ArcBest Corp (ARCB) 2011 Q4 法說會逐字稿

Welcome to the Arkansas Best Corporation Fourth Quarter 2011 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, Friday, January 27, 2012. I would now like to turn the conference over to Mr. David Humphrey, Vice President of Investor Relations and Corporate Communications. Please go ahead, sir.

Welcome to the Arkansas Best Corporation fourth quarter 2011 earnings conference call. We'll have a short discussion of the fourth quarter results, then we'll open 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 risks. For a more complete discussion of factors that could affect the Company's future results, please refer to the forward-looking statements section of the Company's earnings press release and the Company's most recent SEC public filings. We will now begin with Mr. Newcity.

Thank you for joining us this morning. Today, we are pleased to report on a year of improvement that was highlighted by our Company's return to profitability. Tonnage increases in the early part of the year and the resulting revenue growth paved the way for improved pricing levels and return for the value ABF delivers to its customers. Though a relatively small portion of our total revenue, our non-asset-based businesses had significant growth in both revenues and profits; thus, making a meaningful contribution to 2011's positive results. Later, Judy will give her perspective on our recent performance and the factors that are affecting it, but now, I'd like to cover the details of our results for the fourth quarter and full year of 2011.

Our fourth quarter 2011 revenue was $463.2 million, representing an increase of nearly 6% per day compared to last year. Our net income for the fourth quarter was $0.08 per share, excluding a $0.03 per share charge for our supplemental pension settlement related to an ABF executive retirement. These results compared to a net loss of $0.12 per share in the fourth quarter of 2010. The supplemental benefit plan was closed to new participants at end of 2005. At the end of 2009, the benefits of this plan were frozen for all remaining participants. For the full year of 2011, Arkansas Best had revenues of $1.91 billion, an increase of 15% per day compared to 2010 revenues. Excluding the fourth quarter pension settlement charge, our net income for 2011 was $0.26 per share compared to a net loss of $1.30 per share in 2010.

Our effective tax rate for 2011 was 33.3%. This includes effects of an alternative fuels tax credit of approximately $1 million, based on ABF's use of propane. Based on current law, this tax credit will not be available in 2012, due to its expiration at the end of 2011. In addition, a reduction in valuation allowances related to deferred tax assets also reduced our tax rate, as did non-taxable life insurance proceeds received in 2011. We anticipate our 2012 full year tax rate to be in a range of 38% to 42%.

Arkansas Best operating cash flows for 2011 were $101 million, including depreciation and amortization of $74 million. Our net purchases of property and equipment totaled $46 million for the year. In addition, we financed $30 million of ABS revenue equipment purchases. We did not purchase any treasury stock in 2011. We paid dividends on common stock of $3 million. Full details of our GAAP cash flow are included in our earnings press release.

At year end, our unrestricted cash and short-term investments totaled $175 million. Our restricted cash associated with collateral pledged to our workers compensation letters of credit and performance bonds totaled $53 million. We had debt of $71 million consisting of $44 million in equipment capital leases and $27 million in equipment notes payable. Arkansas Best had no borrowings under its accounts receivable securitization program. Availability under this program is $75 million. At the end of the year, our stockholders' equity was $466 million. It was reduced in the fourth quarter by recognition of a $25 million other comprehensive loss. This reflects the impact of lower interest rates on the nonunion pension benefit obligation and weaker investment performance than anticipated in the nonunion pension plan assets. Based on these factors, we expect that our 2012 plan expense will increase. We'll know more specific details in the coming weeks, after our actuaries complete their work. We'll share the 2012 changes when we release first quarter earnings.

Moving on to ABF's results for the quarter, ABF reported fourth quarter revenues of $422 million, an increase of nearly 5% per day compared to last year. ABF's quarterly tonnage per day declined 7.6% versus double-digit increases in last year's fourth quarter. ABF's fourth quarter operating ratio was 99.4% after excluding this year's pension settlement charges compared to 101.9% in fourth quarter 2010. For the full year of 2011, ABF reported revenues of $1.73 billion compared to $1.51 billion in 2010. In 2011, ABF's total tonnage per day increased 4% versus last year. ABF's full-year operating ratio was 99.7% after excluding this year's fourth quarter pension settlement charges, compared to 103.9% in 2010.

Beginning with the current financial reporting period, we have expanded the operating segment details we are providing. We are doing this because of accounting rules that require public disclosure of business lines that meet certain operating profit thresholds. The Freight Transportation segment will consist of ABF's results. The three new categories consist of non-asset-based business segments that, on a combined basis, had growth of 30% in both revenues and profits in 2011. I will also point out that we periodically review our workdays to ensure accurate representation of per day business level changes and trends. We recently did that review again. As a result, we have reduced the January 2011 and December 2011 workday totals by 0.5 day each. On both the segment changes and the workday change, David can provide a file that summarizes how this affects historical figures. And now, I'll turn it over to Judy for her thoughts about our quarter.

Thank you, Michael. Good morning, everyone. I'm pleased to report continual improvements in our quarterly and annual results that reflect revenue increases and better margins associated with improved account pricing at ABF and positive revenue and profit contributions from our emerging non-asset-based businesses. The economy is slowly recovering. That fact, coupled with the tightening of industry capacity relating to an increasingly burdensome regulatory environment, should create a healthier marketplace for our Companies to compete in during 2012. Our comprehensive service offerings and the stability of ABF's work force, as well as our outstanding safety record, position us well for the future. ABF has already benefited from the improving environment, as reflected in our third consecutive quarterly profit and our return to full-year profitability. Excluding the pension settlement charge, ABF's fourth quarter operating ratio improved by 2.5 points versus last year. We made great progress in 2011 as our full year OR improved by over 4 points compared to 2010.

ABF's fourth quarter per day tonnage declined by 7.6% versus last year. The tonnage decline in each month of the quarter was fairly consistent, with some monthly deterioration as we moved through the quarter. This was a result of some economic softness, particularly in the industrial sector. Pricing actions we took earlier in the year and the fact that we were comparing back to a fourth quarter in 2010 when ABF's tonnage increased over 14%. The challenging prior year tonnage comparisons will continue through April 2012 because ABF experienced double-digit tonnage improvements in each of the first four months of 2011.

During last quarter's conference call, I mentioned that the incremental profitability of our account base is much healthier than it was in 2010. As we move into 2012, that continues to be true. Through January 25, ABF's revenue levels are above last year by about 2.5%. Freight totals are below the same period last year by about 7.5% and our total pricing, including fuel surcharges, increased about 10.5%. Pricing on ABF's traditional LTL business, excluding fuel surcharges, is above last year by about 9.5%. January sequential tonnage trends are improving versus what we saw in the fourth quarter and January sequential pricing is down slightly versus the same period in December.

I wanted to give an update on our lawsuit against the teamsters and various other parties related to three modifications of ABF's union labor agreement that were granted exclusively to the YRC companies and not to ABF. After the Eighth Circuit ruled in our favor and returned the case to the lower court, we filed an amendment to our original complaint and the other parties filed motions to dismiss. There were then response filings by each side that concluded on January 16. We will now wait on the court's ruling on the defendant's motions to dismiss. The timing of the court's decision is not known, but we expect it will be during the next few months.

We believe that ABF has always been a market leader in providing quality LTL freight services. As customer requests have evolved and expanded, we have responded by developing new services. For example, our time-definite, truck brokerage, and global offerings make our Company a true partner in our customer's supply chains. We're able to analyze our customer's business and bring innovative solutions to them. Earlier, Michael mentioned the new financial details we're providing on some of our non-asset-based businesses. These businesses operate in markets that are larger than our traditional LTL markets and, as a result, provide significant future growth opportunities for our Company. We are making investments in sales and IT to fully develop these businesses and support the growth that we anticipate. ABF drives the asset-based results of our Company. It also offers a solid foundation for the development of these complementary service offerings.

The past year has produced positive achievements that are the results of the hard work of each of our employees. I want to congratulate them for returning our Company to profitability. We all understand that more progress needs to be achieved to reach a level of sustained profits and shareholder returns that match our historical performance. We have a great team in place that has been equipped and enabled to serve our customer's needs. And now, I'll let Michael finish up with some additional financial information.

I'll wrap things up with a few details about our CapEx plans. We anticipate our 2012 net capital expenditures to be within an approximate range of $80 million to $90 million. This includes revenue equipment of approximately $55 million, which are mostly replacements. This represents an increase compared to our 2011 net CapEx total of $77 million. We plan to buy 103 more tractors this year, but 1,250 fewer trailers. We purchased an additional 1,000 trailers in the second half of last year, so we will not buy as many in 2012. Our plans to purchase more tractors in 2012 are partially related to increased costs we have experienced this year in the areas of equipment maintenance and repairs. In the fourth quarter, these costs were up over 13% versus last year. For the year, they were up over 25% compared to 2010. Much of this is related to the increased maintenance costs associated with the new engine technology added in 2007, and our migration to a four-year trade cycle on these road units.

The 2010 technology engines we have recently added have performed better, but it will be later in the year, after we run them in all seasons under various weather conditions, before we can fully assess their cost and performance. By purchasing more road tractors in 2012, we are beginning to move back to our traditional three-year trade cycle on road power. We expect our 2012 depreciation and amortization to be in the range of $80 million to $85 million compared to last year's $74 million figure. Now, I think we're ready to take some questions.

Frank, I think we're ready for questions.

(Operator Instructions) John Godyn, Morgan Stanley.

I was hoping you could help us think about demand elasticity here. I know at the end of the day, in isolation, price is higher, incremental margins, but of course, because of the operating leverage in the business, tonnage declines can be a pretty dramatic headwind, too. How do you get the balance right? Are you getting any sense that customers have become even more sensitive to price of late than maybe they had been a quarter or two ago?

What we have experienced in 2011 was -- at the early part of the year, a growth in the business that helped us stabilize our account base. With that improvement, we were much more confident and much more certain of the environment. As a result of that, we were able to go back to our customers and ask them to pay us for the value that we're offering and that we deliver to them every day. We were successful in doing that. We feel, as I mentioned in my comments earlier, better about the account base that we have. The incremental profitability of that base is in really good shape and that's where you need to get to as a starting place to move forward. And this recession was tough on us.

It was tough on all the companies that we compete with. But getting to that place is what's important. We have many, many opportunities in this Company to grow our business. We're comparing against some tonnage comparisons from last year. But we feel good that we will feel about the business opportunities that we have and we feel like we have enabled our team to go out there and successfully accomplish that. But obviously, the best balance that you can have is to have good pricing figures and tonnage growth, which is certainly what we want going forward. But we feel we've enabled our people to go and accomplish that.

Thanks. And just a quick follow-up. In the past, you guys have offered some commentary along the lines of 75% of tonnage declines were macro driven, 25% due to price. Can you just update us on that balance?

I don't know that I would have the specific percentages, but one thing to keep in mind is that our business correlates well with the ISM/PMI index and it has about a five- to six-month lag on when you look at it. That's where the best correlation is. If you look back at last summer, the PMI index was actually at a much lower point than it was earlier in the year. I believe its high point was above 60, moved down to about 50.

That's part of what we're experiencing in our business levels now. There's no doubt that our pricing actions have risk associated with them and that's risk that we are willing to take. It ends up with the right results again with our account base being in better shape than it has been. There's a portion of those two things. Then, as I mentioned earlier, the comparisons that we have to last year are pretty tough for us right now.

Okay. Thanks a lot.

Chris Wetherbee, Citi.

I was wondering maybe, Judy, if you could comment a little bit more on the tonnage throughout the quarter? It sounded like things got a little bit weaker towards the end there. I'm just trying to get a sense of -- I think you were running around 6.5 down through the first couple of months. How did the end of the quarter work out for you in December?

I'll give you the percentages here month by month, but then I want to add a comment to the end of that discussion. October was down about 6.4%, November down 8% and December down 8.5%. For the total quarter to be down 7.6%. One of the things that we did post the November conference when we gave an update that said we would be down about 6% to 7%, is we have pulled out the results of FreightValue, our brokerage company, out of ABF's results. That changes these numbers a little bit and I think David sent out a file to everybody that gives you all the background on that. But what pulling FreightValue out of the numbers did is that these numbers are slightly worse than they would otherwise be. I want to make sure that we're clear on that, because it could create a point of confusion.

Okay. That's actually very helpful. Going back to the last question a little bit on the balance of your freight, when you think about the absolute tonnage levels that you're ending the fourth quarter with. Once you get past some of the comparisons that are a little bit tougher, particularly in the first quarter, how do you feel about the relative profitability of the business or where you feel, from a resource perspective, compared to the actual tonnage you moving on a per day basis?

We feel much better. I think, again, we're going to get hurt by the comparisons through April. But we feel good about the business base that we have. Obviously, I mentioned earlier, we need to grow this business. But we feel good about those prospects as well.

So there's going to need to be some volume growth associated with this to see some of the OR recovery that you'd want as you move forward into the year '12?

Absolutely. Because we have a network that has available space in the trailers that we're moving. Having more business is going to be good for us in terms of the profitability of the business.

Okay. Great. Thanks for the time. I appreciate it.

Justin Yagerman, Deutsche Bank.

Piggy-backing a little bit on what Chris was asking. I'm just trying to get a handle on how much of this has been by design and how much of this has been out of your control from a tonnage standpoint? You've got a competitor who's recapitalized, who's out there talking about taking market share back. I'm wondering if they're pricing differently in the marketplace and making it more difficult for you guys to retain tonnage, while raising price at the same time. Because the balance doesn't feel like it's there right now. The comps are difficult, but the economy is stable. To see these kinds of declines in tonnage is a little bit disconcerting. I'd just like to get an idea of what kind of visibility you guys have into the improvements as we go forward?

When we look back at the actions that we took on pricing, for the most part, the business that we lost or are better balanced with our customers was about what we had expected. I'll say this, there is always some business that you lose in that process that perhaps you rather not have and we have some of that. But we feel that the actions that we took were appropriate. Obviously, we improved the operating profit for our Company by $64 million in an environment that was okay. It wasn't great. We're still waiting on the housing recovery in our business and that's been an important factor.

The other thing I'd suggest to you, Justin, is what I'd mentioned to Chris earlier. We have an impact on our business of what goes on with the manufacturing part of the economy and the recent signs for that are good. There's an uptick in the ISM/PMI index and we're encouraged by that. We're also seeing slight improvement in the housing market and that helps us, too. With respect to the competitive environment, we're out there creating value for our customers and doing the best we can to gain or retain business. The business that we lose to somebody's actions if they are price oriented, typically is business that is not good for us anyway and so we're not overly concerned about that. What we are concerned about is going out there and finding customers that see the value that we provide that are willing to work with us in a business relationship that results in profit for us and we're going to continue to do that.

Are you guys going to proactively adjust capacity in the short term to right size to where the tonnage is right now so that the incrementals can actually pop a bit more?

We have the ability to do that on a weekly or even daily basis. We've shown you before the matching that we can do with our shipment levels and our hours worked. We continue to do that. We have the ability to sell older equipment and, as Michael mentioned, we may want to sell some of that older equipment because it's not good for us from a maintenance perspective. We continue to make those adjustments, as we always have, but we do feel that it's the right time to invest in sales and IT in our business and we're going about doing that because we see some opportunities.

Scott Group, Wolfe Trahan.

I was wondering if you can help walk us through the thoughts for 2012 in terms of what kind of cost inflation you expect in the model? Really what kind of pricing growth we need just to maintain flattish margins and then we can think about tonnage later? But how do you think about the cost inflation and the pricing you need just to stay in the same place?

The bigger part of our costs are related to our labor contract. Our expectation on our labor contract is an increase of perhaps 3.5% to 4% for 2012. It's similar to what we experienced in 2011 is what our expectation is there and that's the bigger part. We are seeing, as Michael mentioned, some inflationary cost areas in the equipment repairs and maintenance area. In the tires area, we're seeing increases there that I haven't seen in my career. We're trying to do the best we can to get a handle on the equipment maintenance side by bringing on more of the 2010 series engines and ridding ourselves of some of the 2007, 2008. Then doing the best we can to get the best deals on tire purchase. But those everyone is facing those increases and it's not any fun.

We have given a range on depreciation. That's another big cost area. Our rail and purchase transportation costs we expect to be up there, because we've seen, I think, in the fourth quarter maybe even a 10% increase in rail costs on a per mile basis. There are some areas that cause us some concern whenever we look at 2012 on the cost side. But the good news is that we are continuing to see a pricing environment that is favorable. In the fourth quarter, our deferred pricing increases were close to 6% and that's a historically high level and so that's a good sign. We're going to need price increases in that range to accomplish what we want to accomplish in 2012.

So, you think you need about 6% pricing? Does that feel reasonable and are there any plans for another GRI?

There's always plans for another GRI. The timing is what is at issue. Last year, our GRI was at the end of, I think it was, July 25 or thereabouts. We would assume that, that would be appropriate and we just have to look at the exact timing. The best timing for us on that is in that range, June to July, because that's our peak period for business.

Thank you.

Todd Fowler, KeyBanc Capital Markets.

Judy, I appreciate the update and the color that you could give on the teamster lawsuit. But thinking about your labor agreement that's coming up in the next 14 months or so, what should we think about from a timeline and how you'll communicate what the progress is in negotiating a new labor contract with the teamsters into 2013?

Typically, the timing on that is the later in the year. I would say you should expect to start hearing us talk about that in the fall of 2012. It's possible that activity goes on in a lawsuit in advance of that, but that's really a separate thing related to the same topic. But I would suspect that you would be hearing us discuss that in the fall of this year.

Can you give us a sense of what you feel like the big talking points will be on the contract? Is it going to be just what the scheduled wage increases are going to be? Is it going to be more flexibility with your workers and some of the things that you're thinking about at this point and maybe what the union's thinking about?

With respect to our thoughts, the big factors are always the big cost areas. The wages for both drivers and dock workers, the benefits in terms of health, welfare and pension, and then the work rule flexibility, those are the key areas that we will be focused on. From a wage standpoint, it's very important, particularly for driver's wages, to be at the market and we've got to be focused on that. The pension issue we've discussed at length. It's a key issue for us.

We are off the market in terms of our total cost structure there and we've got to write that. There's a number of factors involved in that, but the biggest is the fact that we have to pay for orphans who never worked for our company and we've got a burden there that we have to address. I would expect that there would be discussion over that. Then there's a number of areas of work rule flexibility that we would like to discuss and accomplish some things with. Those are the key areas.

Okay. And if David will let me take one more. If you can comment on your thoughts on the dividend with where the balance sheet's at and cash flow for next year. Any thoughts on moving the dividend up a little bit from its current level?

What is wonderful about improving your results to a little above a breakeven profit is improvement in cash flow that goes with that. That gives us options and opportunities and you've mentioned one of them that is on our radar screen. We look at the strategic options that we have in terms of acquisitions and other capital structure options. Certainly, we're moving to a place where that is a more serious consideration and more serious item of discussion and we're glad to have it be that.

We have announced recently that we've kept our dividend in line. But at certain points, earlier years for the Company, we've had it quite a bit higher. That's on our radar screen. We don't have anything to announce right now. But it is something that we look at very carefully with our Board every quarter.

Great. Thanks for the time, everybody.

Thom Albrecht, BB&T.

A while back, l think at one of the fall investor conferences, you announced that you thought going forward you would be able to stay profitable the rest of this cycle. How do you feel about that statement, especially with the March quarter? And then I have a followup question.

Thom, I think it may have been this call last year that somebody asked me, did we expect to make money for the year and my expectation was that we would and as we closed this out, I'm certainly glad that we're in that position. We are better positioned going into 2012 than we were into 2011. Obviously, we had that expectation for profitability and improved profitability and an expectation that we would have a better first quarter than we did last year, because last year's first quarter was not what we would have wanted. But the other things to keep in mind, that I mentioned some in my commentary, is we feel like the freight market that we compete in is going to have tighter capacity and that's good for us, a Company that doesn't have trouble hiring workers, is a very safe carrier and is always there as a stable force in a changing LTL and truck load marketplace.

We're excited to be in that position. We're also encouraged about some of the improvements that we're seeing in the economy. I mentioned the manufacturing economy seems to be improving some from what it was and we're starting to see a little bit of improvement on the housing market side. We don't expect to be back in the 2004, 2005 levels there. But if we could just get to close to something more normal in the housing market, that would help us a lot.

If I could try to put words in your mouth, then the answer is, even for the March quarter you're still optimistic about being profitable?

No, we're not going to give guidance on the quarter. What I said was, I have an expectation to have improved results from last year.

Then the other question I have is relative to tonnage -- given the fact that RPM is much smaller, but it's not small any more, but smaller as a percentage, are you seeing big discrepancies between, what I would call legacy business declining greater than 10% and RPM maybe still being flat to up slightly when you look at that minus 7.6% figure?

Actually, no. RPM 1,000 miles or less, shipments moving 1,000 miles or less is about 60% of our business, so it's not really a small part of the business. And the breakout of that is that we saw some declines in that tonnage as well, but they were lesser than our total tonnage decline and obviously lesser than our long haul business.

Thank you.

Ken Hoexter, Merrill Lynch.

Judy or Michael mentioned in the remarks the January sequential tonnage was up, pricing was down. A big shift from the pricing you mentioned in the quarter. Are you now going out to market to aggressively get the volumes? Or why the sudden shift on the pricing side?

I didn't say it was down, I mean materially, and I didn't say that tonnage was up. I said the sequential trend is better than it has been. David's going to hand me the specific numbers here. Our tonnage through January 25 is down about 7.5% from last year. What we're saying there is that's a better sequential trend than what we've seen, for instance, October to November and November to December. The January to December sequential trend there is better; improving, in other words, not getting worse.

Then on the pricing, we're seeing it down only slightly. I almost hesitate to even mention that, because it's actually fairly stable. But no, and I'm talking sequentially. We've not seen, had a GRI and we've not done any new pricing improvement program other than just roll overs of our deferred contracts. I mentioned earlier that, that was almost a 6% increase on our most price-sensitive business that we rolled over in the fourth quarter. We don't have any concern over that area right now.

Okay. So, not out using price to try to get the volume to back fill?

Again, Ken, I want to back you up on that a little bit. We don't have a lever that is at the top of this Company in my hand where we go one direction or the other on that. It is an account-by-account process. We don't change that. We never changed it, even during the recession. You've got to look at each account and make a good decision based on how that account adds to the profitability of the company and that's a constant thing. It considers market conditions. There's not a big shift.

Okay. I just want to get some numbers in before Dave cuts me off. (laughter) The tonnage runs from a year ago in the first quarter, can you give us what January, February, March look like?

Yes, first quarter last year versus '10, January up 17.2, February up 19.4, March up 23.1. The full quarter, Ken, was up 20.1. Now remember, we've broken out FreightValue, as we've mentioned and as you see in our financials, so that affects the tonnage numbers as well. Those numbers I just gave you are probably different than what you previously had in your models.

Okay. Where do you feel these volumes are going? Is it a lack of demand in the market? Or is it the competitors are coming in and taking share? Is YRC bouncing back? Is Fed Ex taking a lot of share? Can you comment? Is it the competition or is it just, from your point of view, a weaker market?

We didn't experience what we considered to be a very strong market in December. Again, we're more industrial manufacturing based, maybe than some that we compete with. But we didn't feel it was a particularly strong market, as we've been seeing in some of the commentary. We always lose business to competitors and we gain business from competitors every quarter. We're not seeing, really, a dramatic shift in that. When we reflect back on the pricing actions we took and the amount of business that we retained, the business that we retained most recently in the fourth quarter, we feel like that we kept the better part of that. I mentioned earlier that we have some accounts that we lost as a result of our pricing actions.

But the sum total of going through that process put our account base in a better place than it was before. We feel that we were prudent and took the right actions. But that doesn't mean that the heat is off of our people to try to get out there and grow the business. Because that's an important part of our future and profitability and we have a strong message to them that we want to grow the business.

Thanks for the time.

Ben Hartford, Robert W. Baird.

Judy, I wanted to get your perspective on 2012 pricing in the industry. It certainly is trending positively at your Company. In the backdrop of tight truck capacity and many of the truckload carriers talking about 2% to 4% core pricing expectations in 2012. Is it reasonable, given the cost pressures that you're facing and discipline in the LTL industry, that you can see LTL industry pricing up at the upper end of that range, if not above it for the course of this year?

We can't really predict the future. Really the best benchmark for current activity is our contract renewals that we had in the fourth quarter and I've already mentioned that they were, I think, 5.8% increase. That's the best, most recent read that we can give you on that.

Okay. Good. Separately, on the cost side, any specific initiatives being undertaken on the operational side that can accelerate any sort of productivity gains? What's a base line productivity gain expectation that we should think about for 2012?

We constantly review our network and we saw some fairly significant productivity gains, particularly in our line haul operation because when you have more business, it's obviously easier to produce those kind of numbers. We don't really set out publicly a benchmark for productivity. Obviously, in order to offset some of the cost increases that we have, we need additional work rule flexibility and we need additional focus within our organization. Roy Slagle, our new President and CEO of ABF, is very focused on those areas and wants to continue to see improvement, really in the city pick up and delivery operation, the dock operations and line haul operations. We're not going to give a specific target for that publicly, but we're constantly working through that inside our organization and we're generally very successful at it.

Just to clarify, enough productivity gains annually to at least partially offset, but not fully offset the total labor cost inflation?

It's certainly our expectation to have that, yes.

Okay. Great. Thanks for the time.

Jack Waldo, Stephens, Inc.

I appreciate you guys breaking out the financials from the non-asset-based group and the asset-based group and I've got a few questions on that. If do some rough math, I'm getting $7.6 million in EBIT from the non-asset-based group, about 62% more than the ABF subsidiary in 2011.

Right.

And if I look at the last two years combined, this non-asset-based group has generated $13.4 million in EBIT, while your ABF subsidiaries lost about 55. Is that all correct?

Yes, that sounds right.

Do you know offhand the last time that ABF generated more EBIT than the non-asset-based group?

Oh, let's see. David and I were talking about it. The last time we had full year profit was in 2008 and I think we had a total operating profit of about $55 million. I'm guessing that it would be that year, because in 2009, ABF lost a tremendous amount of money.

If you took the last four years combined, it's fair to say that the non-asset-based group with about 0.2 the revenue has generated more of a return than the asset-based group?

Yes, I think so.

If you're getting so much higher of a return on the non-asset-based group, when you think about investing capital, how does that factor into your decision process? From a financial standpoint, you'd think you wouldn't invest much of anything in the ABF subsidiary and it would all go to this non-asset-based group.

I think you've got some considerations there and I think your point is exactly right. We have a management group within our Company that looks at balance of those kinds of issues, where to invest the money, what the best opportunities are. I can tell you that, particularly in 2011, the non-asset-based group would have produced more operating income if it wasn't for the sales and IT investments that we were making in those businesses, because we see a lot of growth potential in those businesses. In 2012, we're continuing that.

When you think about ABF, though, and this is sometimes a difficult thing for people to understand, but if we even saw this in 2011, if we delay purchasing equipment, in other words, lengthen our trade cycle for ABF's equipment, we end up with a bad answer in terms of total cost of ownership and we always have to balance that in our thinking whenever we look at the dollars that ABF needs. Your point about investing in these emerging businesses, the relationship that they have with the ABF business is strong in some cases. It's kind of like everything that we do gets better if those businesses grow. That's the way we look at it and I appreciate your pointing that out.

Jack, I think I'm going to stop you. I just want to say we've got several people in the queue. So the folks coming up, just be brief if you can.

Thank you, guys.

Jason Seidl, Dahlman Rose.

Judy, real quick, you mentioned that dividends are one of the things, obviously, that you are looking at. How do you weigh increasing the dividend from here, which is, call it, 0.5%, roughly where your stock's at to maybe repurchasing shares with your stock hovering around its book value?

When I think about that, you obviously have the consideration of what the return effect is on the Company and its shareholders as a part of that consideration. Honestly, we don't have a lot of shares outstanding. That's another factor that I think about when I weigh stock repurchases versus increasing the dividend. Honestly, I would tend to lean more heavily toward addressing the dividend before I would do anything on a stock repurchase recommendation for our Board. But those are obviously two considerations that we have as a Company and things change sometimes, so that might not always be the answer, but that's my answer today.

Okay. Fair enough. Then my follow-up question, just so I can pull together several of your responses, you guys don't appear to be using price as a leverage, especially when you talked about 6% pricing going forward. You're going to have, probably, tough comps through April. All things being equal in this current marketplace, when you're still trying to get your price increases up to that 6% range which is what you need and you'll probably start having more favorable tonnage comparisons, call it second quarter on, are you expecting the results to be materially better after that?

Our expectation is continued improvement in our business as we go through 2012.

But it sounds like you'll still be challenged in 1Q based upon the very difficult tonnage comparisons?

Yes. From a tonnage perspective, yes.

Okay. Fair enough. Thank you for the time, as always.

John Barnes, RBC Capital Markets.

Hello, Judy, two things. Number one, as you look at the first quarter and I know you've tougher comps, but in terms of just a volume growth, but obviously, already we've had easier comps on the weather and it does appear that the calendar maybe sets up a little better with where Easter holiday falls and things like that. Can you just talk to your first quarter outlook as the calendar sets up for you? Do you think it provides you with a bit of a tailwind?

I think your comment about the placement of Easter on the calendar is probably helpful. And obviously, whenever you go through nearly the entire month of January without having a big weather effect, that's helpful. It just helpful and consistent, movement of freight and operations across the country. We're encouraged by having that stability in terms of operation. As we say this, this probably February's going to be the worst February on record or something. We're sitting here expecting that. But the good news for that is that FleetNet, one of our other subsidiaries would be ecstatic if that happens.

It does, so far, what we've experienced as far as business conditions and I think the calendar. The other factor that is good about the first quarter, if I remember it right, is that March, the month that the quarter ends has five Fridays. I think that's right. David might tell me I'm wrong when we get off the phone, but that's my recollection and that's always good when you can have that kind of a situation in the last month of the quarter.

Okay. All right. Very good. Then just a follow-up -- going back to the conversation about the labor contract, given how long the lawsuit is protracting and you're still trying to get clarity on certain aspects, is it really possible to separate the two events? If you're suing the parties, and especially the teamsters, over certain conditions that they modified in one contract, how do you separate that out when you finally get to a point of having to negotiate a new contract? You're still going to be starting at kind of the same point. The polar opposites of where you need to be, right?

I think that from a separation standpoint, they just really have two different tracks at this point. Could they come together in terms of timing? Yes, they could, but the lawsuit has its own timing and because of the decision making there is not in our hands, we really have to move forward with the normal process that we've entered into on a labor contract side. That's our expectation is that we're just going to move forward in the normal course with that. If it ends up that the lawsuit timing has some affect on that, that's certainly possible. But we have to move forward as if they're two separate activities within our organization.

Art Hatfield, Morgan Keegan.

I don't think you addressed this, but the slight decline in the yield from Q3 to Q4, what was going on there? My second question is on the adjustment to comprehensive income on the balance sheet, how does that work going forward? Does that amortize over a certain amount time or does that just take annual adjustments going forward for that to be worked back down?

Our current method of accounting, I'll address the first one first, is that we would amortize that. I think Michael mentioned in his commentary that we would give you an update on what that will be after the actuaries are finished with their work. That'll be in the first quarter. You've probably seen the numbers for us. We've seen, I think, some other numbers on the same issue. It's a significant issue for companies that have even frozen pension plans going forward. We'll be giving you an update on that. But our current method would amortize that going forward over about eight years.

On the pricing, we felt that the pricing that we experienced, particularly with the LTL business, was very stable from third quarter to fourth quarter. It may be that when you look at that, that there may be some profile effects or mix between our LTL and truck load business. But we felt good about the stability of that moving from third to fourth.

Just a quick follow-up on that, on the pension accounting, any thoughts to change your method in going to mark-to-market on that?

Yes. We are considering that change because, I think, this morning we saw one of our, I think, UPS announced that they were making that change. What we experienced at the end of the year was a drop in interest rates that affected our equity, and this is gross of taxes, by $20 million. That kind of an effect, just because of what's going on with interest rates and you've a long term view on your pension plan, that's just, I want to say, crazy. It's what you have to do, but it's kind of crazy.

I got you. Thank you for your time.

Jeff Kauffman, Sterne Agee.

Judy, I'm having trouble doing the math on this, because I've gone back historically, you've had quarters where tonnage was down like this and a typical drop in OR sequentially from 3Q to 4Q is close to 100 to 150 basis points. Only time going back I see it greater than was in '08-'09 and you a 350 basis point drop in operating margins. With yields up the way they are, that tonnage number, the math just doesn't add up to me. Were there -- I know the gains on sale were done and I know the chemical business had a destocking, I know you had 0.5 day less. Can you help me bridge the gap here, because it just doesn't make sense? I know Michael talked about the maintenance expense being up 13%, maybe you can identify the dollar amount it was up? Was there an increase in incentive accrual, maybe that hit in the fourth quarter? Help me understand how this drop makes sense sequentially.

One of the things that is difficult for us is having everybody understand the relationship of third quarter to fourth quarter for us. We tend to have less retail focus and more industrial focus in other companies that we compete with. If you're looking across the LTL carriers, if you're imposing that on us, that's not going to work very well. The other thing that I've observed is since the housing market declined in the fourth quarter of 2006, we've had weaker fourth quarters than historically prior to that, we just have. My recollection is our range is somewhere between 1 to 2 point increase in OR up to a 9 point increase in OR, if I'm remembering right.

Yes, but that was '08.

For us to have what we had is actually fairly normal. It's not unusual. What you had in the fourth quarter that you didn't have in the third quarter was a much greater tonnage decline in the fourth quarter. When you looked -- we did a comparison, as we do every time, of our operating ratio from fourth compared to third and the big factor was business volume. The other factor that is kind of a mishmash when you're thinking about this is that we did in October of 2010 a general rate increase. This year, the rate increase was in July and that has an effect on this as well. When we look at what happened in terms of business volumes between third and fourth, we knew that fourth was going to be weaker and we gave an update on that toward the end of November that was actually fairly close.

The yield increase should have offset a fair amount of that tonnage decline and I think that's where the math breaks down for me.

I don't think so. I don't think some I don't agree with that, Jeff. We are incrementally -- we had $16 million of incremental revenue. If you exclude the supplemental pension, we brought $10 million of that to the bottom line. That's an OR of about 37, something like that.

Okay. Let me just close with a quick detail. Mike, what was the -- you said maintenance cost is up $13 million. Can you give me a dollar amount on that and was there an increase year-on-year in incentive comp accrual in the fourth quarter?

The increase on that was, as I mentioned, was up over 13% and for the year was up over 25%. The hope is that with the new 2010, 2011 equipment, we're going to see that down slightly, but we're just not going to know until we have more experience on that equipment. The other thing I think folks had missed was the pension settlement expense for a retiring executive that was within there as well.

Jeff, on the incentive there was no material difference between fourth and third quarter on incentives.

No difference? All right. Well, I'll round back with you. Thanks.

Alex Brand, SunTrust Robinson Humphrey.

This is Sterling in for Alex, actually. I just had one question -- I want to stay on David's good side today. On CapEx, in the past you've talked about the issues you've had, mostly with the pre-2004 engines. I noticed your CapEx guidance for revenue equipment actually implies lower CapEx this year over last year. Can you talk about what that level, the $55 million gets you to as far as 2004 engines, 2007 engines and whether or not it implies some extension of the mileage on the tractors versus your historical levels?

No, there's no extension on the mileage. Really, the story there is that we had 1,000 additional trailer purchases in 2011. When we talked about the CapEx early on in 2011, we mentioned we had this range of about $15 million to $16 million and that was for this additional purchase. You could really view that as somewhat of a pre-buy for some of those trailers in the 2012. I think, probably on an overall basis, it's pretty similar. Now with the road equipment, the road power, we are moving back to a three-year trade cycle on that equipment. During the recession, we had less mileage on equipment. We extended it to a four-year trade cycle and now we're moving it back to the three-year trade cycle, which plays into the increase on your depreciation.

Okay. Great. Thanks, Michael. Thanks for the clarity. Based on your CapEx guidance, by year-end 2012, can you give us how many '04 engine tractors you'll have and how many '07s?

I can get that to you later off-line. I don't have that in front of me.

Thank you very much for the time.

Bruce Chan, Stifel Nicolaus.

Most of my questions have been address already, but Judy, I know you mentioned the orphan pension issue is a big issue for you and it's something that is very much on the docket, as far as negotiations go. Do you see any kind of regulatory relief coming this year or are things on hold given everything that's going on in Washington? I don't know if you can comment on that.

What I know about that is that there's not enough activity going on. But there is the pension law that really governs the multi-employer funds as well as the single employer funds sunsets in 2014. My understanding is that there will be some hearings and some activity going on in Washington trying to address the multi-employer pension funds, the funding situation, the orphan situation. I would love to tell you that there could be an outcome there that would handle this issue, because that's really where it should be solved, but we're going to be observers of the process like you are. We continuously, though, work with people in Washington. We have a pension expert that we work with, as well as lobbyists in Washington, trying to make the case for the unfairness on our company of that issue. We've educated a lot of people over the last few years and we're going to continue beating that drum and having that be an emphasis in our organization until we get it solved.

Great. Hopefully you get some traction there. A real quick one for David or Michael on the length of haul if you guys have a number for that? I'm assuming it's 1,093 for 4Q '10.

Yes, we're looking that up right now. It's flat really. Down 0.2%.

Okay.

About 1,049 in fourth quarter versus 1,051 in fourth quarter last year.

Again, you may have a different figure on that. You'll get an update from David because there are some statistics, of course, that changed with FreightValue coming out of the business.

Exactly.

Great. Thanks, guys.

Frankly we have -- I know we're pretty close, but if we're over time I want to be cognisant of who we still have real quick.

We have a question from Michael Bush, Wells Fargo.

Most of my questions have been answered. I just wanted to talk to you guys about the insurance expense that creeped up a little bit this time. How is the safety looking?

We actually had, for the fourth quarter, the best safety results that we've had in five years. However, we had a 2008 claim that developed on us and that's unusual for a third party casualty claim to develop on us. That affected that line item. We have that happen from time to time, and when you look at the workers comp results that we had for the quarter that are up in the salaries, wages, and benefits lines, they were good. So, when we look at the sum total of that, we're not far off of our five- and ten-year averages. But that specific line item was affected by that 2008 claim increase, even though we had really good statistics otherwise.

Congratulations on the safety in the quarter. I'll respect everyone else and catch you offline. Thank you.

Tom Wadewitz, JPMorgan.

There was a question earlier that talked about where, Judy, I think you said you need 6%-ish type of pricing to offset some of the inflation you have in your cost base. To me, that sounds like that maybe the market gives you that and maybe it doesn't, but it's not a low bar. I'm wondering, what do you think it is that's necessary to really get to a more appealing level of profitability? Is it at the end of the day you just really have to play hardball and get the structural changes in cost structure or are there other things to think about? I don't know it's a little hard to see the path to getting enough pricing for that better profitability and I'm not sure what the other choices are.

I think it's a balance. What you're seeing right now is maybe, I don't want to say the extreme side, but that's the only word I can think of, on the tonnage declines because of what we experienced in terms of increases last year and because of the effect of the price up that we did. What you shouldn't do is to look at the fourth quarter and say that we don't have the ability to grow this Company, because we do. I'm very encouraged, again, about the book of business that we have to move forward from. I'm very encouraged by the service offerings that we have and the relationship that some of our non-asset-based businesses have to ABF and the opportunity that, that provides us to grow.

We just have to be as active as we can and as successful as we can in getting those good accounts to come on board and see what the ABF experience is like. Because typically when we have an account, we go out and we do market survey work and the answer comes back, we love you guys. We just need to find those opportunities to grow the business effectively and we have more offerings than we ever have to satisfy our customer supply chain and that is encouraging. We have many examples where the customers have utilized us either for LTL than to do freight brokerage work and vice versa. It's been a win-win for us and for the customer and we're encouraged by those opportunities.

Okay. In terms of the last contract discussion you had with the teamsters, there was some interest in trying to make a payment to get out of this central states plan. Is that in the broad range of possibilities that you could contemplate a big cash payment to get out of that to address the pension issue? Or is that not in the ballpark of possibilities?

It's probably not in the ballpark of possibilities. There was an opportunity to do that back in 2008. We talked to our employees about that and ended up with a contract that didn't include that. But today, probably the focus should be trying to get the cost of the orphans to not be a part of what we have to pay. We believe our people deserve good retirement benefits. But we cannot afford to pay for people who never worked for us and that's our focus.

Right. Okay. Great. Thank you for the time. Appreciate it.

I would like to wrap it up here.

There are no further questions at this time.

Okay. We appreciate everybody joining us this morning and we appreciate your interest in the Arkansas Best Corporation. This concludes our call. Thank you.

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