ArcBest Corp (ARCB) 2003 Q3 法說會逐字稿

Good morning. My name is Roderick, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Arkansas Best Corporation third-quarter 2003 earnings conference call. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Mr. David Humphrey, Director of Investor Relations. Please go ahead, sir.

Welcome to the Arkansas Best Corporation third quarter 2003 earnings conference call. We will have a short discussion of the third quarter results and will open up for a question-and-answer period. Our presentation this morning will be done by Mr. Robert A. Young III, President, the Chief Executive Officer of Arkansas Best Corporation, Mr. David E. Loeffler, Vice President, Chief Financial Officer and Treasurer of Arkansas Best Corporation.

We thank you for joining us this morning. In order to help you better understand Arkansas Best Corporation and its results, some forward-looking statements could be made during this call. As we all know, forward-looking statements are by their very nature are subject to uncertainties and risks. For a more complete discussion of the factors that could affect the Company's future results, please refer to the forward-looking statements section of the Company's earnings press release, and the Company's most recent SEC public filing. We will now begin with Mr. Loeffler.

Thanks, David. In looking at the overall corporate results our revenues for the third quarter were just under $403 million, an increase of 7.3 percent from the previous year's third quarter. Our operating income was $28.6 million compared to 23.9 million in the previous year. And earnings our per share on a diluted basis were 67 cents versus 73 cents last year. But if you exclude the benefit that we were received from the IRS settlement on an interest issue, our gains that we had on property that we disposed of, the kind of charge we took to increase our reserves as it relates to a Reliance Insurance Company, our earnings per share last year was 54 cents.

In looking at the revenue comparisons, ABS revenue was up 7.5 percent from the third quarter last year, and Clipper's revenue was up 4.9 percent. For our cash flow for the nine months ended September 30 of this year refer to the GAAP cash flow statement attached to our press release.

Now I would like to highlight the following items from the cash flow statement. Our net income before depreciation, before the change in the fair value of the interest rate swap, and before our gain on the sale of Wingfoot was just under $65 million. We had an increase in accounts receivable of about $11 million. We made a pension contribution of $15 million. We had a decrease in temporary investments of $36.6 million. And we had other positive changes in working capital items of a little over $18 million. So we had net cash available of just under $94 million.

We had purchases of property and equipment of a little over $61 million; capitalization of software, 2.9 million; and proceeds from the sale of Wingfoot, a little over 71 million. So we had net cash after capital items of a little over $100 million. We had an increase in bank float of just under $3 million. We purchased treasury stock of $4.9 million. And we pay dividends on common stock of $6 million. So we have a net decrease in debt of $92.6 million.

Looking at the status of our outstanding debt, including current maturities, at the end of last year our total debt was $112.5 million, and we had temporary investments of 36.6. So that gave us 75.9 million at the end of September. We had total debt of $19.9 million.

Our debt to equity ratio, at the end of last year was .32 to 1, and at the end of third quarter this year, it was .05 to 1. Debt to capitalization ratio at the end of last year was .24 to 1, and at the end of the third quarter this year was .05 to 1. Our weighted average interest rate on the funds that we are borrowing, and this no longer considers the fixed value of the interest rate swap, was 2.44 percent.

And looking at other internal financial measures for the rolling 12 months ended 9/30 of this year, our after-tax return on shareholders equity is 12.65 percent. As I mentioned, our debt to equity ratio was .05 to 1. And our after-tax return on capital employed was just over 13 percent compared to our minimum acceptable level of 10 percent.

We are currently projecting that our net capital expenditures for this year will be between $69 million and $72 million. The reason for the range is this depends on the timing of some property sales. Our depreciation and amortization for the third quarter was $13.1 million, and we're forecasting the full year to be about $51.5 million.

Last quarter we talked about higher health claims cost and higher pension cost. And I indicated at the time, as it relates to the pension cost, that that will continue to be higher this year. But I indicated as it related to the health claim cost that we saw a significant increase in the second quarter that was abnormal in relation to what we had been experiencing. In the third quarter this year we saw the health claims come back down to a more normal level, which is the an increase of 5.5 percent from what we had saw in the third quarter last year.

Now I would like to turn it over to Robert.

I'm going to talk this morning about ABF first. In the quarter ABF had $360 million in revenue compared to 335 million last year. As David mentioned earlier, about a 7.5 percent increase in revenues for ABF.

The operating income improved from 23.7 million last year to 29.3 million this year, a 24 percent increase in operating income. And the operating ratio improved from a 92.9 to a 91.9, or a point pick up on the operating ratio.

The LTL pounds per day during the quarter were up half of 1 percent, virtually flat. That is something that we have been saying, generally speaking, most of the year. Our business does not yet reflect much of a change in the overall economy. We are encouraged by positive signs and comments from others regarding the improving economic environment, but we have yet to see much change in terms of freight moving in trucks across the country. Obviously, if economy does improve, particularly the manufacturing economy, then this will eventually translate into more business for ABF.

The third quarter LTL billed revenues per hundredweight, excluding fuel surcharge, was up 5.4 percent to $23.60, and that compares to $22.39 in the third quarter last year. If you look at it with the fuel surcharge in there, then it was up $1.49, or about 6.5 percent. That is a pretty good proxy for price, although obviously if there's any change in the profile that changes it. And there was in fact some changes in our profile year-over-year.

Our average length of haul went up from 1,233 miles to 1,265 miles, about a 2.6 percent change in our average length of haul. And our LTL weight per shipment went down slightly from 991 last year 979 pounds this year, about a 1.2 percent decline in weight per shipment. Both of those factors will improve revenue per hundredweight, the longer average haul and the lower weight per shipment both increased revenues per hundredweight shipment. Part of that was a change in profile of our freight.

The retention of the July 14th increase at ABF took. That retention remains good, as does our average increase on renewing contracts. Our sense is that overall pricing pressures were about the same compared to the second quarter of last year, and no real change from the previous quarters of this year.

I have mentioned in past conference calls the implementation of our NetLink system utilizing microbrowsers. The bulk of it is done, but we continue to add to that additional terminals. When I say the bulk of it, obviously we went to the terminals with the most potential for savings first, and then we're bringing up the rear with the smaller terminals as we get to them.

Currently there are 121 terminals utilizing our outbound planning and mobile dispatch. Seventy-four percent of the city drivers now have a microbrowser. All of our distribution centers and eight large terminals are currently operating with the paperless dock, and all 9 of our distribution centers and 28 terminals are currently using our docking yard system. The centralized dock management has only been installed at three of our distribution centers at this point.

Let me give you a brief outline of what this means. Outbound planning is ABF city drivers getting shipment information as they pick it up. And that is transmitted to the terminal for planning of outbound loads. And we're getting lots of savings from that. The mobile dispatch is ABF city drivers' key shipment information of delivery, which provides real-time delivery in both all of our internal and external systems. And then city dispatchers provide customer pickup assignments to the city drivers via the microbrowser.

The paperless dock means that dock workers are performing their dock activity utilizing information on the microbrowser instead of paper documents that we used in the past. The docking yard system has information regarding location and movement of shipment and trailers. And it is keyed into the microbrowser by the worker, thus providing real-time updates. And then centralized dock management, which I mentioned is only installed in three DCs at this point. Dock supervisors make all trailer loading and unloading assignments utilizing the microbrowser, therefore ensuring immediate handling of time critical trailers. This also eliminates the movement between the dock worker and the supervisor that was previously required in providing assignments to the dock.

Rail usage for ABF in the third quarter was 16.7 percent of total miles. That compares to 15.1 percent in the third quarter last year, so that is up slightly. Our piggyback cost per mile was up by about 5 percent over the prior year. That is a result of a couple of things. There were some price increases by the rails. And then we used piggyback more often in shorter more expensive lanes during the quarter, which ups our average cost for rail usage.

David mentioned briefly our cost in the hospital and pension areas for non-union employees. Again, hospital was more reasonable this time at ABF; it was up about 8 percent. Pension on the other hand, was up 98 percent as we moved to shore up our pension fund from the last three years. Stock market problems have impacted those funds significantly, and that is looking good now.

The third quarter had some unusual items in it, what we call other terminal expensive, which is a bit of a catchall, was up $700,000 over the third quarter of last year. A few of the things that impacted was we had a three-day power outage in Chicago. We had hurricane Isabel terminal damage during the quarter. And then we had the large blackout that covered the Northeast and part of the Midwest. And those were some of the things that impacted that other terminal expense and caused it to be over by about $700,000 over last year.

Equipment sales during the quarter resulted in about a $300,000 gain, a little less than 300,000. And that is not a remarkable number in the scheme of things, but it is just to point out again as I have often in the past, that we've got our equipment on our books at reasonable values, and we don't really expect to take large losses or large gains on equipment during the year.

Some things that happened during the quarter of note. ABF launched a redesigned website with an industry-first automated personalization technology. What this means is that the computer looks at how a customer is using our website, and then reconfigures it to better suit that customer's utilization. It is kind of a neat aspect of our website now, and it makes it much more user-friendly to our customers.

During the quarter we had 18 state champions represent ABF at the Natural Truck Diving championships. Drivers qualify for these state competitions by being accident free for a year or more prior to competition. And then qualify for the National Truck Diving Championship by winning a state championship. During the championship drivers demonstrate driving skills and knowledge, written tests and interviews, and then of course they do driving skills; braking, parking, backing, maneuvering through the course. And we were proud to have those 18 state champions represent us at the National Truck Diving Championship.

A biggie for the quarter is ABF has been awarded the 2003 President's trophy for safety by the American Trucking Associations. ABF is the only carrier in the industry that won this award five times. We won the award in 1984, 1989, 1993, 1998, and now again in 2003. It is a trophy that is presented annually to one motor carrier in each of three mileage categories by the American Trucking Associations. It is the highest safety award in the motor carrier industry.

It is also interesting that in each of the last 30 years, ABF's safety ranking has been first, second or third in the last 30 years. And we're part of that. On top of that, the American Trucking Associations named Jim McFarlin Director of Safety and Security for ABF as the 2003 Safety Director of the year. We're proud of Jim for that honor, and it the highest honor given to a professional in the field of motor carrier safety. So those are some sort of nice things that happened during the quarter for ABF.

We have coming in January a new hours of service rule. That rule allows our drivers to be on 14 hours instead of 15 allowed by the old rule. And when the within that 14 hours the driver can drive for 11 hours as compared to 10 hours under the old rule. So an hour less total duty time, but an hour more of total driving time under the new rule. The mandatory rest period between periods is now 10 hours instead of 8 hours under the old rule.

And the new role has a restart provision that was not in the old rule. A driver can be on duty for 70 hours in 8 days, but if the driver has 34 consecutive hours off duty for any reason, he restarts at zero hours.

This new hours service rule for us is a bit of a plus and a bit of a minus. Obviously, we will be able to make some runs now with 11 hours of driving that we couldn't make with 10 hours of driving. That is obviously a plus. But we lose an hour of total duty time. And then the driver has to rest for 10 hours instead of 8, which means we can't turn them as rapidly. And in some cases, this will cost us some utilization and some money.

I think for ABF the rule is not a big deal. I don't think it is going to make a huge difference. We're obviously studying it hard, and have been for some time to see what areas where we can take advantage of it, and areas where it is going to probably hurt us some. It is based on a 24-hour day. If you had 14 hours on duty and 10 hours off duty, that adds up to 24. The old rule was less than a day, which meant that theoretically you would be starting work at different time every day. This should, in most cases, have the driver going to work roughly at the same time every day, which is probably good. Science seems to show that. So let's hope it has the desired safety effect on our drivers nationwide.

Let me talk briefly about Clipper. Clipper is our intermodal marketing company headquartered in Chicago. In the quarter it had revenues of 34 million. That is up from 32 million 4 last year, or almost a 5 percent increase in revenue. Operating income though was down slightly from 700,000 last year to 600,000 this year. And the operating earnings ratio was a 98.2 compared to a 97.7 last year.

Clipper operates in three major areas. They do LTL consolidation. That business in terms of revenue, was 9.1 million, up about 1.3 percent. And it did not make money during the quarter. Intermodal and brokerage, the revenue for intermodal was 16.7 compared to 13.8. That is a 21 percent increase in revenue.

And we are excited about the growth that we're having in intermodal. That is essentially truckload on rails, is what it amounts to. And that has been growing very fast for us this year. We are pleased with the progress we're making there.

And then Clipper control logistics, which is our temperature control operation. These are refrigerated trailers that move on rail. And we are largely moving produce out of California back to the Midwest and to the Northeast. That business was off 13.8 percent, the revenue down from 9.5 million last year to 8.2 million this year. And the operating income was 500,000 compared to 700,000 last year. They had a 94.4 operating ratio, and last year, 93.1.

Our veg (ph) business is somewhat dependent upon how the crops come in. If they come in all at once, it is a spot market business for us. And then there is a large demand and good prices. If these crops come in over an extended period of time, then it is less demand and not as good pricing. And that is sort of what we experienced in Clipper control logistics during the quarter. Still a good business, and something that makes good money for us.

That is all I have got. And I think we'll open it for questions now, David.

Okay, Roderick, I think we are ready for questions.

(OPERATOR INSTRUCTIONS) David Ross of Legg Mason.

Very good OR this quarter. I have a question about the capacity of your terminals right now. Are you still running about 90 percent capacity?

Yes, that is our estimate of it. Obviously with over 300 terminals, we've got some that are probably at capacity, and some that are well under capacity. But basically, we think we're probably around 90 percent.

Do you still have 302 terminals as in July?

Yes, sir.

And are there any plans to reduce that number, or is that kind of about where you see yourself leveling out?

That is about where we will be. I don't see anything big change there.

Also the GRI was the biggest -- you know, 5.85 percent that you have had, and that is holding up well. What percent is contract business? Is it still about a third for you guys?

It's a little over a third.

A little over a third?

For ABF, yes.

And then as for any Yellow, Roadway fall out, have you heard anymore from customers about that?

No. We're not really seeing any going on there, any shipment business to speak of. Well, there is some, but it is very minor.

Very minimal?

Yes.

Just lastly, what is your current average tractor age?

I don't know the exact on it. We're probably on average right now about a year and a half, but it might be nineteen months or something, but it is in that range.

John Barnes, Deutsche Bank.

Could you give us an idea of kind of monthly sequential progression through the quarter, and how things kind of built up into September?

Well, first two months of the quarter were obviously better because of the comparison. CF came in last year in September. And we were looking at just under 4 percent increase in July, about 3.16 percent increase in LTL tonnage in August over prior year. And then September was 5 percent -- 5.4 percent less than prior year. And that decline is largely the impact of harder comparisons.

If you just -- gut feel if you look at it. Do you feel like things are getting better in the economy as you got later in the quarter without the comparison issues factored in?

David?

We really don't see much at all in the way of getting better or getting worse. What we saw in September is about what we would have expected to see when we look at historical trends from July and August to September.

So it was so was kind of a normal progression?

Yes.

In terms of your volume, your LTL tonnage was still a little bit weaker than I would have expected, but it goes to you all's discipline on pricing. I am curious at all, at 90 percent capacity utilization, do you feel like at all potentially you a bit topline constrained in terms of -- is there a theoretical maximum that you can haul? And 90 percent may be it, and you are always going to have 10 percent that just kind of floats out there, whether it is a deadhead head issue or something like that, and therefore, you really are exhausting all of your infrastructure today? Or is this a matter of you are just being conservative as to what you take in, and you are working on the freight profile in your business?

Long question. I think the answer is no, we don't feel constrained. When we make the most money this business is when we run out of everything, and we haven't gotten there yet. If the economy starts to turn and business picks up, we can increase capacity fairly quickly. Real estate takes a little longer, but with equipment we can move pretty quickly. And we can solve the real estate problem in short-term by throwing labor at it -- double using doors and that sort of thing if necessary. But no, we don't feel constrained at all.

And then lastly, have you internally looked any further at uses of your cash flow and debt free balance sheet? Should we be anticipating any kind of announcements in terms of a further increase in the dividend, share repurchase program to augment what you've done, and what you got planned? Should we be looking for further announcements down the road from that?

It would be my recommendation to our Board that we sort of keep our powder dry here for the next ten or twelve months. There may be some opportunities to grow, in which case I want to have plenty of cash to do it with. That said, my Board doesn't necessarily take my recommendation all the time, so I guess anything could happen. But that is what I think we probably ought to be doing going forward.

Ed Wolfe, Bear Stearns.

It is actually Justin Yagerman (ph). You commented that you haven't seen much freight from Yellow or Roadway yet. I just wanted to get a sense for the timing of that, and when it is feeling like from your conversations with your customers, when they would be starting to plan to move any freight over, if they are planning to move any freight over? And what your expectations are going forward regarding that?

It depends on an awful lot of things. It depends on what form the merger takes at what time, when they decide to do different things, if they do. And I certainly am not privy to all their plans. I know what they have said publicly. We will be having contracts -- a large percentage of our annual contracts expire in December. We might see some ripple there. I don't know. We will know in December.

When they begin to, if they do merge operating parts of the companies, that would probably be another milestone. But it is just hard for me to speculate, because I don't know what is going to happen there, particularly with the timing.

You guys commented that freight was off about 5 percent in September. What are you seeing through the first two weeks in October right now?

We're seeing the same sort of progression month-to-month that we expect. There is nothing really different going on in October. We are, again, not seeing -- we're seeing no reflection of any change in the overall economy at this point.

Ken Foster, Merrill Lynch.

Just if you could -- just to follow-up on that question. You don't see any change in the progression, but would you expect -- I would've thought in September we still would've had one full month's contribution from CF that you didn't have a year ago, so you would have squeezed out two-thirds easier comps, I guess, or almost three full months. Would we not still -- should we see freight then down on a year-over-year basis, if you had a down month in September and October and going forward? Or are you seeing it bouncing up a little bit here?

We had last year in September, Consolidated went out of business early in the month, so we had about a full month. At the same time, if you will recall last year, as we went through the fourth quarter we were seeing month after month some increases greater than the previous month till we got through the fourth quarter.

We don't give any guidance in looking forward. All we can tell you is what we're seeing at this point, and again, we were down in September. We're continuing to see a similar trend in October. But from a sequential standpoint, the business levels in September and October are consistent with what we would expect looking at historical relationships from July and August. That is about the only way we can look at right now, because the numbers are kind of messed up on a year-to-year basis.

Thanks for clarifying, David. A couple of questions on the financials, if I may. The Capex, I think you quickly mentioned 60 down to just 72. Was it a bit stronger in this quarter then anticipated? And can you break down what you were spending the Capex on? And then suddenly, on accounts receivable it looked like that popped a bit in the third quarter, but it also look like it popped a bit in last year's third quarter. Is that a seasonal trend, or is there something more to that?

Let me take receivables first. Yes, that's a normal seasonal trend. We normally see that. In looking at our capital expenditures, normally as we go through the year, we have the second, the third quarter tend to be the strongest. The fourth quarter, we will still spend some money, but that tends to be more real estate related than it does equipment related. The majority of our equipment expenditures are now completed. Not 100 percent, but the majority is. Does that help you?

Yes. Can you break it down between equipment and real estate for the quarter, and software?

No. I don't have that for the quarter. I don't have that break down at my fingertips, but we can get it for you.

And then just finally, on the salaries and wages, it looked like obviously a little bit better than expected. I just wanted to clarify, just to understand, what Robert were saying before about comparing the pension and, I guess, just pure rate wage increases. Can you kind of just review a little bit again about that, What the break down there was? Or how we should look at this going forward on the salary and wage line increase.

What we said on pensions going back through the first couple of quarters this year, is that our pension cost this year was going to be little over $11 million, compared to a little over 5 million last year. A big piece of that was amortization of prior losses from market performance. And we knew that was going to be the number for the year, and that wasn't going to change. I would anticipate that our pension costs next year will come down some. But until the get the actuary studies, I can't give you a specific number.

On the health-care costs thought, we indicated last quarter that our health cost were up significantly in the second quarter from what we had normally seen, like 37 percent over the previous year's second quarter. We felt that that was an unusual situation, and it should come back in line, but you just never know. But we did in fact see it come back in line in the third quarter to where -- and look at the total corporation our health-care costs were only up 5.5 percent, which is actually a little below what I think most industries are experiencing.

There is a number of factors in the salary and wage line. The biggest one, when you look at the decline as a percent of revenue, is salaries and wages. And there is some leverage in that line when you look at some additional business levels.

Just then one final wrap up, I guess. Robert, if I may, your return on invested -- return on total capital is now greater than the 10 percent that you are looking for. So to come back to John's question about what your future use of cash are for investing, should we look for a further expansion because you're finally earning that better than return on invested capital target that you set for awhile now?

Well, I'm not sure what the question is? What do we plan to do with our cash going forward? Is that the question?

Well, yes. You're filing -- surpassed your target on return invested capital. So what kind of expansion should we look for, or do we not look for expansion, just continued returns on the money that you have already invested?

We've got several things to look at bare. I'm not uncomfortable with where we are in terms of debt equity ratio or cash position at the current time. If you look out several quarters, if we continue to produce excess cash as we have for the last several years, then we're going to need to be giving good consideration to how we use that, otherwise, we're going to hurt our returns.

The obvious options are we can pay a larger dividend than we are now paying, or we could pay a large onetime dividend, or we could buy back more stock then we have been buying back, or we can invest in something. What I'm hoping will happen in the short term, is that we will have some opportunities to invest in our goose that laid the golden egg, ABF, with some additional business perhaps in the next year or so, based on lots of things that we are all aware of.

If that happens, that is great because that is where I would like to invest money more than anything else. That is where we do well, where we seem to know what we're doing. But if that opportunity doesn't present itself, then we will have to look at those other options, and perhaps the others that I didn't mentioned.

Gary Yablon (ph), Credit Suisse First Boston.

Can we start with yields, Robert? Can you talk a little bit about how the pricing marketplace feels? It sounds like you feel pretty good about the direction of pricing. Could you talk about how that played through in the quarter?

Yes, I think the pricing climate was as good as we have seen in some time. And it has been that way all year long. That is not new for the quarter. I am pleased that. The retention that we have had on the rate increase has been good. We have certain contracts coming due every month, and the increases in those contracts have been good. They're running from time to time now at all-time highs. They go up and down of course. But those have been good.

You always here some anecdotal stuff about somebody doing something stupid, but my guess is that the industry pretty much has toed the line, not chasing business with price during the quarter. Certainly our numbers would indicate that. And I suspect we will see a lot of the same thing with the other carriers when they announce.

I am very bullish about the pricing marketplace out there today. And I am particular pleased with what has gone in the last three years. We have been in a really down market for three years, and pricing has held up, which tells me the industry is matured. And looking at price is just one of the arrows in the quiver, and not the only thing you have got to work with.

You talked about length of haul being up a little bit weight per shipment. What would you say was pure price improvement year to year in the quarter as opposed to mix?

It is about half of it, about half of the 5.4.

Okay.

Excluding fuel surcharge.

Okay. 5.4 percent. Okay.

And that area, that is about what we saw in the second quarter as well, about half of the yield excluding some surcharge.

Just to clarify, maybe I should know this already, X the CF business as best as you can tell, is your tonnage growing year-to-year?

Well, it's hard to tell. With CF business on the August 31st last year, and on September 1st, it was ours. Many of those accounts we shared with CF, so it is hard to say that is CF business or not CF business. It really loses its identity pretty quickly.

Well, give us your best shot. Your best shot is better than mine.

Gary, I would say all things considered it is probably flat.

Just a couple more or so. I guess I want to get back to the balance sheet just for a minute. There probably won't be any way around harping on it, so I will just come out with it. On the one hand, the balance sheet is pristine, but you want to keep the powder dry. I guess my question is, powder dry for what? The world gets better. Does it cost you that much capital if the world gets better to put more business into the system?

And if the world is going to get better, won't you have wanted to buy back some stock at these prices? I guess I am just a little bit confused because you seem to have so much opportunity, given the balance sheet and the fact that you are even still generating a fair bit of cash flow.

Gary, we still have, as Robert indicated, about 10 percent excess capacity. So we do have the ability to take on additional business without adding a lot of capital, without spending a lot of capital dollars. But at some point, the economy has got to improve, and we think there may be some additional opportunities as a result of Yellow/Roadway merger.

I mean history says that there will be some business become available. And we're just trying to take a conservative approach. And we're going to see how things shake out, and what kind of capital dollars we might need to spend band before we would make a more significant decision as it relates to either a dividend or a stock buyback. And keep in mind we, still have about $20 million available under our current stock buyback program as well.

Right. Okay. Let me just ask one on Clipper, if I could. David, you have talked about, we want to make it better, it has got to earn its returns. And there's a point time where if it doesn't, it doesn't fit the portfolio. Could you give us an update on that? And then I actually just had one more.

Well, if the present trends continue, they are going to miss the 10 percent hurdle rate that we used this year, but not by much. We're seeing some excellent growth at Clipper in their intermodal -- their IMC business, their trailer load on rail. It is growing at a good clip.

They're getting close on the one hand. On the other hand, what Clipper does because of its size, I mean they are 10 percent of our business. If they did really well, or if they do really bad, it doesn't make a whole lot of difference, because they're so small compared to ABF.

I have said before, and I think this still holds true, that we probably need to either get a much bigger there or get out of the business, one of the two. So that it has some significance to the Company. If it were twice the size it wouldn't take any more time. So that is kind of where we are. They're making money, and they're not hurting us.

Robert, can we expect some kind of a decision at least on that within the next, I don't know, let's a six months or so?

I don't know. I can't tell you.

Let me throw just one more if I could. It was discussed earlier, you talked about piggyback cost per mile being up 5 percent or so. Were you for the most part able to pass that along?

Well, it is in our cost structure, so yes.

You were?

We don't segregate that out by customer, because that is not their choice. It is whether they have to move by rail or not. But it is in our total cost structure, so yes, it is passed on.

It is passed on to the customer?

Sure. All our costs are.

James Valentine, Morgan Stanley.

Good quarter, guys. The question I had pertaining to the bits of your competition in terms of the Yellow/Roadway combination, in that I'm wondering if -- it is a two part question. The first one is, has the DOJ, or anybody else from the government, come to you to talk about their combination in terms of -- well, just say they come to you guys as part of their overall effort on an ongoing basis to look at a merger in the industry?

Yes, we had a phone call from the Department of Justice in regards to that merger.

James Valentine So now that -- get that on the table. I guess the question is -- the real question I am trying to ask is, if they're asking about things like do you envision pricing going up when you all and Roadway get together -- did that come up? I guess did it come up? And I guess I'm wondering what your view is on that?

I honestly don't recall specifically if that point came up. They asked us a lot of questions. It was probably a forty-five minute conference call. There were three or four of us here on the call, and two people from the DOJ there. But they talked generally about the impact on the industry, and on us in particular, and so forth.

James Valentine Do you view them getting together as possibly helping the industry in terms of pricing, seeing the pricing go up?

Well, if you assume that they are looked at as one company by the customer, then that is one less bidder out there for the freight. And I would consider that to be positive from a pricing standpoint. The fewer players, the better I like it in terms of pricing. But who know? They say they are going to operate them separately, as I understand it. And the customer may perceive that as two companies. And so we will still have two companies bidding against us instead of one.

James Valentine Great. That is all I had. I think Mike Manelli here had a question as well.

I have a question about the labor contract in that, are you guys in any circumstance right now using the new premium service employee?

We're in the process of processing change of operations to utilize some green service people. And we expect to get that done this quarter.

I guess, how large a change in operation -- is this going to be in one or two select markets, or is a major change in how you guys conduct business?

No, it is not a major change in the way we conduct business. We will be trying this in some select markets and perfecting and going from there.

Have you gone forward and tried to get your employees to volunteer for this? And if so, how is the employee reception been to this point?

Well, the employees have not been impacted up to this point. They're probably some of them aware of the changes that we filed. And we're hearing positive things about that, but it is not done yet.

Greg Burns, J.P. Morgan.

I think you've covered a lot of ground. I wanted to go back to the mix of freight in your system, and how your excess capacity may help or hurt you. And I guess my question is, you talked about the change in profile related to the CF business. But I imagine you have some freight in your system that is generating above the corporate average OR that would probably see an above-average rate increase if you had your way. And yet on the other hand, you're carrying some excess capacity. So I am just curious, do you feel constrained given your capacity utilization where you can't necessarily reprice some of your lower margin business, maybe the way you want. And maybe the flip side of that is, if we do get more utilization in your network, should we see the mix shift improving more than it has?

Well, I wouldn't characterize the mix shift as an improvement or a deterioration either one. It is just different length of haul, different size of shipment. Both of those factors can be good or bad, it just depends on how it is priced. I don't see any constrains. We constantly look at accounts that are not performing as we thought they would. Occasionally a customer tells you the characteristics of the freight are going to be one thing, and they end up being another. And we're always looking at that. And we don't feel any constraint whatsoever in terms of repricing if we have made a mistake in the pricing. That is an ongoing thing. And it is not being held back on now because we have some capacity. That would be a mistake.

If you ever get your freight profile out of whack, it takes a long time to fix it, and it is not an unilateral thing. When you start trying to fix your freight profile, that takes two to tango. The customer has to agree to it, and of course you have got to instigate it, as opposed to an operating problem, where it is unilateral. We can fix that on our own if it needs fixing. But a freight profile thing is not something you want to let gather moss. You want to stay on top of it all the time.

Greg, the profile changes that we've seen over the last year, we're attributing 100 percent to the CF business; the longer length of the haul, a little lighter shipments. And at the same time, we have been successful in repricing business where it was necessary, particularly when you look at what we have been able to do with the contract and deferred pricing accounts. We're continuing to see increases there above our historic norm.

In addition, when we look at second quarter to third quarter this year, we saw a slight reduction in length of haul and a slight increase in weight per shipment.

And just following up on this. So what I am hearing from you that you really haven't been more or less aggressive in improving the mix. I mean, if I look at FAK (ph) freight, is that ratio about where it is in your system? Has it has not changed? I guess the question would be, assuming at some future point you get more capacity utilization, is it reasonable to expect, in addition to whatever we assume on price, that you can get more aggressive in substituting freight? Or is that really not part of your strategy?

Greg, I'm going to answer your question in a different way. We're not necessarily focusing on a particular profile. We look at all of this information and provide it externally as indications of what is happening. But internally, we look at account profitability. And that is how we make decisions. As it relates to the longer term in terms of additional business and capacity, we should definitely experience improved operating ratios because of the leverage we have as we get additional business.

We have said several times that because of the size of our system as it relates to our competitors, that when business levels are reduced, it tends to push OR up more. And the reverse happens as business levels improve. We tend to have more leverage. And we don't see anything that will change that.

Right. Okay. And just following up on some questions on the Roadway/Yellow, maybe just in terms of what you're seeing in the market today. I guess we always thought of Roadway as being fairly aggressive on price realized to you guys. I'm curious, if you say that there has been no change, then should we assume that Roadway is just as aggressive on price? Or at least looking forward, is Roadway maybe being a little more rational on price?

Well, I do want to comment specifically about another company particularly, but let me just say that the pricing atmosphere really hasn't changed. It is about the same as it has been most of the year, or all of the year for that matter. And it is pretty healthy. Again, I've mentioned earlier, you hear anecdotally things that seem to not make sense that other companies do. And I am sure we do it too. We make mistakes on accounts from time to time.

But what you have got to look at is where their numbers are at the end of the quarter in terms of revenue per hundredweight. Did it grow? Did it shrink? How much did it grow? How much did it shrink? And that will tell you the story. Anecdotally, it is dangerous because you might hear two or three stories that those companies have several hundred thousand accounts. And if they have messed up on three of them, that didn't make a lot of difference. That is where you have just got to look their numbers when they come out.

Greg, when you look at the numbers you have to take fuel surcharge out, and to the extent you can factor out profile changes. Normally I don't think any of us see that much of a change quarter to quarter, year-to-year in profile changes. But that has been a little bit different with Consolidated Freightways going out of business, because they did half by far and away the longest length of haul.

If you I hear you, since the Yellow/Roadway transaction, there has been no change whatsoever in the pricing behavior coming out of either company? Is that fair?

Again, to repeat what Robert said, we haven't seen that much change in the marketplace over the last year or so.

Ed Wolfe.

It is Justin Yagerman again. My one question to you, I guess I actually have two. When CF went out, you guys admittedly probably took less freight than either Yellow or Roadway. And so I guess my question is, how much of Yellow and Roadway's freight is desirable to you? And in general, have you targeted any specific accounts within it? Is there something specific that you're looking at?

Their freight is very desirable to us. We would like to have all of it. They're both profitable companies and they got a good book of business. There is no conversation around here about specific accounts that we're going to try to get. We want them all. And obviously won't get them all, but if opportunities present themselves, we will be aggressive.

Do you think you would be more aggressive in this situation than you were when CF went out, is what I'm trying to get at?

Yes, think so because there was so much of the CF business that it was just really priced way far below cost. That was that was their problem. Their costs weren't particularly out of line, it is just their book of business was so bad. They had managed to gather up all the cheap business out there essentially. So there was a lot of that we weren't interested in. But in the case of Roadway and Yellow, if opportunities present themselves, it would be a different kettle of fish, because those are both profitable companies with good book of business.

My other question was, you discussed that you have applied for some change in operations with the premium employees, and I wanted to see if you're willing to comment on what regions you guys were starting to look at piloting next day operations?

We will probably let you know that next quarter after we get going.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Mr. Humphrey, are there any closing remarks?

We thank you for joining us this morning, and we appreciate your interest in Arkansas Best Corporation.

This concludes today's Arkansas Best Corporation third quarter 2003 earnings conference call. You may now disconnect.