Stephens, Inc.

Okay. Do you understand what I’m asking normally that or you’ve done such a good job. That’s kind of those things people think that of Arkansas Best is going to, if nothing else, they’re going to be on top of that one?

Bob Davidson

Well, we have done a good job and if you look at the productivity numbers and point that out, but at the same time, we’ve got quick people in our company and we’re going to make sure that our salaries and wages are competitive. And so we’re – even in this kind of environment, headcount us down, but we have given salary and wages increases on our people as well.

Judy McReynolds

And Tom, just to further that, on a full time equivalent basis, our headcount is down 3.7% which is more than shipments are and definitely more than tonnage since tonnage was basically flat. So, I think that honestly when I look at that line, I thought that with the productivity improvements that we have and the actions that we took, it was a favorable result and one that has actually helped us at the bottom.

Tom Albrecht – Stephens, Inc.

Okay. I appreciate all that discussion. Thank you.

Judy McReynolds

Thank you, Tom.

Operator

Your next question comes from the line of David Ross with Stifel Nicolaus.

David Ross – Stifel Nicolaus

Good morning everyone.

Bob Davidson

Hi, David.

Judy McReynolds

Hi, David.

David Ross – Stifel Nicolaus

Question first, I guess, about the traditional long haul business. It has always been ABF's bread and butter. If you could maybe separate out the regional business for a second, I know you do not always like to do that, but can you speak to what the overall, I guess, demand level is like in the long haul business still down year over year significantly. Is that just been in cycle of decline for several years and I guess, what do you see in the long haul market in general?

Bob Davidson

Without being quantitative, David, I would agree with the premise that the longer haul markets are softer. Some people look at ABF's entry into the regional market as the freight downturn began and pointed out that this was not a good time to be entering the regional market. But given what's happened in the long haul market, I’m sure glad we did.

David Ross – Stifel Nicolaus

The question first, I guess, is about the traditional long haul business that has always been ABF try to mutter. If you could maybe separate out the regional business for a second, I know you do not always like to do that but you speak to what the overall, I guess, demand level is like in the long haul business still down year over year significantly. Is that just been in cycle of decline for several years and I guess, what do you see in the long haul market in general?

Bob Davidson

Without being quantitative, David, I would agree with the premise that the longer haul markets are softer. Some people look at ABS entry into the regional market as the freight down turn begin and pointed out that this was not a good time to be entering the regional market but given the first half in the long haul market, I’m sure glad we did.

David Ross – Stifel Nicolaus

I think there hasn’t been a bad time to enter the regional market.

Bob Davidson

Good point, David.

David Ross – Stifel Nicolaus

Anyway, on the RPM initiative, you are looking to rule out western third of the country. Do you see the western third of the country from a regional market perspective being any different in terms of density, profitability, difficulty finding real state than eastern two-thirds you have already ruled out?

Bob Davidson

Let me kind of separate it. The changes that I talked about, the 23,000 new improved lanes are actually in the eastern two-thirds of the United State. There are an enhancement to what we started last year. That will operationally take place in August and we’ll start marketing it shortly thereafter. In addition to that, there are a smaller number of lane changes on the West Coast and we will be doing that probably in the fourth quarter. In both instances, I don’t expect, I expect little if any real estate change because we are, in fact, leveraging the facilities that we’ve already put in place in the eastern two-thirds of the United States. In the western third on the West Coast, those changes tend to be, because the distances are longer, use different techniques, the high velocity exchange points that we have in the East will have a few at West but in large would be line haul changes. So, the answer is, we’ll be doing both, but it won’t involve much real estate beyond what we’ve already done.

David Ross – Stifel Nicolaus

Okay. And then as far as fuel efficiency plans are concerned, it looks you did a good job recovering at least additional fuel expense, but is there anything you’re doing whether it's putting APUs on line haul units or reducing miles per hour that drivers can drive? You also come back to the fuel cost problem.

Bob Davidson

I think the thing to point out there David is we have been doing what we need to be doing in that area for decades. For instance, we have governed our equipment at 62 miles an hour for the last, at least the last five years and before that was 58 miles an hour. We have anti-idling settings on our equipment. So we, of course, APUs clearly aren’t a factor for us because we don’t have sleeper [ph] operation. So the things that we need to do to mitigate, to improve fuel economy, we’ve doing for a long, before it was cool to do that.

David Ross – Stifel Nicolaus

Thank you very much.

Bob Davidson

Thank you, David.

Judy McReynolds

Thanks David.

Operator

(Operator instructions) Your next question comes from Justin Yagerman, Wachovia Securities.

Justin Yagerman – Wachovia Securities

Hey, good afternoon guys.

Judy McReynolds

Hi Justin.

Bob Davidson

Hello Justin.

Justin Yagerman – Wachovia Securities

Hey Judy, a question on workers comp, I remember this was a kind of constant theme just generally industry wide last year. Much people had seen improvement on it. Is there something that changed in the rules year to year that is impacting a little bit of how you’re accruing or maybe has been a little bit of a drag?

Judy McReynolds

Not at all.

Justin Yagerman – Wachovia Securities

Not at all?

Judy McReynolds

The accounting methods and the approach that we’ve used there has been very consistent for – really since I've been with the company, we haven’t made much of a change. We’ve had just different issues along the way to deal with, but the overriding method there is the same. I think, we at times have different results on our development factors which we update in the first quarter. We talked about that in the first quarter and that’s based on a longer history of our performance on claims increases. That really is, for us, it ends up being an activity-based item. If we’ve had increases in claims through the normal course or the normal process or we’ve had an increase in the frequency of injuries or a decrease, you’re going to see that reflected in the quarterly numbers. And I think the point that we made earlier on the call is various volatilities and fluctuation in that and perhaps it’s better to just look at it over a little bit longer term basis and that’s certainly what we do. We evaluated against our five and our ten year averages and that seems to make more sense to us and makes more sense out of the numbers.

Bob Davidson

And the other thing I point out is that I’m pleased at these trends. When I look at, in fact last quarter, we are able to adjust the development factors and that’s positive news because what it shows is, is that we’re seeing progress in that area that perhaps a number of other carriers are not seeing.

Justin Yagerman – Wachovia Securities

Okay. Bob or Judy, either one of you guys maybe it would be helpful if you could take us through tonnage growth month by month through the quarter. You mentioned that tonnage was down as of the first two weeks of July and hard to extrapolate anything from that, but just trying to get a sense of the direction through the quarter how tonnage growth progressed?

Judy McReynolds

Excuse me Justin. I will give you the months and then I want to make a couple of comments about it. Our overall quarter was basically up 0.2, and when you started off the quarter in April, it was down about 0.5, May was a positive 2.1, and June was a negative 0.9. When you look at that, just on the surface, it looks like a big change from May to June, a deterioration perhaps a concerning one but when you see through this and you factor out the calendar effects of the month, in other words, just make up of the calendar of these months, what you have is April and May probably more realistically were down about 0.5, 0.5%, and June was a little worse, down about 1%. So, it’s definitely affected by the calendar make up whenever you look at the individual month but the basic point I think that we see is that when you look back at the fourth quarter of ’07 beginning at that point, we’ve been bumping along the bottom not seeing anything that is much better, not seeing anything much worse and that carries through in July so far.

Bob Davidson

When you start looking at plus or minus 1% increases, that’s just static in the channel and it has been a fairly flat trough since fourth quarter of ‘06.

Justin Yagerman – Wachovia Securities

Okay, that’s definitely interesting. When you’re speaking to your customers, Bob, typically we’re moving into the time of year when people, in a good environment would be talking about trying to find capacity, trying to figure out how they’re going to get goods to the shelves in time for back to school and then eventually Christmas season and everything that fall and winter bring. What are those discussions like right now? Is there any thought that, you know, August 15th we start to flip the switch and things start to get a little bit better having seen a PTs [ph] in the last years? Do you have any expectations around that coming from your customers?

Bob Davidson

You may recall the conversations that I had after the fourth quarter of ’06 where we talk to customers and they told us there was no change but there was impact to change. So, I don’t a lot of confidence in the anecdotal conversations. I think if you just look at the general press, you start to see some realization that truck load capacity maybe finally rationalizing but that’s just purely anecdotal and I have not much confidence on the ability to project what’s going to happen and particularly on the basis of those conversations.

Justin Yagerman – Wachovia Securities

But having been through multiple cycles and having admittedly a lot more knowledge in most of us, you know, Bob what has been your experience in the past, you move through these of periods, when you do see that kind of spot improvement like we saw in June in the truck load market, when you’re getting ATA [ph] truck tonnage index data saying that freight is up year over year or at least from a tonnage standpoint, you know, has that traditionally led an improvement? If you were flying in a storm and had to use your instrument panel not looking out of what’s in front of you, you know, what would that instrument panel be reading right now for you for the next six months?

Bob Davidson

Justin, I love metaphors and that’s a wonderful one. I appreciate that. It’s been my experience that, as I indicated earlier that, I start to be encouraged when I see the truck load guys improve. However, there have been some false positives along the way but I think you’ve got it. If you see improved number from truck load carriers, I think we in the LTL sector has to be a little encouraged for that.

Justin Yagerman – Wachovia Securities

Okay. And then the last question. Because it’s a little long. From the long haul market, you guys did see a decrease in your length of haul. You know, I know that, that is easily attributable to some of the initiatives you made in RPM but, you know, would you also attribute any of that to aggressive pricing. We’ve heard that at least a few competitors had been very aggressive in the long haul market. You guys haven’t been, you know, a big discounter in the past. I can’t imagine that you have been in this quarter. You know, was there some I guess a deliberate move in the way that you were looking at that business’s quarter?

Bob Davidson

We’ve lost some accounts and we’ve gained some accounts. I think that certainly there’s a competitive environment out there that probably is a continuation of what we’ve been talking about for four quarters or so. I’m not sure I see anything specific. I might even look to Southern California imports. This maybe as much of a factor. We have reason to believe that, that is not maybe a specific issue but at the overall long haul LTL market is soft.

Justin Yagerman – Wachovia Securities

Got it. Well, thanks so much for your time.

Judy McReynolds

Thank you Justin.

Bob Davidson

Thank you.

Operator

Your next question comes from the line of Ed Wolfe of Wolfe Research.

Bob Davidson

Hello, Ed.

Judy McReynolds

Hi, Ed.

Ed Wolfe – Wolfe Research

Good morning. Soon I guess. Hey, I apologize because I got on a little bit late. I heard the recap you did with Justin about the tonnage trans but I didn’t hear what you said about July?

Judy McReynolds

Basically, what we said was that it’s down about a 1% so far.

Ed Wolfe – Wolfe Research

But really no major change in terms what you’re hearing from customers of the economy, it feels kind of the same?

Bob Davidson

It does.

Ed Wolfe – Wolfe Research

Is that a little bit about pricing and your model and more generally the LTL model. What’s the ability if pricing were to firm up and it feels like we’re not there yet? It maybe a little closer at the truck load side, maybe we’re not even there yet but at some point when things do tighten and the economy does get better and in between the year, how do you go back and get a GRE after you’ve gone through it? Can you talk about the ability to get pricing in between or is it really waiting for the next GRE and that contracts come up to get that next pricing?

Bob Davidson

Well, as you know, the general wage increase has affected less and less of our business over time and this becomes more of a month by month basis. So, we have through our contract and deferred a pricing process, a monthly cycle, where we review those accounts and ask for increases and as I indicated, before you got on the call, that we got 3.8% average on those during the second quarter and that process actually is healthy because it kind of spreads those negotiations over a year rather in one particular big bite. In addition, if we have accounts that deserve a look mid cycle, we’re not sure about doing that and particularly, we’re dealing with fuel surcharge caps and programs that may have made sense sometime ago but in the current environment, no longer makes sense. So, the biggest thing is not so much mechanical. It’s having an attitude in the process to that and our people are well-trained. They’re well-trained to find out what competitive prices are and we’re certainly going to be competitive in the market place but also, we’re also going to add value and then we’re going to charge for that value and I would suggest to you there are pricing execution process of ABF is well-developed in any industry that you’ve ever been associated with.

Ed Wolfe – Wolfe Research

Bob, can you talk to that 3.8%? What is that 3.8? Is that net fuel, gross fuel, and what it that look like that same number equivalent saying second quarter or the first quarter and fourth quarter?

Bob Davidson

I saw your comments this morning Ed. I’ll point out to you that it is all in many changes in fuel. So, you know, it certainly includes any fuel change up or down that we would have had and you also, I’m sure you know and spoke that the changes in length to haul and wait for shipment would be depressing or whether they are improving

Ed Wolfe – Wolfe Research

Yes, I know that was a mistake and my fault and on tape as I appreciate that.

Bob Davidson

But for clarity on the increase on the footage in contracts, that includes any change in fuel if they would not exploit that.

Ed Wolfe – Wolfe Research

So, I mean –when you talk about the deferred pricing as part of it, what is deferred pricing? What did you mean by that?

Bob Davidson

Well, it is where we've said to a customer we are going to hold your price for a period time, typically a year but we don't have a formal contract. Nobody has signed anything. We just kind of said unless something really unusual happens we are going to keep previous type of price per year and when that year is up we go in and renegotiate. That is kind of non-contract contract.

Ed Wolfe – Wolfe Research

Like in a world contract?

Bob Davidson

Well, I would not put in no terms, but there are accounts that went through the general rating increase without an increase.

Ed Wolfe – Wolfe Research

What percentage in your business now is contractual? What is related to the GRI and what is deferred?

Bob Davidson

I would say the GRI is more like 40% just this of the top of my head and the other 60% is the combination of contract and deferred pricing increases. The contracts are the minority of that.

Ed Wolfe – Wolfe Research

Is that an exchange between the deferred and contractual in the weaker environment the last year or is that always kind of been constant?

Bob Davidson

I think we've always have pure contracts than most people. We tended to decide it that you don't need a contract to do business with ABF and so but the aim–. In those instances where the customer wanted raised stability, we've given it to them but not through a contract.

Ed Wolfe – Wolfe Research

Up in terms of the new teamster contract, I'm guessing there is some puts and takes, am I right that the benefits go up as the longest first about 7%. But you compare to see some of the productivity can you talk to some of that that starts to kick in.

Bob Davidson

Yes we covered that a little earlier April 1st wages went up 2.2%, August 1st 118.1% increase at least in the nominal rate. We will see some productivity improvements but we are focused on using the features of the contract that allow us to be competitive in the regional market and the next day in secondary market and so fall eventually we will see some cost improvement for us to–. We will see that when we get all our people out of lay-off which we are focused on. The big deal now for us, is delivering the customers improved transit times in about 30% of our lines. It is a big deal for us and it does more important test in the cost citing.

Ed Wolfe – Wolfe Research

Sure, and is some of that related to the driver being able to load and unload?

Bob Davidson

Yes.

Ed Wolfe – Wolfe Research

What percentages are your drivers did to expect the pay the extra dollar an hour a deal to be able to do that?

Judy McReynolds

Here we really don't have those numbers in front of us but you know we probably be able to report better on that after we get the roll out completed and we see it in operation either when we have our call on October or perhaps sometime after that soon after that. But you know we have to take to say right now because it is a large change and they are going to the process of getting those jobs in we really don't have the figures for you know where will we end up on that.

Ed Wolfe – Wolfe Research

That is fair enough, I will check back with you on after that. Judy can you talk a little bit about gain on sales of equipment. Obviously, those has dried up a deck can you talk to pricing related to number of vehicle for sale and how we shall look at that going forward?

Judy McReynolds

We have had good success in moving the equipments that we sold. We have on a quarter of a quarter basis that sinks our figures on gain on sale we are pretty even with last year. I don't think that your debate numbers our really much different than that. When I talked to our vice president on maintenance Gary Hunt, he knows about this issue. We have had this success and I think, the overseas market we sold some of our equipment to the brokers to a number of other countries which some point unusual for us. And has provided I think some stability to the used equipment market, but we are just not hearing any negative comments or really any positive comments. Things are just kind of moving along as normal there.

Ed Wolfe – Wolfe Research

The 451,000 in this quarter versus the million 9 last quarter, there was some real state in that last quarter then or was that?

Judy McReynolds

I am looking at numbers that are 451 versus 470 or so last year.

Ed Wolfe – Wolfe Research

No I am not talking about last year I am talking about that first quarter.

Judy McReynolds

Oh in the first quarter, you know we had some–. I have to look back at the year to date figures and I can get back to you on that. I don't have all the detail in front of me, but you know we had some increase sales activity in the first quarter on assets that resulted in gain. But nothing going significant or noteworthy.

Ed Wolfe – Wolfe Research

I will get back to you on plan. That sounds like no change in terms of the pricing of trucks are holding up pretty well.

Judy McReynolds

Yes.

Ed Wolfe – Wolfe Research

In the last kind of the picky things the interest income, sounded they did not even know your cash is up 28 and what is going on with that?

Judy McReynolds

Well, last year in early December moved out of auction rates securities investment. We moved about $80 million out of those and I am pleased to report that we have no losses on that event which I noticed some of our competitors and certainly several other companies are still waiting to get their money there. But what we have to do in response to that was to move our money into either money market funds or recently we've been using a CD program and what has happened to us is our after tax yield is down closed to 2% on the money. So even though we have about $75 million or $76 million on average more money invested in this category, we are earning about 2% after tax was on it. Again, we are not interested here in the speculators who are taking in any inordinate amount of risk on these investments. Capital preservation is the key and so that is what we are doing and this is what the market is giving us.

Ed Wolfe – Wolfe Research

I understood. I don't think investors are investing in you to be a hedge fund but we should assume that at least through the end of the year kind of keep at 2 percentage.

Judy McReynolds

Yes, I would. It is actually after taxes about 1.7 its 2 percentage point less than last year.

Ed Wolfe – Wolfe Research

FBIs saying insured also. Thanks. Bye my appreciation.

Judy McReynolds

No problem.

Bob Davidson

Thanks Ed.

Operator

At this time there are no further questions.

David Humphrey

Okay. We thank you for joining us this morning. We appreciate your interest in Arkansas Best Corporation stocks and price this concludes our call.

Operator

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

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Source: Arkansas Best Corporation Q2 2008 Earnings Conference Call Transcript
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