ArcBest Corp (ARCB) 2006 Q3 法說會逐字稿

Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Arkansas Best Corporation third-quarter 2006 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 session. (OPERATOR INSTRUCTIONS). Thank you. Mr. Humphrey, you may begin your conference.

We welcome you to the Arkansas Best Corporation third-quarter 2006 earnings conference call. We'll have a short discussion of the third-quarter results, then we'll open up for a question-and-answer period.

Our presentation this morning will be done by Mr. Robert A. Davidson, President and Chief Executive Officer of Arkansas Best Corporation, and Ms. Judy R. McReynolds, Senior Vice President, Chief Financial Officer, 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 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 Ms. McReynolds.

Good morning. I'm pleased to report the Arkansas Best Corporation results for the third quarter. Our third-quarter 2006 revenues were 507 million, up about 11% per day from last year's third-quarter revenues from continuing operations of 463 million. Comparisons of our operating income and earnings figures were impacted by a settlement accounting charge of $0.02 per share in this year's third quarter. Last year's third-quarter operating income and earnings figures were improved by a $0.38 per share gain on the sale of properties to a former subsidiary, G.I. Trucking Company.

Excluding the impact of these adjustments, this year's third-quarter operating income from continuing operations was 50.8 million compared to operating income from continuing operations of 49.5 million in last year's third quarter. Our diluted earnings per share from continuing operations for the quarter were $1.26 a share compared to $1.20 a share from continuing operations for the third quarter last year.

We closed the third quarter with a strong financial position, and our after-tax return on capital employed for the 12 months ended September 30th was 16.9%.

I will highlight for you some of the more significant items from our year-to-date cash flow statement. For our full cash flow statements for both 2006 and 2005, please refer to the GAAP cash-flow attached our earnings press release.

Our operating cash flows were $118 million; net purchases of property and equipment, about $99 million; proceeds in the sale of Clipper, $21.5 million; and we purchased treasury stock for nearly $17 million. We pay dividends on common stock of $11.5 million.

Our balance of cash and short-term investments was nearly $146 million at the end of September. Our cash balances increased about $19 million since the end of 2005.

For a capital expenditures update, as we said last quarter, we continue to expect our 2006 net capital expenditures to be within the originally provided range of $125 million to $145 million, but we expect to be closer to the high end of this range due to about $20 million of CapEx or equipment associated with our regional RPM initiative in the East. The actual capital dollars we spend will depend on the timing of delivery of some of our equipment. I'll provide you our projected 2007 capital expenditures in January with our fourth-quarter earnings press release.

Our year-end balance sheet will be impacted by the adoption of a new pension and postretirement accounting standard. In an effort to provide more transparency, the funded status of these plans is required to be reported on the balance sheet. In doing so, previously unrecognized actuarial losses and prior service costs will be recognized as a component of stockholders' equity.

Based on currently available information, our debit to equity as a result of the adoption of these rules will be about $40 million. The majority of this stockholders' equity adjustment relates to our nonunion pension plan. The new accounting rules require liabilities to be measured and recorded on a projected obligation basis. When our plan's liabilities are measured on accumulated benefit obligation basis, this plan is overfunded. As a reminder, our nonunion pension plan was closed to new entrants at the end of last year, and new employees are covered under a defined contribution plan.

And now, I'll turn it over to Bob.

Thank you, Judy. ABF's third-quarter operating ratio before the settlement accounting charge was 89.8; that's compared to an 88.5 in the third quarter of last year. Although we didn't match the superior results that we posted a year ago, it was still the fifth best operating ratio of any quarter in the last 25 years.

During the quarter, ABF had some solid tonnage growth in its base business, and when we combine that with meaningful yield increases, the result was a very profitable quarter. We're pleased with the results, especially considering the investments that we made in rolling out our regional markets and in improving service reliability all across our network.

In the quarter, ABF's revenue was 494 million. That's a per day increase of 11% in total and 6.5% before the fuel surcharge. Total weight per day was up 2.5%. It was up about 4% in July and August and about flat in September. During the third quarter, in order to maintain reliable service for our core LTL customers, we significantly reduced the amount of spot volume business in our system by raising spot prices.

As you look at changes in our business level excluding the spot market volume shipments, our daily tonnage increased about 6% -- a little less than 6% during the third quarter. That range from 4% to 7% increases in each month.

Since the end of the third quarter, the percentage change in ABF's total tonnage per day is running in the mid to high single digits below the same period last year. We've experienced the slowdown in LTL business that's apparently related to retail customers that have delayed the timing of their normal holiday order.

In addition, we continue to see significant declines in spot volume tonnage. Excluding the impact of spot volume tonnage, the percentage change in early October tonnage is down in the low to mid single digits compared to the same period last year. The current drop in spot volume business isn't due to higher prices. It seems to be related to softness in the overall truck load market, perhaps coupled with additional equipment purchased this year by truckload carriers in advance of the 2007 emission requirements.

Total billed revenue per hundredweight in the third quarter was up 6.1% with fuel surcharge and 3.1% without fuel surcharge. During the quarter, ABF secured average price increases of 3.9% from customers under the contracts and deferred pricing agreement. This was the highest quarterly increase for these price-sensitive customers so far this year.

Since mid-August, national diesel fuel prices have steadily decreased. And as a result, ABF's fuel surcharge has declined about 5.5 revenue percentage points. The current level of the fuel surcharge is the lowest since the first of March. ABF customers have been supportive of the fuel surcharge mechanism, and they currently are receiving significant price relief during this period of declining fuel prices. Lower fuel prices are good for the economy, and are certainly good for our customers.

Productivity, as measured by total weight per labor hour, decreased 4.3% during the third quarter. This was partially due to the decrease in the number of larger shipments moving through ABF's network, but more significantly, we've added personnel throughout the Company in order to maintain reliable service, to move some freight off the rails, and to flush out our new regional capability.

So far in 2006, we've added over 2000 new employees resulting in a net increase of over 750 in ABF's total employee count. As you know, we're accustomed to a seasoned workforce, and our productivity levels have initially suffered due to these inexperienced employees. As these new employees gain familiarity with their job duties -- and that usually doesn't take very long -- productivity levels will increase.

In the meantime, the drop in productivity cost us something less than an operating ratio point during the third quarter. And that level may continue into the fourth quarter as we continue to expand the RPM regional initiative, offering new next day and second-day service.

On August 1st, ABF began marketing its RPM network in 67 facilities on the East Coast. Beginning in October, ABF extended RPM to included most of the remaining facilities in the eastern two-thirds of the United States. By November, ABF will be offering RPM service in 220 facilities in 37 U.S. states. We don't expect these RPM shipments to have a meaningful impact on system revenue until sometime in 2007.

ABF is adding employees and equipment as part of its commitment to the regional business. As Judy mentioned earlier, approximately $20 million will be included in our 2006 net capital expenditures for this market. Fortunately, our superior financial condition allows us to make the necessary RPM investments when they meet our return targets and to be patient as business develops.

Our employees are genuinely excited about this growth opportunity and the resulting ability to offer a complete competitive service package in the long haul and the regional [lanes]. We've built ABF on a foundation of providing superior service in the long haul LTL marketplace, and we'll continue to do that in all lanes. ABF is firmly committed to this new regional market, and we expect it to provide significant future long-term growth opportunities.

Finally, I'd like to recognize an important achievement within the ABF family. Tony Spero, and ABF city driver in Stratford, Connecticut, was recently named as a national champion in the flatbed class during the 69th National Track Driving Championships in New Orleans. Tony qualified for the nationals by winning the Connecticut State Championship. Tony is one of 38 ABF employees to be recognized for superior accomplishments in the recent driving competitions all across the United States. There's plenty of evidence that ABF has the safest, most professional group of employees in the industry, and Tony's achievement is another example.

With that, I'll turn it to David to start the Q&A.

Amy, I think we're ready for some questions.

(OPERATOR INSTRUCTIONS). Justin Yagerman.

Looking at your report, I guess the first thing that jumps out is you saw a significant deceleration in your tonnage growth and an acceleration in your yields. And it was actually quite impressive. Was this deliberate? And if so, how long ago did you put these initiatives into effect, and what should we kind of expect from that balance going forward?

Well, you did see a deceleration of tonnage, particularly if you look at September and early October. But I don't believe there was any acceleration in yield. We had pretty steady yields across the year. When I look, for instance, at the increase on contracts and deferreds for the first, second, and third quarters, the numbers are pretty similar.

We did pretty good in yield. But it certainly wasn't related to the tonnage softness. I think the tonnage softness is systemic in the marketplace.

On the yield side, can you just remind us -- I guess they were up 3.1% net of fuel surcharge this quarter. What was it last quarter?

I think it's probably in the neighborhood of about -- between 2 and 3%. We had some profile affects last quarter, Justin (multiple speakers) that you have to remember that really impacted, because we had a higher weight per shipment and a shortening length of haul. So I think if you looked at it, it would probably be about 2%.

So this is a little bit better than that, but also easier to see, because the profile effects actually were less of an impact on the raw numbers.

That's a good point, Judy. I think when you look at the softness in our spot volume market, that certainly explains some of the increase in the yield that we had this year -- this quarter.

So what did weight per shipment to relative to a quarter ago if we're looking at the profile of the freight, and how is it year-over-year?

It's down 0.2 points year-over-year. And let's see --

Probably --

Yes, it's down a little bit from the second quarter as well. (multiple speakers) Again, that's statistical -- it's down 0.2 points year-over-year, down a little bit -- maybe a little bit more than that from the second quarter. And that, again, is consistent with a drop in spot volume.

Is that -- you guys were talking about it. But you're seeing that more on the heavier weight shipments in terms of the spot market activity -- you think that's more truckload freight maybe moving back to the truckload carriers?

I think that may be true.

Okay. On the workforce buildup that you guys saw on the quarter, how much of that if you broke it down was seasonal -- you know, building for peak season? And then how much is RPM?

I think about a third of the net increase was RPM. And the rest was partly to maintain service. And remember, we took some freight off the rails, so part of it is related to that.

Okay. How -- if you compared this year to last year in terms of your personnel planning for fourth quarter, how does that compare? Are you ramping up with workforce in the same manner, or have you -- accelerated that or decelerated it?

Well, we hired more people this year than last year. And I think that would be true even if you took out RPM. We're not trying to hire for the peak -- for the very peak season. In other words, during the heaviest week of the year, you're always going to be stretched on resources. And you're going to have neither a workforce nor equipment to handle that peak. But we, as we were entering the RPM market, wanted to be sure that we were providing superior service all across our system, and we staffed accordingly.

Okay. And I guess just one last question. You guys gave a little bit of insight in your press release into potential OR deterioration in the fourth quarter. That's something you don't usually foreshadow. Is there something else besides RPM that's impacting that or coloring that view? Is it the economy, as well? If things continue at the tonnage -- the pace that they are right now, could it get worse than that? Or is that already incorporated at all into that guidance?

First of all, that's not guidance. And we talked about that number, that was specifically the impact of RPM. It's not meant to indicate what we think overall OR is going to do during the fourth quarter. And therefore, it doesn't really constitute guidance. What we're trying to do is give a little color on the impact of the regional initiative.

Okay. So that doesn't include the economy at all?

No, it does not.

Ed Wolfe.

Just to follow up on Justin, two point clarification from -- if not guidance, some trends you pointed out. First -- so another way of looking at what you say with the up to the 100 basis points from the RPM is -- it's 4 or $5 million pretax kind of cost impact. Is that a (multiple speakers) way to think about it?

Yes.

Okay. When you talked about in your numbers -- I just want to clarify this again -- mid to high single digit down tonnage declines; you're just talking about October. That's not your view of the full-quarter fourth quarter?

That's true.

Are comparisons easier in November and December than October?

Actually, they are tougher, Ed. They're a little (multiple speakers) tougher.

Can you give us your view of when the impact on the truckload side from the hurricane relief and all that subsided, if it did throughout the fourth quarter?

We looked, and we didn't really have much impact in October from the hurricane. We saw, obviously, a drop in business last year in New Orleans. We saw an increase in business in Shreveport. And so all of those really kind of offset each other. I think we reported last year that we saw a little bit of an impact in the third quarter, and not much going forward.

Yes. And Judy, do have the comps for the tonnage from October, November, December a year ago?

I do. What you saw was in October, about flat, moving to about high 2% up by the end of the year, and the overall quarter was up about 1%.

That's helpful. Thank you. When you look at the tonnage down truckload versus LTL, is there any way to break that down, Bob?

Well, I've provided all the color I think we'll provide on that. What we tried to do is separated the spot volume business from the rest of the business. And as we have said, looking so far in October, the overall business is [off] mid to high single digits. And if you strip out the spot volume, you're looking at low to mid single digit.

Yes. You mentioned in your report that there is a sense that retail is a bit weaker, and then maybe that's some inventory delay. What period of time -- when do you say, you know what, it's too late; it's just not happening this year, because they've missed the deadline to get it to the stores by Christmas? When is that day, give or take?

I don't know, Ed. Thanksgiving is a week earlier this year, which makes this trend fairly surprising. But I went through and I looked, examined our top 30 accounts. The ones that were off, I know we haven't lost the business. We found out they're just not shipping. We had our field salespeople survey basically the top three accounts in every terminal. And it's interesting most of those accounts still have a positive prognosis, not only for the quarter, but for '07.

So there's something unusual taking place there, and I don't pretend to understand it.

On the industrial sites are you -- from your manufacturing customers, are you sensing a modest slowdown or any slowdown?

I'm not sure I have enough differentiation to comment on that. But what we've done are anecdotal and not weighted.

How about in terms of regions of the country? Are you seeing some regions stronger or weaker than others?

I think it's probably weaker in the east.

Okay. The employee base that's up 725 net, what's the base -- the total number?

It's up 750 net. I think there's about 13,000 employees.

And just two other small questions. The other income has a 831,000 positive. What's in there?

Talking about other operating income, Ed?

Yes. Under operating income not related to interest income, there's an 831,000 benefit. Last year, it was 759.

Well, it's probably our cash surrender value of life insurance increases for the most part.

That seems very kind of seasonal, almost. Is it --

It's somewhat market-driven, Ed, because those contracts are invested much like you would invest a pension plan and so we have some positive performance in the market and so that's what you're seeing there.

Okay. And then the last little nitty question is on -- gains on sales were very strong in the quarter. What should we think about for next quarter gains on sales and what you're seeing in the marketplace and what you're selling?

Well, we've had just some positive -- I guess proceeds or ability to sell at favorable prices on our equipment, which really -- I don't see that changing. We also had some minor real estate gains in the quarter, which probably won't continue, but it's insignificant. So we're having some positive experience there from a good marketplace on used equipment.

So of the $1.4 million you reported, the real estate is less than half of that?

Yes.

Okay. Will you give us a number on that?

Well, it's maybe about -- a little less than half of it.

Brannon Cook.

Yes, just had a question. I guess I was a bit surprised in the deceleration in October tonnage trends that you guys talked about. If those trends stay kind of where they are trending looking through the quarter, at what point do you decide to get a little more aggressive on price to try to improve the tonnage growth a bit?

We don't. We look at every account individually and decide -- is this account going to be good for the system or not. As I said before, there's not a pricing lever that says we're going to have to cut prices to get volume. In truth, when you go do that, a competitor will react. They will match you, and you won't get the account until it's down to the point where it's not good for either one of you. So we're going to continue to evaluate individual accounts, and make decisions on a one-up basis.

On the other side of the lever, there's things that you can do in terms of operating costs to deal with declining tonnage. We still have a little too much rail, so we've got the opportunity to pull that off. I think our local cartage expense is still to high, and we can do that with ABF people. Our overtime levels have been running fairly high. We've got rented equipment in the system that we can turn back. And then we also have the opportunity to reduce our labor and to increase the amount of trade-in units.

So there's a lot we can do to offset weakness. At the end of the day, an awful lot of our expenses in the business are truly variable.

Okay. You talked about the rail usage being down year-over-year. Could you quantify how much rail you use in third quarter versus a year ago?

Sure. We were 17 even in the third quarter this year and 17.8 last year. And that was trending down during the quarter.

Okay. And do you think that will continue to trend down looking forward?

Yes, I do.

Okay. And then you also -- you said you took some actions to improve service levels in part with the new hirings and etc. Had service levels fallen off a bit in third quarter from where they'd been earlier?

Historically speaking, they were still in pretty good shape, but moving into the regional business, we wanted to make sure we had our best foot forward. So we took some significant steps. Part of that, reducing rail, helps a lot. And we're also running some empties for service that we didn't run before. So it's something that entering a new marketplace, we wanted to make sure that we were throwing in a good footing.

Jordan Alliger.

Just a couple clarifications just to make sure I understand. In terms of the reduction in spot volume, again, that was not something that you guys were doing. That was something that just the overall market was weak --?

In the third quarter, it was something we redoing. We raised prices significantly on purpose to take that freight out of our system so that we could provide more consistent service to our LTL customers. In October, it's market specific.

Okay. So the intent is simply so that you can make sure you have the right service that you need I guess as you go into this RPM business. Is it tied into that as well?

Well, just generally overall. It took us a while to hire the new employees. And while we were doing and taking freight off the rails, something's got to give. So the cheap volume is what gave.

Okay. And then I know you said it was difficult to understand why. But would you care to venture some sort of theory, I guess, as to why after two or so years of shippers starting the peak season in July and August all of a sudden we're down to like three weeks before the holiday season starts?

I wish I had some insight for you, but I don't.

Okay. And then just the final question is -- is your regional model -- is that geared towards larger cities within your network, or is it going to be more expansive than that?

We're going to try to paint the map in areas that we enter.

What was that? Sorry. I didn't catch that.

We're going to paint the map in areas that we enter. It will -- it's not a metro-to-metro service. It's a broad-based service.

John Barnes.

Just in looking out to 2007 with the rollout of RPM, I have two questions. Number one, will you at some point be able to offer this service out of all 288 terminals you pointed to? And what's the hold up on the last 60 or something?

The last 60 are in the west. Basically, you think of Denver west. We do plan to extend the concept into all of the facilities, probably targeting first quarter of next year for the completion of the network.

You've probably got to remember that the west is a little different than the eastern two-thirds of United States in terms of geography -- just the distance between markets. So we'll be using some different techniques and different tools in the west than in the east. There's no specific reason for the delay, except to say that we're doing this in phases, and you don't want to do everything at once.

Okay. And then as you do the west, then, I'm assuming were going to see some headcount increased for that as well. So this kind of OR deterioration that you go some color to on the fourth quarter, we could see extend -- I mean, this is to be expected anytime you go through something major. I'm not nitpicking here. I just want to make sure I understand. The trendline is probably going to be a little weaker OR performance over the next couple of quarters until you get this rolled out, and then you start to see the benefits of rolling out this regional products.

Generally, I'd agree with that, John. But keep in mind that the west -- area in the west is smaller in scale than the South and Midwest that we're biting off this quarter. So the big bump in the pipeline we're already seeing this quarter.

Okay. All right. And then, you said in your prepared comments that you felt like the RPM would be become a meaningful contributor in 2007. Can you -- when you say meaningful contributor, are you talking about topline and margin contribution, or are you just talking about from the revenue perspective? And then can you give us some clarity as to when? Is that a last quarter of '07, or throughout '07?

John, we never talk about markets. And we never talk about what were going to do. Sometimes we don't even talk about things after we've done them.

But were talking about RPM because it's big enough to impact CapEx. And it's something that we're obviously in the middle of. So we thought it was important for us to bring it up and to bring out what we think -- at least in qualitative terms, what the impact would be. We clearly think it's going to be significant. But I'm not prepared to assign numbers to that or even specific timing, although we think it will begin to make an impact during 2007. It will have an impact not only on our topline, but also on an operating income level (indiscernible).

Okay. All right. And then I guess lastly -- well, maybe I'll just follow up with you. All right. That's all I have got for now. I appreciate your time. Thanks.

Ken Hoexter.

Can you talk about what is your mix between retail and manufacturing?

We've been asked that question several times, and we have tried to develop it. And it's hard to quantify, because a lot of manufacturing ships to retail, and it just depends upon the terms of sale. So I think it would be safe to say that our penetration in retail, whatever that means, is less than a lot of other carriers. That, however, may change as we begin to handle more regional business.

I just want to dig into the retail a bit, because it sounded like they had a fairly solid September at many of the retailers. So is this kind of a new slippage in that, or is it a shift that the truckload guys are -- companies are coming in and taking some of the share? It sounded like your major customers haven't seen a shift of the volumes, at least sequentially, from what they were moving. So I just want to understand if there's a share shift going on, or if the customers really are seeing a pullback?

I pretty much already told you everything I know. Certainly, larger shipments were off, and we saw what we think were delays in some retail accounts. When we contacted those accounts, we were told it hadn't moved yet. I realize that's anecdotal, and that's pretty much all we know.

Okay. Can you break out the growth between your RPM and your long haul?

We won't be market specific, Ken.

Okay. But should we guess at this phase that you're still getting much larger growth rates at the RPM division -- positive growth rates?

I will tell you that our business under 800 miles is growing faster than our business over 800 miles. And we certainly expect that to continue.

All right. As you move into the regional business, just a question of -- now we've got brand-name companies with you UPS and FedEx in the market, as well as the traditional carriers, and now, companies like yourselves and Yellow getting more aggressive in there. What has been the customer reaction to your expansion of services into those markets?

It's been initially positive. We're aware that all of that freight currently has a home, and we're going to have to prove ourselves. So there's not been a line of customers saying, wow, we're glad you're finally in this market, but we've been warmly received.

We've got a good value for the proposition in the long-haul market. We expect to extend that into the regional business. And I think you see the investments we continue to make and the expansions that we've made after our pilots as an indication that this is going to be good for us.

But you have also been very focused solidly focused on getting price, as you highlighted before. Is this something where the customers are asking you to prove yourself in the market with an entry price?

We're not focused on price. And we're not focused on transit times for that matter. We expect to give competitive prices, competitive transit times. But we expect to gain business on the basis of the value-added proposition that served us well on the long-haul market.

David Ross.

First question, can you remind us what percentage of your business is spot versus the contractual side?

We won't talk about a specific market.

Okay. And then about your decline in rail usage, is there a specific reason you're shifting away from the rail that's rail related, in terms of -- are they being too aggressive on price; is their service deteriorating?

The price really wasn't the issue, although we've had some change in the price because we've been shifting to our own equipment instead of rail equipment. The big deal is the transit time reliability. We've been able to have an improvement in our transit time reliability that we trace directly to having less freight on the rail.

And then out of the new employees you added, can you give a little color on where the majority of the drivers -- linehaul, P&D, dock workers -- where do they fall out?

I think there was a net 250 increase in drivers. So the other 500 would be somewhere else.

And then as far as the Regional Performance Model is concerned, I know it's still in the early stages. But do you expect that to be along the same lines of profitability as the regular business, or should we see expanded margins after it's rolled out nationally, or maybe a little bit of margin contraction?

We expect the margins to be comparable to that in the long haul business.

Okay, and then, service level targets are the same?

Yes, or perhaps even better in the next-day -- for instance, I expect us to be near 100% in the next-day market, simply because you're running by schedules.

And the last question I have is just a clarification. I think you may have talked about it before it even. But the retailers or some of your customers are saying that they're not shipping yet, and that's why you're not getting the freight. But they are still saying to expect it?

Yes, but again, I wouldn't draw too fine a point on that, David. That's anecdotal. We don't have a lot of retail business. We call those customers -- when we looked a large customers who appear to be off, we called them and said, what's going on? They said, we haven't lost the business. It just hasn't moved yet.

But again, I'd just take that as one data point. I wouldn't draw too fine a point on it because it's not based on very much experience in our Company, and we may not be representative in the overall marketplace in that sector.

Art Hatfield.

Most of my questions have been answered. But Judy, if you could talk a little bit about the postretirement accounting that you're doing this year. I'm assuming that that's not in your multiemployer plans.

Right. It is related to non-union plans -- pension plans, supplemental pension plan and the postretirement medical plan.

And the amount that you take -- what is that related to? Is that related to the deficiency below PBO, or --?

It's really -- since both our regular pension plan and our supplemental plan are on an ABO basis, they are either funded or already recorded on our balance sheet. It's really the difference between the ABO and the PBO, which -- ABO is something that's like earned benefits to date, and PBO is projecting future salary increases, and therefore, the pension benefits that go with them.

So it's really -- these new rules are requiring you to record that additional liability on your balance sheet, and the way that you -- the offset or the other side of the liability entry is really through a debit to equity.

Okay. That's helpful. And then finally, given the fact that this is the first year that this has been implemented, is it fair to assume that the adjustments going forward should be smaller than what we see this year?

Yes. What you'll have is over time, the debit or the losses that you have to record in your equity will reduce, and you'll actually recognize that into your regular expense over time. So yes. The answer is it should be a relatively small effect in any given year going forward.

Keep in mind (multiple speakers) we've sunsetted the plans are represented there as well.

Tom Albrecht.

I just wanted to clarify on this whole spot dilemma, as I sort of reflect on my notes from a year ago, I know you were as an organization fairly excited about some of the spillover freight that may have been traditionally hauled by truckload carriers, and even discussed that you thought some of that was here to stay. But now, it seems like you might be slightly downplaying that. Are you less enthusiastic about that freight? Was it really not here to stay? It just -- something's not quite jibing with the way I remember last year's third- and fourth-quarter conference calls.

Yes, Tom, the freight that has come over from the truckload sector and into LTL is -- much of it's not in the spot market. What used to move by stopoffs, a lot of that is in our core LTL.

There's another group that is on the spot market where you bid on it, and either you get it today or you don't. And that's where we see the weakness. If you look at our weight per shipment, you've seen it's steadily risen since 2004. And I think that suggests an awful lot of that business that came over has stayed -- the part that's now viewed as LTL, but certainly, on the margin with the spot market, we've seen a weakness that continues into October.

So I'm just suggesting that you cannot equate freight that moves from truckload into our sector solely with the spot market. That's part of it, but maybe not even most of it.

Okay. So some of it you still do like, and some of it was of a more permanent nature. Ultimately, I can still be comfortable with that conclusion, it sounds like. And the other part was just spot. Spot is spot.

Yes. Spot is spot, and you bid on it at a point where you think it's good for you, and either you get it or you don't.

Okay. And I wanted to go through a little bit more on the monthly tonnage. One of you had described that you experienced excluding the spot impact, 4 to 6% tonnage in the third quarter. But I didn't hear your usual description of kind of July, August, September. Just sort of forget about the spot for a moment -- what were those monthly numbers that you've always been so good to share?

Well, we gave the trend overall. And then we said taking out the spot, it ranged between 4 to 7. There's not a lot of difference among those numbers.

So I must have missed then July, August, September -- what were those exact numbers then that you gave?

We didn't share that detail. We did say overall it was up about four in July and August, flat in September. (multiple speakers) That's all in including everything.

Sure. All right. And then, has your length of haul continued to shrink a little bit, or did that stall out?

I think it declined in the third quarter.

Okay.

(multiple speakers) slight decline.

Okay. And then, I know you commented as a statement that you continue to have your best growth in under 800 miles, but sometimes you will give the percentage of either your shipments, tonnage, or revenues that come from that segment. I think it's been 37, 38% -- I forget which figure that was, but what was the number, and what was the metric? Was it --

Tonnage under 800 miles was about 37% of the total this quarter. It was about 36% third quarter of last year.

Okay. All right. And I guess -- your mix has always been a bit different where you have maybe fewer contract shippers relative to some of your carriers. And I'm just -- I know people have asked you about retail and manufacturing, but would it be fair to view your revenue mix being exposed to retail as probably 20% or less of the total?

I have got no way to quantify [that]. (laughter)

Let me ask you this. Do you do a lot of 3PL business then?

No, we do not.

Okay. And how about food or medical?

We do some. Again, I don't how to quantify it. I don't know how it compares to the overall market in general. I would suggest that we're a little less exposed to retail, a little less exposed to automotive than the market in general. Other than that, I don't know if I can draw any conclusions.

Okay. All right. And I guess, you guys have always had a very different culture, too, on pricing, which is one of the more attractive things. When the market gets crazy, you're usually able to stand ground pretty nicely. But if we were to see negative tonnage continue on into the first part of '07 Q1, and maybe even a little bit of Q2, and you are down 4 or 5%, at what point do you say, okay, it's time to be a little more competitive, versus let's just not go crazy like the other folks?

The point is we will not, because it doesn't do any good. When we start going after customers on the basis on price, it's pretty easy for the incumbents to match us. And essentially, it doesn't do you any good.

I think the best measure of what you're talking about, Tom, is look back to the 2002, 2003 period. We actually had tonnage declines of 15% at that time. And go back and look at our margins and go back and look at our return on capital deployed. It suffered a little bit, but was still at levels that were at or greater than the S&P 500's average.

So this industry has gotten smarter as the people who weren't smart have gone away. And so the players out there pretty well understand the game. And you'll see that, as I said earlier, there's a lot of this business that's variable cost that you can rationalize. And trying to cut prices doesn't really help you. And so it's not a game that we'll play.

Okay. Well, you've been generous with your explanation. Thank you.

Ed Wolfe.

It's not just you, but the industry has been moving off the rails. I remember a couple of contracts ago when you fought like hell to get up to -- whatever it was, 28% at the peak. And that's been ratcheting down. What have you found -- you basically said that we are going to do less rail, and that's a potential margin improvement. Yet you who fought all this time to get on the rails as a potential margin improvement. So what's either changed -- is it just rail pricing has gone up, or is it -- you have found out it's not the productivity enhancement you once thought it was as an industry?

Well, what has happened -- a lot in the rail is you've had consolidation. You've had constraints in the rail capacity that haven't exist -- historically.

I think what you have seen from us is that we've used rail when we've had to because of the short-term peaks. A good example is 2004, where tonnage just came out of the woodwork. And how did we handle it? Well, we put a lot of freight on rail temporarily until we could move it back into our system. So we use it as kind of a relief and a safety valve.

There are some lanes that will always use rail when they provide competitive service and a competitive price. Unfortunately, we're finding fewer and fewer opportunities. Fortunately, we have been able to hire some great drivers and keep that on the ABF system. And that's a win for us in terms of service to our customers.

So I'm guessing in the next Teamster contract, though, giving up a little bit of rail is not a big issue for you guys. That's maybe a lever you have?

Well, if you look back across as to our historical rail usage, we've never been at the 26% that's currently provided. So I'll tell you that increasing percentage of rail usage will not be on the first page of our contract wish list.

Fair enough. And then, you mentioned in your release retail, which is why I think you're getting all these questions. And I've always thought, and you said that you have less retail than in the market. So is it possible what feels like retail, other people might think of as manufacturing or more industrial or even, say, suppliers to auto that have a retail presence or something like that? Could it be that that's where the weakness in the economy and more so?

First of all, Ed, I don't know that you could take our comments and draw conclusions about the economy because as I indicated before, you're dealing with a really small sample from someone is probably not typical.

But I will say that when I look at weakness that we have in the first part of October -- there are some exceptions, but they tend to be retail names. They tend to be places you would go to buy things. And when we talk to those people, they say, you haven't lost the business. It's just the freight hasn't moved. We don't know a lot, and that's all we know.

Sure. But all I'm just trying to do is get at kind of a description of what you call retail. It sounds based on this conference call it might be retail/manufacturing/electronics/auto. It's hard to know.

Not so much automotive --

What areas is it more? Is it apparel?

(laughter) Ed, it's just some retail names. And again, I think -- I appreciate your desire to drive (multiple speakers)

(multiple speakers) people [dieting] in your region?

(laughter) I think if we get through this call, we'll have a perfect input/output model for the economy of the U.S. But we don't have that much information for you. We're just trying to be helpful and point out some trends that we see. But I would categorize this experience as anecdotal and not quantitative.

I know. We are just hearing a lot of this anecdotal, so I'm just trying to get (multiple speakers)

I know you're just trying to piece together a mosaic from what you learn. And we're just trying to be helpful in describing what we're seeing.

(OPERATOR INSTRUCTIONS). Justin Yagerman.

I just wanted to get a sense -- I didn't see a press release in the quarter. When did you expand your rollout of RPM from 65-ish to 220 terminals?

We put the plans in place --

I think it was at the end of September.

September. We're continuing to roll that out now. We began early October, and we'll be completed sometime in November. So it's an ongoing process on the phase that includes the South and the Midwest.

Now, is the decision to go -- obviously, that's a material increase to go from 65 to 2 20 based on the success that you have been seeing. So can we infer that even on the very small base that it's running at, you're seeing strong tonnage volumes -- or otherwise, into what feels like a very moderating freight environment, to be generous, is this something that you see as just building toward the future, so you would do this whether the economy is good, bad, in different, or is this something you would potentially scale back if things got bad in the early part of next year?

Well, what we've said is that the phase on the East Coast, the results are encouraging, but they're not yet material to our results. We obviously believe in this concept, which is why were extending it. And we are committed to it regardless of the freight environment, so you'll not see us scale back. You'll see us stay, because honestly, the potential is exciting for us. And we're patient enough to wait for the results.

Okay. But I guess if you look at same-store or same-terminal sales going from Q2 when you had the majority of the rollout that you had, and now coming into Q3, are you seeing improving sequential trends that differ from what you're seeing in your core business?

We like the results that we're seeing, but I'm not going to be more specific than that. As you know, we don't talk about specific markets.

(multiple speakers) Justin, we've also said that it's going to take more time. We're not going to see immediate results quarter to quarter. It's going to take more time.

Amy, I think that's going to conclude our Q&A.

Okay.

And let me just thank you for joining us this morning, and we appreciate your interest in Arkansas Best Corporation.

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