ArcBest Corp (ARCB) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the ArcBest Corporation fourth-quarter earnings conference call.

(Operator Instructions)

As a reminder this conference is being recorded, Wednesday, February 4, 2015. I would now like to turn the conference over to Mr. David Humphrey, Vice President of Investor Relations. Please go ahead, sir.

Welcome to the ArcBest Corporation fourth-quarter 2014 earnings conference call. We'll have a short discussion of the fourth-quarter and full-year 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 ArcBest Corporation; and Mr. David R. Cobb, Vice President and Chief Financial Officer of ArcBest Corporation. We thank you for joining us today.

In order to help you better understand ArcBest 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. In order to provide meaningful comparisons, certain information discussed in this conference call includes non-GAAP financial measures, as outlined in the tables in our earnings press release. We will now begin with Ms. McReynolds.

Thank you, David, and good morning, everyone. We have a lot to talk about today as we wrap up another important year for our Company. As most of you know, since May 1 we've been known as ArcBest Corporation, launching a new era as we look to provide the holistic transportation and logistics solutions our customers expect.

But, first, I want to welcome David Cobb as our ArcBest's new Chief Financial Officer. David joined our Company in 2006 as ArcBest's Controller. I've worked closely with David, and he's done a great job for our Company. I look forward to David in his new role as he applies his business, finance, and acquisition experiences for the benefit of our Company and our shareholders. I also want to say how pleased I am that our former CFO, Michael Newcity, will be leading our information technology group and guiding our Company in the exploration and improved understanding of new technologies and business innovation. I thank Michael for his service as our CFO.

I would characterize 2014 as change for the better. Following closely on the success of 2013, this was another pivotal year in the history of our Company as we adopted the ArcBest name, a new stock trading symbol, a unified logo system across all of our companies, updated brand positioning, and so much more. ABF Freight continued on its path to better profitability and increased market share through improved service levels in the second half of the year. ABF Freight won the coveted ATA President's Trophy for safety an unprecedented seventh time. And three of our drivers were once again selected as ATA's America's Road Team captains.

Simultaneous with those successes and improvements at ABF freight, we also worked hard to give our customers more of the services they expect from a forward-thinking transportation and logistics partner through our emerging businesses -- ABF Logistics, Panther Premium Logistics, and FleetNet America. We are better equipped to offer more easily accessible solutions through a single point of contact at our enterprise customer solutions group. And our ability to provide the options for logistics services, including the certainty of an asset-backed solution, is resonating well with our customers. I'll talk more about this in a bit.

And now, David Cobb will cover the details of our results for the fourth quarter and the full year of 2014.

Thank you, Judy, and good morning, everyone. ArcBest's fourth-quarter 2014 revenues increased 15%, to $665 million. Earnings per share were $0.53 for the quarter, compared to $0.38 -- or $0.31 in the prior year on an adjusted basis.

Our effective tax rate for the quarter was 26%. This is below the expected rate of around 37% to 38%. Tax legislation signed in late December of 2014 extended the tax credits related to alternative fuels that previously expired at the end of 2013. As a new tax legislation that was enacted in December included a retroactive tax credit for all of 2014, this year's fourth quarter includes the full-year tax benefit of $1.2 million. The tax credit actually earned in the fourth quarter, which is comparable to the prior-year quarter, approximates $300,000, with the remaining $900,000 associating with the first nine months of 2014.

During the fourth quarter of 2014, we also benefited from our life insurance program, including market returns on the assets. This is reported below the operating income line in other income and increased earnings by about $1 million versus last year's fourth quarter. For the full year, the income related to this program was the same as 2013.

In summary, including the non-GAAP items in the table in the press release, earnings per share for the fourth quarter include the negative impact of the pension settlement charge of $0.03 and benefits of approximately $0.11 due to the favorable tax rate and increased non-taxable insurance income. The positive impact on earnings per share netted to approximately $0.08 due to these items.

For the full year of 2014, consolidated revenues totaled $2.6 billion compared to $2.3 billion in 2013, an increase of 14%. Full-year earnings per share were $1.69 compared to $0.59 in 2013. Adjusted for the non-operational items identified in the release, 2014 earnings more than tripled, to $1.82 per share, compared to $0.55 per share in 2013.

Our effective tax rate for 2014 was 34.6%. This year's tax rate was also favorably affected by the items that impacted the quarter rate, as well as net reductions and valuation allowances on deferred tax assets, which for the full year equaled $700,000. Included in the earnings release is a tax rate reconciliation table. We expect our 2015 tax rate to be in the range of 37% to 40%.

Our results were also affected by the two-class method used for calculating earnings per share, which requires the allocation of a portion of dividends net income to the invested restricted shares in determining the per-share amounts. For the fourth quarter, the impact of this method was about $0.03 per share. For all of 2014, this equaled $0.09 per share.

As a result of recent changes in our restricted stock program, we will return to the traditional Treasury Stock method of calculating diluted earnings per share beginning in 2015. Under this method, there is not an allocation of income to invested restricted shares. However, shares used in the calculation will increase approximately 3% for the potential dilutive securities. This will generally result in a higher-calculated earnings per share compared to the two-class method used in recent quarters.

Full details of our GAAP cash flow are included in our earnings press release. We closed 2014 with unrestricted cash and short-term investments of $203 million. Combined with available resources under our accounts receivable securitization agreement, our total liquidity under these agreements was $258 million at the end of the year.

Our total debt at year end of $128 million included a remaining $70 million balance on our five-year term loan associated with the Panther acquisition. In early January of this year, we refinanced the outstanding $70-million balance on the term loan into a new, five-year $150-million revolving credit facility. This revolver facility has an accordion feature that allows for additional $75 million in funded amounts. In addition, we executed an interest rate swap beginning January 2, resulting in an effective fixed rate of about 3.1% on $50 million of borrowing for five years.

Finally, at the beginning of this year, we amended our receivable securitization to extend the previous June 2015 maturity date to January 2018. Earlier this week, we added Panther and other subsidiaries as participants on the agreement and increased the facility to $100 million from the previous $75 million. This agreement also has an accordion feature, allowing for an additional $25 million. With the changes in these agreements, we have increased the amount and availability of our liquidity, added flexible borrowing and payment options, and have extended the maturity dates.

ABF Freight reported fourth-quarter revenue of $486 million, an 11% increase compared to last year. ABF Freight's quarterly tonnage per day increased 9.4% compared to last year's fourth quarter, with monthly year-over-year tonnage increases of 11.4% in October, 8.8% in November, and 8% in December. On an adjusted basis, ABF Freight's fourth-quarter operating ratio was 96.8% compared to 98.2% in the prior year. ABF Freight's fourth-quarter total billed revenue per hundredweight was $29.34, an increase of 3.1% versus the fourth quarter of last year.

Because of decreases in diesel fuel prices, the range of ABF Freight's fourth-quarter fuel surcharge percentages this year was below that of last year's fourth quarter. This impacts the year-over-year comparisons of revenue per hundredweight changes. ABF Freight's total weight per shipment was 1,312 pounds, 1.1% below that of last year's fourth quarter. This was primarily the result of steps taken to reduce the number of full truckload shipments handled in the ABF Freight network. The average shipment size in the core LTL business increased over last year. ABF Freight's average length of haul was 1,026 miles compared to 1,011 miles in last year's fourth quarter, an increase of 1.5%.

ABF Freight results for the month of January 2015 versus January 2014 are as follows: preliminary daily revenues increased approximately 8%; preliminary total tonnage per day increased approximately 4%; total revenue per hundredweight increased approximately 4%. As a reminder, the recent historical sequential change in ABF Freight's operating ratio has been an average increase in the first-quarter operating ratio over the fourth-quarter ratio of approximately 4 percentage points.

Effective today, February 4, ABF Freight revised its standard fuel surcharge program. We believe this revision will better align fuel surcharges to our fuel and energy-related expenses and provide more stability to account profitability as fuel prices change. Revised program will impact approximately 40% of our shipments and will primarily affect non-contractual customers.

For the full year of 2014, ABF Freight reported revenue of $1.9 billion versus $1.8 billion in 2013. ABF Freight's 2014 total tonnage per day increased 6.6% versus the previous year. On an adjusted basis, ABF Freight's full-year operating ratio was 97.1% compared to 99.3% in 2013.

Our emerging businesses generated strong revenue growth versus last year's fourth quarter, increasing 25% to $187 million. Fourth-quarter EBITDA for these businesses totaled $9.4 million compared to $8.2 million in the prior-year quarter.

In spite of comparisons and strong results in last year's fourth quarter, Panther completed 2014 with good performance in the fourth quarter. Revenue was $80 million, an increase of 19% over the prior-year quarter. Panther's fourth-quarter EBITDA was $6.7 million, an increase of 13% compared to the fourth quarter of 2013.

For the full year of 2014 ArcBest's emerging non-asset base businesses accounted for 27% of total consolidated revenue, increasing from 25% of total revenue in 2013. Five years ago, the non-asset base businesses accounted for only 7% of total consolidated revenue.

I will conclude with some details about our CapEx. In 2014, ArcBest's net capital expenditures totaled $86 million, including approximately $65 million of revenue for ABF Freight and Panther. Depreciation and amortization costs and fixed assets equaled $82 million.

For 2015, net capital expenditures are estimated to be approximately $200 million. This includes revenue equipment purchases of $102 million for ABF Freight and Panther. The majority of the revenue equipment purchases are for road and city tractors and trailers at ABF Freight to replace both existing equipment and local rentals.

ABF Freight is increasing the number of tractor and trailer replacements in 2015 to take advantage of improved fuel economy with the new equipment and will rapidly replace used equipment and reduce maintenance cost. Panther will be replacing some dry vans and adding some life science trailers.

Expected real estate expenditures totaling approximately $55 million are for previously disclosed growth initiatives at ArcBest and its operating subsidiaries. These include freight service under construction, call center facilities, and needed office buildings, a portion of which replaces leased office space.

ArcBest's depreciation and amortization costs on fixed assets in 2015 are expected to be in a range of $95 million to $100 million. Now, I'll turn it back over to Judy

Thank you, David. ABF Freight experienced increased demand for LTL services from both existing and new customers in a marketplace with tight capacity during the holiday shipping season. As a result, ABF Freight increased fourth-quarter revenues and improved its operating results versus the fourth quarter of 2013. While maintaining a high level of service, progress was made during the quarter to improve system efficiencies and productivity. ABF Freight's operational team has worked diligently to respond to the challenges of servicing our customers in the midst of significant business growth.

During the quarter, customer pricing at ABF Freight was enhanced by the early November implementation of a general rate increase, impacting one-third of ABF Freight's total business. We also successfully concluded negotiations on contract-deferred and profit improvement business opportunities during the quarter. These increases averaged 5.8%, which equaled the highest fourth-quarter increase of these types of accounts in the last 15 years.

The growth and improvement in ABF Freight's full-year 2014 results reflected a healthier economic environment; necessary reductions in costs and enhancements to operational flexibilities associated with the current union labor contract; network modifications implemented during the year; and improved pricing that reflected marketplace constraints on available transportation capacity.

As you know, through carefully planned investment, we have expanded far beyond our core LTL services offered by ABF Freight to include complementary services like truckload brokerage, rail, warehousing, and global ocean shipping from ABF Logistics, and Panther premium logistics through -- excuse me, premium logistics through Panther. Panther had another outstanding year in 2014. During a period of capacity constraints in the marketplace, continued demand for Panther's specialized services was evident across all the markets it serves.

Shipment growth was realized from existing shipper relationships and significant new customers added throughout the year. Panther's ability to effectively respond to the demanding requirements of its customers was enhanced by growth of its owner/operator fleet and of its agent network. Throughout the quarter, Panther also had success in offering its services in conjunction with other subsidiaries across the ArcBest enterprise.

As demand for truck brokerage services continued to be strong, ABF Logistics added new customers and effectively developed existing shipper relationships. Increased success in offering its services to customers at other ArcBest subsidiaries was another positive factor in their revenue growth during the quarter. Fourth-quarter operating income was slightly below last year, due to lower gross margins and continued personnel investments for the future.

We believe the ongoing investments in people and IT systems ABF Logistics has made throughout the year will contribute to successfully achieving our strategic growth initiatives for the future. With the strong growth ABF Logistics has experienced in this last year, we've added a lot of new folks who have very little experience with our Company or in their jobs. Productivity improvement, sales growth, and margin increases have a direct correlation to employee tenure. As ABF Logistics employees gain experience, and the IT systems available to them are enhanced and expanded, we expect to realize greater benefits in the future.

In early January, ABF Logistics announced its acquisition of the Smart Lines Transportation Group, a truckload brokerage company located in Oklahoma City. This acquisition expands ABF Logistics' footprint outside of Fort Smith to a location that offers many opportunities for business growth and the addition of new employees needed for that growth. I've talked about our plan to grow the emerging businesses both organically and through acquisition of companies that make sense for us based on the services they offer and the corporate culture they display. We believe the Smart Lines purchase is a perfect fit for the ABF Logistics team on all these fronts.

While FleetNet America experienced revenue growth during the fourth quarter, it was limited by changes in event levels with certain roadside customers and milder-than-expected weather, especially compared to the significant weather events that benefited FleetNet in December of 2013. Fourth-quarter growth of fleet maintenance business was the result of additional business with both new and existing customers. Operating income declined because of labor inefficiencies resulting from the addition of personnel, renew account activity, as well as the impact of higher-than-expected medical expenses.

ABF Moving experienced strong growth in the fourth quarter versus the same period last year, primarily related to its consumer moving business. Its slight fourth-quarter profit reflects a significant improvement over 2013 and was positively influenced by better cost controls and ABF Moving's improved ability to source equipment capacity.

As I mentioned earlier, in January, three ABF drivers were named as captains of the American Trucking Association's 2015 to 2016 America's Road Team. The recognition of drivers Kirk Weis, Bill West, and Chad Miller gave ABF three persons on this year's prestigious industry safety team. Kirk, Bill, and Chad have each driven professionally for over 30 years, with more than 3 million accident-free miles.

They continue a proud tradition at ABF Freight, as we've been represented on every America's Road Team since 1991. This is the third consecutive team to include three ABF Freight drivers. Safety is of utmost importance and a focus at ABF Freight. We are the only seven-time winner of ATA's President's Trophy for safety, the most prestigious safety award in the transportation industry. We are pleased to have Kirk, Bill, and Chad representing ABF Freight and our industry in this manner. These kinds of achievements throughout our Company strengthen the current services offered to our customers and allow us to focus our resources on developing new ways of enhancing our product.

Also last month, ABF Freight President, Tim Thorne, joined representatives from the Teamsters and the US Army in announcing a joint training program to help soldiers transition from the military service to civilian careers as professional truck drivers. This program will allow qualifying soldiers to receive training to earn a commercial drivers license. Both classroom instruction and hands-on driver training are offered during the soldier's final weeks of enlistment. This helps pave the way for a career path as a professional driver with ABF Freight.

Because Tim Thorne is a former veteran and part of his family's three generations of military service, he's committed to the success of the new ABF Freight partnership. We are proud of Tim's service on behalf of our country and the service of former military personnel throughout our Company. Hiring military veterans at ABF Freight is a win-win.

Earlier, David Cobb provided the details on several financial actions we've taken since the first of the year that put us in a better position to meet our growth objectives for the future. We've increased our credit line and improved our liquidity and borrowing capacity, all while lowering our pricing and relaxing our covenants. Our ability to make these changes reflects ArcBest's improved risk profile and our positive outlook for the future. These recent changes are consistent with last October's increase of our quarterly dividends to $0.06 a share, twice the previous level.

Our updated banking agreements give us total maximum borrowing availability of $350 million. The dividend increase improves the return our shareholders receive. We are now even better equipped to organically grow our companies and to act on acquisition opportunities that broaden the logistics services we offer, all while enhancing shareholder value.

In summary, all of our efforts to better serve our customers have borne fruit as ArcBest's revenue has risen to about $2.6 billion at the end of 2014 from $1.5 billion just five years ago at the end of 2009. More customers are now buying two or more services from the ArcBest companies. And, as I mentioned earlier, 27% of our revenue is now generated by the emerging businesses. Together, in 2014, the emerging businesses generated EBITDA of over $40 million, a 45% increase over 2013.

Overall, while we still have more work to do, we're now doing a much better job connecting the dots for our customers about the breadth of our services that we offer in the supply-chain spectrum. A new tagline called The Skill & The Will and the accompanying website, theskillandthewill.com, devoted to customers' and employees' success stories, help us articulate what we do every day to go above and beyond for customers. I feel confident that this focus on exceptional customer experiences will help drive future improvements for shareholders as well.

And now, I think we're ready to take some questions.

Yes, I think we're ready to do some questions.

(Operator Instructions)

Bill Greene, Morgan Stanley.

Yes, hi there, good morning.

Good morning, Bill.

Judy, I wanted to ask you for some thoughts on first-quarter trends. Maybe you could talk a little bit about what you've see in tonnage. But also, given the fact that we'll have the two GRIs, we've got some productivity improvements going, I'm curious how you think this might affect the sequential change in the [OR].

I know you don't give guidance. But typically it would deteriorate, and we'd think, if you follow history, we could actually have an OR above 100, but it doesn't feel like that's the right call here. So maybe you can give some thoughts on color around that too.

Well, I'll start with your first question, which is related to trends that we're seeing so far. And in David's commentary, he gave an update on the tonnage improvement that we experienced in January for ABF freight, which is about 4% of an increase, and also that coupled with 4% price increase for a total increase of revenue of about 8%.

So that, I think, gives you a good read on where ABF freight is in January. With respect to the other emerging businesses and just the overall environment, I would characterize January as a little softer.

If you remember, there was some severe weather activity in last-year's January, and that would benefit both the FleetNet business and our Panther business. And so we're going to be comparing back to a more significant, I think, weather disruption scenario last year than we have this year so far.

And if you look at some of the demand indicators in the brokerage business or in the spot business in general, just a little bit softer there. But we feel like January is a month that is difficult to really read into with what 2015 will be like. And we're waiting for more to come.

So I think that may answer your question. We don't give guidance. When you look at the sequential history for ABF freight, we would have about a 4% increase in the operating ratio, which as you point out, would indicate a slight loss, I think, for ABF freight.

You do have the factors that you mentioned, which we had a GRI late in the year, which is not normal when you look back in history. And we also have the pricing results that we've seen on our contract and deferred increases, which are good.

I think it was up 5.8% in the fourth quarter. And in January, that figure is close to 5%. I think it's 4.8%, so we're seeing some good indications on the pricing side.

I was just going to add, just on the cost side, is it still going in the right direction? Do you still have momentum behind that as we want to think about OR for -- okay.

Yes, we have continued to see modest improvements in productivity. If you look at our hiring patterns, we're hiring fewer new people. So the percentage of people that are with us less than a year has declined.

And we're also seeing some better trends in terms of transportation that we purchase, as well as we're returning rented equipment and lower cartage costs. And so those are all good signs for improvements on the cost side.

That's great. Thank you so much for the time

Thanks, Bill.

Chris Wetherbee, Citi.

Hey, thanks, good morning, guys.

Good morning, Chris.

I wanted to ask a question on fuel. Just curious as we think, and it sounds like you've made some adjustments to the fuel surcharge mechanism in here in February.

As we think about 2015 with lower fuel prices, how does that play through the P&L for freight? Is it a modest net positive, negative, or is it more neutral? Just trying to get an understanding how we're thinking about that these days.

Well, when you looked at the impact of lower fuel prices on our account profitability, as these fuel prices were low, there was a negative effect. And so with the adjustment of this rate structure, we feel like those will be addressed.

We'll have fewer account-related issues that would be driven by some sort of fuel result. And so we feel like that this rate structure change is really appropriate for the progression of fuel prices and the impact on our business.

Okay, so it offset some of that negative impact you were feeling or potentially feeling, I guess?

Certainly, it addresses that impact

Okay, and then just one bigger picture question. You mentioned some of the things you've been doing financially to increase liquidity, bring down interest expense. As you think about the business a year or two out and the mix, where can you take it from a non-asset perspective?

I'm guessing that's going to be the focus of potential acquisitions down the road. Just want to get a rough sense of how you envision it, and how you put to work that additional financial flexibility that you gained?

Well, we've set out a goal for our Company to be a $3 billion company by the end of 2015. We'd like for our emerging businesses to be $1 billion of that total. And we made significant progress on that this year.

The revenue total is above $700 million for those businesses as we close out 2014. We really believe as we go beyond 2015 that there's even more room for the emerging business growth as a percentage of the total business, although, there is tremendous growth opportunity for ABF freight as well.

We've seen much better trends on the LTL side. I think in this environment LTL or asset-based networks are valued more. And we're seeing some great combinations of services that we can offer to our customers that have non-asset and asset combinations where there is a need for some kind of guaranteed service.

And so we're really pleased with how things are coming together. We have our enterprise group formed and working. And that's all for the benefit of our customers.

And we really, again, are pleased with the progress that we made on that in 2014. And we're really looking forward to seeing the benefits of it as we go into the next few years.

Great, thanks for your time, guys. Appreciate it.

Thank you.

Brad Delco, Stephens Inc.

Good morning, Judy. Good morning, guys.

Good morning, Brad.

Judy, I wanted to just ask you a quick question thinking about the balance of growth in Arkansas best freight. Good top-line tonnage, good yields, but do you think it makes sense to kind of curb some of that tonnage growth and focus more on yields? Maybe just comment on that and your thoughts there?

Well, Brad, as you look at our results, I've talked about the GRI that we implemented in November, the contract deferred pricing increases that we experienced in fourth quarter, and what we've experienced so far in January. I would suggest to you, as we always have, we're focused on yield. You can see that very clearly, I think, in the numbers.

And so when we look at tonnage growth in our business, we want to be sure that that growth is good for us. It's effective for our LTL customers and customers that are regular for us that do business with us quarter in and quarter out. And we have managed the tonnage levels of the spot business down, or our tonnage increases could have been greater.

But we enjoy both growth in tonnage and in pricing. And we want that to continue. And so I think our team is very focused on the right kind of business and making sure that we're bringing that profit to the bottom line. We've really begun, I think, to see some improvements there, particularly toward the end of the year.

Got you. Maybe just a quick follow-up. You don't tend to think about where the margins are in LTL and whether or not it makes sense to grow tonnage with where the margins are relative to the growth you're seeing in emerging asset business?

Well, I think we have a focus on how to spend the investment dollars we have available to us in the best way. But I can tell you that what's interesting is as you're growing the emerging businesses, you also get better business opportunities on the asset side as well.

And so you wouldn't want to do one and kind of be siloed in your thinking relative to the other because what's so good about our approach is that it actually results in better business opportunities for all of our business units. And I'm talking particularly in the transportation part. Obviously, that wouldn't affect FleetNet.

We really, when you look at the profitability of our accounts at ABF, we say this all the time, it's on an account-by-account basis. So you're making the decision, an incremental decision, about what's best for you each time you make an evaluation of that account.

And so we're continuing to do that. And then as we have investment dollars, you've seen us spend those dollars to add some scale to these emerging businesses. We feel like that gives us an even better opportunity to grow our entire Company.

Got you. Thanks for the time; appreciate it

Thanks, Brad.

Todd Fowler, KeyBanc Capital Markets

Great, thanks. Good morning, everyone.

Hi, Todd.

Hey, Judy, good morning. Can you give us some thoughts about how you think about returning to a normalized margin level within the freight business? Obviously, you saw nice margin improvement in 2014, but I also think that there were probably some things that worked against you, if it was purchase transportation or the efficiencies of the employees. How do we think about the level of margin improvement that you can see over the next couple of years, what sort of rate of improvement we should be expecting?

Well, we are focused on returning ABF freight to historic profitability levels, but that's a multi-year effort. We've made some progress this year. Honestly, I would have liked to have seen even more progress made this year.

As we go into 2015, we've got many additional opportunities for improvements. Obviously, the productivity of our newer employees, we're gaining ground on that all the time, but we still have work to do there.

Our newer employees tend to have or create more issues in the cargo-care area. Again, we're seeing improvements on that, but we still have some work and a ways to go there. We have some work to do as we're doing this year with our capital program to improve the age of our fleet for the best total cost of ownership outcome for our Company.

So we expect to see improvements in maintenance cost trends, in fuel efficiency, and that sort of thing. And then, our investments that we're making in our service times is really going to benefit us in bringing additional market share to us to the extent that we improve things there. So I could give you two or three more, but I think those are significant enough.

Okay, no, that helps. And so basically the message is that there's things that you can still continue to do outside of just the market factors, the volume and the pricing, to continue to move the margins in the right direction?

Absolutely.

Okay, good. And then, just for my follow-up to your point on the investment in the fleet. It feels like that there is going to be a pretty big step up in depreciation expense into 2015 versus where it had been in 2014. How should we think about that?

Is that going to be a drag on the overall margins of the Company? Or do you have enough visibility where you're going to see, if it's on the non-asset side, increased revenue, and on the asset-based side some improvement in maintenance and those sorts of things where you're able to offset that? You're basically able to absorb the higher depreciation expense from a margin standpoint?

Hey, Todd, this is David. You're exactly right. With the improvements in both fuel efficiency maintenance, we believe that will offset, largely, the depreciation impact that you're talking about. You're spot on.

Okay, and then what about on the non-asset side, David?

In terms of the Panther CapEx?

Right.

That is incremental business primarily for Panther's life sciences trailers, for instance, in some cases replacing rental trailers. They are the only one that has -- they're sort of asset-light on the trailers. Replacing those lease trailers that they had, legacy, from the acquisition will improve costs there too.

Okay. Thanks a lot for the time, and congratulations on the good quarter and good year.

Thank you.

David Ross, Stifel.

Yes, good morning, Judy. Good morning, gentlemen.

Hi, Dave.

On the LTL savings, if you look at ABF freight, Judy, we talked in the past about the new labor agreement that you guys got over a year ago as having $55 million to $65 million in annual savings. And then the network changes that were talked about in the first quarter of last year were in the $10 million to $12 million savings range.

The operating income at ABF Freight only rose about $40 million year over year in 2014. And I know there was some issues in 1Q with the weather holding that back.

But given the strong tonnage in pricing environment, I would've expected to see more of those what I would call $65 million to $77 million in savings come through. So could you talk about what may be holding that back? Or where that stands in terms of are we really going to get those savings, not get those savings?

Well, to back up, and I think you've articulated those numbers and details well. But when you look at 2014, really what we're missing in the discussion as you laid it out, is the fact that we did have a significant productivity improvement -- I mean, excuse me, inefficiency. We needed significant productivity improvement.

And that is the issue. And so when you look at the contract savings, what we got from the wage and other vacations, reduced costs. If you look at the network savings, as you mentioned, those things were offset by productivity declines. And when we talk about the opportunity in 2015, it is significant.

And we have gotten the contract savings that we believed that we would get. The network redesign savings are somewhat less than what we felt like they would be in the beginning. And that's because we have grown, and as you grow, those savings tend to be a little bit less.

And so, again, as I look at it, we close out 2014 -- I think I mentioned a little bit ago that I would liked to have seen a better result. And I would have. We certainly have the opportunity for improvement in 2015 in that productivity area and also, as I mentioned, with our cargo care, and our equipment management, and many other things.

And then just to follow up on the productivity comment with the inefficiency. Was that due to higher volumes that came on board in 2014 not being handled as smoothly because you had to bring the new people on board? Or was there some issue with the unions slowing down their work as a payback for the concessions they just had to take?

Actually, Dave, that's a natural thought that you could have about our situation. But as we looked at it and as we have the ability to reflect on the improvements that people are making, you can clearly see that it was from the business. We hired the people, it was just the newness of the people to our business.

Something that was interesting, and we talked about this a couple quarters ago, we are adding dock workers to our Company that have never driven a forklift before. And so you're in an environment where you don't have access to as many experienced people from the industry to hire.

And so that created more of a significant issue than what we've seen in the past. But I think we also mentioned that this was the greatest sequential growth in 15 years for our Company. And so when you're experiencing that, you're bringing on a significant number of new people.

You're also doing things like renting equipment, using cartage, and other expensive ways to deal with that growth. You'd certainly have an opportunity for some better results as that settles down. And we're doing all of that in the spirit of best serving our customers, and so, again, as we look to 2015, we've got a lot of possibilities for improvement.

It sounds like 2015 is a good year for yield management. Thanks.

Yes, and we agree with you.

Thanks, Dave.

Art Hatfield, Raymond James

Hey, morning, everyone. Hey, Judy, if I could just continue to follow up on Dave's question. Based on what you said, it would lead me to believe that the potential headwinds you saw could be in the $25 million to $30 million range on an annualized basis.

One, am I in the ballpark there thinking about that? And two, could you talk about where you are, what inning, for lack of better words, in recapturing some of that stuff? And if so, where you're at today, what, if any, headwinds may you have in 2015 as you work to get back to where you want to be from an efficiency standpoint?

Well, the number that you mentioned, Art, is a material number. And what I'd agree with you on is this is a material effect. And so we don't get in to giving the dollar values attached to some of those details because we know you have your model and your way of calculating those.

But it certainly is a material effect. When you think about the inning that we're in, I think the figures are right -- maybe the two Davids that are sitting here can verify this -- but I think the percentage of employees that we have that are under a year in the fourth quarter is maybe 27% versus 15% or something like that last year. Something like that. We --

Yes, that's correct.

We have still a higher number of people that are new with us. But that percentage, if you compared it to earlier in 2014, the early part of 2014 is certainly greater. But as we moved into the second and third quarter, those percentages were higher. So we're kind of coming down.

So maybe we're in the fourth or so inning on this process. We still have a lot of improvement to do. And it will depend on how our growth trends are occurring in 2015 as we see this unfold.

Understand that we have a huge amount of emphasis in this area. Our operational team has made a significant progress. But the management of the details in this area is great, and there is a keen understanding of the opportunity that is here.

And so, again, some of what we've experienced is just better serving customers and gaining opportunities from existing accounts. And so we've heard this, well, why don't you increase prices so that you'll have less of that? Well, this is about serving existing customers, and so we want to be sure that we satisfy our long-term customers.

Great. That's very helpful, Judy. Thank you.

Thank you, Art.

Jason Seidl, Cowen and Company.

Thank you. Good morning, Judy. Good morning, gentlemen. Two quick things. One, could you talk a little bit about your expected pension expense for 2015? And then I have a clarification question on something Judy said earlier.

Are you talking, Jason, about union pension expense or otherwise?

Union pension expense. You can talk about both, actually. I'd love to hear both.

Well, you know that we have terminated our non-union pension plan. So the cost that we see there, the settlement charges that you see there, I'll let David speak to that. And then we can talk more about the union pension side

Jason, on the non-union side it's, as Judy mentioned, we curtailed that plan. But along with that, we have periodic settlement charges, as we've had in this past year. And we expect that to probably continue in the roughly $1 million range per quarter.

So that would be the charge. The underlying, really, cost of that plan is basically zero at this point.

And will those costs go away after 2015?

I'm going to let David speak to the defined contribution replacement of that plan.

That's right. In replacement of the non-union pension plan, we implemented the defined contribution plan, which is a discretionary plan. But it also has an increased cost to it. But it was fully implemented in 2014, so we would expect that to be comparable going forward.

Okay, fair enough.

And then on the union side, we have the plan, I mean the contract that's in place. We make the contributions to it. The contribution increase will be in August for that plan.

I'll let David give you the figures, maybe off-line, that we have in terms of the total dollars for that plan for 2014. But we'll have an increase that's maybe 3% to 4%.

About 3.5%.

For our health, welfare and pension on August 1.

And, Jason, as you know, that's just payed out on an hourly basis based on the number of hours worked by our employees. As we grow, as we work more hours, that number would grow potentially based on that

Okay. All right, perfect. And my clarification question. You mentioned 5.8% on the contractual pricing in 4Q. And, Judy, did I hear you right saying that, thus far in January, you're tracking at 4.8%? Or did I hear that wrong?

That's right.

That's correct? Okay, fantastic. Thank you for the time, as always.

Thanks, Jason.

Matt Young, Morningstar.

Good morning, guys. Thanks for taking my question. On the ABF logistics side, I know it's still small, but what's the current mix of the highway brokerage in that segment? And I think I might've missed it, but could you provide some color on what you're seeing in terms of gross-profit margin trends in brokerage?

Well, in the logistics business, that's almost entirely the brokerage business when you look at the totals that are in the press release. And the margins on that business were slightly softer, I think, in the fourth quarter.

That is primarily driven by growth with larger accounts that when you're quoting a larger account there's more -- you're closer to the market typically on that business. And so we've seen some compression there but nothing significant. And we feel good about our opportunities for growth in that business.

Although, as we bring on more business, it would typically be oriented toward larger accounts and perhaps have a slightly lower gross margin. But we feel like that over time the operating margin opportunity in that business for improvement is really good as we have more of our employees gain experience.

There is a significant difference between an account manager that has over a year of experience with us versus someone that's brand-new. And so we have some opportunities for margin expansion there over time.

So is the sales force dedicated on that front? Or are you overlapping with other divisions on that?

Well, we do have a certain, actually, a pretty small number of sales directors that work in that business, specifically for that business. But we also utilize the contacts and the customer accounts and the sales force at ABF Freight because the customers that we have connections with in that business tend to have a lot of needs, particularly in the truckload arena and the ocean-shipping arena.

And so what we are trying to do there is better satisfy customers with the services that we have. And so we make those customers aware through their contacts perhaps on the LTL side of the other services that we offer. And we're also seeing more interaction with Panther in that mix as well.

Great. That's good color. Thank you.

Appreciate it, Matt.

John Barnes, RBC Capital Markets.

Hey, good morning. Thanks for taking my call.

Hey, John.

Hey, just real quick. We've talked about this before, but the network as it exists today, where did you finish the year in terms of how utilized the network is? And I think this goes back to a question someone was asking earlier just about -- I know it's gotten tighter. I know you've used up more of the network, and you can handle less volume in the peak times.

What do you think you have to do? Is this going to require additional investment in the network going forward, maybe larger than expected? Or is this the point where you start to get maybe even more selective about the type of freight you want in the system?

Well, we're continuing to look at the effectiveness of our network with the customer business that we have, which that's a little bit of a moving target because the customer business you have is always changing. But we do, as you close out 2014 and you look back, we had capacity issues that, obviously, we were having to address those perhaps through some inefficient cost answers.

But by and large, we feel good about the network that we have in place. We do constantly evaluate that. And I would anticipate over the next few years that we, as we always have, will have changes to that.

But we don't think that there's necessarily any large expansion that is beyond where we are today. But we do see that things could change over time. And I think that we are focused on the yield side of our equation.

As I mentioned, we had the GRI in November. We had good results on our contract and deferred price increases for the fourth quarter in January and with the change that we made on the fuel surcharge side to address the fuel impacts. So we feel good about the actions that we've taken there, and we feel like we can manage some growth.

We're seeing in January a lesser growth rate than we experienced in the fourth quarter. And so I think that that presents, obviously, an opportunity for things to settle down. But we want to be sure that everyone understands that we have customers that have needs, and we're not afraid of more of a balance between growth and yield as we go forward.

Hey, John, I'm going to try to move on. We've got a couple more I want to try to get in.

No worries. I'll follow up. Thank you.

Thanks, man.

Rob Salmon, Deutsche Bank.

Hey, thanks, good morning, everyone. Judy or David, as a follow-up to John's question, how should we be thinking about CapEx as we look forward from here? Given that the network's a bit tighter, you're investing more certainly in 2015 regarding your rolling stock.

Should we think about it maintaining at these levels looking forward? Or should it naturally come down as we look out to 2016 and beyond?

Well, I think the large dollars on the CapEx side are really in the equipment area. I mean, you're not really seeing large dollars there for anything related to terminal facilities; although there are some dollars there.

But, Rob, it's very difficult for us to say, out in 2016, where our CapEx dollars will land. We are wanting to reduce the age of our equipment, so we'll probably have more dollars over the next few years to try to address that. But it will really be in the equipment area is what we would anticipate.

Okay. And then as my follow-up in terms of bringing in the puts and takes for 2015. You're expecting to see some continued margin expansion in terms of the strong yield environment. But from a cash- generation perspective, or from a free-cash-flow perspective, can that improve in 2015? Or is the net CapEx going to make that challenging?

Well, I think the additional investments that we're making in CapEx will create a more balanced situation than what you've seen from us. We have, probably, in 2014, a build of cash or resources, where in 2015 you won't necessarily see that as much. Although, our opportunities for financing on the equipment side are good and at low rates.

You know, the investments that we're making in equipment, I just want to pause and say, we really feel good about those. We feel like it's going to bring us some much-needed savings on the maintenance side.

We think that the fuel efficiency attached to those units makes for a good decision as well. And so, in my opinion, if you're going to have a more balanced free- cash-flow situation, it's always good to be able to look at that and say that's absolutely the right decision. We feel good about the decision.

Thanks so much for the time.

Thanks a lot.

[Ari Roza], Bank of America Merrill Lynch.

Hey there, everybody. Congratulations on a solid quarter. Just wanted to understand a little bit better. I was hoping you guys could talk about the M&A environment? And just if you're seeing more opportunities than usual, and where that lies on your priority spectrum?

Well, it's a high priority for us to find good candidates, much like we did with Smart Lines. It's a very small acquisition, but it's one that we made recently. We have a team of people that's looking constantly for those opportunities.

We're primarily focused in our logistics businesses for those opportunities because it could add scale to the businesses. But we're looking for those acquisitions that can best fold in to the existing infrastructure that we have. We immediately folded in the Smart Lines acquisition to be an ABF Logistics branch location.

The systems and all that are integrated at this point, and so we're glad for that. But that's what our intention would be. And we feel decent about the prospects that are out there.

I don't want to be overly encouraging because it really is difficult to get the right candidate and the right situation in order to bring that on board. And so we're patient, but, at the same time, we are very active in looking for the right answers there.

Hey, Ari, we're going to move along. We're trying to close out, and we've got a couple more we're going to try to squeeze in. Appreciate you.

Okay, no problem. Thank you.

Matt Brooklier, Longbow.

Hey, thanks. Good morning. I'll make it quick. Your fourth-quarter purchased transportation costs, have things kind of normalized at this point? I know in 3Q we saw some inefficiencies.

I think rail was part of that equation. But just trying to figure out if your PT costs in 4Q, if that's a good run-rate number to use in 2015?

We had a higher percentage of purchased transportation in other quarters. I think we were down to about 3% utilization of purchased transportation. And I'm talking about truck transportation.

Our rail percentages, if you look at the fourth quarter, it was 13.4% of our miles were on the rail. That compares to 15.5% last year. And really just speaks to our inability to use some rail lanes because of service.

Okay, I guess, my question being, has the network balanced at this point in time? And do you expect this to be the run rate of your PT costs moving forward?

Or do you think things could actually get a little bit better next year, given rail comes back or maybe the truckload market loosens a little bit? I'm just trying to get a feel.

I would hope that things could get a little bit better in 2015. But it is hard to predict because when you're dealing in those areas, particularly on the truck side, you're doing it for a reason.

Typically, because you are balancing empties or because you're trying to deal with a customer service need. But I do feel -- I'll say this, it may be because we're in January, I feel better about it right now than I did at earlier points in 2014 about the balance of that and the options that we'll have in 2015. But, as you know, that could change rapidly depending on the conditions from a capacity standpoint.

I think, Matt, to your point there though, that this is a focus area for us. And the ArcBest team is highly focused on making the best use of purchased transportation.

Okay.

Hey, we've got one more we're going to try to get in, and that will be it. But I appreciate you, Matt.

Willard Milby, BB&T Capital Markets

Hey, everybody. Thanks for the time. I'll try to be real quick. Judy, did I hear you right? The truck PT at 3% this quarter?

Yes.

3.3%.

Got it. And if I could ask a question around fuel. I think around 11%-ish, as a percentage of revenue in 2013 was fuel, fuel taxes, oil and lubricants. What's that level dropped to in Q4, if you have that number, given the precipitous drop in fuel prices?

You know, I'm not sure where your number came from there. But we don't typically break that out as a line item that's on our earnings release, which includes fuel supplies and expenses.

That was running at 17.6% of freight revenue for the quarter.

I was just looking at the annual Form M from 2013 had about 11.4%

Oh, okay, that's a little bit of a different break out that they do.

Well, perhaps we could follow up with you offline. We don't have that in front of us.

Yes, I can follow up with you, Will, on that. Yes. I didn't know what your source was on that.

Okay, yes. That'd be great. That's all I had.

Okay, thank you so much.

Thanks for the time.

Appreciate it. All right. Well, listen, we appreciate everybody's participation. And this concludes our earnings conference call. Thank you very much

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.