ArcBest Corp (ARCB) 2004 Q3 法說會逐字稿

Welcome, everyone, to the Arkansas Best Corporation third-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) At this time I would like to turn the call over to David Humphrey, Director of Investor Relations. Please go ahead, sir.

Welcome to the Arkansas Best Corporation third-quarter 2004 earnings conference call. We will have a short discussion of third-quarter results and then we will open up for a question-and-answer period. Our presentation this morning will be done by Mr. Robert A. Young, III, Chairman, President and Chief Executive Officer of Arkansas Best Corp., and Mr. David Loeffler, Senior Vice President, Chief Financial Officer and Treasurer of Arkansas Best Corp.

We thank you for joining us today. In order to be better understand Arkansas Best Corp. 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 public filing. We will begin with Mr. Loeffler.

Thanks, David. In looking at our overall results for the third quarter our revenues were 462 million, up 12.6 percent from the same period a year ago. Operating income was 44.2 million compared to 28.6 million a year ago. And our net income was 27.4 million compared to 17 million a year ago. Our earnings per share on a fully diluted basis were $1.07 compared to 67 cents in the third quarter last year. Our revenues (technical difficulty) for the operating subsidiary for the third quarter this year to the third quarter last or on a per day basis, ABF's revenue was up 16.3 percent and Clipper's revenue, after excluding the LTL operations from last year's numbers since we sold that operation at the end of last year, was down 1.2 percent.

For cash flows for the 9 months ended 9/30 of this year I'd like to refer you to the GAAP cash-flow statement attached to our press release. Now I'd like to review some of the highlights of our cash flow statement. Our net income before depreciation and amortization and the change in the fair value of the interest rate swap was $87.6 million. We had net purchases of property and equipment of $51.5 million, capitalization of software of a little over $3 million; we had free cash flow of about $33 million. We had an increase in Accounts Receivable because of our increase in business levels of just under $31 million and we had a net increase in our liabilities, again, primarily because of increases in business levels of just under $44 million.

We had an increase in our bank flow of a little over $4 million. We purchased treasury stock earlier this year for 7.5 million. We issued common stock, which is the exercise of stock options, of 6.4 million and we paid dividends on common stock this year of 9 million. We had a net increase in temporary investments of $40 million.

In looking at our outstanding debt including current maturities, we have total outstanding debt of $1.9 million. We have temporary cash investments of a little over $42 million. We have about $172 million availability under our revolving credit agreement. And we have letters of credit outstanding of a little over 53 million, and those are primarily to back our self-insured worker's compensation program.

I would like to mention that on October 15th Standard & Poor's raised our outlook on our BBB+ credit rating to positive and indicated that we could possibly be upgraded if we continue our strong operating performance and maintain our strong financial position. In looking at our internal financial measures, our after-tax return on capital employed for the 12 months ended 9/30 of this year us was 15.65 percent and that compares to our minimum acceptable level of 10 percent.

Each quarter we update you on capital expenditures and depreciation. We originally forecasted this year $76 million in capital expenditures. We reduced that number at the end of the second quarter to 69 million. And we're going to further reduce that to 67 million now, about a $2 million reduction, and that's primarily a result of delays in real estate expenditures that will probably roll into next year. Our depreciation and amortization for the third quarter was $14 million and we're currently forecasting our full year depreciation and amortization of a little over $55 million. Now I'd like to turn it over to Robert.

Good morning. I'm going to talk first about ABF freight systems. The truck line had revenues of $428 million compared to 368 last year or, as Dave said earlier, about a 16 percent increase in revenues. The operating income went from 29.3 million last year to 46.2 million this year or about a 58 percent increase in operating income. And the operating ratio for the quarter was an 89.2.

During the quarter each month operated in the high 80s. July was an 88.3, August an 89.8 and September an 89.6 for the total 89.2 for the quarter. So each month of the quarter turned out well for us. ABF had a really good third quarter.

The total pounds per work day were up 10.8 percent. LTL was up 10 percent even and truckload pounds per day were up 14.1 percent. It was strong all during the quarter; it flattened out some in the second 2 months of the quarter and has trended back up slightly so far in October. Through the first I guess 19 days of October we were up a little over 9 percent in LTL tonnage from the same time last year. And that's on a comparable days basis.

When you look at the tonnage during the quarter, July was up 11.56 percent, August 9.68, September 8.84 and then, as I mentioned, back above 9 percent so far in October. That level of tonnage increase for us really activated our operating leverage and produced those numbers that you saw during the third quarter. Revenue per hundredweight during the quarter was up from 24.89 -- and this is including fuel surcharge -- last year to 26.04, this year about a 4.6 percent increase in revenue per hundredweight. When you pull the fuel surcharge out of that the LTL was up about 1.7 percent.

There were some changes in our profile during the quarter. The average length of haul increased -- or I'm sorry, decreased slightly by about 1.7 percent. And the average weight per shipment was up 1.9 percent. Both of those changes result in a lower revenue per hundredweight which is appropriate for the length of haul -- the change in length of haul and change in weight per shipment and don't reflect on the quality of business.

Our retention of the general rate increase through September 30 is a little over 3 percent which we consider to be good. And we are securing price increases us on our contracts and deferred pricing agreements at about a high average level of around 4 percent going forward which, again, we consider to be a good number. I would say that the pricing environment out there is still solid; it's been good all year. It is not changing.

Productivity at ABF was about flat. The additional tonnage that we handled caused some congestion which slowed down our docks a bit, but that was offset to a large degree by our bills per street hour which increased as we got more density on our routes. Load factor actually declined about 1.1 percent, but that's not really a result of poor loadings. What it amounts to is our rail schedules were up as a percentage of total miles and on the rail trailers, which are either 45 or 48 foot trailers, we lose about 14 percent of the capacity that we would have on a pair of 28 foot trailers which is what we run normally over the road. So we lose some capacity when they go to rail and we had to go to rail this year to handle the influx of business.

Total miles per day for ABF were 1,055,000 and that was up about 9 percent -- a little over 9 percent from last year. Rail usage for the third quarter was 20.6 percent of total miles compared to 16.7 percent in the third quarter last year which is a considerable increase in our rail mileage. And unfortunately we're not getting the service that we want from the rails. We're looking for them to get their act together to get their service numbers back in line. And with that in mind, we're trying to pull as much off of rail as we can now until they did their act together.

Empty miles during the quarter were 5.6 percent of total miles and that compares to a little over 6 percent last year, so we were able to reduce empty miles some. Fuel cost obviously has been up. Fuel cost is up almost 57 percent from the third quarter of last year and that's due to higher prices, an increase in our total miles and a lower miles per gallon for road tractors. The new AGR engines are not as efficient as the engines that we traded when we took those engines on. And that's going to be -- as far as I know, that's going to be an ongoing thing.

Depreciation expense for ABF is up and it's related largely to line equipment. Road tractor depreciation was up almost $200,000 and road trailers just under $800,000. And this just reflects newer equipment. We slowed down our purchasing when the AGR engines came in initially to avoid those experimental engines for as long as possible and now we're playing some catch up on road tractors and now that those engines have begun to settle down some we're taking more into the fleet.

Road trailers -- that's going to be an ongoing situation, buying new road trailers every year somewhere in the neighborhood of 1,500 to 2,000 would be my guess going forward each year. As we upgrade our trailer fleet -- it was getting a little long in the tooth. That's going to be a good move.

Equipment sales during the quarter were 573 -- produced a $573,000 gain; nothing spectacular about that, it just shows that our residuals were fairly accurate. Of course, we never know what we're going to get for equipment, used equipment, until we actually sell it.

In terms of our freight profile, we had a 12.1 percent increase in weight per shipments moving in two day or less lanes, and we had about a 10.3 percent increase in weight in our 3 days or more lanes which indicates that we're shifting a bit towards more regional freight. It's a slow shift, but we think we're penetrating that market more and more each year.

You've heard a lot about road driver availability in the industry, the pool is pretty small. I would guess that any road driver with a good safety record and no problems with substance abuse -- those folks have got a job. And so it has been a real tight market particularly for road drivers. Our turnover at ABF in the quarter was about 9.2 percent for all of our freight handling employees and road drivers.

If you pull out retirement, that was about a 3 percent turnover which is pretty minimal. We were able to get a net gain of road drivers during the quarter of 123. We hired I think 162 and with retirements ended up with 123. And we plan to add about 60 more drivers during the fourth quarter as our business continues to be very solid.

We have some nice things happen in the third quarter. 20 ABF drivers represented ABF at the National Truck Driving Championships. Those are people who have won in their state competitions. We're real proud of those drivers. During the quarter ABF was named one of the top 100 agile companies by CIO magazine, that's an information technology magazine. The international competition recognizes organizations that exemplify the highest level of operational and strategic excellence in information technology. We're certainly proud of that award. ABF's selection was based on its innovative solutions for managing freight transportation via the Internet based applications. And the Company's website provides the e-commerce infrastructure that powers these applications.

We were also recognized by Logistics Management magazine as a 2004 Quest for Quality award winner. That recognizes the best of the best in transportation and logistics. It's an annual award based upon a readership survey and it's one of the largest customer satisfaction surveys in the transportation and logistics fields. Readers who filled out the questionnaires rated carriers on five key areas vital to logistics excellence -- on-time performance, value, information technology, customer service, equipment and operations.

And on a lighter note, ABF joined the crew of ABC's Extreme Makeover Home Edition. So, tune into that program and you might be an ABF truck providing freight transportation or logistical support for Extreme Makeover Home Edition.

One number that I look at consistently and that gives us an idea of how fast we're turning our assets, the revenue per tractor for ABF increased 8.8 percent in the third quarter over prior year numbers which is certainly a good sign.

Moving on briefly to Clipper. You'll recall back December of last year we sold Clipper's LTL operations. So excluding last year's LTL business, Clipper revenues were basically flat at about 24.5 million. Operating income was down from 900,000 last year to 200,000 this year and the operating ratio was 99.2 compared to 96.4 last year.

As you probably know, Clipper's business is the intermodal business moving trailers and containers on the rail for the most part. And the railroads have had a bad year in terms of capacity and in terms of service. And so they have rewarded us by raising our prices in the intermodal business which I find unique, but it's caused lots of problems for Clipper.

Clipper is dependent upon the railroads to provide service and when service is bad, prices are going up it's a hard sell for Clipper. The intermodal part of Clipper, the pure intermodal which is truckload business on rail, their revenues were down from 13.8 million last year to 12.3 million this year or about almost an 11 percent decline in revenues. Brokerage business was up from 2.9 million in revenue last year to 3.2 million, about a 9.6 percent increase in our brokerage revenues.

And Clipper control logistics, which is refrigerated trailers that move on the rail, had revenues of 8.2 million last year and 8.9 million this year. So almost an 8 percent increase for Clipper controlled logistics. So two of the segments were up in terms of revenue and one down. Clipper -- not having a good year particularly, and I think we're going to need some cooperation from the railroads to get those numbers where they need to be.

We're excited about ABF's prospects. Looking out a year and a half, 2 years we see lots of opportunities for ABF. What we're looking at largely involves utilizing our nationwide footprint, our ability to deliver freight nationwide in all the provinces of Canada and with a partner into Mexico. There's a lot of potential there. We see some opportunities and we're in a good position to move out on some of these. We're working on that now.

I'm not going to get into a lot of detail on what our plans are there because I don't want to help my competition. But we think we see some really good opportunities. And as David Loeffler mentioned earlier, we finished the quarter with a little over $42 million in cash that's available to us and we have almost no debt. We want to take advantage of that position and we'll do so over the next couple of years. And with that I'll open it to questions.

(OPERATOR INSTRUCTIONS) Ed Wolf, Bear Stearns.

I know it's not perfect science, but directionally if rates or revenue per 100 weight net of fuel was 1.7 percent what do you think it really was when you adjust for the length of haul and for the size of shipment?

Ed, we try to calculate that all the time. That has become much more difficult over the last couple of years because traditionally we would see very little change from month-to-month, quarter-to-quarter, year-to-year in either weight per shipment or length of haul. They were just as consistent as they could be. But it's become a lot more volatile over the last couple of years and we have an internal estimate, but I would prefer not to give it to you because it's a very rough number. We just aren't very comfortable that we can determine that with any real degree of accuracy.

Okay. But I mean, directionally, you said somewhere around 3, 4 percent? Is that fair or is that too high?

It may be on the low side of that number. It's definitely higher than what you're seeing when you factor out the fuel surcharge.

And are you seeing the rate disproportionately better in some markets -- in either longer haul versus regional or regional verses longer haul, or is it pretty consistent across the different (inaudible)?

I would say it's pretty consistent. And we really focus on individual account profitability.

There's no strategic change in focus from your perspective right now to focus on getting a little more tonnage and a little less yield than historically maybe has been the traditional mix there?

No, Ed, we're playing the game the same way.

Okay. I don't want to beat a dead horse, but directionally as you look out give -- well, first of all, what are your thoughts about the economy as you look out 12 months? And then based on whatever your thoughts are, would you expect pricing to continue to firm from here, kind of remain where it is or weaken from here?

I would hazard a guess, and that's all it is, that the pricing is going to remain about where it is. It's been about where it is now for probably a couple years without an awful lot of change. It's been at a good level -- good pricing environment and I expect it will stay that way.

And from where you're sitting, given October and everything else, do you get a sense the economy is okay?

Yes, we're seeing a small bit of an upturn from August and September. And I feel like it's trending in the right direction right now.

During August and September where there any parts of the country or any parts of your type of customers that were particularly weak? Is the retail weaker than manufacturing, could you point to something like that?

Well, it's mainly a surge, I think, in manufacturing activity. In terms of parts of the country, our business has tended to be a little stronger in the center of the country and not quite as strong on both coasts.

And the hurricane, was that some impact do you think in the lull in September and the uptick in October or is that irrelevant?

We tried to isolate those numbers. I don't think it was more than maybe $1 million in revenue. (indiscernible) it wasn't a lot.

Okay. Cash flow now is real. Basically the debt is gone, the cash is going to keep piling it looks like. What are your kinds of priorities to use that going forward?

As I mentioned briefly in my closing, we see some opportunities going forward that will require some capital expenditures and we're pretty excited about some of those opportunities. We'll be rolling those out over the next 18 months.

Ed, we'll disclose our capital expenditures for next year in January because we're still working on all of our plans. But I think it's pretty safe to say that our expenditure will be up next year from this year because we do have some selected capacity issues as you might imagine.

Sure. And I'm guessing that most of the uptick has to do with rolling stock or is some it real estate too?

No, it's going to be real estate (inaudible).

And in terms of the rail miles, it sounded like you started the quarter using more rail and ended with less rail. Can you talk about what percentage you are utilizing and how you see that right now given the weak service?

Ed, I don't recall the percentage each month, but I think you're right, I think we used a little less in Septembers than we did previously. But we would like to be using less rail miles right now because of the rail service.

And would that end timing (ph) with the OR have been better if not for that issue?

I don't think it would change the OR a lot one way or the other. It more impacts our sales and marketing.

Okay, and then one last question. Have you seen any major change in regards to Yellow Roadway and fall-out, whether it's customers or employees coming your direction more than you've seen before this?

No change.

Okay. Thanks a lot for the time.

James Valentine, Morgan Stanley.

It's Chad actually. A quick question for you on the tonnage growth. Given some of the positive trends we're seeing here which are continuing into October; if you do look out into '05, if we assume tonnage growth continues or even slows a little bit here we're going to get back to 2000 levels pretty quick. With that in mind, is there anything structurally that prevents us from getting back to the 90 OR that we earned in 2000?

We'd have to perform well and we'd have to continue to have this good or stronger economy. 2000 really had almost everything going in the right direction. The differences between then and now -- and largely the insurance cost would be a factor -- and pension cost another factor. But other than that things look awfully good.

You brought up the issue of pensions there. Just on that front, with markets flat here and the cash building up have you taken a look at what the pension expense increase might be for 2005 year-over-year? And with the cash might we consider maybe contributing a little bit more than we had originally planned?

We won't have the numbers -- a 9/30 look but we haven't got the numbers yet of the projection of our expense for next year from the actuaries. We contributed 1.2 million this year which is the maximum that we could contribute. So we're trying to contribute as much as we can every year.

Okay. And then just a couple below the line items. I noticed that there was -- I think it was a $1.3 million other income, what did that relate to and is it something we should expect going forward here?

The other income has two things in it, it has increased -- or two primary things -- there an increase in cash render value life insurance and it has the proceeds on a life insurance policy, and this is the largest item. We had a director pass away -- not a Board of Director, but a director level position within the Company -- pass away in the third quarter and that includes the proceeds from that life insurance policy.

Thanks, that's it.

Jack Waldo, Stephens Inc.

Great quarter. I had a few questions. One is on -- with regard to capacity and drivers, what -- as you add capacity, I guess, through tractors and trailers and you deal with this driver retention, how do you guys address that driver problem? Can you increase their pay? Can you increase services to try to retain -- attract those guys? (multiple speakers) that.

What we're doing right now, we're in the process of working out a deal with a driver training school that has multiple locations throughout the country. It runs classes in those areas where we think we're going to need to hire drivers so we're focusing on the locale where we're going to need drivers (inaudible) going forward. And we'll work with them to recruit that class, to make sure we're getting the kind of quality we want and then start turning out some drivers that way.

Is your driver pay still kind of high in the industry?

Yes, our driver pay in the LTL industry is generally well above what they are paying in the truckloading industry which gives us some leverage.

How about compared to other LTL's?

I don't know specifically what all of them are paying, but my impression is that it's pretty much the same.

And then the other question has to do with utilization and tonnage growth. It looks on a sequential basis about the second and third quarter, as you guys mentioned in your press release, was a little bit better than historically has been the mean. And you talk about 9 plus percent growth year-over-year so far in the fourth quarter. What does that translate to on a sequential basis compared to what is historically the norm?

Jack, we indicated in the press release through the third quarter that it's running, if I recall right, about 2 percent higher than we would normally expect to see from the second to the third on a tonnage per day. As it relates to October I can't tell you, we haven't calculated that. And you need to keep in mind when we say slightly above 9 percent in October that we're doing the best we can to match up comparable days and comparable number of days. And that is not a 100 percent precise number.

Fair enough. And I know it's real hard to do this, but could you on a bricks and mortar basis kind of put a guestimate to where you think your capacity utilization is?

Actually the third quarter I think we were still about 2 percent below our peak in 2000 in terms of tonnage. So we've got at least that much additional capacity. And then we've added doors in some key places since then so it's something beyond that. Jack, I think as we get closer and closer to capacity individual terminals become a bigger issue. If we get the growth in the right place we can have a lot more capacity than if we get it in the wrong place. But when you have 10 percent excess capacity, that tends to be a better measure. But as we start getting closer to full capacity the individual terminals become a much more critical issue.

Last question. Based on your comments with regard to business trends throughout the country, my guess would be you have more capacity on the Coast than you do in the Midwest right now. Is that a fair statement?

I don't know. I'd have to just go down the list of terminals and look. There are terminals on the Coast that are tight, but on the other hand we've added some capacity in a few places. Which we added capacity in New York and we added capacity in Brighton (ph) and Carlisle. I'm like Robert, I can't tell you off the top of my head exactly where we're at but we've added quite a bit of capacity in both of those locations.

Thanks for your time and good quarter.

Mark Levin, Davenport & Co.

Most of my questions have been answered but just two real quick ones. The first, with regard to the fuel surcharge, given where diesel fuel prices are right now are you starting to see any pushback from your customers? That's my first question. And then my second question is are you any closer to making a decision on Clipper? I don't think it's been anywhere near that 10 percent return on capital employed that you target for your businesses? I'll hang up and listen. Thank you.

Fuel surcharge seems to continue to be well accepted by customers. They read the paper and they know what's happening to the cost of oil and the cost of diesel fuel. And no, we're not seeing anything change there in terms of customer acceptance of that fuel surcharge. In terms of Clipper -- we certainly are not happy with those results. Just barely -- small operating profit and it certainly doesn't meet our criteria.

Tom Albrecht, BB&T.

Terrific quarter. A couple of things. Just a little different angle on this driver situation. First of all, what's the approximate average age of your driver workforce today? And then, even though your turnover is very low in that, what's been your experience in getting drivers from the truckload industry? Do they fit into a unionized LTL environment? I just would appreciate your comments there.

I think you've hit upon a good point. Our experience has been that very often truckload drivers that move over to the LTL side -- at least our experience with them has been a large percentage of them are not happy with our mode of operation. Our drivers are out back on the same tour duty or they're out, get their rest and then come back. And truckload drivers that like being a truckload driver don't particularly like that model too much.

So there is an issue there in terms of attracting from the truckload fleet. They don't have a lot of extra ones anyway. I don't think that's our best source. Our best source is somebody that's driving for a company that has trucks incidental to their business, someone delivering food products or grocery products for a distributor. Those kind of people tend to be better candidates for us.

And how about the average age, if you had to kind of guess is it 56, 57 years old?

I've seen that number from time to time and, of course, it changes and I haven't seen our numbers on that recently, but it generally runs in the low 50s -- 52, 53, something like that.

Okay. And then, I know you don't want to get in timing and a lot of strategic discussion yet on what you'll ultimately do in the overnight market. But can you give us a couple of examples of as you chat with the Teamsters what you need or desire of them if you're going to move forward into the overnight markets?

Well, I don't want to get into a lot of detail there because we don't -- we're negotiating with the Teamsters now in regards to using premium employees and don't want to do that in public. That's not the right approach. But it's -- generally speaking they're concerned about protecting existing employees and I think they recognize that the potential for additional freight in the overnight market is substantial.

But they've got their job to do in terms of making sure that when we begin to use these employees that it doesn't upset the apple cart with the folks that are there now. Generally speaking, these are going to be employees that are already there anyway, so it's not like we're going to be bringing in a lot of people. But we'll eventually get that done, I don't know how quickly, but we're working with the Teamsters.

Let me ask it a different way. Is it important for you to have that arrow in your quiver? Because if you look at the dynamics in the regional market, while they've been the fastest-growing market for many years, they've also seen the brunt of much of the capacity additions in the last 10 years such that pricing there is maybe a little less attractive than the interregional or longer haul markets. So when you balance that missing arrow versus that shorter haul dynamic, how do you feel about absolutely positively having to be there?

I just think it's an opportunity for us, it's a huge market. And it's a good opportunity for us. Our approach to it will be we'll try to maintain our average profitability in whatever market we're in. When we got into pushing the second day market just a few years ago now, what we found was we were most successful with our existing customers. We've been picking up their 3-day and beyond and went to them looking for their second day business. We were very successful and then that tends to be very profitable business for us because when we bump their dock, instead of picking up 10 shipments maybe we get 12. And that incremental cost on those last two is pretty small.

So that's the kind of thing we're looking at. They can tend to be very profitable accounts when you're just adding business from the same customer in particular. So we're excited about that. We think we can do it. We think it's a potential avenue of growth for us. And again, it's a big market.

Sure is. David, I just wanted to double check one figure. The rail miles -- I heard I think 16.7 in Q3 '03, I didn’t quite catch the Q3 '04 figure.

A little over 20.6 percent.

Okay. Thank you for the discussion.

Gregory Burns, JP Morgan.

Most of my questions have been answered. Just a couple of them if I could. Did you see any change in the nature of the customers or was retail strong, industrial weak or visa versa? Is there anything in the mix of customers that changed or gives us some hints on the economy?

Not really, Greg. I think the main thing that we would have to include since most of our growth -- or a higher percentage of our growth is coming in the middle of the country, that more of that's coming from manufacturing. But we just have so many customers and businesses moving around it's very difficult to ascertain exactly how much and why.

Right. And can you just refresh my memory? What -- do you track or would you know roughly what your exposure is to the automotive or the people that supply them, that sector, because the rails are talking about a slowdown in that area in the fourth quarter?

I think it would be very little exposure there.

And on the capacity issue -- I'm sorry I got in late on the call -- but it sounds like you're bumping up on capacity limits, it sounds like physical almost property limits, and it sounds even potentially employee limits. If you're now going to expand, and correct me if I'm wrong here. But if you're going to expand and add incremental capacity, my guess is that the margins on that expansion wouldn't be where we are now. So I guess what I'm wondering is is this about as good as the OR can get given that it sounds like you're at maximum capacity. And now as you add capacity and free up a little surplus capacity we should expect maybe that the OR basically flattens out or even arises a little bit?

Well, the way we handle growth is there are things we could do in the terminals to handle growth and continue to provide service and take care of our customers that are expensive. If we don't have enough doors in a facility what you do is you throw labor at it and use those doors multiple times which means you may be pulling trailers out before they're finished to put another trailer in to get stuff off the dock and so forth. Those are expensive, but doable things.

Then once we are in that situation we come along and add doors and that extra cost goes away and it offsets largely or maybe completely the cost of adding those doors -- that additional capacity in the terminal. But we can up our door pressure quite a bit by throwing labor at it for a while and it's a nice problem to have.

Okay. So just to summarize, it sounds like you're more profitable when you've got a little spare capacity than when you're at your capacity limits, is that fair?

No, not really. We make the most money when we run out of everything. That's when we're doing a lot of stuff that we wouldn't like to do that's maybe not totally efficient.

Greg, I wouldn't conclude that by adding capacity our margin would deteriorate. If we did that sooner or later our returns get to an unacceptable level. The first thing that -- we've grown a fair amount in the last 10 years and that hasn't been the case. The first thing we do, in addition to what Robert mentioned, when we start looking to adding capacity is we re-examine our customers and reprice business that's not getting adequate returns. It's imperative that capacity addition be driven by profitable business.

It sounds like you see a lot of profitable business out there given your expansion.

That's right.

Thanks a lot.

John Larkin, Legg Mason.

Just wanted to maybe bore into a little bit more what your plans for 2005 are and if you can't talk about it feel free to cut me off here. But it sounds like on the one hand you've got somewhat I would call equipment catch up in order to improve your road fleet and also your trailer fleet which was getting a little ragged. Also there are selected terminals that need to be maybe expanded where you're running into some capacity problems.

Then I also got an inkling that you're trying to layer maybe some new services on top of the existing network which you're not ready to reveal. And then when Tom started to talk about the regional service then I began to think that maybe that was it. But initially when you mentioned it I thought perhaps it was something else. Then, of course, the other alternative would be the starting up of some other business that perhaps may be in transportation and logistics but not directly related to your existing network. Can you at least be a little more specific in terms of the plans for '05 and '06 because you do have an awful lot of balance sheet horsepower to put to work here?

John, I don't really want to be that specific about it for competitive reasons. We've got some opportunities that we're going to pursue pretty hard the next year, year and a half.

Fair enough. The hours of service rules are going to be reworked here over the next year or so. And there's some speculation that the truckload industry capacity problem could be somewhat exasperated because it looks like they'll be tightened down further rather than loosened up. Do you feel as though that could create perhaps more flow of traffic from what is now truckload, multi-stop or otherwise over into your market?

I think there's that possibility. It remains to be seen what they're going to do on the hours of service. I've heard a lot of guessing about where the government is finally going to come down on that. But to the extent that they take away nondriving time from the rails, there are certain types of freight movements that then they become uninterested in and less competitive in. If there's some requirement tie the driver up, or let's say that the customer doesn't want to receive the freight when it gets there, wants it tomorrow instead of today, that's not a problem with us. We drop the trailer on our yard and take it out the next day.

With truckload, obviously the drivers, unless they've got a drop and hook operation going on, the driver is in a real fix because he doesn't want to hang around for 12 or 14 hours. So to some degree if that in fact comes to pass that they have less wait time available to them in their total day, then I think you'll see some marginal additional freight come our way.

Would the requirement of having a blackbox in each vehicle in any way worry you or constrict your productivity? I would guess that you all operator pretty much to the letter of the law now.

Yes, that wouldn't be a problem for us. It would be some additional cost obviously. But our drivers are relaying freight. We don't set up a run that can't be made in the allowed time. So there's no incentive for our drivers to try to cheat on their logs. So I'm not worried about that. We live within the law now and will in the future. In looking at the truckload growth, the ABF people, although we have definitely benefited some from the hours of service, they feel that we've had a greater benefit from the capacity issues the truckload carriers have seen at this point.

That's very helpful, thanks very much. Terrific job on the quarter.

Ken Hoexter, Merrill Lynch.

Dave, just a quick follow up on that last statement there. So are you seeing an end to the benefits from the hours of service or are we still seeing a huge year-over-year increase in the truckload volumes coming your way from hours of service?

There's a lot of demand out there for volume freight right now and the truckload carriers are having a problem with capacity largely driven by drivers -- shortage of drivers. Typically in the winter months demand declines some, so in -- in December and probably running through February you'll see some downturn and that will help the capacity issue for a while. And then come March generally speaking seasonally it starts picking back up again.

And I might mention that our year-to-year comparison for truckload business becomes a bit more difficult in the fourth quarter because we did see some benefit in the fourth quarter last year both in the hours of service and starting to see some tightening of capacity on a selective basis. And that will also make it more difficult to get the kind of yields for the truckload freight that we've been experiencing in the summer.

Dave, is there a way to kind of swag a guess at what kind of percent of the 10 percent volume growth can you attribute to volumes transitioning from truckload or can you not see it that clearly?

We can't see it that clearly.

Okay. And then just to follow up on an interesting statement you made earlier on the call on looking at the freight mix changes, can you talk a little bit about -- because it's obviously been what you mentioned was pressuring yields a bit. Can you talk about what changes you've seen over the few years? You said it was incredibly stable for a while, now it's jumping all over the place or can you quantify that a little bit?

We've just seen more change in both the length of haul and the weight per shipment. I mean, the first thing that occurred was CF went out of business and we generally got the business we got at a significantly longer length of haul and they were also lighter shipments. With the improvement in the economy we've also seen some changes. And we just for years just like clock work we saw very little change. That's about all I can really tell you.

Okay. And then, Robert, can you just throw out what you think about the competitive environment on the LTL side right now? Are you seeing the smaller private regional guys get any more aggressive? Is anybody moving in to take -- as Red Star went out of business -- are there any players that you're seeing get more aggressive in stepping up with all this heavy volume or are most people running at capacity in the same capacity situations you're seeing?

I don't really see any change in the competitive environment out there. I think that we've been through a maturation of the industry over the last 25 years, and the dummies have now gone by the wayside and people understand that they have to understand cost and price accordingly. I just don't see much change in it in the last couple of years truthfully. No, we don't see anybody that's consistently doing something crazy. We all do from time to time and anecdotally you can get all excited about something, but when you look at the numbers of the carriers at the end of the quarter that tells the real story and what we're seeing -- have seen in the last couple of years I expect we will again for this third quarter as people are being pretty sensible.

So same thing with the Conway's and others adding -- and U.S. Freightways adding their Premier Plus. The longer length of hauls, it's not getting any more aggressive on your longer haul business?

No. I mean, we compete with them all the time and we think that when they beat us they probably were too cheap, but that hasn't changed in the last several years.

Okay, great. Thanks for your help.

We have reached the allotted time for questions and answers. Mr. Humphrey, do you have any closing remarks?

No, other than just we appreciate you joining us this morning. And we appreciate your interest in Arkansas Best Corporation and that concludes our call.

Thank you for participating in today's Arkansas Best Corporation third-quarter 2004 earnings conference call. This call will be available for replay beginning at 3:00 PM Eastern Time today through 11:59 PM Eastern Time on Sunday, October 31, 2004. The conference ID number for the reply is 116-2464. Again the conference ID number for the call is 116-2464. The number to dial in for the replay is 1-800-642-1687. Thank you, you may now disconnect.