ArcBest Corp (ARCB) 2011 Q2 法說會逐字稿

Thank you for standing by and welcome to the Arkansas Best Corporation second quarter earnings conference call. (Operator Instructions). I would now like to turn the call over to your Vice President, and Corporate Communications Director, Mr. David Humphrey.

Welcome to the Arkansas Best Corporation second quarter 2011 earnings conference call. We'll have a short discussion of the second quarter results and will open for a question and answer period. The presentation will be done by Ms. Judy McReynolds, President and Chief Executive Officer and Michael Newcity, CFO. We thank you for joining us today. In order to help you better understand our Arkansas Best Corporation and its results, some forward-looking statements could be made during this call.

As we all know, forward-looking statements by the very nature are subject to certainties and risks. For a complete discussion of factors that could affect the Company's future results, please refer to the forward-looking statements session of the Company's release in the Company's most recent filings. We'll now begin with Mr. Newcity.

Thank you for joining us this morning. I'm pleased to report for the second quarter of 2011, Arkansas Best Corporation has improved results that include significant revenue growth and a return to profitability. We are encouraged by the progress that is reflected in these results. It is a product of the combined effort and hard work of all of our employees. However, we believe this is only the first step in a process of continued improvement toward our goal of sustained possibility at the superior levels previously achieved by our Company.

Later, Judy will give her thoughts and prospective on our recent performance and the factors that are affecting it. But now I would like to cover the details of our performance for the second quarter of 2011. Our second quarter 2011 revenue was $499 million, per day increase of 21% increase over last year's second quarter revenue of $411 million. In the second quarter we earned $0.20 per share compared to a net lost of $0.30 per share last year. We ended the second quarter with unrestricted cash and short term investments of $152 million. That represents an increase of over $20 million, versus the end of this year's first quarter.

Full details of our GAAP flow is included in our earnings press release. Moving on to ABS results during the quarter, reported second quarter revenues of $459 million compared to $379 million in the second quarter of last year, a 21% increase. ABS tonnage increased 9.9% per day compared to last year's second quarter. ABS total revenue per ton weight increased 9.5% in the second quarter, reflecting increases in fuel surcharge and improved account pricing. Excluding freight profile and account mix changes, and the changes in fuel surcharge, pricing on ABS traditional LTL business increased in the low single digits, versus last year's second quarter. ABS second quarter operating ratio was 98.2%, versus 103.3% last year. Now I'll turn it over to Judy for her thoughts about our quarter.

Thank you, Michael, and good morning everyone. We are pleased to report a second quarter profit that reflects strong revenue growth across the ABS network, combined with improved account pricing across a significant portion of the ABS customer base. ABS continues to focus on the specific needs of individual shippers and the delivery of a high level of customer service in order to meet those needs. Versus last year second quarter, ABS operating margin expanded by over 5 operating points and nearly 7.5 operating points, versus the first quarter of this year. This quarter's profit represents meaningful progress in our efforts to achieve our past success.

However, these results represent a beginning, and we have much work to do to sustain the same level of performance that produces a sufficient return for our shareholders, and allows us to adequately reinvest in our Company.

As Michael reported to you, ABS second quarter tonnage increased 10% per day, versus the same period last year. In each month of the quarter, we experienced tonnage growth, that the rate of increase slowed through the quarter. On a monthly basis, freight level increases, versus last year, consisted of April at 15.8%, May at 8.7%, and June at 5.9%. The reduction in the pace of monthly tonnage growth was due to three things.

A more challenging tonnage comparison from each successive month of last year's second quarter, some economic softness that occurred during this year's second quarter, and ABS focused efforts to improve yields on a broad base of accounts. The month of July followed a similar pattern, with ABS total tonnage per day increasing approximately 1%. In previous calls, I've talked about the lingering effects of the challenging freight environment and the fact that our Company and our industry has suffered from pricing levels that are not adequate to obtain acceptable returns. Since the second quarter of 2010, the LTL industry has experienced improved daily tonnage trends. As a result of these positive trends and the rationalization of the capacity serving our industry, we have been experiencing a better environment for base rate increases.

The retention of our 2010 general rate increase continues to be followed. Pricing increases obtained on the renewals of contracts and deferred pricing agreements in the second quarter were at historically high levels, and last week ABS implemented a general rate increase that applies to nearly half of our business. In July, ABS total build revenue per hundred weight, including fuel surcharge, was up approximately 15% versus last year. Excluding fuel surcharges, the revenue per hundred weight on our traditional LTL business, was up approximately 8% in July. ABS continues to expand and improve its capability in serving the transportation markets.

The value we are bringing to our customers is higher than it's ever been. On July 6th, the US Court of Appeals for the Eighth Circuit reversed the Lower Courts previous dismissal of a lawsuit filed in November, 2010 against the Teamsters and various other parties. Our original lawsuit related to three modification of ABS union labor agreement that were granted exclusively to the Wire Sea Companies and not to ABS and other parties through our labor contract. Approximately 76% of ABS employees are covered under that labor agreement. ABS believes it's a equal party to the National Master Freight Agreement, that establishes a single National standard for wages and other employment terms, for all participating parties. ABS is very pleased with this decision, and looks forward to further proceedings in the Lower Court.

I want to mention a few recent items that substantiate ABS's position as a leader in the Transportation and Logistics Industry. In May, two ABF drivers were recognized as Distinguished Leaders in the Trucking Industry.

ABF driver, Ralph Garcia, was named a Champion of Change, and was one of 20 transportation professionals invited to the White House to promote the purpose of the trucking industry. During his 32 years as a professional driver, Ralph Garcia has won numerous safety awards and was a previous member of The American Trucking Associations, America's Road Team as an outstanding representative of the trucking industry. Also in May, ABF driver, Tom Martin, was awarded the Wyoming Trucking Association Driver of the Year Award.

This Award recognizes superior driving skills and excellent safety records. Ralph and Tom are two of the many outstanding drivers that positively represent ABF on the Nations highways. ABF's reputation for superior cargo handing was validated, once again, in the second quarter as it's cargo claims ratio was of 0.42% of revenue. Our Customers depend on ABF to deliver the shipments safely and damage-free, and we take that responsibility seriously by striving for continual improvement in the area of cargo care.

In July, ABF was recognized for it's excellence in supply chain sustainability and Informing Technology innovation. Inbound Logistics magazine sighted ABF as one of it's Green 75 supply chain partners, in honor of ABF'S efforts in pursuing innovations and practices designed to enhance environmental performance and efficiency. CIO magazine named ABF as their recipient of the 2011, CIO 100 Award. ABF earned this honor for it's use of IT in leveraging the supply chain services that it offers in the marketplace. ABF's IT expertise allows us to create customized solutions that meet the specific needs our customers.

We are happy to be discussing the results of a quarter that reflect ABF's return to profitability. The hard work of all of our employees combined with our desire to be a true supply chain partner with our customers has been instrumental in the positive results we are presenting today. During the second quarter we made progress toward a return to historical level profitability. The combination of health freight levels in the ABF network, improvements in base rates and our efforts to have a more competitive cost structure, provide a path to ongoing profitability. And David, I think we are ready for questions.

Frank, I think we are ready to get questions.

Thank you. One moment first before the question. Our first question comes from Justin Jagerman from Deutsche Bank.

Good morning, how are you?

Good. Thank you.

On June 14th I think you said the June tonnage was up 4.1% and it ended the quarter up 5.9%. So it sounds like we got a surge there. And you just updated us on July, saying tonnage was up 1%. I'm trying to get a since if the falloff in July, because you did get a normal seasonal surge. I appreciate a little color on that in the back half of June. And if this falloff that we saw in July is outside of seasonal norms, or is something that you would generally expect when you look at the actual raw data.

Justin probably the best way to think about this is by looking at the sequential trends. And when you looked April to March we had a fairly normal sequential trend. But the sequential trends for May to April, June to May and July to June are all at some point weaker than we would expect to see. And as I mentioned, I think that's a combination of things. We do think of a softer economy as playing into it, as well as towards the end of the quarter, or mid- point on in the second quarter and end of July, we began to have more of an effect from our pricing actions, than we had early in the quarter. So when you are looking sequentially, those are two contributors to the issues that we are dealing with there. But we still have the increases from last year and I feel like our tonnage levels are healthy at this point.

Okay. Price increases have certainly been impressive, and you guys have outlined in past comments in detail thoughts on the Lawsuit as well as thoughts on pension reform and what have you. Outside of those outstanding items, can you talk a bit about cost saving initiatives that we should expect in the back half? If tonnage is 1% teetering on that positive type of level, I got to think you guys are starting to think about how to rationalize cost base. What is in store for the back half if we don't see the reaccelleration in tonnage, and how do you insulate yourselves against going into the red again?

I think we have been fairly good at matching our people and our equipment to our business levels. One of the keys to maintaining our profitability is by doing a good job of identifying customers to add to the mix of existing customers that we have, that are those that value the services that we offer and that are willing to pay for that service and that relationship that we have with them. I think we are doing a better job than we have ever done in trying to identify those types of accounts and we are continuing to do more along the lines of understanding where we can gain the advantage, and that's the key. I think the price increases that I mentioned about July, give you an indication of our dedication to improving profitability through better individual account profitability, and that is something that is a difference maker when you look back to the worst part of the recession.

Just the last housekeeping for Michael. Tax rate going forward. How should we be thinking about it? It's been moving in the back half and 2012.

I think you will see it more towards the normal, to provision to the benefit side that we had before in that range.

Justin, would I suggest to you that we would have an upper 30% tax rate. And you know, it's not too far from our expectation, what we experienced this quarter.

Great. Thanks. I will turn it over.

Next question comes from Matt Brooklier with Piper Jaffrey. Please proceed.

Thanks. Good morning.

Good morning. Matt.

You guys showed nice improvement on the price side. I know during the first quarter there was a little bit of impediment from fuel surcharge caps and maybe not working as hard on improving the price with your customers. Maybe you could just walk through how much of your book of business you targeted during first and maybe second quarter from a base rate perspective. How much is the last. And if there's any of the fuel surcharge caps still in place that you need to address moving forward.

Well, the initiative that we talked about on the last call, and as we were presenting at conferences during the second quarter, are largely complete. But the interesting thing is to keep in mind, we continually have pricing programs to address underperforming accounts on a monthly basis. So I hesitate to give you any figure and say that we are done, because it's an ongoing process. But we did have a group of accounts that were further from profitability than we would like, that we addressed, and the word that I have is 90 plus percent of that has been dealt with.

But I don't want to you think its an ongoing effort because it is. On the fuel surcharge front, we have largely addressed that as well, and seen improvements there. We are pleased with the results, but that is the same issue as you look at the profitability and account. The recovery, the fuel surcharge is a part of that calculation. And you know, it could be continually addressed on a monthly basis as we see accounts that have an issue with that.

So from your comments, it sound like a large amount of the fuel price issues have an address but maybe there's a little more to go from here?

Yeah, I think that's a good way to think about. But, again, remember this is a constant effort every month.

Okay. My second question. It looks like you guys did a better job on rents and purchase transportation during the quarter. Maybe talk a little bit about that.

Well, you know, I don't know that we saw much that was very different than what we have seen in the past there. I think whenever you have good price improvements you see a lot of categories improve in terms of percent of revenue.

Matt, really, the percentage didn't change a lot with 13.6% miles in the second quarter this year, versus 13.3 last year and actually the 13.6 was the same percentage in the first quarter of this year as well.

It doesn't sound like anything out of the ordinary.

No.

Very good. Thank you.

Thank you.

Our next question comes from Todd Fowler with Key Bank Capital Markets. Please proceed.

Thanks. Good morning, everyone.

Hi, Todd.

Hi, guys. Judy, I hear what you are saying, better pricing makes a lot of things look better. But it does feel like you have some good efficiencies on the salary and wage line. Do you feel like you're at a point when the network is running smoothly from a personnel standpoint, and if you could also remind us of some of the scheduled cost increases coming through for the third quarter and for the rest of the year?

Yes, I do think things are running smoothly but we always have opportunity to improve things. We are working on additional work rule flexibility type changes that should further improve our efficiency and our service times. So we are, again, constantly looking for those opportunities. The scheduled wage increase on our labor contract occurred on April 1st and it was an increase of 1.7%, 1.8%. On August 1st, which is yesterday, we have it scheduled, a health welfare and pension increase, that is in the 6.5% range.

And we are working through how much of that will be health welfare and how much of that will be pension. There is further evaluation that will be going on with that increase and the negotiating committees that determined that are really still at work and will probably be at work on that through the fall of this year. So it will be some period of time before we know further details on that. You know it is, as scheduled and we are going through that, working through it, just in the normal course.

Sound right. Just to be clear on that. What you are saying is you will have the 6.5% increase on the health and welfare, but there will be maybe a difference in how it's split on the health and pension side?

The 6.5 increase is on health welfare and pension. And each year there is always a discussion of how that gets split out.

So August 1st you did have a 6.5% increase for health welfare and pension.

Right.

Ok. Just one more thing on personnel side. When you have a look at salaries as a percentage of revenue, you are at some of your better levels, going back to 2008. Does it feel like that's sustainable with where the network is at and to dig deeper in your comment, is there additional efficiencies that you can gain going forward or is this kind of a high water mark?

Well, I wouldn't characterize it as a high water mark at all, because in order to return to our historic profitability levels, obviously the salary/wages line is the big line item. So we expect to have further improvements in that line item but to just give you an example, you know our tonnage for this quarter increased close to 10% and our employee base, on a full-time basis, increased only about 2.7%. So there is some advantage that you can gain, and we expect to continue to gain, from adding business and not having to add step for step additional people to handle that business. It just gives you some perspective on the operating leverage that's in the business.

Got it.

Thank you, Todd.

Our next question comes from Tim Huckstep from Bank of America Merril Lynch. Please proceed.

Hi.

Hi.

Can you just comment on the volume flow. It looks like Into July are you up 1%. Do you think based on where the economy is and the sequential trend, are you looking at going negative in terms of the volumes here as you continue to show off some of those unprofitable volumes?

It is possible for us to have that situation. But we really can't predict the future. I was reading a report a couple of days ago about how difficult it is for the average economist to predict the future. So I'm not certainly in a place where I can do that. We do expect to grow the business, both through price and tonnage, but we don't have a crystal ball on that. The trend line has been that we have lesser increases, so I will acknowledge that possibility.

So last year you mentioned you faced tougher comps between April and June it ran from 11.2 up to 12.9. Can you give us how the third quarter progressed a year ago to see what you are comping against?

David just handed this to me. July year-over-year was up 13, August was up 14, and September at 14.9. So the comparison issue that I mention before is still there in the third quarter and into the fourth quarter. Much like we experienced in the second quarter, kind of on an acceleration basis as you go through the quarter.

Lastly, you mentioned the pricing kicked in and that was something that accelerated that deceleration in July that. That wasn't your new GRI increase, though, was that?

That would have only affected the results that I reported within one week and that's on about 45% of our business that is impacted by the GRI. No, we think from the information that we get from our sales and pricing folks, that when you look at the effective date, so to speak, of the prices actions that we took during the second quarter, it was more that you could see those results in the second half of the second quarter, and July is affected even further to the positive by those actions. I appreciate the time. Thank you, Judy.

No problem, Tim.

Our next question from David Ross from Stifel Nichlaus. Please proceed.

Good morning, everyone.

Hi, David.

Judy, the D&A line didn't move year-over-year. So you kept that under control, can talk about the leverage you saw in the Fleet. What the average numbers of tractors in service was year-over-year?

We didn't really change the average number of tractors that were in service. David is handing me those numbers here. We had about 1500, close to 1500 road tractors in service, and about 2300 city tractors in service. That hasn't changed that much.

It is down substantially from where we were in 2006, though. We had much lower numbers, so we are doing things more efficiently perhaps using a little more purchased transportation, in terms of rail utilization, than we had. But again, the statistic that I mentioned earlier about the number of employees that were added relative to the tonnage, tells you because about half of those employees are going to be drivers. And it just gives you a sense of the leverage in the business.

Can you comment on the average fleet age, and how that is trending, versus historical averages and where you want to be?

Road tractors are at about 2.5% now. The city tractors are close to 7 and our trailers are close to 7 years on average age. And we would like for our road tractors to be lower than that, and that will be occurring over the next two quarters. We got a lot of our tractors that we will be taking delivery of and selling some older units. So we will be back closer to our sweet spot there very soon.

So the CapEx need in terms of rolling stock are going to be addressed in the next six months, most likely? The next couple of years?

Yeah, we are replacing equipment over the next six month as we talked about before. We are not doing anything unusual there. But we do need to do some replacements and those are scheduled.

Over the long run, if you look at CapEx levels, should that be kind of proximate to D&A? A little less than D&A because you built up the network, or maybe more than D&A because of facility expansion that you see?

I wouldn't think that facility expansion would play into that really at all. It is typical, I think, for the depreciation and amortization line to be about what your net CapEx is. I'm guessing, because we are continuing to experience price increases at a pretty hefty level, our tractors and trailers that will have the net CapEx line be ahead of the depreciation and amortization just for that reason. And so the relationship will be a little bit more normal than it has been. But I would expect it to be higher than the depreciation and amortization for that reason.

Thank you very much.

Our next question from Jack Waldo from Stephens, Inc..

Good morning. Thanks for taking my call.

Good morning Jack.

Judy, your sequential performance I think is somewhat historic, if I look I could not find a time in my model where your pricing improved sequentially as it has from the first to second quarter. Nor your margins improved as much sequentially aside from the second quarter of last year. When I think about the improvement we have seen on a sequential basis and I think about next quarter, your operation ratio has historically improved by on average about 150 basis points, what are the levers that would impact the third quarter performance to be different than the historical norm. And do you see anything right now that would cause that performance to different than the historical norm.

Two things immediately come to mind. One is the general rate increase has not been, at the time we increased rates in a few, I won't say ever. But we used to do rate increases in the third quarter but in a long time. So that's one thing.

The other things would be just the increases that we have experienced in price and improved profitability of our account base. I think our account mix is much better as we go into the third quarter than what we were going into the second quarter with. And the other thing that I've got to give credit to our sales and pricing folks for.

We had a 7.7% increase in our deferred and contract business. That's a historically high level. Again, got to give those guys credit for that. But it gives you an indication of the environment that we are dealing with. An improved environment.

Its healthier tonnage levels, and allows us to work with our customers to really recover from them the value of our services. And our people and their diligence on that front. Got to give them credit for that.

So it sound like there are a bunch of favorable things impacting that. Am I hearing that right?

Yes.

My second question, before the buzzer comes, you've been sitting on the cash for quite a while, and your stock is trading, well, it's been one of the worst performers in the LTL space so far this year. Now that you're profitable and it looks like that will continue going forward, have you rethought the idea about using that cash to repurchase stock or change your dividend policy at all?

Hey, Jack. No, our current cash position gives us a lot of flexibility in terms of organic investment. In terms of acquisition we are actively engaged in assessing both of those options. In the long-term with a more predictable environment with some additional profitable quarters behind us, we'd have less cash enough to fund interest expenses, CapEx and possibly a debt to capital in the 25% to 30% range.

We are still not really in that environment. As we get more certainty about the economy and the debt market, we will be resisting the dividend. Its something we evaluate on a quarterly basis with our Board. In terms of a stock repurchase, we have authorization from the Board for another $18 million on a purchase. But I think we are still very optimistic about adding value to the Company through organic investment in a regional model, other initiatives as well as potential acquisitions that we discussed in more detail before the recession.

Okay. Thank you very much.

Thank you, Jack.

Our next question comes from Chris Weatherby from Citi. Please proceed.

Good morning.

Hi, Chris.

Maybe a question on how you think about price versus volumes as you move into the second quarter, obviously volumes are slowing down and pricing seems to be accelerating. I guess maybe as you pull the different levers and think about what the optimal mix is as you try to increase your operating ratio and regain additional profitability. How do you think about that? And do you get a sense that the price increases are driving a little bit of the business back to other carriers at this point?

You know I think that's absolutely true. But what we try to do, very diligently, is work with those accounts to get to a profitability level that makes sense for us. And we think for them. But you do have some customers that decide to do something different. Our retention level through this process of increased pricing on these accounts that we worked so hard on has been good.

And we think the environment is good. The mix of accounts that we have now, versus what we had during even earlier period this year is much better. So what you do is you look at the environment. You assess the environment. And keeping in mind the value on each individual account that you're bringing.

And address it accordingly. And there are opportunities to recover what we have lost that we see now and that we see for the next several months. It's a better environment in terms of the capacity serving the environment and the economic outlook although uncertain, we are in a place that's much better than we were at the depths of the recession, so all of those factors are evaluated in how we approach things. The healthiness of our tonnage levels are intact and we are always conscious and ensuring that we are growing the Company. But we're in a place that we are comfortable with and I think we are comfortable with what we are going to do over the next six months, and I think it makes sense from a profitability and from a customer service value standpoint.

I think just a follow up to that, when you think about it, in the past you've given us updates on how much core pricing growth you think you need to return to that 92/93 OR historical mid OR point. How do you think about that now and if you were to have flat or negative tonnage in the back half of the year, does that equation change when you think of the operating leverage you may or may not get form volumes going forward. So going over that would be great.

What you are looking for is an account base that has profitability levels, that earn returns that are adequate for the Company and allow us to reinvest in the business and do thing that make sense for our shareholders, and there's always a balance there. I'm not naive to the fact that you can get too far one direction versus another. But when I look at our situation and the potential for us to return to historic profitability levels with the pricing increases that our sales and pricing folks have put forth, we have a chance to do that. And I'm very pleased that we in a position of strength in that regard. That's what I've asked them to do.

Great. Listen. That's very helpful. Thank you.

Thanks.

Our next question from Tom Albreight, RBC.

Good morning, everyone.

Good morning, Tom.

Let me take this from a different angle. As I look at your performance historically, a couple of your best years, 2005 and 1999, had less than 1% tonnage growth, and you did a lot of work in the year leading up to that and continued to have a very choosey type of freight market in those really good years. If you had, let's say, 1% or so tonnage growth in 2012 combined with what is going on in yields, could we see the same type of performance or if your tonnage actually goes negative a little bit, let's say 2% or 3%, does it make it more difficult to really unlock that leverage?

Well, Tom, I think what we are talking about is, again, choices you can make. It's a lot easier to work with accounts to improve price when the economy is better and it somewhat depends on the economic environment and the environment surrounding our customer base as we work through that. We have had periods where our tonnage has declined and we've gotten the right answer on the profitability side through the right pricing for the right accounts. And so we don't ever have as a goal to be the absolute largest carrier out there.

Tom, you can remember years ago, when ABF's profitability level was better than three of our largest competitors combined that were much larger than us. So our goal was profitability. And you know, again there's a balance but that balance is easier to work with on a pricing side when you've got the economy improving and companies feeling better about their businesses. And we feel like that's the environment we are in now.

But that changes and we have to be mindful of it, and we have to look at the mix of things and get the best answer for the environment. That's one of our challenges. But I think our people do that about as well as anybody.

My last question, and I'm not trying to extrapolate anything. I'm trying to run numbers in my head. But what kind of an OR approximately would you have had in June? And were you profitable in July?

Well, we actually don't know the answer to that on July. We have our Controller sitting here with us, and he's smiling at me saying he's not done yet. So we don't know. We definitely had a good profitability level in June.

Like sub 95 OR.

I don't even have that in front of me but I remember it was in that range. We have acknowledged in the release and in my comments, that we need to do better. So we are not high-fiving over that, but it's a good feeling to have a plus sign in front of the numbers.

Okay. Appreciate it. Thank you.

Thanks, Tom.

Our next question from Tom from JPMorgan Chase. Please proceed.

Hi, Tom.

But let's see, if I missed this, I apologize. But the comments on sequential OR. There are a lot of moving parts and tonnage decelerating a lot.

The pricing improving and how would you think of the operating ratio sequentially third quarter versus second. Is it likely to be better. Likely to be worse? I guess I don't have a lot of visibility to what is likely given the moving parts.

Well, Tom, we don't give guidance, so I'm not going to give you guidance. But I will say what the historical norm is. But the third quarter is typically a little bit better than the second quarter from an OR stand standpoint. We have a range, and it depend on what the economy is doing when you look back at history. But typically its a little bit better than the second quarter, the other factor to keep in mind, is the general rate increase that we did at the end of July. That will affect the results positively for the third quarter.

Can you compare the magnitude impact of revenue that you expect from the ratings, the GRI, versus the cost pressure from the Teamsters. Health, welfare and pension increase. Are those similar magnitude or is the revenue you get from the GRI substantially greater impact than the Teamster impact.

Well, you know, if you think about it we put in about a 7% increase. Close to 7% increase on the general rate increase, and that applies to about half of our business. The other material fact, is that we are working through the contract and deferred pricing increases, which I mentioned. We have a good result on that, close to 8% in terms of increased level in the second quarter.

The previous two quarters were in about the 4% range. If that was the average result that we got on the contracts and deferred pricing agreements for the year, I think we would be in an okay place, relative to the contractual increase that ends up averaging about 4% on our labor contract when you consider the wages and the health welfare and pension, but I would say slightly ahead. We should make up some ground on that but we need to.

I guess for the second, any thoughts on the economic data seems grim coming out but LCL has a momentum which is pretty positive. Do you think there's a lot of risk to the positive LCL pricing if the economic data remains weak in the near-term, or do you think that the industry discipline and focus on profitability really is a dominant factor? You know, if you look down a few quarters.

I think the industry pricing is a dominant factor, even if the economy weakens slightly or continues to weaken slightly. I think there are several reasons for that. One of those being that we had a couple of our competitors that went materially the other direction, and it didn't work out so well for them. And the other is that the capacity serving the industry is substantially less than it was during the last economic upturn. And so those are factors that play in.

The other factors that are not necessarily viewed as positive for the transportation industry, but we see them as positives for us, is the impact on the number of drivers that will be available to the truckload industry because of hours of service rules or the CSA regulations. Those things, typically, are played to ABS hand because they have a good driving job. They pay people well. They have good benefits and they tend to be the top of the heap there as far as choices for drivers.

But at the same time, there's tightness in the rest of the industry because of those things. And I think all of that plays into a good scenario for the LTL industry, but particularly for ABF because of the wage and benefit package we offer our people.

Tom. I am ganna move us along.

Thank you.

Thanks a lot.

Our next question from Scott Group from Wolfe Trahan. Please proceed.

Hi, Scott.

Hi. Good morning. I want to ask the margin question, not on a sequential basis, but on a year-over-year basis.

If you guys have 500 basis points of OR improvement on most single digit pricing in the second quarter, and now we are thinking about 8ish% pricing, it kind of implies much more year-over-year improvement in the third quarter. Am I missing something about that math. Or is this something about the cost coming on or the year-over-year comps.

Well, we do have the August 1st increase on the health welfare and pension on the cost side. And you know, we mentioned a few times already the increases we are having to pay for equipment and when we look at our cost structure, we have to pay high fuel surcharges to railroads and there's a number of inflationary type items that go beyond the labor contract. But we do have an opportunity for margin improvement in the third quarter, that is good because of where, again our sales and pricing folks have gotten us on the profitability of account side, and the fact we put in the general rate increase at the end of July.

You don't think it's reasonable to think about another 500 basis point of improvement?

Scott, we don't give earnings guidance and we don't really know what the environment will be. And you know as well as I know how quickly that seems to change.

Right.

So I just hesitate to give you any kind of earnings guidance because that's not our policy.

That's fair. Is there a level of tonnage that you think you need or that you are targeting for the network. If we start to see tonnage turn negative for a couple of months, do you start to rethink about the pricing levers that you are pushing hard on now or do you feel really good about the direction even if we turn negative about the tonnage for a couple months or quarters?

I feel good about where we are, even if we turn negative. The thing you have to keep in mind is its not just about the top level figures. It's about the individual account profitability and what makes sense. And the nature of this is that you gain confidence from having a better, more balanced capacity situation and a customer service level that is valued more so than any other factor in the marketplace.

So if you get into a severe recession like we were in. Some of our customers have no choice but to think about price. They end up doing that, but as soon as their businesses improve, as soon as they have better choices to make, they look to the value that we bring and it's actually a fairly good conversation, but it's about those kinds of parts of the puzzle that you focus on.

It's not when you see tonnage go negative 2%, you say oh my, we have to do something about price. It's about the individual choices that you have in the marketplace, what your customers are facing, and what they are dealing with that make the answer of what it is.

Scott. We're going to move on.

Thanks for your time.

Thanks, Scott.

Our next question comes from Jason (inaudible). Please proceed.

Hi, Jason.

Hey, guys, good morning. Two quick questions. One just on a housekeeping item. When you were talking tonnage comparison, you are talking tonnage per day, I'm assuming, so I want to get the number on the working days in the fourth quarter.

David is looking for those right now. We can move on and I will come back to that. Because we have that.

He's looking for those. You know Old Dominion came out the other day and I thought they were the most positive in regard to the overall pricing environment. In regards to the overall pricing environment we have seen a lot of, yourself included, your competitors put up GUIs that are healthy. Some of those you pointed out would be healthy for yourself and other LTL carriers. Would you say this is the best pricing environment in the last two years on the LTL side?

In the last two years. I was thinking you were going to ask me in my career.

Oh, no.

I was going to have to think about that. No, definitely in the last two years, yes.

Fantastic. You know what, David, if you have them, great.

I've got it right here. Actually the same as last year, third quarter, 64 days. Fourth quarter, 61.5. And that should give you a total for the full year of 253. One more day than we had last year and that one extra day was in the first quarter, the second quarter, third quarter, fourth quarter all have the same number of days.

Perfect, thank you very much, guys.

Thank you.

Our next question from Ben Hartford from Robert W. Baird. Please proceed.

Good morning.

Ben.

Quick question. A lot has been covered. And certainly the pricing focus has appreciated over the next six months. I'm trying to get a sense for how you view the network given the RPM roll-up is completed.

How you view an optimum size for the network going forward, maybe this cycle. Pick a couple of years out. You're still about 8% or so below the peak of the previous cycle. Are you content at operating at these levels here certainly until you get a threshold of profitability? But when you do resume growth, what is that tons per day threshold look like?

What I would suggest to you is the size that we are, we have 275 locations. That is going to be close to the size we will be for a long time. I don't hear anything from our people that indicates to me that we have any substantial issues there with the number of locations or the markets that we are serving and how we he are serving those. We have been steady, pretty constant.

Maybe 15 years ago we had 300 plus locations and today we have 275. But I'm not hearing that we have a substantial issue there. And honestly if I had to guess at a direction, we might reduce that, but it's not in the plans to do that we just have a propensity to try to do things more efficiently, and that's been the case for a long time.

Great. That's all I have. Thanks for the time.

Thanks, Ben.

On our next question comes from Art from Morgan Keegan. Please proceed.

Hi, Art.

Most of my questions from been answered. But I don't recall you addressing this in the call Judy, but I think in my notes back in April you talked about your access capacity at that time being roughly 5%. You can address where that is now. And you talked about where CapEx was going to go, but more specifically before what you need do to maybe increase capacity if volumes don't fall off from where we they are at now.

Well, one of the things we do in preparation for this call is to look at thing like are we hiring drivers? Are we hiring people? And where we are hiring people and that sort of things. And we have had locations where we are hiring people and where we have tighter capacity. So we have locations where we are going to have to address that. But it might be through either adding doors or looking for a bigger facility in that location, that sort of thing. But none of that is really material.

So from a capacity standpoint, I'd say across the board, that 5% really hasn't changed that much. I think the question is can we handle another shipment. We can handle another shipment at any location we have. And that's going to be the case for sometime. But I'm most pleased about is that we've been efficient with the people that we've added for the business levels that we have, and because of the profitability issues that we face, we need to continue to do that.

Right. Thank you. That's all I got.

Thank you, Art.

We have a followup question from Jack Waldo Stephens, Inc.

From a housekeeping item what was your average length of haul?

It's about 1043 miles, down 2.3% from second quarter of 2010.

And it was flat then on a sequential basis, is that right?

Exactly flat, right?

Yes.

Judy you mentioned something about potentially getting change in work rules?

Yeah.

When was the last time you got changes of work rules? For some reason I thought that was a function of National Master Freight agreement times and thing of that nature.

I would say in the last year we've had one.

And what are you looking to gain from that?

Really more improvement than our service times for customers. But it gives us flexibility. It gives us a little better working situation for our people. From a cost savings stand point, there would be some, but its not a big deal. But it is from a customer service standpoint.

Got you. Thank you very much.

Thanks, Jack.

Mr. Humphrey, there are no further questions at this time.

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

Ladies and gentlemen that does conclude your conference call for today. We thank you for your participation and please disconnect your lines. Have a great day, everybody.