ArcBest Corp (ARCB) 2007 Q2 法說會逐字稿

Good morning, my name is Jackie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Arkansas Best Corporation's second quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS.)

Mr. Humphrey, you may begin your conference.

Welcome to the Arkansas Best Corporation's second quarter 2007 earnings conference call. We will have a short discussion of the second quarter results, and then we'll open up for a question and answer period. Our presentation this morning will be done by Mr. Robert A. 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 filings.

We'll now begin with Ms. McReynolds.

Thank you for joining us this morning. I'd like to update you on our second quarter results, and then I'll turn it over to Bob for further discussion of the quarter. The total Company revenues and earnings figures that I'll provide to you are from continuing operations.

Arkansas Best's second quarter 2007 revenues were $458 million. This is down from last year's figure of $479 million. Our diluted EPS were $0.78 a share versus $1.13 a share last year. Arkansas Best's operating cash flows were $57 million YTD. Our net purchases of property and equipment totaled $45 million. So far this year we've purchased Treasury stock for nearly $5 million and we've paid common stock dividends of $8 million. Our balance of cash and short-term investments was $136 million at the end of June, and this compares to $127 million at the end of March, and $140 million at the end of last year. For full details of our GAAP cash flows, please refer to our earnings press release.

We're continually evaluating our opportunities to best use our strong financial position. These opportunities include our upcoming labor contract negotiations, as well as investments in internal growth opportunities for ABF. We are now expecting the range of our 2007 net capital expenditures to be between $95 million and $110 million. This is down from our previous range of $110 million to $135 million. Our current business levels are driving this reduction. Throughout this year we have been reducing the size of ABF's overall equipment fleet by taking advantage of options to sell older excess equipment. As always, we will continue to evaluate our capital needs relative to our business levels.

And, now, I'd like to turn it over to Bob for his comments on the quarter.

Thank you, Judy, and good morning, everyone. ABF Freight System, our largest subsidiary, reported second quarter revenues of $443 million, that's down from last year's second quarter of $467 million. ABF's second quarter operating ratio was 93.1, that's compared to a 90.1 in the second quarter of '06.

Considering the challenging freight environment and our ongoing investment in ABF's regional initiatives, we were pleased, we weren't satisfied but we were pleased with the 300 basis point increase in the OR. If you pull out the regional investment and if you add back the favorable change in casualty claims that we had, ABF's OR increased by only 220 basis points, and that's a pretty good result in a freight downturn.

Our second quarter tonnage decline is 6.9% and is certainly quite a change from last year's second quarter where we had a tonnage increase of 6.4%. As you know, we first saw this lower tonnage trend starting in October of last year, and our year-over-year tonnage decline has been relatively consistent since then. No improvement and no further deterioration despite the favorable comps that we had in the second quarter of this year. So far in July tonnage trends look a little better but the comparison is clouded by the favorable calendar affects that you have from the 4th of July holiday.

As a result, we've been closely monitoring costs, and though the pricing environment has become more competitive we continue to seek compensatory rates on each pricing agreement that we negotiate. ABF's second quarter price increase, although it was positive, was below that that we've seen in recent quarters. Our total billed revenue per hundredweight in the second quarter increased by 1.2%. During the quarter ABF saw some significant changes in freight profile and freight mix that affected that reported yield increase. For instance, our second quarter length of haul declined by 1.7%, driven by progress that we've made in our regional freight initiative.

In addition, truckload shipments had a larger affect on ABF's system total. We were more aggressive in the prices that we offered in the spot volume market, and in effect these spot volume shipments comprised a larger portion of our total and at lower rates than last year when you may recall we were actively discouraging the traffic to protect service on the LTL freight.

As a result of competitive freight environment, we've discontinued some customer relationships that didn't generate acceptable operating margins, despite the fact that this business actually had revenue per hundredweights higher than the system average. So, as you know, billed revenue per hundredweight, although it's the only publicly reported surrogate for yield and pricing trends, it can be misleading when the profile is shifting.

Yields without profile impact are difficult to calculate and they aren't very reliable, but we probably saw real price increases in the core business in the 2%, perhaps 2%, at 2.5% range. Price increases on customers under contract at deferred pricing agreements averaged 1.7% during the second quarter and 2.8% YTD. Although our environment has become more competitive during industry downturns, we still believe that LTL pricing is compensatory at least for efficient carriers that provide value in the marketplace.

And the ABF Management Team is simply the most experienced in the LTL industry, and we've all been through several soft economic periods together, like the one that we're in now. Over the years our employees have learned how to concentrate on the things that we do best regardless of the business environment, maintaining our ongoing emphasis on disciplined pricing, and having strict control of operating costs, and these folks did a good job this quarter.

During the second quarter, ABF continued its record of excellence in operational areas that benefit our customers and our shareholders. We had lower cost in third-party casualty claims, those are the claims that result from accidents. As a result, as a percent of revenue, these second quarter costs were the lowest in the last five years when compared to both second quarter and full year figures. We believe that we've got the best safety program and the best drivers in the industry, and the improved second quarter results helped us knock 50 basis points from our OR.

As a result of further improvements in cargo handling, ABF's YTD cargo claims ratio as a percent of revenue was 0.07%, compared to the previous full year figures this is ABF's best record in 24 years and the best record of all the nationwide carriers in the LTL industry.

In May ABF was recognized by the American Trucking Association Security Council with its 2007 Excellence in Security Award for superior security practices. Since this award was established in 2001 ABF has received it four of the seven years it's been given. Outstanding safety, security, and cargo care are just three visible examples of the way in which ABF's well integrated quality process is improving our results. They're also areas that are important to customers, they're part of the value that ABF provides in this marketplace.

We continue to make steady progress with ABF's Regional Performance Model. With this operation ABF is offering improved next-day and second-day service throughout the eastern two-thirds of the United States. We aren't seeing runaway growth, but we're making progress in the regional market. Although the costs associated with RPM increased ABF's second quarter OR by 130 basis points, we expect the year-over-year margin impact of this initiative in future quarters to be less because we anticipate continued growth of regional business, and we'll begin comparing back to prior year quarters that also included RPM costs. However, we did anticipate another [regional charge through] with this initiative in the third quarter that may add $1 million per year to our costs until we gain the offsetting revenue.

The regional market is significant in size and has been growing rapidly across the business cycle, and we believe that RPM puts ABF in a great position to effectively compete in this business, and we're committed to the operational and marketing changes that we've made to gain significant penetration in the regional market.

With that, David, I think we're ready to take some questions.

Okay. Jackie, I think we're ready for some questions.

(OPERATOR INSTRUCTIONS.)

Your first question comes from Ed Wolfe with Bear Stearns.

Hey, good morning, Bob, Judy.

Good morning, Ed. How are you?

Good morning, Ed.

Good. You mentioned in the release that there was about a $5.5 million negative impact or 1.2 percentage points from the rollout of the regional product in second quarter. Can you give us for comparison purposes what that looked like in first quarter?

I think we said 1.3, 130 basis points, but --

Similar in terms of total cost, probably about $5 million, Ed.

Okay. And how do we look at this in terms of third and fourth quarter? Is it going to be similar for awhile, or does that come down at some point?

I -- well, I think the costs become the same. I think we start to offset it with additional revenue.

Well, and, also, keep in mind, Ed, that last year in the third and fourth quarter we began to see these costs, and in the third quarter last year it was about 30 basis points on our OR and about 100 basis points in the fourth quarter, last year.

So we start to lap [the effect.]

What did you say it was in the fourth quarter, Judy?

About 100 basis points on our OR last year.

Okay. So if you're at 120 now and it held, the idea would be it'd only be a 20 year-over-year impact?

That's right. And that's assuming that you have -- you don't have the revenue growth, which we hope -- hopefully, will have more of.

Where is the revenue currently? What's the run rate of it right now?

We don't disclose individual markets. We're making steady progress and we're satisfied with the results.

Okay. How do you look at FedEx' announcement that they effectively took their fuel surcharge from where yours was at 19.8 down to 14.8? Does that have an impact as you go out, you know, you guys have such a nice history of maintaining your discipline, but does that mean that we should expect tonnage to be a little bit tougher to come by, or are they not yet a real competitor in the long haul market?

Well, I think if they're not a competitor in the long haul market they will be with FedEx National, but based on what we see currently in the marketplace and the general competitive reaction we don't feel compelled to respond to any general price cut.

Well, I'm not talking about a general response. I mean I -- I'm guessing, well, I'm not guessing -- FedEx is making it very public, they're going for market share and they want everybody to know that. So when you have a competitor of that sort, as 14% of the total market, making that announcement do you sense that we should look in terms of maybe tonnage doesn't grow as fast but your yields hold up or how do we think about that going forward?

Well, as you know, we'll continue to look at every pricing deal individually, and we won't let anything get away from us as long as there's any price, any profit left in it, and where we end up in the mix we'll just know at the end of the quarter.

Can you give us a sense sequentially if you looked at April, May, June and now July the tonnage and the revenue per hundredweight, how they worked year-over-year?

Excuse me, Ed. I -- you know, whenever you look at the quarter the year-over-year tonnage decline for each month were similar. I mean we ended the quarter with a 6.9% tonnage decline and it was similar for each month of the quarter.

And we don't provide, you know, monthly yield details. I mean they're -- we've -- we just don't see the need to do that, and you've got the full quarter effects, and they have been impacted by profile and mix. And so sorting through those is a challenge in itself, so we feel like we've given you what we need to there.

Okay. I'm just trying to figure out how to model it because with all the mix changes and everything it went from 4% year-over-year in first quarter to 1.2% in second quarter. Should we expect that comes back, decelerates, remains the same? I mean directionally would you say how do we think about that going forward?

I mean I think all we can tell you is that the tonnage decline started in October and it's been pretty consistent since then. Pricing was positive, probably overly positive in the first quarter, and weaker in the second quarter, but I don't see any directional trends from that.

Can -- maybe just refresh us? Do you have the tonnage from last year, how they looked in -- a year ago if we looked at April through October kind of stuff?

Sure.

The monthly in April year-over-year is 3.1 increase, May was 5.7 increase, June was 9.8 increase, and then if you move into the third quarter the overall increase was a 2.4 but that was made-up of July and August being up about 4 and September being flat.

Okay. That -- that's helpful. Thank you. The non LTL revenue and operating expense, service and other business, can you refresh what's in that service and other business, and how do we think about that from an operating income? First quarter was up a million, this quarter was down a couple hundred.

Well, I think in service and other we -- we have the holding company, we report fleet net in there and some other of our smaller companies, so that's what's included in that category.

So is a placeholder like zero as per quarter, or should we just assume it's flat and maybe it's up a little or down a little, or how do we think about that going forward?

Well, I think, you know, I think it moves around a little bit but the numbers are always small, so I don't want to give you any guidance on that because I might not be accurate. But, you know, we end up with some small figures there, either positives or negatives, and that would, you know, you can carry that forward into the future.

Okay. And the other net, the $800,000 in the other income, what -- what's in there then?

That's cash surrender value increases on some life insurance policies we have. There's -- these are invested much like a pension plan would be, and the second quarter market was favorable and so we have some favorable results there. Because of the way that those are invested you can have some volatility there, but if you observe, the YTD numbers are similar.

So should we -- so this is kind of a good run rate? We should just keep using it, do you think -- $800,000--?

Well, like I said, it depends on what the market is going to do, so you can use that and what you think there in your modeling.

Fair enough. Thanks a lot for the time (inaudible), as always.

Okay.

Thanks, Ed.

Your next question comes from Justin Yagerman with Wachovia.

Hey, good morning, guys, and Judy.

How are you?

Morning, Justin.

Good morning. Can you, you know, you mentioned that July was feeling a little bit better but that there's some year-over-year issues there in terms of that comparison, can you quantify that a little bit? I mean I know that it's not an exact comp, if we had about 6.9% throughout Q2 in terms of down year-over-year tonnage, you're against an easier comp in July. You know, how is it trending? Is it, you know, I guess how is it trending?

I'd feel real uncomfortable laying a number out there off of this sub period, and I think we gave you the kind of the sense that things are better but it may be because that July 4th holiday fell in Wednesday this year and I think Tuesday last year. So, you know, it feels a little better, but I think it'd be a mistake to lay a number on it.

Sure. But I guess as we get closer to August and I mean we didn't see it last year but traditional peak season should start in the back half of August as we go out through, you know, what leads up back to school, holiday season, and the like. I mean are you hearing any of your shippers starting to talk to you about capacity issues or is it just a way to, you know, mute it out there to think about that?

You know, Justin, that would be the question. As you recall, last year, you know, things were flat in September and fell off the table in October, and even in October and early November our customers were telling us Christmas is coming, Christmas is coming. So I think I would take any market rumblings this far in advance with a grain of salt. I think that -- I think we're all in this industry anxious to see what happens with the [ball] peak period this year and we won't know until it gets here.

Okay. Well, internally as you kind of plan around that and given that uncertainty that you just described, how do you think about that? You mentioned in your prepared remarks something about fleet reductions that are going on. Are you paring back on capacity right now, given the current marketplace? You reduced CapEx, you know, and then I guess in terms of your labor planning are you keeping things steady until you maybe get crunched on that or are you going to be planning to add some people as we get out to the back half of this quarter?

As Judy indicated, we have pared fleet size back to reflect the current reality, but we do have considerable flexibility in expanding that. Number one, we've got equipment options, so we can defer planned sales, we can rent equipment, our percent rail usage is the lowest it's been in several years, so we've certainly got some ability to rapidly expand capacity in the fleet.

In terms of labor, you know, unfortunately, we've got a number of good employees who are on layoff. During the first nine months of last year we hired 2,500 good people, a number of those are on layoff, and so we're anxious for the opportunity to bring those people back to work, and they're anxious to come back.

So it sounds like you've got some variability there, so I guess that's good. Switching focus to the regional effort, you made some good comments on that and gave some color. But I guess is it just the environment that accounts for the 30 basis point deterioration between the OR impact to this quarter versus last quarter or, you know, how would you -- did you make further investments and the revenue just hasn't showed up yet? Or how should we be thinking about that increased disparity that's going on and, obviously, you expect it to narrow a bit in the back half of this year. What -- what's that expectation predicated on?

The regional rollout is not a static event. We continue to tweak it and we add lanes and drop lanes. We'll add new regional exchange points, we'll consolidate some. So I guess -- I appreciate the question, but I think I'd say that the 30 basis point difference may not be meaningful.

Oh, and, Justin, if you'll remember, it was 120 basis points in the first quarter.

It was 120, okay. My mistake. And then in the back -- I mean do you need to see the environment pick-up in order for those comps to kind of ease, you know, or, you know, steady state do you expect things to get a bit better?

Well, I think it's fair to say that this environment was not the best time to roll-out a new strategic initiative, like this was, but it is what it is. And the sooner we start the sooner we reach our goal, so we're continuing to make the investments, as I indicated. We're not seeing runaway growth but we're seeing progress, and we're going to continue doing what we're doing. It -- it's clearly the most important thing that we've done in this Company in years in terms of growing and providing a complete package for our customers, and so --

Are you seeing major differences --

-- (inaudible).

-- in the pricing in the regional market and the long haul market?

Am I seeing a difference?

Yes.

Well, other than the obvious, the fact that the rates are lower, but in terms of margin impact we're actually finding it's a little better than our average long haul.

Okay. And I guess last one and I'll turn it over to someone else. You know, on the Teamster side of things, any kind of preliminary talks going on? Any kind of update there, or is it just kind on hold until UPS finishes up?

I think that's a pretty good statement. We do not expect formal talks to begin until the IBT has finished their discussions with UPS Parcel and UPS Freight, and so I expect those to begin sometime after that's concluded.

All right. Thanks for your time. Appreciate it, as always.

Thank you, Justin.

Thank you.

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

Hey, good morning, guys.

Good morning, John.

Good morning, John.

You commented that as you get into the back half of the year you expect to start seeing the offsetting revenue from the regional rollout. I mean without quantifying it or providing any guidance, I mean I'm just kind of curious as to what your thoughts are in terms of timing of that being, you know, that being a breakeven operation? Is it relatively soon once the revenue shows up, or are we talking about further investment next year that keeps it, you know, keeps it kind of in the red for another several quarters?

Well, I think our ability to predict not only the regional growth but the overall market is flawed. You know, we're -- I expect the investment that we have in RPM in the next-day exchange points to be relatively static. We do have one additional smaller initiative that we'll rollout in the third quarter, but the investment is pretty well there and I expect the revenue to build and build slowly. What the pace of that is depends on a lot of things. One of the things it depends upon is the general economic environment, and we don't really have good insight into that. So I would just say that we're pleased with the investment we've made. We're looking at it as an $800 million or a billion dollar acquisition that we just made except the investment is modest and there's no integration risk, and we're going to continue doing that. And eventually it will breakeven and start contributing, and I suspect that it will do so on a quicker timeframe than we've seen with actual acquisitions that we've made in the past.

Okay. You know, in terms of your comment about not the best and, you know, not the best environment, I mean I get what you're saying from a volume standpoint but, you know, I mean wouldn't you agree that having that offering as the economy began to improve, you know, kind of offsets the near-term pain? I mean, you know, is this something that you think you could have rolled out as successfully if you were dealing with a much more robust freight environment, you know, just given your focus on meeting service in a more -- like I guess with higher volumes comes higher responsibility in terms of service. You know, when things are a little bit weaker like this doesn't it free-up the time to get, to get these initiatives in place?

Well, there is that good point. We're providing excellent service in this market, in our long haul market. Part of it is we have less, a little less freight to deal with, but in terms of building the business it would have been easier to have been started when the regional carriers were full. It would have been nice to have started this as some of the regional carriers were failing as they've done in the last couple of years. But, you know, but it is what it is, and we're here, and I think as you've suggested, when we see a business upturn we're well positioned to I think to grow even faster.

Okay. I think in some of your prior presentations you've talked about that 40%, 50% of your current business are two days -- is two days or less. I mean are you concerned at all about cannibalizing your existing long haul business? And pulling some of that traffic out of long haul and into the regional operation? And, as such, do you believe that there's any necessary right sizing of your long haul network?

John, we're seeing just the opposite. You know, when we're having successes often we have accounts that we've -- have been unable to break-in because we didn't have a full service offering, and now that we're able to provide a competitive regional offering the customer will give us that and the long haul business.

We don't have instances where we have an existing long haul customer, and if a customer says, "Well, okay, I'll give you the regional business but I'll have to give the long haul to someone else." Customers appreciate the advantages of dealing with a carrier in all 50 states rather than just the long haul states, so it's a positive sell rather than a negative.

Okay. In terms of your -- you talked -- you mentioned pricing with existing customers and contract renewals, you know, we've heard in the truckload sector during earnings season that there was a lot of bid activity in the first half of the year and a lot of downward pressure. We heard from, you know, a regional LTL yesterday that they lost a pretty big slug of business on a 15% to 20% reduction in price on a contract. You know, can you just give us an idea of, you know, have you seen -- what degree of irrationality have you seen out there? And when you hear of a 15% to 20% reduction -- I hear what you're saying in terms of you won't give it up, you know, if there's any profitability left, but when does it just become, you know, when does it become so onerous that you really just can't protect a piece of business? Is it -- does it have to be a 15% to 20% reduction or is it as little as maybe 2% or 3% that makes it just an unattractive piece of business?

Well, it kind of depends on where the account started with. I think you may recall the carrier that you're talking about said that they were thinking about giving up the business anyway.

Yes.

And the 15% and 20% cut in price made their decision easier and made it happen quicker.

Yes.

I will tell you that seeing that kind of reduction in price on an LTL account would be exceedingly unusual, but we had a fairly large account which we walked away from in the second quarter over price. They were already up against our limit of acceptability, and somebody else wanted it more than we did, and we were willing to walk away from it because even in the short run we were better off without it than with it. And you'll see those things from time to time, but they don't happen with a lot of regularity and the 15% -- the 20% cut would be really, really unusual.

Okay. And so in that instance it wasn't that severe a cut?

In the instance I'm talking about?

Yes.

I don't recall the numbers, I just know it took it over the line.

Okay. Very good. Lastly, you know, you're still maintaining a pristine balance sheet, and I like your analogy about making an $800 million to a billion dollar acquisition without having to spend that kind of money. And I'm just curious are you reluctant to do anything right now with the balance sheet given the labor contract out there and some discussion about potentially buying your way out of pension plans or what have you? And does that kind of keep you on the sideline in terms of doing anything with the balance sheet, more aggressive buyback, you know, more aggressive dividend policy? You know, are you kind of waiting to get past that or is it mutually exclusive?

The answer to that is yes.

Yes. Okay. All right. Very good. Nice quarter. I appreciate your time.

Thank you, John.

Thanks, John.

Your next question comes from David Ross with Stifel Nicolaus.

Hi. Good morning, everyone.

Good morning, David.

Hello, David.

A question on the RPM. When do you plan on introducing that to the western one-third of the U.S.?

It really depends upon discussions that we're having wit the IBT -- my best guess is late this year or early next year.

Okay.

They require some different operating models because of the longer distances, but we've got some pretty good plans out there, but we -- we've got to have some new tools.

Okay. So these discussions are ongoing?

Uh-huh. And, of course, the scale of the investment there is considerably less.

Okay. And then speaking of discussions with the IBT, you said, again, that you're going to wait till [IBT concludes its] negotiations are done with UPS, but the talks right now have been halted recently, and their contract expires four months after yours, so at what point do you go to the table when they're still talking?

Well, I'd say that we're prepared to talk whenever the IBT is ready, and I don't have the timing on that.

Okay. So has this been more dictated by what the IBT is doing, when they want to talk, or by you guys when you want to talk?

Well, you know, I'll say that we've had discussions internally and with other similar situated carriers, and we're prepared to have those discussions, and I assume that we will before too long.

Okay. And then, Judy, could you just update us on where the share repurchase stands at the moment?

Well, we bought 5 million in the first quarter, and we have about 18 million left on our program.

Okay. Yes, because I noticed you didn't buy any in the second quarter.

That's right.

And then just from a business standpoint, I know you're very focused right now on the Regional Performance Model as your growth initiative, but are you also looking at any other businesses internally? I know that you're not huge on acquisitions, but maybe an international LTL business or truck brokerage potentially?

We actually have initiatives in both of those areas under the way, underway, but we tend to not talk about things we're going to do. We talk about them when they're large enough to be significant.

Okay. Thank you very much.

Thank you, David.

Thanks, David.

Your next question comes from Ken Hoexter with Merrill Lynch.

Hi, good morning, Bob and Judy.

Good morning, Ken.

Can you just clarify -- I think somebody threw out a number before, but what percent is overnight of your volumes in two-day and then three-plus-day?

Well, I'll put it this way, you know, overnights is and two-day is kind of a moving target. For instance, a lot more of our freight became overnight, even though the tonnage didn't change because we started giving better service. But this year a little over -- about 45.5% of our business was less than 800 miles. Last year about a percent less than that.

Okay. And this is before you've seen a significant kick-in from the RPM?

Well, I think it's fair to say that the -- that going from 44.5 to 45.5 is driven by some success in the regional market.

Okay. So without -- since you don't yet provide the revenues, I presume you will I guess at some point in the future when you deem them large enough, how do we judge success in the meantime? Is it just on these, you know, occasional what is going on with the operating margin? I'm just trying to understand what you view internally, I guess, how you're deciding whether to increase investments or slow it down. You've kind of pointed out, Bob, I think you said before that there were some lanes that you've even pulled out of, so I'm just trying to understand how you determine if it is going as well as you planned in certain places and then where to make increasing investments in others?

Well, I think what I said was is that it's dynamic and futuristic, and we can -- we'll add lanes and we'll pull lanes, we'll change -- actually, I changed (inaudible), but just like in our long haul network, the regional network is -- evolves and changes.

In terms of -- I doubt that we will ever report revenues in any particular market segment. Internally we look at this not as a new market but as the completion of the existing market, of being able to sell across the entire LTL market rather than just the long haul. So we think of this as being fully integrated into the fabric of the Company, the only difference is that we've got a parallel line haul network that's operating it.

So I'd -- I guess that we wouldn't even be talking about this except for the fact that we're spending what is a material amount of money, 130 basis points on the OR, to develop it, but that's the only reason it [comes] into the conversation. Eventually, we won't mention it and you won't ask about it.

All right. That makes sense, I guess, because it's -- now it's all one network anyway so you're just rolling out additional service offerings?

Exactly the point. You know, before -- I'm just kind of amazed that before we've sent our salespeople out with -- effectively able to sell 30 states, and now we send them out and they're able to sell 50 states, and when I look back I'm thinking, wow, you know, how did we sell the 30 states.

Now, then how do you think about what your -- again, maybe you can explain a little bit about what the 130 basis points is, what are the upfront costs? Is it training, is it hiring salespeople ahead of actually getting the revenues? How do you in one combined network then decipher what the cost of the RPM is?

Well, it's largely running into schedules because we've got a number of next-day lanes and we're running them every night with whatever freight is available, and, of course, obviously, as we grow additional business the incremental line haul cost is zero.

But with 40 -- I guess if you go back before this big RPM rollout with 40, if we call it 42%, 44% of your volumes being in that next-day or two-day lanes anyway, how then does this shift your costs? How did you ramp-up -- is it just adding more lanes, is that what you're getting at?

Yes, adding a number of new next-day lanes.

Okay. Great. And then the last question I have is have you detailed what you believe the -- I remember I think you guys threw out a number, maybe two years ago or so, what you believe the cost to withdraw from the multiemployer plan would be?

I believe the number is -- is somewhere between $600 and $650 million for withdrawal from all plans, but you've got to know that those numbers are based upon I think '05 --

Yes, it's 12-31-05 fund information.

Right.

Which is not current, you know.

Sure. And subject to negotiation.

Oh, yes. And, you know, and there's been some market changes since then, as well.

All right. Great. Thanks for the time. I appreciate it.

Thank you, Ken.

Thank you, Ken.

Your next question comes from Tom Wadewitz with JP Morgan.

Good morning.

Good morning, Tom.

Hi, Tom.

Let's see, I wanted to ask you about how you think about your labor flexibility in an environment where volumes are soft? I guess versus what I was thinking on comp and benefits you did better in the quarter. If you think about hours worked, union hours worked versus the decline in tonnage can you reduce hours by half that, or how do I think about the relationship between the 6.9% decline in tonnage and what you actually can do in flexibility, and how that results in the change in hours worked?

It -- it's a good question. Is it 100% variable? No, but I think if you read anything into our second quarter results, you -- you'd have to see that it is considerably variable. We've been able to scale labor very close to the tonnage levels and our productivity levels even on a weight-per-hour basis in the second quarter were pretty close to what they were in last year's second quarter. We have and when you lay on top of that the fact that those numbers are muddled by some regional expense that's mixed in there, I think we've shown that we're obviously -- when freight turns up the negative operating leverage will turn positive, it'll be good for us, but I think we saw that the direct labor expenses scaled pretty well the second quarter.

So it might -- it probably wasn't precisely in line but maybe 4% or 5% reduction in hours, something like that?

I can't really quantify the number. You may recall in the fourth quarter we weren't at all happy with how we scaled. We did scale the labor and the results in the fourth quarter showed it. In the first quarter you saw that we've turned that around, and the second quarter I think you saw further improvement.

Okay. So then if I look at the pricing side versus inflation, what kind of effective price do you think you need to just offset your inflationary cost base? Is it -- is inflation just kind of 2% and you need that kind of price to offset it or how do we think about, like I say, the inflationary component is what I want to hear about?

That's a good point. If you look at, you know, if you pull out fuel, because we're covered with fuel, so if you pull that out of inflation, and if you look at what our costs are, a lot of it's labor and that labor increase has been running in the 3% range, including fringe -- but we've had productivity improvements, too. So I think if you look at a number in the 2.5% to 3% range over a long period of time, that probably keeps us even with inflation.

Okay. Great. And then one more question for you. On the competitive environment and given the, you know, the pretty loud action by FedEx Freight, can you give us a sense of who you tend to have the greatest overlap with or whether it's the kind -- historical, did you run into Watkins a lot historically, did you run into Overnight a lot historically, or is that -- or is it just that it's such a consolidated market in long haul that you run into everybody on a frequent basis?

I think it's fair, Tom, to say that everybody runs into everybody, and this industry has consolidated down to a number of players. You have the regional players starting to move into long haul lanes. You've got us moving into the regional lanes, and so we're -- we're -- these artificial market limits are starting to dissipate. Everybody runs into everybody.

Right. Okay. Great. Thank you for the time.

Thank you, Tom.

Your next question comes from Tom Albrecht with Stephens Inc.

Hey, good morning, everyone.

Morning, Tom.

Hey, Judy, Bob. Two different things. What percentage of your business moved on the rails this quarter? And what was that a year ago? And then refresh my memory, is the cap 28% or 26%?

We moved in the second quarter about 12% of our miles from the rail, second quarter last year it was 16%. Our cap is 26% across the year.

But you're allowed seasonal fluctuations; right?

Yes.

Okay. All right. And then I know you've mentioned your length of haul was down about 1.7%, would you actually have that length of haul figure you can share with us?

Sure. It was in second quarter 1,160 miles.

And what was that versus?

1,180 last -- second quarter of last year.

Okay. And then on insurance, how much of the favorable year-over-year comparison was due to favorable developments on prior claims, how much was a low current accident ratio, and how much of it was just because your tonnage is down so you're running fewer miles, and so you're inevitably going to have fewer accidents?

Yes, well, Tom, I think you've got to remember we're measuring this as a percent of revenue.

Yes.

So, you know, it would be more or less independent of the business volume. Part of what you saw is the comparing back against last year, the second quarter of last year wasn't particularly favorable either for workers comp or for BIPD, but what you saw here in the second quarter of '07 wasn't that we have an average comparison against a bad comparison, on a percent of revenue basis we actually had superb results, not only in workers comp which was like 60 basis points better than our five-year average on a percent of revenue, but in BIPD, in those third-party casualty claims from accidents, our second quarter results were 30, about 33, 34 basis points better than our five-year average.

On a combined basis, you know, the results we had in the second quarter were almost a point better than the five-year average. Those are good results, and they speak to the (inaudible) process that we have in place, the fact that we've just got a great group of drivers, and most -- as you know, we've got very low turnover, about 7%, 8%, about half of that's retirement. And we've got a great safety program. We've got a number of awards that we've won. We're the only carrier to have won APA's President Trophy five times. And the awards are nice but it's also nice to see it in the numbers.

Right. Refresh my memory, is cargo in insurance or is that in operating supplies?

It's in insurance.

Okay.

I think I wouldn't want to miss the opportunity to point out the very favorable trend that we've had in L&D cargo claims. The number, I think we reported that the number that we had this year was the best in 24 years, but it's not an aberration. Quarter after quarter that number seems to get lower and lower. We're doing just a great job in handling customers' cargo, and it's probably the most significant way that we -- technology helps us, but at the end of the day not damaging or losing freight is what helps us attract new freight and keep the freight we have.

Okay. So on that insurance item, which is the second quarter in a row that it's much lower as a percentage of revenues, because for the last two years it had been closer to about 1.6% of revenues, approximately how much of that line item would be premiums and how much of that would actually be claims?

Tom, we don't have that breakout in front of us. You know, in that area -- so we could -- we typically don't give that detail. You know, our insurance premiums are not a large part of what we do.

Right.

We have about a million dollar level of retention on our claims, and because of the favorable experience we typically have we have a good result there.

Uh-huh. Yes, I was guessing sort of maybe 25% premium, 75% claims, but I didn't even know if you could sort of verify that as a ballpark, at all?

It's not a number that we ever look at, Tom.

Okay. And then let me shift a little bit, you know, on the yields, Bob, I believe you said that for contract renewals in the second quarter they were up about 1.7%, and when you make adjustments for all the different mix changes -- I think you mentioned spot, length of haul, things like that, your yields were probably up what, 2%, 2.5%, is that what you sort of said?

Yes, I think those are the numbers, the range I gave, and remember that's pretty soft.

Yes. No, I understand. And it seems to me, and I guess I'm really looking more for a comment from you, you know, the [GRIs,] they went into effect late March, early April, depending on which carrier, and generally they've been whittled away, it feels like much quicker this year than we've seen in maybe a decade, and I'd like to get your commentary on that? At least, talking there's I'm sure you guys feel a little differently but what are your comments on that?

Well, I think that, as I said earlier, I thought that our first quarter yield numbers were higher than expected and I thought our second quarter yield numbers were lower than expected, and I didn't draw any conclusion directionally from that, but I think I'd have to agree with you to some extent that the GRI seems to matter less and less in this industry.

We've got a well developed process for essentially having rate increases 12 months a year as we examine expiration of customer relationships, and we adjust our timeframes to fit those that are convenient with customers. So, you know, I think it's pretty obvious we'll have less and less discussion of GRI in every coming year and there'll be more emphasis on how you adjust prices on all your customers, even those that aren't subject to GRI.

Well, it's about 60% of your revenues are noncontract wouldn't a GRI apply to virtually all of that?

I think that number -- I think that number is more like 50/50, and it would, but there's -- there are bid processes that offset that, as well. You know, it's part of the mix.

TA; Okay. Okay. And then, lastly, what percentage of your customers would you say are on your fuel surcharge versus let's say the shippers' fuel surcharge? I don't have a good feel for that. The folks from [Brisinger] probably are developing those schedules, as we talk, but I -- I'd say that the vast majority of or at least a great majority of our customers are on our fuel surcharge.

Okay. That's all I have. Thanks for the commentary.

Yes, thank you, Tom.

Thanks, Tom.

Okay.

Your next question is a follow-up from Justin Yagerman with Wachovia.

Hey, just two quick ones here. On the -- you mentioned that you were a little more aggressive in the spot truckload market in the quarter. We heard that from another one of your competitors. Is that something you would typically plan on doing in a weaker truckload environment? Does that density help out your network to -- even if it's coming in at kind of discounted rates, and how should we be thinking about your presence in that market going forward?

I think you've characterized it exactly right, Justin. You know, last year when we were growing at 6.4% we wanted to protect service on our LTL customers, and so we actively raised these prices and we -- and we saw the result. And in a weak environment we price, you know, back haul lanes, we price to get some contribution in the back haul lanes, because you don't disrupt long-term relationships in the spot volume market. And so like every other carrier out there we use it as incremental freight.

Who is driving that freight, is it your customers or is it brokered freight, or how are you picking up those loads?

No. We do it typically with direct relationships with customers, you know, we don't use -- if we use any broker relationships I'm not aware of it.

Got it. And then I guess my only other question is with this new hours of service ruling that came out yesterday, I'm assuming that goes into effect and you lose the hour of driving, and I guess the 36-hour restart, I don't know how big a deal that is for you guys, but I -- I've got to imagine that there may be some regional lanes where times change because of that one hour? Are there distances that are no longer achievable from a service standpoint because of that and, if so, I mean maybe if I'm missing something, how do these general hours of service changes potentially change your network?

I think the impact for us is considerably less than you'll see from the truckload carriers who probably had some heartburn yesterday. We did not reconfigure our network to consider the 11-hour driving. We were waiting until this was administratively final, which may happen in our lifetime and may not. The -- there are some regional lanes that are affected, that you stretch out, that take more than 10 hours. We've got 45 or 50 days to make those changes, but I can tell you that they are -- they're modest and we don't see any problem dealing with that. We were not using the 34-hour restart provision so that has zero impact on us.

You know, ironically, this reversal is going to hurt the driver productivity and especially for the truckload carriers, and I honestly think it'll, at least on the margin, drive some larger shipments back to LTL carriers. So we think that the new rules were good rules. They make sense from a science standpoint. You know, we've got the absolute best safety record out there, and we believe that these improved safety rather than hurt safety, but at the end of the day going back, losing the eleventh hour helps us more than it hurts us for sure.

Got it. All right. Thanks for the color.

Jackie, I think that's -- I think we're going to wrap it up here.

Okay. And we have no further questions anyway.

Okay. Well, good. Well, we appreciate you joining us this morning. We appreciate your interest in Arkansas Best Corporation. This concludes our call.