Yellow Corp (YELL) 2002 Q1 法說會逐字稿

Good morning, my name is and I will be your conference facilitator. At this time I would like to welcome everyone to the USFreightways' first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one, on your telephone keypad, and questions will be taken in the order that they are received. If you would like to withdraw your question, press the pound key.

I will now turn the call over to Mr. Samuel K. Skinner, Chairman, President and Chief Executive Officer of USFreightways. Thank you Mr. Skinner, you may begin your conference.

Thank you . Good morning everyone. Thank you for joining us. I'm calling you from our offices in Chicago and with me here in Chicago are Chris Ellis, our Chief Financial Officer, John Gallahan, President of USF Worldwide, and on the phone I have Pete Neydon, who is President of USF Holland, and who heads our Eastern truck group, and Jared McArthur, who is President of USF Reddaway and heads our Western truck group. I also have in the room with me our Vice President and Controller, , as well as our Manager of Investor Relations, Ken Ball.

Before we begin, I'd like Chris to make some brief introductory remarks, and then he'll go over some numbers. I'll then return and make some observations, and then we'll take your questions - Chris.

Thank you, Sam.

Like in the past, I'm going to have to read through our disclaimer statement, and then I'm going to go through the P&L.

Our press release and our statistics, which the statistics include shipments, of revenue per shipment, are all on our Web site to download if you like. It's at www.usfreightways.com.

Before I start, I need to read this statement of Safe Harbor. The goal of this conference call is to have an opened discussion and dialogue on the company's results and ongoing operations. We will be making forward-looking statements concerning the company's plans and expectations. We will be commenting on our expectations of revenue, demand for freight, the general economic environment, the pricing environment, and projected costs and profits of the company.

To the extent that we make these forward-looking statements, we are availing ourselves to the Safe Harbor provisions of the Private Securities Litigation Reform Act. We note that the actual results may differ materially from the projections due to risks and uncertainties. For further details, we refer you to our filings with the SEC, and copies of those filings on our Web site in the forms of - like the 10-Ks and 10-Qs for further details.

So now let's go through the income statement. That was part of the press release that you've hopefully received.

As in each quarter for the past year, we are continuing to see the weaker economy, and this continues to have its impact on USFreightways' revenue and profits. And yet we do have a couple of our businesses that are showing an improvement in their profits for the quarter: our freight boarding business, USF Worldwide, and our truck load carrier, USF Glen Moore. We'll come back to look at these to companies in a couple of minutes.

The USFreightways' consolidated revenue for the quarter was $577.7 million, and this compares to $621.4 million last year, or seven percent below the first quarter for last year. The earnings for the first quarter was $5.1 million, or 19 cents diluted earnings per share before special charges. This compares to $8.4 million in the first quarter of 2001.

Now, these special charges recorded amount to a total of 82 the effect of change in accounting for goodwill. The remainder of the special charge, about $12.8 million, was taken to relinquish USFreightways' interest in a joint venture company that we had in the freight forwarding business in Asia. Of the total $82.8 million charge, $72.8 million is non-cash in nature, and $10 million is a cash-related charge. Now, both of these charges were previously announced in press releases that we issued earlier on in the quarter. So, including the special charges USFreightways showed a net loss of $77 million for the quarter, or $2.84 diluted loss per share.

So now let's take a look at how each of our business segments performed during the quarter. First is the LTL group. The total revenue in the LTL trucking group was $430.2 million, or 6.3 percent below the $459 million that was recorded in last year's first quarter. In the first quarter this year, you've got to remember we had approximately one to one and a half fewer working days than in the 2001 first quarter. Also, fuel surcharges, which we recorded as a part of our revenue, declined by 2.1 percent as a percentage of revenue this year, compared to the percentage of revenue last year.

So, if you put this on an equivalent revenue per day basis, and after removing the effect of the fuel surcharges, the LTL group's revenue declined more like two percent per day, compared to last year's first quarter. And, comparing this to our statistics in the fourth quarter of 2001, the quarter we just, before the first quarter, the decline in the fourth quarter of 2001 on a per day basis, was approximately 6.2 percent per day, compared to the fourth quarter of 2001 - 2000, excuse me. So, you're seeing a 6.2 percent reduction per day in the fourth quarter, and a two percent reduction in the first quarter on a per day basis, so, while we're still seeing the economy slowing, but it's slowing at a slower rate as we go along.

Looking at our shipment and tonnage statistics, the LTL group recorded a 4.2 percent lower LTL tonnage compared to last year. And on a per-day basis, the LTL tonnage declined a little less than two percent; roughly 1.9 percent. Likewise, the LTL shipments were off three percent from the first quarter last year, and on a per day basis, they were up about three-quarters of a percent.

Our revenue for LTL shipment was $111.37 in the first quarter, and this compares to $114.55 last year per shipment, which is a decrease of 2.8 percent. However, when you back out this famous fuel surcharge, a gain in which is about 2.1 percent lower compared to last year, the LTL revenue per shipment was down only about seven-tenths of a percent.

Pricing or rates remain to hold up in spite of the economy. The LTL revenue per weight was down 1.5 percent, including the fuel surcharge. But it was actually slightly up about six-tenths of a percent after backing out the effective fuel surcharge. Part of this is due to the lower weight per LTL shipment, which at 1,106 pounds was about six-tenths of a percent below last year's weight per shipment of 1,120 pounds. This slight improvement in yields is a testament of the discipline of the USFreightways team in the trucking area, and its ability to continue to deliver quality service to our customers that is recognized by our customers.

Now looking at each one of our LTL companies, first at USF Holland, revenue decreased 6.3 percent from last year's first quarter. And on an equivalent basis per day, and eliminating the effect of the fuel surcharges, revenue declined about 2.1 percent. Holland's operating ratio, at 93.9, compares to a 93.0 last year. Holland continues to be effected by the slower economy in the central states, which is so heavily influenced by manufacturing, and in the automotive area in particular.

At USF Bestway, total revenue was off 12.2 percent in the year, this year's quarter, and that compared to last year, eliminating the effect of fuel surcharge again. put on the equivalent per day basis, revenue was off 7.8 percent. In spite of this revenue decrease, operating ratio was a 95.9. While this is two points above last year, it's just slightly above the that we registered in the fourth quarter of 95.6, in spite of having this 2.1 percent lower revenue in this quarter compared to the fourth quarter.

Moving over to USF Red Star, in the highly competitive Northeast area, Red Star showed a dramatic volume decreases in January, with a little bit of improvement in February. Then, a competitor of Red Star closed down, at which time revenue picked up dramatically. So for the month of March, Red Star operated at close to break even. Now the management team is absolutely focused on improving Red Star's performance, virtually leaving no stones unturned.

Going at USF Reddaway, in spite of a 5.3 percent revenue decline, Reddaway actually posted a slightly improved operating ratio, from 94.1 last year to 94.0 in the first quarter of this year. Reddaway has managed to use their outstanding service and quality reputation to actually improve their rates before fuel surcharges, up by 1.3 percent over last year, and has also actually increased their LTL weight per shipment slightly.

At USF Dugan, revenue decreased by only about two and a half percent this year compared to the first quarter, and if you back out the fuel surcharges on an equivalent per day basis, its revenue actually increased by about 2.6 percent. With this, Dugan's operating ratio showed up a degradation from 96.6 last year to a 98.7 this year.

Now looking at our truck road carrier, USF Glen Moore, revenue actually increased by 2.6 percent to $25.3 million this year, and that compares to 24.7 million last year, and Glen Moore actually slightly improved its profits with a 96 and a half OR this year, compared to a 96.6 OR last year.

Moving over to the logistics segment, we have our traditional, in the logistics area, our traditional contract carriage, our contract warehousing, our distribution operations, and also our reverse logistics provider, USF Processors. Revenue in this group decreased by six percent to $66 and a half million this year, and that's against $71.1 million in the first quarter of 2001. This revenue decline occurred in really, USF Processors unit, as a large customer generated unusual volumes last year. Now this contract has since ended, so that business volumes at Processors ran in the mid-teens below the revenues that we saw last year.

The other logistics operations, the contract carriage warehousing and the distribution actually showed a revenue increase in the mid-digits, and along with higher profits compared to last year. At USF Worldwide, our freight forwarding segment, while the group posted an operating loss of $1.2 million this year, this is well below the $3.3 million that we saw - that was incurred in the first quarter of 2001. Now we're not satisfied posting a loss at USF Worldwide, but this marks a major improvement in their operations, even compared to the fourth quarter of 2001. Under and his team, USF Worldwide has drastically cut costs in line with the drop in the revenues that they're experiencing.

The $55.6 million revenue this year is really 14 percent below last year's fourth quarter. And it's approximately 4 to $4.5 million of this is a result of no longer having the Asian joint venture in there effective the beginning of the year. This joint venture was consolidated in our results last year.

The lower losses are due not only to cost reductions, the percentage of gross margins on the freight - in other words, the revenue less direct freight costs - have improved as a percentage of revenue. This results from a higher portion of international business, and is also a result of the new freight management system that was converted over in January of this year. This conversion, which has been executed with just a minimal amount of glitches, gives USF Worldwide better quality information for them to manage their freight boarding business.

The last area in our operating area is corporate and other expenses. This area had a net increase of $1.5 million over last year's first quarter. However, if you look at the details, the amortization of intangibles decreased from $1.7 million in the first quarter of 2001 down to approximately $0.4 million this year. Under the new accounting standard, , which I talked about earlier, goodwill is no longer amortized. Instead, companies are going to perform a periodic test for impairment of goodwill.

Now recalling our results for this quarter, USF recorded impairment in the freight segment, which we just talked about. So going back to the corporate and other, the continued amortization of intangibles represents non-goodwill items, such as customer lists and non-competition arrangements that we have.

Now the other major change in the corporate and other is that $2.7 million increase in IT expenses in the current quarter. This increase represents the major commitment USFreightways is making to upgrade the entire IT area, both systems and infrastructure. The information technology team, under is now diverting a significant effort to this multi-year commitment to maintain USFreightways as a leading edge technology driven supply chain provider. As Sam Skinner has already stated in prior conference calls, USFreightways plans to achieve best in class in IT.

Now going down to the non-operating items of our P&L, interest expense is at $5.2 million, is slightly below the 5.6 million that was posted last year. This represents primarily interest on our $250 million of our bonds that we have outstanding, plus charges for related items. With this build up in cash that we had at year end, which we talked about before, and which I'll come back to in a minute, the company has invested funds rather than paying back our bonds in the open market, because these are trading at such a high premium. This invested cash has resulted in the increase in the interest income that you see to $354,000 this year compared to $134,000 last year's first quarter. As you're aware, with lower interest rates out there, that interest income is going to be, remain at relatively low levels.

The other expensed, in the net expense that you see in this area's of $12.9 million, includes the $12.8 million that I mentioned earlier, which is the charge that the company took to relinquish its investment in Asia. Going to the tax line, there is a tax expense of $2.6 million in spite of the operating loss that you see before tax. If you go to the pro forma part of our statement you can see where this come from, comes from. This occurs because the charge for the Asian joint venture is really a non-deductible charge, it's being treated as a capital loss, so looking at the pro forma presentation, the company showed really an approximately 34 percent effective tax rate. This rate now has been running lower than the 40 to 41 percent that we've been recording in the past, and this is due to a one-time reduction in state income taxes that we realized this quarter.

Going forward, the company expects that income taxes to rebound up to the, in the high 30s, 40 percent area. As the year progresses, we'll be in, giving more details of the tax rate that we expect to use. The rate should be a little bit lower than in prior years though, because most of the amortization of goodwill that's no longer there used to be expensed, it was a non-deductible expense most of it. So, without the goodwill the tax rate is going to tend to go down a little bit.

Now let's take a look at the company's capital expenditures. For the quarter, Cap has amounted to $27 million, and this compares to $16 million last year.

In both last year and this year, expenditures have been really in the revenue equipment, in the properties and real estate. However, this year, more equipment has been purchased earlier on, and the real estate projects are a little bit higher too. Since very little was spent in tractors and trailers in all of 2001, the replacement program is going to pick up this year.

So our projected capital expenditures for the year will be well above the $93 million that you saw last year for 2001. We think the range could be somewhere between $150 million to as much as $200 million. But this depends entirely upon how the economy comes out.

So to close out my comments, let's have a quick reference to our balance sheet. Even with the cash outlays for the higher cap ex so far this year, and the payments for our terminating JV in Asia, the company still had over $57 million in cash and short-term investments at the end of the first quarter. Our debt to total cap was 29.3 percent, compared to 27 percent at yearend. And on a net debt basis - in other words, reducing the debt by the cash on hand - our debt to total cap ratio is 24.2 percent at the end of the quarter.

With that, I'll turn it back over to Sam.

Thank you, Chris.

Well as I indicated to you on January 30, at our year-end conference call, we predicted then that the first quarter was going to be one of the most difficult quarters in recent history in this industry. And, unfortunately, what we saw then turned out to be correct. And it was not only our results, but the results from other companies in the industry, indicate just what a difficult quarter that was.

January and February were extremely disappointing, and there was a slight uptick in March. But it is our opinion that we are far from being out of this extended downturn in the economy that we have seen. And while, as I said, March was marginally better, there are no real signs of a full robust return to high levels of economic activity as of this time.

I'd like to discuss a couple of issues that obviously we're working on. Number one, I can report to you that the consolidation of USF Distribution and USF Logistics has gone well. They have been taking out a significant amount of costs by combining those two business units, and they continue to work very closely together, will market together under one company name, USF Logistics. I think that will make them more cost effective and it will allow them to leverage their skills across our entire customer base.

I'm also like to talk a little bit about USF Worldwide. We've talked at great length in the last year about the challenges that they face. I indicated to you a year ago that rebuilding effort would take at least two years. John Gallahan and his team at USF Worldwide as you can tell from the report that you've got in front of you, have made significant strides in reducing their costs and also in converting to the new FMF system. They've done this in the face of a substantial decline in international business in the freight forwarding area, almost unprecedented declines, and while there is much to be done, we are pleased with the progress that they've made so far. We still have significant issues involving our relationships with our agents and independent contractors, and we will continue the aggressive cost cutting program, and we're working towards break even, or close to a break even by the end of this year.

It's also, I want to also talk about a couple of other issues. Number one, the results at Red Star are disappointing. Pete Neydon and his team are working on a number of the issues that are presented there, economic activity in the East to Northeast has been extremely slow and issues indicated earlier, price pressure exists there, and existed there for some time. That level of the performance is unacceptable, and I think as a result of the steps that Pete Neydon and his group are taking, we will see significant progress in reducing that condition.

I also want to discuss for a few minutes the situation at USF Processors, which that you'll recall is our return business located in Dallas, Texas. As you know, earlier this year we made a management change at the top of that organization, and I believe Denis Reilly, who comes to us through, from Menlo, where he was the number, co-number two executive at Menlo, has identified the problems at Processors and is taking significant steps to correct them.

In the meantime of course, we've lost several significant customers, and we have settled a claim with one customer which caused the results to be at that unacceptable level. I am convinced that with the changes, with Denis Reilly now there, and the changes that he is making, that business will bounce back this year. We continue to believe it's a good business to be in, we continue to believe that our returns manager IT technology is the best in class in the industry, and we have a lot of interest in customers now that we've implemented that program. Although, as you'll recall, it took us longer to implement returns manager than we had anticipated.

And, finally, let me talk about our expenditures in information technology. That should come as no surprise to any of you on this call. I've mentioned that on almost each of my conference calls since I became chief executive officer. While we are not world class in information technology at the time, we have taken significant steps with the support of our board to take us to the level that we need to be to compete with the world class competitors in our class.

That includes a replatformingof all of our freight management systems for all five of our LTL companies, one of which is on a legacy system that is basically on its last legs, and the others of which need substantial upgrading. In addition, as a result of 9-11, we began to assess the strength of our IT operation from an infrastructure viewpoint, and we came to the conclusion that I think many other companies came to, that there was work to be done in strengthening the IT infrastructure, to bringing it strength, to giving it complete backup and duplicate systems, as well as to have a system for disaster recovery. And the moneys that were expended this year were expended in that area as well. And that effort is going on as well.

And, finally, as to the second quarter, while there's a lot of talk out of Washington and out of what I'd call macroeconomists about how this economy has returned, we do not - in talking to our customers and others, we think that while there may be a slight uptick, there is not the robust activity that one might indicate would happen as a result of what I say is the macroeconomists and their reporting. We continue, as we mentioned in the press release, to receive accolades from our customers in both freight forwarding and in the trucking and logistics areas. And we continue to receive a great deal of rewards in this very difficult economy.

With those steps in mind, I'll be glad to take some questions.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone key pad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from of Deutsche Bank Securities.

Hi, how are you doing?

Hi, . How are you?

Good.

I know you talked about the progression, January to February, and February to March, but I was wondering if you might be able to give us a little more specific, you know change and then compare that to what you would see typically seasonal trends?

Yes, why don't I , I'm going to ask Pete Neydon and Jared McArthur each to answer that question, and then I'll ask John Gallahan who's with me to ask it, answer it as far as the freight forwarding, so you can basically get the opinion of three senior managers as to what they see in answer to your questions. Pete, you want to go first?

Sure , we saw an improving trend through the first quarter. The first month was very tough for us, we got hit hard by they fall of the holiday, and January was very soft. We saw some improvement in the second month, and again, more improvement in the third. At Holland, we were down about 11 percent in January, five percent in February and down around three percent in March with the month improving. And we're very hopeful that we've seen the bottom, or that we're bouncing along the bottom and that we'll see that trend continue.

Pete, I mean Jared, you want to comment?

Yes sir. , speaking of probably the most dramatic drop was at USF Bestway in Phoenix, and part of that was our own doing where we had some pricing pressures from a few customers that we decided that we would not participate in those volumes. We are seeing now an up tick in their business. Reddaway is probably next in line, and we've seen a positive trend in the last, like January and I think we're going to see it look forward to increasing itself.

But the Dugan, is probably down the least of all of our companies, and as Chris alluded to earlier, the with the fuel surcharges revenue was actually up in the first quarter. So, you know, while we're not totally optimistic, I, there definitely is a larger amount of freight being handled now than there was in January.

John?

The freight forwarding business started off the year very, very soft. January and February were very soft continuation of the fourth quarter. We saw the first up tick at the last week of February, and it continued to build through March. The only, the U.S. domestic market still remains very soft currently.

The only area where we saw any issues of capacity restraint were out of Asia, shortly after the Chinese New Year, and due to some activity of specific customers out there, there was capacity restraints from Asia back to the U.S. and also Asia to Europe. But they have been sporadic and have cleared up very quickly after the quarter end.

Next question. Does that answer your question, ?

Your next question comes from of Goldman Sachs.

Hi.

A couple of questions - one, can you just comment a little further, other than the Northeast, where you're seeing the greatest pockets of pricing and who it may be coming from? And then, secondarily, can you touch on a little bit - I know you had spoken in early January about stepping up the cross-marketing opportunities between the regions under your new sort of setup from a management standpoint. And I'm wondering if you can give an update on how that may be proceeding?

Yes.

First of all, I think it's fair to say that we're seeing pricing pressure in almost every part of the country now. It started in the Northeast, but we've now seen it going throughout the country. That's been especially true in some of our large accounts. We're monitoring those situations very carefully.

Some of the large accounts are basically putting greater pressure on than we've ever seen. And we have to monitor that closely to make sure that we bid in an effective way. And in some cases, we have walked away from because it basically didn't cover our marginal costs, let alone some of our fixed costs, and it made no sense to it. And I think we're not alone in taking those kind of policies.

So I think that's kind of where we are. Remind me on your second question, ?

Just on the whole cross-marketing aspect...

Yes, I'm going to ask Pete and Jared to talk about that. They've been working very closely together. We've been meeting here at the corporate headquarters on a regular basis to talk about that.

But, Jared, why don't you start, and then Pete, you can add anything you want.

OK, thanks, Sam.

, I - you know, we continue to market our products between our sister companies, as we have in the past. We're working diligently now to get some computer , so that we can track in a better from our USF , which allows us to track between companies is working well. And we continue to actually grow in the marketplace.

Sam, that's what I would add. We're seeing nice growth in this segment of the business, near double-digit.

I should comment that I got a letter from a customer - a significant customer - last week, and she was a traffic manager in one of the companies that we do business with. And she indicated to me that she thought the progress we had made on the net and the way our Web site works, works better than anybody she works with, and it's easy to understand. That is one of the first things we began to work on when came in as our CIO, and to get that kind of customer comments is a real tribute to the workings not only of our IT department, but the effort of our business units in working together. And I think that's an indication I've heard from others as well.

Great, thanks very much.

Thank you.

Your next question comes from of Bear Stearns.

Mr. ?

I just want to get a little bit more clarification, because you did talk about spending more money on IT, but it came in at roughly 5.7 million if you back out the amortized goodwill. What should that look like as we go forward in the next, you know, for the rest of the year each quarter?

I'm going to let Chris answer that, but we are making a significant effort. I think it's fair to say that over the next several years, as I think I've indicated earlier calls, we were spending as a percent of revenues, which is the usual measure that we measure IT expenditures, we were spending at the lowest of any major company in the industry. And we have basically doubled that, but that's still, by the way, because I think we're doing it more cost effectively than some, we're still below some of the world-class competitors who will probably spend another 50 to, you know, twice as much as we do. Chris?

Yes, thanks Sam. Yes, that number's correct, it's about 5.7 but that includes everything, of which IT is the largest number. The way these expenditures are going to come down is highly dependent upon where you are on these projects. As you go along, some of the expenditures will start being capitalized at a greater rate. Right now we're at the beginning of a lot of these areas, so it's a larger proportion of them are being expensed.

I think it's fair to say that the numbers that you saw in the first quarter are a good baseline going forward, and it will be ramping up at a certain rate. But as we get into these projects, and these are multi-year projects, I think Sam has alluded to earlier, in earlier conference calls that this is going to be four or five years out there. And as we go further into it, the percentage of the total costs that will be capitalized will go up, but it could ramp up, I don't think it will double by the end of the year, but it will ramp up maybe as much as a million dollars more a quarter, as we move along in the year. Again, when we have more information about when we get closer to the sort of capitalization percentage of the projects, we'll let you know.

Sam also alluded to the fact the we're spending a lot of good money we believe, on our infrastructure, and the nature of that is to be expensed. And that's to put in the backup facilities and things that we need as a result of what we saw in the terrorists, and beefing up the actual computer systems, computer locations, and security throughout the company.

And the $150 million to $200 million of cap ex guidance that you gave for the year, is there any IT cap ex ?

Absolutely - absolutely. There's a very large percentage. I don't have the budget numbers in front of me, but they will be in the neighborhood of...

About 44...

Forty-four?

Forty-four million dollars in tech services in our cap ex - in our budget. We may not spend all of that, but that's what we're basically. There could be as much as $44 million in cap ex under our program. And that - that doesn't - then obviously we also have, as you see from the statement, some significant increases in our operating income.

OK.

And, , if we look at the $5.7 million of corporate, how much of that's IT, and what is the rest of it that's in there?

Well, there are the costs of the executive group, the whole corporate staff, if you will. It's a relatively small staff, and it hasn't grown very heavily.

So your expensive tastes are in there, huh?

Yes. You know, a couple of barbecue restaurants out here. You know how it is. But it's really - the line share is in the IT area.

OK.

Just switching gears for a second, on fuel, is it possible - can you give us the numbers - and if you don't have them now maybe you can get back to us - on what the decrease in fuel surcharge was and what the decrease in costs were for fuel for the quarter versus last year?

Two-one, right?

Yes, what happened was we measured the fuel surcharge as a percentage of revenue last year, and the percentage of revenue fuel surcharge last year. Roughly last year, for the first quarter for the group, it was just about three percent of revenue. And this year it's about nine-tenths of a percent of revenue. So...

If you remember, I said it dropped by 2.1 percent.

Right. Now is that a netted out number, though? How about the cost size, since costs are down 21 percent year over year?

Well we don't have the exact figures, but needless to say, the fuel surcharge is really considered a hedge here. We don't believe that we make a lot of money or lose a lot of money on that. And we try to - and we believe that the fuel surcharges are a pretty good estimation of what the changes in our costs are.

And as you - as it will come as no surprise to you, the last two weeks we've raised the fuel charge as a result of what's happening in the market. But that basically - we stayed pretty much on top of that and adjust it up and down, basically, on a weekly basis. So we stay pretty close to that in cost versus revenue.

OK, thanks a lot for the time guys.

Thank you.

Your next question comes from of Morgan Stanley.

Yes I had a question, I was hoping maybe Pete could address and I know that you've become more involved in kind of the day-to-day operations at Red Star. I just wanted to understand from your perspective, and you know, returning that company back to profitability, is it a matter of just picking up tonnage and you know, reimprovement of volumes, or are there freight mix changes that have to be made there? I understand the Northeast has always been a tough pricing environment, I just want to know, from your perspective, what needs to be done to return that company to sound profitability?

Well the good news is that we have a strong team of good people at Red Star. the President, in sales, at operations are very solid, and we have been spending a lot of time discussing what we need to do to get Red Star back to some positive numbers. I would prefer not to go into a lot of detail as to some of the plans we have, for competitive reasons, but we see some opportunities, and they really do pretty much revolve around getting additional revenues, and we see some ways to do that.

So, we're going to be implementing some plans during the next quarter, and beyond this year, and I'm hopeful, very hopeful for Red Star. As you probably know, Red Star was in the black prior to the recession, and 9/11 had a big impact on it as well. And we think we can get Red Star back to where they were.

OK.

And continue to build.

Great, and one other question, that I was kind of switching gears over here to Worldwide. Obviously, you know, there's a lot of progress been made there this quarter, I just wanted to know from your perspective if you thought that, I know you guys have been, you know, reducing fixed cost at that business, if the fixed cost cuts were kind of in line, and that all we need now is really improvement of revenue, and you know, an improvement in the economy to get that business back to profitability?

John, I'm going to ask John to answer that question.

Great.

I plan to get back to profitability included cost reduction and margin improvement, and we made progress on that in the first quarter. The, there are additional costs that we need to reduce in order to achieve our plan, and that's critical to getting those costs out in order to be back on solid ground of profitability. Part of that, just to elaborate a little bit on that, is obviously three-prong. We had costs in the headquarters that were leftover from the multiple acquisitions that we made, and the multiple IT operating systems.

Some of those are continuing, ongoing, even though we've converted to the new freight management system successfully, we still have, we still are running those other systems until we can wind down the activity in those. So we are carrying that cost with us during most of this year.

The other aspect of it is improving the performance of our company branches here in the United States, which we made great progress in the first quarter, but we have clearly identified other areas where we can continue to make progress there. And the third is, as Sam alluded to, we recently met with our independent contractors here in the United States, and jointly together we developed a plan which would help Worldwide achieve profitability, which involved both concessions from them and also additional sales and marketing support from us. And execution of that part of the plan is critical to our success going forward.

OK, great. Thanks for the update.

Your next question comes from of J.P. Morgan.

Hi guys, hi Sam.

A couple of quick questions. This one is probably for . On , which seems to have more of a shipment decline than the rest of the group, it sounds like what you're saying is it's an issue of competition as opposed to the economy in that region being weaker than the rest of the group. Is that fair?

I think that's a fair statement. I think - you know, there were four or five accounts which I really don't want to mention, but - that we've actually walked away from. Another thing that's very positive about , though, is that we not only have a new vice president of operations, we have a new vice president of sales that came out of our corporate. He was a director of corporate sales in Chicago, and we see some very positive things coming out of in the next period.

So there is a lot of business to be had there. We know that. But a lot of it's priced pretty deep. But I think as we call it, the new is going to move forward.

And just following up on that, showed a little better shipment growth - the - nationwide. Are they a competitor that you're seeing more aggressive, or is it other players out there?

You know, actually, you know, they're always in the market. But it's probably the smaller guys that are taken these niche markets and going in and just really cutting down the price. While their services may not be as good as ours, and a lot of people are, you know, going for price now. So I wouldn't say it's the specifically either.

OK.

And I guess switching gears, probably to on the subject of Red Star. It sounds like things really picked up in March with the . What were volumes, or what were shipments like for the month of March? You were down about three percent for the quarter. Were March volumes positive?

Red Star certainly came on strong at the end of the month, after the APA and we're showing positive numbers.

OK, and ...

... they've been careful about the business that they've taken on from a pricing standpoint, and they are confident that the business they're bringing on board is paying its way.

So from the standpoint of break even, it's really a volume game, to the extent that you saw surge in volumes ...

Well apparently additional volumes are going to, going to help Red Star's bottom line.

Right.

And there we're seeing, we're seeing some good trends.

And, I guess just moving to the forwarding side of the equation, it's, is it fair to assume on freight forwarding since this is a very tough seasonal quarter for the forwarding business that unless something changes dramatically you should show a sequential decline in the operating losses, if for no other reason than seasonality?

John, you want to answer that?

Well it's clear the first quarter is the most difficult in the freight forwarding of the four quarters. However in order to achieve the rest of our plan and to get back to profitability as Sam said, which is the target for the end of this year, we have to, we have to get these other cost reductions that we've already targeted and we're working to execute. Any improvement in activity as freight forwarding generally does improve as the year goes on, will just help us towards our goal of achieving that result.

Right, right, no and I hear you on the plan, but I guess what I'm trying to think of is there a worst case scenario and a rate of change perspective? There was nothing one-time in nature from hearing you in the quarter because you did a lot better than we were looking for, there was nothing one-time in nature in the forwarding operations that would lead you to think that things could get worse from a status quo perspective?

No, if we look at the three sectors we obviously as a result of pulling out of the joint venture in Asia, we did not have the losses in Asia in this quarter's activity. We had improved results from our U.K. subsidiary which, a vast majority of their business is Asia business, so they continue to improve their results even though we changed our relationship with the agent out there, we've continued to grow business and grow more profitable as a result of that. And there was improvement in the U.S. operation as well, although we're not all the way there in the U.S. as we want to be.

Great, great. One final question Sam, can you talk about capital allocation and cash flow? I guess you're ramping up cap ex quite a bit here, yet returns in the marketplace, at least from an equipment perspective are still pretty low. Wouldn't it make more sense to defer more aggressively perhaps some of your replacement and perhaps do a share buyback? Just comment on how you feel about...

I'd be glad to. I'm glad you asked that question, because several - when we had gotten several questions on what's going to happen on October 1 when the new technology rule comes in from the Environmental Protection Agency. What we are doing is - most companies are doing - is that we also have to deal with the fact on October 1 there's going to be a new requirement on engine manufacturers to produce a more fuel - a more emission efficient engine, which has not yet been developed, and only one has been certified.

The initial indications are that these new engines will add several thousand dollars to the cost of each tractor. They will produce less miles per gallon than the current engines, and they may require higher maintenance, especially in the early stages of these prototype engines.

We began to analyze that process of when we should buy tractors. So while we normally would be deferring equipment, especially tractor purchases, as long as possible to take advantage of the technology and when it's ready, rather than when we have to, we've decided that based upon our analysis it probably makes sense to continually track the purchase through October 1. Maybe even accelerating some of the tractors we would by in 2003, and then have a voice period in 2003. And the pay-back on that is quite significant based upon the predicted increased costs of the tractors, the increased maintenance costs, as well as the reduced fuel efficiency.

And when you compare that to what we're getting in the market for our money, or you compare it against the return we'd get on a purchase buy-back at current prices, that is the most effective way to use our cash. And we probably will do so. But I think you can see - you can probably assume that after October 1 that there will be very few tractor purchases for some time.

OK, thank you.

Your next question comes from of Credit Suisse First Boston.

I had a couple of questions.

On the tax rate, it came in at 33.7. What's the guidance for the rest of the year? And, you know, that differs a bit from the 42.4 you gave us in January. So if you had any background on that?

Yes, David, this is Chris.

Number one, there will be a lower tax rate on normal circumstances this year and going forward than you would see in the past, because we're no longer deducting goodwill expenses, which are largely a non-deductible item on our P&L. So when you have less of that, which has a tendency to raise your tax rate, that's going to bring it down. That's good for maybe, if you were running 42 that's good for somewhere between one and two percentage points. Exceptionally during this quarter in which what's happened is, it's a very low base for the income that we had in the first quarter.

But we did have a state tax benefit which is a one-time tax reduction, for part of our tax planning that we put in place last year, and we realize that benefit this month, this quarter. Now that's a one-time event, so going forward as I indicated, we don't expect to have a 33.7 or a 34 percent tax rate for the rest of the year. Depending upon the level of income during the rest of the year, it's going to be more closer to around 40 percent. So, for your modeling purposes I would not use 34 percent, but use closer to somewhere between 39 and 41 percent.

OK, in terms of Red Star, you know, not to harp on that subject, but you know, seems that Holland's doing pretty well right now. How much of the up tick in business do you see continuing coming from APA going under?

Well I think that the APA obviously helped in March, significantly, and it allowed us to reduce our loss in a couple of weeks during March. We actually made a little money at Red Star. I think that business will settle out and that, you know, that probably will continue. Having said that, what we obviously need at Red Star in addition to addressing some of the cost issues that keep Pete talked about, we have to address our revenue issues and as a result of that, I think that we're going to need additional revenues to complete a turn around at Red Star. Both from more aggressive sales, not only to the APA customers but to others, as well as some increase in the economy.

What percent of your freight would you say, across all the divisions, travels in the two to three day lanes?

Pete, you want to take that one?

Yes Sam. At Holland, three-quarters of our business is next day business, so twenty-five percent is two day. Very small percentage, probably a little less than one percent is three days, and the numbers at Red Star would be very close to that, with I think virtually no three day business. So that's the way it is in the east.

Jared, do you want to talk about the West?

Yes. Reddaway is quite different than . Reddaway is 65 percent of their business the second day, and 30-some percent is overnight. That could be 60 instead of 65.

Now for overnight, 40 percent overnight and - excuse me, 60 percent overnight and 40 percent the second day. our companies have very, very little, maybe one or two percent of three-day . Dugan has almost the same numbers as . They have more overnight than they do second day.

Seventy percent corporate-wide is one day, 98 percent is one in two day, and two percent is over two days.

OK.

In terms of Worldwide, you know going on what was asking about, any one-time issues in the first quarter, I mean, you know, the rate of change is - seems to be improving better than what most people had projected. So I was a little curious why, you know, you're still thinking year-end break even and not maybe a bit sooner?

Well, I'll answer that for John, because John can add anything.

Number one, we still have some impediments to getting to break even. We've taken most of the one-time charges and those things that are appropriate now. We still have some expensive real estate that we're sitting on that we have - actively in trying to market and get the less expensive real estate. That hasn't happened yet because the - that real estate primarily is in Chicago, which is a very depressed regional - suburban commercial market.

We're still optimistic we'll get out of that space. The single biggest challenge - not challenge, is to implement the agreements that were reached between the ICs and Worldwide corporate, which increased - which includes increased marketing at USF Worldwide corporate, and some changing in modifications to the current agency agreement. Those two things have to reach fruition in order for us to get there.

And if you consider that the second quarter - you know, the activity still hasn't bounced back - we would like to surprise you with a break even in second quarter, and that's our goal. But it may be optimistic given the amount of changes we have and the lack of activity.

One last question. On the acquisition front, is there anything out there that you guys have been looking at, or any types of companies, you know, if you have any comments on that?

Well, we continue to look at opportunities, there's not a week goes by that we don't look at an opportunity and talk to them. Some of those, a number of them are depressed businesses in the trucking area, and we've taken a pass on them, because they're basically buying the customer list and maybe buying some assets. But we continue every week to have dialog, but there's nothing in the hopper right now.

OK.

And we also get opportunities in the logistics area, and we continue to pursue them, so I think our, you know, the number of deals and situations we'll look at in 2002 will be up significantly from those that we looked at in 2001. But you know, you probably, if you get one out of 20 that you look at that, that you decide to go ahead, that's probably an industry norm.

Right. In terms of Processors, and this is my last question, was this past quarter the last in which we would see the tougher comp due to the unusually large business levels?

I think so, although it's, you know, we're working ourselves out of a hole there, as I've indicated to you earlier. I am absolutely convinced that Denis Reilly is the right person to take this to the level it needs to be, and he know what he needs to do. We obviously took some lumps from a big customer in the first quarter, we don't have any more situations like that that I'm aware of, we've pretty well cleaned those up.

We obviously have decreased volume as a result of the exit of that customer, but I think we're now in a position to market and price our product, you know, not only competitively, but profitably, and we will do so. So I don't expect to see those kind of losses and nor do I see them so far in April. But we still are digging our way out of a hole there.

OK, thanks a lot.

You have a follow-up question from of Bear Stearns.

Can you talk a little bit about the labor increases when they go into effect, and how much they are both salary and benefits?

Yes, I'm going to ask Pete to take that question. They went into effect January 1, and as you know the contract expires March of next year, but Pete, you want to take those?

Well the labor increase went into effect April 1st.

April 1st, I'm sorry.

That's for the contractual people. For the salaried people, we have an annual review process and they were adjusted at the beginning of the year. The overall labor increase was around 1.8 percent but we've actually seen a little bit more of an increase with that because of the fact that when we layoff and we have some people on layoff status, we layoff by contract the lowest paid in our organization.

Now I'm guessing that that 1.8 doesn't include the benefits. What's the benefits going up?

Overall, the benefits, as a percent, when up more than that. But the total impact of the increase was in the neighborhood of three percent. We're actually experiencing a little higher than that, as a result, as I say, of the layoffs and laying off the lowest paid. The effective wage for contractual employees is up a total of 4.2 percent in the first quarter.

4.2 percent? And where was it a year ago under the contract and in reality?

It may have been actually a year ago a little higher than that. I don't have the number in front of me at the current time.

OK.

And then one last question. , do you have the depreciation amount for the quarter?

We'll - I got it right here. The depreciation in amortization for the quarter is roughly $25.4 million.

OK, thanks a lot, guys.

At this time there are no further questions.

OK, thanks to everybody. We will continue to keep you advised as appropriate.

I did want to continue to remind you that is still in effect, and we are complying with it. And we hope all of our fellow competitors are as well, because it's the law of the land. But if you have questions that you want to send us, and we'll be glad to answer those as best we can and put them on the net for everyone to see.

Thank you very much.

Thank you for participating in today's USFReightways first quarter earnings conference call. This call will be available for instant replay beginning at 12:00 PM Eastern Time today through 11:59 PM Eastern Time on Monday, April 29, 2002. The conference ID for the replay is 372855. Again, the conference ID for the replay is 372855 - 885. The number to dial for the replay is 1-800-642-1687, or 706-645-9291.