ArcBest Corp (ARCB) 2008 Q2 法說會逐字稿

Good afternoon. My name is Tabitha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Arkansas Best Corporation second quarter 2008 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. At this time, I would like to turn the call over to Mr. David Humphrey, Director of Investor Relations. Please go ahead, sir.

Welcome to the Arkansas Best Corporation second quarter 2008 earnings conference call. We'll have a short discussion of the second 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 our Arkansas Best Corporation and its results, some forward-looking statements could be made during this call. As you 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'll now begin with Ms. McReynolds.

Thank you, David. I'd like to update you on some of the details of our Company's second quarter results and then I'll turn it over to Bob for his comments. I'll start with the total Company results. Our second quarter 2008 revenues were $499 million, a per day increase of 6.7% over last year's figure of $464 million. Our diluted earnings per share for the quarter were $0.64 a share, compared to $0.78 a share last year. Our second quarter results were impacted by two noteworthy items. First, we are comparing back against a quarter where we had very favorable Workers' Compensation experience. This year's Workers' Compensation costs, although in line with historical averages, are about $0.07 a share higher than last year's costs. Second, we were impacted by the market performance and investments associated with life insurance policies we maintain on certain Company executives. These policies are invested much like pension plan assets would be invested.

The impact of this change in cash surrender values was about $0.04 a share when compared to the same period in 2007. Changes in cash surrender of life insurance are shown below the operating line in the other net expense. When you look at our results on a year-to-date basis, the net impact of the differences I mentioned is less of an issue. We earned $0.98 a share compared to $0.97 a share in the first six months of last year. Arkansas Best operating cash flows were $59 million year-to-date, net purchases of property and equipment totaled $3 million, and so far this year we've paid common stock dividends of $8 million. Our balance of cash and short-term investments grew to $225 million at the end of June. This compares to $197 million at the end of March. If you would like more full details of our GAAP cash flows, this information is included in our earnings press release. We've previously discussed our 2008 net capital expenditures being in a range of 60 to $70 million. At this point, it looks like we'll be at the lower end of this range. We continue to have the flexibility to upsize our purchase plans if business levels dictate the need to do so. We are proud of the fact that our Company's financial position remains strong, and this strength continues to provide us with opportunities and flexibility.

Moving on to ABF, our largest subsidiary reported earning -- or excuse me, reported second quarter revenues of $480 million, a per day increase of 6.1% over last year's second quarter. ABF's daily average tonnage for the quarter was essentially flat to slightly positive compared to last year. Through last weekend, July's total tonnage per day was about about a percent. ABF's second quarter operating ratio was 94.7,versus a 93.2 during the same period last year. And on a year-to-date basis, ABF's OR is the same as last year, a 95.8 in each period. And now I'll turn it over to Bob for his comments.

Thanks, Judy and hello, everyone. A softer LTL freight environment continued in the second quarter. We really haven't seen much of a change either up or down in tonnage levels since the fourth quarter of 2006. During the period, ABF has maintained its focus on the things that have always made us attractive in the marketplace -- providing and enhancing excellent service, addressing the specific needs of our customers and handling freight carefully and safely. Across the business cycle, ABF's been able to scale its labor and equipment resources to match ongoing freight levels without harming service levels. And ABF did a nice job in this area, actually improving operational productivity in the first and second quarter, while improving service levels. Compared to last year, ABF's second quarter operating ratio was impacted by energy related costs and by the Workers' Compensation comparison that Judy mentioned. The increase in costs of diesel fuel and the rise in other energy related costs are having an effect on ABF's cost structure. The supplies and expenses line of our reported financial statement increased nearly 34% in the second quarter, reflecting the costs of the fuel and the oil that goes into our trucks.

In addition, fuel surcharges we pay on rail and cartage movements have increased at a higher rate. And as you might expect, we've also seen some significant increases in the cost of forklift propane in our utility expenses, and even in sales solicitation expense. As with the general economy, energy prices are affecting our costs across the income statement. This year's Workers' Compensation costs, although in line with our five and ten year experience, were higher than the very favorable numbers that we had in the second quarter of last year. The difference in these costs raised ABF's OR in the current quarter by about a half a point. I'm pleased to report that year-to-date, these costs are below our five and ten year averages and we're pleased with the overall trend in Workers' Compensation costs.

Finally, our continuing investment in our exciting regional initiative hurt our second quarter OR by 70 basis points, and that's an improvement over the impact in prior quarters. ABF's build revenue per hundred weight in the second quarter increased by 6% over last year. Obviously, the biggest factor driving this increase was the additional fuel surcharge related to the higher fuel related costs. The higher fuel surcharge was partially offset by ongoing changes in freight profiles and customer mix. Continued success in our regional freight initiative reduced ABF's second quarter length of haul by 2.2%. Total average weight per shipment increased by 4.2%, in part related to an increase in spot price truck load shipments that help us better utilize ABF system resources. Shipment density also increased in the quarter, and all of these factors have a dampening impact on the nominal revenue per hundred weight. Nevertheless, the LTL marketplace remains competitive, especially with soft tonnage levels. We believe that the fuel surcharge is covering our additional energy related costs, but the record levels do affect the overall yield that we get from a customer.

In addition, tonnage losses at other carriers may have heightened the competitive pricing environment. Even at this point in the business cycle, ABF has maintained solid pricing discipline in line with the value that we offer. In a number of important ways, ABF offers superior transportation services and we believe that our customers recognize the overall value of doing business with us. In each month of the second quarter, ABF consistently secured acceptable rate increases from customers operating under contracts and deferred pricing agreements. In total for the second quarter, we secured an average increase of 3.8% on these price sensitive accounts. Each quarter, I like to highlight some of the positive things that are going on at ABF that are benefiting our customers and employees and shareholders; and during the second quarter, the ABF team made further improvement in our industry-leading cargo care.

ABF second quarter cargo claims ratio as a percent of revenue was 0.63%, which was better than we had in this year's first quarter and also lower than last year's figure, which was ABF's best in over 25 years. These Best-in-Class results are no accident. They illustrate the many benefits of ABF's continuing long-term focus on and successful implementation of the quality process. Every person at ABF understands principles of quality that include doing things right the first time, and the need for identification and elimination of the root causes of error. It's always good when we're recognized by the trucking industry for our superior record of excellence in these areas. In late April, for the fourth time, ABF received the American Trucking Association's Excellence in Claims Prevention Award. This is the only national award of its kind in the trucking industry; and in the eight years that it's been awarded since 2001, ABF has won it four times. In the second quarter, ABF continued to improve on a great record as one of the safest carriers on the nation's highways.

ABF's city and road accident rates measured by the DOT recordable accidents per million miles decreased by a remarkable 25% from the second quarter of '07. These numbers are also substantially below our five and ten year averages. These results benefit the health and safety of the ABF team and the general public, and we're obviously very proud of our safe driving experience. During the remainder of the third quarter, additional enhancements to ABF's regional infrastructure will be implemented throughout the Eastern two-thirds of the United States. The operational changes being made will result in transit time improvements in over 23,000 station to station lanes. That's between 25 and 30% of our network. These revolutionary service improvements will allow ABF to compete effectively in both the regional and the national market.

Last year, ABF established a highly effective regional line haul network to complement a very efficient long haul model. It's not easy to do both within the same company. But ABF successfully demonstrated that it can walk and chew gum by improving regional transit times while maintaining and even enhancing the superior service in other areas of our business. To put the current improvements in perspective, the changes in 2007 reduced the transit times in about 6,000 next day lanes. The ongoing changes leverage those previous investments, allowing us to make almost four times as many lane improvements with only a very modest increase in start-up costs. On the zip to zip basis, we're reducing transit times by at least a day in over 4 million lanes. Based upon our experience so far in the regional market, we are very excited about our prospects going forward. And with that, I think we're ready to take questions.

(OPERATOR INSTRUCTIONS). We will pause for just a moment to compile the Q&A roster. Our first question comes from the line of Tom Wadewitz with J.P. Morgan.

Yes, good afternoon.

Hi, Tom. Or good morning, Tom.

Good morning for you, I guess, right? Let's see. I wanted to ask you a little bit more on fuel. I don't know if I missed this at the beginning of the call, but did you -- you mentioned fuel, higher fuel prices as a headwind. Do you have any way of framing what you think the net impact was in terms of, you know, surcharge -- the increase in surcharge revenue versus increase in expense? I guess it's something -- in first quarter it sounded like you thought you were pretty well protected on that by your surcharge. I'm wondering why -- what would have happened in the second quarter?

I don't think there's any difference there, Tom. I think we're just acknowledging that the costs are going up, and not just in the supplies and expenses line where you find diesel fuel and oil. We're seeing it -- just like every other company in the world, I guess, we're seeing those costs filter their way throughout the rest of the income statement. All in, we think we're covering those costs, although as we talked about over a number of quarters, some of those comparisons can get murky. We think we're covering all the costs, but also we think that they're impacting our customers. There is some industry-wide elasticity involved and we think it probably affects us in other yield areas as well.

Okay. So there's not -- it's not like you're coming up on some issues with caps on some of your surcharges or other ways that fuel is becoming more of a headwind for you -- it's not really a change in terms of your positioning versus where you've been, it's just -- I guess, maybe it creeps in in certain areas, I suppose. I'm trying to get a sense as to whether there's a change or not. Sounds like there isn't.

Sure. The line was up 34%. When something is up that much, it's just something that jumps out at you and we felt like we should talk about. We have some fuel surcharge caps where probably we have fewer than those of other carriers, and we're addressing those on a case by case basis.

Okay, fair enough. You had some noise on the Workers' Comp item the last two quarters. Do you have -- is it something where you can have any visibility towards second half and how that might affect the margin performance, or is it just difficult to predict?

I think you're right, Tom, about it being noise. It's obvious that ABF doesn't smooth these costs. We true them up. We reconcile them each quarter. And that's why when you look at those, it's probably more helpful to look at them over a longer period of time. If you take just the first half of this year, you know, the numbers look pretty good. I think Judy has maybe some comment about what happened in the third quarter last year.

Yes, Tom. You know, we had last year's third quarter coming up. We were affected by about a point of an increase in last year's OR as a result of some experience issues we had then and we commented in our release last year that the first half of the year had been good. So looking at it over a longer term, again, we were in line with our historical averages, which that was just -- that's a conversation that Bob and I have had whenever we've talked about the volatility in this line item. You know, it's correct and exactly the right thing to do to true it up at the end of every quarter and you've got reflected your experience.

But really, you can have some volatility in looking at it over the longer term, is a better way to look at it. And when you look at our year-to-date results this year, you know, we're below last year and we're below -- or excuse me, we're -- yes, below last year and then also below our five and ten year averages, which all of that bodes well for the future. But we can't comment on any individual quarter, because we just can't predict the future in this area.

Just I'll give you a little of additional color on that. This year's Workers' Comp number was 180 basis points. Last year it was 130 basis points. But if you look at the current quarter, at 180 basis points, that's just about what the five and the ten year averages are and our year-to-date experience is 150 basis points. So I like the trend. If you throw in BI and PD, in there you get a very similar story; and in an environment where a lot of carriers are showing worse results in these areas, ABF continues to make improvement, basically because of the superior caliber of our driver force.

Right. Okay. And then it sounds like it's notable that it's a bit of an easier comparison in third quarter on the Workers' Comp. One more question and I'll pass it along to someone else. Bob, do you have any thoughts on the pricing environment where it is today? It seems like maybe things were potentially decelerating, getting a little worse in the March, April time frame and -- but yet as the quarter progressed, maybe the pricing and LTL was stable, though still competitive. What's your outlook? Do you think things still stay pretty stable in the second half or are you concerned that they get a little bit worse? Or what are your thoughts on the pricing environment?

I think if I look at maybe the last four quarters, they've seemed to be pretty similar environment. You know, we did have a general rate increase that took place in the first quarter that was, what, like seven weeks earlier than the previous year, so there was some noise associated with that. But I think overall in what everybody recognizes is a freight downturn, it's competitive; but as I said before, although this environment is lasting longer than previous downturns, it's perhaps not as severe. So it's competitive out there and you've got some carriers who have had large tonnage losses and they're trying to take some business based on price and with some success. We've lost a few large accounts on the basis of price, but we picked up some other business as well. I think what's kind of interesting, Tom, is that the lost accounts we had weren't profitable, not profitable, but they had higher than average revenue per hundred weight. At the end of the day, you've got to look at your productivity improvements and you've got to add that to your yield gains, and they have to be more than your cost increases and for us, at least on the year-to-date basis, this has been true for us.

All right. Okay. Great. Well, thank you for the time.

Thank you, Tom.

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

Great, good morning, Bob and Judy. If I take a look at the pricing, I'm trying to figure out -- your revenues were much stronger than I guess we had anticipated. But obviously, the operating income missed by a bit. So I'm trying to take a look at what happened to pure pricing past the fuel surcharge. And obviously you've changed how your build stats are all inclusive and you don't break them out. But if I take a look at your surcharge, it seems to have jumped from about 19% to 35% on a year-over-year basis or about a 16 point change. So that indicates that if your build pricing was up 6%, your pure pricing would have been down about 9%. I want to understand, is that kind of in line with what you're seeing then?

No, Ken. And I think if we would have had a 9% pure yield decline, I think we probably would have noticed that. We don't break those numbers out, and I think partly because there is so much -- there are so many moving parts. I would point to the 2.2% decline in length of haul. You know, I'd point to 4.2% increase in the average shipment size. Those are pretty big numbers and they carry a lot of weight. You know, increasingly, too, at the end of the day revenue is what it is. Yield is what it is. And it's got to cover your cost.

So do you think your ability -- so just looking at the fuel expense, you were relating before, I think in your opening comments, you believe you did offset all of the increased fuel costs?

We think we did, and also the cost increases -- the energy related cost increases -- throughout the rest of the income statement. Again, it's pretty murky because you don't know where all those are; but we think we're doing a good job of offsetting what was a fairly significant increase in energy related cost. However, it affects our customers; and as I indicated, there is some elasticity there, perhaps modal as well, so it's -- I think it's having an effect on us like it's having an effect on the rest of the economy.

All right. Let me jump over to expenses if I can for a second. Judy, when you were talking bouts the Workers' Comp shifts, I take it that was in the salary and wages line?

Yes.

On the rents and purchase transportation line after the restatements that you did, if I go back and readjust first and second quarter, it looks like first quarter -- actually last quarter went down on rents and purchase transportation, this quarter it went up. Just wondering, are you seeing decreased efficiencies? Are you using the rail more? What is causing that shift?

Well, Ken, our rail utilization was really similar quarter-to-quarter. And in fact, we used rail 11.4% of our miles this year versus 11.8% last year. What we've seen is rail fuel surcharges really increase, and that's what's driving the majority of the increase in that line item, is rail fuel surcharges.

Okay.

And there's a few other things that are in that line item, where we used third party transportation on a limited basis or something like that. But that's what's driving the increase in that line item. And we -- on a year-to-date basis our rail utilization was actually down, and so that helped offset some of the rail fuel surcharges issues on a year-to-date basis.

Okay.

I think I pointed out that we're not seeing inefficiencies there. In fact, our load factors are actually improving.

Okay. Just real quickly, then, the fuel is within the -- your direct fuel is within supplies and expenses?

Yes.

Any way to break that out, what percent of that is -- is it mostly fuel or are there other -- ?

It's mostly fuel. But it also includes our repairs and maintenance expenses. And we haven't given the detail of that in the past.

Yes. No, I know that. All right. Thank you very much for the time.

Thank you, Ken.

Bye, Ken.

Your next question comes from the line of Tom Albrecht with Stephens, Inc.

Hi, Tom.

Hey Judy, Bob, everyone. Let me get my factual questions out of the way and then go on a couple of other things. Your average length of haul you mentioned was down 2.2%. But do have you the actual numbers?

It was 1,134.

That was what, 1,160.

Yes, last year?

Yes.

Yes.

All right. And then any comments on your shipments per DSY hour or total pounds per hour?

An increased pounds per hour basis of 4.9%.

Okay. And shipments were up --

0.8.

About 1%.

Okay. And load factor? You used to give that, but I don't think you give it as much as you used to.

I can tell you, pounds per total mile were up about 2.2%.

That's a number that really doesn't mean a lot anymore because as we've entered the regional market in a big way, you don't attempt to have load factor in those particular lanes. So we're really running two line haul operations and we look at them separately in a composite number like that is probably worse than meaningless.

That makes sense. And then percentage of your business tonnage, I guess, under 800 miles?

45.5.

There you go. All right. And on the April 1st new Teamsters contract, I want to make sure I understand this. I know it's about a 3.8% increase in salaries, wages and benefits annually. But am I incorrect in remembering that the benefits part of that does not begin until August?

You're correct. The nominal wage increase on April the first was 2.2%. August first, the benefit increase on the benefits is 8.1%. That's a basic number and it will be different because of differences in employee profile. But those are good working numbers for you.

Okay. All right. I appreciate that. So I just want to make sure I understand, too, on the PT, the predominance of the $4.5 million increase in purchase transport was the higher fuel surcharges in the rail world?

Yes.

Okay. And I assume at this juncture you've not taken advantage that much to put the 4% of your miles on truck load, right?

No, we have not.

Okay. And then, you know, it's -- just kind of thinking through some of the additional flexibilities with the new contract, part-timers, utility workers, et cetera, I realize that you're kind of doing two things. One, you're trying to speed up transit times ultimately as the year goes along, but wouldn't there have been an element to that that just sort of kicked in April 1st and should have been a been benefit to you on the salary wages side?

Well, keep in mind that we were already employing a lot of those techniques under what used to be called the premium service employee. So in April, those employees became utility employees and were basically doing what they were. Now, later this month and on into August, we'll be ramping up in a big way, but our interest here is not so much in cutting costs as it is in dramatically improving our service. And in fact, on a start-up basis, we'll be spending a little bit more money, nothing like what we added last year. Eventually as tonnage levels improve, particularly in the regional lanes and as we get our people off of layoff, which we certainly want to do, we will begin to see some unit cost improvements. But the emphasis for now for us, even in a downturn, is to dramatically improve our service levels, and we're really focused on that.

Okay. And then Judy, you mentioned there was about a $0.04 adverse impact due to the loss or surrender of cash value policies on insurance.

Yes.

So was that the line item that was like 18,000 versus 800,000 a year ago?

Yes.

And so was that a death or a retirement?

Well, it's policies that we maintain on Company executives, and we have about somewhere between 17 and 20 million invested in those, and they're invested much like a pension plan, investment portfolio, would be where you have perhaps 60% in equities and 40% in fixed income; and what happened in the month of June was that the markets were off 10%. These policies, the value of them was affected 5%, which is the shift in the number or the change in the number that you see there. The other thing to note is that these are -- the increases in these policies are not taxable and the premiums are not deductible. So when you see a change in that line item, that's an after-tax number. So it's just a large change and I thought it was worth mentioning since it was $0.04 a share.

Yes, most certainly.

And you know, on a life to date basis, you know, this program has been good for us. Part of this program we inherited from the Carolina acquisition. And we've continued it since that time, so it's been around a long time. Anyway, there's times that you have negative effects and we just thought it was large enough to point out.

Okay. Yes. That's something else. All right. So I guess just one or two other things. How much -- you know, at this point in the cycle, your shipments were down 3.1%. That was on a 4.4% decline in the second quarter a year ago. You know, there's shipments, then there's tonnage. Just negative on top of negative. Does that adversely impact your productivity or at least keep you from realizing the kind of gains that would you like?

Well, you know, obviously, it didn't since even though on a shipment basis we had an improvement in shipment based productivity. I think it's important when you're looking at shipment to consider that there's a cross-correlation between our shorter length of haul and higher shipment sizes. So as we move more into the regional market, you'll see that kind of effect. And also, I think it's kind of interesting to look at the larger shipments -- truck load kind of shipments that we had during the quarter. We've been really kind of surprised by our success in attracting those kind of shipments, even as we continue to raise prices in the spot market. And I think that may point to a firming up in the truck load sector. If that's true, that's prospectively good news for us. As you probably know, the truck load sector tends to see recovery a little before the LTL sector, which sees recovery a little before the general economy. So perhaps the increase in those kind of shipments is a harbinger of things to come.

Okay, and I think my last question, within the ABF Freight System your salaries, wages and benefits were up about $6.8 million. You mentioned the Workers' Comp was 50 basis points, which I guess was about $2.5 million pretax. But that still leaves you with about $4.3 million, and I was surprised that that was higher because the last four quarters had been flat year-over-year or even down a little bit. Was that just execution on your part, thinking volumes were going to be maybe a little bit better? Or was that just the impact of the higher wage cost with the contract?

Well, part of that may have been that. But we also for our non-union employees gave them a salary -- cost of living and merit increases as well. So that's probably part of that number.

Okay. But you understand what I'm asking, though? You've done such a good job, that's kind of one of those things people think of with Arkansas Best, is going to -- if nothing else, they're going to be on top of that one.

Well, we have done a good job. And if you look at the productivity numbers, they point that out. But at the same time, we've got great people in our Company and we're going to make sure that our salaries and wages are competitive and so we're -- even in this kind of environment, headcount is down but we've given salary and wage increases on our people as well.

And Tom, just to further that, you know, on a full-time equivalent basis, our headcount is down 3.7%, which is more than shipments are and definitely more than tonnage, since tonnage was basically flat. So, you know, I think that honestly, when I look at that line, you know, I thought that with the productivity improvements that we had and the actions that we took, it was a favorable result and one that actually helped us at the bottom.

Exactly.

Okay. I appreciate all that discussion. Thank you.

Thank you, Tom.

Thank you, Tom.

Your next question comes from the line of David Ross with Stifel Nicolaus.

Good morning, everyone.

Hi, David.

Hi, David.

A question first, I guess, looking at the traditional long haul business that's always been maybe a bread and butter. If you could maybe separate out the regional business for a second. I know you don't always like to do that. But can you speak to what the overall, I guess, demand level is like in the long haul business? Still down year-over-year, significantly. Has that just been in secular decline for several years, and I guess what are you seeing in the long haul market in general?

Without being quantitative, David, I would agree with the premise that the longer haul markets are softer. Some people looked at ABF's entry into the regional market as the freight downturn began and pointed out that this was not a good time to be entering the regional market. But given what's happened in the long haul market, I'm sure glad we did.

I think there hasn't been a bad time to enter the regional market. Anyway --

Good point, David.

On the RPM initiative, you were looking to roll out the Western third of the country. Do you see the Western third of the country from a regional market perspective being any different in terms of density, profitability, difficulty finding real estate, than the Eastern two-thirds you've already rolled out?

Let me kind of separate it. The changes that I talked about -- the 23,000 new improved lanes are actually in the Eastern two-thirds of the United States. They're an enhancement to what we are -- what we started last year. That will operationally take place in August and we'll start marketing it shortly thereafter. In addition to that, there are a smaller number of lane changes on the West Coast, and we will be doing that probably in the fourth quarter. In both instances, I don't expect -- I expect little if any real estate change, because we are in fact leveraging the facilities that we've already put in place in the Eastern two-thirds of the United States. In the Western two-thirds -- in the Western third, on the West Coast -- those changes tend to be -- because of distances are longer, use different techniques and high velocity exchange points that we have if the east -- we'll have a few out west, but it will largely be line haul changes. So the answer is, we'll be doing both but it won't involve much real estate beyond what we've already done.

Okay. And then as far as fuel efficiency plans are concerned, looks like you did a good job of recovering at least the additional fuel expense. But is there anything you're doing, whether it's putting APU on line hauling units or reducing miles per hour the drivers can drive, to also combat the fuel cost problem?

I think the thing to point out there, David, is we have been doing what we needed to be doing in that area for decades. For instance, we have governed our equipment at 62 miles an hour for the last -- at least the last five years; and before that was 58 miles an hour. We have anti-idling settings on our equipment. So we -- of course, ATUs really aren't a factor for us, because we don't have a sleeper operation. So the things that we need to do to mitigate, to improve fuel economy, we've been doing for a long -- before it was cool to do that.

All right, well, thank you very much.

Thank you.

Thanks, David.

(OPERATOR INSTRUCTIONS). Your next question comes from Justin Yagerman with Wachovia.

Hey, good afternoon, guys.

Hi, Justin.

Hello, Justin.

Hey. Hey, Judy, question on Workers' Comp, because I remember this was a constant theme just generally industry-wide last year. A bunch of people had seen improvement on it. Is there something that changed in the rules year to year that's impacting a little bit of how you're accruing there and maybe has been a little bit of a drag?

Not at all.

Not at all.

I mean, the accounting method and the approach that we've used there has been very consistent for -- well, really since I've been at the Company we haven't made much of a change. We've had just different issues along the way to deal with, but the overriding method there is the same. I think we at times have different results on our development factors, which we update in the first quarter. We talked about that in the first quarter. And that's based on a longer history of our performance on claims increases. But really, it's -- for us, it ends up being an activity-based item. You know, if we've had increases in claims through the normal course or the normal process or we've had an increase in the frequency of injuries or a decrease, you're going to see that reflected in the quarterly numbers. And I think the point that we made earlier on the call is there is some volatility, some fluctuation in that ,and perhaps it's better to just look at it over a little bit longer term basis, and that's certainly what we do. We evaluate it against our five and our ten year averages, and that seems to make more sense to us and makes more sense out of the numbers.

Okay.

And the other thing I would point out is that I'm pleased with these trends. When I look at -- in fact, last quarter when we were able to adjust the development factors, that's positive news. Because what it shows is is that we're seeing progress in that area that perhaps a number of other carriers are not seeing.

Okay. Bob or Judy, either one of you guys, maybe it would be helpful if you could take us through tonnage growth month by month through the quarter. You mentioned that tonnage was down as of the first two weeks of July. Hard to extrapolate anything from that. But just trying to get a sense of the direction through the quarter, how tonnage growth progressed.

Excuse me, Justin. I'll give you the months, and then I want to make a couple comments about it. You know, our overall quarter was basically up 0.2. And when you started off the quarter in April, it was down about a half a point. May was a positive 2.1, and June was a negative 0.9. When you look at that, just on the surface it looks like a big change from May to June -- a deterioration, perhaps a concerning one. But when you sift through this and you factor out the calendar effects of the month -- in other words, the make-up of the calendar of these months -- what you have is April and May probably more realistically were down about a half a point, half a percent. And June was a little worse, down about a percent. So it's definitely affected by the calendar make-up, whenever you look at the individual months. But the basic point that we see is that when you look back at the fourth quarter of '07, kind of beginning at that point, we've been bumping along the bottom -- not seeing anything that's much better, not seeing anything much worse -- and that carries through in July so far.

When you start looking at plus or minus 1% increases, you know, that's just static in the channel, and it's been a fairly flat trough since fourth quarter of '06.

Okay. That's definitely interesting. When you speaking to your customers, Bob, typically, we're moving into the time of year when people in a good environment would be talking about trying to find capacity, trying to figure out how they're going to get goods to the shelves in time for back-to-school, and then eventually Christmas season and everything the fall and winter bring. What are those discussions like right now? Is there any thought that August 15th we start to flip the switch and things start to get a little bit better? Haven't seen a peek season in the last two years. Do you have any expectations around that coming from your customers?

You may recall the conversation that I had after the fourth quarter of '06 where we talked to customers and they told us there was no change, but there was in fact a change. So I don't have a lot of confidence in the anecdotal conversations. I think if you just look at the general press, you start to see some realization that truck load capacity may be finally rationalizing, but that's just purely anecdotal and I have not much confidence on the ability to predict what's going to happen, and particularly on the basis of those conversations.

But having been through multiple cycles and having admittedly a lot more knowledge than most of us, Bob, what's been your experience in the past as you moved through these kinds of periods, when you do see that kind of spot improvement like we saw in June in the truck load market, when you're getting ATA truck tonnage index data that's saying that freight is up year-over-year, at least from a tonnage standpoint? Has that traditionally led to an improvement? If you were flying in a storm and had to use your instrument panel, not looking out at what's in front of you, what would that instrument panel be reading right now for you for the next six months?

Justin, I love metaphors and that's a wonderful one. I appreciate that. It's been my experience, as I indicated earlier, that I start to be encouraged when I see a truck load guys improve. However, there's been some false positives along the way. But I think you've got it -- if you see improved numbers from truck load carriers, I think we in the LTL sector have to be a little encouraged by that.

Okay, and then the last question, because it's getting a little long, from the long haul market you guys did see a decrease in your length of haul. Now, I know that that is easily attributable to some of the initiatives you made in RPM, but would you also attribute any of that to some aggressive pricing? We've heard that at least a few competitors have been very aggressive in the long haul market. You guys haven't been a big discounter in the past. I can't imagine that you have been in this quarter. You know, was there some, I guess, deliberate move in the way that you were looking at that business this quarter?

We've lost some accounts and we've gained some accounts. I think that certainly there's a competitive environment out there that probably is a continuation of what we've been talking about for four quarters or so. I'm not sure I see anything specific. I might even look to import -- Southern California imports as maybe as much of a factor. We have reason to believe that the -- that it's not maybe a specific issue, but that the overall long haul LTL market is soft.

Got it. Well, thanks so much for your time.

Thank you, Justin.

Thank you.

And your next question comes from the line of Ed Wolfe with Wolfe Research.

Hello, Ed.

Hi, Ed.

Good morning. Good afternoon, I guess. (LAUGHTER). Hey, I apologize because I got on a little bit late. I heard the recap you did with Justin about the tonnage trends. I didn't hear what you said about July.

Basically what we said was that it's down about a percent so far.

But really no major change in terms of what you're hearing from customers or the economy -- it feels kind of the same?

It does.

Let's talk a little bit about pricing and your model, and more generally the LTL model. What's the ability, if pricing were to firm up -- and it feels like we're not there yet, maybe a little closer on the truck load side -- maybe we're not even there yet, but at some point when things do tighten up and the economy does get better and it's in between the year, how do you go back and get a GRE after you've gone through it? Can you talk about the ability to get pricing in between or is it really waiting for the next GRE and as contracts come up to get that next pricing?

Well, as you know, the general rate increase has affected less and less of our business over time, and it's become more of a month by month basis. So we have through our contract and deferred pricing process a monthly cycle where we review those accounts and ask for increases; and as I indicated before you got on the call, that we got 3.8% average on those during the second quarter. That process actually is healthy, because it kind of spreads those negotiations over a year rather than in one particular big bite. In addition, if we have accounts that deserve a look mid-cycle, we're not shy about doing that; and particularly, we're doing that with fuel surcharge caps and programs that may have made sense some time ago, but in the current environment no longer make sense. So -- but the biggest thing is not so much mechanical. It's having an attitude and the process to do that, and our people are well-trained. They're well-trained to find out what competitive prices are, and we're certainly going to be competitive in the marketplace. But also, we're also going to add value and then we're going to charge for that value. And I would suggest to you that our pricing execution process at ABF is as well-developed as -- in any industry that you've ever been associated with.

Bob, can you talk to that 3.8%, what is that 3.8 -- is that net of fuel? Gross of fuel? And what did that look like, that same number equivalent, say, in second quarter or in first quarter and fourth quarter?

I saw your comments this morning, Ed. I'll point out to you that it is all-in, net of changes of fuel. So it certainly includes any fuel change up or down that we would have had and you also -- I'm sure you know and misspoke, that the changes in length of haul and weight per shipment would depress yield rather than improve them.

Yes, no, that was a mistake on my part. And a typo. I appreciate that.

But for clarity, on the increase in deferreds and contracts, that includes any change in fuel. It would not exclude that.

So I mean, when you talk about deferred pricing as part of it, what is deferred pricing? What did you mean by that?

Well, it's where we said to a customer, we're going to hold your price for a period of time -- typically a year, but we don't have a formal contract. Nobody has signed anything. We've just kind of said unless something really unusual happens, we're going to give you a stable price for a year. And when that year is up, we go in and renegotiate and so that's -- it's kind of a non-contract contract.

Like in a world contract?

Well, I wouldn't -- I wouldn't put it in those terms. But they're accounts that went through the general rate increase without an increase.

What percentage of your business now is contractual? What is related to the GRI? And what is deferred?

I'd say the GRI is more like 40%, just off the top of my head, and the other 60% is the combination of contract and deferred price increases. The contracts are the minority of that.

Has that mixed changed between deferred and contractual in the weaker environment in the last year or has that always kind of been constant?

I think we always have fewer contracts than most people. We've tended to say that you don't need a contract to do business with ABF. And so -- but in those instances where customers wanted rate stability, we've given it to them, but not through a contract.

In terms of the new Teamsters contract, I'm guessing there's some puts and takes. Am I right that the benefits go up as of August 1st about 7%? You start to see some of the productivity, can you talk to some of that that starts to kick in?

Yes, we covered that a little earlier. April 1st, wages went up 2.2%. August 1st, we'll have an 8.1% increase, at least in the nominal rate. But we will see some productivity improvements, but we're focused on using the features of the contract that allow us to be competitive in the regional market in the next day and second day market; and so while eventually we will see some cost improvement, we'll see that when we get all our people off of layoff, which we're focused on. The big deal now for us delivering to customers improved transit times in about 30% of our lanes. It's a big deal for us, Ed. It's more important to us than the cost increases, than any cost savings.

Sure. And is some of that related to the driver being able to load and unload?

Yes.

What percentage of your drivers do you expect to pay the extra dollar an hour to be able to do that?

Well, you know, we really don't have those numbers in front of us. But you know, we'll probably be able to report better on that after we get the roll-out completed and we see it in operation either when we have our call in October or perhaps sometime after that, soon after that. But we hesitate to say right now because it's a large change and they're going through the process of bidding those jobs and we really don't have the figures for where we'll end up on it.

That's fair enough. I'll check back with you than after that. Judy, can you talk a little bit on gains of sales of equipment? Obviously, those have dried up a bit. Can you talk to pricing relative to number of vehicles for sale and how we should look at that going forward?

We haven't -- we have had good success in moving the equipment that we've sold. You know, on a quarter-over-quarter basis I think our figures on gain on sale were pretty even with last year, and I don't think that year-to-date numbers are really much different than that. When I talked to our Vice President of Maintenance, Gary Hunt, about this issue, we've had good success and I think the overseas market, we've sold some of our equipment through brokers to a number of other countries, which is somewhat unusual for us. And has provided, I think, some stability to the used equipment market. But we're just not hearing any negative comments or really any positive comments -- things are just kind of moving along as normal there.

The 451,000 this quarter versus the million nine last quarter, there was some real estate in that last quarter, then or was that all -- ?

I'm looking at numbers that are 451 versus 470 or so last year.

No, I'm not talking about last year. I was talking about first quarter.

Oh, in the first quarter?

Yes.

You know, we had some -- I'd have to look back at the year-to-date figures, and I can get back to you on that. I don't have all the detail in front of me. But we had some increased sales activity in the first quarter on assets that resulted in gains. But nothing really significant or noteworthy.

I'll get back to you offline. Sounds like no change in terms of the pricing of trucks are holding up pretty well.

Yes.

And then the last kind of nitpicky thing, the interest income was down a bit even though your cash is up --

Yes.

What's going on with that?

Well, we -- last year in early December moved out of auction rate securities investments. We moved about $80 million out of those. And I'm pleased to report that we had no losses on that event, which I know some of our competitors and certainly several other companies are still waiting to get their money there. But what we had to do in response to that was to move our money into either money market funds, or recently we've been using a CD program; and what's happened to us is our after-tax yield is down close to 2% on the money. So even though we have about $75 million or $76 million on average more money invested in this category, we're earning about 2% after tax less on it; and, you know, again, we are not interested here in being speculators or taking any inordinate amount of risk on these investments. Capital preservation is king. And so that's what we're doing, and this what the market is giving us.

No, understood. I don't think investors are investing in you to be a hedge fund. We should assume at least through the end of the year, kind of keep it at 2%-ish?

Yes, I would -- well, after tax it's about 1.7. It's 2 percentage points less than last year.

FDIC insured also.

Thanks for the time. I appreciate it.

No problem.

Thanks, Ed

Sir, at this time, there are no further questions.

Okay. We thank you for joining us this morning. We appreciate your interest in Arkansas Best Corporation. This concludes our call.

This concludes today's conference call. You may now disconnect..