ArcBest Corp (ARCB) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Arkansas Best Corporation third quarter 2012 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, Thursday, November 1, 2012.

And I would now like to turn the conference over to David Humphrey, Vice President of Investor Relations and Corporate Communications. Please go ahead, sir.

Welcome to the Arkansas Best Corporation third quarter 2012 earnings conference call. We will have a short discussion of the third 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; Mr. Michael E. Newcity, Vice President, Chief Financial Officer of Arkansas Best Corporation. We thank you for joining us today.

In order to help you better understand Arkansas Best Corporation and its results, some forward-looking statements could be made during this call. As we all know, forward-looking statements by their very nature are subject to uncertainties and 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'll now begin with Mr. Newcity.

Thank you for joining us this morning. Our Company's third-quarter results reflect the effects of a weakening economy that impacted business levels and profitability at both ABF and Panther. In addition, cost pressures at all of our subsidiaries affected profit margins. In spite of a challenging economic environment, we are pleased with the positive trends at our emerging non-asset based businesses. These companies experienced significant revenue growth and improving profitability during the quarter.

The revenue diversification resulting from the acquisition of Panther and the growth of our other emerging businesses is a positive development for our Company and in line with our strategic plan. Later, Judy will give her thoughts and perspective on our recent results, but now I'd like to cover the details of our performance for the third quarter of 2012.

Arkansas Best third quarter 2012 revenue was $578 million compared to last year's third-quarter revenue of $511 million. This year's figure included approximately $60 million of revenue from Panther [whose] purchase was closed on June 15. Excluding Panther, Arkansas Best third-quarter revenue was slightly above that of last year's third quarter.

In the third quarter we earned $0.24 per share compared to $0.46 per share last year. Third quarter earnings accretion associated with Panther was positive yet minimal, due to the reduced demand for Panther services in a slower economic environment and higher than expected costs.

Excluding the effects of adjustments to valuation allowances, as shown in the non-GAAP table of our earnings release, our year-to-date tax rate was 33%. The fourth-quarter tax rate will depend on our financial results, particularly the proportion of non-deductible items to taxable income.

We ended the third quarter with unrestricted cash in short-term investments of $119 million, an increase of $19 million during the quarter. Combined with the available resources under our AR securitization agreement, our total liquidity equals $179 million. Our total debt of $186 million includes the remaining balance on our $100 million five-year term loan associated with the Panther acquisition and $89 million of capital leases and notes payable primarily on ABF equipment.

Our trailing 12-month net debt to adjusted EBITDA is [0.65 to 1]. The composite interest rate on all of our debt is 2.7%. Full details of our GAAP cash flow are included in our earnings press release.

As a result of moderate third-quarter revenue growth, the increased costs we incurred had a greater impact on profitability. ABF's union labor costs increased further as a result of the labor contract's annual August 1 rise in the hourly union benefit rate. Though the allocations have not been finalized, this increase is expected to average 4.3%.

Previously discussed 2012 cost increases that continue to impact third-quarter results included higher non-union pension and retirement costs, ABF equipment depreciation expense associated with the timing of adding more costly equipment, and previously planned investments made in sales, personnel and IT systems at all companies.

Higher than expected non-union healthcare costs at all companies reduced third-quarter results by $0.06 per share [and a] larger number of high-cost claims that occurred in July and August. These costs returned to normal levels in September. ABF's purchased transportation costs were up during the quarter as a greater need for utilizing these services to meet customer commitments, both domestically in association with ABF's import business coincided with increases in their rates.

We have also completed the fair value assessment of acquired assets and liabilities for Panther as well as the amount of goodwill recognized as of June 15, 2012. Based on the most recent purchase price allocation, depreciation and amortization is estimated to be about $2.5 million per quarter.

During the third quarter, cash surrender value market gains added $0.04 per share to our results. This compared to market losses of $0.05 per share in last year's third quarter. On a year-to-date basis, cash surrender value market gains equal $0.09 per share compared to gains of $0.06 per share for the same period last year.

Because of current business conditions and increased efficiencies in the ABF network, ABF will reduce this year's new tractor replacement purchases by 37 units, or approximately 8%. Thus in 2012, we will now replace 430 tractors in the ABF fleet instead of 467 tractors. This reduction in ABF tractor replacements contributes to Arkansas Best expected 2012 net capital expenditure total of $75 million. This is below the net CapEx range of $80 million to $90 million that we previously anticipated.

ABF reported third-quarter revenues of $456 million compared to $459 million in the third quarter of last year. ABF tonnage decreased 1.4% per day compared to last year's third quarter. Total billed revenue per hundredweight increased 1.5% compared to the third quarter of 2011.

ABF's third quarter operating ratio was 98.1% compared to 96.1% in the third quarter of 2011. The third quarter OR was slightly better than the 98.3% of the second quarter.

Panther had third-quarter revenue of $60 million and operating income of $804,000 [for an] operating ratio of 98.7%. Panther's third-quarter results were adversely impacted by a third-party casualty claim that resulted in charge of over $300,000 and reduced Arkansas Best earnings by $0.01 per share.

On a combined basis, our emerging non-asset based business segments grew revenues during the quarter by over 17% highlighted by 63% revenue growth in the Truck Brokerage & Management segment, and 32% revenue growth in the Emergency and Preventative Maintenance segment. Profitability trends at all of these business segments improved in the third quarter despite continuing to be affected by cost from previous investments in additional sales, customer service and IT.

And now, I'll turn it over to Judy for her thoughts about our quarter.

Thank you, Michael, and good morning, everyone. Arkansas Best results reflect weakness in the economy that affected business levels and revenue at each of our business units.

In addition, cost pressures impacted the profitability of all of our Company. Customer uncertainties surrounding the outcome of the presidential election and upcoming economic events first began to be apparent in our July business levels and seem to be more strongly of an impact in August.

Moving through September, the impact on our quarter was set and our financial results were below historical third-quarter trends as well as below historical profitability relationships between second and third quarters. Despite the softness of the operating environment, our emerging non-asset based businesses experienced revenue growth and improving profitability trends as a result of initiating new customer relationships. We continue to believe that over time these smaller business segments have the opportunity to experience accelerating growth in both revenue and profitability, thus having an ever increasing positive impact on our corporate results. I'm pleased to report that including Panther, Arkansas Best non-asset based businesses generated over 20% of third quarter consolidated revenues.

Following its June 15 purchase, the third quarter was the first full quarter that we have had Panther as a subsidiary of Arkansas Best. We continue to be excited about this acquisition and the opportunities it brings to our Company to more robustly respond to the changing demands of the transportation marketplace.

The broad array of logistic services offered by Panther complements the asset-based core LTL services provided by ABF and the many offerings of our emerging non-asset based businesses. Customers have responded well to the broad array of services we now offer them.

Panther's philosophy of providing a high level of specialized services in response to critical customer needs is consistent with our corporate philosophies and enhances our goal to be an integrated logistics Company, offering responsive supply chain solutions to our base of over 60,000 customers.

Panther's business and profitability were also affected by slowing third-quarter economic trends, both in its domestic activities and in its international freight forwarding segment. The addition of some new accounts contributed to Panther's quarterly increase in loads, but some reductions in shipping activity and certain customer verticals reduced business levels below expectations. Given softer demand trends, Panther experienced pricing pressures that resulted in gross margin compression as well.

When the economy improves the benefits of Panther's continued load growth will result in greater profits. We have identified a number of significant opportunities for having Panther work together with our other companies to enhance our overall logistics offering and better serve our customers.

So far the implementation of these initiatives has resulted in direct Panther partnerships with both ABF and FleetNet. As a result, each of these companies is experiencing growth prospects and operational benefits. We've an identified list of opportunities and we're continuing to work through them for the benefit of our customers.

The impact of the uncertain economy on freight demand and customer shipping patterns left ABF with slightly lower third-quarter revenue that was the result of less freight in the midst of a stable pricing environment.

The lack of growth in ABF's revenue base combined with the cost increases described earlier by Michael, pressured margins and contributed to disappointing third-quarter results.

As Michael said, we are working to address these cost issues, and I'll talk more later in the call about that.

ABF's lower third-quarter freight levels also reflect the lingering effects of increased pricing actions that were implemented in the final three quarters of last year and continued through the first quarter of 2012. As a result, some business and customers were lost. We have experienced some sequential improvement in recent market share reports as ABF seeks to increase business levels with existing customers and add new customer relationships that offer opportunities for ABF to profitably grow.

In the third quarter of last year, ABF's total price increase was over 17%, some of the highest-yield increases in our Company's history. The LTL industry pricing environment remains stable and rational. ABF continues to gain price increases, but at a more modest level than we saw last year.

During the third quarter, ABF's total billed revenue per hundredweight increased 1.5%. When adjusted for fuel surcharges and changes in freight profile and mix, the average price increase of ABF's traditional LTL rated business was in the mid to high single digits on a year-over-year and sequential basis.

The retention of our late June 2012 general rate increase has been in line with expectations, and we were able to obtain positive increases on the contract and deferred pricing agreements that renewed during the quarter.

All of you are aware of the devastating effects of Hurricane Sandy and the loss of life and damaged property along the East Coast. Our thoughts and prayers are with everyone affected by this tragic event.

This week's business levels at ABF have certainly been affected by the storm, but prior to that, we were definitely experiencing further softening in ABF's business due to a slower economy.

As a result of both of these factors, we now expect ABF's October tonnage to be below the same period last year by approximately 4% versus a 2% decline that was expected prior to the storm. This change reflects the impact of lower storm-related business levels of the last three days of the month. On a revenue basis, we expect a reduction in ABF's October revenue related to the storm of approximately $2.5 million to $3 million.

October total billed revenue per hundredweight is expected to increase about 1.5% over October of last year. Excluding fuel surcharges, the year-over-year increase in October billed revenue per hundredweight is expected to be flat. As we saw in the third quarter, these yield figures are impacted by the effects of changes in ABF's freight profile and account mix.

Regarding the storm, ABF was fortunate as our folks remain safe and we currently only have one report of property damage. Though ABF business levels are down because of the storm's initial impact, there may be some opportunities for additional fourth-quarter shipments resulting from the cleanup and rebuilding efforts. However, the impact of that is unknown at this time.

In the last couple days, Panther has received increased calls for expedited services as traditional transportation networks have been significantly curtailed. There are still a lot of shippers closed in that part of the country, so Panther expects additional business opportunities as people return to work during the remainder of this week and early next week.

In early August, the US District Court for the Western Districts of Arkansas entered an order dismissing ABF's lawsuit against the Teamsters and various other parties related to modifications to the National Master Freight Agreement.

In late August, we filed a notice of appeal seeking review of our case in the US Eighth Circuit Court of Appeals. We believe in the strength of our legal position and in the importance of addressing past wrongdoings that adversely impacted our financial results. We filed our opening brief in support of the appeal with the Eighth Circuit Court on Monday. While we continue along that path, we will also begin negotiations on our next labor agreement and we consider these two paths to be separate and independent of each other.

We remain fully committed to addressing ABF's above market cost structure through the negotiation of a new labor contract that will replace the existing contract that expires on March 31, 2013.

As previously announced, we expect to begin negotiations with the Teamsters National Freight Industry Negotiating Committee, the negotiating arm of the Teamsters on December 18. In this process, we expect to have a productive discussion as we seek to identify and implement solutions that will allow our Company to be successful for many years to come.

I always like to highlight the positive things that are happening in our Company, and once again in this quarter, I have several to share. In August, ABF sent 24 state driving champions to the 75th National Truck Driving Championship in Minneapolis, Minnesota. ABF drivers Robert Sutton and Rick Camarda earned recognition at this event. Robert won the National Rookie of the Year award, and Rick placed second in the 5-axle classification. I'm proud to have ABF represented by such superior drivers.

So far this year, ABF continues to provide an extremely high level of cargo care for its customers. Year-to-date ABF's cargo claims ratio is 0.44% of revenue, which puts ABF on track to have one of the best years in history and illustrates our continuing commitment to offer safe and damage-free care of all customer shipments.

Last month, the Safety Management Council of the American Trucking Associations recognized ABF as the first place winner in the LTL local division 50 million to 100 million miles category of its National Truck Safety Contest. This marks the seventh time in past 10 years that ABF has earned recognition in this annual truck safety contest.

Also in September, ABF's IT team was once again recognized as an innovator in business technology by InformationWeek magazine. It was the seventh consecutive year that ABF was included on the InformationWeek 500 for its ongoing efforts to enhance supply chain performance on behalf of its customers.

The outlook for the remainder of the year and 2013 will depend on a number of factors, including the outcome of next week's presidential election and the resolution of the economic elements associated with the fiscal cliff, as well as the outcomes of our labor negotiations and our lawsuit against the Teamsters.

We continue to make good progress in the areas we control. As a Company, our goal is to provide our customers with a high level of service, options and flexibility. The acquisitions we've made and the organic investments we continue to make specifically address our customers' needs and should allow our Company to be even more responsive going forward.

And, David, I think we'll be ready for some questions.

Amanda, I think we're ready.

Perfect. Thank you, sir. (Operator Instructions) Justin Yagerman.

Hey, guys. Good morning.

Good morning, Justin.

Good morning, Justin.

I was curious on Panther because that's where some of the shortfall was relative to our estimates in the quarter. How should we be thinking about incremental margins and variable cost in this business? It feels like maybe there was a bit more of a drag from economic activity in the quarter than, I think, we would have thought. So when you guys look at this, how quickly can you react within the Panther business to falling economic conditions? It would seem to be a more variable business, but it didn't really show up the way we thought it would in Q3, so I'm just curious.

Yes. Well, Justin, we have, I guess, several factors to consider with respect to Panther's business in the third quarter and I really feel like the third quarter was unusual for some of these reasons. They have a variety of verticals that they work within. About half of those verticals had load growth and the other half didn't. Some of the areas where load growth was down were their government and high-value products verticals. And you can understand given the uncertainties surrounding, as I mentioned, the presidential election and the fiscal cliff, how that's affecting those verticals. And you can also probably appreciate that those would positively impact margins, if they were more normal in growing.

The other factor to consider, it's a lesser portion of their business but growing, is as Europe struggles and China slows, their global freight forwarding business was also hurt. And one of the impacts on the margin is the investments that they're making to grow that business with more of a long-term outlook about that growth in their business.

And then the last thing to mention, and this is going to happen at times, they had a large third-party casualty claim that impacted their margins in the third quarter that when we look at that that's highly unusual. And so, I mean, we've all been talking about Hurricane Sandy and the perfect storm, I think they had some of that in their business as far as kind of a number of negative factors impacting the third quarter. I don't see that as being normal and I do see some of those areas improving and being reconciled going forward.

How big was this casualty claim just in terms of thinking about (multiple speakers)?

It's $300,000, ended up being $300,000.

Okay.

But on their business that's pretty significant.

No, it's meaningful. Yes, sure.

Yes, yes.

Justin, you still there?

I believe his line disconnected, sir.

Okay.

Okay.

Well, let's just move on to the next one then.

Scott Group.

Hi, Scott.

(technical difficulty) happening with yields, Judy, I think I heard you say that that yields were pretty much flat net of fuel in October. And you can just give us some color about why you're seeing so much pressure there and what's happened?

I really don't see it as that, Scott. When you look at the third quarter, even though our reported revenue per hundredweight increase was a 1.5% increase, when you strip out fuel surcharges and profile effects, we had a mid to high single digits increase in the third quarter. And what we're reporting to you in October doesn't have the profile effect stripped out. And so my assessment is that we haven't seen that much change in October. And so, we're not experiencing what we consider pressure. We think that it's a pretty healthy environment as far as rates and yields go.

Can you explain that -- sorry, so you're saying that yields in -- I thought you said that yields ex fuel were flat?

Well, that again has not been adjusted for profile effects on our business.

So changes in mix there. So what do you think the underlying pricing is in October?

Well, I didn't say that it wasn't. I didn't. I mean, again, 1.5% -- think back to third quarter, 1.5% increase, but when you remove the effects of profile, we're up mid to high single digits in terms of pricing increases. It's the same -- we haven't calculated that effect for you in October because we don't do that until we get to quarter-end, but you have similar things going on there.

Okay.

It changes in weight per shipment and length of haul, that sort of thing.

Okay. And then in terms of the tonnage, I don't know if you gave it, I don't think you did that, do you have the monthly tonnages for the quarter and then how do you think about -- I think, you said that that Sandy cost about two points of volume at the end of the month in October, how do you think about potential for LTL to Sandy tightening and improvement from Sandy going forwarded? I'm guessing there is an opportunity for Panther on the expedited side to see some benefit. How do you think about that?

Scott, I do think that there is an opportunity for it. At this point, it's hard to quantify. When you have an event like this, it's often difficult to see the improvement other than if you're able to look at those specific terminals. But we have impacts of that across the system, and so we'll be looking at that and try to quantify that as we see the impact and we get to the end of the fourth quarter, but I would expect that to be a positive. It's such a dramatic economic impact in that area of the country, there's going to have -- they're going to have needs for a number of things, rebuilding materials, just all kinds of needs in every part of business life and in people's personal lives.

Panther has seen an uptick in their call volume related to the business. One of the issues that was unclear for them was a number of people weren't back at work yet, and so they felt like that that there would be additional call volume increases as people came back to work towards, I guess, later this week which is now one more day after today and then early next week.

And David has the monthly tonnage numbers for you.

Yes, Scott. Before we move along, let me give you those. This is total tonnage per day, by month, year-over-year. In July, it was down 2.6%, in August it was down 1.9%, and in September it was up 0.5%, and then for the full quarter it was down 1.4%. Thanks a lot.

All right. Thank you.

William Greene.

Yes. Hi, there. Thank you for taking the question.

Good morning.

We've got a lot of moving parts here for October and even this quarter, I think, you have an extra operating day. Can you give us any sense for -- given the tonnage decline and the yield commentary, could you be profitable in October?

Yes. I mean, that's a possibility. Yes, I mean, it's hard to fully bake in the effects of the hurricane and the lost revenue, but we do have an expectation of profitability. We were profitable in every month of the third quarter.

Okay. So, I guess the month is not quite closed, but at this point you think it is possible?

Yes. I mean, yes -- we don't have the books closed basically.

Yes. And then --

We know the tonnage and pricing figures, but we don't have the books closed.

Yes. Okay, makes sense. And then when you look at kind of the network overall, can you just sort of give us a sense for what percentage of your revenue comes from -- I don't know if you want to call the Northeast or the affected states or what not, just sort of trying to get a sense for the impact on Arkansas Best as things start to recover, but also depending on how long this lingers in terms of the effect from the storm and lost economic activity?

Well, let me say this. It's very difficult to do that because there's effects in other regions of the country of what's happening up there. So it's really not a good way to look at that to just isolate the regions, specifically the region that's specifically affected by that. But to give you an idea, we have had more closures than this. But as of yesterday, we had five facilities closed and the reports coming in from everybody, our transportation and our terminal operations area, with things were pretty normal everywhere else, not perfectly normal, but pretty normal everywhere else. And we have 277 locations in the Company. And so --

Okay.

It's -- and when you sort through that, it should be relatively small in terms of the impact on profitability for the quarter. But I can tell you with some of the major hurricanes that we saw in New Orleans, when we sorted through the details of that, we had negative effects from lost business, but we also had recovery of that because of increased business in terminal facilities that were relatively close. And the net effect was not nearly as large as what people perceived it to be.

Okay.

Hi, Bill.

Hi.

Before we move on, I was just going to get you on your work days. There are 61.5 work days in the fourth quarter and there were 63 in the third quarter.

Okay.

(multiple speakers)

Thank you.

Thanks.

Thanks.

Tom Wadewitz.

Yes, good morning. Thanks for the chance to ask a question here.

Hey, Tom.

Yes, hi, Judy. Let's see -- so, how would you look at, I guess, the environment in LTL? Do you think that it's kind of a blip here in October and maybe things kind of stabilize or do you think it's going to be pretty weak for the full quarter and does that challenge the profitability? I think that Bill asked you about October, but fourth quarter is a difficult seasonal quarter sometimes and with weaker freight, I just wonder if you have confidence of being profitable for the quarter or not?

Well, typically when we move from the third quarter to the fourth quarter which -- there's a lot of reasons that this relationship might not be typical, there's about a four point OR deterioration -- or between three and four points kind of leaning more towards four. And so, if we have a 98 OR, we had a few unusual things in the third quarter. It is possible for us to have a loss in the fourth quarter. We will obviously be doing everything we can to try to work through that, but it's certainly possible.

As we look at October kind of pre-storm conditions, I think, I mentioned in my comments at the beginning of the call, we were down about 2%, that changed to about 4% with the storm. But that 2% is a little softer sequentially than we would have expected. And so, we are seeing some business weakening in October even relative to what we saw in September.

Now, some of that is calendar related, is the way that the calendar is made up in October. There's more days of the week that are lesser revenue days than you would have had, for instance, in September. So, that's a part of it. And we actually expect, from a tonnage perspective, to see improvement as we go through the quarter. Some of that is better calendar, some of that is weaker tonnage trends from last year. And so, there is a variety of things going on here. We don't see the business environment as very good right now. In my opinion, it's not very good right now. We hear that from customers and we've also seen the commentary from all the truckload carriers and some of our LTL competitors as well.

So, it's hard to say what will happen after the presidential election, if that somehow changes things or gives a boost in activity, we hope so. But to -- kind of to look at what we can typically rely on, the ISM PMI Index is an index that typically correlates well with our business. And we, in the past, or I guess in the summer month, that was running at about [49%]. Typically that works into our business with about a four months lag. So we saw that improve in September, and it was up to nearly [52%], I think.

And so -- and there's some predictions I think that suggest that that's going to continue to improve. If it does, our business correlates well with that and that is a bright spot and we're also encouraged by the commentary we continue to hear about housing. And then I guess the last comment is we hope to see some business boost as a result of the hurricane.

Hey, Tom. We're going to move along, but appreciate you.

Thank you.

Jack Waldo.

Good morning.

Hi, Jack.

Hi, Jack.

Hi, Jack.

I had two questions; one, do you know what the amortization of intangibles number will be for Panther?

It's $2.5 million.

[Roughly] on the intangibles it's $8.7 million a year, and in all in it's $2.5 million a quarter.

Yes.

Okay. And Judy, as you guys enter your next round of contract negotiations, are there -- I guess, I'm wondering how your philosophy has changed relative to previous negotiation points? Are there not -- we wouldn't expect you to reveal your game plan, but are there certain things that you're focusing on more or less this contract negotiation than in past contract negotiations?

Well, our basic approach is going to be to obtain a contract that allows us to compete in the marketplace successfully. And we're also focused on protecting our employees' benefits. And lastly, we're very focused on growing business. And so, if we can accomplish those three objectives, that will be a success for us.

Okay, okay. But are there -- I would imagine that's kind of your theory going into all these negotiations. To some degree I'm just guessing if the characteristics that you think would make you successful have changed at all relative to (multiple speakers).

Well, one thing I comment about is we are negotiating a single employer national contract. This is the first time we've ever done that. And so, in our view, it's favorable for us to control all elements from the management side of that discussion. And it does make for a different process, we think it'll be a smoother process, one that gets completed in a time frame that allows us to move forward under the objectives that I've laid out. We really feel like that this is going to be a better negotiating scenario so to speak for us, being in control of all the management side elements. And in the past, that's not been the case. It's been much more complicated and taken longer.

Got you.

Hey, Jack. I'm going to move it along. We've got several others who want to get in. Appreciate you.

Thank you, Jack.

Ken Hoexter.

Great. Good morning, Judy, Michael and David.

Hi, Ken.

Hi, Ken.

You mentioned that you're seeing it kind of weak right now. Are you seeing businesses hold their purchasing decisions till post-election, kind of are you getting that feel from the customers? And you also mentioned that the rest of the country not as impacted now post-hurricane you're seeing, I guess, the rest of the 277 service centers, I guess, rebound to the same level, or are you seeing any of that business pick up as they prep for any post-hurricane kind of service levels?

Well, the weakness that you described, we have had specific customer discussions about managing their businesses more conservative given the presidential election and the fiscal cliff. There's specific discussions really for both ABF and Panther on that point. And that's been going on since, as I mentioned, since July. We've been hearing that. And so, that is a factor.

We can't, at this point, can't really measure any activity level across the system relative to the hurricane. There might be a conversation you could have with some people up in, for instance Carlile about trying to figure out how to get some freight into those New York facilities, those kind of things. But the conversations that we could report to you are really relatively small. I do -- I think it'll take some time to see the business boost that could result from the devastation that's occurred up there. Again, I would expect it. But as I've described earlier, most of the time even on these large storms, when you sit back and you look at the impact on a full quarter, you have loss of business and then you have the acceleration in some locations that occurs after that, it's just typically not that material. That's the honest truth. I wish it was different. We take business from wherever we could get it.

Wonderful. I appreciate the time.

Thanks, Ken.

Thank you.

Christian Wetherbee.

Good morning. This is [Seth] in for Chris.

Hi, Seth.

Hi. If you could comment on your fleet kind of outlook heading into 2013? I know for this year you mentioned you've taken down CapEx a bit and new tractor replacements going to be down 8%. If everything remains status quo, can we expect similar declines next year? And also pertaining to that, does it makes sense to reduce it more if everything stays status quo with the Teamster contract?

Well, first of all, we're not assuming status quo with the Teamster contract, I can tell you that. But we do have to look at the amount of business that we have and the equipment that we need to serve that. That's why we're adjusting where we are this year. The other thing that's happening is there are evaluations being done of our network, and in some cases we're able to be more efficient than we once were or we're using a greater portion of rail where we can rely on the service to be improved. You saw in the third quarter, we were up, I think, 15.8% rail, which was up from the previous year. And that enables us to have a smaller fleet, but it is certainly the case that we need the profitability of ABF to improve and that has a direct impact on the amount of equipment that we buy.

Okay. And then do you have a long-term target percent of [bigger that could] go by rail? Do you think (multiple speakers)

We don't necessarily operate from a target, but fairly consistently over a long number of years we've operated between say 10% and 11%, all the way up to say 18% to 20%. And again, that is a cost-effective approach for us in certain circumstances. And if the service is good, we're going to continue to use a good percentage of rail as a part of our total miles. And we like that optionality and some customers want you to do that. So it's a good thing to have as a mix or a choice in your equipment capacity, in your capacity that you use to serve the network.

Hi, thanks a lot, Seth. Appreciate it.

Thank you.

Jason Seidl.

Hi, Jason.

Hey, guys. [Good morning]. Just to clarify something that you (technical difficulties). Signing new contracts in the quarter, signing them at mid single digit pricing increases, I guess that's the best way for me to ask it?

Jason, you kind of cut out at the beginning of what you were saying. Could you ask your question again? I'm sorry.

Sure. You talked about pricing a little with Scott, and you mentioned that in the quarter, if you exclude mix and fuel and look how you sit in mid single digits. But I guess, in the quarter, what were you signing new contracts at? Is it that mid single rate?

3.6%.

3.6% was the new contract rate.

Yes.

Okay. I guess, that's my one, [I won't get another].

Yes. Okay, thanks.

All right. Thanks, guys.

Thanks, Jason.

Tom Albrecht.

Hey, team Arkansas Best. I just had a question about your weight per shipment. It was up a bit. It'd been kind of in a bandwidth closer to 1,350 pounds. It was up about 2.1% year-over-year to 1,376. Are you doing more either truckload shipments or are you seeing a lot more increase in business in that 5,000 pounds to 10,000 pounds? And if you are, can you speak to the profitability of that versus sub 5,000 pounds?

Well, if you look at -- I've got a measure that that I can look at here. We typically don't disclose because we don't give all the surrounding details. But of that that 2%, there was also an increase in LTL weight per shipment for the quarter as well compared to last year's quarter. There was some effect of those heavier shipments. In other words, it drove the number to be higher than it was. And from a profitability standpoint, you can look at those slices like that. But really what we're doing is looking at it on an account-by-account basis, because you can have a variety of answers based on the shipment size as well. So, it's just not that one way to look at it. But we did have -- I'll acknowledge this, we had a mix change in our business in the third quarter that was [gross] with less profitable accounts and that's a negative to the quarter. We had our accounts that operate a little worse for us grow more, and that's a factor in the deterioration of our OR for ABF.

Okay. So to summarize, and there's not necessarily an intentional strategy --

No.

-- behind that weight per shipment. But on that less profitable comment you made, are they more resilient companies in the broader US economy that -- I mean, what would cause them to grow more versus your more profitable? Are you too --

Yes, I think in this economic environment --

-- expensive on the pricing?

No, no, no, I don't -- I think that it's a mixture of things. One of the confusion points, I think, is the fact that we have raised prices significantly and we've had some account loss and some effect of that. But these are companies that are growing in this kind of environment and they obviously had growth in the third quarter. And so, it was definitely a factor in the third-quarter business.

Hi, Tom. We're going to move along.

Thank you.

Thanks, Tom.

Appreciate you.

Thank you.

Todd Fowler.

Thanks. Good morning, everyone.

Hi, Todd.

Hi, Todd.

Hi, Judy. Hey, Michael. Just a point of clarification on one of the earlier questions there. I know that you don't give guidance going forward, but you talked about the fourth quarter and you said that the sequential trends within the margins you could operate at a loss. Those comments were isolated to the ABF freight segments for the total Company --

Yes.

Okay. Just wanted to make (multiple speakers)

Yes, absolutely, and actually thanks for that clarification because when you look at the success that we're having in some of our emerging businesses and we expect that to continue in the fourth quarter, that's a -- those results will be a positive in the total picture.

Right. That's what I was trying to get at. Thank you.

Yes.

And then, I guess, for my main question, if I think about the second part of 2011 and the first part of this year, it feels like that was the period where there was a lot of pricing work that was done and you saw that impact on the yields. You also saw some impact on the tonnage.

Going forward into 2013, would your expectation at this point be that you can grow tonnage in line with what the market is doing at this point? And you made some comments about some market share data and actually some improvement there. But I guess, thinking about 2013, should we start to think that yields and tonnage are going to grow more in line with the market going forward? Thanks.

Well, Todd, I think once you get past the first quarter of 2012 where we were -- even then we were continuing the larger price effort to get our base of business back where it needs to be. Once you're beyond that I think you do start to see some more normal activity as far as comparisons, price improvements and that sort of thing.

It depends on the economy whether we will be able to grow tonnage levels. As we've seen in the third quarter, that that is definitely a factor. It's my hope that we'll see something that is more encouraging than that in 2013, but most economists are not saying something along those lines. Typically you have to have better GDP growth than we had in the third quarter to see more robust freight environment. And so, 2013 will be a challenge as long as that's the case.

Right. But from a Company specific standpoint, I think this was, again, one of the earlier questions, I mean, you are where you need to be from a yield standpoint with where your cost structure is where you feel that, and so there's not going to be --

Let me say this. On yields, we need to continue to increase yields. Our yields are not where we want them to be.

But I mean, if the market's mid single digit type yield increases, obviously, I mean you're going to be doing your own work to move that up as well, but there's nothing specific like we saw going back a year or so ago that you're thinking about, I guess, from a strategy standpoint going forward?

No, no. I mean, there's nothing that we can point to in 2013 that really makes it unusual from a kind of a customer negotiation business as usual standpoint. It's more about the economic conditions that we will be facing in that year. And as you mentioned before, we expect our emerging non-asset based businesses to continue to grow. We've seen some terrific growth in some of those companies and we expect that to really outpace kind of normal economic activity in 2013.

Okay. Thanks a lot for your time.

Hi, Todd. We're going to move along.

Okay, David. Thank you.

Thanks.

Appreciate you.

Anthony Gallo.

Thank you. Good morning.

Good morning, Anthony.

I just want to go back to this pricing comment. You said that pricing was rational and stable and Conway said the same thing. And I'm curious, in a capital intensive industry, where the leaders are all operating at low single digit margins, why capacity shouldn't be -- being pulled and why pricing shouldn't be being pushed a lot higher? That would see more rational to me.

We would support that kind of activity. Well, I mean, you're going out there and it's deal by deal. You're working on each account deal and I think our people are as good as anybody in the market at getting the best that we can for that particular deal. And I think that pricing is in a much better place than it was. But I think I commented a minute ago that it needs to get a lot better. And we're still -- even with the accelerated price increases that we did last year and increases this year, we're still at maybe 2008 pricing levels, something like that, and you what our costs have done over the last few years since 2008. And so, it's clear that prices for our Company need to continue to move up and we hope that we'll have market conditions that allow us to do that.

If you don't get the help from the Teamsters that you need, will you think about or will you consider pulling capacity out of the market?

Well, you've seen what we're doing for this year. We're reducing our equipment by 8%.

I'll take that as a yes. Thank you, Judy.

Thanks.

Thanks, Anthony.

Bruce Chen.

Yes, good morning, Judy, Michael and David. It looks like --

Hi.

-- we would get a fresh [ISM number out of] 51.7, which is encouraging.

Well, good.

Yes.

Would you say once again, Bruce?

It looks like 51.7.

Good.

So that's pretty good news. But unfortunately soft freight levels are still something that you've to live with in the past couple of quarters now and may or may not resolve itself depending on what happened in the next week or so, and obviously depending on some larger issues outside our control.

A couple of your competitors have undertaken some cost management programs, some targeted productivity improvement programs, line haul optimization, sophisticated pricing software and continue tech rollouts to address some of these facts, and maybe deal with, and I'd say, new normal level of tonnage.

And certainly you've done a lot with yields in addressing labor costs as a big piece of the puzzle, perhaps more for you than for others. But can you remind us of how ABF specifically is responding to some of the other issues on the expense line? I know you have in-house software and you've talked about increased rail usage. But are there any other specific targeted efforts that you can maybe call out or remind us of, what's the next step here?

Well, for many, many years, we have had effective use of technology in our Company and it's interesting to see some of the others that we compete with begin to do some of the things that we've been doing for maybe 10 years, and we're glad of that, because the smarter marketplace makes things better.

But from a cost standpoint, we have over the years, really in response to the recessionary environment, done a number of things to address our situation. That is not to say that we don't have many, many more. One of the things that we constantly do is evaluate the size of our network and whether it is appropriate for the business levels that we have, we look at freight flows, we study optimization models and that -- you may not have observed this, but for instance, whenever I first came to the Company 15 years ago we had 311 facilities, I think, and today we have 277. And there was not any one big change in there, but it was just a constant evaluation of the right size for the Company. You've also seen us talk about a balance of utilization of rail with our line haul network and the appropriate needs and equipment levels that we have to serve our business. But we've -- on the non-union cost side, we've done a number of things to reduce costs. We have had to pass along more of our health care cost increases to our employees back several -- a few years ago.

We had to freeze our defined benefit pension plan and put the people that began to work for us after that over into a defined contribution plan. We've suspended 401(k) matches at times. And unfortunately not made contributions to our defined contribution plan, all in an effort to try to lower the cost of the Company. And there are other areas that we are looking at to accomplish even more cost reduction.

I do commend our competitors as well as our Company for approaching cost issues in more of a lean fashion because if we deal with these lesser levels of freight for some period of time into the future our Company as well as the companies we compete with are going to have to be more efficient. And that's something that is going to be important to have a successful business model going forward.

Okay, that's very helpful.

Hi, Bruce. I think we are going to move along. And, Amanda, I think we have got time for one more question.

Matt Brooklier.

Hey, thanks. Good morning.

Good morning.

I jumped on a little bit late. I heard that October tonnage or tonnage per day was trending down 4%. That was inclusive of the impact from Hurricane Sandy?

Yes.

Is that correct?

Yes.

Did you -- have you given --

It was 2% before that.

Okay.

Kind of before we had that impact, we were estimating about 2% decline.

Okay, so pre-Sandy, 2%. Okay. That was the question. And just secondly, where are we with respect to the cross-selling initiatives with Panther? I think that was part of the rationale for the purchase. Where are we in that process at this point?

Well, we have had some wins, with that whole process, pretty quick wins. Just to give you a picture of some of those, Panther now covers about 85% of the [ex-med] time-definite business that ABF has, which -- that moves that can't be handled within the ABF network because of time constraints and that sort of thing. And so, Panther has really moved up and in terms of the solution there for ABF customers just to make sure that we handle all of their needs. And again, these needs will be beyond what can be handled in the ABF network.

We also -- FleetNet, our emergency growth side and preventative maintenance company is handling all of Panther's business there. And so, that's been a good account addition for FleetNet as well. And there is a number of other areas -- we're looking at sales strategies, global forwarding, best-in-class solutions for customers and doing some LTL specialized services even that Panther generates that can move through the ABF network.

And so, there's a good list both teams at ABF and at Panther and then as well in some of our other subsidiary companies are working hard to try to get the best answer for our Corporation and for our shareholders and I commend them for doing that.

Okay. Okay.

So it's been good.

That's good to hear. Thanks for the time.

Thank you.

Thanks, Matt. Amanda, I think we're done and I just want to thank everybody for joining us this morning and we appreciate your interest in Arkansas Best Corporation. This concludes our conference call. Thanks a lot.

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.