Arkansas Best execs remain calm in the storm

Editor’s note: The following story appears in the newest edition of TBQ, a magazine about Arkansas business and political news produced by Little Rock-based journalist Roby Brock. Brock will soon post PDF links to the magazine at his Web site.

story by Michael Tilley

Bob Davidson is supposed to be alarmed, concerned and dang-near worn out from the constant hand-wringing about a national trucking sector that has seen freight demand fall faster than the end-of-the-season hopes of Dallas Cowboy fans.

He’s not frayed in the least. He might be in the hot seat, but he’s careful not to let you see him sweat.

Davidson, the CEO of Fort Smith-based Arkansas Best Corp., is as non-plussed as the other executives at what is one of the nation’s largest less-than-truckload companies. The execs at the five-story corporate headquarters don’t get excited when the ledger posts black. They don’t get excited when the ledger posts red. No ups, no downs. They are the Lutherans of the trucking sector.

It’s not that they are arrogant and uncaring, or ignorant of the tough situation they face. Not at all. It’s that they’ve seen hard times before — although admittedly not this tough — and come out of each a little better than they went in.

Arkansas Best, Davidson stressed, has a management team with an average tenure of almost three decades with the company. They know the drill. You get on the bull, you get thrown off. You get up, and get back on the bull. Sometimes you last 8 seconds, sometimes not. Either way, there is always another rodeo. There is always another quarter. This too shall pass.

“This too shall pass. This will end. (The economy) will recover,” a stoic Davidson said of an economic downturn that might be second in length and severity only to the Great Depression.

THE PREDICAMENT
The poise is at the same time refreshing and puzzling. Davidson’s almost unnerving calm is emblematic of an entire company whose laconic leadership masks an insightful awareness of their predicament.

And this is the predicament: Daily tonnage for the trucking company was hovering at a decline of more than 15% in late February compared to the same period in 2007 — and the period in 2007 was down from the same period in 2006. That freight decline would approach 20% further into 2009.

“We are now over 27 months into a freight recession that is the worst I have seen during my 37 years in this industry,” Arkansas Best President and CEO Robert Davidson noted in the company’s fourth-quarter earnings statement. (ABF Freight System is the primary subsidiary of Arkansas Best, a transportation holding company.)

Arkansas Best reported Jan. 29 that its 2008 net income was $29.16 million, a big drop from its 2007 net income of $56.82 million. Its revenue in 2008 was $1.833 billion, slightly below the $1.836 billion in 2007.

The company recorded a fourth-quarter net income loss of $10.97 million, compared to a net income of $13.48 million in the same quarter of 2007. Tonnage per day declined 11.5% in the fourth quarter and 4.2% for the year.

The company cut about 2,000 jobs in 2008, with another 350 expected to be cut in the first quarter of 2009. Not since July 1980 has the company cut so many jobs.

It got worse.

The company announced April 22 that it lost $18.2 million in the first quarter, a wide swing from the $8.5 million earned in the same quarter of 2008. Total revenue for the quarter was $339.7 million, down 24% from the 2008 quarter.

The company responded to the freight slowdown by cutting staff and equipment. More than 625 jobs were cut — in addition to the 2,000 cut in 2008 — and 326 trucks and 488 trailers left the fleet in the quarter, resulting in a 20% decrease in trucks since the fourth quarter of 2006. The company has cut its workforce 23% since the fourth quarter of 2006. As of Dec. 31, 2008, the company had 10,512 active employees.

THE BEGINNING
Tonnage hauled by the carrier started to decline in October 2006, long before the smartest kids in the room — Fed chiefs, Wall Street bankers, business media pundits, Warren Buffett, etc. — had an inkling that the national economy was about to pull an Evil Knievel over the Snake River Canyon.

And Davidson admits he didn’t think in October 2006 the initial decline was serious.

“Not to worry,” Davidson said, recalling his thoughts at the time.

Those October declines persisted into December, and Davidson and his peers believed the decline in freight demand would be “shallow, but not extended.” It extended to August 2008, at which time the national economy began its smoky, mortgage-laden dive into the Snake River credit-crisis Canyon.

“It was clear to us that something was different. We’ve seen tonnage declines … but we’d not seen tonnage declines like this,” Davidson explained. “I’ve never seen this in my 37-year history” at Arkansas Best.

But the predicament, Davidson noted, is what it is.

“It’s just a tough world out there,” he explained. “It is what it is. … It’s our job to work with whatever the macroeconomic environment throws at us.”

HOUSING, MANUFACTURING HITS
It’s thrown them a serious blow to freight orders created from residential housing construction and the manufacturing sector — two of their more active drivers of business in recent years.

The housing sector problem is simple — housing starts at are historic lows. Housing starts in January were 50.5% lower than starts in January 2008. Yes, 50.5% lower. Depending on which economist or government agency is issuing the report, housing starts in 2009 are going to get worse or they are going to go beyond getting worse.

The manufacturing problem, however, is potentially worse than the housing sector because the issue for trucking companies is two-fold.

First, and obviously, manufacturing output in the U.S. is in decline, thanks primarily to the auto sector. But before the output began to decline, technological improvements in consumer goods — particularly electronic goods — began reducing the weight of manufactured goods hauled by U.S. truckers.

Although the value of manufactured goods had increased in the U.S., Davidson explained, the weight of those goods had declined. Instead of shipping 3- to 5-pound music players, trucking companies were shipping iPods and similar small products from Apple competitors. Heavy cathode-ray tube televisions were replaced by lighter plasma-screen televisions. Again, the dollar value of the products was higher, but the weight was lower.

“Unfortunately, we don’t haul dollars. We haul weight,” Davidson professorially summarized.

RUN FASTER
So how does a company that hauls weight survive a national recession that is daily removing much weight from America’s economic waistline?

Davidson unexpectedly answered that with a joke.

Two hunters were walking through the forest when they inadvertently crossed paths with a bear. One hunter began to run. The other hunter yells that it is foolish to run because everyone knows humans can’t outrun bears. The running hunter yelled back, “I don’t have to outrun the bear, I just have to outrun you.”

The moral of the joke, of course, is to always hunt with people who are slow runners, like Arkansas Razorback quarterbacks.

Or maybe not. The point Davidson was making is that the economy, no matter how bad it gets, will still need trucking companies. The key is to effectively manage the freight downturn and “outrun” the pack of truckers chased by recessionary bears.

And while nothing is a sure bet, Arkansas Best is likely to be among the survivors. Despite the almost $30 million loss in the past two fiscal quarters, the company has a relatively solid financial picture. It holds a little more than $200 million in cash — cash, by the way, it preserved by moving out of the equity markets and into stable securities prior to the stock market downturn. The company also has a $325 million line of credit at decent interest rates, and carries virtually no debt. It is one of the few — if not the only — national trucking companies to announce an acquisition stance. The recession is creating fire-sale prices at transportation-related companies, Davidson said.

“This is the best buying opportunity I’ll ever have,” Davidson said.

Near the end of the interview, Davidson did show a little emotion in stressing that what is going on at Arkansas Best “is not about Bob Davidson. … This is just an extraordinarily unusual culture” that knows how to survive tough situations. Indeed. The company survived a hostile takeover attempt, labor disruptions, periods of excessive debt loads, and the mid-1990s acquisition of WorldWay that almost broke the company.

“There is not a new plan here every week or every month,” Davidson said. “I’ve worked with these people for decades. I don’t have to worry about what they are doing. … The macroenvironment is awful, but yet we are still here. … And we are fortunate because we have the best management and we have the best balance sheet in the industry.”