ArcBest Corp (ARCB) 2003 Q2 法說會逐字稿

Good morning. My name is Luwana. I will be your conference if a tilter. I welcome to you Arkansas Best Corporation 2003 earnings conference call. All lines have been placed on mute to the prevent background noise. After the speaker's remarks there will be question and answer period. If I you would like to ask a question simply press star and the No. 1 on the telephone key pad. If you want to withdraw the question press the pound key.

Request to Arkansas Best Corporation second quarter 2003 earnings conference call. We will have a short discussion of the second quarter results and then open up the question and answer period. Our presentation this morning will be done by Mr. Robert A. Young the third President and CEO of captions. David Loeffler VP and CFO and Treasurer of Arkansas Best Corporation. We thank you for joining Us today. We help you better understand Arkansas Best Corporation and it's results. Some forward-looking statements could be made in this call. Forward-looking statements by their very nature are subject to uncertainties and risks. A more complete discussion of factors that could reflect the Company's future results please refer to the forward-looking statement in the Company's earnings press release in the most recent SEC public filings. We now begin with David Loeffler.

Thanks David. The results for the second quarter our revenues were 378 billion dollar which is an increase of 9.5% over same period last year. Operating income was $13.5 million compared to $13.3 million a year ago. Earnings per share on diluted Davis were 60 cents. Included in that is gain on a sale of Wingfoot and payments and changes in the fair value of our interest rate swap. If you excluded those two items our earnings per share was 30 cents.

That is increase from 26 cents a year ago. In looking at the revenues, ABS revenues up nine and a half percent, Clipper's revenues up 8.6%. Six month ended June 30th of this year I would like to refer to GAAP cash flow statement attached to press release. I now cover a few of the high lifts the cash flow. Net income before the change of the interest rates were up, before the sale of Wingfoot and the before the depreciation and amortization was $36 million. You have to deduct from that increase of accounts receivable of $5 million.

Pension contribution we made in second quarter of $15 million, add back to that a decrease in temporary investments of $36.6 million a positive change of working capital items took about $10 million. So that gives us nest net cash available of such under $63 million. We had net purchases of capital and equipment and capitulation of software of $29 million proceeds of sale of Wingfoot of at over 71 million dollar. Net cash after capital items of almost $105 million. We had a reduction in bank float of $3.5m We purchased treasury stock for $4.9 million we paid common dividends of $4 million. We had decrease in debt of a little over $92 million. In looking at the status of outstanding debt including be current maturities end of last year our total debt of $112.5 million.

We had temporary investments in cash of $36.6 million. So, if you take that away from the debt we had about $76 million. At the ends of June this year we had $20 million in debt and no temporary investments. Looking at debt equity and debt to capital ratio, at the end of 2001 we had a .38 to one debt equity ratio. At the end of last year that was reduced to .32 to one and at the end of June .05 to 1. Our debt to capital ratio has also steadily decreased to .28 to one at the end of 2001, .24 to one at end of 2002 and a .05 to 1 at the end of June this year. Weighted average interest rate excluding the fixed swap rate is 2.6% . looking at internal financial measures for the rolling 12 month for June after this year after tax equity on shareholder ROE is13.6%. Debt equity ratio is .05 to one and after tax return on capital employee which is our key financial measure is 13.2% compared to minimum acceptable level of 10%. I would like to mention and many you have may have noticed that our effective tax rate for the first six months of this year is significantly lower than what it has been at 35.4% and that's because of our tax for the gain on the sale of wing foot we had a significantly higher tax basis than we had book basis. The normal rate that you should use excluding that item is 40.6%.

We are currently forecasting our capital expenditures for this year on a net basis to be $72 million, which is up from the previous information that we have given you of $69 million. This is a result of a couple of factors. We haven't really added anything to it but it's taking longer to sell some of our facilities than we anticipated and that is somewhat offset by the fact that we have not been able to buy some of the CF facilities that we put in our forecast. Our depreciation and amortization for the second quarter was $12.2 million we are still forecasting the depreciation and amortization for the full year to be between 52 and $53 million.

In our last in fact and also on our press release we talked about pension expense and our funding status so I thought I might update you on that. Pension expense for first six month of this year $5.6 million compared to $2.7m for the first six months of last year. We revised our pension expense for the whole entire year to be $11.1 million that is based on receiving our actual study sin the second quarter this year compared to $5.3 million last year. Looking at the funding status of pension plans on ABO basis, at the end of last year they were over funded $6.8 million. The $15 million contribution that we made in the second quarter this year was on behalf of 2002.

So the actual over funded status goes up to about $22 million that doesn't consider the positive performance we have had on the assets this year. On a PBO basis, again when considering the $15 million contribution, we were about $1 million over funded looking at 2002. Now I would like to turn the call over to Robert.

I am going to talk about the individual subsidiaries briefly. The revenue at ABF was $337 million. That's up 9.4% from last year. The operating income was up 17% from $12.5 million in the second quarter of 2002 to $14.6 million in the second quarter this year. So we are able to bring a lot of that to the bottom line. Our LTL pounds per day at ABF, that is on a workday basis, were up 2%. To give you a file for this year of what we have been seeing in terms of LTL tonnage in January up 3.8% in February 1.5%, in March bounced back to 3.29%.

As I recall the Easter holiday was in March in 2002 and in April of this year. So that has a fairly significant impact on the numbers. So the whole first quarter was up 2.75%. In April it dropped counsel to .4% increase of LTL tonnage and again I think that is the Easter effect. As somebody around here said good Friday came on Friday this year. So that had a big impact on us. May was up again 2.88%. In June up 2.49%.

The whole second quarter was up about 2% that largely being impacted by the April lower number. So it's been up and down but generally with the exception of those timing differences on Easter, I think it was relatively steady during the year or during the first half. The second quarter LTL build revenue per hundred weight excluding the fuel surcharge was up 6.1%, $22.71 compared to $21.41 last year. If you include the fuel surcharge revenue per higher weight was up 7 .6%. We concentrate on revenue per higher weight without the fuel surcharge. Obviously fuel surcharge is a factor of fuel prices and not yields. Of that 6.1% increase, excluding the fuel surcharge, about half of that was profile and other half was yield. The profile did change some. That is the reason for that.

The length haul went up from 1246 miles last year in second quarter to 1275 miles this year. 2.6% increase in length of haul for ABF. I think all of these are the impact of CF numbers, the freight that we inherited from CF. But LTL rated class also went up from 73 to 74 and that is about 1.4% increase in class. And then the weight per shipment went down about 2% from 995 pounds last year to 976 pounds this year. All three of those factors would cause the yield to go up. I've been able to report in most quarters over the last you couple of years some improvement in our productivity, our shipments per dock street and yard hours.

Have been trending upward. Didn't do that this quarter. LTL bills per dock hour were almost flat. It's 4 .28 bills per last year, 4.27 bills per hour this year. .01 change or pretty much flat. LTL bills for street hour pretty much the same thing. Declined from 2.36 to 2.34 a very slight .02% decline. In trailer we per yard hour up some 4.36 to 4.4 or .04 increase. So up and down in productivity but generally a flat experience.

The productivity increases we have seen over the last several quarters, not including this last one, we think are largely a result of some technology that we have been implementing, we have been putting micro-browsers in the hand of our freight handlers. These micro-browsers are communications device. They look very much like a cell phone although we are entering the -- we are not using voice on it. We are entering the numbers. There are 114 terminals using out bound planning. City drivers using micro-browsers and 112 units are using mobile dispatch. Right now 74% of city drivers are utilizing micro-browsers. All nine of distribution centers are currently operating with a paper less dock and all nine of our DC's and 20additional terminals are currently using dock and yard system. Centralized dock management has been installed at 3 you're distribution centers.

Let me explain some term terminology. Outbound planning is ABF city drivers keying in shipment information at the time of pick up which is transmitted to the terminal for planning of outbound loads.

Mobile dispatch is the ABS City drivers are keying in shipments in information at the time of delivery which provided delivery info to ABF internal and external systems. And city dispatchers provide customers pickup assignments to the state drivers via the micro-browser.

The paper less dock simply means that dock workers are performing their dock activities utilizing information on the micro-browser instead of using a paper document. Then the dock and yard system is information regarding a location and movement of shipments and trailers, primarily trailers, and is keyed into the micro-browser by the dock worker providing real-time updates. In centralized dock management means that dock supervisors make all their trailer loading and unloading assignments utilizing the micro-browsers insuring quickly handling of time critical trailers.

Movement between dock handler and supervisor that was previously required and providing the next trailer assignment. All he got to do is look at micro-browser, he doesn't have to run down the supervisor or vice versa to see what he is expected to do next. We are getting good productivity improvement using this system. Rail usage for ABF in the Q2 was 15.3% of total miles up 13.4% in the second quarter last year and up there 14.4% in the first quarter this year. We are using rail a bit more this year. It's been on an upward trend. It is also the case that our rail mile, rail cost per mile is up about 5.5% from last year.

A couple of reasons for that is a higher percentage of the trailers that we rail were higher 28-foot pup trailers and that increased our rail [cost] and to accommodate did volume where we use a lot of these miles to shave peaks rail was used in some shorter more expensive lines, more expensive per mile and that pretty much covers the increases there. Non union employee welfare cost was a big factor for us in second quarter this year. Up about $3.3 million over the second quarter of last year. I think that's a mixture of last year being somewhat good and this year being pretty bad. Our medical costs were up from 3,000,775 last year to 5,000,005 this year, about 1,000,770 or 47% increase for medical cost for non union employees. I suspect that is a bit of an abdominally but we will see how it pans out in next couple of quarters. I can't imagine that our costs would continue to go up at a rate like that it pretty phenomenal. Pension costs were also up from 1,000,166 last year to 2,000,676 this year on or 1 million and a half bucks or a 129% increase in pension costs.

So between those two and a few other things we were up from $7 million to $10,000,003 or $3,300,000. Big increase in those costs. We certainly don't feel like that ought to continue but we have to see out of the next quarters work out. But the pension, of course, I think most companies have had some impact there from the down market and having to fund the pensions to offset the losses that we have had in investment results over the last few years. I was reading in the "Wall Street Journal" this morning that the recession ended in November of 2001 so I guess we can look forward to those pension costs improving as our investment results improve.

Equipment sales were a non factor for the second quarter this year. We had gains on sales of road tractors of $20,000, which means to me that we pretty well figured out what the residuals ought to be on the units. The losses we had were on road trailers that amount to do $160,000. We are in the process of upgrading our road trailer fleet buying this year 1500 trailers and we will probably continue to go something close to that level going forward and bring that fleet to a much younger age. But the one cent we are trading in we are not getting what we thought we would get. We have to change our residual outlook on that.

Gains on sales of city tractors and trailers amount to about $20,000 gains on sales other equipment such as forklifts and safety cars was about 45,000. The net of all those was a loss of about $75,000 on equipment sales. Again not a severe factor but I like to point out the fact that it's not significant. The market for equipment, we have pretty well kept our residuals in line with. We had an increase of 2.8% in revenue on our lanes, that are two days or less during the quarter, year-over-year comparison. And we had about 11% increase in revenue on [our lanes] that are three days or more. I think obviously the impact there was a freight way we took on from Consolidated Freightways, their average length of haul was probably up around 1400 miles.

So I don't think it's a matter of having lost short haul lanes market share as much as it was picking up more of the long-haul freight when we got the freight from Consolidated Freightways shut down. We previously announced that ABF has a [general rate] increase of 5.85% that went into effect this last Monday and our reports from the field are this is being well-accepted and that is good news. Our equivalent employees full time equivalent employees decreased 226 from the same quarter last year. We were at 11,654 in the second quarter of 2002 and 11,428 full-time employees this year. That's a snapshot. Obviously goes up and down on a daily basis.

A bit of good news our empty miles were down as a percent of total miles in the second quarter of this year. They were about 6.5% of total miles in the second quarter this year compared to -- I'm sorry in the second quarter last year, 6.5% and in the second quarter this year 5.9%. So a nice improvement in reduction of empty miles. I've talked about Clipper our inter mobile marketing Company briefly. Clipper had revenues of $33 million compared to $30.4m last year, about an 8.6% increase, operating income was about $700,000 compared to $800,000 last year. We didn't bring that additional business down to the bottom line like we should have.

On the [inter-mobile] side, I would describe that as essentially as truckload on rail, piggyback. Increase in shipments there was 30%. We really grew in the quarter in that [inter-mobile] business and we are heartened by that. Our Clipper control logistics, which is moving produce in refrigerator trailers on the rail, shipments were down 9%. I don't think there is any loss of market share there. Our interpretation of that is that the produce is a little late coming out of California. And that's largely what we are picking up. Several of the crops had to be replanted this year because of excess moisture early on and we suspect that we will pick up those declines in the third quarter this year. We just have to see. But I suspect that is the case.

Year to date Clipper has had revenue of $61.5 million compared to $56.2 million last year. The operating income was $239,000 versus $68,000 last year and if we can continue on track, I think we will probably get close to our Budgeted numbers for Clipper for this year. That's it in terms of additional data on the operating subsidiaries and I will go ahead and open it up for questions at this time.

Okay Luwana I think we are ready for questions

+++Q&A

At this time I would like to remind everyone in order to ask a question press star then No. 1 on telephone key pad. Pause for a moment to compile the QA roster. First question from Mark Levin of Davenport and Company.

Good Morning. Quick question. [Yellow] mentioned on their call this morning that the reception that they are getting from their customers about the merger has been favorable. I am curious what you are hearing from your customers not only existing customers but new one cent as well, thank you.

My goodness they just announced this deal. If I understand from what yellow said, it's probably six months before the acquisition will take place. So it's a bit early to see anything there. We have noticed this week each day this week, an increase in our bill count of between two and 3% over what we would have expected from the prior week and an I can totally we have had just a handful of customers indicate they were moving freight to us because of the announced deal. And I would emphasize a handful. I don't think there is any significant impact there at this time. But my gosh, we are probably six months away from the transaction even taking place. So I think it's a bit early to talk about that.

In terms of the opportunity that ABF could have here, are you reevaluating or considering high hiring more salespeople and if not why not?

We don't have any plans at this time to change our approach to sales. We are always looking for good sales reps that might come on board but we don't have any goal of adding a certain number of sales represents.

Okay. Great. Thank you gentlemen.

Next question comes from Dan [Moore] of Stephens incorporated.

Dan and Jack here. Good morning guys.

High Dan.

Just a couple of questions, Robert, Dave. You had mentioned, yellow had mentioned you are probably to going to hear the words paraphrased by people today, yellow had mentioned demand had accelerated in the last two weeks and while I realize that we are very early into the quarter and the month for that matter, I would be very interested to learn whether or not you are seeing an acceleration or have seen acceleration in your business such that you would be comfortable saying that it appears that the economy is recovering hearing?

Well, I would be cautious about extrapolating too much about what we have experienced this week. As I mentioned bill count is up two or 3% above what we would have expected this week and that is positive. I don't know why that is. I don't know where that is coming from but it certainly feels better this week and so I would say, you know I would be on the optimistic side as opposed to if our bill count was going down.

Uh-huh, with respect to this year's GRI, what is your view of retention? Are you more or less optimistic about this year's GRI, Robert?

We are very positive about it. The experience we have had and of course it just went in Monday, but the experience we have had and the word from our sales represents in the field is it's being well-accepted and they have got adequate explanations for rides necessary and the customers are accepting it

And just to get a little bit of perspective on yields, as you had mentioned earlier in the call, you had a profile change in your quarter which reduced, if you will, the revenue per hundred weight statistic probably about by half. Yellow had a similar change in proposal and if I understand correctly, also increased their absolute minimum charge. That would imply you guys are really focusing on yields, which is always the case.

So I guess here is the question I would like to ask. Looking back over the last six to nine months, some people have said that you've been too focused on yield. Robert, is there anything you would do differently looking back over the last nine months, post CF bankruptcy, that might have inflated your tonnage statistics more than once was otherwise the case?

We are happy with our approach to yield and yield management and the management of our business levels. It's always a balance. One thing we don't want to do is start taking on business at break-even or worse levels and buying equipment to handle it. So we are careful to control our growth with business that is paying its way. No, I wouldn't change a thing. I think what we did there was the right thing to do. It would be -- it would be attempting to take on some of that business that was not come compensatory for a lot of reasons but it didn't tempt us.

It seems as though their earnings were pretty strong this quarter, in my opinion, they had a good quarter. When you focus on taking on some of that CF business, if it's may be not at the same level of margin that you might try and bring it on add to, what are the risks to that long-term? Just curious I couldn't say, as the economy recovery and that sort of thing?

Well, we have probably, my best guess is 10% additional capacity and I would like, as the economy recovery apparently according to "Wall Street Journal" it did last November of 2001.

I missed that.

Yeah, but as it does recover and I assume it will at some point in time we want to be able to take on business without having to add capacity for awhile. That's when we make the most money is when we run out of everything. We want to do that at profitable not break-even business. Does that answer your question

I think some of the last couple here, I am just going to switch gears Robert and David feel free to join in as well. With respect to the merger, I imagine there are a lot of questions out there and you've probably been on the receiving end of many of them, I think you have a unique perspective Robert because you've been in the industry for awhile and two, you've been through a couple of these types of merger, certainly not to this same scale or size, if you will, but I would be very interested in getting your perspective on what your experience was in your last merger which I guess was Carolina back in ’95.

If you may recall, if you don't have the numbers in front of you that's fine, but generally speaking what level of freight divergence you saw when you began to integrate that operation and I guess second question I would ask with respect to that is what is, you know what's in it for the customer, this type of deal? My own personal [view] is that nothing is in it for the customer. They may be phased with potential of higher pricing and reduced service and there seems to be ample capacity out there. So I am struggling with why shippers would embrace this.

We have done a lot of deals over the years,. The last three we did of size were [Navaho] freight lines back in 78. We did east Texas in 82 I believe and of course in 95 we bought World way and the large subsidiary there was Carolina freight carriers. Every deal is different and I wouldn't for a minute try to extrapolate our history with what is going to happen with somebody else deal. But we kept about 60% of the Carolina business. Some of that we didn't want to keep and some of it we did want to keep.

Could I just ask in relation to that question or that comment Wasn't Carolina really in essence an expansion of your existing geographic[footprint]? It wasn't that you had a lot of business in their network per se, some certainly, but more of an expansion strategy, correct?

Well Carolina covered the east earn half of the United States, didn't get to the western states. So the overlap was only in the eastern half. They were stronger running north and south along the east coast than ABF was and that was something we [covered.] So it probably was two-thirds of our terminals that were impacted with our merger. That was the case there. In the case of some of the early acquisitions it was more of an overlay.

Okay. Excuse me for interrupting.

Are you through Dan?

Last question was customers and I am sorry Robert. That will do it. What in your opinion in this type of merger, what in your opinion would be in it for the customer?

Well, I don't know that I can answer that

Fair enough.

If there are economies of scale that come with it, I suppose customers would look favorable on that but I really can't answer for customers.

Okay. Thanks for the time. I appreciate it.

next question comes from John Barnes of Deutches Bank.

Can you give me idea of where you stand on capacity usage today. How much additional freight do you think you could take on?

Our best guess is we have probably got 10% more capacity at ABF without much in the way of capital expenditures. Beyond that we probably start having to add doors and buy equipment.

And then your comments concerning terminal sales and terminal purchases, could you elaborate on that? I got interrupted and I apologize for that but could you elaborate on what is slowing down the process of selling the terminals? What is encumbering you from doing that and in terms of the purchasing of CF terminals is this merely a reflexing of bids that you did not win and therefore you are looking for alternatives of what you had planned to purchase?

John? Really insist terms of selling terminals, it's just more of an issue of interest out there for the terminals. And in terms of the CF terminals, really there is not that much in the way of alternatives. Most of these we were looking at from an [opportunity] basis

These would have been replacements or would they have been new terminals, new areas that you would want to move into

Most cases they have been replacements and they might have been a replacement for a lease terminal that we have a lease that will run out in let's say the next 12 months or something like that. Those were all more of an opportunistic situation.

Do you have back-ups in those situations or maintain the status quo.

We will probably maintain the status quo. So in a lot of cases they were lease facilities. We currently have lease facilities so we extend the leases. That type of thing.

Thanks for your time guys.

Next question from Greg Burns of J.P. Morgan.

hi guys, the cap ex if I heard correct was $70 million. Is that a gross number before any proceeds or what is the initial cap ex before -- is that a net or gross number.

That's $72 million that is the net number.

What is the gross number

Around 80.

Can you help me out with something? Your depreciation and amortization is running sort of 48, $49 million runway. Your business is growing tonnage wise, shipment wise sort of two to three percentage and basically you are saying your cap ex is going to be 67 something percent higher than depreciation so, you still have 10% excess capacity. Can you talk about how you are thinking of that. You have surplus capacity, your be unit growth is in 2% range. Why not significantly pair back growth here.

We are looking at swamp, somewhere in the area 65 maybe up to $70 million in normal maintenance cap ex and most of what we are looking at here is maintenance. There is a little bit of opportunity type situations. Then you always have the situation where particularly when you look at facilities, where all of the over all, in looking at the entire system, you may have 10% excess capacity. That doesn't mean you have it in every terminal. You might have terminal A that has 30% excess capacity and another terminal that is actually running at full capacity and you need to add some doors.

So it's a combination of those factors. Robert mentioned that we are, this year we are going to add 1500 trailers. Last year I think the number was five hundred and some of that is a result of what occurred out of the Carolina acquisition. We ended up outlet of that acquisition with a whole bunch ever trailers. What we did was we kept the best one cent and sold the worst one cent which allowed us to not have to replace trailers at that time. We are now at the point where we are going to have to be buying trailers at the rate of 1500 a year. So that is some of the increase that you are saying. Our run rate is depreciation in amortization is more in the area of 52 to $53 million.

If I just look at depreciation ex other amortization it looks for the six months at 24 and a half and I just double that, that gets me to 49. Are you saying [I should} be -- that is not the correct run rate?

We well we are projecting depreciation amortization for the year of 52 to 53. Remember we are buying equipment this year as well.

And more on the subject of this, are you going to change the depreciation schedule because you indicated you weren't getting the prices you wanted? Are you going to change the residual way one way or the other that will affect the depreciation line.

We already changed them only the trailers.

When did that change disco go in?

June

Did that essentially increase depreciation?

Yes. I don't have the specific impact of that change.

Okay we will follow up off line. I guess just on the health and non union medical costs we had pension in our number but we were a little surprised by some of the other costs and if memory is correct I think you had some of those costs as well in the first quarter. Can you give a non union, non pension cost all in, in the second quarter and what it was in the first quarter because I think in the first quarter you also cited medical costs

no, we didn't in the first quarter. The medical increase all incurred in the second quarter and they are for large claimant's and that is claimant's that have total claims over $15,000. So, it all fell in that category. Like Robert said, we are hopeful that this is an unusual situation because it's 100% in the second quarter. We didn't see any of it in the first quarter.

Right. Okay then just finally in terms of the pick up, how much do we read in what you are seeing in July? I mean is July really a representative month or would you be more encouraged if you saw this in September? Can you give us a little flavor as to how meaningfully -- because obviously yellow is a little bullish right now.

I wouldn't put too much weight in what happens in three or four days which is what I was talking about. If its significant to see that it will be significant. July generally is probably not a good month to set the pattern for the year as a lot of stuff goes on in July with the holiday and then you have a lot of companies shut down in July for vacation, that sort of thing. I think essentially you are right. It's not the best month of the year to pick to multiply by 12 or something. So yeah I think you are on track there.

Are your customers sounding any different, you know, either more or less cautious or any change in tone in your customer base.

Well of course we are watching that closely and we are hearing negative comment and, in fact, almost exclusive negative comment about what two companies coming together might mean for them. But again most of them are probably going to take a wait and see attitude.

Thanks a lot guys.

Next question from Kenneth Hoexter from Merrill Lynch

On supplies and expenses at ABF was a little higher than what we are looking for. Can we talk about fuel expenses, what your gallons look like year-over-year and what percent was offset by fuel surcharge and I will ask a follow-up after that.

Ken, almost the entire increase in supplies and expenses is fuel, particularly as a percent of revenue. But we are virtually recovering all of the increase in fuel costs with fuel surcharge.

So was there a residual benefit from the delay in the surcharge change? In other words did you walk away with any profits from that?

You know, off the top of my head, I can't tell you Ken.

Secondly you talked about not adding more sales going forward. I think Robert mentioned before when somebody asked earlier. But are you starting to contact customers or have you right after the yellow roadway transaction was announced to kind of get a jump start on talking about some of the confusion that might be in the marketplace to head them off from starting to calm down some of their customer views?

What we tell our sales represents out reps out there is to not talk about any competitor, not put down any competitor, to be available to answer questions and to try to attract them based on what ABF can do for them and what our services are, that sort of thing. We think it's bad business to ever try to talk down a competitor.

Okay. Great, thanks.

Next question comes from Gary Emblem of Credit Suisse first bank.

High guys, how are you?

hi Gary

Three questions. First I want to step down a minute and talk about over all cost structure operating ratio. I was looking at old files this morning and was hard pressed to see the last time one of the bigger national carriers had a better operating ratio in the quarter you did and you have to go back a long time to find that. Not that that's a question you really want to hear. What am I missing here. What are you guys doing to widen that spread that I am seeing.

We were able to improve year-over-year but not as much as yellow did. Quite frankly I have felt for sometime it would be good if our major competitors could produce better numbers. I think its gives a better perception for the whole segment of the industry and I congratulate yellow on a good quarter. They really came along.

Do you feel that this for you was a good quarter.

No I don't feel this was a good quarter for us. It was better than the same quarter last year but not as much as I would like. But keep in mind we are dealing with numbers in terms of tonnage and shipments that are below the year of 2000 still and trying to maintain or improve your profitability in that sort of a sluggish economy is difficult to do. I can't recall in years past when all of us would struggle to be profitable in a downturn we are operating in the mid-90's in a downturn and I consider that to be very bullish

What pockets, what times of equipment are you seeing values not what you thought they would be?

Trailers, trailers of -- we are selling trailers that are pretty old. Not many of them are old enough to vote but a few are and it's hard to estimate what the values are going to be on those older trailers. What almost all carriers did is they changed the law to allow 28's nation-wide back in, I think it was 84 and 85 and everybody started buying the 28-foot pup trailers in large quantity to take advantage of that new law and those trailers are needing to get out of the fleet now and we inherited a bunch of them from Carolina. We didn't buy any trailers for a good while. We are going to play catch up for awhile until we get our fleet in much better shape trailer wise

You mentioned, Robert, earlier a bunch of puts and takes to the pricing, the six and a fraction on reserve per hundred weight. How much of that was pure price?

Half

Half of it

Uh-huh

Could you talk just a little bit about capital structure, tax laws making it easier to get dividends to shareholder, whatnot, what do you think about that as you look out to next year?

We sort of anticipated that, and last January we implemented a quarterly dividend. We are paying eight cents a share now and we have also been doing some share buy back. We are authorized $25 million until share by back buy back interest we did some in each of the, […]. That is where we are in that thinking rate now. Certainly dividends now are more attractive than they were a few months ago because they are now equivalent tax wise to capital gains. So we are already moving in that area.

Does it get you to think about maybe there is a payout ratio higher that might make sense?

You have to talk to my board about that. They are a bunch ever hardheaded guys. I don't know what they will do.

All right. Thanks a lot.

Next question from Edward Wolfe of Bear Stearns.

Good morning guys. Robert can you talk a little bit more, you said you are not increasing the sales force yet 10% capacity in your existing network. In there were to be a flood of freight coming your way as the merger gets a little deeper in the process, what is it that you need to do to handle that freight and how much of that can you handle?

Well, if that happy circumstances were to evolve, there are a lot of things that we can do in the short run that you wouldn't do long-term. […] you can throw labor at that by moving trailers in out in and out. You can handle more than one location out of the same door, that sort of thing.

We are only using about half of the rail capability we have under our labor agreement and we can ramp that up dramatically if we need to in the short term. I wouldn't want to do that long-term. I want to keep that reserve there to use it to shave peaks with. But in the event that we were to enjoy more freight that we can handle there is lots ever things we can do in the short run. We can fairly easily rent city power with a little more notice we can rent Road power.

How much do you think you could take on? In that happier circumstances?

Hello? Hello?

ladies and gentlemen, this is the operator, I apologize. There will be a slight delay in the conference call. Please hold and the conference will resume. Thank you.

He cut the conference […] just a technical difficult. We will get back.

You may resume there.

Okay we back there?

Sorry we had a little bit of microphone problem.

I wish you wouldn't ask questions like that

We blew out the wires just thinking about the potential freight coming your way.

I would guess in response to your question somewhere in the 20 to 25% range we could take on

That is helpful. If you look at the 49 cents of continuing earning to date and you look at a typical first half of year about 40% of your ABS appears you are on a run weight rate of $1.47 or $1. 48. Which is well-below consensus. When I look at press release and listen to the call and hear you talk about non union health and pension, how much of that do you think is likely to recur when you are talking about one percentage cost of extra costs, obviously the pension costs that are union continue. What are the others that are non union continue or but what about the other issues?

The non union pension costs, I have indicated that that would be $11.1 million for the year. So that increase is going to continue. So far when we look at work Corp. are comp of BIPB it's running same level as last year. We are hopeful the health increases we saw in second quarter are an unusual situation and won't continue but we just don't know because all of the increase we had was in the second quarter in the large claim area. We didn't see any of that in the first quarter.

Can you quantify how much that total was in the quarter, second quarter?

The health costs, the non union health costs in the second quarter was $6.1 million was $4.5 million in the second quarter last year.

So you are saying that difference was 1.6, give or take, was unusual in the quarters?

Yes, I mean that is higher than what we saw in the second quarter last year but also higher than what we were experiencing in the first quarter this year

Can you give us a feeling from the economy standpoint, is there any difference recognize as you see it from manufacturing and retail. Yellow has been saying manufacturing is feeling a bit better. Roadway said not really. What are you seeing?

Eventually it has to be manufactured whether it's going to retail or someplace else and the economy has been sluggish all year. We really hadn't seen any kick in it. I mentioned a little bill counting increase this week. I don't know if that's the economy or what it is. But for the year so far we really hadn't seen much strength

That recent up kick in big counting you are not seeing it from certain industries than others?

No

It's sort of spread out in geography wouldn't you think

Yeah

Tanks for your time.

Again in order to ask a question press star then the No. 1 on telephone key pad. Your first question comes from John Larkin of Legg Mason.

Congratulations gentlemen of doing such a great job of cleaning up your balance sheet. Not too long ago the debt to capital ratio was higher subsequent to LBL but you have done a great job there. I want to talk about the by back program. It looks like about 5 million of the authorized 25 million has been utilized at least through the end of June. Do you see the board perhaps increasing the authorization here as we get into the latter part of the year and as your balance sheet moves toward being close to debt free here? Is that a possibility?

Well we have still got $20 million left. So I don't see any need to increase that by back authorization at this point, John

What is your philosophy about the by back? Would you characterize it as being more of a opportunistic by back, a steady by back? How do you plan to use that authorization? Do you care to comment on that at all

I think we are being apartment naive about it. We would like to buy the shares back as cheaply as we can but I suspect over time we are going to use the whole authorization. That's the whole idea of it

Perhaps once you've done that we could perhaps be count on another one being authorized at some point in the future.

Who know but that would be topic for configuration at that time

With respect to the revenue per hundred weight half of that is due to what I call mix changes and half of that is due to real yield improvement. Is it safe to say that once we get to the one year anniversary of the exit of CF from the business that that mixed change portion of the yield increase will no longer be there?

Yeah that will normal eyes. John we won't see that total until the fourth quarter though because in the third quarter we only had one month of CF.

Exactly. I understand that. So the 3% would be the more normalized run ever increase. Now one last question, sounds like some of the productivity improvements have been plateauing here in the quarter even though you continue to roll out some of the great productivity enhancing systems. Is there anything unique about that in the second quarter that would have caused the productivity improvements to take a breather.

There are a lot of things that impact productivity and technology is one of them. Certainly we went after the low hanging fruit first with those systems but I think we still have some higher level fruit to pick going forward. We don't have it as I mentioned in those statistics, we don't have it in all terminals yet and we don't have all systems in all terminals yet. So we have some additional pick up there from technology I think.

Thank you very much.

you have a follow-up question from Dan Moore of Stephens incorporated.

Hey guys, yeah, just a quick follow-up to question Gary was asking earlier in the call. With respect to your fixed costs infrastructure, I recall back in 2000 when we were in the middle of the inventory correction and the economy was going to hell, you were catching quite a bit of grief from some of us because you weren't pairing down your fixed and variable cost structure as much as some of your peers and this is certainly a blind question here from my end, I don't have a lot of perspective on it today, but I'm curious, as you've watched what your peers have done, what roadway and yellow have done with their head down headcount and some other items, would you say that your adjustments have brought to you date pretty well in line with the same adjustments that they have made with their headcount and that sort of thing or would you say that you've been more conservative or a little bit more liberal in that area?

Dan, I really haven't followed what they have done. I don't know what they have done in terms of headcount and where it came from and so forth. So I really couldn't answer that.

Fair enough, Robert. Thank you.

Thank you. At this time there are no further questions. Mr. Humphrey are there any closing remarks

We appreciate you joining us this morning. We appreciate your interest in Arkansas Best Corporation. Thank you very much

This concludes Arkansas Best Corporation 2003 earnings conference call. You may now disconnect