ArcBest Corp (ARCB) 2010 Q1 法說會逐字稿

Good morning, my name is Tamika, I will be your conference operator today. I would like to welcome everyone to the Arkansas Best Corporation first quarter 2010 earnings conference call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) I would now like to turn the call over to David Humphrey, Vice President of Investor Relations and Corporate Communications. Please go ahead, sir.

Welcome to the Arkansas Best Corporations first quarter 2010 earnings conference call. We will have a short discussion of the first quarter results and then we'll open up for question-and-answer period. Our presentation this morning will be done by Ms. Judy McReynolds, President and Chief Executive Officer of Arkansas Best Corporation, and I am David Humphrey, Vice President of Investor Relations and Corporate Communications for 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 risk. For more complete discussion of factors that could effect the Company's future results, please refer to the forward-looking statements section in the Company's earnings press release in the Company's most recent SEC public filings. We will now begin.

Thank you for joining us this morning. Although we have experienced some stabilization in our business as a result of the improving economy, we're reporting substandard results for the first quarter of 2010. While we have recently seen some minor improvements in our business levels, our industry continues to be in the midst of a very challenging freight environment where current pricing levels don't allow us to fully cover our costs. Despite these ongoing challenges, we continue to focus on providing a superior level of service to our customers in return for acceptable pricing while closely controlling our network cost to a daily basis. We are hopeful the encouraging economic news will continue and it will more effectively translate into further improvements in our freight levels and acceptable margins for our Company. Later, Judy will give her thoughts and perspective on the recent performance and the factors that are affecting it.

Now I would like to cover the details of our results for the first quarter of 2010. Our first quarter 2010 revenue was $360 million compared to $340 million last year. Our net loss for the first quarter was $0.85 a share compared to a net loss of $0.73 a share last year. Our first quarter year-over-year comparisons were impacted positively by small improvements in our daily tonnage levels and the non-union benefit cost savings we disclosed in our fourth quarter earnings call. These positives were offset by declining yields in cost increases under our union labor contracts. Our first quarter results last year were positively impacted by lower compensation's cost as a result of the annual development factor update. We estimate the year-over-year increase in costs is a result of this item to be $3.9 million on a pretax basis. As always on an annual basis, we update our development factors. Our first quarter costs for worker's compensation were only slightly changed as a result of this year's update and, by comparison, our costs are only slightly higher than our five and 10 year averages. During the first quarter, our unrestricted cash in short-term investments declined by $10 million. There this is reflective of our current financial results and the fact that we're not currently generating positive cash flow. Full details of our GAAP cash flow are included in our earnings press release.

Moving on to ABF's results for the quarter. ABF recorded revenues of $333 million compared two $323 million in the first quarter of last year. ABF's tonnage was up 3.3% per day during the quarter off of a very low base from last year. And ABF's first quarter operating ratio was a 110.7 compared to an operating ratio of 108.3 in the same quarter last year. And now, I will turn it over to Judy for her thoughts about our quarter.

Thank you, David, and good morning. ABF's first quarter results reflect the first quarter levels in the midst of a challenging pricing environment. There are many signs that indicate our overall economy is getting better and in the first quarter, they didn't result in improvement in our operating margin; however, ABF continues to focus on the needs of our customers. Our customer-centric approach to the marketplace has produced good results in the past and has sustained us through the difficult period of the last 3.5 years. We remain firmly committed to it and know it will be the key to our future success. ABF's first quarter tonnage per day, as David reported, increased by 3.3% compared to the same period last year; however, you will recall that in the first quarter of last year our tonnage was down 16% versus 2008. Generally, our freight levels are down over 20% compared to the second half of 2006 when the freight recession first began to effect ABF. We're encouraged by this quarter's moderate improvement in business but our results are an indication we still need a consistently higher level of properly-priced freight moving through the ABF network in order to fully leverage our operational resources and return to profitability.

It's my goal to continue to find ways to increase the very ability of our overall cost structure because of the uncertainties we face with this economy and in the marketplace. Pricing in our industry remains at a level that doesn't allow us to adequately cover our ever-increasing operating costs. We continue to feel the negative effects of aggressive industry pricing that began in the second half of 2008. In mid January we implemented a increase that is holding more firmly than last year's increase but not as well when compared to our longer-term history. ABF's total billed revenue per hundred weight decreased 1% in the first quarter, despite a 'increase in fuel surcharge levels associated with higher diesel fuel prices. Removing the effects of fuel surcharge and changes associated with shipment profile and freight mix, ABF's base pricing decline is in the low to mid-single digits. Combined with very low business levels, this adversely affected our margins in the traditionally challenging first quarter.

ABF has maintained a high level of customer service in spite of the fact that network resources are at very low levels. Our people have always been one of our greatest competitive advantages and they continue to perform in a superior manner even in the currently challenged environment. For instance, ABF has always been an industry leader in the safe handling of customer cargo. In the last two years, ABF's cargo claims as a percent of revenue have been as low as we have experienced in over 25 years. And this year's first quarter, ABF's cargo claim ratio was 0.51% of revenue which amazingly reflects further significant improvement versus the low levels of 2008 and 2009.

As we saw in late 2009, ABF's first quarter -- this year's transit time performance reflects year-over-year improvement as ABF continues to excel at meeting customer requirements through the delivery of shipments at the time they needed. Also in the first quarter, ABF's frequency of DOT recordable accidents was, once again, in the low range recorded in 2009 which was ABF's best in 17 years. Those are all examples of ways that our people make a meaningful difference by working in a productive, cost-effective manner so that ABF offers one of the best overall levels of service in the LTL industry.

There have been recent developments in a couple of important areas that I wanted to mention. Both of these impact our Company's future greatly and progress on them will help ensure our future longevity. Last week, ABF reached a tentative agreement with the leadership of the teamsters union on changes to our current labor contract to include a 15% wage concession and an earnings plus plan that pays our union and non-union employees when ABF's operating ratio reaches certain levels of profitability. If this agreement had been in place during the full year 2009, the annual operating cost savings would have amounted to approximately $74 million which equates to between 5.5 points on ABF's operating ratio.

This tentative agreement, which was overwhelmingly endorsed by the teamster leadership is a step in the right direction in addressing our higher cost structure that currently puts us at a sizeable disadvantage to all of ABF's union and non-union competitors. The proposed contractual changes agreed to last week incentivize all of our employees to work together to improve levels of profitability. As improvements in our Company occur, the proposed agreement calls for some or all of the wage concessions to be restored. We're pleased with this tentative agreement and the help it provides us to better align ABF's cost structure with that of the rest of the LTL marketplace. We encourage all ABF union employees to vote in favor of this much-needed agreement. Based upon our current schedule, the ballots should be mailed April 30 and they should be counted by May 21.

Throughout the last few years, our non-union workforce and executive team have made numerous financial sacrifices by foregoing annual cost-of-living increases, absorbing higher healthcare costs due to structural changes in our Company plans, suspension of 401k match benefits and other changes to freeze certain executive benefit plans that have further aligned compensation with the performance of the Company. In last quarter's earnings release we highlighted some expected cost savings associated with further reductions in non-union fringe benefit costs. We are still on track to achieve the 2010 cost savings versus last year, likely in the upper end of the $15 million to $18 million range we previously provided.

Secondly, late last month legislation was introduced into the US senate that addresses the payment of multi-employer peg fund benefit to retirees whose companies have gone out of business and no longer make contributions to the multi-employer pension funds. Similar legislation was introduced in to the house late last year. We support and have been working to secure a legislative solution that addresses the current inequitable situation in which some of ABF's pension contributions are, in effect, used by multi-employer funds to pay the benefits of persons who never worked for our Company. If this legislation ultimately becomes law, it will be an important step toward making sure that all of our pension payments go toward our goal of fulfilling our obligations to ABF employees and retirees who have served us see well over the years.

Recent economic signs point to a slowly-improving economy and we're hopeful that this will translate into continuing improvements in our business. Though our first quarter tonnage is somewhat positive versus the extremely low tonnage levels of last year, we still don't have enough freight moving through the ABF's network to adequately take advantage of all the potential leverage in our operating model. In addition, the lingering effects of the aggressive industry pricing continue to impact our ability to retain existing accounts and obtain new customers at compensatory prices.

As our business has stabilized somewhat since the beginning of the year, we continue to emphasize our traditional principles, including offering a high-level of customer service and superior value while closely controlling costs and maximizing network resources, pricing in a disciplined manner that centers on individual account profitability while seeking to fairly reimburse ABF for the enhanced service that it offers. During the challenging period in our business, we have prudently made strategic investments in our award-winning sales force and design of the ABF's regal network that position us for the increased portion of the regional and long-haul markets; however, it is vital that business conditions and pricing levels continue to improve and for our employees to vote in favor of the wage concession and earnings plus plan so we can return to profitability and once again build towards sustaining our Company for the future. David, I think we are ready to take some questions now.

Okay, Tamika. I think we're ready for questions.

(Operator Instructions) The first question comes from the line of Edward Wolfe with Wolfe (inaudible).

Hi, good morning.

Good morning, Ed.

The 15% equal sacrifice on the non-union side, how do we think about that? I know you have already implemented a lot of measures. Should we assume that most of that is implemented or is there more to come if this is ratified?

I think if you looked at the agreement that was available with our 8-K filing or online, there were about nine items that were listed there as potential or actually as items that will be considered in this process. There is going to be a subcommittee that is formed and will look at this issue and considering these items will make a determination of what additional sacrifice the non-union folks will have to have to be at parody with the union side. That process is not yet ongoing because we have yet to form the subcommittee that will look at it.

I get it. But just directionally, if it's 15%, are you 10% there, 5% there, 0%, ballpark? Is it more than half, do you think?

I think we're not going to collect all that information and provide it until the subcommittee looks at it. I think you can look at what is outlined and arrive at a way for you to estimate that, but we're not going to give any specific comments on that because it's for the subcommittee to look at.

I suppose there is going to be a snapback for the non-union that matches the union?

Well, I think all of that remains to be determined. You can see from the agreement that the spirit is to have parody between the union and non-union employees.

Okay. What happens if there is partial ratification? Is it possible to have wage reductions for some but a couple of terminals don't vote for it and not have it for others or is this an all or nothing kind of proposition?

It's really all or nothing and takes 50 plus 1 to get it accomplished.

Okay. Getting off of this subject for a second. How do you think, Judy, about the competitive market? The past couple of years you guys have been disciplined relative to the market and certainly more than most and it's come out and maybe not winning bids that other people have gone for but also having to protect some freight of your own. How do you think about if, assuming ratification occurs and you have another 15% on the wage side, how do you think about going and growing again? Is it mostly protecting your own or is there some share to get some volume back into the market? How do we think about it?

I think, obviously, based on our last year's results with $100 million loss, we need this wage concession to improve our profits and that is first order of the business.

Right. And so obviously it's less cost. Do you use start to use it as a method to grow or do you let it sit there all in margin? How do you think about it? Obviously, at some point this goes away and you want to start building up the freight again.

That is exactly right. I think what you have to do when you're thinking about this in terms of your costing is that ultimately at the end of the contract, you go back to the wages that were in place before. That has to be a part of the modeling and a part of the thinking when you work through the pricing decisions. My view is this will be added to our margins. It will reduce the cost that we have and get us in line with the marketplace and our intention is not to take this and go out and discount in the marketplace and take on business that doesn't make sense for us for the long-term .

Appreciate it, Ed. Ed, we'll let someone else get on.

Fair enough.

Thanks, Ed.

Your next question is from the line of Tom Wadewitz with JPMorgan.

Morning, Tom.

Yes, good morning, Judy. How are you doing, David? I wanted to ask you a little more on pricing. I'm sure you'll get plenty of questions on that on the call. Can you give a sense of through the quarter did you start to see an improvement in the competitive dynamic or was it pretty similar in each month of the quarter in terms of the pricing dynamic?

We didn't see a variability through the quarter. We were watching the general rate increase. It was -- by comparison to last year, we are seeing a modestly better result. When you compare to history, it's a weak environment. Also, during the quarter we were working off of a low base of prices to begin with and that is the effect you see in our numbers.

Have you seen any of your own business that has actually had a rate increase where you have had a contract come up and you had a rate increase, setting inside the GRI that you've gotten some traction on, it looked look your base rate was pretty flat if you try to take out fuel in terms of first quarter versus fourth, so do you have any examples where rate actually went up?

In our contracts and deferred pricing figures that we typically report on, we had a 2.2% increase for the quarter and that is on about a fourth of the contracts that we have renewed in a year and so that is modestly better than what we saw in say the last three quarters of last year and it's still not where we need to be given our cost increases.

Right. Okay. I appreciate that. Thank you for your time.

Thanks, Tom.

Your next question is from the line of Jason Seidl with Dahlman Rose.

Good morning, Jason.

Good morning. This is Matt Alcott.

Hi, Matt.

Thanks for taking my question you can talk a little about traffic trends in the the quarter? Have you seen an upward trend as of late?

I think you're probably talking about volume trends as you move through the quarter?

Yes. Yes.

I think David's got those figures.

Yes, let me give them to you, Matt. In January, our year-over-year total tonnage per day was up 1.8%. February affected by weather, obviously, up 0.7 and March was up 6.8% so those were the pieces that added up to the 3.3% in the first quarter.

Got you. My second question is in the unfortunate event that the proposed plan with the union gets voted down, what would be your plan b, if there is one?

I think we're operating today in a mode where that is not implemented and we -- I think we will continue to have to prompt the marketplace to try to gain business with our traditional approach and with our sales force that does such a good job of getting out there and reminding customers of all the things that we do well and we'll continue to have to grow the business. We're also hopeful that there will be some positive impact on the legislation on the pension side that has been introduced now by both houses. We think that perhaps over the next few months there is a good opportunity for this to get a serious look and if it does it could provide a path for us to reduce our pension costs by the percentage of the cost that is paid for people that never worked for ABF and that would be a substantial change as well. Those are a couple of answers to the question. I think what you do is you just block and tackle and approach the business in the way that we have been over the last year, year and a half and the economy becomes more important in terms of when it improves. We are in a situation where the losses that we have, if that continues it will be difficult for us. And that is why this wage concession and earnings plus plan makes sense. It is so necessary because it helps us come closer to aligning our costs with those in the marketplace.

Okay. And you guys had a solid top-line in the quarter but the operating income line fell short of our expectations. Can you talk a little bit about what causes operating expenses to be on the high side?

I think probably, without knowing exactly what pieces that you're looking at, there was a fairly large increase in fuel. And that is on the operating supplies line. That is one area, there are fuel surcharges that are included in the revenues but when you look at our cost, the bigger part of the increase comes from that category.

Okay. Okay. That is all for me. Thank you very much.

Thanks.

Okay.

Your next question is from the line of Jon Langenfeld with Robert W. Baird.

Hi, Jon.

Hi, Jon.

Good morning. Can we talk a little bit about the pieces making up pricing. So you have the GRI which is roughly 40%, a little less than 50% of the tonnage and then you talked about the contractual business, there is a portion of that that is up on a year-over-year basis at least? How do we net that against the fact that if we look at the core commentary that sequentially here the pricing hasn't improved a whole lot?

I think when you look at the different pieces, what I would suggest to you about the general rate increase as you look sequentially, honestly, there should be more of a benefit of that in the first quarter when you compare to the fourth quarter. In past years, again going back before 2009 because 2009 was so unusual in itself, we had a much more positive effect of the general rate increase and so that is, again, as you mentioned, on about 40% of our business. On the contractual side, when you look at what is happening there, you have to remember that we all last year, we were looking through the contractual side and those contracts don't come in. The contracts that we had the 2% increase that is not an immediate effect in the first quarter, that's as you work through the quarter. So more of what you're impacted by is what went on all of last year and quarter-by-quarter, which was not good.

Jon, if you sign a contract at the end of March, that is included in that statistics she gave earlier but obviously that doesn't take effect until we move down in the year.

I got you. So if I look at the number, the revenue per [100 weight], roughly the same in the fourth quarter as the first quarter, fuel prices are higher here in the first than the fourth. You have the GRI which was in effect for some of the quarter versus the fourth. The fact that it's flat where would the incremental pressure come from relative to the fourth or is that just more of a seasonal mix issue with some of the freight weights?

There was an effect of the mix issue. We had more of our growth that occurred in the first quarter was from the truck load side and that is a worse mix of business for us in terms of overall profitability than we have on the LTL business. And that typically happens in the first quarter relative to the fourth quarter because you're going to be out there in the spot market more just to try to fill those trailers. I would suggest to you we had even more of an effect of that in the fourth quarter. I don't know if that is because of something that is occurring in the economy or what specifically is going on there but we had a greater effect of the truck load business of our figures and also it is good to keep in mind that is a worse mix of business for us by comparison?

Okay, all right, good. And then remind me where we stand in the timing of pay incomes relative to the union contract?

On April 1 we had an increase of about $0.45 which ends up being 1.8%, 1.9% increase.

Right. Right.

And then on August 1 there will be a $1 increase that is for health, welfare and pension probably in the order of about 7% of an increase on that.

Okay. Great. And then last question, as you think about CapEx, looks like you did some more operating leases, capital leases in the quarter.

Yes.

How do you think about the 40 to 45 net CapEx you discussed at the end of the year and is that going to be split between capital leases and cash payments?

We have the option to do that and so we are looking right now at whether it makes sense for us on the 345 road tractors planned to buy, whether we'll finance those. We have the option to do that and we may do that if the terms look good. The number for net CapEx that you mentioned, I think the range we gave is $45 million to $50 million, and we're comfortable with that range still being the range to work with for 2010.

The 45 to 50, is that a net or gross number?

That is net.

Okay, yes. Great. Thank you.

Your next question is from the line of Todd Fowler, KeyBanc Capital markets.

Good morning.

Hi, Todd.

Judy, the $1.75 that you mentioned that the savings would have equated to in 2009, is that an all-in number so that encompasses what anything would have been from the earnings plus-profit sharing piece including the non-contribution of non-union employees?

What I said was that the savings would have been $75 million if you had implemented the agreement in 2009. And, yes, that is all in. It considers the earnings plus plan and the wage concession.

Okay and then so what would be different between 2009 and 2010 right now with that $75 million?

I think what we're trying to tell you there is we're giving a benchmarker, a baseline based on 2009 because we don't give earnings guidance. If we were to estimate that for you in 2010, you would then be trying to figure out how much the hours are and in your modeling expertise, you might be able to figure out what our 2010 forecast is that we don't give you.

Just thought I would ask. [ Laughter ] Okay. Moving over, then, to the operating cash flow here in the quarter, I have it as being about $6 million of negative operating cash flow. Is there a tax payment, a tax refund coming through there this quarter?

Yes. Well, go ahead, David.

Our tax year ends in February and we're working on that return now and expecting that later in the year, probably in the third quarter what, we would expect. Okay, a cash rate -- . About $30 million is what we're estimating at this

Okay. So that did not hit yet in the first quarter then?

No.

Okay. And looking ahead as far as the cash for the remainder of the year, there is a question about the CapEx requirements. What other things would be out there? I see the restricted cash which I think is related to self-insurance is about the same number. Is there a chance that moves up or down or is that pretty much fixed and then is there anything else from, I guess, non-union pension contributions or anything else on the horizon for cash flow the rest of the year?

The restricted cash we're estimating to be in a close range with where it is and right now for the remainder of the year. We don't typically see a lot of change with the need there. As far as the non-union pension contribution, based on how things look today, we wouldn't be required to make a contribution. Actually, it's probably not in our plans to do that but we do have the flexibility to make that decision as we go through the year and we watch how the market is returning and that sort of thing. Again, as we stand right now, probably not going to have a tax deductible contribution but that could be re-evaluated at some point later this year.

Okay, I will put somebody else on the clock. Thanks a lot.

Thank you.

Thanks a lot, Todd.

Your next question is from the line of Justin Yagerman with Deutsche Bank.

Hey, Judy, David, how are you?

Hi, Justin. Doing well.

Good. Jon and Tom were asking around it, I guess I would be curious to get a sense of your pricing trajectory here in April. I got to assume that it sounds like maybe your tonnage as well, sounds like tonnage ended the quarter quite strong and from everything we hearing in the environment, sounds like it may have continued in April. I would love your thoughts on that and I have a couple of questions of the operating leverage on the mall.

Justin, you're right. March dip was a little stronger on the tonnage side than January and February, obviously, especially February was affected with weather but it was up 6.8% in March. So far in April through earlier this week, we're up 10% to 11% year-over-year in April.

And, Justin, real quick I want to point something out to you though, and this is in response to the question I think you're asking. When we look at those figures obviously things look look they're getting better. We lost money in every month in the first quarter, including March, even at those tonnage increase levels. Part of it is the mix of business issue that I was talking about but part of it is just an aggressive pricing environment from kind of the latter part of 2008 and 2009 that we're living with today and even though those figures look better in April, our projections show that we would still lose money in April and so this is, I guess my point in telling you that is that it's going to take a while for us to work out of this.

It's a loss for you in Q2. I'm not surprised to hear that. I am trying to get an idea of, on the pricing end of things, how things are trending then given the fact that you're seeing that strong tonnage bump. Are you seeing a commensurate move up just in tariff pricing to your customers in April or are strengthening in terms of that trend and in terms of the GRI holding in?

It's a small slice but based on what I have seen, there is not much change that we've seen in the first quarter.

Okay, within that context, I mean, is it safe to assume that your operating leverage should be working against you and that OR is probably worse on a year-over-year basis in Q2 the same way that it was in Q1?

We have a small slice in April, Justin, I'm really giving you more visibility than I normally would. Typically when you look to the second quarter versus the first quarter, you're going to have an improvement in your overall operating results sequentially. We're hopeful that that will be the case but there is a lot of the quarter left to go.

That's fair. Switching focus a little bit, that $74 million number you that threw out there for the 2009 impact from these teamster wage negotiations in place, I am assuming that you're off of higher hours and higher net count hours than you currently have?

I'm not going to talk about hours, but we do have, if you looked at first quarter relative to fourth quarter, we have about 200 fewer people.

Okay.

Your next question is from the line of Jack Waldo with Stephens, Inc.

Hi, Judy. Hi, David.

Hi, Jack.

I wanted to ask, maybe talk a little bit -- Judy, you mentioned about getting in line with the marketplace in terms of compensation? What do you estimate the wage discrepancy between you and the competition right now?

Well, before we entered this recession on the wage side things were pretty close. What we have seen happen is that the non-union competitors that we have had have cut wages somewhere between 5% and 10% and then with [wire C] out there, there is a 15% wage concession that is in place and so, what I'm referencing is that we're, with this concession agreement, that we're moving closer to the market. There is a range there but just making a comment that we're closer.

Okay. Okay. And you can't ballpark it any which way?

Well, what do you mean? I don't know what you mean by ballpark it.

10%? 5%?

Oh, gosh, I don't really know. I know that some -- there has been discussion of restoration by some of the competitors that we have, but really I don't know what the final outcome is going to be on that in 2010.

Okay. And then you said you see many signs the economy is getting better but no signs in your OR. Under the current cost structure and the proposed cost structure, what do you think the level of freight is to get to profitability?

Well, what I'm -- from the perspective that we have here in the first quarter with the results that we have, we need tonnage increases that are probably in the 10% range and we need 8% to 10% pricing increase for this year and then some healthy increases for the years after that. We're a long way from where we need to be.

And I guess this is kind of the main question from the union side, and then I have one more question after this. Is a 15% price reduction or wage reduction enough to get you to profitability?

Well, I think what we did is we gave you the 2009 view of that.

Yes.

You can look back at 2009 and see what impact it has. In 2009 $75 million would not have taken us back to profitability.

Last question. I understand the 15% wage reduction, that makes sense to me and I understand it helps preserve jobs and I understand how it gets you a lot closer to profitability but it does kind of cap, at least the benefits to you guys or ABF shareholders if things heat up. A lot of that benefit will go back to the employees. I guess my question is --

Jack, wait one second on that. I want to correct something that I have seen out there in some of the reports. One of the things I have notice side a couple of people have been calculating the impact of the earnings plus incentives on the OR before the incentive and it's actually after and when you do that, I think you get a different result.

Oh, so the numbers would go higher not that our -- .

More of it -- .

No that our analysis is wrong.

Well, no, I'm not suggesting that. I'm saying when you calculate the appropriate incentive, the ORs that are listed there are after the incentive.

Okay. Okay. That makes sense.

I think there is a modification that needs to be done in the calculation.

It makes a big difference, too.

Yes, it does.

And then following up on that last question, if -- you mentioned you're down 20% in tonnage, I know there is a clause that if you increase your work force by 20%, is that correct, the old wage structure can go back in?

Yes.

Okay, so if there was a huge pickup in the economy or if there was huge industry consolidation, anything that would make your tonnage go back to 2006 levels, your employees and you guys would go back to the same structure we're dealing with, is that right?

I think there is another caveat there that profitability of the company will be considered and so it is not without that discussion first.

Understand. Understand. Okay, thank you guys very much for your time.

Thanks, Jack.

Your next question is from the line of Chris [Weterby], FBR Capital Markets.

Great. Thanks. Good morning, guys.

Good morning, Chris.

I guess, Dave, to get perspective when you think about the volume trends in April here, they were looking up 10% to 11%. Just to remind us from a year-over-year perspective, I think last -- second quarter was pretty flat and down 17% for most of the quarter.

Yes.

Was there a lot of variability month-to-month there?

Yes, very little, in fact. I'm looking at it here. April of last year down 17%, May down 16.8%, June down 16%. It all added up to 17% for the quarter so very consistent. To Judy's point earlier, we're comparing back to some very, very low levels. So we got some increases and we're encouraged by that, but we're really coming off some very low bases.

It gets to that point when you talk to your customers and I know they have fairly limited visibility into what their shipment levels are going look like in the go-forward period, but is there a sense from an absolute basis that there is a lot of momentum to the upside? I'm trying to get a sense of the speed or direction of the market as it's getting better.

What I would suggest is the LTL market is recovering very slowly. More of what we have seen has been on the truckload side and pure LTL market is a part of what we're seeing in terms of increased levels but it's not increasing at the pace of the total.

Okay, okay, that is helpful. Switching over to pricing, if you could talk about the competitive dynamic within the LTL industry as far as maybe freight switching at this point back and forth to carriers, I guess how much are you having to still defend freight or is there seemingly a sense of more rationality in the pricing environment?

We're still having to go through some difficult discussions with accounts that we have had for long periods of time. It may be modestly better as we reported in terms of the contract and deferred pricing increases and what we have seen on the general rate increase compared to last year but we, as I mentioned earlier, we have a -- we're at a level where we need some large increases to get back to historical profitability levels and we're going to need some help on the cost side and on the tonnage side to get there as well.

And the commentary on pricing in the industry is better and that is good. We won't need to see that in the numbers that are reported.

Okay. That is helpful. And kind of the last question, just generally on the kind of capacity. When you think about where we are, obviously so far from where we were at last kind of peak levels, based on what you have on the ground now, can you give us a sense of roughly what you think your capacity is and how you will be able to absorb there on the material increases on the cost side, just trying to gauge the operating leverage in the business as it stands right now.

The bigger part of our costs that we have, employees and equipment, we have scaled pretty well. Where you get into more of the fixed cost is servicing given cities. If you're going to service a particular city, you have to have certain city routes in place and if you're going to give good services as we have been committed to doing, you're going to continue to have that service ongoing even if the trailers are half full and so there is some fixed cost that are there and in place. Also with our regional network, we have been giving good service on our next day and second-day lanes and that is basically a fixed cost network. So those two areas are areas that we could have an advantage by adding more freight. But in the longer-haul lanes and with our equipment levels we've scaled those pretty well and if we brought on a lot more business, we would have to bring on more people and more equipment to handle that business.

Thanks, Chris.

Thanks very much for your time, guys.

Thanks.

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

Hey, good morning.

Hey, Ken.

David, Judy.

Hi, Ken.

I just want to talk about on the pricing, obviously, a big point of discussion, when you -- you talked about people watching the GRI and seeing how it fleece through. What are you seeing on the market as far as you're not going to speak to any particular competitor but after why -- or I guess after Fed Ex (inaudible) got really aggressive on pricing as we entered the year they kind of pulled back from that and Yellow did a little bit to win back some business. What are you seeing now from inaggregate those largest of the competitors in the market, I want to understand why where you're seeing the aggressiveness right now.

Well, I'm not going to name any particular competitor's name. What we're seeing is not much change. Just kind of collectively, I think, from our sales folks that is what I hear.

Collectively, when you say not much change meaning there is still aggressiveness out in the market?

Yes.

Okay. And can you talk about the mix and class changes as well?

I think a couple of things to note for the quarter. I mentioned earlier that we have had more of our tonnage increase that is weighed towards the truck load increases and we have also had more growth in our short-haul lanes than long-haul lanes.

Ken, a couple other things to think about. Length of haul was about the same, that is basically flat for the quarter.

Yes.

And I'm looking at average class on our freight and it was about flat as well.

That is great stuff. And you said more short haul. And do you still break out the regal business as kind o percent of revenues?

I think it moved to 59% of our total tonnage versus 58% last year.

All right, wonderful and thanks for the time.

Thank, Ken.

Thanks, Ken.

The next is from the line of David Ross with Stifel Nicolaus.

Good morning, Judy. Good morning, Dave.

Hi, Dave.

Can we talk about this MOU, I guess, the employee plus plan a bit? Yes.

Okay.

I am having a hard time understanding the math. I want to know what you're using for the benchmark because in the table listed it will say 95% operating ratio reported and 3% of pay and --

The operating ratios are after the incentive.

What operating ratio is used to calculate the incentive?

You have to have the incentive and work back to it. It's a circular calculation that is not as easy as the straight forward calculation.

That is what didn't make sense to me.

What we plan to do, Dave, after we file your report, we're going to send you an example.

Okay.

We'll make that available to anybody. And that does appear circular, I would agree with you, but I'm told it's fairly simple math actually. We'll provide examples for anyone that is interested.

Okay, that is helpful. It still looks like at some level, maybe not the level we initially assumed, that you cap out in the profit and employees reap the benefits of really doing well?

I think what it -- two things that it does, and I think you would agree with me, I think you would agree with me that most of these are good things. If we were to get into the low 90s in terms of operating ratio, the wage cut would be restored and we would love to have that problem. And then also, what is there is it creates a situation where more of our costs are variable and actually move with our earnings. That is another goal we have is to make more of our cost structure variable. It gives us the flexibility to deal with whatever conditions that are out there in the economy we're faced with.

I didn't see, I think they are good things, as you mentioned, but is it a 92 OR that the waste cuts go away?

I think it's a 90.9 is what I think it is.

Okay. It looks from here because the wages are about a third of your cost structure and a third of revenues that your every hundred basis points in additional margins it is a 3% increase in pay so at some point it looks like that is a one-for-one kind of trade off and I didn't know if that is the 93 OR, 92 OR, maybe you're saying -- .

I think it's 90.9.

Okay. And it will be helpful to see an example.

Yes. Yes. I'd be happy to do that.

The other question, you talked about the mix of truckload versus LTL and the whole definition is the 10,000-pound shipment and I know you guys look at it differently than that.

The truckload rate is what I'm referencing.

If you had to look at the truckload weighted freight versus attritional LTL freight, how much of that 10%-11% growth in April do you think is pure LTL versus head of truckload having an impact on the growth?

We have gotten away from the split of that and I will give you the color that it's more of the growth relates to truckload than it does to LTL.

Okay. And that is helpful. Last question on fuel. You mentioned fuel expense rising.

Yes.

You have fuel surcharges to cover that. I didn't know if fuel was a net neutral in the quarter, if you lost a bit due to caps you had in place, better pricing environment or rising fuel helped you on the margins?

I think that you have a mix of things that are a little bit different in the first quarter than we had in the past. When you have declining yields excluding fuel surcharge levels, when those fuel surcharge is applied to each bill based on the revenue that is billed and one of the things we're seeing in the first quarter is weaker fuel surcharge levels because our pricing on the base business is worse and that is something that has had an impact on fuel surcharges as well.

That makes a lot of sense. Thank you very much.

Thanks.

Thanks.

Your next question is from the line of Matt [Macquire] with Piper Jaffray.

Thanks, guys. Good morning.

Hi, Matt.

One quick questions for you. As you see more tonnage come in to that network obviously that is a good thing and granted not at the average yield you guys would like to see. What is the thought process in terms of capacity and more so kind of heads in your network? Is there the need as we see tonnage kind of ramp up here to start adding back personnel at this point?

We typically scale our workforce to our business level. So, yes.

Okay. And in terms of the potential timing for that, as we enter and we're in second quarter and feels like we're seeing potentially sustained double digit year-over-year growth in terms of the tonnage, are you guys starting to add heads at this point in time or is it more of a kind of second half event?

As Judy mentioned earlier, we were down 200 people in the first quarter versus last year and we still every day and have done this forever. We match our labor with the business levels and you have to address what you have to handle and we have been doing that and continue to do that. Certainly, we have some available capacity where we can handle this some freight and as Judy pointed out earlier, as we would have some pretty significant increases, we would ultimately have to add some resources to handle that and we're manage that on a dally basis as we always do.

Okay. Thanks.

Thanks a lot.

The next question is from the line of John Barnes with RBC Capital Markets.

Hi, John.

Hi, John.

Hi. Good morning. Judy, unless you want to give the specific numbers, I was at least looking for some direction in terms of the operating ratio on the long-haul business, traditional long-haul business versus the regional, and I am specifically interested in your comment about how the regal network is much more of a fixed cost network. Can you talk -- what's influencing the unprofitability more?

I think we're still in a mode where we're adding freight to our regional network. We put it out there for customers to utilize back in the first part of 2007. We have made some progress and still have a lot to go and at this point our regional initiate of, we're still losing money on that initiative and as we add additional freight, that freight is good for us typically because we have those tractors and trailers and people involved every night. So that is what is happening with regional. I think the long-haul business is going to be reflected in our overall operating results. We lost money, quite a bit of money, in the first quarter and it's a losing proposition at this point.

Is regional losing more than the traditional business or is it losing less as a result of just being a smaller business?

I think the fixed cost coverage issue causes you to have more of a loss in the regional network but it's not a huge number and we're making progress on it.

Okay. All right. Is there any, given where the volumes are today, trying to get the cost structure, you said more variable? Is there any attempt, are you look at all at downsizing the size of the network?

We don't see a great need to do that. I can tell you we have had some consolidations of facilities that have made sense for us. We were at the end of last year at 281 facilities and Dave is going to read to you the number that we're at now which is a few less.

A few less facilities and what we're doing, John, is you're tweaking the network and seeing where you can make changes and do things like. That we have done that to give you an idea of some of the capacity numbers. City Tractors are at like March 1991 levels, facilities are at 1987 levels. We're always doing that, trying to see is there a better way of handling the freight we have with the resources we have and doing it more efficiently.

The number, again, I remember this and I think it's 277 facilities we have today versus 281 that we had at the end of the year so on smaller facilities we are making some consolidations and we have been doing that over the years.

Thank you for your time, guys. Appreciate it.

Thanks, John.

Thanks.

The next question is from the line of Jeff Kauffman with Sterne, Agee.

Thank you very much. Hi, Judy.

Hi, Jeff.

Hi, Jeff.

David, I want to get a sense of what is going on with weight per shipment. You gave the tonnage changes by month through April. Could you give me similar changes on the shipment side?

I don't know if I have it per month. I can tell you weight per shipment is up 7%, I think 7.1% is what I recall.

Is that pure local legal or truckload?

That is our total tonnage per day and that is going to include all. Judy was talking about the fact we have seen increases in the truck lead seed of things and that is affecting that.

A lot of questions are asked. I would like to drill down on the operating expenses, in particular the fuel expense, the rent purchase transport and the labor. On the fuel side, it was up $10 million. You mentioned the fuel surcharge was down a little bit because your base was down. Of the $10 million increase year-on-year that you paid on fuel, how much of that did you recapture through surcharge?

We don't typically break out the fuel surcharge from our total revenue dollars, Jeff.

What percentage of the increase was covered by the surcharge? I'm trying to figure out how much of $10 million you covered.

I think what you have to do, as I illustrated in my comments before, was it's impacted negatively and positively by would yield that you get on the base business and so breaking that out is not something that is really specifically accurate on a stand-alone basis. I think you have to consider it all in.

Jeff, to illustrate in conjunction with the fuel prices going up to the level of, I mean the fuel surcharge percent it ranged from like 11% to 14% last year and 18% to 20% this year but to Judy's point, that is based on the yields that you're generating and the revenue that you've got.

And what you're give is the published fuel surcharge rate.

Right.

That applies.

Right. Gives an idea that it's gone up.

Okay.

The percentage has gone up.

(inaudible) purchase transport. I was a bit surprised by the increase in that. Was that truckload related? Fuel surcharge maybe reimbursed in rails, weather-related?

In fact, you hit on all three points. I think we looked at the same thing, we're always trying to, you know, figure those things out ourselves and when we dug into that, what you find is that there were more volume loads moving in out of the West Coast, rail fuel surcharges and rates were up quite a bit, if I'm remembering this right it's probably in the 10% range, maybe 9% to 10% which is a lot, and also we utilized rail to catch up after some of the more significant winter storms because it is just an effective way to get your system back in balance.

So would that have been a short-term thing to cover playing catch up or is $34 million probably more of a run rate going forward?

I am not, I think it's going to be variable with our business levels, but two of the three things that I mentioned are probably not going to go away. We're continuing to see more of the truck load volume business and so I don't expect that to change quickly and then also the rail fuel surcharges, I don't think they're going to stop charging the fuel surcharges. Those two things are probably going to be there for the next few quarters. The weather effect was obviously a first quarter effect.

One last followup and then I will turn it over. Weather was an impact. You had shipments delayed, you had trucks idling in the cold, you had people probably standing around the docks getting overtime. Best guess across the categories, what do you think weather probably ran you? I know it's an outdoor sport.

Weather impacted, when we looked at the final numbers, it was less than $1 million so it really wasn't significant.

Okay.

Something to remember is that last year, the first working day in March, there was a significant winter storm.

Yes.

And what Dave is giving you is the year over year.

Right. Okay, guys, thanks so much.

Thank you, Jeff.

The next question is from the loan of Neal Deaton with BB&T.

Hi, Neal.

Hey, Judy and David. Good morning. A quick question. Am I correct that any pension relief you all would possibly get would have to be in the form of legislation from congress because in something they read earlier in the week, it appeared that basically the teamsters wouldn't give any concessions like they did to IRCW, whether it's in the form of pension deferral or whatever. Is that correct?

It's not part of our tentative agreement. We have no change to pension as a part of that agreement. So when you look at the prospects for pension relief, it's a fairly long path. The first step of that would be the legislation.

Okay, and I guess it's fair to assume as the year progresses with elections coming and changes and everything, likelihood of passing seems more difficult the further we go in the year.

I agree with the best prospect for that occurring is over the next few months.

Okay. And let me -- I looked in your K earlier in the week as far as head count and everything. If you wouldn't mind, how many teamster employees did you have at the end of Q1 2010?

I believe you calculate that number 7000; I want to say 7300, something like that?

That's about right.

Okay. And I know you gave the year over year head count with 200 fewer employees, but did you all do any head count reductions from the end of 2009 through March?

Yes.

Yes, we did. That is what she was talking about.

Okay.

We had some of those. Yes.

That was a sequential change?

Yes. The 200 I mentioned is relative to fourth quarter.

Okay, sorry. And then this is more moderate but other revenue category was up higher than we thought and I know that is a catch-all for you all. I want to see what was kind of drove that up sequentially and year-over-year.

One of our businesses that we don't talk about very much but is a good and profitable business that is small is Fleetnet and something that happens with them is they are in basically the business that we call it AAA for trucks. They love it when there is significant winter weather. As you know, there was significant winter weather and they had a pretty phenomenal result and that is reflected in those numbers.

Okay.

It is very small in terms of the Company. With respect to the line-item, it had an effect.

That is helpful. One final one. It looks like your long-term debt crept up a bit from $17 million in the first quarter to $27 million if I looked at that right?

Neal, that was related to additional capital leases we did on the remainder of the 2009 tractors that we bought.

Okay. That's what I thought. How many tractors was that?

350 is how many we had last year.

Okay. And that is all I have got for now. Thank you.

Thank you, Neal.

Do we have anymore?

You have two other questions.

Okay.

The next question is from the line of Arthur Hatfield with Morgan Keegan.

Okay.

Good morning. I'll be quick. I know it's been a long call. Just a couple quick followups. Judy, the question came up early on about potential snapback for non-union employees as we move forward. Who would make that decision?

That is -- on a subcommittee there is represented both management and members of the teamsters. I think on a non-union side what we have to do is make sure in total in terms of wages and fringes that there is equal sacrifice and parody. As long as we're within those parameters, I think we have some flexibility to handle that the way we need to, but we will be reporting the results of that or the decision for that with -- to the subcommittee and hearing what the subcommittee has to say about it as well.

Great, great and that is helpful. And a lot has been said about your operating leverage and I know you discussed the disparity in growth and how it effects operating leverage with regards to truckload rated freight versus LTL rated freight. Did the growth rate in those two metrics, how did they change throughout the quarter?

I don't have that in front of me. I think by memory we had more of the volume activity in March. I don't have that in front of me.

Okay.

We can answer that question for you from a trend standpoint offline.

That would be helpful. That is all I got for now. Thank you.

Thanks.

Last question, Tamika.

The last is a followup from Edward Wolfe.

Okay, Ed. Make it brief.

I'll let you go. It's been a long call.

Thank you. We want to thank everyone for interest in our Arkansas Best Corporation and this concludes our conference call.

This concludes Arkansas Best Corporation first quarter 2010 conference call. Thank you for participating. You may now disconnect your line.