ArcBest Corp (ARCB) 2002 Q2 法說會逐字稿

Good day and welcome to the Arkansas Best Corporation Second Quarter 2002 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Director of Investors Relations, Mr. David Humphrey.

Welcome to the Arkansas Best Corporation Second Quarter 2002 Earnings Conference Call. We will have a short discussion of the second quarter results and then a question and answer period.

Our presentation will be done by Mr. Robert Young, III, President, Chief Executive Officer of Arkansas Best Corporation. Mr. David E. Loeffler, 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 now, forward-looking statements by their nature are subject to uncertainties and risk. For a complete discussion of factors to affect the results, please refer to the forward-looking statements section of the company's earnings press release and company's most recent second public filings. We'll begin with Mr. Loeffler.

Thanks, David. At looking at the over all results for second quarter the revenues $345.1 million compared to 406.6 million in the second quarter of last year. If you exclude GI's revenues from the second quarter of last year since we sold GI in August, of 2001, our revenue per day is actually down 5.3%.

Our operating income is $13.3 million, compared to a year ago of 19.9. Our operating ratio for the total corporation is 96-1 compared to 95-1 a year ago. Our net income is 6 1/2 million compared to 9.8 million last year.

And our earnings per share on a fully diluted share is 26 cents compared to 40 cents a year ago. And looking at the revenue changes for ABF, their revenue per day was down 5.2% and Clipper's revenue per day down 11.4%.

In looking at the condensed cash flows for the first six months, ended June 30 of this year, our net income before depreciation and before the noncash accounting change relating the write off of Clipper's goodwill was $32.5 dollars. We had positive changes in assets and liabilities of 8 million dollars. We had net purchases of property and equipment of 26 1/2 million. Capitalization of software of little over 2 1/2 billion. Positive changes in our bank flow to the about 2 million for a net decrease in debt of before temporary investments of 13 1/2 million.

The status of our outstanding debt including the current maturities, our debt net of temporary investments was just under $144 million at the end of 2000. Just under $119 million at the end of 2001. And $110 million at the end of the second quarter this year.

Our debt equity ratio is reduced from a .61 to 1 to a .38 to 1 at the end of last year and down to .36 to 1. The weighted interest rate that we're currently paying on borrowed moneys when considering or fixed swap rate is 6.87%. This is up about 42 1/2 basis points as a result of our new credit agreement.

Our internal financial measures that we monitor closely all the time, our after tax return on shareholder's equity for ended June 30 this year, 9 1/2%. Our debt equity ratio as I mentioned .36 to 1. Our after tax return on capital employed was 8%. That's compared to our minimum acceptable level of 10%.

We continue to expect the expenditures in the range of $45 million, actually, they'll probably be lower than that. But we'll be probably somewhere in that range.

And we're still projecting our depression and amortization for this year to be a little less than $50 million. Now, I'd like to turn it over to Robert.

Good morning. I'll talk about ABF first. It's roughly 90% of our Arkansas Best Corporation business. ABF revenues in the quarter 308 million compared to 324.8 million last year, down about 5%.

And the LTL pounds per day down 6.1%. Truckload pounds down 12.4%. LTL tonnage and truckload tonnage were both coming back some from previous quarters. To give you an idea of the trend in the first quarter, LTL tonnage was down 8.38% from prior year. In the second quarter, 6.1% from prior year. The truckload tonnage in the first quarter of this year was down 19% from prior year, and 12.36% in the second quarter this year. So they're both trending in the right direction.

If you can find some positive in the fact that it was not down as much as it used to be. Second quarter LTL revenue per hundred weight up 3.1% compared to the second quarter last year which is a positive.

It was $21.31, a hundred versus $21.67 last year.

In our profile, our length of haul was up a bit from 1236 miles last year in the second quarter to 1246 miles this year. Up about ten miles year over year.

And length of haul. The commodity class did not change. The average commodity class and the weight per shipment went down some from 1009 pounds last year to 990 pounds this year.

Our LTL yield changes have been quite stable in the past two months. We've retained a good chunk of the rate increase that came in last year. And our renewals of contracts in June were very encouraging. We had a good increase in those contracts, and that bodes well for retention of the August 1 increase coming up shortly.

One of the real pluses at ABF for last few quarters and I'm glad to report this again is our productivity continues to improve year over year and I think that's somewhat remarkable in light of the declining tonnage we have experienced.

Our LTL bills per dock hour improved 2.64% year over year. LTL bills per street hour improved .85% or almost 1%. Our trailers per yard hour improved 6.98%. Those are nice improvements and those small percentage improvements amount to a lot of dollars.

One way we have done that is the use of some new technology. I mentioned this before but I'll update you to where we are on it. Based on an analysis performed at the ABF terminals using the net link system that we utilize microbrowsers typically yielded improved in productivity approximately 4 to 6%.

Currently, there are 81 terminals using the outbound planning. That's city drivers with microbrowsers so they can transmit information on the freight they're picking up back to the terminal before they get back and allows for planning allowing to load some direct loads, and move freight around less on the dock when they get back.

There will be 101 terminals using the outbound planning and mobile dispatch by year end. By the year end, 70% of the city drivers at ABF will have microbrowsers. All nine of our distribution centers are currently using the yard and dock system and between 20 and 30 end of the line terminals on that system by year end.

So we have gone after the terminals with most potential first. The additional terminals because they will be smaller won't produce the same impact and still have potential for additional improvements as a result of the use of this technology between now and year end.

Our rail usage for the quarter was 13.4%. That's up some from 12.8% last year. Still, at a relatively low number, compared to what we have done historically, and we intend to keep it there. Actual piggie back miles almost exactly the same. It was 10 million 480,000 last year. So, not much change at all in rail miles but as a percentage, it did go up some.

One area where we have suffered some this year is in our insurance costs. Worker's comp insurance is up over $2 million from last year. A lot of this is the result of large premium increases, and we increased our retention levels this year. Good trade, but nevertheless, our cost in total are up. The bodily injury and property damage is up about a million 6. Over last year, and again, it's just the insurance market has really hit us hard. One bright note on the insurance side is the cargo loss and damage claims are down from last year down about $300,000 and our cargo loss and damage claims now are running about .77% of revenue, the lowest I can ever remember.

And that's good for a lot of reasons. Obviously, it's less expensive but it means we have happier customers out there, and we continue to make improvements, have for the last several quarters in our cargo loss and damage. I'm very pleased with that.

In general, our insurance costs are impacting ABF a little over one point on the operating ratio this year. So, that's not been a good area for us. We'll be working on that to try to get those costs back in line.

Equipment sales in the second quarter have resulted in a gain, again, if you've listened to past quarters' reports we've been doing this for sometime now. We gained - we had a gain about $210,000 in the second quarter on equipment sales. Obviously, $210,000 is not a very significant number but my point in talking about this is to give you some confidence that our accounting for residuals on this equipment is conservative and realistic.

And, I'm very pleased that we're able to continue to do that. We don't anticipate at ABF any real change in our cap ex plan from what we told you about. We've reduced the fleet by 5% since 2000. And, in terms of road power, we have 500 tractors ordered this year. We have received a little over 400. We expect to be at about 475 received by the end of this month. And so, we're very close to having received all of those tractors and those tractors will not be impacted by the October 1 engine deadline on the new engines that we expect to be less efficient both in terms of fuel mileage and maintenance.

What we'll do on that next year is still up in the air. Obviously, we have got sometime to think about that. Perhaps we'll have more information on those engines by the time we need to order next year's crop.

In terms of employees, our second quarter this year versus last year is down 3.1%. In terms of total employee equivalence, that takes into account overtime and casual hours. It's down in terms of head count by 375 from 12028 last year to 11653 the this year at quarter end, varying day-to-day.

One thing we look at pretty closely in terms of efficiency of our tractor fleet is the miles per calendar day. We're running in the second quarter about 463 miles per calendar day on our road power. Last year, that was at 468 so very little change and we'd rather see those numbers in peek months more than 500 miles per day and an area where we can make some improvement in utilizing the road power where we have most of our dollars tied up.

ABF had a decent second quarter, I think, in particularly in light of the continued weak tonnage environment. Our operating ratio improved a couple of points from the first quarter. And, that's indicative of what happens in terms of our operating leverage as we came up seasonally with business our profitability improved significantly.

Moving on to Clipper, Clipper's our intermodal marketing company. Clipper had total revenues of $30.4 million in the quarter this year. Down about 11 1/2%. The operating ratio at Clipper was a 97-3 compared to 96-7 last year. And the LTL part of Clipper, we did a good job in terms of increasing yields. And that was the easy part of what we need to get done there. Then we have to bring back that business at - or like business at better yields and get the totals back up where they need to be.

Our load average increased at - in the LTL sector at Clipper which is a key number for them. And the protective shipment area where we're running refrigerated trailers on the rail we had a much better result than we had in the LTL part.

Shipment up 4.65%. One thing that hurt us is our business declined at Clipper is that a big part of our income there comes from rail incentives and we didn't earn those this year. That cost a quarter of a million dollars in the quarter by not earning them from the increased tonnage. And Clipper has some bad experience with bad debt expense running about $180,000 more than we expected last year.

LTL revenue was - as I said, is down 8.4%. Intermodal revenue was down 19.9% and really hurt us on the rail incentives. On the other hand, our margin ins LTL improved. The gross margin improved 18.8% to 22.19%. Again, that's the easy part of the battle. We got rid of some of the noncompensatory freight and we have to add back good freight.

In intermodal, our gross margin improved from 11.16% to 11.12 and had significant shipment declines from the major customers there that really hurt the volume, and Clipper Control Logistics, the refrigerated trailer part of the business, business was up 5.1%. And the operating ratio was 90.3 for CLipper Control Logistics.

There's room for improvement at Clipper. We see where that can happen. Largely has to do with improving volume, and we think that can happen. And certainly needs to happen sooner rather than later. With that, I'll open it to questions.

I think we're ready.

Thank you. If you'd like to ask a question, you can do so by pressing star 1 on your touch tone telephone. That is star 1 if you have a question. We'll pause for just a moment.

Our first question will come from Dan moor with Stevens incorporated.

Good morning, gentlemen. A couple of quick questions. Robert, I was just wondering if maybe you could give a sense for the seasonal improvement that took place in the quarter. Maybe from a tonnage perspective, and or, you know, a profitability perspective.

Well, the, of course, the second quarter is normally a stronger quarter. And, it was indeed this year. Came back fairly well. And, the impact of that was rewarding in that it improved our operating ratio considerably over the first quarter.

And, I think that the lesson there is that if the economy begins to turn at some point in time, then we could look for similar types of improvement in O.R. The first quarter was down in LTL tonnage just a little over 8%. The second quarter was down a little over 6%.

So, there was an improvement in year over year decline. Not something to get, you know, real excited about but certainly it was better. To give you a little better feel for that, just going from January through June, the decline over prior year in January was 8.7. February 8.48. March 7.85. April 5.4. May, 6.8. June, 5.78.

And, the last quarter then averaged 6.10. That's LTL tonnage versus last year. And the truckload improvement was, I guess, really little more significant. January through June, it was down 20. Down 15. Down 20. Down 15.7. Down 14.2. And down 6.6 in June.

So June really improved in terms of comparisons to last year. You're looking at a first quarter number on truckload tonnage down 19% in the first quarter and 12% in the second quarter. I'm rounding those numbers off but gives you a feel for the improvement there.

Is there anything to the, you know, the improvement, I guess, experienced sequentially from, you know, I guess May to June? Sounds like a very big number there at least in truckload. Is it just related to concerns on the strike or something else at work there that you might be able to give us some color on? Seems like a lot of improvement in a short period of time.

I asked our marketing people if that long shoreman strike had impact on us and the answer was no. I think this was general improvement in truckload.

Okay. Okay. Just wondering, as well, I guess, if you could give us a sense for, you know, whether or not you're taking market share from your competitors. I don't know if you can give us any clarity there at all, but it would certainly be appreciated if possible. And then I guess a related question, you know, what is your current capacity of utilization. How much freight could you take on in a short period of time and take on effectively?

Well, in terms of terminal capacity, we can take on a heck of a bunch. Probably another 20% without too much problem. In terms of equipment, you heard me talk about miles per day on our road power running in the neighborhood of 460 miles per day. That I've seen those numbers up around 515 miles per day.

So you calculate that percentage per schedule. So, there's a lot of room there at ABF to absorb additional business. How that comes or when it comes, I don't know. Somewhat encouraging. The tonnage transfer we're seeing right now but it's like watching grass grow. Not very quickly.

And then I guess as it relates to taking business from competitors, is there any evidence of market share gain at the expense of others? Certainly not on the basis of rate, that's for sure. But, other market driving factors.

There's nothing of significance there that I would report. We're constantly gaining business from our competitors and at the same time, we're constantly losing some business to our competitors. So it's hard to say that there's any one area there that is significant.

Well, David, maybe you could give us a little update on the equity interest in Wing Foot. What the expectation here as April approaches.

We have a $59 million investment in Wing Foot. We have the right to put that at the end of April of next year, no final decision has been made as to what we're going to do.

And then we'll be assessing that as we forward. That put is for around $73 million.

Okay. And then last but not least, maybe if you wouldn't mind just giving us a little bit of color on the GRI, what the effective rate increase is, and what portion of your customer base that's going to effect immediately.

You're talking about the August 1 increase, I assume?

Yes.

That will affect, you know, we have about 30% of our business under contract. So, those increases will have to occur as we go through the contract renewal process. But the rest of it - most of the rest of the business will be impacted by the increase.

Okay. Thanks, guys. Appreciate it.

Thanks, Dan.

Up next we'll hear from Jordan Alger with Goldman Sachs.

Yeah, hi. A couple of things. One, can you perhaps talk about where we sit today from a volume standpoint? Sort of you listen to customers and what you have seen thus far in July realizing it's early. Are trends running the same or showing improvement?

And then, just sort of secondarily, where if any either geographically or by customer segment have you seen some of the most improvement? Thanks.

The month of July, of course, is about half over, so months tend to be tail-end loaded for the industry but so far this month, our revenue numbers are maybe slightly improved from prior month in terms of year over year comparisons.

But that can change before the month is out but right now, it looks somewhat encouraging. But again, very small change. Nothing - no big bump. No big hockey stick there.

The strength we see, the strongest area of the country, southern California. That's a very definite. We're seeing some strength in the Midwest, particularly the upper Midwest but it's hard to see a trend there. It's not been going on long enough.

Those would be the most significant things. I really can't give you any idea in terms of industry sectors. We just don't have enough information on that. Our [sick] codes we're only applying to about a fourth of our business, so it's really hard for us to tell you on that.

Okay. And, I guess given your comments, the sequential improvement to operating margin principally due to volumes. Was there anything else specifically on the productivity end or cost side of note? Other than just the gains from more volume through the system.

Right. Other than the productivity improvements I mentioned earlier, it's largely a volume impact. Increasing volumes will have some very nice effects on ABF going forward because we're - we've got a picture that's not full. When we get that full up, we're going to get a lot of cream to skim off the top.

Okay. Thank you.

Moving on, we'll hear from John Barnes with Deutsche Bank, Alex Brown.

Good morning, guys. Okay. Let me go ahead and get this out of the way. Now that ups is done negotiating and looks like they're approving the contract, when do you expect contract negotiations to heat up between your negotiating committee and the teamsters?

Well, I think that now that that contract's out of the way, that it's going to open the teamsters up to begin to talk to the straight carriers on the national master freight agreement and wanting to move forward as quickly as we can.

They've got things on their calendar as do we that will have to be taken care of in the meantime. I think you'll see those talks get going pretty soon.

Has there been any discussion so far where you stand in terms of what you want, what they want, and given what people consider to be the richness of the UPS contract, are you fearful they're going to come back and try to dig a little deeper?

Well, we haven't traded ideas yet. There have been no proposals made from either side, and so, we don't know what their proposals will be at this time or do they know ours.

But there have been ongoing discussions between the industry and the teamsters since the last contract was signed where we have tried to make them aware of issues that are important to us, and they have been making us aware of issues that are important to us.

So we have some idea, but no specifics at this point. The UPS contract, I think it's good that they got it done prior to the expiration. Some of the things that they're doing won't apply to us. They use a very large percentage of casual employees that are part-time employees, I think they call them at UPS and we don't have anywhere near that number of part-time employees. That was a big issue with them and I don't think will be with us.

There's some real differences between UPS and the freight contract. Some of the things that are in that contract look fairly rich to me. On the other hand, UPS is a fairly rich company. And the freight industry is for the most part not operating at the profitability levels of UPS. I expect the teamsters will take that into account but we haven't seen their requests yet.

It has been my experience in these contracts and I have been in quite a few of them, that we end up giving them more than we thought we would and they get less than they wanted. That's the nature of the beast.

Absolutely. All right. In looking at the balance sheet and cash flow, you're getting down here. I mean, dramatically reduced debt. What do you think is the right structure for you? Are you comfortable being debt free especially if you exercise the put option? You open yourself up to being debt free in a very short period of time, at that point, what's the appropriate use of the cash flow and your balance sheet? What kind of opportunities present themself?

Well, we're comfortable with quite a bit more debt than we have right now. You're aware, trucking business throws off a lot of cash. We have a lot of depreciation and we can handle a fairly significant portion of debt pretty easily. Our company has from time to time. Sometimes more than we wanted.

But, it is not our goal to be debt free. It just so happens that we have been making enough money and with the sale of the tire company to Goodyear, you're right. It would appear we'll be close out of debt or out of debt in the not too distant future unless something happens. That gives us a lot of options that we can look at. I guess that's the happy news.

The things that come to mind is we could pay a dividend or we could buy back stock. Or some combination of those two things or we could make an acquisition or acquisitions. We don't have anything planned right now. There have been no plan put together as to what we're going to do but we're certainly looking at it and looking at different ideas as to what we might do. I don't think being totally out of debt is good. That doesn't give the stockholders a benefit of leverage, and some leverage is good. Too much is bad. I've been on both sides of it. I guess I'd rather have no debt than too much debt, but in general terms, I think that if we don't have any debt at all, we're not doing the shareholders a favor. We'll be looking at that and finalizing some plans in the not too distant future, but we don't have anything to offer you right now.

Okay. And then last question, I'll turn it over. On your returns, clearly, this quarter you have dipped below the kind of minimum return on invested capital. Is this just a function of getting the profitability back up to prior levels or is there something else going on internally to bring that back up?

The year to date numbers are not good because the first quarter was poor. The first quarter only 6 cents as I recall. 6 cents a share.

And, at 26 cents a share, we are getting back in the numbers that we need to have, but not happy with that number. I mean, one good news - piece of good news, I guess, the bonus expense is down this year. It's based on return on capital employee. All of us, all the shareholders and all the people that participate in the bonus would like to see the number up because it's only a piece of the profitability.

So, we're very concerned about that. It affects our personal pocketbooks. We're going to try to get it back on track.

All right. Thanks for your time.

Up next, we'll hear from James valentine with Morgan Stanley.

Hey, guys. Question first on market share in that the national carriers including you guys have seen your yields hold up better than regionals and Robert you mentioned the length of haul getting longer. And, I'm wondering if the regionals here are possibly discounting in the shorter haul lanes that they typically operate in. In order to claw away market share and maybe you can address Conway's announcement to be offering in effect longer length of haul services and I think trying to do it without taking up customers' rates which I suspect will have some market implications for you.

Well, in general, for the last, oh, say three years, we have been taking market share from the regionals. All of the long-haul carriers got into the second-day market and most with fairly good success.

I would guess that some of the impact on our length of haul came from the improvement in our truckload business that came about in the quarter. That tends to be longer haul business. But I haven't really looked at that.

You know, we have reduced the transit times in more than half of our terminals since 1999 in order to get into that two-day market. Conway, well, actually, just to talk about the regionals in general, they have been more aggressive on pricing. I'm not talking any one company now. I'm talking about the group. They have been more aggressive on pricing, and they may be taking back some of the market share although I don't have an analysis of that in front of me nor looked at one recently, but I suspect that they are taking some with some of the aggressive pricing they're doing. Conway's announcement that they're going to use sleeper teams to expand their service, you know, I mean most of the long-haul carriers use sleeper teams right now. We use very few. We have a very few number of sleepers out there. It's not part of our strategy. Sleepers are useful and can do a good job for you if managed properly but with the thing to be careful about with sleepers is that because it's an expensive unit, two drivers on board and the truck, you have to be careful you don't start inventorying freight for them and means the freight sits there for a day or two before it actually starts moving. Once it starts to moving on a sleeper team, it can move faster than a relay. But sleeper teams and relays tend to move freight. Is kind of the way I look at it. We think we can compete effectively the way we' operating now and have been sometime and competing with sleeper teams as long as I've been in the business. We have made acquisitions and almost all had sleeper teams and almost all of them were broke. They're a tool. They have some applications. And they can do a good job in certain jobs. They're not going to change the world.

Conway's effort, though, to try to extend the length of haul without taking up - I should say extend the service reach for a customer doesn't cause you concern that there could be a market share shift going back in their favor given they say they're not taking up pricing to do it?

Uh-huh. I'm not overly concerned about that. We've been competing with sleeper teams as long as I can remember.

I was puzzled when you say that for three years ABF taken share from the regionals. I don't have the statistics but I think at least of the companies, the few private and public companies I look at, I think their volumes held up better the last two or three years than ABF and the nationals. Is there a dynamic - and could be other things beyond national versus regional causing your volumes not keeping up and everyone is down the last year and a half, causing yours to be down more than theirs?

Well, what we have seen when the economy was growing, our two-day business growing faster than the three-day and four. Which tells me we're taking market share. Had to come from some place.

And that wasn't due to your customers saying, I'm going to migrate from a three-day product to a four-day?

We didn't charge more. We just gave better service. In the case of - since the economy has turned down, while our two-day turned down also, generally speaking, it has turned down less than the three-day has gone. So again, it would indicate to me we were taking market share.

All of the regionals during the downturn had declines, also, but we moved into two-day markets we hadn't served before and got business. That had to come out of somebody's hide, and the likely suspect would be the regional carriers because they were handling most of market.

Do you think on a truckload? I'm trying to where else would explain your volumes not keeping up with their volumes.

Well, I think probably the case is they would have grown faster if we weren't taking part of their market.

I see what you're saying. Good. I guess one modeling-type question that I think on August 1st, the health and welfare contributions you make will go to a rate the same as the central states health and welfare plan. And I think that some subjectivity to that increase and could be a meaningful number. I thought that someone said that UPS's contract might be used as a gauge for the increase. And their health welfare and pension costs which they don't break out separately are in total going up 6% on a year on the life of the contract. I was trying to figure out if that's what we should be using for your inflation for that per week contribution you are making.

Jim, it's Dave. The increase August 1 hasn't yet been determined, and I don't have any better speculation as to what you should use for modeling than you might.

Okay. So we'll wait. What should we look to? Because, I mean, for the companies that follow that number, up 15, 20% meaning not for LTL's because healthcare inflation is going up so much.

Well, because it hasn't yet been determined, we don't even want to give any kind of guess at what that number will be. That could just work against us.

Okay. I understand that. Thanks.

And as a reminder, if you would like to ask a question, you could do so pressing star 1 now. Up next we'll hear from Mark Levin with Davenport and Company.

Good afternoon, gentlemen. A very quick question. From your conversations with your customer base, are you feeling more or less confident at these sequential volume improvements are sustainable? Are there fears or concerns about a potential double dip situation just based on your conversations with your customer base? Thank you.

Well, I think that because the improvement has been so slow that you do worry that it wouldn't take an awful lot to turn it back in the other direction. I haven't seen any sign of that. And I have - my general feeling is positive that we're going to continue to improve. I suppose if there were a large event that that could change.

But generally speaking, our customers tend to be positive, optimistic. We're seeing - we have done some correlation between truck tonnage and the manufacturing indexes, and find a strong, oh, say, an 82, 83 correlation between the numbers and those numbers indicate that the economy or that the tonnage coming out of manufacturing companies is going to pick up sharply as the year goes along.

We're about a five-month lag to their indexes. And, if that correlation holds up, then we should have a continuing strength into the fall.

Thank you, gentlemen.

Our next question will come from John Larken with Leg Mason.

Good morning, gentlemen. Question on the insurance. Your operating ratio increased by about 200 basis points. It sounds like about half of that was related to insurance.

That's right.

I was wondering if you could give me a flavor how much is premium related and how much increase due to increased accident frequencies severity that falls below our self retention levels.

John, when you look at the increase in premium and the increase in our retention together, about a point of it is premium related.

Okay. So, that's all premium related. How does your -

There's - excuse me.

- Over time.

Okay. Could you repeat the question, John?

Yeah. The question was, you know, looks like about half of our operating ratio deterioration was related to increased insurance expense. And typically, insurance expense is broken down into two categories. One is the premium increase. And one would be related to that portion of the risk that you more or less self insure.

And I was wondering if you could break that increase down for us.

Okay. About a point of it is increase in the operating ratio. Just a little less than that is premium related. And that includes the increase in the retention on work comp. A couple of tenths of the point relates to a little bit of increased severity that we have experienced.

Okay. So, the premium is harder to control but the severity and frequency, obviously, can be controlled through increased focus on safety. And that's what Robert was talking about when he said there's work to do here.

Yes.

Okay. Back to the teamster labor contract for just a minute. At least one of the other CEO's in the national LTL industry is talking about trying to push for some sort of what I would call a regional subcontract or rider to the MMFA which would allow a nationwide network carriers to perhaps start up or acquire regional carriers to do a better job of competing with some of the non-union carriers.

Do you think that's a realistic point of view? Is that a priority for the negotiating group and for Arkansas Best?

Well, it's not a priority or Arkansas Best. We don't have - we got out of the regional business. We sold GI last year.

Right.

My guess is some of the folks with regional operates or anticipate regional operates would like to see a separate agreement for regional carriers. And, I suppose that's something that the teamsters caught to consider if they want to be a player in that market.

I would think the teamsters ought to consider that otherwise they'll be limited in the number of memberships to get in the regional market. And things stay like they are where the regional carriers who are teamster bound the same contract as the long-hauls. That's a possibility.

Okay. Lastly, and this is I guess a follow-up to Jim Valentine's line of questioning on the reduced tonnage levels in the national LTL and I agree that, vis-a-vis, seeing the other sectors of transportation.

I have been hearing from the what I would call the third party logistics companies, the low-hanging fruit they look for first going out to take a look at the client's traffic flows would be LTL business that can be consolidated into truckload quantities.

And I'm just wondering if you're hearing that's having any kind of an impact when you talk to your sales force.

Don't hear much about that. There's some that goes on. There has been as long as I can remember. The disadvantage that you have in trying to do that is it's a truckload operation. That's taken two or three large shots of freight and tried to make a load out of it and that can be done.

The problem they have is the LTL customer that's used to receiving that freight is used to having it delivered by a city driver that comes when they want him to come. Basically, you know, he comes for the most part in the morning.

Truckload guys arrive wherever they arrive and want to be unloaded right then to get another load whereas the city driver can be scheduled - appointment freight for us is a huge percentage of the total freight where they want it delivered at a certain time on a certain day and that sort of thing.

So they have a trouble competing with that. That's a big advantage we have is a local terminal operation with flexibility that a truckload guy does not in terms of handling those shipments.

The price there can be attractive. And so, it is a factor but this is not anything new. Truckload carriers have been doing that as long as I can remember.

Right. That's helpful. Thank you very much.

Up next, we'll hear from Ken Hoekster with Merrill Lynch.

Hi. Good morning. Just a couple of questions on some of the measures you're undertaking to increase the efficiency of your line haul fleet. I believe you were talking about to 515 range. Can you talk about what needs to be done to get there?

And then, just wrapping up on the terminals and the technology, is all the first phase - do all the terminals getting the first phase of the technology rolled out yet?

We'll have most of it done by year end. And, probably two thirds of the benefit's already there because we have gone after the areas with the most potential first, obviously. With the technology.

But we should have everything - not everything, but most everything we're going to get done will be done by year end in terms of rolling out the microbrowsers and then rolling out additional features that we can use the microbrowsers for once they're in place. The cost of some additional programming is pretty cheap once the hardware is place. The hardware is relatively cheap. The microbrowser's essentially a Nextel cell phone. They're not expensive.

And we think that once we get the current stuff rolled out, west camp, our B.P. Operations is thinking of new potential uses for it all the time and ways to effectively get more productivity out of our people by working smart.

And, I'm pretty excited about what we're doing there. And it's remarkable that we are getting that kind of productivity improvement in a down economy. I don't - it might be even more exciting if we had additional business to work with. So I'm real pleased with. That it's the first time in my experience where we have had productivity increases when we have had less freight to work with. Kind of nice.

And the line haul fleet efficiency?

Well, the line haul efficiency will come, essentially, from our operating leverage. We have the equipment there.

- Something more.

We need more business. We have been trimming back the fleet. We work the other side of the equation. We've been trimming back the fleet and it's down, I think, 5% from 2000. Which helped some, but the more fun approach to have more business. And, we have more money tied up in road power than any other thing and if we can improve the turns on that and get it up to more miles per day, that's big bucks for us so we're looking at that very hard.

We think we're in an improving economy so I don't think I want to cut more tractors out and there a potential to have a nice, quick influx of business and in which case we want to handle that and get a share more.

So, those are the thing that is we're thinking about there. But just an increase in business, and then seasonally, it will improve. I'm talking about beyond that. I would like to see up over 500 miles a day on the road power.

Then one more for Dave, if I can. On the return invested capital that you're referring to and I think you had questions on that. When do you expect it to rebound to those threshold levels? I guess, when is your target on the cost cutting side and freight side and built into the model. When do you think you get there?

Well, first of all, we don't provide guidance or forecast or projections from that standpoint, but I will mention that getting the 10% this year is probably going to be a pretty good challenge.

Okay. Thanks.

And as - up next we'll speak to Tom Albatch with BBNT Capital Markets.

Thank you. I thought I'd change my last name. My - most of my questions have been asked but I wanted an update. On the second day lanes, I know about a year ago you were talking about, I don't recall by shipment or by tonnage, but approximately 36% of your business was coming out of those lanes.

What's the approximate figure for that today?

It's about the same. Not much change.

Okay.

That is accurate.

Okay. That's all I had then. Thank you.

We'll take a follow-up question from Dan moor with Stevens incorporated.

Just real quick. I apologize if you covered this. Head count, year over year, David, what's the change in head count for full-time?

On a casual or excuse me. On an employee equivalent basis, second quarter to second quarter down 3.1%.

And then casual?

That's considers all employees on an equivalent basis.

I got you. Thank you very much.

And there appears to be no further questions. I'll turn the conference over to you, Mr. Humphrey.

We appreciate your interest in Arkansas Best Corporation.