Yellow Corp (YELL) 2003 Q3 法說會逐字稿

Good morning and welcome to the USF Corporation’s third quarter earnings conference call. This conference is the sole property of USF Corporation and any rebroadcast or 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 on the line, you are accepting these terms. Thank you.

All participants have been placed in a listen-only mode. Following the presentation, there will be a question and answer session. If you would like to register to ask a question at any point throughout the conference, please press the numbers 1 followed by 4 on your touch-tone telephone. I would now like to turn the floor over to your host, Mr. Dick DiStasio, President and Chief Executive Officer of USF Corporation.

Good morning, ladies and gentlemen. Thank you, [Leeandra]. Welcome to the third quarter earnings conference call for USF Corporation. As you know, this is my first conference call since I joined the company seven weeks ago and I am pleased to share with you my first impressions and more importantly, what the management team and myself will focus on over the next few months.

My initial reaction is USF Corporation has an excellent management team. I’ve just completed my visits to all the business units and have been impressed with the quality of the team. In addition, it is evident our focus is on the quality of our service. That comes across loud and clear in how we manage our business.

USF has excellent brand recognition. I have received this feedback from the calls I have made with our customers. We are all well respected in the TL and Logistics business and are seen as a leader in the LTL segment. In summary, USF is a quality company with an excellent customer base, managed by a focused organization.

Having said this, how do we begin to address our number one priority of creating increased shareholder value? I believe that begins by assessing our current business model. We have already begun the process of determining where changes need to be made to improve our performance.

I need to tell you, I am disappointed in our financial results. However, it is clear we have significant opportunities to improve our bottom line. We will begin by focusing on our key issues. And these key issues are; one, address Holland’s stagnant growth and get them growing again. Two, assessing our information technology plan to ensure we achieve our financial benefits in a timely manner. And three, deal with the structural issues within our LTL business units, which prevent us from growing market share at the rate of our competition.

In addition, within the next few months, my management team and I will reassess our current strategic plan and make recommendations to the board to redefine that direction. Let me make it perfectly clear, we have a business model that needs to be fixed to adjust to the changing environment. We need to listen to what our customers are telling us, and operate in a seamless environment. We need to take advantage of the operating synergies that will improve our bottom line. We will act and perform as a company of one. There will be challenges to execute our final plan. But know this, our organization is up to the task. USF has a proud reputation and history to build upon. Our people know and feel it every day. We will succeed.

Before I turn it over to Chris, I want to express how excited I am to be given the opportunity to lead this quality company. We have some challenges ahead that we need to work through. However, there is no doubt in my mind that the management team is well prepared to handle. We have the energy and the vision to get us heading in the right direction. And that is, growing top line revenue profitably, while maintaining our quality service product to our customers, thus providing increased shareholder value.

Thank you. And now I’d like to turn the call over to Chris Ellis, our CFO, to take us through our financial results. Chris?

Thank you, Dick. Welcome everyone. And I’m going to go over the P&L and some non-income statement things; our balance sheet with you for a few minutes. But before I get started, I want to read the normal Safe Harbor statement that we have.

The goal of this conference call is to have an open discussion and dialogue on the company’s results and ongoing operations. We’re going to be making forward-looking statements concerning the company’s plans and expectations. We will be commenting on our expectations of revenue, demand for freight, the general economic environment, pricing environment and projected costs and profits for 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 the actual results may differ materially from the projections due to risks and uncertainties. So for further details, we refer you to our filings with the SEC, like our 10-Ks our 10-Qs, for further details.

That being out of the way, I hope that you’ve all got a copy of the press release and our statistics. They’re both on our Website at www.USFC.com. And if you haven’t gotten them now, they’re available for your perusal.

So now let’s look at the income statement. First, I want to remind that our discussions are going to be around the income from continuing operations. There’s a small loss of about 130,000 from discontinued operations in the statements, which is some leftover expenses that were related to the freight forwarding segment that was disposed of back in 2002.

Our net income from continuing operations for the quarter was about $13.1m, or 48 cents diluted EPS. And this compares to last year’s income from continuing operations of $13.4m, or 49 cents diluted EPS. Now, looking at the revenue for the quarter, our consolidated revenue was $584.7m, and that’s an increase of 1.1% over last year. But there were 64 working days in our fiscal quarter this year and that compares to 63 working days last year. So, on a working day basis, the revenue actually declined about 0.5% this year, compared to last year.

And in our LTL Trucking Group, the revenue was $486.4m, and that’s up 0.6% over the third quarter of 2002 and on a working day basis, it’s down about 0.9%. Now, included in there is diesel fuel prices, which are higher this year than in last year’s third quarter. So our fuel surcharge increased about 1% as a percentage of total revenue. So if you back out the fuel surcharge from our LTL group, the revenue per day decreased a little less than 2%. So, this relatively flat revenue for the quarter, is similar to what we had in our second quarter this year. And again, the primary reason is that Red Star showed a decrease of over 16% in revenue as they have restructured their company.

Since last year, Red Star, under the leadership of Steve Caddy, has done two major things. First off, they got out of some business with a large retail customer that was not profitable. And then secondly, Red Star reduced their geographic coverage, going back to their core market in the Northeast. They’ve closed terminals in Atlanta and the Carolinas, both North and South Carolina. So, if you back out the effect of Red Star, the remaining LTL Trucking companies showed about a 3.5% increase in revenue this quarter over last.

Now again, we’re looking at Red Star. Their operating loss for the quarter was $1m. And this is virtually the same as last year’s third quarter. But, when you compare this to earlier quarters this year, Red Star’s losses are showing a steady decline. In the first quarter, for instance, of this year, their loss was of $5.3m. So, while you’ve got a $1m loss and this is not acceptable in and of itself, this is a drastic improvement from the 5.3m loss that we had earlier in the year. And Red Star actually had a couple of modest profit weeks during the month of September. So, with the experience that we’re seeing so far in October, Red Star is still shooting for a break-even operation in the fourth quarter.

Moving on to Holland, which is our largest regional carrier, revenue at Holland was up 1.4% over last year’s third quarter. And on an equivalent working day basis, the revenue was virtually flat with last year. Holland saw a slight decline in volumes, off about 3% from last year and that’s both in shipments and in tonnage.

Holland has been dealing with a slower growth in their core lanes in the Midwest. By this I mean the Michigan and Illinois and other Great Lakes states. And this sluggishness has also affected their competitive pricing. There are, in the strictly regional area—and by this I mean those carriers that are in the 400-500 mile overnight market, a lot of competition. And this has put a lot of pressure on the pricing. So in order to maintain their superior service levels, Holland has resisted most of the rampant discounting and that’s been caused by the excess capacity in the regional competition market. As a result, Holland’s profit decreased from $18.8m in 2002’s third quarter, to 16.6m in this year’s quarter.

Looking at our other LTL carriers, USF Bestway showed a modest revenue growth of about 3.5%, or about 2% growth on a per working day basis. Their operating profit was pretty even with last year at 2.8m, but included in this year’s numbers is a gain on the sale of a terminal of about $900,000. So without that gain, the OR would have been about at 95.5, instead of the 93.1.

Over at USF Reddaway they have continued their strong performance and they had a revenue growth of 8.3% and an operating ratio of 86.8. And that’s virtually the same as last year’s OR in the third quarter. This company remains a dominant carrier in their market area. And we believe that Reddaway is one of the top performing LTL carriers in the whole country.

Looking at USF Dugan, their revenue grew 6.1% or 4.4% per working day in the third quarter and their operating ratio improved from a 99.2 last year, to a 97.3 in the third quarter this year. In last year’s third quarter, Dugan had a charge, you’ve got to remember, of about $600,000 for an environmental matter. So if you back that out, before this charge, their OR last year would have been about a 98.1. So, even before the charge, on a comparable basis, Dugan did show a better OR of a 97.3, compared to the 98.1 last year.

Going over to our truckload operations, Glen Moore, which is our truckload carrier, posted a 13.6% revenue increase and they also grew their profits from $1.6m last year, up to $1.8m in this year’s quarter and that maintained the same OR of 94.7. Now unlike our LTL carriers, which have their fuel surcharges, which pretty much hedge the increases in fuel prices, Glen Moore is not able to cover all these increases. So with the higher fuel cost as we mentioned earlier, compared to last year, we estimate that it added almost a percentage point to Glen Moore’s operating ratio this year.

Going over to Logistics; in our Logistics business segment revenue was essentially flat with last year’s third quarter and profits grew a modest 1.4%. However, this performance is better than meets the eye. If you remember, in April this year, the Fleming Companies declared bankruptcy. And this was Logistics largest customer. And by the beginning of the third quarter at least, this business was essentially gone. So, to make up or offset this revenue drop, Logistics picked up revenue in their domestic container and drayage business and in addition, they’ve also picked up a significant amount of business in their distribution and cross-dock operations.

Going down real quick, looking at our corporate area, as you can see there’s a slight reduction in the costs, about $600,000 at corporate. And this is a combination of several items. First of all, we had lower claims reserves. And this is for those larger accident and worker’s comp claims that are handled at the corporate level. The smaller cases are handled in the individual operating companies.

Also, we had some lower IT expenses, as I mentioned earlier, our projects have moved into the capitalization phase of the projects under the accounting principle SOP 98-1. And then offsetting these decreases in cost, we did have some extra costs in the regular corporate area. It’s primarily concerning the hiring of Dick DiStasio as our new CEO.

Going below the line, you can see that the interest expense is pretty much in line with last year. I remind you that virtually our only debt are the $250m of notes that we have. And they mature in about 7 or 8 years and we have virtually no bank debt. Our interest expense is a little bit lower than last year, about 373,000. And that’s basically a decrease in the interest rates that you get on short-term investments.

Our tax rate came in at about 42.9%. It’s basically the same as we’ve had earlier in this year. It’s been pretty consistent. This is slightly above the 40.6% that we had last year and that reflects the changes that we had in the state tax rates, which results for different, one level to the other, this year versus last year. And we also had a small tax credit that we realized last year.

So, looking real quickly now at our non-P&L items; our CapExes for the third quarter came in at $29m, and that’s compared to 36m last year. I’m not going to go into details. It shows you a breakdown by category. If anybody’s got any questions later on, I’ll take it. But YTD CapExs are 99m. But the higher CapExes so far YTD are really in two areas.

First area is our IT projects as we’ve spoken in earlier conference calls, have ramped up to full swing. And the YTD expenditures are about $27m, and that’s compared to only $6m last year. And this increase is for those major freight management and customer interfacing projects that we’re going to start rolling out sometime next year.

The second area that is up is we made several terminal purchases, which had to do with the closing of Consolidated Freightways. There were actually three of them we bought earlier this year. The total year, we’re still projecting our CapExes to come in around $130m-$140m. Another item to look at is our cash on hand. At the end of the quarter it’s up now to $83m, and that’s up from $57m that we had at the end of the second quarter. So as a result of this, the company’s debt to total cap remains really strong. Our debt to cap is 27.9%. And this is compared to 29% at the end of last year. And if you back the cash out to get the net debt, our total cap on net debt is 20.5%, so it’s very strong.

That ends our review of the P&L. And so, Leeandra, we’d like to turn it over to you to monitor Q&A for us.

Thank you, sir. The floor is now open for questions. If you do have a question, please press the numbers 1 followed by 4 on your touch-tone telephone. If at any point your question is answered, you may remove yourself from the queue by pressing the # key. We do ask that if on a speakerphone, to please pick up your handset to provide optimum sound quality. And once again, to ask a question, that is 1 followed by 4 on your touch-tone telephone.

Our first question is coming from Jason Seidl, of Avondale Partners. Sir, your line is live.

Hi, Dick. Welcome aboard. Hey, Chris. How are you guys today? I guess just a quick question, with Holland seems to be having problems growing its revenues, although I look at some of the other carriers in the area, their numbers don’t bear out that there’s any massive discounting going on. Is there any one particular area that Holland is having a problem with—any one segment?

So I understand your question, segment meaning what region or what industry?

No, what business industry?

No, I would—we’ve seen obviously from reports, the automotive industry and so forth in the Midwest, but nothing in particular.

Okay. Looking over to Red Star, we have seen improvement and break-even is nice, but I’m sure that’s not the ultimate goal for the company. Is it your intention to have it as a stand-alone carrier? Or down the road is it a possibility to merge it in with Holland, as they’re both unionized and they do have some overlap of states?

To answer responsibly on that question, we need to look at that strategically. And as I mentioned in my opening comments, we’re planning to go offsite to talk about the strategic direction of the company and redefining it. And that is definitely a question on our minds as well. And we plan to address that relatively soon and come up with an answer for that.

But your points that you bring up are valid points and we understand that we have to address that.

Okay. Aside from Holland, any other places in the LTL network that you guys are losing market share because of pricing—that jump out at you, not just normal fluctuations?

Hey, Jason. This is Jared McArthur. We’ve seen in the West, [Houston], Bestway, Reddaway, pretty good up-tick. We don't see, especially on the retail side—things have remained pretty strong. Probably not to the level of ’99, but very good so far this year.

Jason, going back to the earlier point, if I could make a point. This is Chris. You talked about the volumes at Holland. Where the volumes are down, is basically like I said in the opening comments, is in the Great Lakes area. And in fact, the rest of their market, they’re actually growing their market. Their revenues are up either in the high single digits or the double digit area. And obviously, their core market area is in the central states. So the largest volume is going to be there and that’s where they’ve been hit by the sluggishness.

Okay. Let me switch my comments real quick to the truckload division. It looked like it had a pretty decent quarter. It’s still the fairly small part of USF. With a strong balance sheet and a lot of cash, are you guys going to continue to look to expand Glen Moore?

Yes. That's part of that strategic direction I talked about earlier. It is a solid business unit for us from a profitability standpoint. And it’s our intent to grow that PL division and obviously we need to look at opportunities out there that will fall into that pattern.

Okay. And one last question, for the LTL division, Chris, I don’t think you guys had much of a gain from the closure of CF, but did you acquire much rate and if so, could you put a figure on it?

It does mention in the press release that our PremierPlus business has grown again. Obviously, the growth rate has fallen off. The further you get into it. The third quarter this year you did have a month of comparison with the demise of CF, but there is a comment in there that says that our PremierPlus business grew 10.4% the third quarter compared to last year. And it’s up to 12.8% of our total revenue, compared to 11.8% in the third quarter last year. So there is still an increase, but it’s flattened off. Because we’re now comparing apples and apples.

Okay. And one last question. Was there any difference on a month to month basis in your tonnage levels as you moved to the quarter, overall?

Again, you’ve got to look seasonal. We compare everything to the same month last year, because the LTL industry is so seasonal. We did see the up-ticks in the volumes, because it’s normal that you would see those during the quarter. But again, the volume increases for the whole quarter are down compared to last year.

I guess what I’m getting at, Chris, on the year over year change in volume levels at the LTL Group?

In other words, did it pick up later on in the quarter, compared to last year. I think it’s pretty flat.

Okay. Fair enough. I’ll let somebody else have at it. Thank you, guys.

Thank you. Our next question is coming from James Valentine, of Morgan Stanley.

Good morning, guys. Chris, one of the great things about USFreightways, I know you guys try to, in effect, try to close your books each week and try to make sure you’re on top of things. And I guess one of the positive things about reporting kind of late in the quarter here, relative to some others is that you probably have a better feel for how October is shaping up than some others. Can you give us some thoughts now that we’ve got the CF comparisons behind us. We’ve got some people saying things are picking up, some people saying things aren’t picking up or that September was stronger than October, kind of some feel for what’s gone on in the last few weeks?

I’ll start if off. We are seeing the continuation of the seasonal pick up. Again, it’s different. I’d like if the other guys will weigh in on this. I’m just the bean guy you know, Jim? But anyway, it is showing the seasonal pick up. Some areas of the country are doing better than others. But I think the trends that we saw in the third quarter are so far continuing pretty much into the fourth quarter.

I guess what I’m getting at, are things accelerating beyond just the seasonal pick up?

Jim, Jared. It’s in pockets, but I don’t think it’s dramatically increased over the normal seasonal up ticks.

Okay. And that’s fine. I know we’re hearing that from a few other players that are saying it’s not a resounding—if we let the press write the view on the economy, it would obviously be much more bullish that we’re hearing from some of the carriers.

The second question, Dick, maybe you can talk through this if you think it’s appropriate. But, the prior CEO had had a study done by a third party on where the company needs to go over the longer term. Do you think that that’s going to be the framework of this offsite that you do and moving the company forward? Or do you think that you’re going to start anew?

I think I wouldn’t throw out the baby with the bath water here. I think there are definitely some valid strategic issues that have been raised and put together on the previous report. And I think we’ll build upon that. I think we do need to take a clear look, that I believe the last strategic plan didn’t address. And that is the changing market and the business model that we’re in, I think, effectively. There will be, I think, significant changes going forward in the strategic plan to address those issues.

Okay. And then the last question, I guess back to you as well, is that the question I get from clients is given that Holland operates in an environment where it competes with non-union players, and the operating ratio here, especially versus, Lithua, Fed Ex, Freight Air or Con-Way, the most recent quarter, that gap that you guys had that you had closed a few years ago, it seems to be widening.

Can you walk us through whether it’s based on your experience in prior industries or your knowledge of coming over to USFreightways, what gives you confidence that you can take unionized operation and get the margins possibly back to former levels? Or do you think that’s going to be tough to do given all the inflation we’ve seen, especially in healthcare costs and the new Teamster’s agreement?

Well, it definitely is a challenge, Jim, that we have to deal with here with Holland. But definitely it’s not insurmountable that we can’t deal with those challenges. I definitely think our cost structure there needs to be looked at closely. And there are definitely efficiencies that will arise from us operating as a company of one. The significant, in my opinion, synergies that we haven’t yet taken that could bode well for us once we operate more as a company of one.

I think secondly, from the standpoint of how we look at our particular business, the long-haul business needs to improve. And if we focus on that from a sales and marketing standpoint, I think even with the cost structure, after we improve it, we can be more profitable than we are today.

Great. Thanks so much. Appreciate it, guys.

Thank you. Our next question is coming from Thom Albrecht, of BB&T.

Hey, guys. Good morning. A couple of questions here. And I know this may sound similar to others, but if you look at Holland, that’s basically about a billion dollar carrier in terms of revenues. That’s one of the bigger regional carriers in the country. One of your priorities is to jumpstart the stagnant growth there, but I really don’t see how that’s possible unless you make an acquisition. Obviously if you expand some geographically you start to bump into other of your LTL carriers. I don’t know that you’ve got a lot of cost opportunity. So I’m really wondering what might be some of the things you’re thinking about beneath that broad priority?

Well, Thom, just to mention a few—and again, I don’t tend to make you believe we have all the answers at this point. But I think just a few here to mention are valid issues that we see. One, the growth in the regional markets. We still have opportunities there that we haven’t taken advantage of. And there are pockets of business that if we pursue that, we see—I wouldn’t call it significant growth, but growth there that could definitely improve the top line. And again, I don’t want to sound like a broken record, but there’s long-haul business out there that we really haven’t taken advantage of yet is significant. It is significant. And that’s where we see tremendous growth opportunity.

Now, when you talk about the PremierPlus, I just sort of envision that as the strength across your five different companies, but is that something that maybe Holland has not sold as aggressively as maybe other companies within the USF family?

Thom, you answered the question.

Okay. And I guess too, just strategically overall—maybe you’re not comfortable commenting on this, but the previous regime—actually, really two regimes ago and I guess it was Sam’s year that was kind of cleaning up some acquisitions. But, outside of a strategic acquisition in LTL or truckload, at this point in time, do you envision USF regaining its acquisitive mode that it had for so long?

Again, it would be premature for me to give you any kind of definite answer. But obviously when you look at the company strategically, that is a direction that we have to assess and seriously assess, in order for us to grow in the mode that we need to. So, yes, acquisitions is something we’re going to look hard and long at. Any good business that wants to grow, acquisitions plays a key role.

And then I guess lastly, as you’ve met with customers and gained some favorable feedback on your strengths and your overall strategic positioning, what were one or two of the negatives that you heard from customers, either on the IT side or just overall?

It definitely relates to our systems. Overriding, the general consensus is that we don’t act as a company of one. We have five business units and from time to time we have a tendency to act as independent business units. And there isn’t the seamlessness there that they would expect from a company that would deal in the business that we’re in and that’s shipping product within the region or across the country. And we need to address that quickly. It’s loud and clear from our customers. They definitely have complimented us on our service and they see our service level as one of the best in the industry. But they would like to see us act more seamlessly going forward.

Okay. Good answers. Thank you very much.

Thank you. Our next question is coming from Gary Yablon, of Credit Suisse First Boston.

Good morning, how are you? Dick, I wanted to ask you—you talked about strategic direction and reassessing, we’ll see what building blocks from prior management we’ll keep. I guess one question I’d ask is—roughly speaking. It’s a little unfair to put you on the hot seat just yet, considering you’re fairly new at this company. But how long to investors wait if it’s not been a whole lot of fun relative to some other stocks in the trucking sector? Can you give us some rough sense of a timeframe of how long it takes? And what are the odds if we’ve got to reinvent this thing again and then start over, that’s not a whole lot of fun. Can you at least put us in the right stadium?

Well, that is a difficult question to answer and give you specifics that you can put your hand on. What I’d like to see us do is show signs that we’re trending positively in 2004. I think it’s critical that you start seeing the signs that we’re moving in the right direction, next year. As you know, it takes time to put together a plan. The management team to support that plan, although I believe we’re ahead of the curve there. And then start turning things around. But there will be trends that will indicate we’re going in the right direction. And believe me, we’ll take every opportunity to point those out to you.

Can we talk a little bit about corporate overhead? It’s gone up a fair amount for this company in recent years. What we outsiders have been told is a fair amount of that spend you had to make effectively this company under-spent on things like IT. But for a company this size, it’s just been a staggering increase. We obviously don’t see where you’ve gotten paid for it, if you have. So if you have gotten paid for it with your customers, maybe you can talk to that. And are there any chances those numbers start to come down?

That’s a very fair question you ask, Gary. First of all, the increase in spend does come from our IT area. As you know, we’ve under-spent in the previous decade, significantly, where we probably should have been spending. And we’re sort of in a catch-up mode. And with any organization that puts in a new enterprise system, there will be significant dollars spent, but the implementation of that program does take time to roll out. Again, I’m not offering any excuses that we haven’t rolled this thing out quicker, but the fact of the matter is, we haven’t rolled it out to the extent that I think all of us would agree that we’re happy with. But we do have an emphasis on starting to see some of that turnaround next year in the 2004 earnings.

But we’re assessing that spend and making sure that we spend it prudently and we put it in the right packets that we need to in order to get those benefits as quickly as possible.

I think secondly, to address the corporate spend number, is yes. We’re going to review how we’re organized here and how well we use the resources that we have available to us here at corporate. And where appropriate changes need to be made, we will make those changes.

Okay. And I guess finally, I’m just trying to wrap a bunch of things together. I’ve followed your stock and this industry for some time. There’s a lot of folks who were asking me questions today. And just to humor myself this morning, I calculated the median trading volume on an average daily basis in your stock between 2000 and 2003, and it’s down by 43%. What I take away from that is far less people care about what you’re doing. I don’t mean that to give you a hard time. I’m just looking at numbers and as people call on the phone and the names that come up and the names that don’t come up. This in the past has been a great company and earned a lot more money and had much better operating ratios, things that you don’t need me to tell you.

What I’m really getting at, Dick, is why’d you come here? What do you want to make out of this? Just let us get in your head a little bit on that.

I’ve analyzed the same numbers that you have and concur with you that the activity has not been there that has been there in the past. And I guess my response to that is we haven’t had a lot of exciting news to tell over the last few years.

I should point out though, we are a profitable company, not as profitable as we used to be. And I tell you, the reasons that I joined this organization were a few critical reasons. One, I really thought highly of the management team and individuals in this organization. I think we have quality people here. I think that we need to have a little clearer direction in which way to go and when that direction is much clearer, I think you’re going to see this management team really perform well in the years to come. And I think you’ll see some of that trending will move positively in 2004.

I like the industry. I like the LTL business and TL business. I’ve been in distribution most of my career. I think there’s a tremendous opportunity for us. The USF Corporation has a great brand recognition. And I think we haven’t taken advantage of that brand. And I look forward to the challenges ahead to make us the number one player in the LTL business. I know the competition is strong out there. And I know we have a number of key issues internally we have to deal with. But those issues aren’t insurmountable, Gary. And I think we can put the plans in place to deal with those key issues and I think we can grow this business significantly and not only get to where we were in the prior years, but exceed some of your expectations out there. And I see that as a challenge. And to be able to come on board with a company with a good management team in a good industry, with huge potential, especially if the economy turns around. I see this company performing extremely well down the road.

That's exciting to me and that’s what drives me to come to this office everyday. And I believe I can get the people who are here as well motivated in seeing that as well as I do.

Fair enough. Thank you.

Thank you. Our next question is coming from Greg Burns, of JP Morgan.

Hi, guys. This is actually Jayson Lemberg, in for Greg. Coming back to the IT for a second. You have spent a lot of money investing in that area and trying to create one seamless company. Now you’re saying you’re going to reassess that strategic direction. Do you feel you spent money on the right systems? Could this investment increase in the future? What’s your outlook on that area?

Well, Jason, let me step back for a moment and explain more clearly what I mean buy assessing the IT spend. I’m not talking about going in a different direction. What I’m talking about is assessing the priorities within that direction. The dollars that we have spent to date have been spent in the right area. And as you know, anytime you put in a new enterprise system, there are various modulars and components of the enterprise system that you assess what comes first, second and third and so forth.

And my comments are really addressed to where we move those projects on the list. I think the direction we’ve gone with overall is very accurate. I think the decisions made in the past are the appropriate ones to move forward. The question becomes, are there ways we can move some of these projects around to get a bigger bang for the buck sooner. And that’s what I mean by my comments about looking at the spend and how we spend it.

I don’t know what the spend is going to be for the future, whether we reduce it or expand upon it. It’s too early to tell. I see that what we’ve done to date though has been appropriate. And believe me, we have not wasted dollar one in this whole project up to this point in time. Again, our objective is to get this up and running as quick as possible, so we can see the benefits of it and our customers can see the benefits of it.

So, you actually expect to see an OR benefit next year from your IT spend or is this something we’re going to have to wait a little bit longer for? I know it’s a work in progress.

The fair answer to that is, as you know it takes time to implement this. It’s not like you put a switch on the wall and then you click it on and you have light instantly. It’s a gradual process. And as we rollout the software to our terminals, we’ll slowly begin to see the benefits occurring. And I believe that the annual full impact won’t happen until sometime in 2005, the beginning of that year. That would be our target. But 2004 is the year that we roll this out appropriately. And you know when it comes to IT spend you can overspend. And we want to do this thing appropriately to make sure we control our costs.

And then switching to yields, can you give us a breakdown ex fuel surcharge per division and what your outlook on pricing is by region?

When it’s posted on the web, it shows you what the fuel surcharge is as one of the tables there. So you basically have to back that out with the yield numbers that we gave you company by company, because it’s pretty much the same across the board. So whatever yields you see on those tables you just back that out and that will give you the ex fuel surcharge.

And the pricing outlook by region going forward? I know you mentioned parts of the Midwest, the Great Lakes region. Can you comment on some other regions across the country?

Yes, Jason, Doug Waggoner. We really don't see any problems with yield. We have the typical pricing pressures that we always have. I wouldn’t say it’s particularly strong in the shorter length of haul, a little firmer in the longer lengths of haul. But I think we’re doing okay in that regard. Fuel surcharge is running about a quarter of our yield [inaudible].

It’s just axiomatic that when you have this package taken out with CF, you have the strengthening in the long end of the market case. And especially with the announcement of what’s going on between Roadway and Yellow. But there’s more competition in the regional sector, so you’re not going to see the buoyancy in the pricing. Hopefully, if the economy is really starting to rebound—again, September looks strong, October flattened out a little bit. Hopefully the first thing you do is you get the volumes and then the prices start firming up later on.

Thank you.

Thank you. Our next question is coming from Ed Wolfe, of Bear Stearns.

Hey, guys. It’s actually Justin Yagerman, how you doing? I just wanted to ask you a couple of questions. First off, I guess most of our conversations this quarter on hours of service have been focused on the TL industry. But I wanted to get a sense of how you think some of that might play out for your regional LTLs and also how it might play out in your TL business, and get a sense of whether you think it’s a positive or a negative on the LTL side and how you’re going to cope with it on the TL side?

We’ve analyzed hours of service and it varies by companies depending on how the actual terrain of the company is. As an example, at Reddaway, we do a lot of mountain terrain and do a lot of chain up time. It could have a mild effect on us. I think the companies Dugan and Bestway and even Holland, flat land, we don’t see it to be a negative. I think as it washes out totally, it will probably just be a push.

Why is it that the terrain would have such an effect on it?

To give you an idea, in Reddaway, we run about 100 scheduled a day from California to the Pacific Northwest. We traverse probably four or five mountains, hooking up a chain four different times going in one direction. And in the past if we pulled of and took a nap or took a rest for one of our drivers, it was logged off-duty, not driving. But the new rules, effective January 4th, every bit of your time from the moment you left until the time you finish has to be logged on as on duty. So, even though you can drive 11 hours over 10, overall it hurts.

Chris, I just wanted to get a sense, you guys said you had a $900,000 gain of sale on Bestway in the quarter?

Yes, it’s funny how you’re buying terminals and selling terminals pretty much on an ongoing basis now, because it’s really part of operations. They had a terminal that they moved into and they were able to swap out of one.

How does that compare to the last couple of quarters in terms of gains or losses?

We’ve had gains. For instance, we have gains every quarter on our equipment sales. As your old equipment gets sold off you sell it and you have gains. So every single quarter we have gains on getting rid of operating assets.

When you look at how you’re faring in terms of market share and your competitors, are you looking at targeting any potential Roadway or Yellow freight, after Yellow’s acquisition of Roadway?

As Dick indicated, we’re focusing on our efforts of improving the seamlessness of our PremierPlus product. We’re not intentionally focusing on any one competitor. We just think that it makes sense to have that capability shored up and ready for the marketplace.

All right thanks guys, that’s it.

Thank you. Our next question is coming from Jeff Kaufman, of Fulcrum Global Partners

Thank you very much. Two questions, we’ve talked a lot about the IT spend. Can we talk a little bit about the equipment spend? A couple of years back, mid to late 90s you were spending between 8 and 9% of revenues on CapEx to fund mid teens growth. Lately you’ve been spending a little bit closer to 6%. As you begin to execute on this growth plan, is it reasonable to assume that the equipment portion would drive the CapEx spend back up to that 8 or 9% level? Or were there other factors that led CapEx needs to be higher than they’re going to be this next cycle?

Yes, Jeff. As you know, I think we’ve explained this before. We really separate all of our capital expenditures, especially for revenue equipment into what we call maintenance and expansion. And in the late 90s we were expanding in the double digit rate. And if you don’t have trucks you can’t haul freight. So as you’re growing, you’re naturally going to be spending at a higher rate and that’s why you get this higher percentage of revenue at that level.

In the last couple of years we’ve managed our fleet and when the volumes flatten off you’re capital expenditures will go down. In 2001 it was very low and that was because that was the year that the volume dropped off. Our fleet is in very good shape. We can be very discretionary on what we spend on equipment. And that year we battened down the hatches. If business volumes dictate, we’ll obviously have to increase our capital expenditures to handle that extra freight. We like to keep the right amount of equipment for the level of business we’re at.

I guess if I’m hearing what you’re saying, there’s no age issues in the fleet, there was no overspending that occurred. So therefore, if you were to grow revenue at a 10, 12% rate, we would be growing the CapEx budget at a 10%ish rate.

That’s right. I think probably right now there’s probably some excess capacity that we have in there. When volumes start picking up significantly we have the capacity to handle the beginnings of that. And you do have to remember we did have the pre-buy last year of tractors. And this year the tractor capitalizations are next to nothing, but we’re spending more on trailers. So the fleet’s in really good shape. But if there’s a sustainable growth in late 2004 you’ll probably see an increase in orders.

Thank you. Second question and I’m glad you touched on this in your comments. We’ve been hearing a lot of anecdotal stories from some private fleets in the Midwest about recently increased discounting activity. I’m not gonna mention the culprits, but it’s not you guys. It is one of your competitors. We’ve heard that that situation has been deteriorating. Now it’s not evident in the yields that you show for Holland, which is the region we hear where most of this is going on. But you did allude to that in your comments.

Has the discounting or the competitive pricing, from your perspective leveled off at this stage? It was more…used to happen, now it’s not happening as much. Is it increasing? And if I took a look at your business and tried to separate the mix effects on your yield from the competitive market effects of your yield, is your average yield—if I looked at what you’re pricing in the market today, ex any recent rate increases, versus what you were pricing 3-4 months ago, is this a material lower level as we head into 4Q and next year?

I’ll start if off, Jeff. I was the one who made the comment. You hit the nail right on the head. Holland, if you look at the tables you can see the rates that Holland has charged have actually shown a modest increase. And that’s why the volumes dropped off, because some of this discounting, they just decided they weren’t going to meet this. And when you’re a superior service level carrier like we are you try to maintain that superior service by maintaining your pricing. And I think Doug will probably add something onto this.

I think you’re onto something there. Looking at Holland’s yield, it was actually the second best improvement of our LTL groups. And I think that’s probably part of the reason for the stagnant tonnage. I would also tell you that we made some tough decisions at Holland this last quarter on a couple of large corporate accounts that had marginal profitability and took a tough stance and lost some business. We have seen some increased price competition in that region, but we held the line on it and our yield shows it. Unfortunately, our volume doesn't.

Can you afford to continue to stay out of the fray or does it look like the mess is deteriorating among the guys out there cutting prices?

I think it’s in a steady state right now.

Okay, I’m glad to hear that. Thank you.

Thank you. Our next question is coming from Ken Hoexter, of Merrill Lynch.

Hi. Just a quick question if I may. On Plymouth at Red Star, obviously we saw revenues down a bunch as you continued to cull revenues that you mentioned. Was there any contribution that you gained from Plymouth and is there any other opportunities that you’re looking at right now to add business?

Right, Ken. Absolutely, it’s been according to plan. I think the retention that we’re getting out of Plymouth Rock may be even a little bit better than we—if you recall, it was a small carrier, about 30, $35m and we mentioned we wanted to retain in somewhere in the $20m and I think the retention rate that we’re getting is at or above that. That’s really helped out.

If you look at the revenue per shipment at Red Star too, there’s like 12-13% improvement in that over last year. A lot of that has to do with the better quality revenue that we got from that acquisition.

Does that mean the revenues you’re keeping at Red Star are that much lower then?

No. The major increase in the revenue per shipment had to do with that retail customer we had at very low revenue per shipment. And just by exiting that business, it showed a major improvement in the yields. But in addition to that, the quality of the customer base that we got from Plymouth Rock was also good. But the largest improvement occurred because of exiting the business.

Revenue per shipment last year overall was $127.32 and this quarter it’s $139.00, which is a 9.5% improvement over last year. It’s come from a combination but the largest improvement is the result of culling that unprofitable freight that we had.

Got it. Thanks. Rich, a question if I may. Obviously a lot of system questions, but when you said customers were concerned that the systems weren’t meshing well, is that more on the PremierPlus type of goods that are going between systems or is that dealing with different regional carriers with one company?

I think that’s definitely a correct comment you made. It is dealing with the long haul on the common Pro number that we’re dealing with.

So, it’s the first part. It’s the PremierPlus. Thanks.

Thank you. And our final question for this morning is coming from Gary Yablon, of Credit Suisse First Boston.

Hi, just wanted to follow back. Could you talk about capital structure and how you think about that? It sounds like we’re seeing the bottom in this company’s performance and maybe the economy is going to start helping us a little bit. You’ve got what some might say is an over capitalized balance sheet and a fleet that sounds like it’s in pretty good shape. The previous management wasn’t very aggressive, i.e. buying in shares. Could you talk to us about your philosophy on things like that?

Well, you pose a very interesting question that I’ve been asking myself since I started with the company 7 weeks ago. I don’t have a definitive answer for you, Gary. And again, I’m not trying to beat around the bush or not answer your question. It is a critical point that I need to look at and see how we employ capital here. And look at all those issues surrounding that. My philosophy is you want to get a good return on capital employ and by looking at whether it’s a stock buyback or investing in more revenue producing equipment, acquisitions, you want to look at where you’ll get the greatest return. And that’s how I want to look at this business. So, I will look at all those avenues. And when the appropriate time comes around, which one makes the most sense, that’s what we’ll pursue.

Would you agree if someone were to say to you, your company, let’s see, has [inaudible] leverage in the low 20% range, it could certainly use some more leverage on it, would you agree with that statement?

Absolutely. Unequivocally

And you would weight acquisitions with repurchase of shares? It just strikes me it’s hard to find better things than buying your stock if you think there’s a bottom to your company.

The point is, where’s the capital going to be employed back? If we see an acquisition that really makes a great deal of sense for us from top line growth and profitability, you’ve got to weigh that. And again, I understand the concept of stock buy back, but again, it’s where you get the best bang for the buck, and what we want to do going forward.

Fair enough. Thanks a lot

We have no further questions.

I just want to thank you very much, ladies and gentlemen, for participating. I want to conclude by restating our commitment to improved shareholder value. That is our top priority and I want to make sure that message gets across loud and clear. It has gotten across through the organization and we’re firmly committed to it. We understand the issues impacting our organization. The management team and I will take the appropriate action and we will take it quickly over the coming months to improve our performance and I want you to know you have our commitment.

This concludes the USF Corporation fiscal 2003 third quarter conference call. Please note that there will be a replay of this call available this afternoon. This replay can be accessed at 877-519-4471, using the PIN number of 4224924. Thank you and have a wonderful day.