ArcBest Corp (ARCB) 2005 Q1 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the Arkansas Best Corp. first quarter 2005 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 Mr. David Humpfrey, Director of Investor Relations for Arkansas Best Corp. Please go ahead, Sir.

Welcome to the Arkansas Best Corp. first quarter 2005 earnings conference call. We will have a short discussion of the first 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 and Chief Executive Officer of Arkansas Best Corp.; 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 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 now begin with Mr. Loeffler.

Thanks, David. Looking at the overall corporate results for the first quarter, the revenues were a little over 417 million, up 11.3% from the same period last year. Our operating income was 17.4 million, compared to 8.3 million last year and our net income was 10.5 million compared to 4.5 million the first quarter of last year.

Earnings per share on a diluted basis were $0.41 compared to $0.18 in the comparable period last year. Our revenues for the first quarter this year compared to the first quarter of last year, ABS revenues were up 11% and Clipper's revenues were up 12.3%.

For our cash flows, for the first three months ended March 31 of this year, please refer to the GAAP cash-flow statement attached to our press release. I would now like to highlight a few of the more significant items.

Net income before depreciation and amortization was a little over 25 million. Net purchase of property and equipment was 11.5 million and capitalization of software was 1.2 million. Net negative working capital changes of 3.8 million, we had a decrease in our bank flow of over 5 million. We purchased $1.5 million in treasury stock, we issued common stock which was the exercise of stock options of 2 million, and we paid dividends on common stock of 3 million. We had an increase in cash short-term investments of 1.3 million.

At the end of the first quarter, we are basically out of debt and we have cash and short-term investments of a little over $72 million.

Our after-tax return on capital employ for the 12 months ended March 31 of this year was 18.6%, compared to our minimum acceptable level of 10%, and our weighted average per cost of capital net of taxes was just under 10%. We continue to project our capital expenditures for this year to be $94 million. Our depreciation and amortization in the first quarter was $14.6 million; and we are forecasting full year depreciation and amortization of a little over $62 million.

I would now like to turn it over to Robert.

Good morning. Talk about, first, ABF Freight System for the quarter. Revenues were 384 million. That's up 11% from the same quarter last year, a nice increase in revenues. The operating income almost doubled from 8.7 million last year to 17.2 million this year.

The ABF tonnage in the first quarter -- I'm talking LTL tonnage -- was up 2.9% per workday and the truckload tonnage was up by 6.7% from the same period last year. The first quarter, LTL billed revenue per hundredweight -- excluding the fuel surcharge -- is up 2.3%. And the billed LTL revenue per hundredweight -- including fuel surcharge -- was up 7.2%. We're looking at $26.28 compared to $24.52 last year. Nice increase in revenue per hundredweight.

Our length of haul stayed -- it's down about 2% from 1274 miles last year to 1249 miles this year. The decline in length of haul is probably in part attributable to the fact that we are growing faster in the two-day lanes; and our strongest growth tends to -- in the first quarter was in the center of the country which makes for shorter lengths of haul. The weight per shipment was virtually the same -- 986 pounds last year and 985 pounds this year. So it's not a lot of change in terms of what we are hauling.

The pricing is -- continues to be strong. Deferred pricing activity during the quarter was good. These are the contracts some of which come up each month and some deferred pricing agreement come up each month. That continues at a strong level, and we view the competitive environment as fairly firm. There we see a few pockets of price aggression but that's not abnormal during any (inaudible).

Our productivity was about the same as last year. Very little change there. Some up. Some down. Overall, about the same. We took on about 2000 new employees last year. We typically see some decline in productivity until those people begin to get experience and learn our way of doing things.

Rail miles during the quarter as a percentage of our total miles were 14.6%; and last year 14.5%. So virtually no change in use of rail. Fuel cost is up almost 50% from last year. Now that includes higher prices, increase in miles, and lower miles per gallon. The new engines are getting slightly less fuel economy and obviously the prices were up. That's no news to anybody.

Equipment sales during the quarter for ABF produced a profit of $116,000. Again, not a significant number but, again, reflective of the fact that our residuals are accurate.

ABF's LTL in lanes that are currently two days or less showed an increase in revenue of 13.4%, while lanes three days or longer were up 10.8%. Again, we are showing faster growth in the shorter haul lanes.

On the international scene, ABF's become the first major carrier to successfully complete the U.S. Canadian border crossing. The Electronic Manifest Program, developed by the U.S. customs border protection. The first crossing occurred March 11 in Blaine, Washington where the CBP is conducting a pilot program of a new commercial trade processing system that is going to speed up the movement of freight across the Canadian border. I'm sure that helps us give better service to our customers and also provides some additional securities.

Moving onto Clipper. Clipper revenues in the quarter were up 12.2%. We're pleased with that. The Clipper had about a breakeven quarter operating-wise. Lost a little bit last year so some improvement there. The big change there was the brokerage. The revenues there were up from 2.4 million to 4.4 million or about an 80% increase in revenue from brokerage and Clipper control logistics -- our refrigerated operations, it's refrigerated trailers on rail -- showed a 23.6% increase in revenues. So we're seeing some good growth at Clipper and that's typically in the weakest quarter of the year for Clipper. So that is encouraging for the balance of the year.

That is all I have to say on those individual subsidiaries. All in all, we showed some nice improvement from last year. We are seeing -- right now we are seeing tonnage in April being about flat with last year. That means that probably you are seeing some slowing in the economy but it's still at good levels. Still good firm levels and levels where we think we can make good money.

While we had a nice improvement in the first quarter over the prior year, we still see room for improvement. That's encouraging and that is what we will be working on the quarter to come. With that, I will open it for questions.

(OPERATOR INSTRUCTIONS) Ken Hoexter with Merrill Lynch.

Two things I was to follow-up on Robert. Can you talk a bit about the cash usage? What you plan on doing with this free flow of cash you are enjoying now? And, secondly, thoughts in the marketplace as following the Yellow and U.S. set back position -- what your thoughts are? Are you seeing any spillover in volumes from that? Do you feel that with this great cash flow that you are looking at additional acquisitions that you might not have before?

I don't see any impact on us from the Yellow acquisitions of USF. That should not impact us much one way or another. What was the rest of your question?

Cash usage. I mean you're building a significant amount of cash. You've got no debt. What (MULTIPLE SPEAKERS) are you looking at with that?

I think the fact that we did elect to up our dividend or change our uses of cash should be an indication to you that we feel like we have good ways to spend that money going forward with internal growth. We are not in the process of valuating acquisitions. We see some great opportunities for growth at ABF that should require quite a bit of capital for the next few years. That is what we are pursuing.

Mostly internal?

That's correct.

And you are not -- Just to clarify that first answer. You're not seeing any spillover of volumes from Yellow or USF on to your network?

Nothing identifiable. I would say it is sort of business as normal.

Last question I have is on your volumes. You had a huge spike from the hours of service from the second, third, and fourth quarters last year. Do you see any of that reverting back to the truckload carriers? Are you seeing capacity increase over there? Or is this volumes that you anticipate continuing to grow going forward?

With the current hours of service regulations in force, half the freight that we are getting now is not attractive to the truckload carriers. Typically it's freight that they might have put on stop offs before. This is not a problem for us because the fact that we operate through a terminal system and have local pickup and delivery. That is something, of course, that we do quite well. Smaller volumes. And I think we will continue to see that for a while. I do not know what is going to happen in the hours of service. That's a question right now. But as long as these current regulations are in effect, it's just freight that is not terribly attractive to the truckload carriers.

I suppose if you saw a big softness in truckload, that some of that might revert back and might become more attractive to them if they needed business. But for the foreseeable future, anyway, I see that continuing. Don't see really any change on the horizon here until something organic changes.

Dan Moore with Morgan Keegan.

Couple of questions here. Just wondering -- and I don't have these numbers in front of me -- but if someone could by chance remind us of how tonnage progressed in the second quarter of last year? If there's any way to get those statistics that would be the really helpful. And if you don't have those handy immediately, I will just address another couple of questions.

This is Dave. In April -- these are LTL tonnage per day. April tonnage was up 6.5%, May 7.5% and June 9.2%. For the quarter it was 7.8%.

And that was LTL or total?

That was LTL.

So that is kind of what you are comping up against here as we move into the second quarter and you are more or less flat. So it sounds like things get incrementally a little bit more difficult as you move through the course of the quarter. Incremental margins, this quarter I think, were around 22%. Is there anything that would -- that we should be aware of other than maybe pension's costs being a little bit higher? Anything we should be aware of that would cause incremental margins on revenue growth year-over-year to be better than that 22 % in the second quarter? Any cost factors that we should at least be mindful of as we look out here and project for 2Q?

No, not really. I mean even in pension, you're only looking about $.5 million over the course of the year. So that's not that significant.

No. Not at all. What about the GRI, David? Any update on when you guys are going to be implementing the GRI?

No. Not at this point.

I would imagine -- it sounds like pricing is going pretty well so I would imagine that no reason to believe that your rate increase wouldn't be too terribly different than what we would see or have seen elsewhere in the market. I know a couple of people -- one or two others -- Conway I think already came out with theirs, didn't they?

Yes. We've made no decisions at this point as it relates to either the timing or the amount.

How about share repurchase authorization? Can you give me an update on where you are with that?

We have 11 million left to spend under that share repurchase program.

With regard to Clipper. Any plans on -- any plans in terms of improving yields or returns at Clipper here? Any plans to divest that subsidiary at any time in the near future?

Clipper had some nice increases in revenue first quarter. That should -- if that continues, that should bode well for subsequent quarters. Particularly pleased with the growth in their brokerage operation, up 80% last year. Of course the returns on that or return on capital flow there is excellent. That much capital employed. But we're somewhat pleased with what we see going on there. We will have to wait and see how the rest of the year picks up.

Fair enough and then just one or two other questions and I will turn it over. Dave, looking out here and this is just for modeling purposes as much as anything. If you all grew revenue around 11% in the first quarter and you had tonnage growth of approximately 4% and that is more or less going to be flat maybe marginally down a little bit in the second quarter. That would suggest that revenue growth is going to slow modestly here in the second quarter. Historically, you have had incremental margins of 10 to 20%. But you are comping up against some pretty healthy numbers from the same year period a year ago. And I don't expect you are going to answer this question but I'm going to ask it anyway. Any chance you all would like to comment on second quarter expectations right now with respect to the street?

You're correct. We would not like to comment.

Jack Waldo with Stephens Inc..

Nice quarter. Wanted to -- could you give us some color on monthly tonnage trends in the first quarter?

Hello?

We're still here. We are looking for the numbers.

In January, LTL tonnage per day was up 5.4%, Feb. 3.8% and in March, just up slightly.

How do you think -- or can you put -- can you quantify how Easter and the Chinese New Year might have impacted March?

Yes. If you factor out Easter it would add about 1 percentage point to both the LTL and the TL tonnage.

Could you talk a little bit about rail services and the cost of purchased transportation? I know services weren't too good in the second half of last year and the cost of purchased transportation ran up. Have you seen any improvement in either of those areas?

The rail service particularly the east-west service into California and out of California has been impacted. The weather of course had an impact on that. A lot of washouts out there. And I think probably just the fact that the rails didn't anticipate the growth that has been available to them this year has impacted that quite a bit, too.

Piggyback cost per mile is up for us roughly 8%. That's rate increases in (inaudible) rails and to some extent the mix of rail that we use haul affects that some too. This year, the rails have not been a particularly quality provider for us. And I look for that to get better. I hope that it gets better. At some point we were running 60% on time and those sorts of numbers don't help. They're getting better of late but what are they going to do during the peak of the year? That's the question. Get into the late summer and early fall I don't know how well they are going to handle it.

What are you planning to do, during the peak of the year, with regard to purchase transportation? I know that as costs increase in the second half of last year, you implemented some things to maybe offset some of your needs to rely on purchase transportation. Do you think that can take fruition here in the second half of the year?

We have been in the hiring mode on road drivers in order to take freight off the rails. But we always use more rail during the the peak year because that's how we handle our capacity issues that are very seasonable. That's -- we think -- the right way to do it. So you will probably be seeing rail usage go up from apparently around 14.5% to 2% the following year. (inaudible) certainly don't want to own the equipment to handle those peaks, but it is an issue this year to see how well they respond. We use less rail, typically, than our major competitors' long haul market. That has certainly paid off for us this year.

How have your efforts to hire more drivers gone? Are you still seeing a pretty tight drivers' supply out there even for the type of wages and benefits you give to your employees?

The wages -- and we're not largely different from anybody else on the wages, at least as far as the LTL carriers are concerned with paperwork with the truckload guys. We have started some training schools. The problem is, good drivers got a job. They don't have a problem finding jobs. So we are doing some training now. In some markets we don't have much problem hiring drivers; but in other markets it is a very tight market for drivers. And that is where we are focusing our schools.

We have a partner out there that we work with that will set up the schools for us. We work jointly with them on who we put into those schools. So we are attacking that way. I guess the good news is is our turnover is including (indiscernible) it runs around 7 or 8%. But when we get somebody, they tend to stay and that helps us. And it's pretty frustrating for the truckload guys to hire 20 and lose 19 and we don't have that problem.

Could you talk a little bit about your next day service and plans to roll that out? Have you heard back from the union and do you have any plans to roll that out?

We are working on the premium service employee with the union right now. Should sometime in the next couple months have a hearing and get that worked out. But that is not done yet.

One question on both restricted stock and then, also, on expensing options. You won't expense options until 2006. Is that correct?

That's correct.

And how does the restricted stock work? Is it pegged to the price of your stock for the average of the quarter? I know you put some expectations going forward. Just wondering, how much do we need to model in fluctuations to stock price relative to that?

The restrictive stock is valued at based on the closing stock price and the date of the grant. And that's what's amortized over the five-year period. And that closing price was $32.65.

Thank you very much for your time. Nice quarter.

Jordan Alliger with Deutsche Bank.

Couple of questions. One, you talked about how tonnage looked so far in April. What about on a weight per shipment basis thus far in April?

I don't have those numbers in front of me but I don't think there's any difference there, remarkable difference there. It's been running pretty steady.

Steady vs. year over -- year-over-year steady in other words?

Yes I assume you're talking LTL (MULTIPLE SPEAKERS). They are running about the same.

If we are seeing some slowness but still good tonnage growth but slowness, how does one boost the productivity as the year-over-year growth in volumes comes in a little bit? I know last quarter you mentioned things were kind of flat. My guess is you would like to increase it, even if tonnage growth slow a little bit. How do you go about doing that?

One of the things that will work for us this year is as I mentioned earlier, we added a couple thousand employees last year. That many new hires. And those people will become more productive. It has been our experience anyway that as they get more experienced in their job and it helps us on claims, it helps us on productivity also. We are continuing to roll out the new things in technologies that help us with productivity. Knowledge is a real boost in -- can you give you a real boost in productivity knowing what's coming or what is going to happen allows us to schedule people more efficiently. And we are seeing continued improvements in our technology there that helps us in productivity.

Again, while we see business growth slowing some, the business levels are still very good which gives us an opportunity to make some improvement.

Ed Wolf, Bear Stearns.

Robert, just to clarify, I mean I think it's pretty clear from the questions but the press release when you say you are slightly ahead of last year in April for tonnage, that means slightly ahead of an absolute basis and in other words tonnage is basically flat?

That's correct.

And you said that April cost you about a percentage point both LTL and total tonnage in March. So I'm guessing it benefited you by that much in April year-over-year?

Just the opposite. It benefited us if we would have factored -- yes, you're right. If we would have factored Easter out. Of March, then, the impact on the first quarter would have been both LTL and TL tonnage would've been up about 1% more. And it has a reverse effect on April but we didn't give you the particular percentages.

But suffice to say it's modestly down if that were added into the --?

That would be correct.

From where you are, saying, is it just tougher comps or has the world slowed down a little bit? I mean you said shipment size hasn't really changed. So I'm guessing it's not dramatic but has the world slowed down a little bit?

I think both things probably are going on. I think the comps obviously are more difficult in April because our business really took off last year in April. But my sense is that the economy has slowed a bit.

Yellow said that they reported basically the opposite of your report, which was that first quarter tonnage was basically flat for Yellow and Roadway but that in April, they are up 3% in tonnage. Is there anything you are seeing different from them that might account for this?

No, but I am pleased with that. That means that should keep us with a strong pricing environment.

Okay but you're not seeing them, in other words, reduce the pricing in order to see that uptick in times. That's not apparent to you?

Not particularly. No.

In the report you talked about LTL freight density decreased by 2%? Can you explain what that is?

To put it very simplistically more plastic and less steel.

So just a mix of the freight?

Yes. It's probably a mix of the freight. That's been an ongoing phenomenon now for years. Density of our freight has been going down for years. Typically, more -- look at a schedule moving over the road, we are more impacted by cube than we are weight. In other words we fill the trailers up before we run out of (indiscernible) weight. That has been going on for years now.

So that is not the same thing as weight per shipment freight density in other words?

No, it is not. It's just that the kind of freight we are hauling now is less dense than what we were hauling previously. And that's been going on a long time.

Okay. If you look out -- it's obvious from your comments and maybe it's not obvious, but that the tonnage comps are getting more difficult so I'm guessing if you looked out through '05 you would say tonnage comps are less than a year ago. What do you think about pricing vs. a year ago? Should we see an acceleration in pricing as you get through the GRI and things hold pretty firm? Should it be fairly flat or do you think it gets tougher as you go out?

I think most carriers I've seen report so far have shown nice increases in profitability and at least flat to up, with maybe one exception in terms of tonnage. So I think the pricing will remain stable. And I mean those are the things that impacted and they're going in the right direction.

Does stable mean where we are at, net of fuel or modest acceleration as the GRI comes in?

I think you'll see increases in our revenue per hundredweight. That would be my guess. We've already seen a few carriers report a general rate increase coming up shortly; and my guess is you'll see increases in revenue per hundredweight.

Net of fuel?

Yes.

David, just quickly. Can you comment on the tax rate going forward? What we should be using? It's been a little bit lower than it has been this quarter?

Probably still around 40%.

John Larkin with Legg Mason.

Question on the fuel surcharge that's accounting for a fairly big chunk of the increase in revenue year-over-year. We had a high cost of fuel in the first quarter. What percentage of the uptick in fuel cost is covered by the fuel surcharge?

It pretty well covers the uptick in fuel cost, the fuel surcharge does.

Is there a delay as there is with some other fuel surcharges and other sectors of transportation or is it pretty much timed to make you whole?

It's updated every Wednesday.

So once a week If we were to see a decline in fuel cost during the second, third, and fourth quarter, that wouldn't really be much of a benefit nor would it be much of a hindrance?

That's correct.

So it's really neutral at this point? Now getting back to one of the questions that Dan, I think it was, asked earlier about the fact that you had about a 200 basis point improvement in margin which was very nice. The yield increase, when you net out the fuel surcharge, looks like it's about where you like it to be to offset your labor cost increase. All else being equal. You mentioned that productivity in your pickup and delivery on the dock and maybe in the yard was about the same as it was last year even though there's a little more volume.

Does that incremental 3 or 4% volume really give you enough leverage to expand your margins by 200 basis points or were there some other cost control issues there that will work into your benefit during the first quarter?

Combination of two things. When you purely look at percent of revenue, the higher yield with the fuel surcharge has a (indiscernible) impact in lowering the percent of revenue and then also there is some leverage with the additional business. I think one of the other factors you have to keep in mind is because of the size of our network, we tend to be more negatively impacted in the (inaudible) softer or weaker quarters and we get more positive benefit in the stronger quarters, particularly the second and third quarters.

One question I think Robert was mentioning that your turnovers up to I want to say 7 or 8% due to retirements and that sort of thing. I've heard from some other carriers that their workforce is aging. Do you expect that turnover to accelerate over the next 3, 4, 5 years or do we still have longer than that to wait?

I'm not sure I can answer that. Our average age now is presence on road drivers I think the last number I saw was 53 years old. Some of those guys have got a ways to go before they -- on average -- retire, but I expect, I guess would be you'll continue to see retirements at about the level they are now.

So, at that pace you feel comfortable you'll be able to find the people you need?

So far we've not have a problem doing that.

Chad Bruso with Morgan Stanley.

Most of my questions have been asked here but just in terms of pricing. I believe it was last quarter when you were talking about the deferred pricing on some of your contracts. And I think you said they were up 5% in the fourth quarter. What did you see on the deferred pricing agreements that rolled over in the first quarter, if there were any?

4.6%.

And then you mentioned in your prepared remarks I think it was that you are seeing pockets of aggressiveness. Where specifically were you seeing those, both on a geographic and maybe a lane by lane basis?

What I'm talking about is mostly anecdotal. We hear about a deal that went down that surprised us but I couldn't categorize it as being in any certain part of the country or any certain industry or (inaudible).

Would it be a large customer vs. small customer? Or anything like that? Or just varying across the board?

Just across the board.

Brannon (ph) Cook with J.P. Morgan.

Talking about the pricing environment. As you look across your -- the market, are you seeing any regional strength or weakest? Are you growing more quickly in the Southeast vs. other areas as you look across your network?

What we saw in the first quarter -- and that really has been true now for a couple of quarters -- is that our growth in the center of the country is stronger than on either coast. That has impacted our length of haul to some extent because, obviously, you can't go as far from the center of the country. But that has been a phenomenon that has been going on now for at least a couple of quarters. (inaudible) center of the country.

Is automotive -- the slowdown there, does that impact the growth in that Ohio River region for you guys?

It hasn't impacted us an awful lot. Heavily dependent upon automotive.

Also you mentioned you are looking to get the union some concessions there that you need on your next day business to get that up and running. Could you give us an update on the timeline you are looking at, assuming that happens the way you want to when we can look for that to start to roll out?

I think we're shooting right now for a hearing with the union in the next 60 days or so. Can't pin that down exactly because there's a whole lot of schedules that have to be put together to get that done. We're hopeful that we will get that done shortly.

Assuming that goes the way you want to, that's something you would look to roll out in the second half of this year?

That's correct.

(OPERATOR INSTRUCTIONS) Dan Moore with Morgan Keegan.

You may not have these numbers handy but, David, you and I were talking about this, I think, the other day. Could you remind us for those of us who are on the call and might like to know where you historically repurchase shares? Over the last year or two just very generally speaking if you have those numbers? And if you don't have those numbers, maybe you can just recollect here in a second and I will ask one closing question which is, could you put in context 2004 relative to previous years be it 1994 or 1998. I asked one of your competitors recently if they would characterize 2004 and they characterized it as a solid economic environment. But I think most truckers have described it as the best year in trucking so I would like you to comment on that as well if you would, please?

In our annual report, the shares that we had repurchased through December had an average purchase price of $26.25. That was about to $12.6 million. And as it relates to the economic environment, I think we would agree that 2004 was a solid year; but at the same time, we would probably say 2000 was a little bit better year.

Thanks again. Appreciate the time. Good quarter.

At this time, there are no further questions.

Thank you for joining us this morning. We appreciate your interest in Arkansas Best Corp. This concludes the call.

Thank you for participating in today's Arkansas Best Corp. first quarter 2005 earnings conference call. This call will be available for replay beginning at 12:00 PM Eastern time today through 11:59 PM Eastern time on Friday May 13, 2005. The conference I.D. for the replay is 537-7908. Again, the conference I.D. number for the replay is by 537-7908. The number to dial for the replay is 1-800-642-1687. Again, that number is 1-800-642-1687.