ArcBest Corp (ARCB) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Arkansas Best Corporation third quarter 2011 earnings conference call. During the presentation, all participants will be in a listen-only mode, after which we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded Friday, October 28, 2011.

I would now like to turn our conference over to David Humphrey, Vice President of Investor Relations and Corporate Communications. You may proceed, sir.

Welcome to the Arkansas Best Corporation third quarter 2011 earnings conference call. We will have a short discussion of the third quarter results and then we'll open it up for a 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 and Mr. Michael E. Newcity, Vice President and Chief Financial Officer of Arkansas Best Corporation. We thank you for joining us today. In order to help you better understand Arkansas Best Corporation and its results, some forward-looking statements could be made during this call. As we all know, forward-looking statements, by their very nature, are subject to uncertainties and risk. For a more complete discussion of factors that could effect 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.

Thanks, David. Thank you for joining us this morning. I am pleased to report that in the third quarter of 2011, Arkansas Best Corporation experienced improved results with increasing profits that reflect significant revenue growth and positive account pricing during a period of slightly lower freight levels. Our third quarter results reflect additional progress we have made and we will continue to strive toward reaching our goal of returning our Company to its historical level of profitability. We possess the elements needed to be a vital supply chain partner to our customers. We have an experienced group of employees who work hard every day to customize our services to meet the unique needs of our customers in return for a fair price. Later, Judy will give her thoughts and perspective on our recent performance and the factors that are effecting it, but now, I would like to cover the financial details of the 2011 third quarter.

Our third quarter 2011 revenue was $511 million, a per day increase of 15% over last year's third quarter revenue of $446 million. We earned $0.46 per share compared to a net loss of $0.03 per share in last year's third quarter. Our results for the quarter reflect stock market losses of $0.05 per share on the cash surrender value of executive life insurance policies. This compares to stock market gains of $0.06 per share during the third quarter of last year. We ended the third quarter with unrestricted cash and short-term investments of $168 million. Full details of our GAAP cash flow are included in our earnings press release.

Moving on to ABF's results for the quarter, ABF reported third quarter revenues of $466 million compared to $410 million in the third quarter of last year, a 14% increase. ABF's tonnage decreased 2% per day compared to last year's third quarter. ABF's total revenue per hundredweight increased 15.9% in the third quarter, reflecting improved account pricing and increases in fuel surcharge. We estimate that two-thirds of the total unadjusted revenue per hundredweight improvement is from pure pricing gains. Adjusted for freight profile and account mix changes and excluding the effects of fuel surcharges, third quarter 2011 pricing on ABF's traditional LTL business increased in the mid to high single digits versus last year's third quarter.

ABF's third quarter operating ratio was 96.1% verses 100.6% last year. During the quarter, we experienced an uptick in revenue equipment maintenance costs that caused them to be slightly above our 5 and 10 year averages. We are continuing to monitor those costs and evaluate what they mean for our future equipment purchase plans. We are currently in the midst of developing our formal 2012 CapEx plans and we'll share details in January when we release year-end results.

As we have stated previously, ABF contributes to 25 multi-employer pension funds with Central States being the largest. Under our current 5 year union labor contract, each August, ABF has incurred an annual increase in union health, welfare, and pension benefits. In January of this year, Central States issued a special bulletin to all Teamster locals participating in its health, welfare, and pension funds. In that bulletin, Central States said that the trustees of their pension fund had decided not to require any 2011 increase in pension contribution rates. They further stated that current Central States pension benefit levels would be maintained. We have now been advised of the benefit allocations requested by the negotiating committees of the pension funds to which we contribute, including those of Central States. The combined effect of the 2011 allocation process was a 3.8% increase of our union HW&P costs as of August 1. This compares to the previously expected union HW&P increase of 6.5%. And now, I'll turn it over to Judy for her thoughts about our quarter.

Thank you, Michael, and good morning everyone. I am pleased to report that in the third quarter, we experienced significant improvement in our profit that were the result of meaningful increases in our pricing levels during a period when ABF's freight totals were somewhat below the same period last year. The increased profitability we've recorded during this quarter is a reflection of our ability to achieve account pricing that better matches the value and superior service ABF offers to its customers. Versus last year's third quarter, ABF's operating margin expanded by 4.5 operating points. During the last 3 months, we were able to build on the progress we made in the second quarter. As a result, our operating ratio improved by over 2 points versus that period. However, as Michael previously mentioned, we will continue to work hard to attain the levels of profitability that meet our expectations and those of our employees and shareholders.

As we moved through each month of the third quarter, ABF's freight tonnage compared to the same period last year moderated. Third quarter tonnage declined 2% per day versus last year. On a monthly basis, freight level changes versus last year consisted of July which was up 1.2%; August which was down 2.5%; and September which decreased by 4.3%. This slowing trend in our business was associated with the combined effects of some moderation in the economy, reduced business associated with ABF's increasing pricing efforts, and healthy tonnage comparisons from last year.

Pricing on ABF's broad base of accounts has improved significantly and we are beginning to recover some of the pricing strength that was lost during the most recent recessionary period. Industry supply and demand continues to rationalize and shippers are placing a higher priority on the strength of partnerships with exceptional companies like ABF. A more stable economic environment and the resulting pressure on industry capacity allows ABF to benefit from its stable, well-trained workforce and its industry-leading record of superior safety, cargo care, and loss prevention. More and more, when customers seek a reliable logistics partner, they understand the positives that result from choosing a full-service carrier at a price that equates to the value they receive.

As we saw last quarter, all of the third quarter yield measures that we monitor have been strong and are moving in a positive direction. ABF is having excellent retention of it most recent general rate increase that was implemented in late July. Third quarter price increases obtained on renewals of contracts and deferred pricing agreements were very near the historically high levels we experienced last quarter. As we approach the end of October, freight totals are below the same period last year by between 6% and 7%. October's sequential tonnage trends are weaker than history would suggest, but we expect them to be consistent with the sequential trends of recent months. October total revenue per hundredweight including fuel surcharge has increased approximately 12% verses last year. Without fuel surcharge, revenue per hundredweight on ABF's traditional LTL business is up approximately 7%. This is in addition to ABF's 5.9% general rate increase that was implemented on October 1 of last year. As a result of the continued strength in pricing, ABF's total revenue for October is ahead of last year by approximately 5% despite the tonnage decline.

ABF's successful expansion into the regional LTL market continues to benefit our customers and our Company. The roll-out of ABF's RPM regional initiative occurred in the midst of one of the worst recessionary periods in our Company's history. However, our organic implementation of this initiative was the right thing to do. It required a minimal capital investment and it allowed us to focus on the development of high-level services on regional shipment that our customers have come to expect from ABF. The ability to offer competitive regional and long distance LTL services within 1 nationwide network provides flexibility and additional options to our customers while allowing ABF to maximize its use of available network resources.

With March's completion of regional service to the western third of the United States, ABF is a nationwide full-service LTL carrier. As a result, over 60% of ABF shipments are delivered next day or second day compared to approximately 30% prior to RPM. ABF's regional business is growing faster than that of its traditional long-haul business and ABF has increased its regional market share. Because of the size of the regional market and our low penetration, the addition of regional shipments continues to be an opportunity for future growth at ABF.

In early July, the Eight Circuit Court of Appeals reversed a lower court's previous dismissal of a lawsuit ABF filed nearly a year ago against the Teamsters and various other parties. Our original lawsuit related to 3 modifications of ABF's union labor agreement that were granted exclusively to the YRC companies and not to ABF or other parties to our labor contract. Approximately 76% of ABF's employees are covered under that agreement. 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. ABF has filed an amendment to its original complaint and we are waiting for the scheduled responses by the various defendants. ABF continues to move forward on the timeline defined by the court.

ABF and its employees are frequently recognized for outstanding achievements in the transportation industry and this continued in the third quarter. ABF improved on its own record as one of the safest carriers on our nation's highways. ABF's combined city and road accident rate as measured by DOT reportable accidents per million miles declined by 49% from the third quarter of 2010. Based on available historical figures, this quarter's road accident rate was the lowest in at least 6 years. We're very proud of the positive contributions of all of our employees in the critically important area of safety.

During the quarter, ABF's driver John Hazlett won the 3-Axle Class at the ATA National Truck Driving Championships. John, who works at ABF's Service Center in Vincentown, New Jersey, has driven for ABF since 1986. He has previously won National Truck Driving Championships in 1994, 2000, and 2007. ABF's city driver, David McAllister, who works out of ABF's Service Center in Salisbury, Massachusetts, and is a 29-year veteran of our Company, was recently recognized for having driven accident-free for more than 60,000 consecutive hours. John and David are 2 of the reasons why ABF is consistently rewarded for being an industry leader in highway safety.

Earlier this month, American Trucking Association's Supply Chain Security and Loss Prevention Council honored ABF with its 2011 Excellence in Security Award for superior security practices. Since this award was established in 2001, ABF has received it in 6 of the 11 years it has been presented. We continue to take seriously the security of our employees and that of our customer's cargo. I mentioned on last quarter's call, ABF's July recognition for the information technology excellence by CIO magazine. Last month, ABF's IT team was once again recognized as an innovator in business technology by InformationWeek magazine. It was the sixth consecutive year ABF was included on the InformationWeek 500 for its ongoing efforts to facilitate supply chain management through IT innovations. Most all of our IT work is performed in-house by a group that we believe is the best in the business.

Though there is some uncertainty about the economic environment, many encouraging indicators exist that point toward a positive outlook. The ISM Manufacturing Index to which ABF's business trends have always had a high correlation continues to be in the range indicating growth. Industrial production is expected to exceed GDP for the second year in a row. We believe our Company is well-positioned to positively respond by maintaining our focus on meeting the needs of our customers through innovation, creativity, and flexible service offerings. I think we're ready for some questions.

[France], I think we're ready.

Thank you.

(Operator Instructions)

Our first question from the line of Justin Yagerman from Deutsche Bank. You may proceed sir.

Hello, good morning, guys. It's Rob on for Justin.

Oh, good morning, Rob.

Hello, Rob.

Hello, good morning. You guys talked about some of the solid growth you guys were seeing across your regional initiative. Could you talk a little bit to the profitability that you experienced within that segment, as well as the operating leverage that you guys feel you can gain from incremental growth?

What we have seen in that area, Rob, is a continual improvement, and basically we've been in the mode of getting to a point of recovering the cost that we have invested in that over time. Our investment life-to-date in that, which is really since the second quarter of 2006 is about $58 million.

Again, I always compare that to what we would have had if we'd had made an acquisition in this area, which would have been at least $500 million of $1 billion. But, it's interesting that life-to-date, we have a slight loss on this business, but it's basically at break-even. And so, what we're pleased about is that going forward, as we add freight to those lanes, we have an expectation for this business to have the returns and the profitability that we've had historically with ABF long-haul business.

Judy, when you're talking to a slight loss there, is that on an overall operating ratio basis, or are you speaking more to kind of the investment that you made versus the total operating income you've generated to date?

It's the latter.

Okay, so in Q3, would it be fair for us to assume that you guys were generating a profit in that segment? And if so, can you speak a little bit to the operating ratio of that business versus the longer-haul business?

Well, Rob, it is fair to assume that we've made a profit on that business in the third quarter because of the profit levels that we experienced, but the truth is that it's integrated into our systems and it has a common city pick-up delivery sales force and that sort of thing with the rest of our Business, so we would really, on a go-forward basis like to look at this as just a part of our Business. And I think that when you back up and you look at the operating models that we've used, it generated a 96.1% for the third quarter.

All right, that's fair, I guess. To dig a little bit into the operating leverage you guys gained in the quarter -- certainly you had a lot of leverage at a salary, wages and benefit line. Could you speak a little bit to the puts and takes, as that played out in the third quarter, that was kind of in the face of some labor benefit increases that you saw, and how we should think about this as we look forward?

Well I think the yield improvement is really the story there, as well as, we experienced a 3.8% increase in health, welfare and pension as of August 1, and that's an annual increase, if you can think about it that way. And the improvement though in the operating ratio, so to speak, with respect to that line, is clearly a reflection of our yield improvement.

And on a going-forward basis, we continue to expect to have a better yield environment and, as long as that is the case, we will be able to recover the cost increases that we have under the labor contract, but we still haven't yet reached what we consider to be acceptable profit margins for our shareholders so we have got a lot of work to do there.

Hello, Rob, I think we're going to move along.

Thank you, Rob.

I appreciate your time.

Our next question from the line of Scott Group from Wolfe Trahan. You may proceed.

Thanks, good morning.

Good morning, Scott.

So, Michael, can you give us a little bit more color on what exactly changed with the health and welfare. I think you said it was supposed to be 6.5% and now it's 3.8%. Talk about why that changed and is that locked in now for the full year and what percent of the salaries line is that health, welfare and pension represent?

The information I gave probably in the first part of the discussion here is about as much as I can give on that right now. We don't have any knowledge what's going to happen in 2012 with that. That's just about as much as I can give on that.

Scott, if you look at the breakdown of our labor costs, typically 2/3 of those costs are going to come from the wages; 1/3 of it is going to come from health, welfare and pension. And what we work with there is the direction of the trustees from the pension funds and the negotiating committees that work on those issues of how that breaks down between health, welfare and pension and what the needs are from those particular buckets of cost. So, it's a process that basically goes on outside of our Company and we're provided that information from the funds.

And it's now locked in through next August, they can't make a change based on changes in the market or discount rates or anything? Is that right?

It's something that is established one time a year.

Okay. Great.

Yes.

Judy, when was the last time, can you remember a period before when you had tonnage down 6% and yields up, net of fuel, 7%? Is there a--?

Can I remember a time like that? I am sure that there's been a quarter like that in our history. What is interesting, and what we're experiencing right now is, very good yield results. And the yield results that we have had since we entered into our price initiatives, really late March, early April, that has continued on and has been supplemented by the general rate increase that was done at the end of July.

The results that we have gotten on the contract and deferred pricing increases, those are all very, very good results. And so, not too many times in our history would we have had those kinds of results.

The flip side of that is we should have them, because we had a recessionary period that was really rough on us from a pricing standpoint, even though our posture was not to go out and undercut market prices to obtain business. So that's what's unusual.

Is it unusual to have a 6% decline in tonnage? We have had those before. In this case, we're experiencing that as a result of 3 things -- really tougher comparisons from last year plays a role; it also is true that we have had some business loss as a result of our pricing increase; and, we think that the economy is somewhat weaker than it was at earlier points this year.

But we know how to manage through that. We have a good correlation with our labor hours to our shipment levels, and we feel like when we look at our book of business, that we are in much better shape than we have been for a long time, and so we're very pleased about that.

Scott, I appreciate you. I think we're going to move along.

Thank you, Scott.

Our next question from the line of Chris Wetherbee from Citi. You may proceed.

Great. Thanks, guys.

Hello, Chris.

Hello, Chris.

Hello, how are you? Quick question -- when you think about the progress you have made from an operating ratio perspective and you look out a little bit. Particularly in the 4th quarter, you mentioned your tonnage being down as much as it has.

You've historically shown a nice slide where you've matched your [D,S, and Y] hours relative to your shipment levels. How flexible is the comp line, in particular, when you think about tonnage being down 6% or 7%? Can you pull a lot of those costs out of the system?

Well, we do and we have a history of doing that. What we experienced during the worst part of the recession is an issue that is typically always there on a service level, and then also in the depth of the recession, you have to maintain a number of employees especially in your city operation to just operate the business.

But, what we do is very carefully manage the hours to the shipment levels we have and when tonnage declines, you always have the decisions to make about trade-offs on continuing to provide good service to customers. During the recession, we chose to do that. We're continuing to choose to do that.

We are a Company with a condition, financial stability, and we continue to want to make sure that our customers are served well. And so, we'll do some of those things, but to a large extent, we can manage the hours to the business that we have and on a little bit longer-term basis, we can manage the equipment levels to the business we have, and by longer term, I mean, you know, a few quarters. We do a good job on that, and we did a good job during the last period of tonnage decline.

Okay. That is very helpful. And then, just with my follow-up, when you think a little bit longer term, maybe some modest economic growth in the US coupled with the fact it appears like industry pricing has been very, very solid. I mean, is it unreasonable to assume that, in the next year or so you could achieve kind of closer to full-year run rate margins like you achieved in the third quarter?

I know you don't like to give forward guidance on that, but just conceptually, can you make a nice step forward towards what would be a little bit more of a normalized or closer to mid-cycle margin for you guys in the next year or so?

That is absolutely our objective. That is what we're working toward. We do need some help from the economy, but we believe that the supply/demand rationalization in the industry is such that we should continue to have good pricing results.

I think you know that, again, ABF is typically in the right place on that. We make sure that we're getting the best value to our customers and that we get paid for it, so as long as we do those things, and as long as we have economic conditions that help us, that's certainly our objective.

Hey Chris, thanks a lot.

Thanks for the color.

Thank you, Chris.

Appreciate it.

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

Yes, thanks. Good morning.

Hello, Matt.

How are you doing?

Good. How are you?

I'm good. If I think about October with your revenue up 5% and your tonnage down 6% to 7%, if you back into your yields with fuel, that would suggest they're up about say, 11%,12%, and just looking at that sequentially would suggest that your yields are kind of flattish versus the momentum that you had in third quarter, where they were up a bunch.

So, I'm just curious and trying to understand that movement, and I know probably fuel is a part of that, but if you could just talk to your yields in October, and kind of why they have sequentially softened a little bit. Maybe how much is fuel, and then maybe how much is being maybe a little bit less aggressive in terms of price increases in light of the volume declines?

I think when you look at that, if you sorted through the pieces there, the fuel is the factor there. We have not really experienced any softening on the pricing side as a result of the tonnage level. We continue to be very pleased with the results there.

We continue to have good results on our deferred and contract price increases. As I mentioned before, we are at historically high levels. So, I think what you were seeing before when you looked for instance at third quarter to second quarter, and you looked sequentially at the same area, we did a general increase, at the end of July.

And we were at a period where we were starting to have some of the best contract and deferred pricing increases in the Company's history. So, kind of the good news is, those things are baking in and they're not -- I don't see them weakening and I see that any effect that you have there is just really a factor of the fuel surcharge, and that is because of lower diesel prices.

Okay. That is helpful. And my second question, so tonnage is down 6% to 7% in October, but I think the comps get easier as we move through fourth quarter. Do you have the year-ago comps by month for 4th quarter?

I do. Let's think about September, too and then I'll give you the 4th quarter, because it's relevant when you are thinking about this. If you looked at September, 2010, verses 2009, it was up 14.9%; October was up 16.3%; November 15.5%; and December 12.4%.

Okay.

So, October was really our peak increase last year.

Got you. Okay, that's very helpful, thank you.

You're welcome.

Our next question from the line of Todd Fowler from Keybanc Capital Markets. You may proceed, sir.

Great. Thank you. Good morning, everybody.

Good morning, Todd.

Hello, Todd.

Hello, Judy. Hello, Michael. Judy, can you talk about, and I understand that it's definitely more art than science when you think about the network and the balance. But, obviously you made the right decision here in the quarter trading off volume for price, and you had nice results as a result of that.

But going forward, how do you think about growing your volumes and growing the Business and balancing that with what you need to do on the price and the profitability standpoint.

Well, I think that we, obviously, would like to have tonnage increasing at a healthy level, along with these price increases. That gets you the best answer that you can have, an even better answer than what we had in the third quarter of this year.

What I mentioned earlier was, I am very pleased about the status or the state of our business book for ABF. I think that was, goal Number 1 is getting that to a place that we were comfortable with it. It's in some of the best shape, in terms of incremental operating ratios that we have ever had.

And so that is where we start. But going forward, we would like to have a balance between tonnage growth and yield improvement, but really, I think, sometimes there's a view that there is a 1-answer sort of thing here and it's really not the case.

I mean, what you see with us is, there's 4,000 pricing deals a month and our pricing folks are working with our salespeople and the salespeople are not all in the general office. They're out in the field seeing what's happening out in the marketplace every day.

And what our team does better than most out there is to get the best results from a customer in terms of providing value and then getting paid for that. And we will continue to do that. Our results do correlate well with about a 5-month lag to the ISM PMI index. You have seen that weaken.

We have seen some weakening in our figures but that doesn't mean that we have gone too far one direction or the other. It's just making a good decision on every deal that you have in front of you, and I think our people do a great job of that.

Sure, now and that makes sense and I do think that you see some of that here this quarter so congratulations on that.

Thank you.

Just for a follow-up, as I look at the balance sheet, obviously I know that maybe you have a greater need for a little bit of safety from some uncertainties and some contingencies in the future, but can you talk about the right level for the balance sheet from a net cash position, and how you think about maybe increasing the dividend, I guess I should say, going forward?

What I think about there is, first of all to be very thankful that we've been in the situation that we've been in through this recessionary period. It's given us some great choices in terms of continuing to invest in the future of our Company.

We do have some investments from an internal organic standpoint that we would like to make, and we continue to make those. Typically, those cash flow very well. We have some acquisitions that we could make that are on the smaller end, and so, we have that in mind as we are looking at our options too.

Historically we have had a higher dividend level. We're not afraid to go back and reinstate that, but we have to look at all the choices that are in front of us. And I'll be honest with you, I'm still not particularly comfortable with the banking environment and what that has to offer.

Whenever you're thinking about funding sources for the various things that you'd like to do, I still think that being in a position of control there is the right place to be. And so until that clears up, you'll see us be more conservative on that front, but I'll be the first to say that we have some good investment choices out there that we can make that I think would be pleasing to our shareholders and we're going to work through those in a prudent fashion.

Todd, appreciate you.

Yes, sounds good, David. Thanks again for your time this morning.

Thanks, Todd.

Thanks, Todd.

Okay, bye-bye, thanks.

Our next question is from the line of Tom Wadewitz from JPMorgan Chase. You may proceed/

Yes, good morning, and congratulations on the strong pricing result. That was a good performance.

Thank you.

Let's see. On the sequential pricing, you have seen a pretty material pick-up. I know you don't report the X yield numbers, although you did give us some perspective this morning. But it seems like it's maybe up 5% sequentially, second versus first and third versus second X yield, which is pretty strong.

Do you think that, that is likely to continue sequentially in fourth quarter or was that kind of a 2-part step-up that maybe stabilizes? How would you view that sequential pricing momentum?

Well, when you looked at second quarter compared to first, you had the effects of our price improvement program to look at, and that was material. And then when you looked third to second, you had the fully-baked effects of that price improvement program, as well as the general rate increase that went in. And so when I look at fourth quarter to third, I don't have the same expectation in terms of sequential improvement of that nature, because we don't have the same factors impacting the quarterly comparison.

But I do, again, I mentioned this 2 or 3 times. Our book of business is in much better shape, and we continue to have good contract and deferred pricing increases that bake into your results over time. And so, I like where we are. We will continue to work hard on doing the right things on each account opportunity that we have, and we still have some of those opportunities ahead of us, but I don't expect to see as material of an effect as you have seen sequentially for the last 2 quarters.

Okay. That is helpful. And then the second question is, I guess we're revisiting the pension comments. It sounds like you don't want to get too much into the details with it. But, my understanding, when I have heard you talk about this historically, Judy, was that your pension contribution was really set contractually.

So, if Central States was in worse shape, you really didn't have risk because it was set contractually. But, I guess the comment this morning sounds like it's not really firmly set contractually, and there's some element of Central States kind of coming to you that has an affect within the contract. So, maybe if you could just help me understand the process a little bit better in terms of what's locked in and what's not?

Well, I think what you have said is, when you look at the actual labor contract and the increases that it provides. It provides the maximum increase on both the wage and the health, welfare and pension. What we have discussed here today tells you that there can be a different answer, if that is what the funds negotiating committees choose to do. And that is the case here. But, in terms of a risk exposure, it's not possible for them to go above the dollar an hour increase in terms of the maximum.

Okay, great, thank you.

Does that make sense? Okay.

Yes.

Okay, thank you.

Thanks, Tom.

Our next question is from the line of Ken Hoexter from Bank of America Merrill Lynch.

Hello, good morning, Judy and team.

Good morning, Ken.

I just want to delve into your comments. I know that October represents the toughest comp, right? So up 16%. But in your commentary, you kind of also highlighted the weakening economy. I want to understand, do you view it more of being that tougher comp now, as far as the volumes being down 5% or 6% for to date, or are you really seeing any kind of shift in the economy that is dragging things further down?

Well, I always look back at what's going on with the ISM PMI index. Again, I bring that up a lot because it correlates well with our Business. And when you think about that index, it's an indication of what's happening with the manufacturing economy. And if you remember, earlier points this year, it reached 60%, and maybe even over 60% for a short period and it's moved down. And I think that, that is playing in to the results that you're seeing.

But, it's definitely the case that it's kind of a 3-pronged effect. I mean, you mentioned the tougher comparison, and that is absolutely at issue here especially when you look at what's happening in October, when you look at year-over-year comparisons for October compared to September.

And then, we do know that there has been some effect of our pricing actions. We feel like we're in a good place, and really it's the impact of those 3. I could break that down for you in terms of how much economic, how much is pricing, how much is the previous comparison, and I could get close to right, but really all 3 are at issue. We are in a position where we're much happier with the account base that we have, and that is where we go from for the future.

Okay. And then on the court case, can you just give an update on, I guess, the process we're waiting for, in terms of post the appeal's court decision.

Sure. On October 12, Judge Wright granted our motion to file an amended complaint, and so we filed our amended complaint immediately upon her decision there to allow it. We have filed the complaint with some amendments in order to clarify a few points in light of the other party's previous motions and the previous rulings by Judge Wright and what happened in the Eighth Circuit.

The responses by the various defendants will be due on November 11 unless for some reason that date would be extended. And really the next anticipated steps that we have is that from both sides would include motions and motion responses that can take approximately 30 days or 15 days each, and based on all of that we think there will be a decision regarding our amended complaint and the defendant's responses that will occur sometime in the first quarter. But we don't really expect anything prior to that time just because of the time it takes to work through this back and forth process.

All right, Ken. We're going to move along.

Appreciate the time.

Thanks, Ken.

Thanks, Ken.

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

Yes, good morning, Judy and everyone else.

Hello, David.

Question on the other operating income.

Yes.

You had other operating income of $2.8 million in the quarter. Usually, or at least the last 6 quarter it's been tracking about just under $1 million -- $600,000, $700,000 or so. Is there anything one time in there or is that just FleetNet or is there a growth in freight value segment or what's going on there?

If you think about what's in that line, there is a number of things. We have FleetNet, we have a small logistics subsidiary, and then we have some effect from the Arkansas Best Parent Company costs, but that's typically not the largest item. FleetNet, when I was looking at the comparison in these results, ends up being close to 70% of the profit in that category, and so they're doing very well.

They have had good success, good growth. They really have some opportunity to continue to grow so I'm very pleased with what we see on that line. If you think about their business, which is the emergency roadside repair business, and then the preventative maintenance business, when you have over 100-degree temperatures in the middle of the country for late July all the way into September, you're going to have one of the best years you have ever had, and that's been the case with them.

But I wouldn't just leave it at that. They have done an excellent job. They have a new CEO that we named July 1. His name is Gary Cummings and we're very proud of him, and look forward to the work that he's going to be doing, and glad that is there.

And again, though, you have to keep in mind that the summer months are going to be the best months for them, and the winter months. So, they're going to do well in January and February when it's snowing and icy out there. So, each quarter is somewhat different because of that seasonal effect.

Okay. But I mean at 4 times the average profitability level, and that is something that only started to be profitable a few years ago, is that just a continued kind of profit center for you guys?

Sure is.

Okay, so, maybe it's seasonally stronger than average but --

Right.

It should be profitable going forward?

Should be. You know, I can't think of a time honestly where FleetNet wasn't profitable. If we had a loss on that line, it was a result of something else. But, no, FleetNet is a great edition to our earnings. It's obviously, it's in the other line because it's not large enough to break out yet, but we look forward to the day when we do.

Okay and then you mentioned that maintenance costs are increasing. Is that helping FleetNet on the preventative maintenance side? Is more of that operating income coming from the emergency roadside assist, or from the increase in kind of preventative maintenance contracts?

It's more on the emergency roadside assist really, but the future for FleetNet could hold some good growth on the preventative maintenance side. They've had increased customer inquiries that result from the new CSA rules and what companies are having to do to comply with that, and as you know, the average age of tractors that's out there is older than it should be and that helps them, too.

And then, David, we're going to move along.

Got it.

Thanks, Dave.

Thanks.

Our next question from the line of Thom Albrecht from BB&T. You may proceed, sir.

Hello, Judy, and everyone.

Hello, Thom.

Great quarter.

Thank you.

I'd just like to get maybe a feel for, I know in September that was your greatest declines in tons per day. Historically, September is the biggest month in the quarter. Would it be fair to assume that you not only had your best absolute level of profits in the month of September, but maybe your best margins, even though the tonnage decline was greatest?

Actually, I know you are going to think is weird, Thom, because you're like me, you have been around this industry a long time. I think July was our best month in terms of profit, which is just backwards from what you think about from a longer term history in our industry.

It was because of the calendar, the make-up of the calendar and again our tonnage was up in July, and September was a weaker than normal month to some extent because of what we experienced on the tonnage side, but it was mostly about how the calendar fell for the quarter and the make-up of the days in each month. And so, but that is weird. But, that is the honest answer to the question.

So, October has a lot of days. Is it 23 days, I believe?

I believe that's right.

Can we assume more like a July contribution. I think that is what we are all struggling with -- volumes coming off a little bit, we know some of that is money losing accounts, some of it might be something else. Just trying to find that right sweet spot there, in terms of how we're looking at your margins.

Well, October -- when you have a 23-day month, that is obviously very helpful. But, Thom, I can't really -- I don't want to really give you any more guidance on that particular month. We haven't actually seen the results of the month. We have given you what we know.

Yes.

And we have got to close that month out to be able to tell. I mentioned earlier, obviously we would like for tonnage to be growing, but we are in a better place to start with as we move into the fourth quarter.

Hello, Tom, I think we're going to go ahead and move along. We have got a few more waiting.

Sure, thank you.

Thanks, Tom.

Thanks, Tom.

Appreciate you, man. Good to see you.

Our next question from the line of Jack Waldo from Stephens Inc., you may proceed.

Hello, Jack.

Hello, Jack.

Hello. I hate to keep on focusing on this issue because you guys have made just such tremendous progress in such a short period of time. But, this is the hardest quarter I can recall to ever model you guys.

(Laughter)

If I go back in time and look, there have been quarters in which sequentially you've seen volumes do what you have done. But there's never been a quarter in which you've seen that happen but revenue go up. And, I guess my first question is, what is your idea on the relationship or the impact margins, I guess, or EPS or whatever it is, between tonnage and pricing? Pricing is 1% and pricing worth 5% of tonnage, or--?

I mean, Jack, when I see a price increase, I expect it to hit the bottom line. That's first comment.

What if you see a tonnage decline?

Well, when you see tonnage decline, it's a little trickier, as you have mentioned. But the factors at issue there would be the decision-making that you make on being able to manage the hours to the shipments, which we typically do a good job of. But given the situation that we're in, we're going to maintain good service levels for our customers in the fourth quarter, as we have really throughout the worst of the recession and into this recovery.

And I'm not going to give you any guidance on the incremental margins on our tonnage because that would be -- you get to put all those pieces together and figure out what I think about earnings for the fourth quarter and I'm not going to do that. But, you know, from watching our Company for years, that we do a good job of managing our costs to the business levels that we have, and we're going to continue to do that. There's no reason that we have that we won't do that in the fourth quarter.

Judy, you just had a quarter where tonnage was down sequentially and margins improved?

Yes.

Is it out of the question to think that could happen again?

Well, we had a price increase in that quarter. When you think about it, it was at the end of the July, but it was there for 2/3 of the quarter. That has an impact, but with the strong pricing results that we have, we should have a better than normal situation, as far as our ability to produce bottom line results.

Hello, Jack, I think we're going to move along.

Thank you. Our next question is from the line of Art Hatfield from Morgan Keegan.

Thank you. Hello, Judy.

Hello, Art.

Good morning, everybody. Hello, Judy, the call would be a lot shorter if you would just tell us what those earnings were going to be.

(Laughter) Yes, it sure would, wouldn't it, Art?

Quick question. We have talked a lot about the sequential impact of revenue and the volumes and how pricing has flowed through on a quarter-to-quarter basis throughout the year, but as I think about the cost side of things, is it fair to say that, given the timing of your general rate increase and the timing of the employee costs increases in the third quarter, that, that is, the impact on operating ratio is baked in at this time and we don't have to think about that being a incremental impact to fourth quarter and beyond?

I think that's probably true.

Okay.

I think that's a good way to think about that. Yes.

No, that's helpful. And then, you guys have a lot -- I've tried to go back and look at my model and I know you may not want to answer this, but I've tried to look at kind of what the historical kind of seasonal impact on operating ratio is Q3 to Q4. Do you have a number for what that has been for the year?

Well, let me say this. We have a range, as we have had throughout this recession, it's been really difficult on some of these what-should-it-be questions.

Right.

David Humphrey just put this in front of me and for what it's worth, the OR deterioration from third to fourth for the last 6 years ranged from 1 to 5.5. 3 years, approximately 1 point and 2 years of approximately 5 points. So, and he points out that we had a really unusual change in the 2008 OR.

And it was because of the much-worsening economy. But it is difficult for that reason. The other thing to keep in mind is the timing of these rate increases. Last year in the fourth quarter, October 1, we did a rate increase. This year we have already done that. We did that at the end of July.

And so, you have to keep in mind the factors there. But we did give you the month-to-date revenue per hundredweight with fuel surcharge, without fuel surcharge increase. We haven't adjusted that for profile effects and all of that sort of thing, but we have given you what we know on the pricing front when you look at October 2011 compared to October 2010.

Hey Art, I think we're going to move along.

Okay, no, that's great. Thank you for the time.

Thanks, Art.

Our next question from the line of John Godyn from Morgan Stanley. You may proceed, sir.

Hello. Thanks for taking my question.

Good morning, John.

Good morning. It seems like this quarter's tonnage decline was mostly weight per shipment, as opposed to shipments falling. Is that the same dynamic playing out, when we look into October with your commentary?

Well it's, to some extent, yes, it is. What is interesting -- I was looking at these statistics before the call. We have seen a decline in weight per shipment, but as you look throughout each month of the third quarter, it wasn't really worsening, and so, it is kind of there as a decline when you look year-over-year, but it's in a stable place, so to speak.

Okay, thanks. And I just wanted to follow-up on one of the comments in the release. Just on this idea where you said that you are prepared to appropriately adjust resources to business levels going into the fourth quarter. Can you just elaborate on that, and maybe speak to some of the levers that you have to pull.

Well, the best thing I can think of to do -- which I don't know if David shared this, but I'm surprised if he hasn't -- is our chart that shows the correlation of our hours to our shipments. We have very good correlation with those 2, and that is perhaps the biggest lever we have to pull, and that is what I mean when I say those words in the release.

All right, perfect. Thanks a lot.

Okay, thanks.

Thanks, John.

(Operator Instructions)

We have a follow-up question from the line of Scott Group from Wolfe Trahan. You may proceed, sir.

Hello, Scott.

Hello. Thanks for the follow-up, I appreciate it. So, Judy, I heard 2 interesting things on the call. One that July was maybe the most profitable month in the quarter, and 2 that you're happy with the state of the Business and the incremental margins on volume are better than they have been in a long time.

When you think about those 2 things, and tonnage now down 6%, are we getting close to the point where you think about starting to focus on tonnage again, and maybe give up a little pricing, or how much longer do we need to see tonnage down 6% before you say hey, we need to start getting some volume again?

Well, again, what we do in the marketplace, we do 4,000 pricing deals a month, we look at each one on it own merit. We consider the profitability of that account, but we look at the market factors affecting that business. We never knowingly undercut market prices and we would not do that just because we have a 6% tonnage supply. We would not change that posture.

We're going to have adjustments as the market adjusts, but we're not going to take any action that is of that nature just because we have a 6% tonnage decline. We never do that and historically have never done that. We just get the best answer on each pricing deal, on an account-by-account basis.

Hello, Scott, we're going to see if there is anybody else in that queue that hasn't asked a question yet.

Okay.

Thank you, Scott.

Thanks, Scott.

Our next question is a follow-up question from the line of Jack Waldo from Stephens Inc., you may proceed sir.

My question was answered. Thank you, guys.

Thanks, Jack.

Mr. Humphrey, it looks like we have no further questions at this time, sir. Back to you.

Okay. Well, we appreciate your interest in our Company and this concludes our third quarter conference call.

Ladies and gentlemen, this 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 weekend, everyone.