ArcBest Corp (ARCB) 2005 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Arkansas Best Corporation Second Quarter 2005 Earnings Conference Call. [operator instructions] Mr. Humphrey, you may begin your conference. Please go ahead.

Thank you. Welcome to the Arkansas Best Corporation’s Second Quarter 2005 Earnings Conference Call. We will have a short discussion of second quarter results and then we’ll open up for a Q & A period.

Our presentation this morning will be done by Mr. Robert A. Young, III, Chairman and CEO of Arkansas Best Corporation, Mr. David E. Loeffler SVP, CFO, and Treasurer of Arkansas Best Corporation.

We thank you for joining us today. In order to help you better understand Arkansas Best Corporation and its results some forward-looking statements could be made during this call. As we all know forward-looking statements by their very nature are subject to uncertainties and risks. For a more complete discussions of factors that could affect the company’s future results please refer to the forward-looking statement 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 our overall corporate results from the second quarter, our revenues were $456.7 million, up about 7.6% from a year ago. Our operating income was a little under $39 million compared to $32 million for the same quarter a year ago. The total corporation’s operating ratio was 91.5 compared to 92.5 last year. Our net income was $23.4 million vs. $19.3 a year ago and our earnings per share on a diluted basis were $0.91 compared to $0.76 in the second quarter last year. Our revenue increases in the second quarter this year over the second quarter last year on a per-day basis, ABF’s revenue was up 6.8% and Clippers revenue was up 15.2%. For our cash flows for the six months ended June 30, 2005 I would like to refer you to our GAAP cash flow statement attached to our press release.

Now I’d like to highlight a few of the more significant items in our cash flow statement. Our net income before depreciation and amortization was a little over $63 million. We had net purchases of property and equipment of just under $31 million. Capitalization of software of $2.2 million. We had a decrease in bank flow of a little over $2 million. We purchased treasury shares in the first six months of this year of $5.5 million and we issued common stock, which is the exercise of stock options, of $2.3 million. We paid dividends on common stock of $6.1 million. We had an increase in cash and short-term investments of a little over $18 million. We basically had no debt at the end of the second quarter and we had cash and short-term investments of a little over $89 million.

For the twelve months ended June 30 we had an after-tax return on capital employed of 19%. We continue to project net capital expenditures for the year to be approximately $94 million. Our total depreciation for the second quarter was $14.8 million and we’re currently forecasting full year depreciation and amortization to be a little over $61 million.

In our press release we talked about a reduction in worker’s compensation costs. Excluding the $1.1 million charge we took last year, last year’s second quarter worker’s compensation costs were higher than normal and this year’s are a little lower than normal. I’d prefer not to get into specific numbers, however.

Our effective tax rate for the first six months of this year was 39.2% and that’s the effective tax rate that we’re projecting for the full year. Our effective tax rate is a little bit lower than it has been because we’ve had an increase in tax-exempt income on short-term investments and we have a little bit lower effective state income tax rate.

I would now like to turn it over to Robert.

Good Morning. I’m going to talk first about ABF Freight for the quarter. ABF’s revenues were $417.5 million compared to $391 million last year. That’s about a little under a 7% increase in revenues. The operating income went from $32.8 million in the second quarter last year to $38.1 million this year or about a $16% increase in operating income. The operating ratio for ABF in the second quarter was at 90.9 and that compares to 91.6 last year. Total pounds per workday were down 1.2%. The LTL pounds were down 3.4% and truckload pounds were up 7.8%. If you look at ABF with the 3.4% decline in LTL tonnage this year that compares to last year it was up 7.81%. But, if you compare 2005 with 2003 it’s about a 4%, a little over 4%, increase in tonnage from 2003 to 2005. In other words, we gave back a bit of the very strong gain that we had in the second quarter last year. Through the first 21 days of July the average daily tonnage is running about like it did in the second quarter.

Second quarter LTL billed revenue per hundredweight excluding the fuel surcharge is up 3.2% and the LTL billed revenue per hundredweight including the fuel surcharge is up 8.5%. The nice increase was including fuel surcharge and the billed revenue per hundredweight on LTL. The LTL average length of haul declined a bit from 1,274 miles last year to 1,256 miles average length of haul this year. That’s about a 1.4 % decline in average length of haul. That reflects, I think, probably the increasing second day business that we’re seeing at ABF. The weight per shipment was up slightly from 980 pounds to 988 pounds in terms of the LTL weight per shipment.

On the pricing side of things, we secured about a 4.1% increase on revenue from contracts and deferred pricing agreements that expired and were renewed during second quarter of 2005. That’s on about $47 million in annualized revenue, which is a strong price increase on those expiring contracts and a little bit above our average of the last several years. On balance I think pricing remains relatively strong. We see a few pockets of price aggression but all in all we think pricing is remaining sane.

On the technology side of things, a job of a city driver application has been pilot tested at one of our larger terminals using a Nextel I 355 phone. We’re going to be deploying this application through the balance of the year and into next year. This is an application that replaces an existing city driver application that gives the driver the ability to enter information while out of cell coverage and it also, and this is probably more significant, transmits the GPS coordinate information, which is going to give us some additional efficiencies from our technology. We are very pleased with that introduction and look forward to seeing that implemented for the next several months.

Rail usage for ABF was 15% of total miles compared to 18.2% in the second quarter last year. We just were able to put more freight on our own trucks with our own drivers, which give us better service, which is key in keeping our customers happy. Fuel costs for ABF was up 53.5% from second quarter last year, obviously a very significant factor. Most of that was price. There was some impact from lower miles per gallon for road tractors due to new EGR engines, which are less efficient that the ones they replaced.

Cargo cliams were a real bright area for us during the quarter. That’s just a measure of net cash payouts to revenue on cargo loss and claims. It was .79% of revenue last year in the second quarter and improved to .74% of revenue in the second quarter this year. Generally, I think most carriers are happy if they can get that below 1%. These are the lowest numbers I have seen recently. We’ve been putting in the lowest numbers I’ve seen in my career. We’re very happy with that. There’s nothing good that comes from freight claims, obviously.

Equipment sales resulted in a gain of almost $500,000 in the quarter. Again, this just shows that our residuals on this equipment are pretty accurate and also reflects a better used truck marked out there that we’re seeing this year.

Facts about our LTL, correction -- our total tonnage transit times. Lanes currently two days or less, there was no change in weight year over year and lanes currently three days or more we had a 2.2% decrease in weights. So, longer haul lanes is where we had some decline. We continue to grow faster in the shorter haul lanes and along those lines we’ve got something new going on there that will impact us over time. Our new premium service employee agreement with the Teamsters, that we agreed to in May, began implementation in June and as a result of this agreement ABF is going to be able to offer more second day service lanes and now provide overnight and even same day service in some selected lanes in the dense Northeast market. This agreement applies to 13 terminals in the Northeast and over time we’ll be expanding that across the nation as we gain experience with it. The really good news there is our employees are embracing that. They see the opportunity for additional work opportunities for them. It’s going to help us penetrate the faster growing and much larger overnight and second-day market.

One thing I look at in terms of utilization for ABF I have always watched is miles per tractor per day. We have more money invested in road tractors than anything else and those miles last year in the second quarter were 488 miles per day, and this year 508 miles per day per road tractor, that’s a good number, generally anything over 500 we are getting a good return on that equipment. We are very pleased to see that.

Moving on to Clipper. Clipper had a good quarter. Revenues were up about 15% from $25 million last year to $28.8 million this year. Operating income almost doubled from $700,000 to $1.3 million. The operating ratio improved from a 97.1 last year to a 95.4 this year. Increase in revenues in probability came from all three segments. If you recall, Clipper operates in the intermodal part of the business, which is essentially moving truckload freight on rail. Intermodal had revenue increases of 6.2%. Brokerage revenues there were up 30.1% and Clipper control logistics, which is the moving of refrigerated trailers on rail, revenues there were up 18.4% so all three segments of Clipper were positive on the revenue side, and of course that produced much better numbers for Clipper for the quarter.

That’s all I’ve got on the specifics on those two subsidiaries and with that I’ll open it up for questions. David?

Christy, I think we are ready for some questions.

[operator instructions] Your first question or comment comes from John Larkin of Legg Mason.

Good morning gentlemen. I just wanted to ask a question on the terminal sales to G.I. in the third quarter that was talked about in the press release. It looks like you are going to have a gain there of around $10 million in the third quarter. What will the cash impact of that be?

John the proceeds from the sale are $19.4 million and we are going to have a tax liability of about $5.6 million.

John Larkin. Okay. So, that will just add to your cash account, I guess, in the third quarter, given that you are debt-free.

That’s correct.

Given that the stock did have a couple of down drafts in the second quarter I guess I was a little surprised that your share per purchase wasn’t perhaps a touch more aggressive. Do you have any plans to perhaps upsize that program going forward?

John, that’s something we are continually evaluating. But, I do think we you look at our repurchasing you have to keep in mind that basically we have about a five or six week window where we can buy stock. We follow the same insider-trading window that the officers of the company have and that starts on the third day after we release earnings and it ends the last day of the second month of the quarter. So, we have a fairly short window that we use. But, that’s something that we are constantly evaluating and constantly discussing with the board and as we have continually said, we’ll be opportunistic.

I have one question on the fuel surcharge also. I guess LTL is a little less fuel intensive than truckload. How would you characterize your fuel surcharge presently? Is it more or less recapturing all of the increase in fuel price or are you still losing a little bit in a period, like the second quarter when fuel accelerated price so rapidly?

John, Robert Young. Fuel surcharge covers our increase in costs. Of course it is part of the total matrix of pricing. You’ve got discounts in there and then the base price and whatever we do with price increases and the fuel surcharge is just part of that matrix. It goes up and down weekly, as you know. It’s a way for us to cover the cost of fuel and yet as fuel goes down it’s not built in to the rate so I think it’s probably the right way to do it.

Just one last question on Clipper. Clipper did quite well in the quarter. Does their excellent performance give you any reason to perhaps invest more in that business or perhaps consider an acquisition that might be complementary to Clipper?

John, I’ve said for sometime Clipper is such a small part of our business, it’s less than 10% of our business, that we either need to grow it or get out of the business, and we constantly are looking at that. Obviously, good results give us more options than we would have otherwise. There’ll probably be some rollup in that business over the next few years. I think you are going to see some problems with equipment. The rails are getting out of the trailer business. Some of the smaller IMC’s are going to be struggling to come up with equipment so I think there’ll be some pressure to do a rollup in that business to get the size and so forth to demand the equipment from wherever it is going to come from, either owned or leased from a third party.

Thank you Robert.

Our next question comes from the line of Jack Waldo of Stephens, Inc.

Good morning gentlemen; nice quarter. I would like to dive into Clipper’s model a little bit more and kind of understand a little bit where you are getting that leverage. Has there been a change in the number of employees that you have. Is it more the spread on what you’re charging vs. what it costs to move freight?

Well, you’ll recall a little over a year ago we sold off the LTL portion of Clipper, which was a fourth segment that Clipper was in. The LTL segment required a huge percentage of the employees. The clerical functions were tied to bill count there. And, we were not particularly good at that. We got out of that business which allowed us then to concentrate on those three remaining segments. Now, last year we suffered in part because those LTL sales reps that went off the payroll and a large part of them went with the purchaser of the LTL segment. Also contributed to the other segments and we had to replace that sales presence but it is paying off this year with their concentration on the three segments that remained. I think simplifying the business and concentrating on those areas where excel is helping.

So there isn’t anything on an operational basis that would change kind of the performance we saw in the second quarter going forward? I’m just trying to get a better sense of how to model Clipper going forward.

Yeah. Well, I think you see the overhead at the right level now for the business that we’re in, whereas previously we had some hold over from the LTL portion and we were still having to process some business after we sold the LTL portion, so you’re seeing a right-sized overhead now for Clipper.

Well, right off the bat you remember the last time Clipper had these types of revenue growths or rates or margin improvement?

I think this is Clipper’s best performance since about 1997 or ’98. Yes, since 1997, as I recall.

Congratulations.

Thank you.

I wanted to shift real quick to ABF Freight. When you mentioned, just for clarification, when you mentioned the daily business trends for tonnage was down a little bit over 3% does that include TL freight as well as ATL freight?

No, truckload freight was up. Truckload pounds were up 7.8% for the quarter.

I’m sorry for the quarter to date in the third quarter.

Oh, I didn’t mention the truckload poundage for the third quarter. I was just talking the LTL tonnage. I’ve forgotten what those numbers are but it’s up.

Okay, so pure LTL. And then also could you remind us when you’ll have any type of increase in your salaries, wages and benefits under the National Master Freight Agreement?

There is an August increase in fringes. Then salaries are scheduled for next April.

Okay. Then, last question, there’s been a lot of talk about capacity and the possibility of excess capacity entering the marketplace. Are you seeing any of that or do you envision that scenario playing out at all in the ’05-06 time frame?

I’m seeing just the opposite. There have been two regional carriers shut down in the last six months or so and I haven’t seen any new entries.

You’re not worried about the existing players adding too much capacity?

I think what you’ll see most LTL carriers do is actually add the capacity as the business goes up. You’ve got that flexibility of most of the carriers and by capacity for rails or in some cases from truckload carriers so they don’t have to add the capacity until the business is on-line.

How does that differ from what you saw in the late ’90’s when we got into kind of an excess capacity situation?

Well, I’m not sure we had an excess capacity in the late 90’s but truthfully we just have a lot fewer players today. The ones that are around have got the experience of monitoring their growth and using outside capacity until they know for sure they need the additional tractors and trailers.

Thank you guys for your time.

Your next question or comment comes from the line of Jordan Alleger, Georgia Bank.

Yeah hi, good morning. Can you maybe discuss-- obviously the volumes on the LTL side were weak in the quarter? Is it pretty much tied, given the weight per shipment was up a little, is it safe to say that most of it is tied to just the comps or did it generally feel that the economy was growing at a slower rate and how does it feel at this point? Even though things haven’t picked up, are the customers feeling better about things, et cetera?

Well, the number that resulted in the second quarter was a combination of several things. We had a decline in LTL tonnage, as I mentioned earlier. Part of that is I can think of one large account that we priced out of because it was not profitable, in fact it was a loser. It’s the case that a lot of the growth that was available in the short-haul market due to the shut down of a couple of the carriers and due to the fact that’s a faster growing market than the long-haul market we don’t participate to a large extent in that market. We are in the second-day portion of it but the overnight market we’re just now getting in in the Northeast. So, that’s an area where there was probably significant growth that we just don’t participate in. We are just not players in the overnight market. It is a combination of a lot of different things. I am certainly not unhappy with the way we have managed our tonnage in terms of if you look at the earnings they were up 16% over last year with about a 7% increase in revenue. I think we played the game fairly well. We could have been larger and that’s not a real trick. We could have stayed in a couple of accounts that we priced out of but you have to manage the revenue growth and the tonnage growth and the profitability, and it’s a fairly complex dance. But, there are a lot of factors involved in that.

And just a second question, in terms of the premium service arrangement. I know it’s early but is there a way to get a sense for scope or targets that you’d look for in terms of, at least in these Northeastern states, how much business you might expect to obtain under this or how do you rollout progression of using this arrangement might look like?

Well, I don’t want to share our game plan there, the numbers on that. But, essentially you’re going to see us continue to expand that in the Northeast in those terminals where we have that approved. Then, as we get comfortable with that and see how it works and decide that a few tweaking changes here and there would help us, we’ll go ahead and roll this out in other geographic areas. We’re running into opportunities that we really did not anticipate and we’re allowing terminals up there to generate business rates and service that we had not anticipated. We’re sort of very pleased with what we are seeing so far in the Northeast. We’re finding a fairly big market for same day, which is not something we really anticipated. But, our people in the Northeast are seeing the opportunity and taking advantage of it so I’m fairly optimistic this will not be a big impact in the third quarter, but by this time next year I think we’ll see some significant impact from it.

Thank you very much.

Your next question comes from the line of Edward Wolfe with Bear, Stearns & Co.

Good Morning. Hey Robert, can you talk a little bit about tonnage throughout the quarter vs. expectations. If I recall in April you were pretty adamant that tonnage was going to be negative but I’m guessing you thought it wouldn’t be 3-4%. Is that a fair statement? Did the world slow did a little more than you thought or was that pretty much what was in your head at that point?

Well, again it is a very complex question. I mentioned before we walked away from some business during the quarter. I think I mentioned, I can think of one very large account that we priced out of. That’s part of the scenario and another part is the economy probably is not as robust in terms of growth as it was this time last year, although apparently there’s still a good growth in the short-haul markets. I don’t know where’s it’s headed. I know this; I know that we feel pretty good about business right now. I don’t think you are going to see us doing any significant amount of repricing on accounts. I think we are pretty happy with what we’ve got and our emphasis going forward is going to be on growing that tonnage.

The business you walked away from did you know about it when you made those comments in April and do you know where it went? Did it go to Yellow or Roadway?

No and no. I don’t know and no, I don’t know.

Okay, so you didn’t know about it in April when you gave the original guidance, is what you’re saying? Okay, so is the guidance the per tonnage in third quarter basically the same even though the comps are a little more difficult? Is it minus 3-4% for LTL tonnage?

Yeah, I mentioned earlier through the first twenty-one days we’re seeing about the same thing in the third quarter that we saw in the second.

Okay. In terms of the yields, did the impact of getting the GRI a little earlier in the quarter help in the quarter?

You bet.

And, does that grandfather with this quarter or does it compound because you stared to get it earlier? How should we think about that from a yield perspective?

I’m not sure what you mean exactly?

Well, in other words did it help in the quarter because you had it for five weeks where five weeks ago in the quarter in the comp you didn’t have it?

Yes.

Edward Wolfe. That obviously, but now in the second quarter you will have had it the whole quarter plus you had it the whole quarter last year only you got it earlier this year. Does it matter that you got it earlier? Does that help you or does that hurt you?

No difference for the third quarter.

For the third quarter, yeah.

Right. No difference for the third.

Okay. Just a small thing, if you add up in the model the eliminations, the other revenue and eliminations vs. the other expense and elimination that gap was narrower than normal? Is there a reason for that this quarter?

Ed, this is Dave. We are continually reevaluating our charges to the other companies to be sure they are carrying their fair share and, you know one of our goals is to have minimal uncovered costs as a holding company.

So, there’s nothing one-time?

No.

Is there anything here we should see going forward kind of stuff?

No, nothing at all.

Okay. And, the purchased transportation coming down 8% from 9 and change last year; in the press release you made comments about taking stuff off rail. Why would moving stuff yourself be cheaper than moving it by rail? I would think it would be the other way a little bit, at least in some situations.

Generally it would be but where we have taken it off is intended to be, in many cases, in the higher cost lanes. All lanes aren’t priced the same. And, also we were able to improve the service. But, we had a fair number of lanes where the cost was higher than by truck.

Okay, so that makes sense. Thank you.

Your next question comes from the line of Chad Brusso with Morgan Stanley.

Great, thanks. Most of my questions have been asked here but just one on the entrance into the overnight market here in the Northeast. Historically the Northeast has been one of the tougher places to make money so I’m just curious as to just why you guys chose to start there, if there’s any reason and I know that you wouldn’t want to give a time frame but what region would you look to expand into next?

I don’t recall all of the reasons,to be honest with you, why we started in the Northeast first. I think we have been in negotiations with Teamsters for some time and I think perhaps that one just moved faster than some of the others. I don’t recall exactly, to be honest with you. It’s not a bad place to start it because it is a very dense territory, which gives lots of opportunities for overnight and even same day, so it’s a good area to start. We’ll be moving it across the country. I don’t know yet exactly where we’re going next.

Just a follow up to that, too. It sounds like you’re pretty happy with where you are in the beginning stages of this, but we saw Yellow make a similar attempt and then within a couple of weeks of rolling out its overnight service it announced it was going to acquire U.S. Freightways. If some point over the next year here you’re not happy or you don’t think that you’re going to be able to get the type of margins on this business that you think that you can now, would you consider doing an acquisition to expand your foothold in that market or are you pretty focused on doing this internally?

We’re focused on doing it internally.

Okay. Thanks for the time.

Your next question comes from the line of Ken Holster with Merrill Lynch.

Hi, good morning. Could you just provide the rollout through the month of the quarter of how volume’s trended?

Ken, in total tonnage April was up a little over 3%. May was down 2.6%. June was down 3.8% and July month-to-date is down 3.4%.

Dave, can you remind us of the [view of handy] of the trends of third quarter a year ago? Wasn’t it well over 9-10%, right?

Total tonnage last year for the second quarter was up by 0.4% and for the month of July was up over 12%.

Similar as we look at third quarter August/September was also double digits, right?

I don’t have August and September right at my fingertips. I don’t know that it was double digits but it was close if it wasn’t.

Okay. So do you recall if July was the peak or –-

I don’t recall, Ken.

Supplies and expenses, just making them up here, on a percent of revenues was pretty flat the last two quarters at just over 14.5%. Are there other things that you can do as we look at fuel jumping up now to $58.00 on average or so for the third quarter? Are there things in that line other than fuel that you can try to cut costs out with our should we look to see that increase?

That line basically has fuel and repairs and maintenance. So, there’s some opportunities but not a lot because fuel is by far and away the biggest piece.

And then Robert, do you think this trend of falling business off the rails is this one to continue or is this just where you’re looking at each lane and saying hey there’s more profitable opportunities to pull those particular lanes off the rail or is this a trend that you are focused on continuing?

I think you’ll see us always have somewhere in the 9-14% level of total miles on rail. That is an area where we try to peak [shave]. We’ll run above that at times. Last year, for instance, when business popped all of a sudden we used a lot more rail miles. It’s a safety valve for us and it allows us to keep our equipment at a level so that we don’t have too much for most of the year and just enough during the peak, so you’ll always see us keep something in the range, I think of say 9-14% rail miles.

I just want to come back; you talked about the bankruptcies earlier, or closings of various carriers. And as you look at the yields going forward, obviously you were aided by the GRI increase. But, should we look, I guess you are basically saying, I think you said earlier that you are not seeing additional capacity come in so should we see your ability to continue to take yield remain solid or are you seeing tougher and tougher comps just with a little bit of volume slow down that you were highlighting?

Well, I think yields will continue to be good. The pricing environment, I think, is still good. Comparisons year over year on yields, I think will remain strong. But, that’s subject to a lot of things but right now that would be my guess as to where we’re headed for the rest of the year. What was the second part of your question?

I guess I’m just looking at the volley between adding capacity and continuing to take price. I guess at what point do you look to say we’re going to go ahead and increase some of that capacity? Does that put any pressure on you continuing to raise the yields at these levels?

Well, I don’t look for us to be adding a great deal of capacity any time soon. What we typically do is we add the capacity essentially after we get the business. Again, by using rental equipment and using rail we try to peak change so that don’t get into the business of buying equipment in anticipation of business. I think that most carriers do that to some extent, I mean it’s a somewhat a cyclical business and it obviously cycles during the year and you have to take that into account with capacity and that’s what we try to do.

I’m going to rephrase that a little bit differently, too. If we were to try to normalize the very strong growth last year in tonnage, how would this year have looked? Since these closings occurred would you have -- were you active in taking some of that volume, I know you said you probably got some business, but would you have been a victory in winning some of that business that spilled out in the market place?

Well, the two sizeable carriers that have shut down were in the short-haul market and we’re not a big player in that market. We are not a player at all in the overnight market, other than we’re just starting to in the Northeast, so we really didn’t benefit from those shut downs.

So, has the ramp above that overnight – is that just starting –-

It’s just starting.

You’ve been talking about that for a couple of quarters.

It just started in June.

Okay. Thanks for your time.

Your next question comes from the line from Brandon Cook with J.P. Morgan.

Good morning. I had a question, obviously with the premium service agreement coming on and growing up that business and you mentioned the new technology with the Nextel IT that you’re rolling out. Are there any one time costs associated with that that we should expect in the third quarter?

No, the cost of the Nextel Equipment is not significant. As I recall, it’s about $100.00 a unit so we aren’t talking about a lot of money there.

In regards to training employees with this premium service agreement is that going to be a higher cost in the third quarter? Might there be some growing pains associated with that? If you could maybe, you know – I know that agreements basically are going to give you more flexibility with the employees but could you maybe give a little more clarity on exactly what you were able to get out of that in terms of with the service agreement?

Yeah, there’s no significant training involved with the premium service employee. What they do is that an employee can work in several different jobs on the same tour of duty. So, on any given shift that employee can be a road driver, dock man or city driver. And, it allows us to do things like go from terminal to terminal within an area with a city employee who then can load and unload that equipment while he’s in route. It also allows the employee to supplement the road board to some extent if we have a load pop up unexpectedly our drivers tend to be based at our hubs and so they can be eight or ten hours away plus then they have to take a rest when they get there so we can start that load towards the hub with a premium service employee and road driver can meet him and turn him and take it back to the hub and get it moving several hours sooner than we would have otherwise. So, it helps us in a lot of different ways but the key there to getting new business is the ability of that driver to run milk runs or [meat] turns or sort of things you need to do in the short-haul market in order to provide service. It means the driver can go out to a local shipper pick up a load of freight or maybe go to two or three local shippers and pick up two or three shipments and then go directly to another terminal that’s only a hundred miles away or two hundred miles away and do all of that in the same tour of duty, performing all of those duties. It gives us quite a bit of flexibility and provides us an opportunity to get into a great big market. The short-haul market is twice as big as the long-haul market that we have traditionally competed in. And, it’s growing faster so we are excited about it.

Brandon Cook. Okay, sounds good. I guess you mentioned that you didn’t see much benefit or impact from the shorter haul LTL bankruptcies that you mentioned. Is it correct that you didn’t see much of an impact in your business in terms of some of the other acquisitions that have gone in the market place specifically with Yellow shutting down the Dugan operations?

Well, Dugan is one of the things that I was talking about. That’s one of the sizeable carriers that shut down during the quarter. It wasn’t a bankruptcy. They shut it down and covered it with their other carriers.

Okay, thanks for clarifying.

Your next question comes from the line of John Barnes with BB&T Capital Markets.

Hey, good morning guys. Can you give us an idea on how many premium service workers you are starting out with?

That changes so frequently I don’t know. I mean, we’re adding premium service employees as we go, as we see opportunity.

All right, is it the same compensation structure as what Yellow negotiated, or was there any difference? Did you negotiate a different pay rate for your premium service employees or is it the same thing as under the contract?

No, it’s covered by the contract.

When you talked about having to negotiate with the Teamsters in putting these employees in place, is this a process where you have to explain exactly what these employees will be doing, you know talking about the work rules and that type of things or is it just coming up with the number of people that are going to be employees? I guess what I’m trying to get at is, you know, why is this only encompassing thirteen terminals to start? Why didn’t, when you negotiated it, why didn’t you say okay we want to roll out this offering nationwide and this is what we’re going to need to do nationwide?

I think in the future you’ll see this go faster. But, this is sort of the first inning of a nine inning game and the Teamsters and we both want to make sure we do it right so we are very careful about implementing the first one and we want to work the kinks out of it and make sure that it works for us and works for our employees and then we’ll go ahead and expand it from there but it’s a matter of describing what you’re going to do and how you’re going to do it and get an agreement with the Teamsters and the idea behind it is covered in the National Master Freight Agreement but the details have to be covered by a change of operation.

Okay.

John, this is consistent of how we normally roll out new services or new technology, where we’ll go in to one area and implement it there first and, as Robert said, kind of work the bugs out and make sure it is operating like we want it to operate before we roll it out further. So, that’s how we do most type of new efforts.

Yeah, I guess where I was trying to get out was yeah, the go slow mentality is I think appropriate, but do you have to go back to the Teamsters every time? I mean, once you get done with these thirteen terminals, are you going to have to go back to the Teamsters a second time to do thirteen western terminals or is this all-encompassing and now gives you the go ahead to run these routes regardless of what terminals you want to pick?

Every time we put a new group of terminals in we’ll have to go back and do it again but we will start off ahead of the game by understanding from both sides what works.

Okay, very good. Robert, when it comes to the accounts that you say you priced yourself out of, was there something that changed with those accounts during the period that you operated them that all of a sudden they became unprofitable, that something changed with that business that made it unprofitable? Because, I can’t imagine you would have gotten into the business however long ago knowing that it was unprofitable, so what changed to force to your hand on those pieces of business?

Well, when you take on a new account very often you don’t really don’t know for sure how it is going to operate. It takes some experience to figure that out. And, it’s now just in terms of prices, it’s in terms of claims and in terms of other impacts that that business has on you and you evaluate over a period of time and if it’s not working then you price yourself out of the business or somehow agree with the customer that it’s not working for us.

John Barnes. Okay, so there wasn’t anything that changed with the business, a change in–

Just an account that didn’t work out like we thought it was going to.

John Barnes. Okay, very good. Guys, thanks for your time.

Once again, if you have a question or comment please press *1. Our next question comes from the line of Tom Albrecht with Stephens, Inc.

I’ll just ask the question I think everybody has trouble asking. I don’t think anybody questions your ability to execute. You guys are the best long-haul operators out there but you know, once your tonnage turns negative I think in the back of everybody’s mind there’s always the fear that when will pricing follow and you guys have always been very disciplined in that front, but in a GDP environment where GDP is still growing at about 3% and you guys have now turned negative, that’s what everybody sort of worries about that pricing then could become an issue two-three quarters down the road. How do you look at that in the context of things?

Well, I’m not concerned about it. We’ve been through cycles at ABF over the years. We tend to be a little conservative but for good reason. The results we produced in the quarter were, I think by anybody’s measure, darned good results; a 90.9-operating ratio. I could have had more revenue pretty easily. That’s not hard to do. We try to balance our returns with revenue growth. I think you’ll see that in the long-haul market we’re doing fine. We’re not losing any market share there. In the short-haul market we’re still not participating enough, although it’s growing for us. The two-day is the market that we’ve been in for a few years now and it amounts to about 25% of our revenue and maybe a third of our tonnage. We continue to improve our offerings there and continue to move in that market. We’re just now on the very infant stages of getting into the overnight market. Those are the big markets; the second-day and the overnight markets are the fastest growing and by far the largest piece of the market and that’s the opportunity for us. You can look at it as a problem or you can look at it as an opportunity and we think it’s an opportunity. We’re going to continue to attack that market. We think we have the skill set to do it and we think we have the cooperation from the Teamsters to allow us to do it now in a very meaningful way and that’s going to mean more jobs for more ABF employees and more opportunities for ABF employees. We’re pretty excited about that. It’s a little bit on the [come] because we’re not there yet. We have made progress in the two-day market and I think you’ll see some opportunities open up for us now in the overnight market, which is a huge market.

Right, so excluding the overnight market for a moment, which will be very interesting to watch your guys move into that. But, I think so long as you perceive that there is a good opportunity to improve yields and your overall mix then we shouldn’t be concerned by 2-3% tonnage declined is, in essence, what you’re saying? And, that if you see the yield opportunities begin to go away, then at that point you may focus on jumpstarting tonnage a little bit more? Would that be a fair answer?

Yeah, that’s always the balance we have to look at. I have seen our tonnage in years past not be what we would want it to be for a short period of time but I don’t think it’s a good idea to start tonnage. I think that obviously it’s got to be an upward trend over the long pull. But, in the short-term segment like that it doesn’t bother me at all. I’m not worried about it.

Okay, I appreciate you thoughts. Thanks.

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

Thank you for joining us this morning. We appreciate your interest in Arkansas Best Corporation. That concludes our call.

Thank you, you may now disconnect.