聯合包裹運送服務公司 (UPS) 2004 Q4 法說會逐字稿

Welcome to the Q4 2004 Overnite Corporation earnings conference call. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Mike Mahan, Vice President Treasury of Financial Planning with Overnite Corporation. Please proceed sir.

Good morning and welcome to Overnite's fourth-quarter 2004 earnings call. With us today are Leo Suggs, Chairman, CEO and President, and Pat Hanley, our Senior Vice President and Chief Financial Officer. Our comments today contain forward-looking statements, including projections of future results, and are made only as of today's date. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties. Please refer to the Safe Harbor provision at the end of our press release for a review of some of the factors that could cause our actual results to differ materially from our projections. In addition to our comments today -- includes certain non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings press release, which is available on our Website at www.ovnt.com. Leo Suggs and Pat Hanley will provide our comments this morning, followed by a Q&A session. With that I will turn the call over to our Chairman, Leo Suggs.

Thank you, Mike. Good morning folks. We had another strong quarter. Our earnings per diluted share in the fourth quarter ended up being 59 cents versus 37 cents last year on a pro forma basis. This represents earnings growth of more than 60 percent, which is a little better than the first nine months of the year where the earnings were up 48 percent. For the year, including the fourth quarter, our earnings per share ended up being 2.27 versus $1.50 last year. That's an increase of 51 percent.

Our operating ratio for the fourth quarter was 93.4 compared to 95 last year. The operating ratio for the full year also ended up at 93.4 compared to 94.9 last year on a pro forma basis. I am pleased by the 1.6 point margin improvement for the quarter and the 1.5 improvement for the year.

Our revenue for the quarter was up 11.4 percent on tonnage growth of 5.6 percent. Our mix-adjusted LTL prices, excluding fuel surcharge, were up over 5 percent for the fourth quarter and a little over 4 percent for the year.

Our balance sheet remains strong. Our stronger-than-expected cash flow enabled us to pull ahead another $26 million in pension funding at the end of 2004 and reduced our debt by about 33 million during the year. We also finished the year with a cash balance of $21 million compared to about 11 million at the end of '03. During the year we renegotiated our credit facility to provide us with more flexibility and lower interest expense.

Pension expense and funding requirements continue to be a concern for all employers that offer defined benefit plans. Overnite is no exception. We funded a total of 56 million in 2004, which included the pull-ahead of 26 million. Our pension expense in 2004 was nearly 40 million and is now projected to be about 55 million in 2005, primarily as a result of the lower-than-expected discount rates. However, there is a positive side to this story, and Pat will talk about it a little later.

We also made some significant progress in improving the quality of our service product. The transit times on about 7000 lanes were improved last year and we significantly reduced our cargo claim expense. As we continue to grow our business and build lane density, we will find more opportunities to improve in these areas and continue to reduce our operating costs.

The economic growth forecasts for 2005 are pretty good, but they're not quite as strong as what we saw in 2004 and the pricing environment continues to be firm. We fully expect to continue to grow profitable revenues and improve our margins again in 2005.

To conclude my comments, I would like to thank all of the Overnite employees for a successful first year as a stand-alone company. It has been their ready, willing and able attitude, and their personal commitment to serve our customers and continuously improve our service product, that was really the key drivers for our success in 2004.

I will now turn it over to Pat to go through the financial results and provide some guidance for the first quarter. Pat?

Thank you, Leo. Good morning folks. I want to remind everyone that my comments today are comparing results to prior periods will be on a pro forma basis as if we were a stand-alone company in both periods. This makes the numbers more comparable and the detailed pro forma adjustments are available in our press release. With that said, let's discuss our results.

Our operating revenue for the quarter was a record 421.4 million, an increase of 43 million, or 11.4 percent, from the 378 million in the fourth quarter of 2003. For the year, our operating revenue was up 11.7 percent. Our fourth-quarter operating income was 28 million versus 18.8 last year, which was an increase of 49 percent. Our operating ratio was 93.4 versus 95, which was comparable to our full-year operating ratio of 93.4 versus 94.9 last year.

Our fourth-quarter net income of 16.6 versus 10.3 last year was an increase of 60.9 percent. This equates to an EPS on a fully-diluted basis of 59 cents versus 37 cents last year. Net income for the full year was a record 63.3 million versus 41.8 million last year. The EPS for the year was 2.27 versus $1.50 last year, an increase of 51 percent.

Tonnage was up 5.6 percent for the quarter. As we mentioned during our last earnings call, we took some pretty aggressive pricing actions on a group of low-margin accounts which cost us some business in the last six months of the year. However, as you can see from our results, our revenue and our earnings growth during the fourth quarter were comparable to the first three quarters. We made the right decisions and we will continue to focus on improving our customer mix and leveraging yield. For the year our tonnage was up 10.1.

Our rate factor, excluding steel surcharge, was up 0.6 percent in the fourth quarter but down 1 percent for the full year. On a mix-adjusted basis our prices were up 5 percent in the fourth quarter and a little over 4 percent for the full year.

As Leo mentioned earlier, we contributed 56 million to our pension fund during 2004, which included a pull-ahead of 26 million at the end of the year. We expect to contribute another 30 million in 2005 and may elect to pull ahead around 15 million of the 2006 funding at the end of 2005.

In pension expense for 2005 we're facing a significant increase. Our pension expense in 2004 was nearly $40 million and is now projected to be 55 million in 2005, primarily as a result of a lower discount rate at year-end and the impact of poor asset returns in the year's 2000, 2001, 2002. You have heard people refer to this as the perfect storm for pensions. We believe our pension plans help us retain quality employees and minimize driver turnover. We also see some light at the end of tunnel. Assuming discount rates increase as forecasted, and our asset returns for next year average 8 percent, I would expect 2006 pension expense to come in around 45 million.

Now I would like to talk about capital expenditures. Net capital expenditures ended up being 81.9 million for the year compared to 56.9 million last year. About 60 percent of that capital was attributed to revenue equipment, whereas 20 percent was real estate and repairs, and the remaining 20 percent for technology and miscellaneous operating equipment.

The year-over-year increase was primarily attributed to the additional equipment we purchased to replace older equipment, as well as the 6.3 million we invested in the Newburgh, New York facility. We are currently projecting our 2005 CapEx expense to be between 90 and 100 million, which consists of about 30 percent for real estate, 50 percent for revenue equipment, and the remainder for technology and miscellaneous operating equipment. We expect depreciation expense to be about 62 million in 2005.

A couple of other items worth noting relate to our debt restructuring. We closed on a new $250 million revolving credit facility, which gives us greater flexibility to pay down and redraw debt which was not available under the previous credit facility. In addition, we closed on a new 100ml accounts receivable secured loan which will be used primarily to support the issuance of letters of credit.

As Leo mentioned earlier, our balance sheet is in very good shape. Our cash balance at the end of the year was 21 million compared to 11 million at the end of last year, and we paid down our debt by about 33 million during the year. We expect our tax rate to be 40 percent in 2005.

Now to our 2005 forecast. We are projecting our earnings per share on a fully-diluted basis to be between 32 and 38 cents in the first quarter and 260 to 270 for the full year. This forecast is contingent upon the economy growing at about 3.5 percent, mid to high-single-digit tonnage growth, and continuing firm pricing.

That concludes our comments. We'll open up to any questions you might have.

(OPERATOR INSTRUCTIONS). Ken Hoexter, Merrill Lynch.

Pat and Leo, I just want to ask you a bit about the LTL tonnage in the fourth quarter. I know you said you were trying to take some of the lightest revenue goods off and your operating ratio still did well, but it seems to have really tailed off when the economy seemed to be doing well. On a comparable basis you went from 11 percent growth in the first half of the year down to less than 3 percent in the fourth quarter. Can you talk about what is going on with respect to the LTL tonnage?

Ken, there are two things are happening. Number one, you will remember toward the end of 2004, primarily in anticipation of the changes to the hours of service, our fourth quarter last year was much stronger than the previous quarters. So we are lacking a much stronger fourth quarter. The second piece of it, and we alluded to it, is the fact that we elected to take some pricing action on some of the lowest yielding accounts. And while that had a short-term impact on incremental earnings, it freed up capacity. And when you look at the improvements that we made in our mix and the improvements in yield in the fourth quarter, there is no question we did the right thing. So, we were obsessed with doing the right thing to give us the capacity to grow with better business as opposed to just trying to pile on as much tonnage growth as we could.

Leo, can you then set the stage for how your book of business looks today? You still need to get rid of 20 percent of the business that is not earning a good enough return. Can you talk about what we can look for the outlook on volumes as we move forward? And can you talk a bit about how it panned out, volume growth, through the quarter?

We had -- in our earlier conference calls and investment meetings, we have talked about the fact that the yield, as you all know, is substantially better on the local accounts than it is on the national accounts. And we had an objective to improve our mix between those two groups by about 50 basis points for the year. We ended up improving that mix by about 200 basis points. So I think without the rather dramatic action that we took in the third and fourth quarter, that wouldn't have happened. I think that Pat had commented in his comments early on that -- as far as what we are expecting going forward, so far as our tonnage is concerned. We will continue to balance our yield and our growth depending on what the economy does. We -- here again, I think if you look at the results that we produced for the year, it's -- we're very happy with the way it came out, and we're not planning to really change that strategy going forward.

Let me just add a little more commentary. If you look at our mix of business at local versus the marketing national customers, our local business, if you look at the full year and you look at it by quarter, it is continuing to hold up. So you wouldn't have seen that decline you're talking about, the 2.8 we quoted to you as the LTL. It all came in our marketing national accounts. And quite frankly, I couldn't have told you we would have expected exactly those numbers, but we expected this result to occur. And the good news is that's pretty much behind us as we are going forward. So we're pretty darn optimistic as we look at 2005. And I quoted to you in my commentary, we're looking for high-single-digits growth in tonnage, and that is LTL and TL, but we are still looking for upwards of certainly in the 5 to 6 percent range in the LTL.

And you believe that is going to start as soon as the first quarter, or is there still some more of this swapping out of revenues?

There will be some minor continuation of that, but we -- I would tell you that January is not a great indicator, because, you know, the first quarter really starts on March first. But so far things are looking good.

Just to wrap up; I'm sorry to take up a couple of questions here. But if you then see this upper (indiscernible) high single digits, 5, 6 percent on the LTL side -- because there is no more of that mix shift that will harm the tonnage growth rate -- do you then also start to see a positive swing? If you're getting that 5 percent yield growth, you will see a couple of points on revenue per hundredweight increasing?

Ken, the revenue per hundredweight that you guys use is not really a good indicator. Because if you look as an example, our weight per shipment increased I think more than any carrier in the industry. It was up 26 and 27 percent. Also, our length of haul came down a little bit. And the average class of shipments based on heavier density came down a little bit. So the revenue per hundredweight macro is really misleading because of the fact that we have seen some dramatic changes for the better in our shipment characteristics.

Gregory Burns, J.P. Morgan.

Just a question, Leo, following on your comments about the mix shift and looking at the length of haul, can we assume then that the regional part of the franchise is growing the fastest?

It's fairly well distributed. We did have toward the end of the year a good shot in the arm, and we know why that happened. There was -- just as our shipment size changed, a lot of that was attributed to some delivered actions that were taken that eliminated some small shipments from specific -- a specific customer, and most of that was long-haul business. But the things that are happening, here again, you can't just look at the numbers and assume, well, all of a sudden you had a shift in your growth. We have had what we consider to be the growth that we managed and expected in all three of the sectors.

Yes. I will certainly take profits over revenue any day. I'm just trying to -- we saw Newton's (ph) results today, Yellow, they were quite strong, obviously benefiting in part from what was going on with Red Star, etcetera. Is there any part of your business region or customer base that is maybe acting stronger or weaker?

The Northeast was strong, the Midwest was strong, and the West was strong. So those were the three strongest areas of the country. And while we were very cautious about -- and always are as cautious about taking on business that put our competitors out of business, we do have some opportunities in those areas. And we did see a little more growth in the Northeast.

On the truckload tonnage which just seems to be growing quite rapidly for all the LTL carriers, I guess as the truckload guys really are capacity-constrained, is some of that business inherently opportunistic, that perhaps as the truckload guys add more capacity or as you get more pure LTL freight, will it fall off? Or is that business going to stick long-term?

Some of it I think will stick long-term, because I think that -- as an example, some of the business that we inherited that would be over the 10,000 pound limit but not a full capacity load falls into that capacity that used to be moved as truckload stop-offs, and with the hours of service because of the higher stop-off expense of the truckload carriers, has reverted back. So I think some of that will stay on a permanent basis.

A lot of the other truckload traffic -- some of the truckload traffic that you see growing from us is because of the fact that with truckload capacity and prices going up, in some cases we are shifting that back to our own trucks, especially during the traditionally slower part of the year. So you have to go harder for truckloads in order to maintain decent balance in your lanes. So we look at the truckload segment of the business as one that we can fluctuate mainly to match our capacity and balance needs.

That is helpful. Pat, on the pension issue, we have seen a couple of companies in transportation essentially shift to defined contribution while still keeping existing employees on the defined benefit. We saw FedEx put all new employees onto a 401(k) plan while keeping existing, and I think Yellow has done the same thing. I know your competitors Old Dominion have a defined contribution. Any thoughts of down the road saying, hey, existing employees will still be on the defined benefit, but all new hires will come in under a different scheme? Any thought about doing that?

We have all sorts of thoughts, Greg, but we are always looking to do the best for our employees. Defined benefit plans by their very nature in what is going on today are very expensive, but they're very expensive -- and I quoted to you the 2000, 2001, 2002 -- but for us, those were losses of sort of 1,7 and 13 percent. And most people had that same kind of experience in those years. If you look at our experience for 2004, we had about 23 percent positive; last year we were somewhere around 11 percent positive. And our goal and our guideline is the 8 percent I quoted to you. As that continues to go on, we are going to see a dramatic decrease in pension cost, assuming by the way that we hit the 58 percent.

The thing that was a very big surprise to us in pensions this year was the fact that while short-term interest rates -- Greenspan raised rates I think 1.25, the actual rate declined. And that happened to us in about the last six weeks of the year. We started looking at that because we thought it was going to remain flat. And that piece alone cost us about $7 million in '05.

Where did the discount rate assumption go, from what to what?

The absolute discount rate for us went from 6.5 to 6. And my point in bringing it up in the earlier commentary is the guidelines right now are that interest rates should go up about 60 basis points. And I said if we got back to the 6.5, and assuming that we make the estimate of the 8 percent -- and you don't know the answer to that -- than we are going to have a 10 percent reduction -- $10 million reduction in '06. And that ultimately as you look towards the outer years -- again, you have got to get the returns -- and the assumption is as we continue to look at interest rates, they will head up. But if they just stay flat at the 6.5, we should get the 10 million, and in three years time it will be under 30.

That is what the trend is, and the reason -- we are going to look at it, as your question asks are we going to look at it? Certainly we're going to look at it. But you have read all about driver shortages. We don't have a driver shortage in the LTL industry. We also at Overnite have single-digit turnover in our drivers. So before we make any changes in defined benefit plans we want to make sure we're doing the best thing to keep and retain our folks, and do it in a competitive manner. So yes, we will look at it. But what's happening right now is we call it the perfect storm -- we fully believe it will mitigate over the next few years, and we see a fairly dramatic reduction next year in 2006.

No, I hear you. I think most shareholders probably would want to see just the reduction of volatility, and I certainly understand the competitive concerns. But it seems like if I'm a new employee applying to either Old Dominion or Yellow, they are going to offer me a 401(k) plan. So it would seem like the competitive comparative is maybe not what it was when you guys were battling the unions, etcetera. Okay. It sounds like basically you guys are rooting for higher interest rates. It's a natural hedged year business.

I just want to get back to the half-a-point we lost, Greg.

Scott Flower, Smith Barney.

Just a couple of quick questions, and I know winter happens every year, but I'm just trying to get a sense of not necessarily relative to UPS but in general if you've heard spotty comments about how the weather has or hasn't impacted LTL operations across different parts of the country. And I'm just trying to get a sense is this just normalcy for you? Yes, winter happens, nothing severe. Has the weather in any way shape or form, either actually in December or as we have looked so far in January, had an unusually difficult effect on your operations or your service parameters?

No. We have had our bad spots; we do every winter. It's been a little worse than it was last year, but it's not been out of what I would consider to be winter effects.

Also help me -- I know -- and I like Pat's comment that the quarter begins March 1 -- but help me get a little color. I know the first couple of weeks of January are light volume and also volatile. How is the early part of January going on a tonnage basis?

Without getting specific I would say it's pretty good.

Okay. I know you mentioned to a previous question -- is it those same regions, Northeast, Midwest and the West, that are still sort of leading the pack in terms of strength?

I'm not sure, Scott. Pat may know. We don't normally analyze that until the end of the month. But I don't think we have seen any dramatic changes in the pattern. But business has remained pretty good.

The last one for me is just -- and I understand Pat ran us through the CapEx and kind of where you're spending it -- but as you look at your network, are there particular areas, facility-wise or otherwise, terminals, that you're tighter on than elsewhere? I'm just trying to get a sense of geographically where some of those capital dollars are going that Pat is describing. Secondly, I know it's a complex question that I'm trying to get you to boil down for me, but when you think about your capacity utilization and I know there are multiple parts and pieces, how should I think about that? How tight are you running? Obviously it depends regionally. But help me understand how you look at capacity and geographically where you're spending some of those real estate or facility dollars?

There's two things that become involved here, Scott. One is that our business so far as rolling stock is concerned is very flexible. It's elastic. We can change it very quickly. The constraint comes in the brick and mortar area and we can change that as well by constantly operating a dynamic network. And to the extent that you get pinched in one place you move a little bit somewhere else. You may add a little handling cost or a little security to do that, but even in the area of the capacity in our hub terminals, we do have some alternatives. I will tell you that at this point in time the area where we see the greatest opportunity from a standpoint of improving productivity and service is in the Northern California area. We do not have a hub there at all today, and that's one we're looking at.

Scott, let me just -- you asked the earlier question -- we don't have near the detail on the individual regions, but I would tell you that as Leo said, the Northeast, the Central and the West were the strongest in the fourth quarter. And I would tell you that that is also true insofar the month of January. Again, as we said January is a small indicator of where the quarter is going to turn out. But I would tell you right now -- and your question was really weather related. We're seeing fairly strong increases in all of our regions. So we're not seeing anything that's really being inhibited by weather, and growth seems to be pretty strong across.

John Barnes. Credit Suisse First Boston.

Could you just talk a little bit about -- if I'm looking at my model, I was modeling for '05 -- I'm kind of modeling the volume growth you're talking about. I think I'm being a little bit more conservative on price, just because I always like to be a little conservative there. But I was just in looking at the degree of margin improvement or lack thereof, to get to a 260 to 270 number -- am I missing something? Is there something in your business that does not allow for the same degree of operating leverage as maybe some of your competitors? Or is this is a matter of conservativism on your part?

John, we try to project it like we see it. We certainly don't want to overpromise but neither do we want to -- we want try to keep you guys from being on a limb one way or another. We want to give the information to you as accurate as we possibly can. I would say that the only factor that is different for us at this moment from some of our competitors is what we have already explained with regard to the pensions. And I think if you convert that and add it back in, you will see that I think that we're not greatly out of line from others so far as what we expect out of the incremental earnings from increased tonnage.

That makes sense. I just wanted to make sure I wasn't missing anything with your model that is preventing you or something. More importantly on your book of business as you have chased off some of this underperforming freight, if you had to look at your book today how much do you think is still -- is it 20 percent that us still underperforming? Is it 10 percent that you still need to focus on?

I was just going to say we look at every account every month from a standpoint of yield. And basically if -- it depends on how strong your business is. Because you can get an incremental contribution so long as you're not adding capacity from almost all of the business that we handle. But if the economy is strong and business is strong, if you add capacity without taking out some of that low margin business, all of a sudden you no longer have the incremental contribution because you've added the capital to take care of it. So there is a bottom amount of traffic that we're always looking at, and depending on how strong our business levels are, drives the decision as to how aggressive we are in dealing with that from a standpoint of trying to improve the rates or putting in it risk in order to free up capacity. So we look at it from a standpoint of -- especially in expansion capital -- what is going to be the return on the expansion capital and what impact is that going to have on the lowest yielding business we have today.

John, the only other comment is as Leo said, we're going to continue to look at it. We did a conscious effort back in the end of the second quarter beginning of the third which is what we talked about so far in terms of business we ran off. We're going to continue to do that but I would tell you I would characterize that as maybe a surge of what we're going to do versus what we think we're going to do ongoing. So we're not looking for that type of surge again as we head into 2005. That said, everything that Leo said is correct -- we will look at our business. We'll look at where we're adding capital and make sure that the business we have is still contributing before we make those investments.

That makes sense. Then if I look back six months ago, and you have gone through this surge of price that you really wanted to take dramatic pricing action on. Six months ago for the sake of argument your book of business was graded at a C. In terms of magnitude where do you think it is today? Is it a C+? Have you moved it up a full grade level? Do you feel better about your book of business today?

I think if you look at what we are reporting in the fourth quarter from a standpoint of our yield numbers, that gives you some indication of how much we have improved. And most of that had the general rate increases and the things that you always have, but most of the dramatic improvement has come from improvement in mix. So I don't know how to grade it at this point in time, but if you look at what we have gone in our actual yield that takes into consideration the changes in weight per shipment and length of haul and average classification, we have made more progress in yield this year in the fourth quarter than I think we have made in several years.

Lastly, Leo, as you look out into the landscape, are there still acquisition opportunities out there to move either into -- and I guess what's more important to you? Is it geographic expansion? Is it -- are there other services you would like to offer? And if there's not something to acquire, what have you targeted for '05 in terms of offering yourself internally as new initiatives?

We're confidently looking at that from a standpoint of what is the return on organic growth versus the return on acquisition growth. We keep an open mind and we're going to try to invest for the greatest return to the shareholder. I will tell you that today's multiples are such that one of the things that we look at is how quick does something becomes accretive. And as you know from your experience, you have to really look long and hard to make sure you get the right fit. It's easy to go out and add revenue, but we really want to look at it in terms of what impact is that going to have on our investors and our EPS.

And then on the service side, is there anything specific you can point to that you're looking at offering in addition to what you already do?

We have -- as most of our competitors, we have a whole portfolio of value-added services. And in those value-added services the margins are two to three times what they are in the core LTL business. So we continue to put more and more resources against those particular areas. Another area are special services which is truckload, primarily dedicated fleet. Obviously they have some great opportunities right now, and we -- we have managed that growth from a standpoint of the return on invested capital compared to investing in the LTL segment of the business. But there is certainly, as you would expect, some great opportunities in that area right now. We could grow that business a lot faster than we are if we wanted to really focus in that area.

Is there anything prohibiting you from growing it quicker?

Here again, I think when you look at where are you going to get the best return on your invested capital, that's the consideration that we have. If we had -- if we wanted to spend 50 percent more capital, then we could do that. But that's not the plan right now.

Edward Wolfe, Bear Stearns.

I'm sorry I joined a little bit late. If I repeat something let me know. Your tonnage assumptions going forward seem a little bit more aggressive than what you reported in the quarter of 5.8 percent. And I know you did some calling intentionally in the quarter. Are you finished with that calling process, and is that why you expect the tonnage growth accelerates a little bit going forward?

From a standpoint of the deliberate project, yes. That is pretty much completed. As we mentioned earlier, we manage yield every month. So there will always be some accounts who are at the bottom of the list that we are constantly trying to rehabilitate, but not in the numbers that we had back earlier around the end of the second quarter.

So you expect even in the first quarter year-over-year tonnage to be up more than slightly less than 6 percent in the fourth quarter?

The other thing that we talked about was that -- Pat, you've got the numbers; quote what our growth in the fourth quarter of '03 was compared to the third quarter. So one of the anomalies is the fact that the fourth quarter for us lapped the fourth quarter last year where our tonnage growth was substantially more than it had been earlier in 2003.

Ed, what Leo is referring to is if you looked at our total tonnage growth in '03, this year it was 8.9 percent, and we quoted 5.6. And this is combined TL and LTL. And if you compare that to last year '03 it was 3.7 versus 7. So you had almost a doubling of the growth in '03 from third quarter to fourth quarter. And if you look at what has happened to our tonnage growth year-over-year, we went from 9 percent to sort of 5.6 percent to about the same. So I would tell you that tonnage stayed about the same, it's just the surge we had. And then again, it is a conscious decision to wash out what we call our low margin primarily marketing and national accounts that were eating up capacity at a low margin. And we consciously made a decision to try to ratchet up the margin on our accounts.

And my other comment that you may have missed was if I look at my local versus my marketing national book of business, the local business did extremely well in the fourth quarter just as it has done all year. So I didn't see any decline there. It was all in the areas that we targeted. So as Leo said, we think that surge of clearing up has pretty much been done. So we are seeing it in January. The results for looking good so far. Again, you may have missed it, but the first quarter doesn't begin until March 1. So we won't take too much comfort yet in the fact that January is doing pretty good, but it is.

But if your year tonnage guidance is mid to high single digits, it's not back-end loaded in your own mind. I'm guessing that you're expecting the same for the first, second, roughly, third, fourth quarter year-over-year. Is that fair to say?

I would tell you probably the biggest question you'll have -- and you all look at your own models -- the second quarter was probably the strongest quarter we had. I think we had close to 14 percent tonnage growth in the second quarter. So if I look at just that quarter -- and I haven't looked at that and I don't really want to get into that level of detail yet -- we may have a tough time in the second quarter year-over-year because of how strong it was. But if I look at the absolute amount of tonnage flowing through the system, yes I'm looking for consistent growth throughout the year.

In terms of pricing, can you see any trends that are different or diverging between the regional business and the longer-haul business?

No.

No.

Do you expect that the current pricing net of fuel -- taking fuel out of the equation -- is more likely to be better 12 months from now, worse, or the same?

My theory is it's been the same for a long time. I think your yield changes more from your mix of customers than it does from your general rate increases or your contract renegotiations. So I think we have been looking at a pretty darn stable pricing environment for a long time.

I said that the pricing is firm, and I think we still think that. The only thing you should note in the -- you were asking a question about regional inter-regional long haul -- again, some of the business that we lost -- consciously lost -- was more inter-regional long-haul. And we see that. So that has had some impact on us in the fourth quarter that we would see going away as we look at 2005.

That makes sense. Pat, what's your discount rate assumption in '05 and what was it in '04 for the pension?

It was 6.5 percent. And you all should recognize the discount rate is not an assumption, it's a snapshot you have to take at year-end. What exactly is the discount rate? So for us at year-end 2003, which is the discount rate that impacts pension expense for 2004, it was 6.5 percent. And when we took that snapshot at year-end 2004 it was 6 percent. The comment you may have missed, Ed, is that if you look at expectations for interest rates this year -- and I was using sort of the 10-year treasury -- the estimates that we have seen are about 60 basis points going up. So our assumption is by the end of this year we will get back to that sort of 6.5 percent. But it has no impact on '05. It's only going to be on '06.

Mark Rosa, Thompson Davis & Company.

Could you explain the impact that you expect the pension expenses next year to have on your cash flow?

Cash flow -- we put in $56 million in 2004. We are projecting -- right now we have a total of 45 in. And what I have indicated is I would say we're sort of committed to 30, and we will see how the market is doing on the last 15; we may or may not do that. So it's about 10 million down is what I'm from telling you from cash flow.

Based on how much we pulled ahead there is no cash flow requirement that would erode cash flow in 2005 unless we wanted to pull some more ahead.

And just so you all know, it's a voluntary contribution. So if you make it, really make sure that your funding is staying around 90 percent or better, and that's what we have been doing so far.

And you mentioned the impact of the pension expenses for the full year 2005. Do you have any assumptions for Q1 on how it will affect everything?

It's ratable. What we have said is pension expense is up about $15 million for the full year, and it's ratable how it goes in throughout the year.

Chad Bruso, Morgan Stanley.

Not to harp on this issue too much, but with respect to the pension, did you change any assumptions to the expected rate of return or anything else? I thought you said there was a 15 million increase and 7 of it was due to the discount rate, or did I get that wrong?

No, you got that right. The point -- the assumption we make on interest rates is that we're going to have an 8 percent return. And that's the, if you will, going forward assumption. So what I was commenting on earlier is your pension is affected by the returns, and you put it in over five years. So it's a five-year average. So -- and the example I gave earlier so everybody understood is 2000, 2001, 2002 we had negative returns of 1, 6 or 7, and 13 percent. In '04 this last -- let me do '03. '03 we had around 23 percent positive. '04 we had 11 percent. Again, the assumption we were using was 8 percent. So we beat our assumption. The market is going to be the market. We don't know what it's going to be. But as we look forward, the opportunity is that we'll get to at least the 8 percent, and we'll be dropping off those negative return years in that five-year average. And that's why I suggested that interest rates come up back to where they were -- go up 50 basis points, and you start lapping those bad years and dropping them out of your five-year average, we see interest expense going down. On the look at 2006 right now making -- using the 8 percent assumption for returns and there's a half a point increase in interest rates, we see that expense go from 55 to 45. And it continues to improve in the next few years because you're overlapping such full return years in 2002, 2003. So we could see it going under 30 as we go on out.

I guess with that said in the near-term here with respect to the pricing environment, just given where we are in the cycle and the strong demand you saw in the fourth quarter, it sounds like you expect some of that to continue into this year. You're not adding much capacity to the network and you're going back to customers and taking up pricing, upgrading your mix. I guess why not take up price even more? I don't want to take anything away from these great efforts here, but in fact your 5 percent is some of the best we have seen in the industry. But it's similar to what I had in my notes from last quarter. And given the big increase in pension expense here and tighter capacity, why not go back and put some of these costs on the customers here?

There is a balance, because even the actions that we took in the third and fourth quarters cost us some incremental profit dollar short-term. But it freed up capacity longer-term to where we could improve our yield within whatever the capacity might be. So I think that if you -- you have to constantly balance the aggressiveness of your pricing actions with your capacity. Because if you took action that chased off 10 percent of your business, while your rate for hundredweight might go up and your yield might go up on your existing customers, your fixed costs would more than offset that and your EPS would decline. So it's a balancing act.

Gregory Burns, J.P. Morgan.

Pat, I just want to clarify the thinking on volumes and comparisons. Just going through my model and just put some numbers on that you grew roughly 9 percent in 3Q against a roughly 4 percent year-ago, and then in the fourth quarter you were up again 7 percent, so you did 5.5 percent, which I fully understand. But the conflict even tougher going forward -- I mean, you're up against close to a 13 percent comp in 1Q and 13 and change in 2Q. So if you just use your comparison logic and the idea that you really got rid of these national accounts in the back half, so they're still negatively comping you, what is explaining your optimism on the first half, I guess?

Again, I think the answer is when I look at where we lost the volumes in marketing national accounts, when I look at our local business, it has stayed strong and continued to grow. That clean-out has gone -- it's not completely over, but a major portion of it is over. And we think, therefore, we can start growing as we look at 2005. And again, I don't -- I hate to stress anything about January, because as we have talked during this call, you've got weather problems in January and January is just a small month -- but so far, we look at our plans -- doing pretty well. But it doesn't make any difference until I get to March.

I hear you. I think I understand. It sounds like what you're saying is that you created a hole and you have more than filled it up, or you're rapidly felling it up, so that it's essentially no longer a negative drag on the comps even though you won't anniversary it for two quarters. Is that a fair summary?

That's a fair summary.

One other thing. Leo, what is your estimate of excess capacity in the system? I know capacity means a lot of different things in the LTL world. But what are the capacity bottlenecks? And if you had to pick a utilization number, where do you think you are?

I think the standard number for the industry is 90 percent. It's really hard to say, because as I mentioned earlier, we have a very elastic business. We have the ability and the flexibility to utilize external resources so far as truckload carriers, or in some cases rail or whatever we need to do to increase our line-haul capacity. So far as terminals are concerned, we can articulate our network through our models to where if you get a pinch in one particular area, you just simply channel your loading patterns through different places where you do have capacity. So I think if our tonnage increased 10 percent tomorrow, we would figure out some way to handle it without losing our service. So I don't think capacity is a big issue right now, but I do think that where the opportunity is if you continue to re-engineer your networks to where you reduce the number of handlings and reduce (indiscernible) miles, that's where your real opportunity comes. And that's what we are looking at strategically so far as where we will be adding bricks and mortar going forward.

This concludes the question-and-answer portion of today's call. We'll turn it back to the speakers for closing remarks.

Thank you all. I think Leo summarized, we are -- a great first year out, and we're looking forward to continuing to grow in 2005. Thanks.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.