ArcBest Corp (ARCB) 2004 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Arkansas Best Corp. fourth-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). I will now turn the call over to David Humphrey, Director of Investor Relations for Arkansas Best Corp. Please go ahead, sir.

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

We thank you for joining us today. In order to help you 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 risk. 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. I'd like to start by looking at the overall corporate results for the fourth quarter. Revenues for the fourth quarter of 2004 were 450 (indiscernible) .5 million, up 15.4 percent from the same period a year ago. Operating income was just under $40 million compared to a little over 21 million a year ago. And net income was $24 million compared to (indiscernible) .7 in the fourth quarter of 2003. Earnings per share on a diluted basis were 95 cents for the fourth quarter of 2004 compared to 58 cents for the same period in 2003.

In looking at the revenues for the fourth quarter of 2004 compared to the previous year, ABF's revenue was up 18.4 percent on a per day basis and Clipper's was up 4.5 percent. Looking at the results for the full year, revenues for 2004 were 1,716,000,000, up almost 10 percent from 2003. Operating income was a little over 124 million compared to 73 million in 2003. And net income before gain on Wingfoot in 2003, the gain on the sale of Clipper LTL operations before the (indiscernible) costs associated with Clipper's LTL operation for the charge for the interest rate swap. A little over $42 million in 2003 compared to 75.5 in 2004.

Earnings per share on a diluted basis were on the same basis as net income was $2.94 in 2004 compared to $1.66 in 2003. Revenue on a per day basis for ABF in 2004 was up 13 percent; Clipper, excluding the LTL operation in both -- 2003 was up 2.8 percent.

I think we're having a little problem on the hearing. We're going to switch mics here. Hold on just 1 second. Let's try this and see if this is better.

For our cash flow for the 12 months ended December 31, 2004 please refer to the GAAP cash flow statement attached to our press release. Now I'd like to highlight a few of the more significant cash flow items.

Net income before depreciation and amortization and changes in the fair value of our interest rate swap was 125 million. Net purchases of property and equipment were 64 million; capitalization of software was a little over 4 million. We had an increase in accounts receivable because of the increases in business levels of about 20 million and we had a net increase in liabilities that's primarily a result of a number of factors -- increases in wages, increases and paid time off, increases of work comp and bodily injury and property and increases in accounts payable of $32 million.

We had a positive change in bank flow of 7.5 million. We issued common stock relating to stock option exercises of 8.7 million. We purchased treasury stock of 7.5 million and we paid dividends of 12 million. That's a net increase in temporary investments of almost $66 million from the previous year.

At the end of last year we had basically no debt and $68 million in temporary investments. Our after-tax return on capital employed was 17.33 percent compared to our minimum acceptable level of 10 percent. Our weighted average cost of capital net of tax is a little under 10 percent. Our net capital expenditures for 2004 were $64 million. That's a little less than what we projected at the end of the third quarter which was 67 million and that's basically a result of the fact we were trying to buy 100 used city trailers; we just couldn't find the quality we were looking for so that didn't happen and we had some lower terminal expenditures.

Our depreciation and amortization for the fourth quarter was $14.3 million and for the full year of 2004 was a little over $55 million. For this year our net capital expenditures are estimated to be approximately $94 million. We covered the primary reasons for the increase in the press release, but I thought I'd add a little additional information -- a few comments that might help clarify some of this.

On a per unit cost increase our road tractors are going to cost 13.3 percent more than they did in 2004 and our road trailers are going to cost 8 percent more. From a fleet size standpoint we're really not adding much capacity. We're going to add 25 road tractors which is a 1.6 percent increase in our total road tractors; we're going to add 250 road trailers which is 101.4 percent increase in that fleet. In the city tractor fleet we're going to add 110 City tractors by transferring road units to the city, that's an increase of 4.3 percent, and we're going to buy 150 -- net 150 increase in city trailers which is an increase of 6.6 percent.

We're adding 242 terminal doors to the system which is an increase of 2.8 percent. In looking at our total purchases for road tractors, we're going to buy 575 this year, 550 of which are replacements compared to 393 last year. Road trailers we're going to buy 2,000, 1,750 of which are replacements compared to 1,500 that we purchased in 2004. City tractors we're not buying any new ones, we're going to transfer some from the road and in 2004 we bought 125 new ones. City trailers -- we're going to buy 300 used city trailers and we didn't buy any in 2004. Now I'd like to turn it over to Robert.

I'm going to talk about ABF. Fourth-quarter revenues for ABF were 420 million compared with 355 last year, about an 18.5 percent increase in revenues year-over-year. The operating income was 40.1 million compared to almost 23 million last year or about a 76 percent increase in operating income. So we had a good quarter compared to -- in 2004 compared to 2003. And the operating ratio was a 90.5 compared to a 93.6 in 2003 in the fourth quarter.

For the full year ABF revenues were 1,585,000,000 compared to 1,398,000,000 in the prior year, about a 13 percent increase for the full year. And the operating income improved from 77.8 million in the full year 2003 to 127.8 million in 2004 or about a 63 percent increase in operating income. The operating ratio for the full year was 91.9 which we feel is a good operating ratio compared to a 94.4 in the prior year.

The total pounds per workday in the quarter were up 10.5 percent. Of that 10.5 percent the LTL was up 9 percent and the truckload pounds were up 16.5 percent for the quarter. And for the full year total pounds were up 8 percent, LTL pounds up 6.8 percent and truckload pounds up 13 percent. Probably the biggest change that we saw in tonnage during the year in the makeup of it, of course, was the increase in truckload pounds that we hauled during the year. The spot market was good for truckload tonnage, good prices and a lot of availability because of the constraints that the truckload sector had.

On a per day basis in the fourth quarter October LTL tonnage was up 10.1 percent, November year-over-year comparison declined to 7.9 percent and then it came back some in December with an 8.6 percent increase in LTL tonnage and those three average the 9 percent, as I mentioned earlier, for the quarter.

The fourth-quarter LTL billed revenue per hundredweight, excluding the fuel surcharge, was up 1.2 percent. That was impacted by a change in our mix of the LTL average length of haul increased -- or I'm sorry, decreased from 1,294 miles in the fourth quarter of '03 to 1,248 miles, about a 3.6 percent decline in average length of haul. And the LTL rated class was pretty much the same; it was 75.4 on average, to a 75.2 in 2004, so it was down slightly. And the weight per shipment went up from 998 pounds per LTL shipment on average to 1,011 pounds in the fourth quarter of 2004.

So those things all contributed to a lower revenue per one hundredweight. That's not necessarily good or bad, that just reflects a different type of freight that we handle. But it does show your revenue per hundredweight -- or it does decrease your revenue per hundredweight.

The LTL yield net of fuel surcharge after the adjustment for profile change is probably in the range of 2 to 2.5 percent. The reason I say probably and give you a range is that that's not an exact science trying to adjust for the profile, but that's the number we think is probably pretty close. The general rate increase was around -- the retention is around 2.38 percent. That rate increase went in in June of '04.

And probably the most interesting thing is that on our deferred pricing activity -- this is the renewals of contracts and deferred pricing agreements that came up in the fourth quarter of 2004 -- we secured a price increase of 5.0 percent. That tells me that -- or at least that's a good indicator that the pricing environment remains good. We would typically in any given quarter average somewhere around 3.5, 4 percent. So that's a nice increase over what we have seen in recent years.

In the productivity area, we had a mixed bag. Our LTL bills per dock hour were down some from 4.15 to 3.99. I think that's probably largely having to do with the new employees that we had on board; that they're not as good as the folks who have been around a while they're not as savvy in moving freight. They catch on but it takes a bit. And we probably had some congestion because of the amount of business that we were doing.

On the other hand, our LTL bills per street hour improved from 2.32 to 2.34 bills per hour on the street. And that probably has to do with more density with the additional freight that we handled in the fourth quarter this year versus fourth quarter last year. So we had some up, some down in the productivity area.

Rail usage for the fourth quarter was 20 percent of our total miles and that compares to 18.1 percent in the fourth quarter of '03. We used more rail, largely because of the additional business that we had, that's our safety net to take on a burst of business and so we used a bit more in the fourth quarter this year. The cost was up on the piggyback, cost per mile last year was $1.06 and this year $1.17, that's about a 10 percent increase in cost per mile.

Now that cost per mile varies for a couple of reasons. The high percentage of our 28 foot pup (ph) trailers on the rail increases cost and then there was a rate increase in the fourth quarter by the railroads and then another factor that probably impacts it even more is if we used more shorter haul rail which on a per mile basis costs more. All those things combined to give us some additional cost in that area in addition to the additional miles.

Fuel cost for ABF was up 79.7 percent in the fourth quarter of '04 compared to '03. Obviously a big number. That's due to several things. Obviously we had higher prices. I think everybody is aware of what was going on there. And then we had a little bit worse mpg from 6.6 mpg in 2003 fourth quarter to 6.361 in the fourth quarter of 2004. So 6.6 versus 6.36 -- a slight decline. That's the new engines, they're not as efficient and we probably ran a little faster.

Price per gallon, this is without taxes, was 92 cents in the fourth quarter of '03, and $1.52 in the fourth quarter of '04. About a 63.79 percent increase in price per gallon. That was the big news this year; a lot of cost went into fuel this year.

A big number for us in the fourth quarter, a negative number was workers compensation. It was $3.9 million higher than it was in 2003, that's almost an operating point on our operating ratio. A big chunk of that has to do with required reserves for excess insurance with Reliance which is an insurance company that's in receivership. They had to reserve a lot of those claims that may or may not get paid by Reliance. And we'll just have to see but we're trying to make sure that we've got adequate reserves for what may ultimately happen there.

Hopefully that's a onetime situation. That's an insurance company we were doing business with a few years ago that got in trouble. On the other hand our bodily injury and property damage is below 2003 by a little over $1 million. The bodily injury and property damage was below because of lower severity of the new claims and the associated lost development with those claims.

Equipment sales for the quarter resulted in a gain of approximately $0.5 million. We lost some money on the sale of road tractors, about $62,000. We had gains on a sale of city tractors and trailers -- city tractors and trailers of about 483,000. And then we had gains on the sales of some miscellaneous equipment -- some bob trucks, forklifts, yard tractors, safety cars, etc., of about 101,000. Net of all those is about 522,000 gain on the sale of equipment. Obviously we'd like to see that continue to be a fairly small number because we want to have our residuals where they ought to be.

ABF had some nice awards in the last quarter of 2004. ABF won the 2005 CIO magazine enterprise value award. We were named the exclusive recipient for the entire transportation industry of CIO magazine's enterprise value award and that award recognizes exemplary application of information technology. CIO said ABF was the best in transportation because of innovative tools for managing freight transportation via Internet-based applications.

And then ABF was named as one of the top two U.S. companies to sell for in the service sector by Selling Power magazine. This is the third year in a row now that ABF has been named in this select group, placing among the top 10 each year. The Selling Power research team identifies and ranks the best companies to sell for in the U.S., particularly companies with sales forces of 500 or more salespeople.

The ABF drivers, Richard Alford of Louisville, Kentucky and Ralph Garcia of Albuquerque, New Mexico, have been selected for the American Trucking Associations as America's Road Team. They'll be captains for the next 18 months. There were 13 people selected out of the industry with a collective 312 years of experience and nearly 19 million safe driving miles. They were selected from a group of 28 finalists who competed before a panel of judges from the trucking industry and trucking media. It was a high honor for our folks to be on America's Road Team and we're proud of them.

And then I think most of you are probably aware of a press release that came out December 16th saying that ABF President and CEO Bob Davidson had been named Arkansas Best Corporation President and Chief Operating Officer. Bob joins me on the holding company list of officers and will continue to be fully responsible for ABF but will take on some additional holding company duties as the year goes along. Bob has done a great job at ABF the last 2 years. His 30 years of experience with the Company has prepared him to do a lot more and we're looking forward to working with Bob.

One fact that I look at all the time is miles per tractor per calendar day. Any time it gets up over 500 miles a day we're getting good utilization in our system in road tractors. We were in the fourth quarter at 507 miles per day, that compares to 475 miles a day in the fourth quarter of 2003. Good utilization of your equipment, of course, is one of the keys to operating well in the business.

At Clipper, and inter mobile company, revenue was 25.4 million in the quarter compared to 31.3 million last year, that's an 18.8 percent decline. But I think you're aware we sold off part of that company last year. And if you exclude the LTL which we sold, then revenue was 25.4 million this year compared to 24.3 million last year, almost a 5 percent increase in revenue on the remaining parts of Clipper. Clipper had an operating income in the quarter of 300,000, an operating ratio of a 98.7.

Clipper lost some sales force that worked in all areas when we sold the LTL portion and it's taken us a while to fill in -- backfill there to get the sales coverage that we need for our intermodal which is the truckload on rail. And that revenue was down in the fourth quarter this year 13.5 million versus 14.4 million last year, down about 6.6 percent. Clipper's brokerage operation, on the other hand, had a 6 percent increase in revenue. And Clipper Controlled Logistics, which is our cooperation with refrigerated trailers on the rail, had a 28.8 percent increase in revenue. Nice growth for Clipper Controlled Logistics.

I'd just like sum up by pointing out a couple of things. The operating ratio for 2004 was the third-best in the last 25 years. I'm glad to see that. The fourth quarter of 2004 had a better operating ratio than the full year; it was a 90.5 in the fourth quarter and a 91.9 for the full year. That's unusual because the fourth quarter is typically one of the slowest quarters if not the slowest quarter of the year. It's usually a toss up between that and the first quarter. So having a better OR in the fourth quarter than the full year is good news.

We had a good revenue growth during the year, 18.4 percent growth in the quarter, 13 percent for the full year and the operating income was up 75 percent in the quarter year-over-year and 63 percent for the full year. So those are nice numbers to think about. We've got a strong balance sheet. Dave mentioned some of those numbers earlier. We've got no debt. A large cash position and two things that I think are important for a healthy company is to have growth opportunities and the capital to pursue them and we think we do.

We see some good growth opportunities with transportation products utilizing ABF's existing national franchise and, as I mentioned, we've got the capital to pursue those. So we're looking forward to a good year in 2005, very optimistic about it. And look forward to the balance of this year. And I'll with that open it up to questions.

(OPERATOR INSTRUCTIONS) John Barnes, Credit Suisse First Boston.

Just to make sure I understand this completely with the mix shift, you are saying that if you exclude the mix shift in your business that you actually realized a real price increase of 5 percent in the quarter.

No, I don't think that is what you said.

John, we said if you take out the changes in weight per shipment and length of haul that the price increase that we saw net of fuel surcharge was 2 to 2.5 percent in the fourth quarter this year versus the fourth quarter last year.

But you're still comparable with where the pricing environment is right now?

Yes. I'm sorry; we're having some problems here with breaking up a little bit.

So you're still comfortable with the pricing environment that you see right now?

Yes. And I think what we saw in the price increases in the fourth quarter on the deferred pricing accounts was particularly encouraging. The 5 percent that Robert mentioned are the largest increases we have seen in the last 2 or 3 years.

Okay. What percentage of your total book of business on the deferred side has been repriced? Is there some more to go? Have you repriced half of it and you've got another half to go to see these 5 percent type increases, or is it pretty much all done?

No, it is an ongoing process every month. Every month we have a certain number of contracts come up for repricing. If my memory is right, December is the single-largest month we have, and I think March may be the second-largest month.

Okay. In terms of your cost structure, I just wanted to make sure I understood. In the quarter you had to take out some insurance reserves because of this failed insurance carrier. Therefore, your OR in all likelihood could have actually been a little bit better?

That is correct. That should be hopefully a onetime thing. I hope our current insurance carrier stays solid.

Yes, that would be nice, wouldn't it?

Yes, it sure would.

Good deal. Could you talk a little bit about the fourth quarter in terms of kind of monthly progression? Did you see the same type of strength throughout the quarter? I'm sorry, is this my headset or is this your phone?

I am afraid it is ours.

Okay, I'm sorry. In the fourth quarter, October, November, December, did you see the same strength last throughout the quarter, or did you see some falloff when you normally do towards the end of December?

What we had in terms of tonnage in the fourth quarter was October was a little over 10 percent, November was almost 8 percent, and then December was back up some to 8.6 percent year-over-year comparisons.

Okay. Lastly, Robert, as you look out into the industry right now, a lot of people are talking about for truckload and LTL, this is the best industry environment they have seen, and they're really optimistic about 2005. I'm just curious from you; I mean a lot has been made about the potential capacity situation. I think you all did a good job of explaining exactly why your CapEx budget is going up a little bit this year. But I am curious as you see the other LTLs talking about CapEx increases, are you concerned at all that there is too much capacity coming into the marketplace, or are you comparable that the increases we are seeing are no greater than kind of the expected increase in demand for your services?

I don't see anything there that alarms me. What I have seen from other carrier so far, I think that they are normal increases that you would expect to see. Most of us have had to rent equipment this year. That sort of thing has been going on probably with most of the carriers. I know we have. That is one reason for our increase on city tractors. We have been renting equipment to supplement that fleet. What that means is that with the additional equipment, we won't rent as much in the coming year unless, of course, we have phenomenal growth; that would be nice.

As you went through the year if you were, just for the sake of argument, were renting 100 trucks this year, how many of those 100 rentals would you be looking to replace with a purchased piece of equipment? Would it be half or would it be 75 percent?

75, 80 percent, something like that would probably be what we'd shoot for.

So you're comfortable enough with your outlook that you don't mind taking on the ownership of 75 percent of what you were renting to make up for your shortfall?

Not at all.

Very good. Guys, nice quarter and thanks for your time.

Ken Hoexter, Merrill Lynch.

Good morning. I just wanted to follow on John's question there for a second on the capacity question. Are you seeing -- I just want to make sure I get this right. You're not seeing other carriers add any extra incremental capacity? You're not seeing any new startups coming into the marketplace in any kind of unusual (technical difficulty)?

At this point, we haven't seen what everybody else is doing. There have been a couple of companies come out today and talk about their plans for next year, but we haven't seen everyone's yet. Of course, we won't see from the private carriers, but in any event, I haven't seen anything yet that concerns me about too much capacity.

But I guess you wouldn't see it from just normal pricing in the marketplace. I mean the ongoing, not going what outlook is for '05; I mean what you're seeing kind of in the marketplace today.

Well, I think the pricing out there right now reflects a strong marketplace. I don't remember us having a full quarter of having 5 percent increase on our contracts that have expired. So that is a strong number.

No, I agree; it definitely is. How about any change where I guess we're just over a year into the combined Yellow Roadway. You used to get a lot of questions on this. Any increase in their marketing or any change in their atmosphere in the marketplace?

Haven't seen anything there that is irrational. They're doing what they normally due.

Great, thanks.

Chad Bruso, Morgan Stanley.

I wanted to dig a little bit deeper into what you said you were seeing in January here. It looks like you said volume growth fell off from -- I believe it was 8 percent year-over-year in December to 2.5 to 3 percent in January. How much of this would you say is weather versus slowing in overall demand versus some of the problems UPs experiencing out west that might have impacted some of the volume you move across their network?

We are seeing a little slowdown in January. How much of that's weather-related is hard to tell. First thing you've got to do is go back and look at January last year -- we have weather every year -- and I haven't done that at this point. But I'm not concerned about what we're seeing in terms of tonnage growth now. What we've seen for the last 12, 14 months is months go up and down, but the quarter -- the first quarter is going to be, and is every year, largely based on what happens in the month of March. That's when we do a lot of business and January and February are typically slow.

I'm not particularly concerned about January to date numbers. Certainly there's been some impact from weather. We don't get many days when we get 30 inches of snow. But unless you compare to last year -- and I've forgotten what the weather was this time last year -- it's kind of hard to say.

So based on where you're at right here, it wouldn't be out of the question to see something like 4 to 5 percent tonnage growth for the LTL tonnage in the first quarter when all is said and done?

I don't know, but that's certainly a possibility.

What type of -- how about for the full year? Obviously we don't know what it's going to be, but comps get a little bit tougher from here. What type of volume growth would you say that you need and given some of the pricing trends you're seeing to improve margins year-over-year?

We don't give any guidance on tonnage growth or speculation. Based on what we are seeing and know we're anticipating that the economy should grow some in 2005, but beyond that we don't provide any guidance or speculation of any kind of business levels.

Okay. Just one last one for you. It looks like the 3.5 percent decline in your average length of haul, that's the largest one that I could find going back quite a ways. Would you give us maybe what the growth was on a lane by lane basis? Maybe in the 2 day lanes versus 3 day and longer?

Yes, we can do that. In our lanes that are 2 days or less we had a 22.3 percent increase in revenue year-over-year in the fourth quarter, a 14 percent increase in weight and a 9.7 percent increase in shipments. In the lanes 3 days or more a 16.8 percent increase in revenue, an 8.6 percent increase in weight and a 7 percent increase in shipments. So from those numbers you can see that our shorter lanes are growing faster than our longer lanes.

And then into January here has there been any change between the 2 day and the 3 day trends?

I don't know. I haven't really looked at it. This is something we look at more on a monthly or even quarterly basis just seeing it vary so much day to day.

Okay, great. Thanks.

(OPERATOR INSTRUCTIONS) Jordan Alliger, Deutsche Bank in which he only.

Just a question -- you mentioned the stock productivity and some of the addition of new people. Can you maybe talk a little bit on how quickly that will take to work through to get the productivity going in the direction you want it to go in?

I don't know if I can quantify that. You put a new guy on and he learns over time. The new guy's going to have to stop and ask questions, get guidance whereas the older head out there on the dock knows what you do, doesn't need to ask anybody and is more efficient in what he's doing. I don't know what the catch up on that is. And it wasn't just that, that's part of it. Part of it had some congestion on the docks with additional business. That costs you in productivity for sure. But both of those things impacted.

Jordan, we're also working very diligently at being sure we meet our service standards and commitments to our customers and that at times can have an impact, too.

Is there going to be a need for -- I assume there will, but (technical difficulty) for the economy what they are, would you envision similar levels of hiring of new employees or does it moderate? How do you see that?

I hope so, that'd be good news. I like training new employees.

Great, thanks very much.

Edward Wolfe, Bear Stearns.

Good afternoon. When you look at the trend of the truck load volume growing faster than the LTL that I guess really started with the hours of service last year in the first quarter, do you expect that to level off? What are you planning for when you look at truckload tonnage versus LTL tonnage in '05?

That's hard to read. My guess is that the biggest constraint that the truckload industry has is not equipment, it's drivers. They're running at all-time highs and trying to bring in those additional drivers is going to be tough. One of the things they'll do to bring in additional drivers is raise pay or do other things that cost them money that makes the job better for the driver which then pushes their rates up which makes it easier for us to compete.

So even if they are able to solve some of the driver problems they're pricing is probably going to end up being higher in order to do it. I think we'll have good opportunities in 2005 in the spot market for truckload freight. It may not be as good as it was in 2004; it was pretty spectacular at times, but I think it will still be good.

But I'm guessing then that your revenue per hundredweight and your yields are going to be skewed again in '05 and look a little worse cosmetically than they are because of some of the mix shifts from LTL to truckload?

But of course it won't impact the LTL revenue per hundredweight.

Right. For the LTL revenue per hundredweight you talked about 2 to 2.5 percent adjusted for all the different mix change. What's your best guess if assuming the economy stays where it is more or less? Is that 2 to 2.5 percent adjusted rate -- is that better, worse or the same a year from now?

It depends on competition, it depends on demand, it depends on a lot of things.

But I mean what you're seeing out there in the marketplace -- gut. No one's holding you to it but what's your gut?

Maybe I'll try to answer it this way -- we're continuing to see a very good pricing environment and we're also, as we've mentioned a couple times, it's particularly encouraging when we see the level of price increases we've been able to maintain on (inaudible) pricing accounts.

Okay. I think it was Robert who mentioned growth opportunities. Can you talk a little more about what those growth opportunities are?

Our emphasis is on finding new transportation products that utilizes our existing nationwide franchise. I don't want to talk about specifics on that because my competitors tend to listen to these calls, but we see some good opportunities and we've got the wherewithal to pursue them.

Are those at ABF, are they at Clipper, are they at both?

I'm talking about ABF.

Okay. And it feels like Clipper had a bit of a breakthrough on the margin side this time around, is there anything that's not sustainable in their 2 percent? I don't want to get crazy over a 2 percent operating margin, but from where they've been that's pretty good.

Yes. Clipper sold off the LTL last year. The sales force that went with that did cross selling for the rest of Clipper and we lost those salesmen. And we've had to backfill to get the coverage there. We actually lost accounts because we didn't have the same folks calling on them or anybody calling on them in some cases. So Clipper has been recovering from that. That was an effect that was certainly not a good one.

And I think that it looks brighter for the coming year. The part of Clipper that did not improve a lot during the year was the intermodal, the pure truckload on rail and that's where we lost the sales penetration. The other parts of it had nice increases.

So again, what's going on right now is you've stabilized the accounts that were leaving without the LTL business there and you're starting to cross sell again? I don't quite understand why it's --?

We've had to add sales coverage that we didn't have before other than through the LTL people.

So it's more volume that's helping the margin?

In some cases, yes. It was not with the intermodal, the volume was actually down there, but in brokerage and in the refrigerated area --certainly had more volume.

Thanks a lot, guys, and congratulations on a terrific year.

Jack Waldo, Stephens Inc.

I wanted to ask do you have any -- what type of impact will pension expense have on FY '05? Is there a big year-over-year change from FY '04?

Jack, if you'll recall back the last year we gave an estimate for '04 at this time last year and based on the work that the actuaries did, when they got the final editorial valuations that number changed what we considered to be a fair amount. So we're not going to give any estimates on the pension expense until we see the actuarial valuation which will probably be toward the end of March. All that said, we don't anticipate that it would change significantly from what it was this year. But I don't want to give you any specific numbers until we see that valuation.

Okay. And on purchase transportation expenses, which is kind of the primary downside in our model -- and given your growth objectives increasing the amount of your freight that's actually on the roads, is there a goal or anything of how much you want to drive down as a percent of total shipments? What goes on -- what (indiscernible) would purchase transportation?

From a total miles standpoint we've been running higher all the year than we would like to run. But as Robert mentioned, that's our safety valve when business levels really pick up. We'd like to get down to more in the mid to low teen range as a percent of our total miles. And part of what we're doing with some of the equipment and driver hiring is to get in a position to move more of the rail miles to the road.

Fair enough. Talking a little bit about the regional marketplace, you had made some comments before about entering more the next day or the 2 day market. Do you have any comment on where those plans stand and also -- I haven't seen any comments on the union with regard to utility employ or any stance on that?

Well, we're big into the 2 day market and have been for some time and continue to grow faster in that market than we do in our longer haul market. And we're pleased with that. When you get around to the overnight market, that's where the premium employee comes in. One of our competitors recently worked out a provision with the union that they need in order to take their approach to that. What they did would not work well for us. We have a totally different or substantially different network. Their network structure design is considerably different from ours. So we've got to have a different approach. We're working with the union on that and at this point have not gotten that done.

Will it be something that you'll kind of -- I'm assuming will just kind of dip your toe in at first and do it in selected lanes and then kind of --?

Yes, that's exactly what we'll do.

And do you have those lanes already targeted?

We have it in mind what we want to do, yes.

Do you know what the working days will be in 2005? The first quarter of 2005, excuse me?

I don't know off hand, no.

Okay. And then also, I guess -- what impact does diminishing debt balance and an increasing cash balance have on achieving your ROC and does that impact obviously any of your growth strategies or where you set your target rate going forward?

Our target rate will stay the same. As cash builds and we've paid off virtually all of our debt it's harder to make the ROCE. We're aware of that. We've got to grow. We need to grow substantially and that's going to be our goal in 2005 because that's what will put money in our incentive pockets.

Thanks a lot and congrats on the good quarter.

John Larkin, Legg Mason.

Most of the good questions have been asked already, but a little longer range question. It may be too early to really think about this seriously but I've been reading some speculation that the individual less than truckload carriers may negotiate separately with the Teamsters rather than as a unified group as they have in the past on the next contract. What are your thoughts on that?

I don't know. I mean, we're not due for another negotiation until 2008. A lot of things can happen between now and then. I really don't have much to add to that. Certainly a possibility -- we're down now to just a very few carriers, so it's not going to make a hell of a lot of difference whether we negotiate as 4 or 5 or one I don't think.

Okay. And then just one question regarding how you view your Company's service positioning in the context of the industry vis-a-vis let's say some of the other competitors that offer interregional multiregional and in some cases nationwide service such as FedEx Freight, the Conways, yellow Roadway, etc.. Is there a unique marketing angle and positioning that you all are using to your success here over the last couple of years that really does differentiate you?

I think the key is execution. We've got to do for our customer what they expect us to do. We pick up accounts constantly because of service failures of our competitors both regional carriers and long haul carriers. I suspect from time to time they get some from us. In various lanes we probably do a better job than a lot of folks and in some lanes maybe not as good a job, there will always be those differentials. But the key is execution and it's a matter of degree. You're not ever a total failure or a total success and we're constantly pushing on that and I think David Loeffler mentioned earlier that some of the additional cost on the dock and the loss of productivity in the quarter was probably a result of some of the things we did to keep our service (inaudible).

And service is still defined as transit time, transit time variability, freight damage, the traditional service metrics?

That's always been part of it. And then today what you see a lot more of is being able to provide the technology (inaudible). A lot of our more sophisticated customers are looking for a lot of things from us in the technology realm and being able to provide that and do a good job of it is another factor. Transit time certainly is a key.

How many other carriers out there do you think can compete with you on a technology basis with respect to interacting with your customers?

I don't know the number. Just in general you're looking at the larger carriers generally have a good competency in that area and some of the smaller carriers do, but some of the smaller carriers can't afford it.

Thank you very much.

Gregory Burns, JP Morgan.

I got partially disconnected from part of the call, so I hope I'm not asking a redundant question. But can you guys refresh me on where you are with the percentage of business that's under contract and sort of what percentage of your business effectively might get repriced between now and the next industry price increase?

The percentage we're looking at, probably mid 30 range, maybe a little bit higher than that and there's a certain amount that comes up every month. December is by far and away the biggest month.

Right. (multiple speakers).

I can't give you specific breakdowns by month, I don't have that. But there's a certain amount that comes up every month all year long.

Because what I'm getting at is it seems like the spot price increase is accelerating pretty much across transportation -- it sounds like for you guys as well -- and it seems like the contract rate is lagging that as you would naturally expect. So I'm wondering of pricing on the spot level just sort of levels off just the rollover effect will cause your pricing --? In other words, have you pretty much -- based on what the spot price has done in the second half of '04 have you pretty much baked in a pretty healthy price increase in '05 just on the rollover effect?

I think we mentioned earlier that we had good numbers on our renewals in the fourth quarter.

Right. That's what I'm getting at.

And that certainly will impact us going forward and the fourth quarter tends to have the most renewals. Particularly the month of December a lot of people have their contracts there because obviously (inaudible).

Right. But were those renewals legacy or something that was out of the ordinary or is that a good proxy for the rest of the business at the kind of rates we can expect? I'm just trying to see of that's an apples-to-apples sort of renewal rate or is there something unusual about those particular contracts?

I'm not sure I know. I was surprised at the renewal rate, it was higher than what we typically had been experiencing and I consider it a real positive. Whether that is a proxy for the rest of the year I can't tell you.

Okay. And on January -- again you may have mentioned it -- but it sounds like things are slowing down vis-a-vis the trend and I hear you, it's not a significant month, but what will you look to -- do you basically need to see February, do you need to see March? What kind of signs do you need to see or how much data do you need before you get a good understanding of the first-quarter trend line? And I guess since there's seasonality in every January, particularly January over January, what could explain this kind of slowdown?

Greg, I think realistically we need to get to the last week or two of February and start seeing now that goes, get into March. If I were to pick the months that were probably the least credible in terms of picking trend, January would be one, February would be two (indiscernible). The weather is always a factor to some extent but it is every January, February. You're just coming off of year-end.

We ended up with December with LTL tonnage up 8.6 percent. We ended up the year pretty strong (inaudible) and we're pretty pleased with that. And as Robert said, we're not concerned about what we're seeing in January, it's just way too early to tell. The last week of every month is critical and all we've got is the first 2.5 weeks to look at.

Right. Great, well, I appreciate you guys sharing the data, it's helpful. Thank you very much.

Dan Moore, Morgan Keegan.

Congratulations on the quarter, pretty decent numbers. I wanted to ask just a couple of quick ones here. And some of these may have been covered, I got on the call late. And if they have been covered I apologize.

The first question I have related to spot market yields, your exposure to the spot market in the fourth quarter and what that may mean for the first quarter. Since most over the road truckload and LTL carriers are doing more spot market activity -- or certainly did more spot market activity in the third and fourth quarters, wouldn't it be reasonable to assume that the delta or change in yields fourth to first quarters is going to be greater than historically has been the case? Am I thinking about that right or no?

I just don't know. I mean, the spot market has continued to be very strong. Remember, that is truckload, that's not LTL.

Sure.

And you would think that as you move further into the year the market might get firmer than it would be let's say in to December, January and February just because business levels would have picked up and there will be more tighter capacity, less capacity available. But that's just speculation. I really don't know. We continue to see the truckload business that we're able to handle be very strong on the one hand and the pricing to be very encouraging on the other hand. Particularly when you get into the months where more business levels are strong, that spot market business is competing heads up with the LTL business and we've got to get comparable margins to be able to move the equipment to the truckload side.

Robert, David, we've seen some paradigms in the truckload market over the last 12 months that we really haven't seen in any other cycle and I guess maybe said a little differently, there seems to have been some real structural change in the truckload industry over the last several years that's been borne out more recently through yield improvement and earnings growth, very visible yield improvement and earnings growth. And while yields are clearly pretty solid in the LTL -- across the LTL marketplace they haven't necessarily been quite as strong as what we've seen in the truckload market.

Could we see a similar development as more and more freight comes on line as more LTL -- more and more LTL capacity or utilization trends, I guess -- capacity utilization trends reach that 100 percent barrier? Could we see yields pick up to a level that we haven't in the past? I'd love to hear your speculation on that. And granted, it's speculation, but I'd love to hear what you think about that.

I've got several friends in the truckload industry that tell me they need to charge more because they need to pay more. they very often will tell you -- this is not me talking, this is folks that I know in the truckload sector -- that are saying that they underpay their drivers and they need to pay them more. It's a tough job being away from home a lot as compared to our drivers for instance.

I look for their prices to continue to climb which should mean that there's going to be continued availability of a lot of spot market truckload for us. That bodes well for the LTL industry because we could use a lot of that freight for various reasons.

Dan, I think over the last 2 or 3 years we've seen in regionals long haul LTL now (indiscernible) truckload last year, so continued emphasis on being sure that business is priced right and that's very encouraging for the whole industry. And I think as people tend to do a better job of that, see the benefits that it has in terms of their results and their competitors I think that bodes well for the whole (inaudible).

Absolutely. Where is capacity utilization at ABF today given the fact that obviously there's seasonality in the business? But how would you have characterized maybe the fourth-quarter environment if you haven't already commented on that?

No, we haven't commented on it and that's a very elusive number. You're going to have terminals where you've got a lot of capacity and other terminals where you might be running at 110 percent capacity. I think maybe the best way to answer it is we're now pretty much back to 2000 business levels from an LTL standpoint.

Which was about as good as we've ever seen, correct?

Yes, pretty good. Yes, we do have some capacity in certain locations, but we've got other locations where we don't have capacity. That's why we're adding 240 new doors this year. And also keep in mind -- particularly on the terminal side -- when we add capacity it's a stair step approach because (indiscernible) 10 additional doors is not cost-effective and just adds to that 20 or 30 doors planning for the future.

Okay.

Sorry I didn't give you a specific number, but actually if I were to do that I'd probably be more misleading than anything.

I understand. It was just a question worth asking. Last one here and, Robert, you're going to love this one especially. But in April, as I remember, of '04 tonnage mention spiked up significantly almost kind of out of thin air -- a very surprising increase in LTL tonnage from February and March levels. Incremental margins in 2Q, 3Q and now 4Q, which is to say margins on each incremental revenue dollar on a year-over-year basis have been around 30 percent for the last three quarters now. It looks like there's probably a pretty good chance that that more or less continues into the first quarter but then will be lapping much more difficult comparisons.

Understanding that it's a very fixed cost business and that the tonnage growth you experienced over the last 9 months has certainly gone a long way towards yield improvements -- have gone a long way towards allowing you to achieve that sort of incremental margin. For modeling purposes can you sustain that moving forward? Is 20 percent a good number? Can you give us some clue as to now we ought to be thinking about that?

Dan, I don't think I can give you a specific number, but the key -- one of the keys in this business is to hold your fixed cost in tight. And then obviously bury your variable cost with the level of business. And it's hard because there's always a lot of creep on the fixed cost side, some of which is unavoidable. But for instance we'll be adding a couple hundred doors this year, that's fixed cost. That will go in there but we think that that is going to pay off or we wouldn't do it. It will reduce our variable cost where we've got congested docks. But the key is to hold your fixed cost in line and try to keep on top of that. It's hard to do.

Dan, let me try to answer it a little different way. I'm not going to get directly to your question, but when we make decisions to spend capital dollars, they have to meet our 10 percent after-tax return on capital deployed (inaudible). That's really kind of how he look at it.

Okay. Fair enough, guys. Appreciate the time, have a good day.

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

We just want to thank you for joining us this morning and we appreciate your interest in Arkansas Best Corp.

Thank you for participating in today's Arkansas Best Corp conference call. This call will be available for replay beginning at 3:00 PM Eastern Standard Time today through 11:59 PM Eastern Standard Time on February 11, 2005. The conference ID number for the replay is 318-1307. Again, the conference ID number for the replay is 318-1307. The number to dial for the replay is 800-642-1687. Again 1-800-642-1687. Thank you. This concludes today's conference call, you may now disconnect.