Yellow Corp (YELL) 2002 Q4 法說會逐字稿

Good morning, my name is Anissa and I will be your conference facilitator today. At this time I would like to welcome everyone to the Yellow Corporation fourth-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks will be a question and answer period. If you would like to ask a question during this time, press star and the number 1 on your telephone keypad, if you would like to withdraw your question, please press the pound key. Please note this call being recorded. With us today is Bill Zollars, President and Chairman and CEO. Don Barger, CFO of Yellow Corporation. James Welsh, President of yellow transportation, and Jim Ritchie, President of Meridian IQ. Thank you, I will turn the call over to Mr. Stephen Bruffett, treasurer of Yellow Corporation. Go ahead, sir.

Thank you, Anissa and welcome again to the Yellow Corporation fourth-quarter conference call. During our conference call today, we will make certain forward-looking statements regarding our outlooks on certain matters. Company outlooks in these forward-looking statements are subject to various risk factors. We will try to highlight these risk factors as we discuss these statements; however the format of the call prevents a more thorough discussion.

For a more thorough discussion, refer to our annual report, 10-K, 10-Q and the forward looking disclosure in last night's earnings release. Before I turn the caw over to Bill, let me emphasize any financial results discussed in today's call are presented in the New Yellow format only that excludes SCSC Or treats them as discontinued operations. Now turn the call over to Bill Zollars.

Thank you, Steve, and welcome. As we finish off 2002 and head into 2003, I can tell you that the company has never been financially stronger. We have never been operating more efficiently than we are operating today, and we have never been better positioned for future growth. We have a tremendous amount of momentum coming off what we saw as very good quarter. I know there's been a lot of focus on the outlook, and we will spend considerable amount of the call today giving you additional information and providing more clarity around the guidance, but before we get into that, I want to cover what I think was an extraordinary year for Yellow in terms of accomplishments. Let me give you a quick perspective on the fourth quarter.

We did provide expectations of about 15% revenue growth in earnings per share between 45 and 50 cents. And we also stated that our objective was to grow both volume and yield at the same time. Our actual results for the fourth quarter really lined up favorably with all of those forecasts. Earnings per share, as you know came in at 50 cents at the high end of our guidance. A pretty big improvement over 7 cents a share from 2001 in the fourth quarter. We grew our revenue by 19% on consolidated basis and simultaneously increased yield. And might just point out that of the three of us that are normally put in the competitor category, we have the best earnings growth and the best improvement in operating margin in the fourth quarter. For the full year, the story is even a little bit better. Earnings per share excluding unusual items, as you know, $1.03, up from 56 cents in 2001. So we have just about doubled our earnings per share with about the same revenue volume as last year. And that's earnings per share doubling is with 15% increase in the shares outstanding due to the equity offering we had in 2002. I want to point out to you if you look at the full-year basis and compare us with our competitors.

We had the highest growth in revenue, by far the best growth in operating income, and the best growth in margin as well. So we feel really good about the performance not only in the fourth quarter but for the full year. And that performance could have been significantly better. As you know we took some additional accruals for workman's comp this year that totaled about $30 million or 60 cents a share. So if you just look at the operating fundamentals of the business, without that adjustment, on the workman's comp side we could have been at $1.63 or thereabouts. In addition to that we generated $50 million in free cash flow in 2002 and that was a big improvement over 2001 as well. As a result of that equity offering, the spinoff and that cash flow generation, we ended 2002 in a very strong financial position. Our debt-to-cap ratio is now around 20%.

As I said, I think the best financial strength that we've had at least since I have been at the company, and that gives us a lot of flexibility in pursuing our strategies. Our strategy for 2003, very consistent with where we have been, one-stop shopping. 2002 we made a lot of progress in that area. In January, as you know we are launched Meridian IQ. They are off to a really good start. They have gone from about 25 contractual customers to 190. They have gone from managing about 150,000 shipments to managing about 600,000 shipments and they have become profitable. They are off to a real good start. In April we did our equity offering and as you know that was very successful and raised 94 million dollars.

At that time we talked about tuck-in strategies to assist the growth of Meridian IQ and we made a couple of those in August with the acquisition of Megasis and Click Logistics. And then in September, consolidated freightways closed their doors and we believe we responded very effectively to that. As a result, we throughout about $300 million of profitable business on an annual run rate basis through the fourth quarter and picked up 100 million of that and the full $300 million annualized impact will hit us in 2003. So we feel good about the way we reacted to the CF bankruptcy. In September we completed the spinoff of SCS and another strategic event we believe benefited the shareholders.

Throughout the year, we continue to focus on penetration of premium services, and just as an example, Exact Express continues to grow very rapidly, grew about 35% year-over-year, as did many of our other premium services, and that continues to be a central part of our strategy going forward Tampa -- going forward. And then our investment in technology continued in 2002, probably the most obvious example of that technology is we now have over 100,000 customers using our MyYellow.com web site to do business with us.

It has also allowed us to move into regional markets using the same network that we use for our long-haul business which allows us to get that done without having to acquire companies with separate networks. So all in all, a lot of real significant progress on the strategy, and we think a very solid year in terms of operating performance, and we are carrying that operating momentum right into 2003. So I now want to shift over and talk a little bit about the outlook and the focus that has been there since our press release. The first thing I would like to do is take you from the fourth quarter to the first quarter in terms of a bridge, because I think part of the problem that we've had is dealing with seasonality effectively in some of the forecasts on the street.

Historically, as you move from the fourth quarter to the first quarter of the year, our earnings usually are about 50% in the first quarter of what they were in the fourth quarter. So if you start by taking a 50 cent a share number in the fourth quarter of 2002 and cutting that in half, kind of the baseline would be 25 cents. As you know, we included in our press release the cost of doing our biannual transformation conference which was extremely well attended this year, and I know some of you know the reaction from the customer base to that conference. But since that was not in our first-quarter numbers last year and is in this year, it has about an 8-cent impact.

So if you took that 25 cents, which you would expect normally as part of the seasonality of the business, took the 8 cents out in that 17-cent area which gives you a little feel for where we are -- where we are headed. Then again, historically, if you look at the first quarter as a percent of the annual earnings, it ranges somewhere within 10% and 13%. Just to make the math easy here, let's just take the 10% for second. And, again, go back to the guidance that we've given you, 15 to 20 cents, add in the 8 cents which is kind of a one-time cost. So now you are at the 23 to 28 cents for the quarter times 10 gets you to $2.30 to $2.80 and that's kind of where we are in terms of our view of the future. The momentum coming into this year is still very strong. Every month of the previous quarter got stronger.

So October, November, December, every succeeding month was stronger than the previous month. January has now with about a week to go has been about equal to September in terms of the momentum. So there's no loss of momentum there. On the volume side. On the yield side, it has actually gotten better every month including January. So January's yield is better than the yield in any of the previous three months. So the 23 to -- you know, the 23 to 28 cents and then the $2.30 to $2.80 is kind of the way we are looking at the world.

The reason we said we were more comfortable with the lower end of that range is because we are trying to take an extremely conservative view of 2003. The economy, although there are some signs recently of a slight uptick, is still very fragile, and we are taking the view that the planning we need to do as a company should be on the basis of a flat economy. So that's why we said we were more comfortable with the low end of the range; however, you can see from the $2.30 to $2.80 spread, that there is a potential if we did get to the $2.80 to have the best year in the company's history. That's kind of the outlook from an earnings-per-share standpoint. To give you more flavor around the forecast, we will expect that Yellow Corporation will operate around the 94 OR for the full year, not in the first quarter but for the full year. And on top of that, you can assume that the corporate residual expense will been the same as it was in 2002.

And I think if you do that math, you will see that, again, we are coming out somewhere in the $2.30 to $2.80 range in terms of our expectations for the annual number. So hopefully that gives you a little bit more information and flavor around the guidance. I'll just close by saying what I said at the beginning. We feel very optimistic about the future potential.

We are really in a very strong financial position from a balance sheet standpoint, the momentum in the marketplace seems to be continuing and our ability to manage growth in both yield and volume appears to be working very effectively. So with that, I will stop and we've got everybody here so we can get into any kind of detailed questions would you like to ask. But at this point, we will turn it over to you for questions.

Thank you, at this time, I would like toOCF1 O remind everyone in order to ask a question, you will need to simply press star and then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q & A roster. Your first question will come from Ed Wolfe with Bear Stearns.

Hi, Bill.

Hey, Ed.

Just wanted to have one point of clarification. In the first quarter I think you alluded to 8 cents related in the conference. I am guessing what you meant was some of that was also pension, because at the analyst meeting you said $3 million of expense, maybe $4 million for the conference that will make it substantially higher than that. I just wanted to --.

Actually about $4 million Ed and and this translates into 8 cents a share.

Just doing my math.

Yeah. And then the pension impact on the first quarter will be about $2.5 million. Only reason I didn't mention that is we think the annual impact of that is probably around $10 million. So you know, that's not necessarily a one-time cost, but the conference certainly is.

Okay. And Don, can you talk a little bit about what the -- we talked off-line about the assumptions for pension, but do you have a better idea of the cash impacts and what the cash outlays might or might not be over the next couple of years.

Yeah, I will let Don speak to that. He's got access to the numbers here on the cash side.

Yeah, Ed, we have funded the pension about $11 million, $12 million in 2002. And we have done our actuarial report and we will be doing $25 million this year -- 35 million this year and then about $25 million the following year but we actually do take a longer-term view on that and are very comfortable with our ability to fund the pension, as well as continue to provide enough capital to grow the business.

Okay, thank you. Bill?

Yeah.

Seems like not just you guys but also certainly Roadway were fairly conservative in their first-quarter guidance. Does some of this have to do with uncertainty depending on when the timing and when the contract plays out you just don't know what might be ahead of you?

Yes.

And do you get a sense now with the recent developments with the Teamsters bringing in, you know, doing what they normally do and trying to get an internal authorization vote, things going any different than you thought when we spoke last week?

No, I don't think so, Ed. You know, maybe just kind of a summary comment on that. And obviously we don't want to get into any details here, because you know, we are not at the table. And we don't want to negotiate this in public, but the reality of the situation is that we've been negotiating now for a little over three weeks straight, and it is not unusual after the two sides get an opportunity to trade economic proposals to take a little bit of time off to digest those which is where we are.

And as you might guess, the Teamsters asked for a little more than we thought would be reasonable, and we offered a little less than they thought was reasonable and I don't think that would surprise anybody.

But in terms of the process that you go through, you may recall that the strike authorization vote was asked for by Teamsters in the UPS negotiation and they ended up with an early settlement seven days later. So I think it is part of the process. It didn't surprise us. We still feel good about getting this contract renewed before it expires.

Do you have any sense from your customers of -- you know, is there a particular day or time when they start to get a little bit nervous and put contingency plans?

I think it varies by customer, Ed. Some of them already have contingency plans and we understand that, but we are pretty convinced that they are not going to need them.

Okay. One last question and I will let someone else have it, on the Meridian IQ side, now that you hit profitability, I am guessing in the first quarter maybe you will take a step back on the profitability side, but for the year, what kind of margin do you think is obtainable at Meridian IQ?

It is a little tough to read that one accurately because we are in a growth mode there, and we are going to be reinvesting in that business to accelerate the growth and we will be looking at ways to do that for both organically and through tuck-in acquisitions. I think you -- for the year you will see small contribution to operating income from Meridian IQ, but beyond saying it will be positive and it won't be big, it's hard to tell.

Okay, thanks a lot. I appreciate the time.O CF1O

You bet, Ed

Your next question comes from Jason Sidel from Avondale Partners.

Bill, Don, how are you this morning?

Can't complain.

Bill, you mentioned that there was a lot of mow men forum October through November and December and into January. Can you clarify that in terms of a tonnage basis per month?

Let me give you actual numbers kind of rounded. But they will give you a sense of what's going on here. And I will just give you some LTL weight numbers that I think you can I think judge the trend. In October we are up about 11 percent year-over-year. November up 14. In December up 16. And in January that trend is pretty much held even with December. So, you know, you can see they are building momentum on the volume side. And the other thing that's important to know is that yield has gotten better every month including January.

That was kind of leading into my next question. Is that improvement in yield a function of raising some of the rates on the CF rate that you have -- Freight that you have taken or an overall effort to boost rates in some of the customer bays.

It is really both, Jason. We did get significant increases on the business that we took over from CF. But we also have about a third to a half of our contractual customers come up for renewal in the fourth quarter, and we did better there than we have historically.

I am going to assume that you did better historically because we have a huge discounter out of the market now, right?

Yeah, that's really one of the reasons. The other is just a capacity issue where, you know, supply and demand are in much better balance now without that billion and a half dollars' worth of capacity at CF.

Okay, I might have missed this and I apologize if I did, can you talk about your Cap Ex projections on a gross basis for next year, for this year.

I will let Don.

Cap Ex somewhere between $100 million and $110 million.

$100 million and $110 million. Thanks a lot, guys

Dan Moore with Stevens.

Good morning, guys.

Hi, Dan.

I have several questions but I will try to keep it as brief as possible. Just to start off on the yield side, I want to be clear about one thing, fuel prices have clearly risen here lately. When you see the yield progression or talk about it in the first quarter, that's excluding fuel surcharge, correct?

That's correct.

And can you give us a sense for -- and you may have said that you weren't going to and I missed it. Can you give us a sense of what the yields look like on a monthly basis? Yield growth?

Yeah, I don't have that in front of me, but, you know, overall, for the quarter, it was, as you know, 3.4%, and it's held at about that level and gotten a little better actually in January.

Okay. [ INAUDIBLE ] Business. I talked to several shippers and some of your competitors and my sense is that you -- you all are looking at some of the business you brought on, and, you know, making some decisions along those lines and obviously you picked up quite a bit of business before CF ever went out. Can you talk to me about your strategy right now to improve yields and kind of what's under way?

Sure, Dan. You know, we are operating as we have said in the past at about 90% of capacity right now, which is about where we want to be in terms of efficiency of the network. We continually focus on customer mixed management, and we will do that as the economy recovers, and be very calculating in terms of adding capacity only when it makes sense. So I guess what I am saying there is we are continuing to do customer mixed management and keep our capacity at about -- our operations at about 90% of capacity with the richest possible customer mix in terms of profitability, and that's a real-time ongoing kind of effort.

Have elevated that focus lately? I guess that is what I am trying to get at.

The focus has been there for the last two years because of the situation we have been in from being driven primarily by the weak economy. So I would say that focus has been intense for quite a while now and remains very intense.

Fair enough. On the GDP growth side, you make some comments -- made some comments in the press release regarding growth in '03. From the economy. And, you know one thing I didn't see in here is if the economy grows, what EPS could do in the sense of, you know, I think the street was certainly assuming some combination of either economic growth or additional CF business in their forecasts. When we try to make sense of all that, you know from GDP growth is growing at 2% to 3%. What does that mean for Yellow?

Yeah, I think that -- you know, the economic engine is so vital to this business that it can have tremendous impact because, you know the operating leverage that we have. You know, we are assuming 0 growth. If that were to go to 3, it would really increase the likelihood that we would be near the upper end of that range that I gave you, but we just aren't going to plan on that. And it is pretty tough with all the uncertainty in the world around the international situation that we ought to be planning on that. You about it does have tremendous impact because of the operating leverage.

I realize it is difficult to answer this next question. But can you give us any idea of what your core business is doing, core business, I mean -- what I mean by that is, you know, business excluding the impact from CF on the quarter?

You are right, Dan. That's very hard to unTangle that. We -- if it is not flat, it may be a tick positive. And by a "tick" because that is a very technical term we use in the transportation business. By a tick I mean maybe 1% or 2% positive. But the good news is, it is not going down. Worse case is it is probably flat. Best case is it is probably going up a couple of percent.

I will wind down on two questions and then hand it over. What -- what is the business from CF annualizing that?

About $300 million.

Okay. No chance that's going to go to $350 million?

There is always a chance. You know, we are focusing on service excellence here, and as customers --

I even in the tonnage is improving through the course of the quarter as it did, I guess I should ask the question a little differently, is that because comps were easier in the fourth quarter as you moved through the quarter or because you are actually bringing on more business?

Well, again, it is probably a little bit of both. You know, what we would expect to happen depends a lot on the economy. If the economy starts to pick up, sure, that 300 could go to 350 because the underlying demands from those customers will go up and that will probably be the most telling aspect of what that number turns out to be for the year.

Sure. Last question here. Share repurchase authorization. Where do you stand on that? I am looking at your balance sheet. Not a whole lot of debt. Stock has fallen 50% here recently which I probably don't need to point out. Where do you stand on doing something there?

Well, we've got the authorization. We dusted it off, because we think our stock is undervalued right now and we will pull the trigger on that when we think it is the right time to do it.

Is that a new authorization or something that's remaining in an existing authorization?

We've got some previous capacity from past authorization, but, you know, we can enrich that if we need to very quickly.

Guys, thanks for the time.

You bet, Dan

Your next question comes from John Barnes with Deutsche Bank.

Hi, Don, on the Cap Ex assumptions, can you give us the distribution on where the -- between revenue equipment and other and what is "and other."

Sure, John, basically think of it in three buckets. About 65% of that will go toward equipment for, you know, rolling stock. About 15% for structures and that's driven by picking up a couple of additional terminals that we think are attractive. And about 15% on the technology side. And then the balance is "other." Which is pretty small.

All right. In the fourth quarter, you essentially had to accrue all your management bonus, you know, once the CF business came in. Can you give us an idea what the total bonus was that was accrued?

You know, I think when we finally end up sending out the results for the year you will see that the total bonus payout was in the $20 million range. So, you know, it's most of that.

So 95% in the fourth quarter?

No, a little less than that, John without getting into the specific numbers but it was a big number.

Okay. And --.

Because, you know property of bonus we pay is to the sales force and that's a little more consistent throughout the year.

Sure. And then lastly, Don, can you give us what the total on the corporate residual is for '02?

Sorry, John, didn't hear the question.

The corporate residual in '02, what was that total number.

In '02, around $14.5 million.

That's what I had. Thanks.

Your next question comes from Jeff Rosenberger with Clover Capital Management.

Following up on last question of bonuses, can you give us a idea of how high the bar is raised for three levels in '02.

Yes, Jeff, I can. This is probably the first time we have talked about it but probably important in the sense that one of the things that we always look at is being able to feel good how much the shareholders get versus how much we pay ourselves. So this year, because we -- we didn't think that the return to shareholders was going to support the kind of bonus percentage that our formula would normally generate we cut that in half. Or to say that another way, payout at target was 50% of what it would be in a more robust year and in a better economy. So we did raise the bar significantly from an internal performance standpoint.

So it -- I guess what I am trying to understand is if you make your -- say the 230 number that you have been talking about, will that be enough to trigger a bonus?

Sure. Well, without getting into the specifics, you know, the plan we have for 2003 is more consistent with what we've had previously, and a little different than 2002, because we would expect the shareholders to get significant return before we start paying out the bonus. So to say it a different way, we will be much closer to paying out at target if we deliver the expectation for 2003.

Okay. When you -- when you look at the Cap Ex, Don, have you been successful with any of CF's terminals?

To date, we have picked up two terminals. I think one directly and one by a -- working with the lessor.

Okay. And you talk about the pension costs going forward. Can you give us a sense as to what the underfunding look like at your end? $81 million I think at the end of last year.

The underfunding was about $160 million at the end of the -- at the end of the year. And obviously that was driven by the stock market performance.

Right.

But I also have to tell you that we have done a lot of analysis on asset allocation, on, you know, aid service distribution, and we think that the investment return assumptions that we have, in fact, are appropriate and as I told you earlier, we take a longer view and we are very comfortable with our ability to fund that and continue to grow the company.

So you are not changing your assumptions?

No, sir.

What about your interest assumption?

The discount rate?

Yeah.

The discount rate has to drop a half a point. And by the way that has about almost a two-thirds impact on that annual pension expense number.

Okay. And well to the Exact Express you gave the percentage increases can you give us a sense of what the volume levels are now?

On a run rate we are -- you know, we are probably in the 125 million dollar range, something like that.

Does that include direct only or exact express only.

That's exact only report.

How much would direct express.

Definite Delivery? Definite Delivery, sorry. Another 30 or so.

Thanks.

You bet

Your next question comes from David Mack of CFSC.

Hi, guys, how are you?

Good, David.

We have a few questions for you. One, can you just come back -- you said on the bonus issues, we need to deliver the expectations. When you say deliver the expectations, I am not sure what you were referring to.

What I was talking about was our internal plan which we use to benchmark our bonus plan. That's what I meant.

On the workman's comp issue, can you talk to incremental cost associated with that in 5e 03.

Boy, we hope we have taken care of that one. It was a very painful experience in 2002 and really dug into our operating income. But we think that the maximum exposure next year should be minimal because of what we have done this year.

The worker's comp accruals that you noted in the third quarter, were there similar accruals in the fourth or --

Yes, there were, David, yeah.

And in Q4 on the bonus payout, some large percent of 20 million.

Yes.

How different is that then what it is normally when you spread it?

Well, normally the fourth quarter will be one of the smallest quarters because we try to accrue it on a seasonal basis as we go through the year. So it was significantly different this year than it was last year. Or any other year -- well, last year was 0, so it was a lot different.

Let's -- let's go back. I am not trying to make you look better than you are, but I want to understand the 95.7 operating ratio on the LTL side and put it in the context of how you look at it.

Right.

Could you give us a little color on that?

Without the accrual on paid for performance, we would have been below 95.

Okay. Don, incremental cash contributions on the pension distribution issue from a cash flow point of view in '03?

'03 about $35 million. '04, about $25 million.

Ha is the cash impact, but as he said the expense impact about 10.

Okay. I wanted to ask a question about any -- any residual lawsuits or claims that relate to the pension for the bankruptcy of CF. I know that -- well, could you go into that a little?

We don't have anything there.

Okay. All right, thank you.

Your next question comes from Greg Burns with JP Morgan.

Hey, guys. Just wanted to circle back quickly on your -- what looks like a somewhat conservative first-quarter outlook and revisit the seasonality. I mean, to get to the low-end of the range, it sounds like you are saying the third quarter of '03 will be triple what you earn in the first quarter, which seems inconsistent with how the year 2000 played out. Is that the right way to think of it? Are you saying you will earn 25 cents in the first quarter and, you know, 75 cents plus by the third quarter?

Greg, let me just give you a little bit of history, and only pick a couple of years here at random, but if you looked at '99, the pattern was 11% in the first quarter, 26 in the second, 31 in the third, and 32 in the fourth. 2002, was 10, 15, 33, and 42, which obviously was skewed because of the CF situation. But on average, the second quarter is, you know, 25, the third quarter is 33, and the fourth quarter is about 30 or so. Yeah, it is really skewed toward the last three quarters of the year.

Okay. But -- am I right to assume that -- that you are taking a conservative view on -- on your first quarter given whatever Iraq and the other labor uncertainties? I mean, do you view that as conservative or basically what you expect.

Well, I think the range covers the conservative to the less conservative, but it is all based on zero growth in the economy. So, yeah, we are being conservative in the first quarter and we are being conservative in our planning for the year, realizing that there is tremendous upside potential.

And just an update on January on both your customer base and any competitive trends. It sounds like things are getting better competitively, but how does the retail side of your customer base -- when we spoke you indicated at your meeting the industrial was looking a little bit better. Can you give us an update of how the retail side of the business looks like for you guys, and then on the competitive front, is there risks that some of the CF business moves around to -- [ INAUDIBLE ] Indicated that some of the business is moving around. Could some of that slip out of your system?

First of all, on the retail, we don't see much difference in the retail trend from the manufacturing trend. You know, customer by customer, there is variability there depending on how they are doing. But overall, again, we see it as flat to maybe a tick up on the retail side. In terms of customer churn, you know that is something that is part of the business. So customers do leave and new customers come on board. Some of that is because they make the decision. Some of it is because we decide we need a different kind of customer mix. So that's going to go on on a realtime basis. It is going on now. But I would say it isn't any -- there is no more churn right now than there has been and probably there's less.

Okay. That's helpful. Thanks a lot.

You bet, Greg

As a reminder, if you would like to ask a question, press star and number 1 on your keypad. Your next question comes from Rob Aman with found Asset Management.

Looking at Q4, you mentioned the outside accrual in the quarter and if you back out decent percentage of 20 million or even just call it half of that, you are looking a adjusted earnings number of closer to 70 cents or so. And then using your basic rule of thumb if earnings fall roughly in half from Q4 to Q 1, at what point closer to 35% number not included expenses on pension or the conference. So given that Q4 was a little abnormal, why wouldn't we be looking at a number more like that in Q1?

Well, if you took out all of those adjustments and compared things quarter to quarter, you will end up with a higher first quarter number, but, again, we've got accruals on the pension that are in there, and the one-time cost of the conference. And, you know, on balance, zero growth in the economy. So you can find a way to get to a higher number in the first quarter and, you know, I am not saying that is not possible, but I am saying we are trying to be very conservative here.

If it was roughly 70 cents adjusted in the fourth quarter, if you take out the bonus and pension in the conference, --

Yeah --.

Even with that it comes to like a 22-cent number. You are using your own rule of thumb and I would also think that would point to a much higher number for '03 unless something else is going on operationally.

I think the 70 number is probably too high, Rob in terms of adjusting the 50 cents. So, you know, we probably will start with a lower base than that, but you know, just to kind of reiterate, operationally, you know, nothing has has deteriorated in terms of efficiency, in terms of yield, and in terms of the revenue growth. So operationally, things are in good shape.

Okay, well what was the corporate residual in Q4? In Q4? About $4.5 million, Rob.

If I back that up in Q4 you also said the bonus accrual, you ran Yellow Transportation at under a 950 OR. I don't see how it could be much different. Maybe I will follow off-line but the math doesn't seem to work there. It has not to be high 60 and using your rule of thumb is teams like the level of conservative doesn't tie out with something else unless CF is going back into business and taking the freight back or something of that nature. That, that's not going to happen. I think difference in where the math may be working here you may have a little too much in PFP because of the 20 million, as I said part of that is paid throughout the year to the sales force.

I only backed out $10 million of the total expenses. I will try to follow up offline.

We need to go through the numbers with you Rob.

Thanks

Your next question is a follow-up from Ed Wolfe from Bear Stearns.

Hi, just wanted to follow up on one thing, Don. You gave 15.5 million, I thought, as the corporate -- 14.5 million, I thought, as corporate piece. Is that for '02.

Yes, that's for '02.

You said '03 should look similar to that. I am assuming that the 4 million for the conference is in there. 14 million --.

The full number I gave you includes the conference. We are obviously managing our costs and we have reduced expenses in other areas.

Okay, thank you

Your next question is a follow-up from David Mack from CFSB.

Hey, guys require just wanted to follow up on your customer base in terms of the mix in exposure and what you are hearing from them, you know, retail versus industrial.

Yeah, I think that you are know, we can -- we can find examples of people that are doing better than others in any industry that we serve, and the retail is no different. But, again, as a general comment, it is pretty flat. Maybe up 1% to 2%, but it is hard for us to untangle that from the 300 million worth of business we picked up from CF. That's about as much flavor as I can give you David, sorry.

Okay, thanks

Your next question comes from Andres Petery from Morgan Stanley.

Good morning, Bill.

Good morning.

How much of your new Yellow business is in the 500 to 600-mile markets and also on the contract, national accounts, what percentage are you of your total.

Andy, we have about 47% of our business in two-day and another 30% in three-day. We have 70% of our business in three days or less now. In terms of contractual business on a revenue basis, it is about half.

So that would be from past years?

It's down a little bit but not materially.

And are you getting the rate increases you want there with the national accounts?

We are doing a little bit better than we expected to do.

And what is your lower average in -- load average in those regional markets.

I will let James deal with that one, but he doesn't have the number -- he's --.

Certainly, it's less than our five-day lanes, but -- and I don't have those numbers right in front of me, but I can tell you less -- not appreciably less.

Closer to 20 than to 15? In line haul?

As far as load average?

Yeah.

No, it's more than that.

More than that. So it's pretty good. Okay. Thank you.

You bet, Andy

Your next question comes from David Mitchell with William Blair.

Hi, good morning.

Hello, David.

A couple of clarifications on a few things. One, back to the corporate residual --

Sorry, we are having a hard time hearing you.

I will put my headset all way back.

Great, thanks.

The corporate residual expense you said was $14.5 million in '02 and you said approximately the same in '03 even though it will include $4 million for the conference is that accurate?

That's correct.

That's a pretty impressive cost management, and that basically -- that answers one of my questions. Okay. The other one is, when you say general comment on the non-CF business that you have, that it's flat or maybe up 1% to 2%. I know that's difficult for you to gauge, but is that -- that's flat -- that's -- that flat part of that is what you are talking about in your economy in your guidance, correct?

Yeah, exactly. We are still assuming a flat economy for the full year, and that's really been the basis for our guidance and our outlook, although, as I said, there is a little bit of evidence that maybe it is up a couple of percent, maybe 1%. We are not ready to declare victory there yet. So our plan is based on zero growth.

Okay. All right, thanks.

You bet

Your next question comes from Herb Brookfinder.

Two quick questions, is the board looking to pay cash dividend lately and two, what percent of your contract, longer-term contracts actually come due in 2003.

Herb, we are going to be talking about dividend policy at the upcoming board meeting here in February. It's back on our radar screen obviously because of the elimination of the double taxation. I have to tell you that our inclination is we have better ways to spend the money because we have tremendous growth opportunities, but we will certainly be talking about it with the board as an option. In terms the owe -- of the longer-term contracts, most of our contracts in the contractual bucket are one-year contracts. We have some two- and three-year contracts but a fairly small percentage.

So you basically renegotiating all those contracts in the course of this year. Is there a quart we are there is disproportionate number of these that come due?

Yeah, the fourth quarter is the heaviest, and, you know, we are probably doing 40% -- 35% to 40% in the fourth quarter.

Sounds like with the environment the way it is, you are in a favorable position of negotiating these, at least from the standpoint right now?

I think it is working out that way. Obviously the thing that would put us in an even stronger position is some economic recovery, but right now we are finding we are doing a little bit better than we had anticipated.

In terms of your capital expenditures, in terms of when you are replacing old equipment and putting on new equipment, how much of an increase do you think overall there will be in your fleet this year?

In terms of capacity?

Yeah.

We are probably going to be able to handle the growth that we have in the plan with the capacity we have now. Now if the economy really took off, we would probably have to add some trailers, but right now, the capacity looks like it is in balance with the business volumes.

Are you actually going to wind up having more equipment in service as a result of capital expenditures during this year than did you last year?

No, almost all replacement equipment.

All replacement? Thanks a lot

Your next question is a follow up from Jeff Rosenburger from Capital Management.

I would like to follow up on that line of questioning. You said 90% utilization and that's sort of where you want to be. If the accounting picks up and volume goes up 10%, how much will it cost you to add enough capacity in terms of capital, how much it going to cost you to add enough capacity to handle it?

The first thing we are going to do, Jeff, is try to figure out whether it makes sense to add capacity or to rearrange our customers mix. And drive more profitability from same volume. That is the first sort of discussion we will have. And then beyond that, it is a pretty fungible situation. You know, it is really a function of adding trailers, and we can add anywhere 1 to several 100. So it is kind of a simultaneous equation that we get into when we get to the point where we are running out of capacity. And it's -- it's something that -- you know, it is a very high-class problem and one we look forward to having but we don't have it yet.

Actually -- and I think it is sort of at the core of all the questions you have had on the call. I mean, people are trying to understand the conservative guidance, and everybody understands that, you know, you have got some uncertainties with the economy and also you don't know what your labor cost is going to come in at, but I think one of the things that has got me scratching my she had a why pricing isn't up more than it is. I mean, you've got -- you talk about 3.5% yield increment and took $2 billion of capacity out the industry, and you know, my -- you know, my uninformed back-of-the-envelope calculations would say $2 billion of capacity reduction should translate into 3.5% more of yield.

First of all, it was only about a billion and a half capacity when CF --

That was in revenue but not in capacity. I mean -- because they had done over $2 billion, you know the year earlier.

Yeah, but I think the relevant relationship is what is the demand versus, you know, what is the capacity. And there was still a lot of excess capacity because of economy. So, you know, I think -- and then I think the other part of the answer, Jeff, is that it's -- it's 3.5%, but that is significantly higher than what we have been experiencing, and my guess is as the economy recovers, and this supply demand equation further tightens, you will see more upward pressure. One of things I think that is keeping the lid on pricing right now and probably retarding the yield is the fact that the economy hasn't recovered yet.

Okay. Last thing is, Meridian IQ, you -- you are running at an annualized rate of $100 million. What kind of rough guess do you think you are going to have in terms of revenues for '02 -- or '03 rather. I want to make sure I am understanding what you are saying, that the reason it is only going to be marginally profitable is because you are spending to fund the growth. It is not because the model doesn't provide for higher margins on that.

Yeah, that's exactly right. We could probably make more money if we were focused more on the bottom line than the top line, but we really think we have got a very high potential business here that will probably grow about 35% to 40% again next year. -- or this year, I should say. We will look at tuck-in acquisitions to accelerate that growth and we would expect positive contribution, but we are going to trade off some profitability there for faster growth.

Now the 35% to 40% is above the run rate in the fourth quarter or is that over the full-year number?

I would say over the full-year number, Jeff?

Okay. Thanks.

You bet

Your final question is a follow-up from Dan Moore of Stevens.

This is actually Josh Waldo. Good morning, guys.

Good morning, Jack.

I want to touch base on the capacity issue with regards to rail. Would you describe a little bit what your rail use was in this quarter and how that is year-over-year?

Well, they are looking up the percentage, Jack, let me just make a couple of general comments. This year it was harder for us to use the full 28% rail that we were allotted because of the Customer Service requirements and the fact that the economy wasn't providing a lot of activity. We ended up for the year -- for the quarter I should say about 26% rail versus about 23.9% a year ago. And, you know, that's really a function of the surge in business that we got in the fourth quarter. And they are looking up the number for the year right now. And they should it here in a second. 24.7 for this year compared to about 22.6 for last year. So, you know, we used a lot of rail, but worked at our cap of 28.

Appreciate it, guys.

Okay, Jack.

Thanks

At this time, gentlemen, there are no further questions. Do you have any closing remarks?

No, just to say as I said at the beginning, we feel really good about where we are. We have tremendous momentum coming into 2003 and wing we have great potential if we can get a little bit of economic help this will be a very good year for Yellow. Thanks for joining us and we will talk to you again

Ladies and gentlemen, this concludes today's conference call, you may now disconnect.