Arkansas best accelerates revenue with 'RPM'

Arkansas Business, April 23, 2007 by J.R. Ledford

THOSE GREEN ABF TRUCKS headed down highways could start hauling in even more green for President and CEO Robert Davidson.

ABF Freight System Inc. of Fort Smith has become one of the nation's largest less-than-truckload carriers, generating 97 percent of parent company Arkansas Best Corp.'s $1.86 billion in revenue during 2006. But there is more opportunity, Davidson said, and he's got a plan to accelerate revenue even more.

ABF's Regional Performance Model initiative--RPM, get it?--could add more than $1 billion to annual revenue, Davidson said. In 2005, Davidson and ABF began the RPM operational model, which allows for the continuation of its long-haul service, but also delves into regional markets, using time and prices as leverage against competition.

ABF started with 13 terminals in the Northeast, and success had led to expansion of the model to the Southeast and Central regions of the country. ABF competes against UPS Freight, formed after the acquisition of Overnite Corp., and FedEx Freight of Harrison, and now also pits itself against smaller, regional carriers. "It's the most significant thing this company has done in years," Davidson said.

This momentous new model is costing ABF about one point on its operating ratio of 92.5 percent. ABF did not disclose how much has been invested in the RPM, but the company has forecast expenses of $20 million in 2007. Davidson is banking on good returns. "If we just achieve a modest market share of about 5 percent, which is again modest, in a few years we'll be a $3 billion company, instead of a $1.9 billion company," he said.

Full marketing of the program began in January, and ABF expects to break even on its investments in RPM later this year. Davidson estimated it will take another two to three years to reach that goal of 5 percent market share. Stephens Inc. trucking analyst Thom Albrecht has cautious optimism about RPM.

"I think it's a good initiative," Albrecht said. "I don't think it's guaranteed that it will be successful, but they do need to get into the regional markets--which are typically defined as deliveries made either overnight or second-day deliveries."

Albrecht said ABF needs to jump into the regional market for two reasons: First, ABF's traditional services of third-day or later deliveries are flat if not shrinking. That represents about 60 percent of business.

Second, regional distribution is growing quickly. He said the market is growing faster than gross domestic product, which is about 3 percent.

Albrecht said the regional markets are growing faster because of the just-in-time inventory practices by a number of industries. It's easier to synchronize JIT inventory when shipments are coming from hundreds of miles away rather than thousands.

Davidson said the logistical changes also are related to broader changes in the national economy. As manufacturing moves overseas, distribution has been shifted primarily to finished goods that are shipped into the country. Now people, especially in the retail segment, want more local distribution in areas, for example, around Atlanta or Memphis.

"In the freight below 800 miles," Davidson said, "there's about twice as much tonnage and it's growing faster." Demand for the RPM services will begin with existing customers, Davidson said, already having relationships established, but it also opens a new market.

Business needs are always evolving, and transport companies must adjust accordingly.

Arkansas Best actually owns other subsidiaries for diversification and support. It owns FleetNet America Inc., a third-party vehicle maintenance company that provides services to truck fleets and manufacturers. It uses a network of more than 60,000 vendors to repair trucks across the nation.

The company also enlists the help of its own Data-Tronics Corp., which is a computer information services provider for the company, and Transport Realty Inc., the real estate subsidiary.

A previous holding, Clipper Exxpress, its intermodal operations, was sold in June of 2006.

Davidson said 2006 was like two different years for ABF, putting a bump in the road for the company. ABF was in overdrive through the first three quarters. In the third quarter, revenue was up 11 percent compared with the third quarter in 2005.

Tonnage was tracking well against the previous year, and it was looking good into the fourth quarter, leading into the Christmas season. But things slowed down. "We surveyed our customers, asked them what's going on," Davidson said.

"We did that in early and mid-October, and they said not to worry --everything is on track. But it wasn't on track."

Traditionally one of the busiest times of the year, October and November tanked, leaving quarterly revenue down 7 percent from the same period the year prior as tonnage fell.

The comparable period in 2005 may have been artificially high in the post-Hurricane Katrina construction environment, especially when contrasted with 2006's soft housing market.

Arkansas Best's stock price was as high as $50.67 in July, but fell to $35.68 in December. ABF still walked away with a 6.5 percent increase in revenue over 2005, but income fell 20 percent.