ArcBest Corp (ARCB) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Arkansas Best Corporation fourth quarter 2010 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. Thursday, February 3, 2011. I would now like to turn the conference over to David Humphrey, Vice President of Investor Relations and Corporate Communications. Please go ahead, sir.

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

Thank you for joining us this morning. Today we report on another year of challenges that also included some encouraging signs in our business, that give us hope for better days to come. As we move throughout 2010, we experienced positive changes in freight levels and account pricing that helped reduce our operating loss. We still have a long way to go to return our Company to steady profitability. We must maintain our focus on providing a high level of consistent service in the LTL marketplace, while continuing to seek an equitable level of pricing. Later, Judy will give her perspective on our recent performance and the factors that are affecting it, but now, I'd like to cover the details of our results for the fourth quarter and full year of 2010.

Our fourth quarter 2010 revenue was $441 million, representing an increase of about 19% per day compared to last year. Our net loss for the fourth quarter was $0.12 per share, compared to a net loss of $0.88 per share, after excluding goodwill impairment and pension settlement charges that occurred in the fourth quarter of 2009. For the full year of 2010, Arkansas Best had revenues of $1.66 billion, an increase of 12% per day compared to 2009 revenues. Our net loss for 2010 was $1.30 a share, compared to a net loss of $2.46 a share excluding goodwill impairment and pension settlement charges last year.

Our effective tax rate for 2010 was a benefit of 39.7%. This includes the effects of an alternative fuels tax credit of nearly $1 million, based on ABF's use of propane. Without it, our 2010 benefit tax rate would have been 37.9%. This compares to a benefit rate of approximately 23% in 2009 that was negatively impacted by the goodwill write off that carries no tax benefit. For 2011, if losses continue, our tax benefits may be less than historical benefit rate. Excluding the effects of potential tax valuation allowances, we expect our 2011 effective tax rate to be at normal historical levels, in the high 30% range.

Arkansas Best's operating cash flows for 2010 were $26 million, including depreciation and amortization of $72 million. Our net purchases of property and equipment totaled $42 million for the year. We financed $36 million of ABS revenue equipment purchases through capital leases. We did not purchase any Treasury stock in 2010. We paid dividends on common stock of $3 million, full details of our GAAP cash flow are included in our earnings press release.

At year-end, our unrestricted cash and short-term investments totaled $142 million. Our restricted cash, associated with collateral pledged to our workers' compensation letters of credit and performance bonds totaled $52 million. We had debt of $57 million due to the capital leases I mentioned earlier. Our availability under our asset securitization was $75 million. At the end of the year, our stockholders' equity was $480 million.

Moving on to ABF results for the quarter and full-year, ABS reported fourth quarter revenues of $411 million, an increase of 18% per day compared to last year. ABF's quarterly tonnage per day increased 14.8% against increasing comps from last year's fourth quarter. ABF's fourth quarter operating ratio was 101.8%, compared to 109.3% in fourth quarter 2009, after excluding last year's goodwill impairment and pension settlement charges. For the full year of 2010, ABF reported revenues of $1.53 billion compared to $1.38 billion in 2009. In 2010, ABF's total tonnage per day increased 11.2% versus last year. ABF's full-year operating ratio was 103.8%, compared to 107.2% in 2009 after excluding goodwill impairment and pension settlement charges, and now I'll turn it over to Judy for her thoughts about our quarter and full year.

Thank you, Michael, and good morning, everyone. Our Company's improved fourth-quarter and full-year results show the positive effects of increased revenue related to additional business levels and improved pricing. The economy is getting better and opportunities are developing for ABF to handle more freight and improved margins. Versus last year, ABF's fourth quarter operating ratio improved by 7.5 points, as supply and demand moved closer together, customers are once again placing more importance on relationships with carriers like ABF, who offer a solid balance of exceptional service at a fair price. Our efforts are channeled toward meeting the specific needs of our customers, growing our business profitably, and working toward a more flexible and efficient cost structure.

ABF's fourth quarter tonnage increased by 14.8% versus last year. Throughout the quarter, ABF maintained strong increases in business versus progressively more difficult monthly tonnage comparison from the fourth quarter of 2009. During 2010, our monthly sequential tonnage changes compared favorably to history. In January, ABF's tonnage increased 12.6% versus January of 2010. This would have been approximately 15% without the effects of winter storms during the month.

Following the aggressive price competition, the LTL industry experienced in 2009 and early 2010, pricing began to show signs of improvement in the last half of the year. In October, ABF implemented a 5.9% general rate increase. Most all of our competitors increased rates in the Fall, as industry pricing discipline became more of a focus. During the fourth quarter, ABF's total build revenue per hundred-weight increased by 2.4% versus last year, and 3.3% versus the third quarter of 2010. Without the effects of fuel surcharge and changes associated with shipment profile and freight mix, sequential base-rate pricing increased about 3%. During the fourth quarter, price increases on contract and deferred pricing agreements were 4.3%, the best they've been since the fourth quarter of 2006.

In spite of a difficult competitive environment, ABF adhered to its customary practice of consistent disciplined pricing. Last month, ABF filed an appeal to the Eighth Circuit regarding the December dismissal of its lawsuit against the Teamsters and other parties. In response to motions filed by the parties, the Eighth Circuit has issued a revised briefing schedule for this appeal. ABF's opening brief is due to the court on February 18th.

As we've said before, this lawsuit was filed because of the economic modifications to our union labor agreement, that were granted exclusively to the YRC companies, and not to ABF or other parties to our labor contract. ABF believes it is an equal party to the National Master Freight Agreement, that establishes a single national standard for wages and other employment terms for all participating parties. The legal and advisory fees associated with our litigation of this matter added fourth quarter costs of $0.05 a share, compared to legal costs of $0.01 a share in 2009.

Based on our labor contract, we make contributions to the multi-employer pension plans on behalf of our union employees; however, approximately half of the union pension payments we make don't benefit ABF employees or ABF retirees. These dollars go to pay for persons who never work for our Company. We continue to be a part of a broad coalition of stakeholders that is working with the US Congress to achieve a legislative solution to correct the situation. Earlier this week, I was in Washington, where I met with several legislators about this issue. As a result of the November elections, many of the faces on Capital Hill are new, and the committee assignments have changed; however, we continue to work diligently to secure a legislative solution to the situation. Resolving it remains an important priority for our Company.

We have continued to excel in areas that strengthen the customer experience and substantiate ABF's reputation for value. As a result, ABF has achieved historic milestones that set new standards for safety, cargo care, and driver superiority. In September, ABF became the only sixth-time winner of the American Trucking Association's Presidents Trophy For Safety. This is the highest safety award available to motor carriers in the United States. Once again, ABF's cargo claim ratio was better than last year's previous historic low, measured as a percent of net cash pay outs to revenue, 2010's 0.49% figure represents the 14th year in a row that ABF has improved on or equaled the previous years cargo claim ratio.

Last month, three ABF drivers were named captains of the ATA's 2011-2012 Americas Road Team. The recognition of drivers David Boyer, Nate McCarty, and Tim McElwaney made ABF the only carrier to have three persons included on this year's prestigious industry safety team. These kinds of achievements throughout our Company strengthen the current services offered to our customers and allow us to focus our resources on developing new ways of enhancing our product. Based on the recent progress we've made, ABF expects to expand its regional LTL service throughout the western third of the United States, some time in March.

We've made good progress toward returning our Company to profitability, but we have much more to do. The key to continued progress is to focus on leveraging our people, and our service offerings, while working to make our cost structure more competitive. These resources, combined with our innovative use of technology and analysis will help us maintain the high level of service that our customers and our marketplace demand. We believe that many of the regulatory changes that are evolving within our industry will highlight ABF's established history of experienced well-trained professionals, delivering our customer shipments safely, and free of damage or loss.

As marketplace changes occur with some of ABF's peers, we will work to capitalize on available opportunities that allow ABF to become a vital part of the supply chains of even more customers. In 2011 we will work diligently to attain a level of performance that provides long term benefits to our customers, employees, and shareholders. And I'll let Michael finish up with some additional financial information.

I'll wrap up things with a few areas that will have an impact on our 2011 results and cash flows. We anticipate our 2011 net capital expenditures to be within a range of approximately $65 million to $85 million, including revenue equipment of approximately $47 million. This represents an increase versus our 2010 net CapEx of $42 million. This increase includes planned purchases of 35 more tractors and 400 more trailers than we did last year, most all of which are replacements. This year's increase in CapEx is also affected by the rise in unit cost of tractors and trailers. This year's CapEx range allows for adding even more equipment, if business levels require it. We expect our 2011 depreciation and amortization to be in the $70 million to $75 million range, about the same range as last year's $72 million figure and I think we are now ready to take some questions.

I think we're ready for some questions.

Thank you. (Operator Instructions). Our first question comes from the line of Justin Yagerman. Please proceed with your question.

Good morning guys.

How are you?

Wanted to just get a sense, when I look back in my model, this years revenue mix feels at least on balance in the fourth quarter, similar to back in 2003, when I look back at tonnage levels and I look back at revenue per hundred-weight, not 100% apples-to-apples but in the ballpark and you guys in Q4 of 2003 were doing a 93.6 OR, here we're obviously in a much different environment, we've had inflationary pressures over the last several years but I guess what I'm trying to parse out is how much of that difference between the OR that you had back in 2003 and the loss that you guys put up this quarter do you think is inflation and how much do you think is opportunity in terms of where it is that you guys can tighten up your network and take out costs to get back to a more Arkansas Best type of operating ratio?

Well, Justin, I've done similar looks, I'm not sure that I picked 2003 to look at but certainly, we compare our results and our revenue levels to times when we had similar revenue levels, and I know what you're saying as far as our historic profitability, that's something that our team is very much trying to accomplish again. What I would suggest to you, is that every time that I've looked at it, when you look at the inflationary cost pressures that have occurred, and in particular for us, the contractual obligations that we've had to increase our costs, what you'll see is that those increases have not been paid for through rate increases in the marketplace, and much of that deterioration has really occurred in 2008, 2009, and the early part of 2010, so when I look at the situation, we've acknowledged that we have some cost structure issues that we have to deal with and we have outlined how we're working on those, but what I see as an opportunity is for us to go out and to continue on deal by deal basis, on a contract-by-contract basis to get those increases back, and fortunately, beginning in the Fall of this year, we're getting to an environment where that's possible.

So of you continue along that path, what's the near term OR goal for you guys to get back to? I mean, not guidance, but just kind of a soft target of where you would want to be a year from now in terms of profitability levels, given that you're still going to have, even if you assume you guys still have this cost structure, which is unfairly weighted against you versus some of your competitors.

Well, Justin, when you're in our situation where we've cut in half the loss that we had in 2009, our near term objective is to be profitable and but that's not going to be at all where we stop. I mean, that's not a satisfying result to us. I think you know this from past conversations, but our officer group and even at field levels, we incentivize our group based on return on capital employed and our target is a 10. That's where we achieve our target incentive, and that's heavily embedded in people's minds.

I think we'll move on.

Okay.

Thank you, Justin.

Our next question comes from the line of Ken Hoexter of BofA-Merrill Lynch. Please proceed with your question.

Great. Just before I get to my question, Judy, can you just kind of give a little more information on the lawsuit? Just what are kind of the process maybe obviously you can't guess what the result will be but what are the important things? So you have to file by February 18th and then is there other deadlines that come after that?

Yes. I've got a schedule that I was given by our General Counsel that shows as you mentioned, our opening brief that's due on February 18th, and the appellee's brief or their response, I guess is due March 7th, and then we have a reply brief that is due March 21st and then we anticipate that oral arguments will be heard between or in the week of April 11th to 15th.

Okay, so we still have a little bit of time here.

Yes.

Great. Thank you for that. Let me just get back to looking at your tonnage growth, I mean really strong volume growth at great rates, so your revenues did well. I just want to understand that. Do you target, if you're at 12.8 million tons per day, do you target getting back to that 14 million to 14.5 million peak? Is that where we should look for you to grow over the next two or three years and I guess I'll leave it there first and then come back with a follow-up.

Well, again, I think that's a good near-term objective is to get back to that level, but we see a tremendous opportunity in the marketplace. There's been, even as we sit today, there are fewer resources I guess, so to speak, serve in the LTL market. It's a question, whether the economic conditions will improve to a place where the marketplace moves to a size that it was before, but if that is the case, with some of the downsizing that's already occurred and some of the consolidations or mergers of companies that is occurring in 2011, we have a tremendous opportunity to grow market share on the long haul side for that reason.

On the regional side, we've highlighted that opportunity for our Company for some period of time. That's a market that is twice the size of the long haul market and our penetration is much lower, and in the fourth quarter, we saw some traction in growing there at a more rapid pace than our other business, so we feel like we can accomplish something that would be north of where we were even at our high point for those reasons.

That's helpful and just lastly, could you throw out a percentage as you usually do, on what is on that longer haul side versus regional?

It's 58.4% was our tonnage moving a thousand miles or less.

Great. Thanks for the time.

You're welcome, Ken.

Thanks, Ken.

Our next question comes from the line of Chris Wetherbee with Citigroup. Please proceed with your question.

Thanks guys.

Good morning, Chris.

Good morning. On the yield side you gave a nice update for tonnage in January. I was just wondering if you had some indicators on yield whether just growth rates, or at least directionally how things progress through the month.

Well we hesitate to give details, monthly details on yield because it requires with our profile changes that we experience, it requires analysis that really makes more sense on a quarter basis, but I'll say this. We discussed before this call how the general rate increase that we put in October 1 was holding, and it continues to hold very well, and the contractual increases that we obtained at the end of the year, particularly in November and December, I think November was a 5% increase and December was maybe 4.5% or 4.6%, those are good increases, and although we don't have January's figure yet, if we are able to attain something that's in that range, we're in the right place and moving the right direction.

Okay, that's helpful and then just a follow-up on the cost side of I could. Just wanted to get a sense of what you may think the headwinds could be in the First quarter and then in the full year of 2011 from the legal process as you're going through and you gave us that great outline a minute ago, and then just I guess, followed on to that any other kind of discrete levers that you think you can pull on the cost side as you go forward in 2011 to continue to bring that OR down that are different from obviously operating leverage from more volumes and better pricing.

The lawsuit as I understand it, moving forward in this appeals process, at least the initial part will be less expensive than what we've experienced, but as you know, this process can change, it can be more involved, and if we're continually successful throughout the process, if we win on appeal for instance, the likelihood of that case getting remanded back to District Court and us having to continue the process, we hope that's the case, and so we will have some fees that are along with that process later in the year, but this initial part of the appeal is less expensive than what we've been experiencing, so that won't be a substantial headwind.

I think you know probably already this but I'll outline it for you, we have a contract with our unionized employees that calls for a 2%, basically a 2% wage increase on April 1 and then it requires a health, welfare and pension increase that's probably somewhere in the 7% range on August 1. We blend that together and it's about a 3% to 4% increase combined so that's the bigger part of what we face in terms of cost increases. We're also experiencing some increases in equipment costs. I think our unit costs are up 8 or 9% on the tractors, trailers are up some too, but again for the most part, those are neutral as far as the competitive landscape and so the bottom line we deal with, is we need rate increases to cover those things and we need rate increases to make up for the loss rate we had in 2009 and the early part of 2010 so we have to continue to be diligent about that.

Chris, we'll move on to the next one.

Sounds good. Thanks for your time.

Our next question comes from the line of David Ross with Stifel Nicolaus. Please proceed with your question.

Yes, good morning, Judy and all.

Hi, Dave.

Can you talk a little bit about the regional business, why you're deciding to expand in the western third now and then what implications that may have for the OR? Normally that would depress the OR, as you're trying to grow out that new area.

Well, as you know, we've been planning this for some time and the opportunity has been there. We wanted to see a little bit more of economic improvement and we're starting to see that, and we're excited about the opportunity that we have in the West. The good thing is that the costs associated with this expansion, at least as I understand them are probably $4 million to $5 million for a year and so it's not tremendously expensive and that would be if we had no additional business, that's just purely the costs that we have with that initiative, again, assuming no business and we don't think that's the case at all. Our sales folks that are in the West are excited about this and they are anxious to get it rolled out and so that's kind of the story there.

It's more economy, not as much you see competition weakening or downsizing out West?

Well that's kind of been the case already, so in my mind, it's more about settling in with where the economy is going to be and needing to see some improvement.

And then has your sales force talked to you at all? I know it only happened earlier this week but FedEx combined its long haul and regional networks and wondering if you are seeing any overflow freight from that integration?

I heard a story this morning that we've seen some freight but that's probably one among many stories. I have heard from our sales force that there have been questions. We were hearing more questions and concerns being presented about that integration and that is going to be something that we're obviously ready for, positioned for and making sure that we're in contact with those accounts. Some of them we do business with, and some of them would be new to us, but we see that as an opportunity for us for sure.

Great. Thank you very much.

Okay, thanks, Dave.

Our next question comes from the line of Jack Waldo with Stephens, Inc.Please proceed with your question.

Good morning, Judy and David and Mike.

Good morning, Jack.

Judy, is it so when you said that if you kind of blend together the wage and health and welfare increases, did you say 3% to 4% combined?

Yes.

Is the math as simple as figuring out what rates and volumes are going to be up and then subtracting out three to four points on that to figure out where EBIT growth would be?

Well, Jack, I think you and I know that there are other line items that we have, the non-union side, we will have healthcare cost increases and other increases that we deal with, but the majority of our costs, 75% of our employees operate under the contract and so that's why I outlined those first is because that's the material part of the cost, but you have to, I think Michael gave you an estimate of what we think depreciation will be and that's another big factor, and you always have the mix of what's going on with fuel and fuel surcharges and so there are various other things to determine but those are the big ones, that you mentioned. What's our tonnage going to be, what's our pricing going to be, and the big cost structure item is the union contract.

And then you mentioned something interesting about expanding into the West with the regional rollout and if I look and we just assume that tonnage is up 4%, it would kind of bring your tonnage back to 2007 levels. I guess my question is how much room do you have to grow your network, given the capacity constraints you have now, and is growing into the West, should we view that as a net capacity addition for you guys, and what costs are associated with growing West-ward?

Well, as I mentioned, the annual costs associated with that is about $4 million, so it's modest, and when I think of what we're doing in the West is I think that we're creating a better service opportunity for next-day and second-day business for our customers, and it's a different model. We're going to be using sleeper teams and all the costs that I've associated with that are included in this $4 million figure, but I don't think of it as a major capacity addition. I don't think of it that way at all. I think of it as the flexibility to better serve the next-day and second-day market out there, so in my view, it's much more of an opportunity to grow the business with a more efficient cost structure or a more efficient model. That's really the way I think of it.

Okay, fair enough. And before David hits me--

I'm getting ready to put the axe on you. We'll going to move on, okay?

Thanks.

And our next question comes from the line of Matt Brooklier with Piper Jaffrey. Please proceed with your question.

Thanks. Good morning guys.

Good morning, Matt.

So we're growing tonnage nicely here. It only sounds like a little bit in terms of network expansion on the regional product side. The networks going up nicely on this tonnage growth. Where are we in terms of staffing levels and do you need to start adding more heads into the model as we're growing at a higher end right here?

Well, we view the labor costs, the majority of our labor costs that are associated with our business is variable costs, and to some extent, when you get to the low tonnage levels that we were at, in the later part of 2008 or 2009, you get into a situation where more of that becomes fixed or at least semi-variable, and so you have less flexibility, but as we have moved up, we have added the costs that are associated with the tonnage and/or the miles driven, whichever way you want to look at that, and that's really the way that we view that. I'll give you an example of what I was talking about on the fixed cost side. We've already reported our tonnage numbers for the quarter but our headcount went up about 3.8%, and that's substantially less than what the tonnage grew but again, that's because we're coming from a low point. The mistake that could be made is carrying that particular extreme through to all tonnage levels for all future periods, because at some point you're going to get back to a place where it's much more of a variable cost.

So I understand the fixed component in terms of headcount and heads are up 3.8%, and you're growing tonnage at 14-ish in the current quarter and you don't need to add that much more. I guess more simply put, do you need to add more heads to the model moving forward with this run rate of tonnage, or are you currently comfortable with your staffing levels?

Well, as we, if we were at this, continued at this same tonnage level, we would stay at a similar level of employees. If we grow tonnage, we'll have to add people to service that business.

Okay, thank you.

Thanks.

(Operator Instructions).Our next question comes from the line of Neil Deaton with BB&T. Please proceed with your question.

Hi, good morning, all.

Good morning.

Everybody has already covered the LTL questions I was going to ask so just want to ask it's a smaller category for you all but your other revenues, the catch all category came in a little lower than we were looking for and it was up year-over-year, but it trimmed down sequentially which I notice it did that in 2009 too. Is this more of a seasonal issue or was there something particular in this quarter? Could you just give a little more color on this catch-all category?

Well, most of what you see here is driven by Fleet Net's business. Fleet Net is the primary business that they're in is emergency roadside services, okay? And so when you're in the Summer months and you've got 100-degree temperatures, they're going to love that. I can tell you this week, they're loving things because the weather is horrible and they love snow and they love sub-zero temperatures, so they have a better situation from a growth and profitability standpoint in the summertime and they have it in the wintertime. The Spring and the Fall, not so much. They don't like that time of year as much because they aren't needed as much, but that line item is driven by their business and so it is somewhat seasonal. There are other things that are in there, but by and large, that's what we're dealing with.

Okay, that's good color to have going forward, and then just two quick housekeeping questions. I don't believe you gave an average length of haul?

Yes, I've got that for you. In the fourth quarter, that was 1,093. It's down slightly from fourth quarter 2009 by 1.3%.

Okay, and then also, just what was your percentage of freight shipped via the rails?

Rail percentage was 15.6%.

Okay, that's all I have for now, thank you.

Thanks, Neil.

Our next question comes from the line of Tom Wadewitz with JPMorgan Chase. Please proceed with your question.

Good morning. It's Alex Johnson on the call for Tom Wadewitz.

Hi, Alex.

Hi. So I wanted to circle back to the question I think that kicked off the Q&A in terms of margin and looking at a comparison back to fourth quarter of 2003, and I guess the question is sort of do you make money on fuel, and do you make more money on fuel as fuel prices rise?

Well, we don't break out the fuel surcharge from the other pricing mechanisms that we have. We report a total revenue per hundred-weight. That's been the case for several, several years, and we don't like to separate the two, because they work together. For instance, if you go back to the Summer of 2008, when fuel prices spiked, that had a dramatic impact, a negative impact on our ability to get base rates, and so you have to think of the two together. I'll say this, when you have movements that are steep in terms of fuel prices, you can have profit in the fuel surcharge, because of that timing issue as well as the fact that the fuel surcharge changes with the diesel price, you have other underlying costs that are impacted by fuel, that is supposed to cover, rail fuel surcharges, what we pay to third parties that we use, and that sort of thing, so there's not one answer that's the case all the time there, but we don't like to separate it out, because it does have a direct impact, either positive or negative, when fuel prices move on our other pricing components.

Okay, so correct me if I'm wrong but it sounds like the intention of the Company is not to make more money on fuel as fuel prices rise, and if that's the case, I'm just trying to think, I see supplies and expenses in our model in the fourth quarter of 2003 was 12.6% of revenue, and in the fourth quarter of 2010 it was 17.2%, so is there just an optical impact on the margin of like 460 basis points from that period that we should be considering?

I think what that represents is the increase, well again, I don't have that in front of me, so I'm not sure what our miles driven were for that period, relative to the miles driven in this particular quarter because that's the factor here too. It's not just about the price, so the majority of what you're seeing there is an increase in fuel prices. Its got to be, and what we have is a top line that has also been impacted by increased fuel surcharges, so even though the revenues might be similar, the mix of the revenues may be different.

Right. Okay, thank you very much.

You're welcome.

Thanks, Alex.

Our next question comes from the line of Ed Wolfe with Wolfe Trahan.Please proceed with your question.

Hello, good morning or good afternoon I guess.

Hi, Ed.

Judy, can you talk a little bit, I mean directionally, you guys right now have grown your tonnage the second-most of any of the public companies this quarter and your yields, your reported gross yields and the implied net yields are at the low end of what everybody is growing them. Is there a little bit of a change in that you're taking what the marketplace is given you and you were more disciplined a year ago and now as the other guys get more disciplined there's stuff coming towards you? Is there a little bit of a strategy to take the freight while it's out there to take? Should we interpret it that way?

No, not at all. I think we're obviously willing to take good market opportunities, but there's two things to keep in mind. First is there's some significant profile effects and I think if you lined us up which we do this, so I'm assuming that you could too, you line us up on a weight per shipment basis and then also length of haul basis.those two thins were dampening to our revenue per hundred-weight increase and they were more dramatic than others that we compete with. The other thing to look at is, the OR improvement that we have reported. It's 7.5 points better, and that is a pretty long distance from anyone that has reported so far.

So I think that the decisions that we make continue to be made in the same way. We look at an account on that accounts basis and we make the decision based on whether that account adds to our profits, and if it does, it makes sense for us to do and we'll take that business. If it doesn't, we'll make a different decision, but that model, the approach we've taken has been the same throughout this period. We do acknowledge weaker periods, that we have more fixed costs. I mean, that's acknowledged in our costing model and our decision-making, but as we have moved into better tonnage levels, that becomes less of an issue.

So when I look at total build gross surcharge 24.15 or up 2.4% and I imply down about 1% net of fuel, you're saying that there's obviously a negative impact on that for both weight of shipment and length of haul. Can you talk to the magnitude of those?

Well let me say this. I'll just give you the pure price number. Year-over-year, it was up nearly a percent, sequentially, it was up 3%. That's really kind of a stripped out base price figure.

How do you define that. That's existing account, same-store basis or how do you define that?

It's the revenue per hundred-weight change excluding profile effects and fuel surcharge.

Thank you very much. I appreciate it.

You're welcome.

Our next question comes from the line of Art Hatfield with Morgan Keegan. Please proceed with your question.

Judy, I just want to make sure I heard, sorry, I should have said good morning.

That's okay.

I'm trying to get in before David cuts me off.

Okay, we'll have to go to the next question.

Thanks, Dave. You said sequentially, core price was up 1% and year-over-year in the quarter at 3%?

You have that opposite.

I've got it backwards?

And it's not poor price, it's pure price. I thought I heard you say poor price. The pure price is up 3% sequentially and up nearly a percent year-over-year.

And I'm sorry, I meant to say core price. The comments on the West expansion of cost of $4 million, that's not net of any revenue that you would generate from that?

No, that's the cost without assuming any additional business.

And just real quick, is it fair to assume given what fuel did in the quarter that it was probably a slight headwind for you in Q4?

Well, Art, I just went through this a little bit with someone else. We don't break out the details of that. We feel like there's a total price being paid by a customer that's influenced by what that fuel price is, and so we really can't get those two things separated from each other in a way that we can honestly answer your question very well. We try not to do that.

That's fair. Last thing, on the OR, and I know you don't want to give guidance, but given how well you manage that down throughout 2010, given some constrictions you got on some of your costs and what the pricing environment was, given where we are today and what tonnage is doing for you and some of the things you talked about with the FedEx consolidation, maybe you see some of the benefit there and directionally, where price is today, and getting maybe a full year benefit of improved pricing, Judy, would you be disappointed if you didn't see the same kind of improvement in OR in 2011 that you did in 2010?

Yes. I would be disappointed.

Okay, thank you. That's all I've got. Thanks.

Thanks, Art.

Our next question comes from the line of Jon Langenfeld with Robert W. Baird. Please proceed with your question.

Good afternoon.

It is. Hi, Jon.

How you doing today?

Good.

When you think about pricing and you think about secondary and tertiary markets and where your density gets less, had you guys used this downturn at all as an opportunity to disproportionately increase the rates on some of those lanes? It just seems to me like I know the customers want it but it's one thing to want it and it's another thing to actually pay for it. It seems to me like the network rationalization of some of these tertiary markets, it seems to be an opportunity out over the longer term.

Not speaking to any specific market, when we go in and we look at the marketplace in really trying to accumulate the information for a general rate increase for instance, we look at lane information, we look at market information, and we put in increases that we feel are appropriate for that market so I guess the point of my comment is that we do get that granular, and it does make a difference, what is going on at the very detailed or specific level in these markets and in these lanes in terms of what we increase, and we are very good about breaking down for what we do for a customer and to each value proposition, and charging appropriately for it. I think our salespeople and our pricing people on a combined basis do about as good a job at that as you'll see anywhere and we don't miss many opportunities either, so I think your point is well taken. You need to be looking at what a service or performance of a service for a customer costs you, but oftentimes, what we're dealing with is what the market price is, not so much some sort of a cost-plus type approach.

And I know you guys have said for a long time, it's very important that you're able to cover the entire country but do you challenge that strategy internally to say what if we didn't cover all 58 states fully and what if we pulled back from these regions and how detailed of an analysis have you done on that front?

We've done a very detailed analysis at times and where we are in terms of our facilities, is always changing. I think David has a statistic that's in some materials he gives me that shows that I think we've reduced our facilities by about 20, taking some of our smaller facilities and combining them, or offering service out of the larger location to a smaller location, and I'll be honest with you, since I've been with the Company, we've continually done that, and we have optimization software that we use routinely for our line haul operations as well and so this is an ever changing network. It has to change to respond to market changes, but we're not far from where we need to be, really, and if we dramatically downsize from where we are to some smaller set of locations, it would affect our service which we think we're positioned very well from a service offering level right now.

We're going to move on. Thanks a lot.

Our next question comes from the line of John Barnes with RBC Capital Markets. Please proceed with your question.

Hi, good afternoon guys.

Hi, John.

I got on a little bit late so I apologize if I missed this, but two quick ones. Number one, can you talk about the legal costs you incurred in the fourth quarter? Is that a similar amount we should assume on an ongoing basis on kind of a quarterly basis until this legal issue is wrapped up?

John, it's Michael. Actually, Judy made a comment about that earlier. No, on an ongoing basis, it shouldn't be as much as we experienced last year, is what our counsel is telling us, and did you want the detail on the fourth quarter on that as well?

I got that. I just missed I'm sorry I missed that answer. I apologize.

That's okay. It's fine.

And then my other question was Con-Way on their call this morning was talking about kind of gave parameters around what they think they need to see pricing do in order to get back to a historical operating ratio, and I'm kind of curious as to you've done a good job on pricing, how much more pricing do you think you need? I mean, is it, for example was they need 4.5% to 5% increases a year for the next two years in order to get back somewhere closer to their historical rate. Is that something you see as necessary as well? I mean, is that the kind of level that you would expect to need in order to kind of get back to your historical OR levels as well?

Yes, I think they've got it right on. I mean, I had said several months ago that we needed 8% to 10% and what I was referring to is, if you look at our results and you lack at where we need to be, that's about how far off we are. They're choosing to say that will occur over a two-year period of time. I don't know. I think we're charging and challenging our people to go out there and get the increases that are appropriate in the marketplace today, and to retain the good business that we can, and so I wouldn't necessarily suggest any particular period of time, just go do it. Do what you need to do.

Okay, so similar type of number that they threw out today?

Yes, I think what they're saying makes sense.

Okay, thanks for your time guys. I appreciate it.

Thanks, John.

Our next question is a follow-up question from the line of Ed Wolfe. Please proceed with your question.

Yes, just directionally, when we look at first quarter and I know it's impossible in January to look at first quarter and then you add the weather, but you're getting sequential pricing and then you've got the weather and then you've got a seasonally slower quarter. When we think directionally relative to fourth quarter, how should we think about first quarter profitability, normally you'd think it's down but because of the pricing maybe it's flattish or up. How do you think about those just direction?

Well, typically, the first quarter is, we were looking back at history on this. The average increase in the OR for the first quarter is somewhere like three to four OR points above the fourth quarter, and what's interesting about that is we actually have the rate increase kind of flip-flopped. We did the rate increase in the fourth quarter or at the beginning of the fourth quarter this year and not in the first quarter, so that relationship, that normal relationship is a little flawed in terms of what it might be, but we have, if we are able to continue the growth that we're experiencing and the pricing holds in there, we should hopefully be able to have a much better result than we had last year, and that's certainly our expectation. The weather this week is not making that easy to see through, but that's affecting everybody the same way.

Can the weather be made up? Is that something, or is there costs in lost freight that you just never make up?

We think of it as you never make it up. We have, one of the things that we do as the Company is we bring in from a promotion standpoint, officers from the field into our general office as they progress in their careers, and we've got some people here that have spent a lot of time out in the field, either on the sales side or the operations side, and that question always comes up, and they will always tell you, you never make it up.

All right, thank you so much for the time. I appreciate it.

Thanks, Ed.

Our next question is a follow-up question from the line of Jack Waldo. Please proceed with your question.

Sorry guys, Ed just asked my question. Thanks.

Thanks, Jack.

We appear to have no further questions at this time.

Okay, well we appreciate everybody joining us this morning. Thank you very much. This concludes our call.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.