ArcBest Corp (ARCB) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Arkansas Best Corporation third quarter 2010 earnings conference call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded Wednesday, November 3, 2010. It is now my pleasure to introduce David Humphrey, Vice President of Investor Relations and Corporate Communications with Arkansas Best Corporation. You may proceed, sir.

Welcome to the Arkansas Best Corporation third quarter 2010 earnings conference call. We will have a short discussion of third quarter results and then we'll open up for a Q&A period. Our presentation this morning will be done by Ms. Judy R. McReynolds, President and Chief Executive Officer of Arkansas Best Corporation and Mr. Michael E. Newcity, Vice President, 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 there very nature, are subject to uncertainties and risks. For a more complete discussion of factors that could affect the Company's future results, please refer to the forward-looking statements section of the Company's earnings press release in the Company's most recent SEC public filings. We will now begin with Mr. Newcity.

Good morning, and thank you for joining us. Increasing tonnage levels at ABF continue to have a positive impact on our financial results. But because of the lingering effects of a challenging pricing environment, the additional tonnage was not enough to return our Company to profitability in the third quarter of 2010. With more freight moving through the ABF network, we were able to maintain the productivity and capacity utilization levels we experienced last quarter. And combined with the associated revenue increases at ABF, we were able to reduce our Company's operating loss to levels approaching breakeven.

As we move toward the end of the year, we are hopeful that the gradual economic recovery will maintain itself and that ABF can continue to benefit from a better freight environment. Later, Judy will give her thoughts and perspective on our recent performance and the factors that are affecting it.

Now I would like to cover the details of our results for the third quarter of 2010. Our third quarter 2010 revenue was $446 million, a 12% increase over last year's third quarter revenue of $399 million. Our net loss for the third quarter was $0.03 per share compared to a net loss of $0.23 per share last year. During the third quarter, our unrestricted cash and short-term investments were $145 million. Full details of our GAAP cash flow are included in our earnings press release. Our year-to-date effective tax rate was the benefit of 38%.

Moving on to ABF results for the quarter. ABF recorded third quarter revenues of $410 million compared to $370 million in the third quarter of last year. ABF tonnage increased 13.9% per day during the quarter versus last year's third quarter. ABF third quarter operating ratio was 100.6% compared to an operating ratio of 103.8% in the same quarter last year.

As we saw in the second quarter, our operating ratio improved on both a year-over-year basis and the sequential basis. ABF third-quarter operating ratio improved 3.2 points versus the same period last year. Our sequential second quarter to third quarter operating ratio improved by 2.7 points. And now I'll turn it over to Judy for her thoughts about our quarter.

Thanks, Michael. I am pleased with the year-over-year and sequential improvement in ABF third-quarter operating profitability. During the quarter, ABF tonnage per day increased by nearly 14% compared to last year's third quarter. This is a higher level of additional freight than we saw in this year's second quarter. And it is important to note that it occurred versus a period last year when tonnage comparisons became steeper as we moved through the quarter. Sequential monthly trends were historically strong throughout the third quarter, especially when compared to the previous four year recessionary period we have recently experienced.

I am also pleased with the continued year-over-year and sequential growth in tonnage in October. Year-over-year tonnage was up over 16%, which extends the strong positive trend we have been seeing throughout this year. This March, our sequential monthly tonnage trends have been better than those of the last three years. ABF continues to offer superior customer service, and we distinguish ourselves by crafting distinctive solutions to match the needs of specific customers. The tonnage increases we've experienced reflect an improving economy and the successful efforts of our sales force that have resulted in market share gains.

With more freight in our network, we've made progress in reducing our quarterly losses. However, we still have work to do in order to obtain accessible levels of profitability. ABF third quarter total billed revenue per hundredweight declined 2.5% despite a year-over-year 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 year-over-year base rate LTL pricing declined in the low single digits. Versus the second quarter, ABF sequential pricing was down, but at a lower level of decline.

In order to address our declining yields and to respond to changes in market pricing, ABF implemented a general rate increase of 5.9% on October 1. This rate increase is holding well and it, along with the ongoing rate increases on our contractual business, provides a good foundation for improvements in profitability.

I'd like to highlight some positive events that illustrate the broad reach of ABF's excellence in various areas of our Company, that benefit our customers come in and enhance the services we provide for them. ABF's level of superior cargo care continue to set the standard in the LTL industry. Our third-quarter cargo plane ratio as a percent of revenue was 0.51%, which is consistent with the positive trends we experienced in the first half of the year. ABF is on pace to finish the year with another outstanding record of providing exceptional cargo care through careful handling and attention to detail.

Continuing its long pattern of recognition for superior industry achievement in the important area of safety, in late September ABF became the only six-time winner of the American Trucking Associations President's Trophy. The President's Trophy for safety is the transportation's industry most prestigious award. Winning this recognition for an unprecedented six times establishes ABF as the industry standard for safety.

Also, in September, ABF was named to the 2010 InformationWeek 500 in recognition of information technology excellence. ABF's efforts to facilitate supply chain management processes through originality and computer technology placed ABF among a list of the best IT innovators for the fifth year in a row. Customers have come to depend on the unique technological tools offered by ABF that improve the efficiencies of their distribution channels and allow them to streamline costs. It is especially pleasing to have the work of our in-house technology group recognized for excellence and innovation by an industry expert. I am so proud of our people, and I am proud for them and for our Company that they have won these prestigious awards.

As you may know, on Monday, in an important development for our Company, we filed a grievance under our labor contract, the National Master Freight Agreement, and an accompanying lawsuit in federal court here in Fort Smith, Arkansas against various parties, including the International Brotherhood of Teamsters and certain YRC companies. We believe that the IBT and YRC violated the NMFA in 2009 and 2010 by entering into a total of three concessionary site agreements to the exclusive benefit of the YRC companies. We are filing a grievance, as required by the NMFA, to resolve this matter.

However, because we believe, that the grievance process is fundamentally flawed due to the conflicts of interest of YRC and the IBT, we are asking the court to establish a fair and appropriate grievance process. Or in the alternative, we are seeking to have the court declare the three YRC concessionary amendments null and void. And we are seeking financial damages in an amount estimated to be, approximately $750 million by the time the NMFA is set to expire on March 31, 2013.

There is legal support for the claims we are making, both in the court system and in the cases decided by the arbitrators. We are not seeking to have the provisions of the most recent YRC side deal applied to ABF because the temporary fix they provide is not an appropriate long-term solution for ABF or the Unionized trucking industry.

ABF made every effort to avoid filing these actions, but we have no choice but to do so now. All of our other attempts to work with the IBT over a period of more than a year have failed. The purpose of the grievance and the lawsuit is to resolve the issues in a way that is equitable to ABF and that provides the industrywide solution we need to sustain our Company for the long-term, safeguards the jobs of ABF employees, and maintains the integrity of our freight network.

We have set up a website that contains more information about our legal actions. It is located at abflegalaction.com. As we go forward, we will strive to execute on our goals that include profitable revenue growth resulting from a sales approach based on strong relationships and excellent service, strategic use of award-winning technology, and a focus on preserving a conservative financial foundation.

A great company is comprised of individuals who are all striving to do the best job they can, each and every day. I appreciate the sacrifices many of our employees have made during the recent challenging periods. I look forward to when all of our hard work is rewarded with a return to profitability. And now, David, I think we are ready for some questions.

I think we are ready to take some questions.

Thank you, ladies and gentlemen. (Operator Instructions)

Our first question is from the line of Edward Wolfe from Wolfe Trahan. You may proceed.

Good morning.

Hello. How are you?

Good morning. You just talked about damages that could total $750 million. Are those damages both against the IBT and YRCW? Or are they only against IBT, the claims?

They are against the defendants in the lawsuit .

And who are the defendants, I guess is what I am asking?

Well, there is a list of them. But, I think, in summary, you have the IBT, you have the YRC companies that include New Penn, USF Holland, and YRC Inc. You have TMI which is Trucking Management Inc., the negotiating party on behalf of the YRC companies as well as something we refer to as TMS Inc. which is the negotiating committee for the IBT.

Okay. I would guess if you put them all together, they don't have $750 million. I understand directionally what you're thinking and how you are doing it. Is the goal ultimately to get them back to the table to discuss this? You haven't been able to get them to the table, but if they came, that would suspend the suit, or what are you thinking?

We came to filing the lawsuit after a long period of trying to accomplish our objective in other ways. We are at this point where we filed a grievance, we filed the lawsuit. And we fully expect our efforts to result in success through this process.

Okay. Let's just switch gears if we could. Could maybe Michael take us through the tonnage and the yields by the monthly trends in the quarter?

Sure. On tonnage, July was up 13%. August was up 14%. And September was up 14.9%. That's year-over-year. Of course, these are off cyclically low prior years, but the improvement is very encouraging. Sequentially, June 2010 was about average compared with May. But building on a 15 plus year highs and sequential monthly tonnage growth that started in March, trends for July and August were also historically strong. For September, sequential growth was more modest. But one of the best since the fall peak disappeared in 2006.

Do you have October as well?

As Judy mentioned, October was up north of 16% year-over-year.

Okay. And on the yield side?

Ed, we are not going to give numbers on sequential yields.

Directionally, are yields improving sequentially? Or are they flat sequentially? Can you give direction?

Well, I think when you look at the third quarter in total, compared to the second quarter, sequentially, we were down a little bit. Maybe close to 1%. One of the reasons that we put in the rate increase was because we needed yield improvements. We've increased rates on our non-contractual business beginning October 1. And we'll be working through the contract after that point to obtain the increases on the rest. It's also the case that the market has moved to increase rates. But I will be the first to say that we needed the rate increase. We put in. We are glad to have it in. And it's appropriate for this time for those reasons.

Our next question from the line of Jon Lagenfeld from Robert W. Baird. You may proceed.

Good morning. When you look at the volume side, how much of it is new -- more shipments from existing customers versus shipment from new customers? Have you looked at that trend?

Well, we've looked at those details, Jon. And it's definitely the case that it is more from existing accounts.

Okay, good. How should we think about the growth more generally? From the standpoint of the profitability still isn't there. What is to prevent you from saying, Look, we are not going to grow. We are going to focus on the yields even more so than we are today and take on less freight. I am just reflecting on the fact that your volumes are back to basically '07 levels, at least on a quarterly basis. And yet, a long ways to go on the pricing side. How do you think about that trade-off between the two?

First of all, I completely agree with your commentary. It is, I guess, certainly not our objective to have tonnage growth and it not result in a better improvement in profitability although we had a decent improvement. I think our putting in the GRI October 1, is a testament to the importance of yield. The good news is it looks like the industry is headed in the same direction as we are.

We feel that both are important in order to be a successful Company over the long term. You have to have a good balance there. I think our people do a very, very good job of assessing that on each account that they are looking at. And it is the case that when you look at our results that it is the rollup of a number of decisions. I think we probably look at 4,000 pricing deals a month. But whenever you are in a recessionary period, you have to make adjustments to what is happening in the marketplace. The good news is it looks like the economy is improving some. We certainly feel like we need a yield improvement, and others in the industry feel the same.

Okay. Great. And the last question was just on the sequential yield performance from the second to the third quarter. How should we think about that? I mean, it seems like it has slipped a bit even if I adjust for mix. Is that just a function of freight rolling on from deals made earlier in the year?

Well, it is always a combination of that. I mean, it's the case that whenever you are looking at the quarter's results that you are impacted by pricing decisions, particularly on contract business that was made perhaps several months before. That is a factor. That is part of the results that you get. One of the things that I've looked at whenever I was reflecting on our results compared to others in our industry, is that we have been consistent in our approach to our pricing decisions. We have been very consistent. Others haven't. You have to take that into consideration when you are looking at their results.

Very good. Thank you.

Our next question comes from the line of David Ross with Stifel Nicolaus. You may proceed.

Good morning, Judy, Michael, and David.

Hi, David.

Can you talk a little bit about the improvements that ABF has made to its business through the downturn? There's a lot of focus on yields and all the problems that that has created and the labor cost structure issues. But can you talk about any initiatives that you've done on the line haul optimization side and new technologies to help customers better document, et cetera?

Well, sure, Dave. We have always been looking for ways that we can improve the business, and this quarter and this year is no different. I think one of the benefits of having an awful economy and a recessionary environment is it focuses you on ways that you can improve things even more. We have for many years had visibility in the dock management area. Whenever a driver goes and picks up a shipment, we know exactly the path that that shipment will take. We know if it's a regional shipment. We know if it's a long-haul shipment. We also know if there's some sort of time sensitivity involved with that shipment. That helps us plan.

We use technology to our advantage and to our customers advantage each and every day. I think you are aware of our management of hours to shipment levels and our management there is very, very close. It keeps our cost structure as variable as it can be. That's a great advantage whenever you are trying to closely, closely manage costs. But I'll be honest with you, that hasn't really changed in this downturn. It has really been the case that it just helps our cause. We have continued to look at facilities that are not necessary for our network and for our system. A lot of them are smaller facilities. We've actually reduced our facilities by 20 this year. That is because of the ability that we have to deal with those locations through other means. And having the understanding and the visibility on those issues really helps you.

We have also made some optimization changes in our line haul structure. We've moved some locations of people so that we can have a more optimized solution there. And that has resulted in some better management and better load averages and efficiencies that show up this quarter.

Okay. And then in the past, there has been talk about acquisitions as a primary use of cash. Are those on hold temporarily as you try to fix the LPs, or can you comment on that?

Well, whenever we look at the opportunities that we have, obviously, we consider the needs of the core business. The good news is the core business is looking like it's a little bit healthier. We do have a conservative approach. One of my corporate objectives is to have a conservative financial structure. I think that's important when you have uncertainties in the economy, and it's going to continue to be important. We look forward to a time that, hopefully, is not too far away that we can continue on the path of our strategy to diversify in the transportation space. Probably it will be more on the asset light or non-asset based side, but we do have in our minds the challenges of the core business and the needs of the core business. We are not going to put the Company at risk with anything that we do.

Thank you very much.

You're welcome.

Our next question is from the line of Todd Fowler with KeyBanc Capital Markets. You may proceed.

Great. Thank you. Good morning, everybody.

Hi, Todd.

Judy, going back to the yield conversation, first, can you remind us how -- what percentage of the revenue the GRI applies to?

It's typically about 40% to 45%.

Okay. And then can you talk a little bit about what your approach is to the contractual relationships at this point? Are you trying to pull forward any of those conversations in light of what you are seeing in the environment? Or are you letting those conversations happen as those contracts come up? Or is there a percentage of the freight that you are looking at that you're saying we need to have these conversations sooner?

We are looking at places where we need to have those conversations sooner. That's been communicated to me by our sales and pricing group. I think that makes sense because in some cases we made adjustments midstream with those contract customers. We have those initiatives as well as just our normal renewals that come up each month.

Okay. And then can you also comment a little bit on how the network feels? Obviously, tonnage has come back this year. You are still below where you were in the peak. But are you feeling at this point, any pinch points in the network, or is the network still operating pretty smoothly reflecting the tonnage increases?

There are a few locations where we are seeing some pinch points, but I think from a top-level perspective, we are always in the position where we can handle more shipments. That's where we are. We have to watch for those. I think your comment is absolutely right. Sometimes I think people ask us questions about capacity or our ability to handle shipments and they think there's one answer. There's absolutely not one answer. It's location by location. I think we are in a good spot. We can definitely take on more business. It just needs to be a well priced business.

Okay. And maybe just one last one if I could. Probably for Michael. If you were to return to profitability at some point in the future, how do we think about the tax rate given the fact that you've had several quarters of losses at this point? Do you have operating loss carry forwards that you will be able to apply that would reduce the tax rate or is the tax rate essentially the same and it's just cash taxes?

I think looking long term, it's going to be the normal range.

What about like in the first couple of quarters that you would hit a profitable level would the tax rate be lower in those quarters?

Well, I think what Michael is saying is that we've anticipated the ability to use the losses, so you are not going to see volatility for that reason in the tax rate.

Okay. I think that makes sense. I might follow up off-line though.

Okay.

All right. Thanks so much.

Our next question is from the line of Justin Yagerman with Deutsche Bank. You may proceed.

Hey, guys. With 20 fewer facilities and an optimized line haul, you should be taking restructuring charges like all of your competitors.

Well, I mean, I like straight up numbers.

I do too. I wanted to get a sense what the teamster reaction thus far has been to the lawsuit that you guys have put out there? Has there been any labor issues? Has there been any feedback from any of the locals that has either been either positive or negative as you guys are going out there with a little bit more of an aggressive tone?

We have had no instances of any issues from a productivity standpoint or anything else across the system, so that's all good news. The feedback that we are hearing from our employees is positive. They are encouraging in their comments about the action and we think that that's positive. We are not surprised by that, because we think that it's the appropriate action at the time.

Yes, that's good to hear. Can you give us a sense of if you'd had these concessions in the quarter or at least the first round, what your quarter would have looked like with 15% better labor costs on the wage side? Obviously, notwithstanding the interest and pension issues. I mean, just the 15% labor. Can you quantify what that would be for you guys?

I am going to go back to our comments before, back in May. In 2009, what the concessions that we asked for, that were voted on in May, were worth, was about $74 million, I believe, is the number. If you think about the impact of that on this quarter or any quarter, that would have been to improve things by about $20 million. You can see what differences that makes. What we think about when we think about having an industrywide solution that makes sense for us is not necessarily about any one of these particulars. But that we want to be a Company that competes well and has as much of a chance of success as any competitor that we compete with that's out there. And that's what's important to us.

That's fair. Judy, can you remind me what percentage of your freight at this point is in next day and regional? And maybe talk a little bit about the capacity utilization on that end and room for improvement and maybe some of the service differentials that you guys put into place in terms of how those trucks run?

Our less than 1,000 mile freight is close to 59% of our total. I think David is showing me 58.6%. It was about 58.1% last year in the third quarter. We've improved our presence in the regional market. That is where we have an opportunity. We still have, basically, we have a fixed cost infrastructure that is running there. It's necessary to provide the service next day and second day. We can use more freight there. As we talked earlier in the call, I mean, it is location by location. We can't have one answer there in terms of the capacity, but we're in a position where more freight adds profit to the bottom line. That's the case in the fourth quarter and will be the case in 2011.

I appreciate it.

Thanks a lot.

Thank you.

Our next question from the line of Ken Hoexter with Merrill Lynch. You may proceed.

Great, good morning. Good morning, Ken. Judy, just following on that, can you talk about about pricing? I guess maybe on the GRI's a bit. What's the early adoption like on that? And then the pricing differential in the regional versus the long-haul business? If you are growing the regional, should we see the revenue per hundredweight continued to come off a bit, or does it grow? How should we think about that over time?

Well, I think, in response to your question about the GRI, it is holding well. We're pleased with how that's going so far. We've seen the month of October and the commentary that's coming from our pricing people is positive.

On the regional side, when you grow in the regional market versus growing in the long-haul market, I think your comment is appropriate in that the revenue for hundredweight is typically lower in the regional market for obvious reasons. That does have a dampening effect. What we've tried to do for this quarter in my comments is to factor that out and give you a look at pure pricing. But when you have all these moving pieces, that is difficult to do.

But your point is well taken in that just because you have a decline in revenue per hundredweight, that doesn't mean that that is a negative to profit. It depends on what that is caused by.

Just to follow-up on that, in your commentary you talk about pricing taking time. I just want to understand that a little bit, because it's so important to the whole discussion. It seems like a lot of the questions are revolving around, we've seem stuck at this 23 and change rate for hundredweight for the last two years consistently. You've rolled in the GRI. What are your thoughts on that and where do you expect to see that? I'm just trying to understand the amount of overcapacity you still see in the industry relative to the implementation of these rate increases? And how the market will, obviously, everybody is trying to put them in, but how we can look at them being sticky?

Well, if you compare the market conditions in October and November versus, from a GRI perspective versus where we were in January of last year I think that we're in a much better situation as an industry. If you think about some of our competitors out there, particularly our larger competitors, many of them are at capacity. We can still use more freight in our network. We know our objectives are to have pricing on the freight that we add that is good for us. So I think the opportunity is certainly there for there to be a better scenario going forward.

When you think about the amount, I'm not going to give you guidance on this other than what's there and what we have already said, but if you have an increase that is close to 6% on 40% of your business, I mean, you can do the math on that. It is typical that as you go through a year that the GRI deteriorates as you go throughout that year. That's just the natural course of things. In a normal environment, that's about a quarter point per month of deterioration. We have seen much worse than that over the last couple years.

Great. If I could just throw in one quick number question, Michael. Last year in this quarter, in the fourth quarter, did we have a big ramp up at the end of the year? I'm just looking at the tougher comps on the volume side on a growth rate basis. Is that something we should expect as we move forward? I am looking at Judy's comments of the 16% growth in -- or I think Michael, you mentioned it earlier, 16% in October. What are we comping against in November and December?

Last year we saw a -- actually we saw a decline in November of about 1.3%, in December of about 2.6% year-over-year in 2009. October actually was down 5.3% year-over-year.

Great. Thank you.

Thanks, Ken.

Our next question from the line of Tom Wadewitz from JPMorgan.

Hi, Tom.

Hi, Judy. Hi, Michael. Hi, David. The first question on the lawsuit. Do you have examples that you can cite that would be somewhat analogous historically related to the kind of enforcement of the national master agreement where a party didn't -- got an exception and was kind of broadened in line with the contract? I guess also, you could kind of say you had negotiated yourself, and actually had a teamster ratification vote which failed, but you were trying to do the same thing. You kind of are saying that you can't do that. I am wondering, does that hurt you in terms of your argument? I guess a couple questions there just on how you are thinking about the lawsuit and the strength of it?

Well, Tom, on the legal support side, we have precedent for both the lawsuit action and the grievance action. I'm not going to get into citing those for you on this call. We've given a good amount of information and outlined the details of the lawsuit in the grievance on the website, and that's pretty much the information that we are going to be limited to here. But we feel good about our case. We feel that we are in a strong position.

With respect to the concessions that we ask for and that were voted down in May, we were in the process of really trying to settle our claim with respect to the contract breaches when we went through that process. We reserved our legal rights throughout that process. That was just an attempt to try to settle these claims. Obviously, that attempt failed. We are where we are in terms of the grievance and the lawsuits, and we feel that this is the appropriate path based on all the events that have transpired to date.

Is there one precedent that you could perhaps site, or is that within -- I guess I just wasn't aware of what you would think of was a precedent to this suit?

Well, we have experts that have worked on this with us. We have that information in our files, but we're not going to try this case in the public forum like this. It is not a part of our strategy to give that kind of information at this point.

Yes. Okay. That's fair enough. One more and I'll pass it along. On the cost side, how would you think about your -- if -- let's say tonnage is up a couple percent next year, how would you think about your rate of operating cost inflation? 2% or 3%, or is it more realistic to think in the 4% or 5% area?

Well, we're not going to give guidance on our cost structure other than to say, you know that our Union contract calls for an average 4% increase when you consider both the wages and the benefits. That's on about two thirds of our cost.

Okay. That's a pretty good starting. Thank you for your time.

Thanks, Tom.

Our next question from the line of Matt Brooklier with Piper Jaffray. You may proceed.

Good morning, guys. You've made a statement on the wayside with the announcement of this lawsuit. I was just wondering if there's anything else, and potentially this will take some time in terms of the progression of the lawsuit, but kind of near to intermediate term, is there anything you can do internally from a wage and comp cost perspective to potentially augment kind of the run rate of cost? I guess my question is, is there anything you can do internally and proactively to potentially cut more costs out of the model?

Well, we've taken many of those actions on the non-Union side already. We continue to look for ways that we can do that. One of the most obvious ways for us to lower our cost is to be more efficient. To continue to look for ways to be more efficient. One of my objectives is to be able to make more of our cost variables. I think uses of technology allow us to do that, but we continue to look for ways that we can better optimize our asset utilization and our people utilization to the business that we have.

Okay. And it sounds like at this point, more tonnage running to the network, which obviously is a good thing. I think someone mentioned previously that you are having some pinch points within the network, and I think we are starting to see that in your purchase transportation line, which was up and a little bit more than I had anticipated. How should we think about, and again tonnage growing nicely in October -- how should we think about how you guys run your network and kind of the purchase transportation expense line going forward?

Well, I can give you a little bit more color on that purchase transportation line that hasn't previously been given. Our utilization of rail was about 16% in the quarter versus about 12% last year. That has an effect on that line. Also, in that line are rail fuel surcharges, which have been up. Those are two factors there.

From a business standpoint, we have grown more in the West, and we find effective utilization of the rail in the West. It is helpful to us. We also find that the use of rail as well as other forms of purchase transportation at times helps us with the peak seasons. It helps us to be able to utilize those as suppliers of services because that creates a situation where our cost structure is more variable. In other words, as business volumes come downs seasonally, you can reduce that. And you haven't gone out and bought a bunch of equipment that you can't necessarily use in the lower seasonal periods. We find that to be very effective. I think if you looked over a longer period of history with our Company in a normal economy and in an improving environment, we typically have a higher utilization of rail. Again, it's just an efficient way to service the business.

Okay. It sounds like that potentially more seasonal versus ongoing moving forward.

Well, yes but no. We always have some utilization of rail. I think you understand that. But the acceleration of that deals with the peak seasons.

Thanks a lot, Matt.

Okay. Thank you.

We do have a question from the line of Jason Seidl from Dahlman Rose.

Good morning, everyone. If you guys could focus a little bit on some of the contractual renewals that you're getting. You gave us some great color regarding your GRIs, but what are you seeing -- and I understand they vary customer to customer, but on average what are your pricing renewals looking like on a contractual basis?

The increase in the third quarter was 2.3%. What is interesting about that is that if you look into the detail, September was a 3.8% increase, and that was the best monthly increase that we've had since June of 2008.

What about October?

I don't have that information yet.

Directionally, would you think it's higher or lower?

I would be guessing, but I haven't heard anything from our sales and pricing people that indicates that we had any issues there.

Okay. Your guess it is probably as good?

Again, we have to wait for the numbers to be pulled together.

Okay, not a problem. As it pertains to the lawsuit, I think you guys named TMI as one of the recipients of the lawsuit. Correct me if I'm wrong, you guys pulled out of TMI in August of 2007, correct?

As a bargaining member, but we are still an administrative member of TMI, yes.

But you did pull out as a bargaining member. Okay. That's all I have for today. Thanks, guys.

Thanks, Jason.

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

Hi, Jack.

Good morning, guys. Can you hear me?

Yes.

I had just a few questions. One, could you talk a little bit about your CapEx expectations maybe for the fourth quarter and for next year?

Sure. We previously mentioned we are in the $45 million to $50 million range for the year. We are probably going to be on the lower side of that for the year. And then expectations for the fourth quarter or for 2011?

2011.

I think the note there is that we are probably -- actually, we are neck deep in our annual forecasting process. I don't have a concrete figure for that yet, Jack, but I can give that to you in January.

You think directionally it is going to go up?

Well, I just can't give an exact on that. We are just right in the middle at this process.

Okay.

Actually, it's been something we've been discussing for the last week or so.

And, Judy, trying to understand something that I guess might be a little longer-term issue. Since we've been covering the LTL space, one of the benefits we hear from the Union agreement is that the National Master Freight agreement creates somewhat of a level playing field for all competitors and that there is some consistency or you could forecast expenses pretty easily. Obviously, that dynamic has changed. I guess what I am getting at, and maybe it's a forward-looking statement, but why would you engage in another type of disagreement down the road if one of the presumed benefits is no longer coming to fruition?

Well, that's exactly the point of the lawsuit. I know you have probably read it and looked at this, but we feel that the industrywide contracts that we signed should be enforced. It has been violated. And, that is our position. We think that from ABF's standpoint, that that's what we need to have happen. We could get into speculating with you about what the future might hold one way or the other, but right now we are focused on the enforcement of the contract that we signed.

Okay. That makes sense. And then I wanted to understand one thing, too, and it's not necessarily with you guys but with the overall LTL space. I understand that if you've got the agreement that your competitor has, you can see substantial incremental margins, margin improvement, things of that nature. But when I look at expectations going forward, the type of margin improvement is at a historical high level. Earnings improvement at that too. I'm just kind of wondering. You've had incremental margins that have been above historical norms here over the last two quarters. I'm just wondering, how much would you expect in a great environment? Or asked another way, what type of environment would have to exist for you guys to improve the operating ratio by another 400 basis points?

Well, I think your point at the beginning was right here. I mean, we need to be in a situation where we have a cost structure that makes sense for the market. And that 's the heart of what's happened as far as the violation of this agreement that's most painful. Is that we've had to live with the full cost structure where others haven't.

We have had this year so far a tremendous amount of operating leverage in the network. You can see how the operating results improve whenever we add business that's good for us. The closeness or the nearest term way to continue to improve and to get that kind of improvement on the operating ratio would be to have better improvements in pricing. And I think that the groundwork has been laid to move that direction. I am not going to agree with you or disagree with you on four points, but I've said at very early this year, we need pricing improvements that measure to be 8% to 10%. We have taken a shot at that. We are going to see how much we get from this one, but we need further improvements because we've gone down so far. But that is a way to greatly improve the operating ratio for us and for the industry.

Jack, I appreciate you.

Thank you.

Thanks, Jack.

Our next question from the line of Tom Albrecht with the BB&T. You may proceed.

Hey, Judy, David, everyone.

Hi, Tom.

Two questions. Now that the industry has essentially gone forward with the second GRI in 2010. What is your opinion that you are going to also be able to follow through, with if not a winter GRI at least a spring or summer GRI in 2011? And then I'll come back with my other question after you answer that.

Tom, I am not going to speculate on the timing of our next GRI. I think you've seen, by the actions that we took this fall that we have to assess the marketplace and to do what is appropriate for the conditions that exist. I will admit to you that what was done this fall is a little bit unusual, although the industry has been doing rate increases probably every 11 months, and that's why it's moved so much, over the years. One thing I'll say in addition, is that the fall timing of the general rate increase makes a lot of sense to me. So I like that timing. I think that that makes sense for our Company and it makes sense for the industry.

Yes. Certainly. I've got some thoughts on that. Judy or Michael or whomever, can you give an approximate estimate on how many teamster hours that you'll pay out on during calendar 2010?

Tom, we don't ever give that guidance.

Okay. It doesn't hurt to ask.

I know.

All right. I will jump back in the queue. Thank you.

Thanks a lot, Tom.

Our next question from the line of Anthony Gallo from Wells Fargo. You may proceed.

Thank you. I just wanted to follow up on Judy's response to Tom's question. You mentioned you were trying to get 8% to 10% price increases and certainly working towards that. I just want to make sure I understand, you don't think you need to get back to the same revenue per hundredweight in the 2006/2007 timeframe to get back to that same level of profitability, tonnage and shipment? I mean, you've taken a substantial cost out of the system. Am I understanding that correctly, or do you think you need to get back?

Well, I think it depends on the timeframe for your comments. We have cost increases that we are going to be dealing with under the Union contract and from an equipment perspective, healthcare, there's all kinds of things that will continue on the course of increase no matter what we do. We are always looking for ways, and we found many ways to cut costs or be more efficient, but there will continue to be a need for greater rate increases. My point on the 8% to 10% is, is that if you look at where the industry had gone over the last couple years, that is what you need to get back from the perspective of what's been lost. But also because that's what makes sense in an environment and in a situation where you have continual increases. By the way, we are not the only one. I think we've seen many of our competitors restore the wage increases that were lost and some of the fringe cost increases. Everybody is affected by healthcare. Everybody is affected by equipment costs. This is an ongoing thing. That's what my comments referenced.

That make perfect sense. A different topic briefly. FedEx rates going through a much-publicized restructuring. How often do you come across them, and what you see as either the opportunities or challenges from that?

We come across them often. They are a direct competitor for business with us. We see their restructuring as an opportunity. I think our sales force and our operations people are excited about that opportunity, because we do a great job in handling long-haul business, which that's my understanding where most of the restructuring will occur.

Fantastic. Thank you very much.

You're welcome.

Thanks, Anthony.

Our next question from the line of Art Hatfield with Morgan Keegan. You may proceed.

Hi, Art. This is actually [Derek Raby] in for Art. I just wanted to look at the salaries and wages line item real quick. The increase in the quarter primarily. I think you put through a planned health, welfare and benefit increase. I believe it was August 1, but can you talk about some of the other drivers to the sequential increase in the quarter? And then how to think about that line item going forward? And also, if you can just real quick touch on your headcount levels and where you see that going next year.

Yes. The year-over-year change is due primary from the wage increase that we had in April as well (inaudible) pension. We had an increase of 0.9%. And in August -- as Judy mentioned, on an annualized basis going forward - (inaudible) same things on that line.

Derek, are you there?

Yes. I am getting a lot of feedback.

We are too. We apologize for that. I just wanted to check and see if you were there.

Yes, I got about half of that response.

I think what Michael's basic answer was, and I hope you can hear me better, is that the increases you are seeing in that line item do relate to the contractual increases that we had on the wage side April 1, and then on the health, welfare and pension side on August 1. Then there are a variety of other items that are in there, in that line item, on that non-Union side as well, and then also our Workers Comp costs are in the line item as well.

Okay. Thank you. And also on the headcount?

Yes. Let's see. Are you back on? I think we've made a technical correction here where Michael will be able to answer that question.

Total full-time equivalent employees, Union, non-Union, we saw that increase by about 238 employees or 2.3% in from third quarter 2009 to third quarter 2010.

And if you think about that, Derek, from a -- the perspective of business levels, our shipment count was up about 5%. Our tonnage was up 14%. That is one of the reasons that we had an improvement in our results, is we have had a lower addition of people than the business levels. Again, it really speaks to operating leverage.

Another way to look at that is our productivity number on total weight per DSY labor hour actually increased by 8.2% in the third quarter compared to third quarter 2009, which is a similar increase that we saw the second quarter.

Okay. Thanks for that. Also, I wanted to turn back to your profitability levels. I doubt you'll be able to give it to me, but I figure I'll ask, can you kind of go through your OR progression throughout the quarter? And then, also, when do you guys feel you'll be back to a profitable level? Is it a Q4 then, or is it more 2011?

Derek, we are not going to give month by month operating ratios. That is not something that we feel we need to do. And from a profitability standpoint, obviously, we are working hard to get ourselves into a profitable position. We think the rate increase helps that, but we are not going to forecast or predict results and give guidance on that in the fourth quarter or for 2011 either. Okay.

Thanks a lot, Derek. Let's just check. Maybe there is one or two more questions.

We do from the line of Jeff Kauffman from Sterne, Agee. You may proceed.

Hi, Jeff. I will get these in before the gong master, David Humphrey--. You mentioned the $45 million to $50 million CapEx, but through three quarters it looks like you are only at $1 million net. Is there an awful lot of fourth quarter CapEx going to take place? How is that going to be equipment versus facilities and such?

Jeff, I think there is a footnote on the bottom of that cash flow that tells you that it's really $21 million if I am remembering it right.

That's right.

What that net is, is it's net of the capital lease borrowing. We don't like the presentation of that either, but it's required.

There is also another $6 million of equipment that we've received but have yet to get the expense.

And with FedEx taking some terminals out of their network with the overlaps, is there a chance that there is some opportunistic terminals that may be better fits for you where either fourth quarter or 2011 CapEx could go up a little bit on the real estate side?

Jeff, I think the opportunity may be there for some of that really more in 2011. I would suggest to you. I am not hearing anything that is near term that could affect the fourth quarter, but we are always looking for better scenarios from a location standpoint. Not necessarily adding any to any cities, but just having a better replacement facility for an existing facility that is maybe not as good of a location or something like that. It does present that opportunity, but I am thinking that is more in 2011.

Okay. Last question. It is going to follow along with what big Ed Wolf was doing there earlier. The incremental margins are terrific. The operating improvement is terrific, but to the uninitiated, it looks like you guys bought business this quarter. Your tonnage is up almost 14%. Most other folks are in the mid-single digits. Your shipments are up 5. Most other folks aren't up that much. The rest of the industry, this particular quarter, was reporting rev per hundredweight increases of 3%, 4%, 5% with the exception Old Dominion, that is a different story. You were not only down sequentially, which is not normal in the third quarter, but negative 2.5%. Can you help me understand -- and I know with the GRI this should change, but was this more an issue of you had contracts that were out there at certain prices and maybe some folks that went away came back to you and took advantage of those prices, or were you out there pricing new business at these rates to try to build the tonnage up?

Well, whenever I look at the details of the new business that we took on, and the existing business that -- or existing customers where we added business, we absolutely improved the profits on those accounts. That's what our objective is. As we look at business opportunities, we are always looking to see if it makes our situation better or worse. Something I would suggest to you when you comparing across the industry, particularly with some of the larger players that are out there, if you'll remember, we didn't take the aggressive pricing action on the downside, and so we are not going to have the increases that some of our competitors have on the upside. We have been as steady as you go in the approach we have taken with customers, and our customers have really appreciated that.

Okay. Well, thank you very much. I will contact off-line.

Appreciate it. If there's one more quick question, we will take one more and that's it.

Okay. We have a follow-up question from the line of Edward Wolfe from Wolfe Trahan.

Real quick, Ed.

What's the maintenance CapEx number going forward that you need to spend? Are you going to do more of this off-balance sheet?

Cap leases are on balance sheet, first of all. Well, maintenance CapEx I'd suggest to you it ends up being somewhere in the range of what we have spent the last two years if we were at the same level. You and I both know that as you add business is the business that's added becomes more permanent, you going to have to ratchet that up. But it is going to be lock step with the business that you are adding.

The last three years have been different numbers. Is it $50 million to $70 million? I mean, what's the right number?

Maybe I said three. The last two years have been $45 million to $55 million, something like that. Years ago -- I'll say this -- years ago, our maintenance CapEx, I told people was $75 million to $80 million. You've got to be a Company that is of a larger size than we are today to warrant that kind of maintenance CapEx. But we will be -- if we see that business volumes are increasing and that that is steady and staying, we will make some decisions to add equipment. Until we start to have some certainty in our business levels and that the economy has improved, we are going to be very cautious about that.

Ed, I appreciate you. Thanks, a lot. I think this concludes our call. We just want to thank everybody for joining us this morning. We appreciate your interest in Arkansas Best Corporation. That concludes our call.

Thank you, ladies and gentlemen. That does conclude the conference call for today. We thank you all for your participation and kindly ask that you please disconnect your lines. Have a great day, everyone.