ArcBest Corp (ARCB) 2010 Q2 法說會逐字稿

Good morning. My name is Teshanta and I will be your conference Operator today. At this time I would like to welcome everyone to the Arkansas Best Corporation second quarter 2010 earnings 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)

I will now turn the call over to David Humphrey, Vice President of Investor Relations and Corporate Communications. Please go ahead, sir.

Welcome to the Arkansas Best Corporation second quarter 2010 earnings conference call. We will have a short discussion of the second quarter results, and then we will open up for Q&A session. Our presentation this morning will done by Ms. Judy R. McReynolds, President and Chief Executive Officer of Arkansas Best Corporation, and Mr. Michael E. Newcity, Vice President and Chief Financial Officer of Arkansas Best Corporation. We thank you for joining us today.

In order to help you better understand Arkansas Best Corporation and its results, some forward-looking statements could be made during this call. As we all know, forward-looking statements by their very nature are subject to uncertainties and risks. For a more complete discussion of the factors that could affect the Company's future results, please refer to the forward-looking statements section of the Company's earnings press release, and the Company's most recent SEC public filings.

We will now begin with Mr. Newcity.

Good morning, and thank you for joining us.

Although increasing tonnage levels at ABF contributed to improving financial trends in our business, the improvement was not enough to return our Company to profitability in the second quarter of 2010. The additional freight moving through the ABF network has allowed for better utilization of system capacity, and has helped reduce the operating loss during this challenging freight environment. As we move into the second half of the year, we hope to see continued improvement in the overall economy and sustained enhancement of the freight fundamentals that positively drive our business.

Later, Judy will give her thoughts and perspective on our recent performance, and factors that are affecting it. But now, I would like to cover the details of our results for the second quarter of 2010. Our second quarter 2010 revenue was $411 million, a 13% increase over last year's second quarter revenue of $363 million. Our net loss for second quarter was $0.30 per share compared to a net loss of $0.62 last year. The results for the quarter reflect market-based changes in the cash surrender value of Executive life insurance policies that reduced our earnings by $0.07 per share compared to last year's second quarter. ABF's second quarter workers' compensation and third-party casualty costs as a percent of revenue were below the unusually high levels we experienced during the same period last year, though they did somewhat exceed our five and ten-year averages.

During the second quarter, our unrestricted cash and short term investments improved to $144 million. The improvement included the receipt of Federal and state income tax refunds of $29 million. Second quarter working capital requirements did increase, primarily reflecting higher receivables associated with improving business levels. Full details of our GAAP cash flow are included in our earnings press release. Our year-to-date effective tax rate was a benefit of 37.9%.

Arkansas Best's solid financial foundation has been an important element sustaining us through the recent difficult period. Earlier this month, in an attempt to expand our financial flexibility, we filed an automatic shelf registration statement with the Securities and Exchange Commission. Though we have no imminent plans to offer any securities in the financial markets, this prudent step equips us to take advantage of potential marketplace opportunities.

Now moving on to ABF's results for the quarter. ABF reported second quarter revenues of $379 million, compared to $344 million in the second quarter of last year. ABF's tonnage increased 11.9% per day during the quarter, versus last year's second quarter that was down significantly from the previous year. ABF's second quarter operating ratio was 103.3% compared to an operating ratio of 107.8% in the same quarter last year. This reflects a 4.5 point improvement in year-over-year second quarter operating ratio. Our sequential first quarter to second quarter operating ratio improved by nearly 7.5 points, which is the second best sequential improvement experienced in the last ten years.

Now I will turn it over to Judy for her thoughts about our quarter.

Thanks, Michael.

First of all, I want to welcome Michael as the newest member of our Executive management team. Michael has been with our Company for 17 years, and he has played an important role in the creation and development of a number of unique innovations that have enhanced the services we offer to our customers, and has improved the analytical tools we use internally to understand and evaluate our business. He has the knowledge and enthusiasm to help us adapt to an ever-changing industry environment, and to identify growth opportunities that will contribute to our Company's future success and longevity. I am pleased to have him in this important new role.

Now turning back to our results for the quarter. ABF's second quarter performance was positively impacted by the increasing level of freight moving throughout our network. ABF's second quarter tonnage per day increased by nearly 12% compared to last year's very weak second quarter, when year-over-year tonnage was down 17%. Year-over-year tonnage so far in July is up approximately 14%, but as we move through the third quarter, our comparisons become more difficult.

We are encouraged by the progress we have made in reducing our quarterly losses. It appears that our economy is slowly rebounding from one of the worst freight recessions in our Company's history. ABF was able to capitalize on an improving economy by increasing its freight totals consistently during each month of the quarter; nonetheless, we are not pleased with our results, and we know we still have work to do in order to return our Company to consistent profitability. It is essential that we act to improve the margins on existing freight through disciplined cost control and better pricing, and that we add new freight at yields that properly compensates ABF for the value it provides. ABF will maintain its long-established emphasis on listening to the specific needs of our customers, in order to offer unique solutions that form the basis for long-term, mutually beneficial relationships.

As a result of the recent improvements in the freight marketplace, we have found that, once again, more value is being placed on the high level of personalized service offered by ABF. For nearly two years, LTL industry pricing has been at extremely low levels, because of fierce competition for a reduced level of available freight, and competitive pricing that was far below rational levels. This activity is contrary to ABF's discipline pricing approach and, as a result, our freight yields have also suffered. Consistent with the levels we saw in the first quarter of this year, ABF's second quarter total build revenue per hundred weight decreased nearly a percent, despite a year-over-year increase in fuel surcharge levels associated with higher diesel fuel prices. Removing the effects of the fuel surcharge and changes associated with shipment profile and freight mix, ABF's year-over-year and sequential base rate LTL pricing declined in the low single digits.

However, we did experience improving pricing trends throughout each month of the quarter. Retention of the mid-January general rate increase exceeds last year. The level of price increases secured on contract and deferred pricing accounts renewing in the second quarter was better than it has been in two years. If pricing in our industry truly solidifies, we will be operating in a healthier environment, where ABF's high degree of value and superior service can generate success for our Company.

As many of you know, in late May, ABF Teamster employees turned down a tentative labor agreement that included a 15% wage concession, and a performance-based incentive plan. Since that time, we have been evaluating our various options for achieving our goals of increasing the variability of our cost structure. We believe that solutions can be found that are beneficial to everyone. We greatly appreciate the financial sacrifices all of our non-union employees have made during the last few years to help our Company get through this difficult time. At the beginning of the year, we highlighted expected 2010 costs savings associated with reductions in non-union fringe benefit costs. As we reach mid-year, we are still on track to be in the upper end of the $15 million to $18 million range of yearly savings that we previously provided.

It seems that every quarter ABF's people find a way to excel in various areas of our Company, and this year's second quarter is no exception. One area of consistent excellence at our Company is the safe and careful handling and loading of shipments moving throughout the ABF network. In the last few years, cargo claims costs as a percentage of revenue have set long-standing records. In this year's second quarter, ABF's cargo claims ratio was 0.44% of revenue, which reflects further improvement versus the already low rate recorded in the first quarter.

As previously announced, early next month ABF will have 16 championship drivers from ten states competing in the National Truck Driving Championship. ABF will be represented by six repeat winners from last year, four 2010 state driving grand champions, and three former national champion drivers. In addition to these individual achievements, ABF recently won team driving championships in Arkansas, New Mexico and Wyoming. These are examples of the excellence that we strive to achieve everyday at ABF. These superior accomplishments translate into a better experience for our customers, and safer streets and highways for our entire nation. We wish the ABF team good luck next month, as they represent the excellence of all ABF employees in the important area of driving safety and superiority.

During the first half of this year, we have been pleased with the improvements we have seen in our nation's economy. However, our economy -- the recovery appears to be tenuous, and there's uncertainty about the rate of further improvement we will see in the second half of the year. ABF's business trends have always correlated well with the economic activity of the manufacturing sector, as measured by ISM's CMI Index. Consistent with historical patterns, ABF's tonnage began to increase approximately five to six months after the PMI Index indicated the beginning of the manufacturing recovery. We remain hopeful that ABF's business will continue to grow, consistent with a positive PMI reading over 50. Though we remain cautious, as the growth of the PMI Index has moderated recently.

Moving forward, our Company will operate based on the principles ABF has consistently followed in both good times and challenging times throughout our history. These include utilizing our award-winning team of employees and technological innovations to offer a superior service in the LTL industry; striving for consistent growth of our business based on the goals of long-term profitability and development of strong customer relationships; establishing customer pricing that emphasizes individual account profitability, and fairly compensates ABF for the value it offers each of its accounts; and maintaining a conservative capital structure as it offers us flexibility to act on future strategic opportunities that might present themselves. We have a great team of employees who offer the best customer service in the LTL industry. We pledge to do everything we can to return to a sustained level of profitability that will insure our Company's future success.

And now, I think we're ready for some questions, David.

Okay, Operator, I think we are ready for questions.

(Operator Instructions)

Your first question comes from Jason Seidl with Dahlman Rose.

Morning.

Morning, everyone. A couple of quick questions here. You mentioned that you guys have started to see some of the best pricing renewals in the last two years; can you give us numbers behind that? What are you renewing the pricing at on contracts?

What I was referencing there, Jason, is an increase in our contract and deferred accounts in the second quarter that was nearly 3%. Those are our most price-sensitive accounts, and so that's an average for the accounts that we dealt with during second quarter. And as mentioned in my comments, that's the best we have seen in about two years' time.

Has it been pretty evenly divided between regional and longer-haul business at 3%?

I think there's probably no difference to note there.

Okay. Could you give us an update on the legislation in Washington as it pertains to the multi-employer pension issue?

Yes. We're actually somewhat disappointed where that is at this point. There's two bills, as you know, that have been introduced, one on the House side and one on the Senate side, and there's not much that's moved in Washington over the last few months, and our -- bills relate to the [partition] and the orphan relief really are no exception to what has been happening to other pieces of legislation.

We get attention and we get recognition by the Senators and Congressmen when we talk to them about this. It is certainly the case that 30 years ago, when the industry was deregulated and these multi-employee rules came in, really the Government created the situation that their in, and there's recognition that the Government needs to fix that problem, but as you know, there's a political environment that you have to work through there, and honestly, that is causing this to move slower rather than faster right now. It doesn't mean it is forever over, but just slower rather than faster.

You know, the last I checked, it seems like there's support on both sides of the aisle, so this isn't something that the upcoming Congressional elections will have any impact on, this is just sort of Washington's backlog and maybe look to 2011.

Well, you know, your guess is as good as mine on that. We are continuing our efforts to participate in coalitions with other industries that are affected by this. We continue to keep our lobbyists focused on this, and so we are not going to let our foot off the gas on that at all, and we hope we will be able to make some progress, we actually hope maybe later this year, but certainly in 2011 we hope it moves forward a little bit better.

Okay, great. And the last question and I will turn it over to somebody else, you talked a little bit in your release that you are starting to see or hear some positive commentary in the industry; are you starting to see it? Are you starting to see other carriers take their rates up here throughout the second quarter and early in the third?

Yes, we have seen evidence of that.

Okay. Thank you very much, guys, I appreciate the time as always.

The next question comes from Jon Langenfeld with Robert W. Baird.

Good morning, all.

Morning, Jon.

On the CapEx side, can you give us some view as to how you are thinking about CapEx? I look at CapEx in the last upturn, it averaged maybe about $70 million or more a year. We've been kind of on this $40 million run rate here probably the last three years. So how are we to think about that as you move out the next couple of years?

Jon, I think if you look at what we had as an average during better times, it was certainly more than we are spending today. We can't really give you a figure on that because obviously we want to get the best utilization out of the equipment that we have, and we are not at a place where we are fully utilizing the tractors and trailers that we have today. But as we see the economy improve, and as we have some more certainty surrounding that, you will see our CapEx numbers move up some. But I will tell you, and you can see it a little bit in this quarter, we are able to use relief valves, you know like rail, and if we need to we can use rented equipment and other means to try to address accelerated business levels in a short time frame, and try to assess whether that's going to be permanent or not before we actually bring back more fixed costs. So we do have the ability to do those things, and I think that's beneficial in our cost structure.

You have had minimal cash CapEx, year-to-date at least. Have you had -- what is your expectation for the full year?

The full year is going to be between $45 million to $50 million, probably toward the upper end of that. We are at $5.5 million so far on the budget.

And will most of that be -- is that the cash CapEx, or are you still thinking operating leases on some of them?

That's cash CapEx.

Cash. Okay. How do we think about the shipment size? You are at the highest shipment size, at least tons per shipment, that I have on record for the last couple of decades, so do you think this is a permanent shift? Is this the outcome constrained truck load capacity and, eventually, you know, as that market eases its out, you know, you will see that go back, or how are you looking at that internally?

We are actually trying to assess that ourselves, and we don't have all of the answers, I can tell you. The interesting thing as we moved through the quarter, the LTL weight per shipment continually moved up, and that is not to say what you have suggested isn't the reason for that, because when you see capacity tighten on the truck load side, there are larger LTL shipments that will move back into the LTL environment. So there's several different things going on here, probably an improving economy, what's going on with the truck load landscape and the tight capacity there, and honestly we can't tell you whether this trend is one of a permanent nature or not at this point, but we are still studying that issue ourselves.

Okay, great. And then the last question, can you remind us the timing and the magnitude of the wage and benefit increases that the union gets contractually?

Yes. We will see another one in August on the wage side -- I am sorry, the HWMP side, the fringe side, it will be a dollar increase at 6.9%, and then we will see another one in April of 2011 for $0.40 an hour at 1.7%.

That's on the wage side.

On the wage side, that's right.

$0.40 is the wage in April?

Yes.

Okay. Great. Thank you.

Thanks, Jon.

The next question comes from Justin Yagerman with Deutsche Bank.

Hi Justin.

This is Rob Salmon on for Justin. You guys had given some nice color about pricing, and what you are seeing on some of your increases on contracts, have deferred accounts; could you give us a sense, if you adjust for kind of the weight per shipment increases that you saw, which would have a negative impact on the yield, how yields trended from the beginning of the quarter to the end?

Yes. We try, and you know this is difficult, but we with try to strip out profile shifts and other mix changes when we look at revenue per hundred weight. We have -- I mentioned that we had about 3 -- you know, I guess a 3% or so mid-single digit decline, when you look at it on a pure pricing basis. What we saw throughout the quarter, though, was that the weaker part of that actually came in April, and it was better in May and even better in June. So there's a trend there that we are seeing some modest improvement, where it is not improvement that's exciting yet, but it's modest and it's definitely going in the right direction, and it went the right direction during the quarter. That coupled with what we are seeing on the contract side, those are a couple of points of -- of information to think about, when you are thinking about the direction and the trends involved. I mentioned a little bit ago that we are seeing some actions on behalf of competitors. We are hearing about those from the field. So, you know, those are all signs of -- that we are hopeful about.

But again, this is an uncertain economy and an uncertain environment, and so we have got to be mindful of that whenever we are giving color comments to you. We don't have a crystal ball, but things look a little bit better.

That's definitely fair, and any sort of improved rationality in the competitive landscape certainly would help everyone's bottom line. You know, it looks like you guys got a lot of operating leverage out of the tonnage growth that you saw, and you are continuing to see that in July thus far. Could you remind us what the monthly comps are for Q3 from 2009?

If you look at the a monthly in Q3 last year, we were down about 13% in July. Year-over-year in August we were down about 10%, and in September it was about 7% in terms of decline year-over-year.

That's helpful. And then I guess shifting gears to the cost side of the equation, you had indicated that you guys are in discussions with the teamsters, and you feel like you guys could come to an agreement that would be mutually beneficial to both of you guys; to the extent you guys can comment on how those negotiations are coming along, and sort of timing that we should be thinking about, I would imagine this would be something you would like to get something in place in before that August dollar per hour increase on the health and benefits side?

Well, yes, Rob, that is -- obviously we want to, you know, try to find solutions as quickly as we possibly can. I didn't characterize what we are experiencing as -- as negotiations at this point. We are studying solutions. We are in a situation where our interest and the Teamsters' interest in solving our cost structure issues have never been more aligned. There is definitely a need to address that, and we are actively working on solutions and our situation is pretty fluid, and really I am not in a position to give you anymore commentary on the details or as -- the timing because I just -- you know, I just really can't share that and I really can't determine the timing.

So that is where we are. I will commit to you that we are spending an awful lot of time and resources studying this issue and looking for solutions.

Understand completely. I guess final one before I --

Rob, I think let's move on to somebody else.

Okay.

Thanks, Rob.

The next question comes from Tom Wadewitz with JPMorgan.

Hey, Tom.

Morning.

How are you?

Good how are you doing.

Good.

Let's see. You have been asked a couple of question on price, and I want to ask you another one on it. What did price look like by month in the quarter? I don't know if you have given us numbers like that in the past, or are willing to talk about that a little bit? You referred to it improving, but can you give us kind of monthly revenue per hundred weight numbers in the quarter?

Really we don't give that detail, Tom, because there's a lot of work that's involved in trying to sift through and look at the pure pricing part. So we never think giving that level of detail is beneficial for you or for us, because we end up having a lot of confusion about the profile and mix effects.

So, what, what I did say before and I think you can -- you can really look at is the best information for the second quarter is that -- that April year-over-year was weaker than May and then June, and so we saw improvement in the year-over-year trends each month of the quarter. We are hopeful that that means we are going to see some continued improvement. The improvement that we saw was obviously modest, because the overall numbers for quarter were still not where we would like for them to be. But, you know, at least maybe we could call that stable and slightly improving as we ended the quarter.

Were you -- I mean I guess the reported numbers, including fuel, were down about 0.9%.

Right.

Revenue per hundred weight. Were you actually up in revenue per hundred weight in June then?

If you compare June to May, we had a positive.

Okay. So how much conviction do you have on third quarter that you would be up sequentially and up year-over-year in your pricing? And it sounds like your commentary would indicate that's a reasonable expectation; do you think that's the right way to look at it, or is that being too optimistic?

Well, you know, I would say that anything you think about, I would caution you to think of modest improvement. These improvements don't happen, you know, quickly, and we are all -- in this industry, we are all impacted by the contractual arrangements we have entered into the last year, and so it takes time to work through that and for that to work into the numbers, even if you're actively seeing good increases. And, you know, that is certainly true of us, and I believe that's true of everybody, you know, that's trying to work through this issue.

Okay. And then I have a question. If I heard the comment right at the beginning of the call, I think Michael mentioned about a shelf registration and putting that in place, and potentially looking to opportunistically raise some money. What -- I mean bearing in mind that you're conservative in the way you approach things, it seems -- I guess it seems a little surprising that you would consider that, given that you've got a pretty significant -- what do you have about $140 million in cash position and short term investments; can you give us any more thinking behind that comment or how we should view that?

Well, the way we think about that is just -- is just as a public company taking a prudent measure. It is -- we reached the well-known seasoned issuer status, which is impacted by your market cap during the quarter, and we had an opportunity where we could achieve that status earlier in the year, but we didn't want to go through putting the shelf out there because we thought it could add some confusion to other things that were going on for us. But what this does, if we continue to maintain the well-known seasoned issuer, the WKSI status as they commonly refer to it, we can keep this shelf offering in place for the next three years. And what it does is give you flexibility in case you have opportunities that come your way. And there is honestly nothing specific that we are addressing with that today, it is just a prudent financial flexibility measure in the market.

Hey Tom, I appreciate it.

Okay, thanks, David. Thanks, Judy.

Thanks, Tom.

Your next question comes from Edward Wolfe with Wolfe Trahan.

Hey, Ed.

Hey. How are you doing?

Good. How are you?

Good. Sorry to follow up on that question, but on the shelf question, again, it just seems surprising. Is there any financial things that you need to do, whether it is spending on real estate or on trucks, or is it possible as part of flexibility for negotiating with the Teamsters? What should we think about -- why even have the flexibility in place, given your balance sheet?

None of the things that you mentioned are specifically on my mind, you know, specifics that are on my mind as far as any, it is just -- it is just, you know, again, we don't know what's going to happen two and-a-half years from now, and so you put something like that out there to give you the flexibility.

Okay. June, you noted, was up from May on a pricing standpoint. Is it also up year-over-year in June?

I don't believe so. I don't believe so. I don't have that in front of me, but I don't believe so.

Okay. The non-freight, the service and other, it looked like it was -- you know, you had $1.8 million or so of profit there. What is driving that, and is that something that goes forward?

That's -- it is really driven by small logistics company that we acquired at the end of second quarter 2009, plus [FleetNet], plus some parent company improvements, versus a loss from the parent in the prior year.

So is that an ongoing fair enough number to use quarterly, or is there something special this quarter or seasonally?

No because, you know, that logistics company, we actually purchased it at the end of the second quarter, so it is probably not a fair number going forward.

The other thing you deal with there is -- I don't know that you know much about FleetNet, but FleetNet is a company whose average account, or bread-and-butter type account, is a truck load carrier that has 250 to 500 trucks, and you can imagine that their business is improving because of what's going on the truck load side and, you know, they do much better when those trends are much better. So there is some impact that if you believe that the truck load industry is going to continue it improvement, we will see some improvement from FleetNet continue into future quarters. And Michael is right, the other part of that is really related to having a full quarter of this logistics company versus a month of it last year.

So, you know, there are some improvements there; we are not in a position where we give guidance on -- on any detail for our Company, but we do want to comment that those are encouraging signs, and they could continue, depending on your view of the truck load space is.

Okay. And directionally, when I look at your freight, you guys used to break out truck load and LTL tonnage. You don't do that anymore. Directionally, I am guessing the truck load is up much stronger than the LTL, and does that impact the mix of your yields a little bit?

Yes and yes.

Can you give some context around that, how much the truck load might be up?

I think it's up a few percentage points as a total of our business, which in order to move the needle like that, you know, we are seeing strong trends there. There is a part of that business that from a mix standpoint actually would result in reduced yields, but all things considered, you know, that business was good for us, and it was good to do more of that in the second quarter. We did see improving year-over-year tonnage trends as we went through the quarter for LTL, which is also an encouraging sign.

Ed, we appreciate it.

Thanks a lot, Ed.

Your next question comes from Chris Weatherby with FBR Capital Markets.

Great, thanks, good morning guys. I guess just talking a bit about volumes, switching gears and talking a bit about volumes for a second, you look at the sequential improvement from first to second quarter of about 14%, it looks like by far away the best quarter or the best sequential improvement you have seen kind of in the history of my model going back. So I am just kind of curious from your per speck I how you think about that from a business -- just kind of an organic business level perspective, as well as a competitive perspective and what you are seeing in the marketplace, and how you might think about that continuing into the third quarter so far?

We definitely did see better sequential trends. I think that when we look back at our 15-year average, we definitely had a sequential trend improvement that was positive and encouraging. We're continuing to see that in July. July's trends are better than normal sequential trends. So that's encouraging so far. We have the same, I guess, question marks about the economy that everyone else does. We don't know how -- how bullish to be on the economy because of some of the weak indicators that are out there. But what we are seeing so far in the third quarter looks to be good, and it is a little better than we would have expected based on the history.

Okay. And then when you think about market share relative to that performance sequentially, how do you think about maybe business moving around a little bit?

I will tell you, market share is tough to gauge, as much movement as we have seen with some of our competitors. I do think that we're gaining some market share. I think probably it's the case that our numbers are more about an improving economy, but we really don't have a lot of detail and a lot of clarity on that, because of everything else that's gone on in the marketplace.

Okay. And then, you guys gave us the break down on a monthly basis for the third quarter of last year; I am curious if you gave it for the second quarter of this year, just so I can understand how it progressed through the quarter?

Second quarter -- are you talking about last year's trends?

No, this year's trends.

Okay, okay. I got you. Year-over-year, April was up about 11%, May was up about 11.5%, and June was up 13% year-over-year.

Okay. One final question and I will pass it along, when you think about customer activity, you mentioned kind of uncertainty I guess in the overall economy. From a customer perspective, or an account by account perspective, have you seen any difference in attitude or positioning as we've gone through the last four or six weeks, and kind of their behavior, from a business activity perspective?

We have been encouraged by a few signs that we've seen. We've gotten some good increases from some of our larger accounts; none of our accounts is really large enough to move the whole needle themselves but, you know, you have to be encouraged when you see larger, more price-sensitive accounts, take a decent increase. So that has been the case over the last couple of months.

Okay, that's helpful. Thanks for the time, guys, appreciate it.

Your next question comes from Todd Fowler with Keybanc Capital Markets.

Hi, Todd.

Judy, when you think about the sequential improvement in the operating ratio here in quarter, and you think about the sequential trends, can you still see improvement or would you expect to see sequential improvement as you get into the third quarter?

The history is that our third quarter operating ratio is typically better than our second quarter. That wasn't the case, when you look back to 2006 to 2008, because of some other things that were going on with our business and the economy, but typically you would see some improvement, anywhere from 2 to 4 points of improvement based on history. I am not giving you guidance. I am telling you that's what we will see. That's just what the history is, so that's kind of the normal or average expectation.

I understand that would not be guidance, and I guess I am also partially asking is there anything that would be unusual in this third quarter that would prevent those normal historical trends from recurring?

There's nothing unusual that we are aware of. That doesn't mean there won't be something unusual.

Fair enough, I guess. And then how does the network feel at this point, from where rolling stock capacity is? Do you have -- as you've seen the tonnage come back, are there any -- are you getting close to having any pinch points in rolling stock or in facilities, both on the national side as well as on the regional side?

We really have to evaluate that on a location by location basis as far as the facilities, obviously. We always have facilities that have stress on them, and we are always having to address that. We don't have anything that's really materially different than other times going on right now, and we're comfortable with what we've laid our as far as CapEx, you know, based on the tonnage levels that we're seeing today.

As you know in our business, as you add business there's a variable cost component that goes with that. And there's operating leverage that exists on the more fixed infrastructure, but there's definitely variable costs that goes with having business. So if we continue to see better increases, you know, we will have needs that are beyond what we have outlined, but we really don't have that expectation for 2010 at this point, but you know certainly things could change if we saw some dramatic improvements in the economy.

Okay, so based on that, I mean the incremental margins that you experienced during the quarter, you know, with the stronger than expected seasonal tonnage you still should be able to, you know, have similar incremental margins going forward because you are just at the point where it is the variable costs coming back, nothing yet on the fixed side?

Again, without giving guidance to you, everything you said makes sense.

Okay. The last one I have, and maybe this is for Michael, but looking at depreciation sequentially, it was down from the first quarter, at a lower run rate than where we have been for the past several years. I'm assuming that's a function of the operating leases. Is that a decent placeholder to use going forward of does that continue to come down? How do we think about the line item on depreciation expense?

Michael, you can verify this, but I think our full-year guidance for depreciation is somewhere $70 million to $75 million. What you're seeing when you move from quarter to quarter there is really the impact of having lower capital expenditures for a fairly long period of time here. If you just think about the difference between what we're planning to spend, $45 million to $50 million, versus the historical depreciation of $70 million to $75 million, over time if we continue to spend $45 million to $50 million, you know, our depreciation numbers would obviously come down to come closer to meeting that. It's just basically the result of where we've been.

Okay, I've got it. Thanks a lot for the time this morning.

Your next question comes from Ken Hoexter with Merrill Lynch.

Morning.

Morning.

You mentioned the tonnage shifts by month; can you just talk about -- you mentioned July briefly, that they're kind of better than normal. So when you look toward peak season, are you seeing your shippers start to prepare for that peak?

I can't really give you any color on that. I'm not hearing about anything unusual. I'm sure shippers are always preparing for the peak, but it has been so unusual the -- whether there is a peak, when the peak occurs, you know, all of those things that we have been dealing with for really the last four years. I am not hearing anything unusual out of our sales folks or our customers, either one.

Then just on looking at some of the customers that have stayed with one of the struggling carriers, out there are you seeing any increase in discussions for kind of switching, as far as that market share gain that you were talking about.

Nothing that is really dramatically different than what we've seen. Obviously, there was more of that at the end of last year, and that was not so much about us, that is an observation of what went on in the industry, but we are not seeing anything dramatically different than we have seen all year long.

You mentioned on the pricing side, can pricing continue to improve I guess from your point of view without a reduction of this excess capacity, as you see it?

We have seen that, very modest, but we have seen it. So we don't know if it is going to continue or not. But we saw it, as we have mentioned, sequentially throughout the quarter, and so it is definitely possible because it did happen. I will caution you that those numbers are modest, though.

My last one is just on the casualty line, where you mentioned you saw above five and ten-year averages, but still down from a year ago; was this due to accidents? Is it because the equipment is getting older? What is the kind of driving that?

No, I don't think there's any -- there wasn't any specific notable event in the second quarter this year. Sometimes you just have activity that's just a little more negative. We can't attribute it to just a few claims, there's nothing related to a few large claims or anything like that. It is just the way the activity turned out for the quarter. And it's really not materially north of our five and ten-year averages, it is just a little bit.

Thanks.

Thank you.

Appreciate it.

Thank you, Ken.

Our next question comes from David Ross with Stifel Nicolaus.

Good morning, Judy and all.

Hey, David.

A question on I guess the strength you saw by sector, or what your customer base is seeing. I know doing the difficult things well for customers has got you into the furniture business over the past several years, or everybody else has gotten out of it because they thought it was too difficult to haul. There's a spike in furniture shipments this past quarter due to expiring home buyer tax credit, and I didn't know if that was a spike that you saw in your business, and if you think it is sustainable?

Dave, we didn't have anything noteworthy bubble up from our sales group on any particular sector, and on furniture, it is possible that we did more furniture business; I can honestly say nobody mentioned that to me. I hope you're right and that's the case, because typically that's -- that's business that we do and that's business that's good for us.

And then to talk a little about the regional business, you haven't talked about the RPM in a while; if you can give us an update there, and if it makes sense at any point to acquire into that space?

David, the -- what we saw in the quarter was a better growth rate in the regional 1,000 thousand miles or less market versus the long haul. We saw good trends in both, but we saw stronger trends in the regional market. We don't at this point see the need for an acquisition, because what we have done has been organic, it is integrated into ABF's network very effectively. I think you know that we use same city pick up delivery operations, the same sales force, the same back office functions to facilitate that, and we're able to do that through the use of technology and visibility for our own people and for customers. So we're where we want to be and where we need to be on providing that service.

We still have the decision to make to roll that out in the West. We continue to evaluate the timing of that and, you know, at some point we will address what we are doing out West. We have an internal model to do that at this point, and you know that's the model that we are evaluating. It wouldn't add a lot of cost to do that. It is really something like a couple of million dollars, I think, for the initiative for the year, so it is a serious evaluation for us. But we have wanted to see the better trends, we have wanted to see that the Eastern two-thirds works for us, and I am encouraged by the signs that I am seeing there.

Last question just on the sales force, are they still compensated mainly on profitability of the business they bring on, or have you changed your incentives at all to focus on bringing in more volume?

That's really a mix. They are -- they have got like a balance score card type of incentive plan, where they have a number of metrics that they have to do -- have to achieve on a team-based platform across their operations tiers and the sales tiers, and so it's called our [Terminal] incentive plan that they're on. They're also on kind of a President's club plan, which is a combination of revenue and growth achievement, profitability achievement. So there's kind of a couple of things out there for them to be incentivized by.

And there has been no change, other than the normal change that can go along with those plans. Michael has historically been part of the group that evaluates the balance of those incentives, and really there has been no change in the approach that is used to evaluate those incentives and to apply the metrics. So, you know, we definitely like to encourage profitability that goes along with revenue growth, because we don't need the practice.

Dave, we appreciate it.

Your next question comes from John Barnes with RBC Capital Markets.

Hey. Good morning, guys. Real quick on the fringe benefit side for your non-union employees, at any point -- have you made any promises as to when these benefits would begin to kick back a little bit?

When you look at the $15 million to $18 million, John, right off the top I can think of about $10 million of that that will not come back, because we now -- well I say that, unless we have improved performance. That bucket really relates to our historical Executive officer plan that were more fixed-based, and we've those to more performance-based approaches, and it is my belief that's a good change for the Company and for the shareholders. The remainder of that relates to things like 401K matching expense, defined contributions, profit sharing-type expense, and those will come back as we improve the profitability of the Company. We haven't made any promises or commitments to do that at any specific time. We want to; we want to have that issue. We want to have the improvement in our result, so that we can bring that back quicker, because our people have really sacrificed, and we definitely want to do that as soon as we can.

Okay. In terms of union employees, given you are still working to whatever solution there is to the wage issue, the wage imbalance, you know, how is that impacting your decision as to what to do in terms of head count, especially as orders begin to pick up; does it improve it at all? Do you hold off on adding bodies until you get some resolution or is that, you know, just as volumes come back you are going to have the bodies in, and you're therefore obviously bringing in somebody at a higher pay scale than you will prefer at this point?

You know, we want to be sure to provide customer service at the level that's required to compete in this marketplace. But an interesting statistic that we haven't already covered is, we didn't have any increase in head count on this level of increased business, and that's a good thing. That's encouraging, and that's a way we can address our cost structure issues, just by being more efficient and more effective, and we have definitely seen some productive improvement, both in the road and in the road and dock operations. So those are things that we asked of our people because of the outcome of the vote, and we believe that we're accomplishing that. It certainly helps to have more freight, it's not bad.

Sure. That opens the next question, which is how much more do you think you can handle, given the existing head count, before you would have to begin to layer in the additional employees?

I think we're at a point where we have talked about having some people brought back from lay offs. We haven't had to do that, yet. So if we started to see something material that's above where we are, we will have to address that business level with the people that's -- that are needed to service it. We want to maintain our service level. We think that's a good thing, and we think that that's part of the reason why we are growing.

John, we appreciate it.

Thanks, David.

The next question comes from Jeff Kauffman with Sterne Agee.

Thank you very much, and congratulations, Michael. Hey, Judy.

Thank you.

Two questions, an easy one and a tougher one. On the easier one, can you talk about when some of this Yellow-related or Kansas City-related traffic began to come on at the discounted rates last year? And how much of that are we going to anniversary in the third quarter, and how much are we going to see in the fourth quarter? Kind of give me an idea for, separate from the rate increases you're getting from your regular shippers, when we can start to untangle some of this bad pricing that occurred a year ago?

You know, the initial part of your comment, Jeff, makes me think that you thought that we discounted to get some of YRC's accounts.

No, you were just protecting your own customers. I get that.

Okay, I wanted to make sure we clarified that.

When do we anniversary some of that?

Well, I think the worst part of the pricing from my memory, and this is just off the top of my head, was as we got into really the -- kind of the first -- I started to say the first through third quarters, but then the fourth quarter was really awful. I think the whole year of 2009 was, you know, not where we wanted it to be from a pricing standpoint. And so, you know, as you get into something better, we've suggested that we've seen some modest improvements as we move through 2010; everything that you're comparing back to in 2009 was awful.

So the -- we have to work through the contractual arrangements that we entered into during that time. That will probably take another three quarters to get fully removed, if you were successful every quarter from this point forward. So it does take time, and you know I mentioned a couple of points of light on that that we are seeing. We have seen and heard some marketplace activity that relates to specific accounts, where competitors are coming in and trying to increase, and those are good signs.

Okay. Thank you. The second question is a little bit of a tougher question. I thought you were very proactive in addressing the non-union cost structure last year, and today your nonunion employees work hard for less money. You were very proactive in addressing the shareholder pain part of it, where you reduced the dividend despite a very healthy balance sheet, and the stock today is lower than it was or around where it was in the recession, which tells me investors just kind of lacked confidence in the management team, basically.

But you have not been able to attack the union costs; I think you tried to play ball on the wage concessions, the union said to you your problem not ours. We waited to see what happened with Yellow, we waited on [MEPA]; at what point do you proactively start to take action to reduce your union costs with or without the union? At what point do you start to look at staffing, start to consider non-union outsourcing, start to consider more furloughs, whatever you can do? What are your limitations in attacking the unionized costs, if the union is not going to grant you concessions?

You know, Jeff, we are doing everything that we can every hour of every day to address this issue, and we have been continuing to identify solutions. There has been, you know, some influence of what is going to happen on the legislative side. Some of that is maybe more clear today, that it is going to be slower process rather than a faster process. So -- but even with it being in the mix, we have never waited on that to be, you know, the only solution.

I will commit to you that we have several paths that we are working on, and if it was something, you know, that was meaningful and that we could share with you, we definitely would, and we will do that as soon as we can. We know the issue. We know what's there. We know what the competitive landscape looks like. The Teamsters know that, too. And we have continued to work on solutions to solve that problem.

Okay. I guess what I asked --

Jeff, I think we will move on. I have a couple of people that still might want to get on.

Jeff, thank you.

Your next question comes from Matt Brooklier with Piper Jaffray.

Thanks guys, two questions quickly. You provided some commentary on July; can you provide a tonnage growth number for thus far in July on a year-over-year basis?

I have provided that. It is about 14% year-over-year growth, yes.

Okay. And secondly, discussion regarding some of your competitors, bigger competitors, starting to take price action; is there anyway for you to give a little more color in terms of the timing of those pricing actions? Did your competitor start taking out price earlier in the quarter, mid-quarter, later quarter? Just a little bit more detail on that?

Honestly, I can't really give you that kind of detail. We have been hearing more comments about that as we've gone through the second quarter, is about the only additional color I can give you there.

Okay. Thank you.

Thank you, Matt.

Thanks, Matt.

Your next question comes from Neal Deaton with BB&T Capital Markets.

How are you?

Good morning all, and I echo one of the others to say congratulations, Michael.

Thank you.

Just two quick maintenance questions here. What was your average length of haul in the quarter? I know obviously the weight per shipment being higher hurts your reported yield, but just trying to get a sense of what the length of haul impact was?

Average haul was 1,046, and really just flat from the prior year, it was 1,051, about a 0.5% increase -- I am sorry, decrease.

That's helpful. And you obviously mentioned that the -- you know, you're pleased with your performance in the regional RPM initiative. What percentage of your freight in the quarter was below a 1,000 miles, you also provided that statistic?

It was just at 59.6% versus 58.7% in the prior year.

Okay, and then one other statistical question, what percentage of your freight did you put on the rails?

Rail usage was, on a mileage basis, was 13.3%, versus 11.5% in the second quarter of 2009.

Okay. I think that has got -- everybody else already asked the ones I had, thanks.

Thanks, Neil.

The next question comes from Anthony Gallo with Wells Fargo.

Just briefly on the pricing question, you mentioned some success in the second quarter; roughly how much of the business over the next couple of quarters is available to reprice, if that's the right way to think about it?

Well, I think what you deal with there is don't necessarily have to wait until the full year's up, if things have changed such that you need to go back in and re-address it. So I would hesitate to give you a specific percentage, because we do have opportunities to go in and address issues with accounts, even if they're on a year-long contract.

Is it fair to say there's more in the next couple of quarters than there was in the second?

No, I don't think -- just on a normal basis, no, there's not much. It is pretty evenly distributed throughout most of the other quarters, with the exception of the fourth quarter, and there's a -- a heavier concentration in that quarter.

Okay, that's very helpful. Thank you.

Your next question comes from Jack Waldo with Stevens Inc.

Morning, guys.

Morning.

I had a question on -- I guess a bigger picture question. You know, if I look at your incremental margins, I think they are the best they have been since 2004. We saw sequential margin improvement; it's the best I can find since 1994. I am just trying to understand, there's all of this loose capacity in the LTL industry; how are you getting these type of incremental margins, particularly with such low pricing relative to where we were?

I think if you also -- if you look back at your modeling, I think you would find that we had the best sequential tonnage growth than we have had in those many years, as well. And so I think it is just having, you know, the additional tonnage; we have always talked about that. You know, but at this level, there's a lot of benefits to having -- having additional freight. Just think what it could have been if the pricing had been where it need to be, in terms of the incremental margin.

Maybe, Judy, expanding on that real quick, if the pricing -- you know, the function of supply and demand, what would happen if demand accelerated, be it from consolidation or be it from the economy? I mean, how would you combat a situation if you had another 10% tonnage growth next year, for example?

Well, we would do the things that we always do to try to address that business. I mean we would -- what that gives you is an opportunity, an even greater opportunity, to deal with your accounts that are not where they need to be. I think that's what you do. When you have an acceleration of growth that strains your capacity, it gives you the opportunity to go back to those lower margin accounts and try to right that situation, and you are able to be much more proactive in working with those accounts to do that.

Then the last question, Judy, I know that you have these cautionary statements on the economy, which are definitely prudent at this time. Your tonnage growth doesn't suggest any slow down; are you seeing any slow down right now?

No, I mean we are not. What I -- you know I just am seeing what everyone else is seeing. We are seeing, you know, the manufacturing index is a little bit weaker than it was; it is still way above 50, so we hope that holds in there, and that would be a good sign for us. But there's still improvements, definite improvements that need to occur, you know, in the economy and the retail sector and the housing market. And you know, I hope that where we are is that those things will go north rather than south.

Right.

But we just don't know, and what this recession has taught us is that we need to be flexible to deal with any conditions that come our way.

I understand. Well, thank you guys very much for your time.

Thank you.

Operator, we will take one more if there's anybody else in queue. If not, we can move on. Is there anybody else in the queue?

Yes, we have a follow up question from Justin Yagerman with Deutsche Bank.

Okay, this will be our last question.

Thanks, Justin.

Asked and answered. Thanks a lot.

Rob, are you still there?

He said it had been answered.

Got it. Listen, we thank you for joining us this morning, and we appreciate your interest in Arkansas Best Corporation, and this concludes our call. Thanks a lot.

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