ArcBest Corp (ARCB) 2004 Q2 法說會逐字稿

I will be your conference facilitator today. At this time, I would like to welcome everyone to the Arkansas Best Corporation's second-quarter 2004 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). Thank you.

Mr. Humphrey, you may begin your conference.

Welcome to the Arkansas Best Corporation's second-quarter 2004 earnings conference call. We will have a short discussion of the second-quarter results, then we will open up for a question-and-answer period. Our presentation this morning will be done by Mr. Robert A. Young, III, President and Chief Executive Officer of Arkansas Best Corporation, Mr. David E. Loeffler, Senior Vice President and 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, by their very nature, are subject to uncertainties and risks.

For a more complete discussion of factors that could affect the Company's future results, please refer to the forward-looking statements section of the Company's earnings press release and the Company's most recent SEC filings.

We will now begin with Mr. Young.

Good morning. First, I'd just like to say that we're pleased with the quarter. What we saw beginning in April was a spike up in tonnage and revenues and that year-over-year comparison improved further in May and then further again in June and continues to improve on a year-over-year basis in July. I will talk more about that later.

I think the patience in not filling our traders with marginal freight early on this year has begun to pay off. We are seeing great operating leverage, which is something we've talked about publicly in the past, and that operating leverage has allowed a very significant portion of that additional revenue to fall to the bottom line, resulting in some awfully good numbers for the quarter.

With that, I'm going to turn it over to Dave Loeffler to talk about some of the financial parts of Arkansas Best Corporation. David?

In looking at the overall results for the second quarter, the total corporation's revenues were just under 425 million, an increase of 10.3 percent from the second quarter of the previous year. Operating income was 32 million, compared to 13.5 million in the second quarter of last year. Net income, excluding the increase in workers' compensation reserves for reliance this year and excluding the gain on the sale of Wingfoot last year, was just under 21 million this year compared to 6.8 million last year.

Earnings per share, again excluding the increase in Workers' Compensation reserves for reliance this year and the gain on the sale of Wingfoot last year, was 82 cents compared to 27 cents in the second quarter last year.

In looking at the revenue changes, ABS revenue was up 13.6 percent from the same quarter last year and Clipper's revenue, if you exclude the LTL division from the second quarter last year's revenues, was up 4.3 percent.

For ABC's cash flow for the second quarter of this year, I'd like to refer you to the GAAP cash flow statement attached to our press release.

I'd now like to highlight a few more significant cash flow items.

Our net income before depreciation and amortization and the change in the fair value of the interest rate swap was just under $48 million. Net purchases of property and equipment was $31 million and capitalized software was $2.2 million, resulting in free cash flow of just under $15 million. The increases in Workers' Compensation and other working capital changes basically had no impact on cash flows in the first six months of this year.

We had a reduction in bank flow of $2.5 million. We purchased treasury stock for $7.5 million. We issued common stock -- this was exercise of stock options -- for $2.2 million and we paid dividends on common stock of $6 million, so we had an increase in cash in the first six months of this year of just under $12 million.

Looking at the status of our debt, our total debt at the end of the second quarter was $1.9 million and we had temporary cash investments of a little over $14 million. Our total availability under our revolving credit agreement at the current time is about $170 million. The usage is for LCs.

Looking at our internal financial measures, our after-tax return on shareholders' equity for the 12 months ended June 30 this year is 14.2 percent. Given the fact that we have no debt, basically our debt equity ratio is 0-to-1 and our after-tax return on capital employed is 14.05 percent compared to our minimum acceptable level of 10 percent.

Originally this year, we forecasted net capital expenditures of $76 million. We are now lowering that forecast to $69 million. The reason for the reduction is basically delays in some real estate projects, which are fairly normal, as well as we had a couple of sales of facilities that weren't originally forecast.

Our depreciation and amortization for the second quarter was about $13.4 million, and we are now forecasting depreciation and amortization for the full year of about $55.5 million versus our original forecast of $59 million. The reason for the reduction in our forecasted depreciation is a result of delays in receiving some of our equipment. These delays are resulting from some issues with the manufacturer. We've got those worked out and we're now starting to get the rest of our equipment.

I would now like to turn it back over to Robert.

(inaudible). I want to talk first about ABF and its quarter.

As Dave mentioned, revenues were up 13.6 percent to $391 million. Operating income was 32.8 million and that compares to 14.6 million last year, or a 124.7 percent increase in operating income. The operating ratio improved from a 95.8 last year to a 91.6 this year.

I mentioned the increases in tonnage that began in April this year, significantly in April. LTL tonnage was up 6.5 percent in April over last year. May was up 7.5 percent; June was up 9.2 percent. July, through yesterday, was up just under 11 percent, so we are continuing to see escalation in our tonnage increases as the year goes along. That certainly is going to bode well if it continues for the third quarter.

The truckload tonnage for ABF is above second quarter last year by almost 11 percent. We are clearly seeing additional freight formerly handled by our truckload carriers. There's been a significant tightening of truckload pricing and beginning in mid-February, ABF started raising prices on the spot market, their quotations for truckload freight. In spite of these actions, business levels remain strong and obviously profits improved on that business. ABF's truckload business is more related we think to the improving economy than to the new hours of service regulations, which we're going to talk about a little bit more later.

Revenue per hundredweight on our LTL was up 3.8 percent without the fuel surcharge and including the fuel surcharge, up 5.8 percent. Good pricing atmosphere out there right now and my guess is we will continue to improve with the tightness right now in terms of capacity that we're seeing in the industry.

Our productivity remained equal to last year's second quarter. Net shipments per dock, street and yard hour are really no change from last year but above the prior three months, so it has been improving in the last four months.

Unusual for us, our real usage was up to 18.2 percent of total miles; that's a little higher than we are used to. Last year, it was at 15.3 percent. We have been using more rail as our business has surged and we are in the process of hiring drivers to now put more of that back on the road.

Our fuel cost is up almost 36 percent from the second quarter of last year, and that's due to higher fuel prices and increasing miles and a lower Miles Per Gallon for our road tractors. We are looking at a price-per-gallon right now of -- this is without taxes -- of about $1.15, versus 89 cents last year, or about a 28, almost a 29 percent increase in the price per gallon, year-over-year.

A bright spot this year in the second quarter is our non-union employee welfare costs decreased by 1.638 million or about 15.5 percent from last year. It went down from 10.5 million last year to 8.9 million this year in terms of non-union employee welfare costs. That's primarily due to fewer large claims. Large claims tend to drive these numbers, claims that run into the hundreds of thousands of dollars, and they don't come on evenly throughout the year. That's a number that I hope we can maintain through the rest of the year, but you never know.

David mentioned depreciation expense related to line and city equipment. A little more detail there -- it's up by about 1.277 million. Road trailer depreciation expense is above the second quarter last year by 765,000. That's largely due to a reduction of the salvage values on our trailer fleet, reflecting the lower market pricing that we're seeing out there for used trailers. Then we had higher depreciation of about 515,000 on new trailers that replaced trailers that were generally fully depreciated.

City tractor depreciation is above the second quarter by about $280,000, and that's because we moved road tractors into the city fleet in 2003. Those tractors have remaining depreciation to go, and they replaced fully depreciated city tractors. So we don't really have more equipment; we just have new equipment bringing about that increase in depreciation. We are talking about 7.8 million this year versus 6.5 million last year.

For the second quarter of 2004, we had a gain of approximately $65,000 on equipment sold, and that's not notable except to say that it means that our residual values are realistic.

Interestingly, our two-day lanes, two days or less, grew 15.9 percent in revenue, year-over-year, and our three-day and longer lanes grew 14.2 percent, so we are growing faster in our short-haul lanes than we are in our long-hole lanes.

I always like to mention some things about ABF that don't have anything to do with the financials. Art Lucas, a driver for ABF in Buffalo, New York, got the ABF medal of excellence presented by Bob Davis and ABF's President recently. During a routine mule break (indiscernible) New York, Lucas helped save a woman's life. This is something that is sort of normal for this guy. He was among the volunteers back in 2001 at Ground Zero; he's a former fireman.

Emphasis on security at ABF has always been the norm, and we received the 2004 Excellence in Security Award from the American Trucking Association. This is the 28th time since 1971 that ABF's safety and security program has earned recognition from the ATA Safety and Loss Prevention Management Council. We've got 16 regional security managers strategically located throughout the carrier's North American system. Each of our security managers is a former law-enforcement official who worked closely with ABF management in local, state and federal authorities and regulators, and they do a great job.

I think most of you have probably heard by now that the U.S. Court of Appeals vacated or threw out the federal hours of service rules that just went into effect in January. The overriding issue in the court's decision was the failure to "consider the impact of the rule on the health of drivers." The DOT has 45 days to review the court's decision and decide what to do. During that 45-day period, the current new rules will remain in effect and we will just have to wait and see what happens after that. There can be additional extensions of the new rules; it could be that the MFCA (ph) will come back to the court with some changes or recommended changes. We don't know yet.

These recent changes -- as I mentioned, they came into effect in January -- have had, we think, little affect positively or negatively on ABF but generally, we think these are good rules. We think having a driver on a 24-hour clock so that he can start to work at the same time every day is good in terms of their (indiscernible) rhythm and should be a safer rule than what we came from. We support the current rules that are in effect and that's also true of the American Trucking Association's and -- (technical difficulty) -- Freight Carrier Association. In other words, the industry supports these rules.

Moving on briefly to Clipper, David mentioned that revenue was 25 million in the quarter, compared to 33 million last year, but that's because we sold our less-than-truckload portion of Clipper back in the first of the year. If you take that out, then we are comparing 24 million to 25 million this year, about a 4 percent increase. We have been struggling this year to keep those revenues up and growing and have had success. When we sold the LTL division of Clipper, we sold I think 24 -- I believe that's the right number sold, not sold but moved those salesmen over to the purchaser. They were primarily charged with selling LTL but they also brought in freight for the IMC operations and piggy-back operation and also for the brokerage operation. We lost that sales coverage when those sales moved out. We knew we would and we were prepared to try to maintain that business, but it's tough -- the relationships there. But as you can see from the increase that we've had, we have been able to either hold onto or replace the business that went with those people. I think that Clipper is on the -- (technical difficulty) -- path now starting to build their business in a very positive way.

With that, I'll open it up to questions.

Okay, Phyllis. I think we're ready for some questions.

Yes, sir. (OPERATOR INSTRUCTIONS). James Valentine of Morgan Stanley.

Good morning, gentlemen. It's Chad Bruso actually. Good quarter. I just wanted to see if we could break apart the 8.5 percent tonnage growth in the quarter a little bit. I'm wondering if you were to put that into three buckets -- the economy versus diverted freight from the truckload carriers versus market share gains -- how would you break that apart?

James, I think the essence is largely just a big pick-up in the economy, particularly the manufacturing sector. We are probably more dependent upon the manufacturing sector than some of our competitors. While we do an awful lot of retail business, we don't do quite as much percentage-wise as some of our competitors, and I think the manufacturing sector came on a little slower than the retail part of it, of the economy, and we began to see that strongly in April and it has escalated ever since then. But our business in the truckload sector is not so much how much; it's how much we are able to charge for it. In the spot market, where we are quoting prices on a daily basis, we've been raising those prices in order to get that business solidly profitable and it's again not so much the volume of that business we've done; it's the quality of that truckload business that we've done.

Maybe on the rate side then for just a minute, how much did implementing the GRI in June this year versus July last year add to profits in the quarter? Then given the strong environment that we are seeing out there, maybe how much of the 5.9 percent GRI do we think ABF can pass through to customers relative to a year ago?

Chad, from memory, I think it was about $3 million that dropped through to the bottom line.

In terms of passing through, I think the best way I could answer that would be that the rate environment continues to be very favorable and as the economy has improved and tonnage levels have increased, it continues to be even a little bit firmer.

Okay, great. Thanks.

Edward Wolfe of Bear Stearns.

Good morning, guys. Just a couple of follow-ups first -- what percentage roughly of your LTL tonnage is manufacturing and what percent retail?

We get that question often, and we've got -- (technical difficulty) -- codes on maybe a quarter of our accounts and we're not even sure how accurate those are. Then you run into the problem if you pick up from a manufacturer and deliver to a retailer, what is that? So, I think the short answer is I don't know.

Directional, if you were guessing, would you say about half of it or more than that is related to manufacturing?

I'd just -- I wouldn't guess. I just don't know.

David, you talked about CapEx and I apologize; I missed your CapEx and depreciation comment. You said guidance is going from 80 to somewhere?

No. Originally, net CapEx was 76 million and we're dropping it to 69 million.

That's for '04.

For '04. Depreciation originally we said it would be 59 million. Now, we are forecasting about 55.5 million.

Are those two related to each other (indiscernible) the push off of the real estate?

Not really. The reduced depreciation is more a function of delays in receiving some equipment.

Who were you having delays with the equipment? Is that Volvo?

Yes.

Okay, and you say those are behind you now, you've gotten the equipment in?

Well, it's coming in. We either have it or it's coming in.

Okay. Robert, you talked about the truckload tonnage at the right price. When you look at the tonnage up 11 percent and assuming you've got it at the right price, is that incremental margin? Is that in line with your regular margin? Does it improve the whole network? Does it help you or hurt you? Is it a neutral in terms of the overall margin and returns in the business?

No, it's certainly helpful to get better prices on that truckload business that we're handling. It adds to the bottom line. It's not marginal -- (technical difficulty) -- we are showing solid profits on that business.

Do you think some of that is related to the hours of service?

Not really. I think the hours of service may have set the mood, but the truckload folks -- they are pretty tight on capacity and their (indiscernible) and raising prices. I think just the whole general mood out there in the truckload sector is responsible for that, not just the hours of service regs, although I suspect that had something to do with the tenor of everybody's thinking.

What are your current plans for restructuring to get into the next-day business?

We have been looking at getting into the next-day business starting slowly, perhaps in one region. We are working with the union to work out a change of the operations on that. We have not gotten that does yet; we are still working.

Is it an '04 event do you think?

It could be late '04.

Did you say the region -- is it the Northeast or are you not saying?

We're not saying right now. Let me add that we are doing some next-day service in some major metropolitan areas. When you look, for instance, at the West Coast, the Los Angeles basin area, we are doing some things there. We are doing some things in the Northeast, but we can do more when we get the change done.

Is the change something that happens with one vote by the union, or does it take place over a series of changes over time? How should we think about how long it takes you once you start to get into the next day --?

Well, once we get a pattern going, then it will go fast.

Then just one last question -- we've heard several different -- or seen several different indicators that maybe the consumers slowed down a little bit at the end of June and July. Really you don't see it in what you're seeing in July but on your retail side of what you do, have you seen any slowdown from some of your customers?

I'm not aware of any; that doesn't mean there's not any. I'm not aware of any. But what we've seen internally is each month has been stronger than the month before, including July.

Thanks, guys, for the time. Great quarter.

Mark Levin of Davenport & Company.

Great quarter, great numbers. My first question, Robert, is this -- how does the current environment compare with 2000? I think that was a year in which ABF posted a 90 OR? Assuming the economy and pricing trends remain a constant next year off of where you are right now, is a 90 OR something you believe feasible for ABF?

Well, yes, if everything -- if the stars are aligned just right and we don't have some unusual thing like the reliance issue we had with our Workers' Comp insurance, those things are possible. I'm not making a prediction but it's certainly within the realm of possibility. That is really all I can say on it.

Does this environment feel a lot different from 2000 or very similar to it?

Very similar to it. We are actually still running tonnage 6 percent below 2000, so we've got some room to grow with our current infrastructure. That should help the bottom line.

My second question is sort of the standard free cash flow question. I guess you get this every quarter I suppose, but what's next? You guys produced I guess another 15 million of free cash flow in the quarter. Obviously, the trends are very favorable. You have a share repurchase program. You initiated a dividend. But is there something out there, in terms of acquisition -- any kind of acquisition possibilities that you guys are looking at? What do you do to deploy some of this free cash?

Well, you took away my speech when you mentioned the dividends and the share repurchase. Obviously, if we were looking at an acquisition, I probably wouldn't be talking about it right now.

Sure but is there a lot of business -- I mean, you've alluded to, in the past, logistics, other types -- is there some type of business that you could see maybe outside of the core long-haul LTL business that you might want to get involved in?

Well, I think we feel that anything we get into, in terms of an acquisition, ought to be something that plays off the strength of ABF's nationwide franchise, something that adds to that. That's sort of the core of our thinking.

Well, great quarter. Thanks, guys.

John Barnes of Credit Suisse First Boston.

A couple of quick questions on rates again. If you had to take a look at the two buckets of your business, could you give us an idea what percentage rate increases you saw on your contract business versus what percentage increases you saw on the spot? I would imagine that the spot rates are going up a little bit quicker.

When you talk about spot, are you talking about the truckload business or are you talking about the non-contract LTL business?

Non-contract LTL.

Okay. We're seeing rate increases on the contracts that are fairly comparable to what we talked about in the past, in the 3.5 percent range, and the rate increases on the non-contract business are higher. We put in about -- I think it was a 5.9 percent increase. Now, generally over time and looking at the total company, there is some discounting of that increase over the next twelve months but the increase is holding very well. We are very pleased with the customer's reaction to that.

So the discounting this time around hasn't been as severe as maybe past rate hikes in that non-contract business?

It's probably a little early to tell. We're just a month into it, so I really don't know at this point, but the environment is definitely more favorable.

Let me ask you one other way as well. Given the strength of pricing in that market in particular, I mean, that seems to be what's juicing the results a little bit here. Is there any chance you take a look at a further increase as we get into peak shipping season? It seems to me that capacity is pretty tight and maybe the market could handle an additional uptick in pricing.

No, we're not considering another increase. I think the more prudent thing would be to try to maintain the increase that we implemented as opposed to getting into discounting and then implement another increase.

So just keep the discounting to a minimum and focus on what you've got right now?

Then secondly, in terms of just improving the overall quality of the freight mix, you commented earlier about not filling up your trucks with just whatever freight is out there. How do you feel you did during the quarter in terms of upgrading the quality of the freight? Is there still some opportunity there or do you feel like you are kind of concentrated heavily in the A and B level freight out there in the market?

We get their book of business in good shape, and we don't have any large amount of freight that we've got to go out and reprice to make it compensatory, so we grow without having to get rid of a bunch of freight while we are doing it.

Then lastly, on your driver recruitment efforts, you mentioned that you are in the process of hiring drivers. Obviously, we've heard throughout the truckload sector that that's a very difficult thing to do. How are you doing on driver recruitment? How long is it taking you to get drivers in the door and get them on the road?

Well, we don't have nearly the problem that the truckload guys do with 100 percent turnover in their segment of the industry. Our turnover at ABF runs 7, 8 percent, so when we hire somebody, they tend to stay hired and that makes it a lot easier to accumulate new employees if you are not having to go out the back door as you are bringing them in the front. We don't need to hire all that many. Compared to a truckload job, it's generally I think a better job. You know, they are home more often, generally speaking. They can be home every night or ever other night, depending on the type of run they have. Occasionally, they're gone longer than that but it's an entirely different kind of job than the truckload guys. I don't anticipate big problems there. There's not a huge pool of experienced drivers out there, so we have to search high and low and we want good ones. We are not taking the first thing that walks through the door. But I suspect we will be hiring, for the next three or four months, pretty hard and heavy.

Okay. Then lastly, this is a very positive quarter and obviously we've heard a lot of positive news from everybody. Robert, what keeps you up at night right now? Obviously, you are just beginning to enjoy the fruits of kind of nurturing this company along through the downturn and now that things are beginning to turn a little bit, you've had a very nice quarter, but what makes you a little nervous out there? What's keeping you up at night? Anything?

What kept me up last night was trying to figure out how to answer this question! (LAUGHTER). Outside of things that are totally outside our control, I'm not too concerned. Things are going really well. I try not to worry about the things I can't control.

Very good. Nice quarter, guys.

Mike Peasley of BB&T Capital Markets.

Actually, it's Tom Albrecht here. Robert, you gave a couple of numbers early on regarding your growth in I believe the second and/or third (indiscernible) markets but I missed that. Could you repeat those figures, please?

Yes, let me look at my notes here. Our lanes currently two days or less grew in revenue by 15.9 percent. The lanes three days or more grew by 14.2 percent. (multiple speakers) -- the interesting thing there is that our two-day lanes continue to grow faster than our long-all, although both grew nicely.

So then what percentage of your overall either tonnage or revenues right now are second-day or less?

Second-day is about 35 percent in terms of -- (multiple speakers) -- revenue. (multiple speakers) -- tonnage, 25 percent revenue.

Okay, good. Thanks for that clarification.

Dan Moore of Stephens.

Good morning, guys. Great, great quarter. We thought you could do 60 cents. Aren't we silly!? A couple of questions here -- I just wanted to start off with a discussion on the incremental margins, 44 percent this quarter, which were just stellar. I'm not sure I've ever seen you guys put out numbers quite like this. To what extent is your venture into the expedited market having any effect on incremental margins at this point?

Dan, that is still a relatively small part of our business. It's growing fast; it's growing 50, 60 percent year-over-year kind of numbers, but it's still a relatively small part of our business. This is our core business that produce these results.

That's great, Robert. Then maybe I guess if we could talk about a couple of other things, impact of your customer exposure specifically. Typically, you've characterized yourselves as having a little bit more exposure to small to medium-sized shippers. I'm wondering, in light of the fact that over the last couple of quarters your tonnage growth has lagged a couple of your peers, to what extent might we conclude that that has really been a function of your customer account exposure rather than the underlying economy or some other factor that is unknown to us?

Well, that's one of those imponderables that we talk about a lot. I think the fact is we do have more exposure percentage-wise to smaller accounts. It is our guess and I will be honest about it; it's just a guess -- that they probably came on a little later in the economic cycle than some of the large national accounts. But I might add that our national account business has also been very strong. But that would be my best guess, Dan, is that those accounts came on just a little slower than some of the larger national accounts.

Sure. Another question, and this one relates to the industry -- one thing we've been pondering on here is the idea or notion that the industry has yet to hit 100 percent capacity utilization, and there's a good chance, given the type of tonnage growth we seem to be seeing out of the industry, that most carriers will achieve that Zenith if you will, here in the next quarter or two. What would that suggest for yields, moving forward, Robert, particularly in 2005? Is there a lot of room left to start to really push that yield number up into the right above and beyond what you've already done this quarter?

Well, it has always been the case in this business that when we run out of everything is when we make the most money. I think we're probably, at the third quarter, going to get pretty close to that. It's encouraging, what we see in the economy right now. If it continues where it is right now or gets better, which I guess is a possibility, we should be looking at good numbers.

I know you don't typically comment on expectations and that sort of thing, but just trying to check your pulse a little bit, typically profitability improves from second to third-quarter levels, which might lead one to conclude that a sub-90 operating ratio is achievable in the third quarter. Moving away from that, I'm just wondering about the incremental margins, though. Do you think that something in the 30 to 40 percent range is sustainable in the near-term, or can you comment on that?

Well, business is good now and seasonally, it always picks up in the third quarter. The thing that we've got to be very cognizant of is we've got to continue to give service. That's something we will be focusing on very strongly, over the next 2.5 months, to make sure that we give service on the business that we've got. Our customers have long memories and if we let them down during a peak period, then that is a problem going forward. So that's going to be a real emphasis for us in the third quarter, is making sure that our service is up to snuff.

Robert, can you give me a sense for where you're operating from a capacity-utilization standpoint? Is it 95 percent at this point, probably in excess of 100 percent at the end of most months? Then what about rail usage? I didn't hear any numbers quoted and maybe I just missed those, but what's your usage of rail at this point? What is likely to occur in 3Q and 4Q?

Well, I think we're running about 6 percent below -- I'm talking tonnage now -- the year 2000. We've got basically the same infrastructure we had then, so we've got at least that much room to go. My guess is more than that because, at that time, we weren't using an awful lot of rail miles; we used 18.2 percent in the quarter of total miles were rail miles. That compares to 15.3 percent last year. We have additional room in rail usage, but that's not our goal and we'd like to get some more road drivers out there and move that freight over the road and get our equipment utilization up to levels that we enjoyed back in 2000.

So, we've got a minimum of 6 percent, maybe as much as 10 percent additional capacity I would guess right now, and maybe more than that. You could do a lot of things in a short-term by throwing labor at it, and it's not a water-level type of situation. You've got some terminals that might be stretched and you've got others that have got plenty of room. So, it's a hard number to come up with, but I would say we've got somewhere around 8, 10 percent additional capacity would be my guess. (multiple speakers) -- spending some dollars.

Fair enough. Guys, thanks, great quarter.

John Larkin of Legg Mason.

Good morning, everyone. A question for you, just to follow on Dan's comments on capacity availability -- it seems that the freight patterns are always changing. I'm wondering, if we get out into a situation in the third and fourth quarter this year where you do begin to bump up against practical capacity at some of your facilities, do you feel it's good use of capital to perhaps expand some of those, or perhaps look at buildings and new facilities, or would you prefer just to sort of optimize the profitability of the network you have now?

Good question, John. We are constantly looking at terminal capacity, door pressure, and we are in fact adding doors at several large terminals right now that are under construction. That's something that we were doing; we started back before business picked up. Because those are long-term decisions, those aren't quarterly or monthly-type decisions, so that will help us some. Some of that will be completed in the third quarter. They will come online then. But we will be looking at where we are tight, looking for additional terminal capacity. We've got terminals that are, right now, at capacity probably and we are having to throw labor at the problem rather than doing it conventionally. Yes, that's something we will do.

Okay. Also, I'm wondering if you saw any positive impact up in the Northeast, especially with freight into and out of the Northeast with the shutdown of Red Star. Did that show up on your radar screen at all?

It wasn't a big impact. We secured some Canadian freight from the Red Star shutdown and probably miscellaneous stuff here and there but it wasn't a big impact on us.

With respect to the Yellow Roadway situation, there has been a lot of speculation about how that integration may unfold over the next couple of years. Currently, it looks like any integration might take place sometime later and may involve those portions of the business that don't touch the customer. What's the general feedback you're getting from your sales force there? Are customers inclined to kind of stick with their current carriers or are you seeing any kind of marketshare capture coming from folks that may be nervous with perhaps too much freight concentrated with one carrier?

We're not seeing anything of significance there. As you mentioned, they have not done anything yet that touches the customer, so I think there has been minimal movement there.

Just one last question on the truckload business -- it sounds like you're doing a great job of playing what I would call the truckload spot market. Are you doing that in conjunction with the truckload brokers, which have proliferated over the last couple of years, or are you doing it directly with your existing LTL customers, or is a combination of both?

No, these are direct sales. We sell to more (indiscernible) brokers (inaudible) truckload (inaudible).

Okay, so basically a customer that you're dealing with calls up and says, gee, I've got some shipments. I can't find a truckload carrier. Can you bail me out here? What's the price? Is that the way it goes?

Yes, but some of these are regular customers, too.

Okay, I understand. Lastly, it sounded, in an answer that you gave a couple minutes ago, that, unlike the type of answers you were giving maybe one to two years ago, that perhaps you are a little more open-minded with respect to looking at using the balance sheet capacity for what I would call accretive or additive strategic acquisitions. Is that a fair read of your earlier answer?

John, my wife tells me I've always been open-minded! (LAUGHTER) -- but the idea is we've got a really fine organization in ABF, a good nationwide franchise. If we can make acquisitions or start something new that as to that, that complements that, that uses that and takes advantage of that, that makes the most sense for us.

Okay. That's terrific. Thank you very much for your help.

Ken Hoexter of Merrill Lynch.

Good morning. I just wanted to check in with you on the capacity utilization questions. Just going back to 2000 when you said you still had about 6 percent more volumes, have you added capacity since 2000? You know, I mean not through any of the Consolidated Freightway's bankruptcy -- did you pick up any of the additional centers, or is there any additional capacity that you still have to grow into aside from that 6 percent?

Well, we've not added truck capacity since then but in terminals, yes, we have. We've bought -- we did buy some CF facilities, not a lot, and we've added other facilities along the way. We actually have about 10 or 12 fewer terminals today than we had in the year 2000. That's because we've been consolidating some terminals into larger facilities.

As I mentioned earlier, we are in the process of adding doors. We've got construction underway right now at various terminals around the system. We do that on a -- we take a long-term view there, not what's going to happen next quarter or even next year. We have the opportunity to purchase a good facility in the right location that gives us added capacity and we think we're going to need that, going forward. We move out regardless of what's going on right now. So, we continue to add capacity during the downturn.

If I can jump onto the overnight business, you said the unions -- you know, you have to wait for some authorization. What exactly -- as part of the move to add more overnight business, what exactly do they have to authorize you to be able to do? Is this -- you are adding on a -- I mean, it's not like you're going to add non-union employees to do that part of the business. Is it just to do more job freedom? I thought the contract had given you some of those. I guess I look at your peer, Yellow, and they've been able to move through this with the current agreement. What else do you need to get from the unions to be able to do that?

These are definitely union jobs, no change there. These are premium -- they are called a premium-service employee and they make a slightly higher wage. For that higher wage, they are allowed to do several different jobs on the same tour of duty. They can be a road driver, (indiscernible) and everything that needs to be done. What that allows you to do is, for instance, go into a terminal that shut down at night and have the guy unload his own freight and reload freight that's waiting for him there.

In the past, you would have had to bring a local person in to do that. That might be 30 minutes or an hour's worth of work and you would've had to given them a guarantee, depending on what part of the country you are in, anywhere from a four to eight-hour guarantee to do an hour's work, so that wouldn't work under the previous contract. With this contract, that would be allowed with this premium-service employee. What you have to work out with the union is the sort of thing -- how this impacts the employees at those terminals that are impacted and how seniority is treated and that sort of thing.

I think the union and we both want to make sure we do this right and have the first ones be done the right way, so that it's -- in terms right for our employees and right for the Company, so it has taken some time to get this done. It's a little frustrating but understandable.

Thanks, Robert. Then just on that same issue, what kind of volumes are shifting? Is it new business that you are adding on with that second-day or even the overnight-type of goods as you've launched that product, or is it some of the current volume shifting, you know, some of your manufacturing volume shifting more toward a quicker move?

Probably some of both. We saw our -- during the business downturn that we had there for three-plus years, we were seeing more growth, generally speaking, more growth in our two-days and less lanes than we were in our three days and more lanes. I think there is a general shift to shorter-haul freight. I think more and more manufacturers are trying to locate near the people who they are vendors for, so I think we are seeing some shift there.

I know you say it takes time but is there a time you would like to launch -- you know, have this on a nationwide basis, or are we going to see kind of terminal by terminal more region by region kind of launching this?

It will be region by region.

Okay. Do you have a goal that you would like to talk about as far as getting it all done at least by the end of next year?

No, I really don't. We are going to start off in one area and smooth it out and implement it as quickly as we can once we think we've got the right combination.

It makes sense. One question for Dave Loeffler, if I may? I just wanted to confirm the charge, the 1.6 million after-tax which I guess is about 2.6, 2.7 million pretax. I don't know if you gave out the official number. Is that in salaries and wages at the ABF Freight division?

No. The total charge is 2.7 pretax. 1.1 million is in salaries and wages at ABF; 1.6 million is at ABC. The 1.6 million at ABC relates to Workers' Compensation claims on companies that we sold which we have retained the responsibility for those claims.

Okay. Is this the -- I mean, we've dealt with this I think a couple times with the charges. Is this the full roll-in charge or is there anything left that can still come down on the --?

Let me try to put it in perspective. We have total claims that would be covered by Reliant's excess insurance of about $8.5 million. We have state guarantee funds, excluding California, which have indicated to us that they will accept the claims; that's about $3.4 million. So, we have exposure of $5.1 million. That includes the claims that originally California had indicated they were going to cover. We have reserved 85 percent of that 5.1 million, and we have $4.3 million reserved.

Okay. That's great. Thank you, guys. Nice job with the operating ratio and pulling through on the quarter.

At this time, there are no further questions.

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

That ends the call.

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