Yellow Corp (YELL) 2003 Q2 法說會逐字稿

Good morning. My name is [Trameka] [ph], and I will be our conference facilitator today. At this time, I would like to welcome everyone to the Second Quarter Earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' 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. If you would like to withdraw your question press the pound key.

This conference is the sole property of USF Corporation, and any rebroadcast of the transcription of the event without prior written consent of the company is prohibited. If you do not agree to these terms we ask that you disconnect now. By staying online you are accepting these terms. Thank you.

I would now like to turn the call over to Mr. Chris Ellis, CFO of USF Corporation. Mr. Ellis, you may begin your conference.

Thank you, Trameka. Welcome, ladies and gentlemen, to the Second Quarter Earnings conference call for USF.

First, I'm going to have to go through some unhappy business. We've got to read the Safe Harbor clause. The goal of this conference is to have an open discussion and dialogue on the company's results and ongoing operations. We will make 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, pricing environment, and projected costs and profits of the company. To the extent that we make these forward-looking statements we are availing ourselves of the Safe Harbor Provisions of the Private Securities Litigation Reform Act. We note that 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 our 10-Ks and 10-Qs for further details.

Joining me today are the following people, on this call. First, we have Mr. Neil Springer who is the Lead Director from our Board of Directors during the transition period that we're going through now. Also, is Doug Waggoner who is our Senior Vice President of Strategic Marketing. We have Pete Neydon, who is President of both USF Holland and of our Eastern Carrier Group. We also have Mr. Jared McArthur who is President of Reddaway and our Western Carrier Group, and also Mr. Tom Lilly who is the President of our Logistics Group.

I'm going to go through our results, and then we're going to take questions and answers from people. But first Neil Springer would like to have a few words.

Good morning. In early April the Directors asked me if I would serve as Lead Director as we were going through a leadership change, and provide continuity working with Sam, and then with our new CEO when that announcement was made. And to that end we established three basic objectives that we have communicated with the Management Team as well as the Board throughout this entire period.

And the first was to drive the search process successfully and to completion, and we should be making an announcement within the next 30 days to that end. I might add that being involved with the business for the past several months I believe has provided some insight into the type of skills that are required for the new CEO, and should allow us to match the needs and the skills most effectively.

The second objective was to work with the Management Team to make certain that we did not waver from our 2003 action plan that we had set down with the Board at the start of the year.

And then third and finally, was to make sure we maintained and enhanced the momentum of the enterprise over this period of transition.

And so with that, that's fundamentally been the objectives of which I've been working now for the past several months. And now, I would turn it back to Chris to lead us through the balance of the information.

Thank you, Neil.

So let's go through the income statement and our operating statistics. We hope you have a copy of the press release and also the operating statistics. As we've done in the past, you should know that the operating statistics are in our press release, and for that matter, are posted on our web site at www.usfc.com.

One last reminder, on the new format of our operating statistics that we put in the first quarter. These statistics present our PremierPlus which is the freight that's handled by two of our companies, of our LTL companies. It shows them as one shipment. And this is just like the customer sees it. We believe that it gives a clearer view of our rates and volumes, and these statistics also show our length of haul now for each of our LTL companies.

So now, let's go through the income statement. Net income for the quarter was $8.1m, or 30 cents per diluted share. And this compares to net income of $5.9m in the second quarter of 2002 or 22 cents per share. However, last year the net income included $7m after-tax loss from discontinued freight business. And this $7m was a loss of about 26 cents from discontinued operations. And so on an apples-to-apples basis we look at income from continuing operations last year which came in at 47 cents diluted earnings per share.

Now included in the 30 cents per share this quarter is an after-tax charge of $1.2m, equivalent to a little over four cents per share. And these are in charges related to the retirement of our former CEO. These charges should not repeat themselves in future quarters, and so without these charges our earnings per share would have been 34 cents per share.

And so for the quarter total revenue was $567.1m or seven-tenths of a percent lower than last year's $571.2m. This year, though, the second quarter had 62.5 working days, and this compares to 64 working days last year. And so on a per working day basis our revenue increased 1.7 percent over last year's quarter, not the decrease. But this relatively flat revenue really comes mostly from two areas.

First of all, USF Red Star, and this is by design, decreased its revenue by almost 17 percent. Red Star's management team is in the throes of restructuring the company. First, they have continually eliminated business from a large retail customer, and this business was not profitable and it amounted to about $30m per year revenue.

Secondly, Red Star has scaled back on its geographical coverage, and this is to its core market in the Northeast. At the end of 2002 they closed their Atlanta operation, and at the end of May this year Red Star got out of North and South Carolina, and as well they closed a terminal in the New England States.

And so the loss at Red Star for the second quarter of about $2.1m with an OR of 103.6 does not compare favorably with last year's second quarter which was a loss of $1.2m and an OR of 101.8. But on the other hand, Red Star has made great headway compared to the first quarter this year. In the first quarter they lost $5.3m and operated at an OR of 108.8. And so this quarter is a commendable effort, especially, considering that they've shrunk revenues at the same time.

And management at Red Star is confident that they will be close to breakeven in the third quarter of this year, and slightly profitable in the fourth quarter, as they relentlessly continue to cut their costs and right size the company. And so excluding Red Star from the LTL Group, though, the remaining companies would have posted a 4.7 percent increase in revenue per day compared to last year.

Now, the other major contributor to the lower leased flat revenue in the quarter was the Logistics Group. At the end of the first quarter this year the Fleming Companies, who was the Logistics Group's largest customer, filed for bankruptcy. And during the second quarter this business has all but ended. In addition, there was another major customer who reduced their activity with the company, in addition. This lower revenue has been the reason that the Logistics segment also reported a drop in their operating income compared to last year's quarter, at $1.8m this year versus $2.1m last year.

Now let's go look at it segment by segment, and first we'll go into the LTL Group. Revenue for the LTL Group of $472.5m was about six-tenths of a percent lower than last year. On a revenue for working day basis the revenue was up 1.8 percent, and this is including fuel surcharges. But since fuel costs this year were higher than last year fuel surcharges also went up, and so if you back out the fuel surcharges the revenue per day was up four-tenths of a percent, so just about flat.

And looking at the LTL Group's profits the operating profit of the Group declined 11.3 percent from last year's second quarter. This year's second quarter came in at 25.3m, versus last year of 28.5m. Now if you back-out Red Star, though, the profit went down instead of the 11 percent it went down eight percent. And so getting Red Star fixed this year is going to go a long way to getting the comps back in line for the company.

We'll touch on the LTL Group company by company now, but before we do that I'd like to take a glance at our statistics. Both the tonnage and the shipments declined 6.2 percent compared to last year's second quarter. And on a per day basis they were down four percent. But offsetting this the revenue per shipment was up 6.7 percent, and revenue per hundredweight was up 6.8 percent.

And our PremierPlus is continuing to grow. This is a business that we have in our LTL Group between two companies, it's basically our long haul product, grew at 23.4 percent over second quarter last year, and it accounted for 12.8 percent of our total LTL revenue this year compared to 10.4 percent of LTL revenue last year.

Now back to the individual operating companies, at USF Holland the daily revenue was up 1.8 percent over last year including fuel surcharge. But if you back out the fuel surcharge Holland's daily revenue was up about a half a percent. Now Holland has been through a really tough environment during the quarter, especially in the Midwest where the automotive business as well as other areas has been, really had an impact. Also, the pricing in the short haul area, overnight regional business has been more intense, and this has put pressure on their margins.

On the positive side in the LTL Group we see that both Reddaway and Dugan showed decent revenue growth, and they also improved their operating profits compared to the same quarter last year. Dugan's daily revenue grew 11.5 percent this year, and their OR remained at a 98.4 percent which is the same as last year.

Now I should mention here another item about Dugan. Some of you know, probably not all of you, and we had a press release on this. Remember, that back in early May, May 8th to be exact, Dugan's Oklahoma City terminal was completely destroyed by a tornado. It was flattened, it was just completely wiped out. And fortunately, no one was injured in this accident or this occurrence. And despite the extraordinary damage to the terminal Dugan was able to continue its operations. Their shipping, handling, and operations were handled out of their Tulsa and their Dallas terminals, and this allowed Dugan to really complete all their scheduled shipments in the pipeline, and really not even miss a beat, and that's just a real tribute to the Team there. And they did take a hit of somewhere around $300,000 for losses in here, and that's included in the numbers. And so Dugan has done remarkably well there.

At Reddaway the revenues were up 9.8 percent per day, and they actually improved their margins with their OR going down by 1.5 points from an 89.4 last year to an 87.9 this year, and so their operating profits grew 23 percent. So about $9m from a $7.3m last year.

Taking a look at the truckload, our USF Glen Moore, the revenue grew by 9.6 percent. And this is equivalent of a daily revenue increase of about 12.2 percent. However, Glen Moore's operating ratio rose to a 96.9 percent from a 94.6 last year. And this deterioration stems primarily from higher claims for accidents, and to a lesser extent they had an increase in empty miles due to the soft economy.

Real quick in Logistics, we covered this business segment earlier when we spoke about the revenue decline, but the margins at the Logistics Group only slipped marginally. This year's second quarter their operating ratio was 97.2 compared to a 97.0 OR last year.

Taking a look at our Corporate and Other, the $8.7m expenses that you see on the income statement includes approximately $2.1m before tax, charges related to the retirement costs for the former CEO. And as I said earlier, on an after-tax basis that's 1.2m. And this equates, as I said earlier, to about four cents per share. And so backing this out, this $2.1m, the remaining costs at Corporate are 6.6m, and this compares to 7.1m that we had in the second quarter of 2002. This reduction of half a million dollars in expenses is entirely due to our lower expenses in our IT area that hit the income statement.

As I mentioned in previous conference calls, the lower IT costs really result in moving into the development phase on our major projects, and these are capitalized. Under the accounting regulations and specifically SOP 98-1 you expense certain costs and certain phases in the projects and then you capitalize some of the other phases. And so what we're now doing, we're heading into, the capitalization phases in these projects. These projects will start rolling out beginning early next year, and there are other projects that are also continuing in further years as the company remains committed to its investment in technologies.

Now let's go and look below the operating line. Interest expense of $5.2m is pretty much in line with what we had last year. Interest income which was at $200,000 is lower than last year's $1m, but last year the company collected on some State income tax recoveries, and those recoveries had a portion, which was shown as interest.

Our effective tax rate for the quarter was 42.9 percent, and this compares to a 37.5 percent effective tax rate last year. Now last year we had some of those refunds I just, State tax refunds, which I just talked about. And this lowered the rate, plus we recorded a small non-taxable gain on a sale of a terminal.

And so our tax rate this year is running a bit higher than in past years because of the lower taxable income as we know there's some non-deductible expenses which always are there in the income statement. And so not being able to tax effect them, things like undeductible travel and entertainment, these drive-up the effective tax rate. And so should the economy recover later on in the year and the results get a seasonal uptick we may get a lower tax rate going forward.

And so that takes care of the P&L, let's take a real quick look at some of the non-P&L items. Our capital expenditures for the second quarter were $32m, and this compares to $27m in the second quarter last year. And YTD we're running at 69m, compared to 53m YTD last year. And included in these numbers so far this year USF has purchased three of the consolidated Freightways terminals that are up for sale. And this accounts for about $15m of the YTD capital expenditures. We're still looking at one long shot, maybe the chance of two terminals that are still for sale. But if we buy any of those it is going to be relatively small, and so we haven't committed to any of those yet.

And so given all of that our total year expenditures which we had mentioned earlier, we're still sticking by our projected number of about $130m to $150m range and this depends on, obviously, how the economy shakes out for the rest of the year.

Cash on hand at the end of the quarter remained good. It's at $57m, and actually this is slightly higher than what we had at the end of last year which was $54m. Our debt to total cap ratio remains really strong. Our debt to cap was 28.4 percent, compared to 29 percent at the year end 2002. And if you do this on a net basis by reducing the debt by the cash and deposits on hand the debt to total cap comes in at around 23.4 percent. And so financially USF remains strong, and is continually improving our already conservative capital structure.

With that, I'd like to turn this back over to Trameka who is our conference coordinator, and we can start taking some questions from people.

(Caller Instructions.)

Your first question comes from James Valentine with Morgan Stanley.

Hey, guys. Two questions here. First, I was wondering about the yield improvement. It looks like it's running at a better pace than we'd seen earlier this year and last year. And there's a few moving parts here. It's obviously a slightly longer length of haul which has been the strength going on, that we've got potentially mixed. And what I am trying to understand is maybe you can guys can break this out for us, between length of haul mix?

And then my understanding is you took your GRI three weeks early this year which would skew the numbers a little bit. And then you said you walked away from $30m of low yielding business, and I am trying to understand how much that is an impact? In my view this is the one area where you guys have been a little bit behind the competitors, and so if you're really making some improvements here in terms of rate increases that will be good news.

Hi, Jim. This is Chris. I'm going to start, and then I am going to turn it over to Doug Waggoner. I presume that you've seen the statistics from the web, and those do show the length of haul.

Right, well, yeah, but I guess it can't - yeah, it's a 5.6 percent, but occasionally - some people say that it's almost a one-one relationship, some people say it's about half the relationship. And so I am trying to understand, you know, how much of the 6.7 percent revenue per hundredweight was up due to length of haul?

Right, well, Doug has got some statistics over there. He'll explain that.

Okay, cool!

Yeah, Jim. I would say about half of the yield improvement was a factor of length of haul improvement. The rest would be the rate increase that we took in early June. And then probably a slight impact from business environments and some large accounts that we took a tough stance with.

You've got to realize that the rate increase was only in there for one month, the one we just had, for the affect of that during the quarter, it can only be for one month.

Right, but it was a month earlier than a year ago, right?

Right. Right. Last year it had no affect. Right.

Right, OK. And OK, I think I have a feel for that then. And then how is pricing sticking? With I mean on the one hand everyone is putting in these pretty high GRIs, and on the other hand everyone seems to be talking about what a sluggish market it is out there in terms of getting pricing. Can you give us some kind of feel for maybe should this pace continue into the third quarter?

Jim, the GRI went in relatively unchallenged by the shipping public, and of course, we have contractual accounts that aren't impacted by it. But I would say price competition remains fierce, and it tends to be inversely proportional to the length of haul.

Okay, good. And then the other question I had was is there any way of positioning yourself for the Roadway-Yellow combination, namely that if the shippers do as some are saying that they're going to shift some of the business away from this what will become one new carrier, you're obviously at the opposite end of the spectrum in terms of length of haul but you do have this PremierPlus. Is there anything else, I guess what are you guys doing to kind of get yourself ready for this, if anything?

Jim, we were already underway, working on improvements to PremierPlus and certainly this plays into it, if there are implications from a merger. We've been working on a three phased approach to reengineer our inter-company line haul, and we're just about complete with the first phase. And the implications of that are A, it saves us a lot of money on our purchased transportation through an engineered network, and B, we've taken one to two service days out of about 289 million zip code pairs. And so, you know, we're positioning it that way as part of our PremierPlus strategy. If there is additional business available that will play right into our hand.

Okay, great, great. Thanks, guys. Appreciate it.

Take it easy, Jim.

Your next question comes from John Barnes with Deutsche Bank Securities.

Hey, guys. Good afternoon.

Hi, John.

Can you talk a little bit about volume progression throughout the quarter and what you've seen into July?

Well, I can start it off. When we got into - as you will recall, we did give a change in our earnings forecast because we got into the quarter and we had to downward adjust that. And that was because when we were - gave the press release and the conference call for the first quarter we were in the latter part of the April and the volumes were looking fairly strong. And then in May they flattened out, and that flattening continued into June. And so that's how we wound up revising for the quarter our earnings estimate. And I would say that this trend has continued right through the month of June, and actually, you know, you do see a seasonal lull in July because of vacations or what-not, but you know, it's really so, so.

Okay. Can you comment briefly on the integration of the pieces of Plymouth that you picked up, you know, and especially on the customer retention side?

I can start that. I just got a message yesterday that the retention that we got on there is just according to plan. If you recall, that company was about a $32m to $35m company, and we said we would retain a certain percentage. We said, projected about $20m. And it's tracking right now a little bit ahead of that, closer to $25m a year.

Okay.

And, of course, you know, we didn't take any of their drivers, or equipment, we took their salespeople, that was it.

Okay. And then lastly, in terms of your comments concerning the CEO search, you know, the release to me and the comments you made earlier on this call it seems like you're fairly convinced you're going to have this wrapped up by some time in September. Can you just give us a little bit more color on where you stand in terms of the process? Have you narrowed it down to one potential candidate? Or are you still, you know, still in the narrowing mode? And I'm just trying to get a feel for why you are so confident that you can get this done by the end of September?

We've - this is Springer - we've been on this process now for about three months. And in the search business you would expect to complete a search like this anywhere between 90 and 120 days, and that's tracking. We have identified a group of a few at the end of the search. We are now looking through that, and we feel confident that we'll be able to make an announcement to the public here within 30 days. And I would hope that, well, there's no doubt that that will be the case and we'll move forward. And then we'll be right online. That would be about the time limit expected to do this search in.

Okay, all right. Very good. Thanks for your time.

Thanks, John.

Your next question comes from Jason Seidl with Avondale Partners.

Hey, gentlemen. How are you guys doing today?

Hi, Jason.

I guess, let me focus on Reddaway, I mean just phenomenal results at that carrier. Wondering, you know, why the revenue was so strong? Was there something particularly going on? Have you grabbed some new customers? What the deal is?

Jared, you want to take that?

Yes, I will. Jason, good morning. Jared McArthur. You know, we've always been the premiere service carrier in the West, at least we believe we are. And our service has not faltered, it's still in the mid 99 range. We haven't picked up any big customers, but we have been able to penetrate some additional smaller customers.

And things have fallen in place well. And we've seen an uptick in business from California to the intermountain and Northwest area. Although the intermountain and the Pacific Northwest intra in those groups really is not that strong, but the inbound from California has really improved. So, and we maintain our productivity enhancement programs. And things are working well for us.

Okay, it was a nice quarter.

Thanks very much.

Maybe I can switch to you, Chris. Can you give us an update on the IT integration and moving over into, you know, one freight operating system? Where that is? Are you on track?

Yeah, Jason, we're on track. As we said earlier, as I go through the accounting side of it we are now in the development phase, and we have different projects. At this point in time the two largest projects that we're working on are our P&D project which we hope will, we expect fully to reap major, major savings. I shudder to tell you how much it is. It's in excess of $20m benefits when it's fully rolled out. And this will take awhile because you have to go terminal by terminal.

And then the other major effort is in our enhanced freight management system. You know that we have five different operating companies, and basically have five different operating systems. And vis-à-vis the customer now, they are really talking as one to the customer, but in terms of making the operational aspects go a lot smoother we need to break this down into one possibly two systems that are much closer. And those are going to really start rolling out next year. They're still doing the programming on it. We're starting to do a little bit of testing in the P&D which is as planned, and we believe that we've actually implemented in the FMS area a couple of the small releases. You go through a bunch of different releases getting from point A to point B, and a couple of those releases have actually already been taking place. But these will be rolling out in the next year.

Okay, fair enough. If I look, you gave guidance for the third quarter. I am assuming that assumes the economy stays where it's at. Looking at the fourth - correct me if I am wrong, but you're also going to have a negative working day comparison, is that correct?

I've got to see, let me see here real quick. Yeah, the third quarter we have 64 working days this year, and last year we had 63. The fourth quarter is a different story, we're going to have 59 working days. And that was 63 last year. But you know, when you get in the fourth quarter and you get around December sometimes that's not always a bad thing, if the bottom falls out in activity from Christmas to New Year's. And so if we could just make that go away, as a business person we'd be real well off!

Okay, I've got one last question, and then I'll turn it over to somebody else. And Chris, maybe you could answer this one, too. When we're looking at, you know, Red Star, obviously improvement in the quarter was nice to see from the results in the first quarter. However, aside from profitability what's the long-term goals in terms of margins? Because if I look back historically it looks like about maybe 3.5, maybe 3.8 percent about the best you've done at least as far back as my model goes.

Hey, well you know, I go back a little bit further ...

Yes.

And there was a point way back when St. Johnsberry went down that Reddaway - excuse me, Red Star actually operated in a 93 point something OR. And so, you know, whether we're going to get back to those days again I don't know. But we - our objective, obviously, is not revenue it's profits.

Right.

And if they can get back to rightsizing the company and make that profitable by the end of the year that will be just a major, major turnaround in and of itself.

Oh ...

And you've got to remember that we report, we think of a company as the LTL Group. And just because Red Star may not be operating at the profitability we would like on a standalone basis they afford a lot of business to the rest of the Group. And they enhance the profits of our other companies.

And so I would ask all the people in the room what their opinion is, but I would expect that we would want to make money on them. Whether they're going to get down to a 95 OR next year I don't really know at this point. We're going to be going through our planning process later on, but we fully expect them to operate and not have as much of a revenue objective as a profit objective.

Thanks, Chris.

Your next question comes from Ed Wolfe with Bear Stearns.

Hi, guys. It's Peter Nesbolt at Bear Stearns.

Hey, Peter.

Let's see, one question from the press release, it's not entirely clear I guess that was their a one-time gain at Reddaway from the sale of the terminal this year, as well?

Yeah, there was. I think it was about $500,000 or $600,000.

Yes, it was $633,000, Peter.

And that's pretax?

Yes, even if you back that out I wouldn't calculate, our OR was still show a fairly decent improvement over last year.

Okay. Most of our other questions have been answered. I guess just one quick follow-up on the CEO search. You know, among the people in the final group are they people out of the industry? Or are they people outside the industry?

Our search has encompassed people in the industry and people out of the industry, and we did that intentional to make sure that we were looking at all aspects of the skill set we required, and we will make our choice out of that two sectors.

Okay, and I guess one final question. When did your current insurance contract expire? And, you know, are you negotiating any kind of rate increases yet there?

Yeah, Peter. We just went through it, and our insurance, you know, first of all, we're largely self-insured. We are self-insured up to $5m per occurrence in our injuries and accident side, and in workmen's comp up to $2m. And so we renewed, and to buy the excess, the price did go up, but an affect on the overall P&L we've been fairly fortunate compared to some of the other companies and especially in the truckload industry, they don't tend to be as highly self-insuring. You see a lot more increases in premiums. But we just have our policy year goes from July 1 to June 30.

Okay, thanks for the time guys.

Sure.

Your next question comes from Sal Vitale with Fulcrum Global Partners.

Thank you. Hey, guys. It's Jeff Kauffman.

Hey, Jeff.

A question for Neil. Neil, are you on?

I am here.

Okay, very good. I am going to preface this by saying I have a buy on the stock because I am encouraged by the changes. But if I take a big step back and look at what's going on here the last few years you're about to swear in your fourth CEO in about six years. There's been several hundred of millions of dollars spent on acquisitions that arguably have not shown anything on the bottom line, or in the case of the forwarding business had to be sold. You've had some changes in leadership over the last few years at the various divisions.

And arguably, although this is still a very good trucking franchise this trucking business has under performed...some of the publicly traded competitors in this space within the trucking business. From the Board's point of view what has been missed over the last few years, and as you search for your new leadership at the CEO level what is the Board looking to achieve that's different from in the past?

I think that the best way to answer that is to say the Board is looking for an individual who can come into this organization, be here for an extended period of time, has strategic vision, has the ability to see an industry that's in transition, understands the strength of USF, both its people and its balance sheet, and take that and move forward into the new industry.

What are you looking for different from the past? Or as the Board looks at the last few years, I mean clearly some of these acquisitions were deals that looked good at the time. What in the Board's opinion wasn't done in the past that is going to be done differently in the future?

I think the best is to comment on the future, because I can't change, or we can't change the past.

Agreed.

The key is to engage the Management and the Board in the strategic vision, then determine the direction you want to take. And as we move forward in the acquisitions to assure ourselves that our due diligence from a strategic and a financial position as well as a management knowledge position, and assure you that you have the right management in place to take on these acquisitions is all in place before you go to execution.

Okay, very well. That's my only question. Thanks.

The next question comes from Ken Hoexter with Merrill Lynch.

Hi, it's Stephanie Koch for Ken Hoexter from Merrill.

Hi, Stephanie.

Hi. The first question, you mentioned that you had taken one to two service days out of nearly 300m zip code pairs. How have you been able to do that? Has that entailed any change in strategy? And will the continued IT rollout enable you to continue that process?

Yes, Stephanie. This is Doug. It's really applying some industrial engineering to our network. Looking at a lot of purchased transportation that we currently buy on an ad hoc basis and converting that to dedicated transportation where we're buying round trips and committed contracts with a couple of vendors. In some cases our own Glen Moore.

And by doing that we sort of scheduled cut times in major lanes where we have a predictable tonnage and we're able to lower the costs and improve service. And certainly, our new IT platform is going to give us what I call more operational technology that will allow us to better manage our networks and our P&D operations.

Hey Chris, it's Ken. Just a quick follow-up on Holland. Can you tell me what percent of the revenues are related to autos?

Roughly 10 percent can be called automotive revenue. And that was one of the areas that suffered the greatest decline in the quarter compared to the same quarter last year.

Is that PR autos or auto and auto related materials?

Auto and auto related.

Great, thanks a lot guys.

Your next question comes from Greg Burns with JP Morgan.

Hi, guys. A couple quick questions. Chris, could you refresh our memory on how much business stuck from the CF, and sort of how that will play out in late in the third quarter and the fourth quarter? And then I guess the second sort of follow-up on that is what kind of volume growth assumptions are you assuming in the third quarter guidance? You know, sort of what's the underlying economic assumption there?

First of all, for the CF it's very, very difficult, and if not impossible to know really how much business you've got. You do it by looking at what happened in the third quarter, and right after their demise, and what went in. And when they went down there were a lot of people really scrambling and just taking anything they could. And then things settled down a little bit.

But we think we've got our fair share of it. Actually more than one would have intuitively thought you'd get being a regional player like we are. I think our best estimate was somewhere around like six or seven percent, five to six percent. And I mean that doesn't mean we're going to sit on our laurels. We're - this is a long haul, if you want to use the pun, things going into the PremierPlus.

And I think Doug would like to add a little bit to this, but first, in the third quarter we've assumed that the economy stays relatively flat. But we do expect even when you have a flat economy you do expect the normal seasonal changes. And in that area we mean the back to school, and the seasonal uptick in the month of September, especially. There have been years when that hasn't happened, but we make those type of assumptions when we do this.

And I think Doug wanted to add something on that.

Well, on PremierPlus, the longer haul business, you know, prior to the CF closure, you know, we had nominal single digit growth. That spiked after CF to around 35 percent growth year-over-year. And, you know, now it's scaled out to as Chris said, 23.4 percent or on a per day basis 26.4.

And just a couple of follow-ups. Five to six percent, Chris, you're referring to, is volume as opposed to revenue?

Yeah, there's very little price in anything these days. I mean you get some revenue per hundredweight increases but again, that's moving your freight more into the long haul sector whereas naturally a higher revenue per hundredweight.

Right, right. Okay. Thanks a lot.

Sure.

You do have a follow-up question from Mr. James Valentine with Morgan Stanley.

I guess somewhat of a specific question about the costs of interlining shipments, could you give us a feel for how much of your, the total costs to moving a shipment for a customer including the pickup and delivery is the line haul for the interline product?

Typically, the line haul portion runs around 31 or 32 percent of revenue.

Okay, I had in my mind about a third, so okay. And that makes sense. And then, in terms of the fact that you have two, I guess almost two-and-a-half unionized companies here, and tell me if I've got this wrong here but I thought that you don't have the flexibility like some of the regional, other regional non-union LTLs to interline with third party truckload companies? And if I am right there how much of a cost differential do you think that creates for you? Because I mean obviously interlining between the two, non-union operations, I presume you do that with an outside third party. How much would you say the differential is there on that third of the cost?

Pete is going to take that.

Well, actually, Jim, we are underlining with third parties right now, both at Holland and at Red Star.

Oh, between - you can interline with ...

Between Holland and Red Star, we have a direct connection at a couple of points, and so we really don't need a third party. But as far as the longer haul we do interline with third parties.

So you can use non-union companies with your union operations then?

That's correct.

Okay, great. Thanks, guys.

Sure.

Your next question comes from Ed Wolfe with a follow-up, with Bear Stearns.

Hey, guys. It's Justin Yeagerman, actually.

Okay, Justin.

Wanted to get a sense for whether or not you're hearing any customers taking action on moving freight over, you know, post the announcement of Broadway-Yellow?

You know, there's speculation out there, but I, you know, I think everybody is taking a wait-and-see approach.

Okay, that's consistent with what we've been hearing. Thanks. That was good.

Your next question comes from Thom Albrecht with BB&T.

Hi, guys. I missed part of the call, and so if you addressed this forgive me. But on the PremierPlus product you grew 23 percent in the second quarter. You've had some quarters at 40 plus percent growth. Some unique opportunities in the last year. What are you comfortable with for sort of a growth rate for PremierPlus as we get past the CF anniversary?

I hate to try to predict the growth rate, but I think that we're poised to expand that business. We're working on, as I said earlier, reengineering the network, and particularly that purchase transportation via truckload, both to enhance the cost structure and the service that we offer. Our technology will make that a seamless transaction to our customers, and we think it supplements nicely our portfolio of services.

Okay. And I guess I wanted to follow-up on Jim's question from a few minutes ago. When you're talking about Holland and Red Star you can interline with third parties, but you mentioned, Pete, between the two of these companies there's really no need for that. I guess going one step farther, if you wanted to do that between Holland and Red Star can you do that as opposed to, you know, Holland using a third party for something that doesn't touch Red Star? Do you have that freedom to do that between those two companies even though you don't have the need to do that?

Well, no, actually, we have practice established, and so because of that we're really bound to work directly with each other.

Okay.

But that's the most efficient way for us to exchange business.

Yes, that's probably because it gives the best service for the customer anyhow.

Yes.

Okay, just a point of clarification. And then, Chris, when you were talking about the economy, it's about where I came in, you mentioned it sort of flattened out after April. What exactly does that mean? I mean we're kind of hearing that there's been signs of life since mid to late June. Is that what you're communicating? Or you're not seeing those signs of life?

Well, first of all, you know, we probably - and you see that when we publish our numbers - the United States is not really one economy. It's a bunch of economies.

Right.

And we do see anecdotal evidence that things are better on the West Coast than they are - was that caused by more imports? We don't know, but then at Dugen you saw that the revenue which goes into the Western part of the country did show some stronger activity. And the weakest part of the country is obviously still the Midwest, and that's the manufacturing side. How much of that is consumer versus manufacturing it's hard to say. But so far, you know, we're not seeing any great shakes of an improvement. We're not seeing another tumble in activity, but I wouldn't say we're seeing a large or a significant increase in business activity at this time.

Okay. Okay, and then, did you give the number of billing days or whatever, work days through the four quarters of 2004?

No, I haven't. I'll get back to you offline on that.

Okay. Great. Thanks for your thoughts.

Sure.

You do have a follow-up from John Barnes with Deutsche Bank Securities.

One last thing. Chris, just going back for a second on the IT integration, you indicated you're now in the development phase on these two products, these two projects. Can you give us an idea of how long development takes? And potentially how long integration takes? And then lastly, in terms of anything you're trying to do strategically, and I am not talking about closing down a terminal in one of your Divisions, or chasing out some bad freight. But is there anything strategically that you've put on hold pending the new CEO taking the reins?

First off, with the IT side, those things are rolling a little bit now, but the major rollout is next year in the FMS. And I think where you're coming from is, you know, when are these going to start hitting the P&L?

And what happens is when those - we're basically centralizing the purchasing power. When you get operating on one system or fewer than five systems you start centralizing your processing power. And so what's going to happen is you're going to have these operating out of one or two computers pretty quickly. And what the costs that are incurred there that would normally have been at the head office will be allocated out to the operating companies, and so those costs will not be seen in corporate going forward. They'll be seen in the numbers of the operating companies.

And so in total we would expect that our IT costs which have been running at one percent or even lower than that, we basically under invested in IT for a few years, and we're going to invest more. And so you would naturally expect that IT costs as a percentage of revenue will go up. However, we fully expect to reap a lot of benefits from this in terms of lower costs and enhanced profitability because of the quality of the information that goes to the customer.

And so what's been built into our numbers are obviously increased costs in IT, but also increased profits by the benefits that the IT generates.

Not to hold you to a specific number, but you threw out 20m in potential cost savings. Is that a net number after the increase in the IT spend?

Yeah.

And of that is that an '05 target?

I would say you'd have to get closer to '05 before you really start getting the benefits. We will start getting some next year, but you know, when you start rolling these things out you don't want to get too specific on the exact dates because you have to test the stuff, you have to make sure that the programs work and everything, and in trying to commit an exact date it's just a tough nut.

Yeah, okay. All right. And then, in terms of the strategic direction?

Yes, Neil I think should answer that.

Yeah, management had made a presentation to the Board in April as to the strategic options for the LTL Group, and during these intervening months the Management Team has been working in quantifying and understanding, and developing an action plan relative to those options. So that when the new CEO comes in that information will be here for him. The intent was that it probably was a four to six month study period to get all of it understood, and implementation plans thought through. So that we did not lose any time during this last four months in working on it, so that the new CEO will have the ability then to take that body of work plus any other thoughts and ideas that he may have, and start looking at implementation and execution plans.

Okay, thanks for your time, guys.

Sure.

At this time, there are no further questions. I would now like to turn the call over to Mr. Neil Springer for any closing remarks.

Well, thank you very much, gentlemen, for your time, and ladies.

Just a couple of oversight statements. We are basic planning our volumes for the next period to be flat like they have been over the last couple of months. And for USF to prosper in that environment it is necessary that we continually reengineer ourselves, and that we continually drive best practices across our entire enterprise. And we believe that with the Management Team, and with the new CEO coming onboard that USF will be positioned to aggressively move forward in this very dynamic and changing industry.

And with that, I'd like to conclude the conference. And have a good day.

Okay, Trameka.

Thank you for participating in today's call. You may all now disconnect.