Yellow Corp (YELL) 2004 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Yellow Roadway Corporation's first-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. (OPERATOR INSTRUCTIONS) With that I would now like to turn the conference over to Mr. Steve Bruffett.

Good morning everyone, thanks for joining us for Yellow Roadway Corporation first-quarter 2004 earnings call. With us this morning are Bill Zollars, the Chairman, President and CEO of Yellow Roadway; Don Barger, our CFO; Jim Staley, the President and CEO of Roadway; and James Welch, President and CEO of Yellow Transportation; and Jim Ritchie, President and CEO of Meridian IQ.

Statements made by management during this call that are not purely historical are forward-looking within the meaning of the Private Litigation Securities Reform Act of 1995. This includes statements regarding the Company's expectations and intentions on strategies regarding the future. It's important to note that the Company's future could differ materially from those projected in such forward-looking statements due to a number of factors including, but not limited to, general economic conditions, labor relations, pricing activity, expense volatility, the extent to which we are able to realize expected synergies and other risk factors. For a full discussion of risk factors please refer to our annual report, 10-Q, 10-K and last night's earnings release.

The pro forma information that we provide to you on this call represents reported results of both Roadway and Yellow for the first-quarter of 2003 with certain adjustments that reflect the combination of the Companies. For more details please refer to our earnings release. Bill Zollars and Don Barger will provide our comments this morning and Jim Staley, James Welch and Jim Ritchie are here and available to participate in the Q&A session. And with that I'll turn it over to Bill Zollars.

Welcome everybody. In our first full quarter as Yellow Roadway Corporation we earned a very solid 38 cents a share, also with a very high quality of earnings. This was the result of a lot of hard work which generated good operating profits from each of our business units. As a matter-of-fact, all of our business units exceeded their first-quarter plans for operating income and all of them closed the quarter with strong momentum. In addition, we are slightly ahead of schedule on our synergy plan and are now comfortable with delivering the top half of the range of the $30 to $50 million that we talked about delivering in 2004. I'm now going to take you through a brief description of what happened at each one of the operating units.

Roadway Express earned operating income of 15 million in the first-quarter and the team at Roadway Express responded to many challenges in the first-quarter. Jim and his team really deserve a lot of credit for their efforts. Revenue was 717 million which was 1 percent above last year's first-quarter revenue when stated on a comparable basis. LTL tonnage comparison improved each month of the quarter when compared to last year. January tonnage per day was down 5.5 percent, February was down 3.7 percent, which we previously reported in our earnings update in March; and then March was down 2.5 percent. The improving trend has continued into April and is now running at about 1.5 percent below the previous year. All of this reflects the effective implementation of the salesforce reorganization at Roadway Express. For the full quarter then LTL tonnage per day was down about 3 percent from the quarter in 2003.

In addition to that, the month-to-month volume growth at Roadway Express has been very similar to that of Yellow Transportation; so sequentially the trends look very similar. As a result of that we're pleased with the progress throughout the first-quarter. On the pricing front adjusting for fuel surcharge and mix, yield was up a solid 3.7 percent at Roadway Express, and this is really good news because it's an example of the fact that Roadway is going about growing their business volumes in the right way with not only volumes going up but yield and margin going up as well. In fact, in March Roadway Express turned in an operating ratio of 93.28. So a very solid improvement in performance at Roadway Express.

Yellow transportation achieved one of the most profitable first-quarters ever generating operating income of 26.9 million which is up 38 percent from last year's first-quarter. And the operating ratio improved to 96.3 from 97 a year ago. First-quarter revenue of 734 million was a record and that reflects an 11.3 percent increase from the first-quarter of last year. LTL tonnage per day at Yellow Transportation, as we previously reported, was up 3.1 percent in January, up 7.8 percent in February, and further increased to an 8.2 percent increase in March. This trend has also continued into April where we're now running about 9 percent up year-over-year on LTL tonnage at Yellow Transportation. For the quarter LTL tonnage per day was 6.6 percent above the first-quarter of 2003.

Also at Yellow transportation a good solid yield story with yield on the LTL business adjusted for fuel surcharge and business mix change up about 3.2 percent. In addition to all of that, Exact Express continues to grow rapidly with first-quarter revenue increasing over 60 percent from last year's first-quarter. So a great performance at Yellow Transportation.

New Penn also delivered a strong first-quarter with operating income of 5.7 million. This is more than three times the 1.7 million earned in the first-quarter of 2003 when stated on a comparable basis. With the operating ratio New Penn was back under 90, 89.8 for the first-quarter compared to 96.5 last year. Revenue of 56 million was up nearly 11 percent from the first-quarter of 2003 while tonnage per day was up a strong 7.6 percent. April also shows a continuation of these business volume trends. LTL revenue per hundredweight excluding fuel surcharge and business mix was up 2.3 percent when compared to the first-quarter of 2003. So again, a very balanced performance and a very strong performance at New Penn.

Meridian IQ continued to make progress and achieve growth targets as evidenced by first-quarter revenue of almost $46 million, more than double last year's 22 million. This increase was driving both my organic growth and by the acquisition of the UK portion of GPS Logistics which was an immediately accretive transaction. Operating income at Meridian IQ of $600,000 was a meaningful improvement from a $900,000 loss in the first-quarter of 2003. Meridian really has gained significant traction in the market in the last six months and we're continuing to expect great things from them going forward.

So in summary, all of our business units delivered solid results in the first-quarter. While there's a lot left to do, we're happy with where we are at this point. And I'll turn it over now to Don.

With consolidated revenue at 1.55 billion, operating income of 41.8 million and earnings per share of 38 cents we exceeded our financial objectives for the first-quarter. And just to reemphasize those, we are focused on three things. The first is ensuring that the Roadway acquisition is accretive as soon as possible. The second is getting a return on invested capital greater than our cost of capital. And the third is debt reduction.

The first-quarter results were close to being accretive which is consistent with our expectations. Based on our forecast, we believe the Roadway acquisition will be accretive on a cumulative basis in the second quarter of this year. Cost synergies are also an important component of accretion and our efforts are on track. As Bill said, we are now focused on delivering the upper half of our $30 to $50 million target for cost synergies in 2004. Also we still expect to be at a run rate of $80 to $100 million a year as we exit this year.

Here are a few examples of the many synergy efforts that are currently underway. We are in the process of outsourcing the processing of most of our workers compensation claims. This was a Roadway Express business practice that was determined to be the best. We are also in sourcing most of the IT functions which is the model employed at Yellow. We also will tell you that the insurance and tax planning savings are largely complete. These will roll in over the course of the year, but the point is we are making very good progress there. Each of these actions will result in significant cost savings over time and you can see that we are able to utilize best practices from those organizations. Our degree of confidence around cost synergies continues to increase with the passage of time.

As most of you know, return on capital is a key measure for us and through the first-quarter we are meeting expectations. We still anticipate exceeding our cost of capital by the end of this year. Moving to the balance sheet, we had $909 million of debt at the end of 2003. At the end of the first-quarter total debt position was $828 million, a reduction of $81 million. The reduction was a result of streamlining our cash processes, good working capital management and prudent controls on expenditures. Our expectations are that debt will remain around these levels for the next couple of quarters and then we will be positioned for further debt reduction in the fourth-quarter. We are obviously well positioned to meet our objective of repaying $100 million of debt during 2004. Our debt to cap ratio at March 31 was 44 percent and we have a target of 40 percent by year end. I'd now like to turn it back to Bill.

Let me wrap up our comments by providing guidance for the second-quarter and the full year. In the second-quarter we expect to earn 70 to 75 cents a share and for the full year we're going to narrow our range a little bit. We still feel that $3 is the appropriate guidance for the full year, but feel much more confident in the $3 after delivering strong first-quarter results. If everything were to break our way we will exceed the top half of that 5 percent range. But really the message here is our confidence level has grown as a result of the first-quarter performance. And we feel pretty good about our ability to deliver that $3 realizing that we're still in April. So $3 plus or minus 5 percent is the current guidance.

Our tax rate for the full year is expected to be 38.5 percent and we'll have capital expenditures this year around $200 million or maybe a little bit less. Our focus for the remainder of 2004 is going to be on the customer to continue to grow the businesses, and best in all of our brands, concentrate on further penetration in premium services, achieve our cost synergies and then, as has been I think evidenced for sometime here, continue our focus on balanced growth in both tonnage and pricing discipline. With that, we'll stop and take your questions.

(OPERATOR INSTRUCTIONS) Jason Seidl, Avondale Partners.

Some quick questions. Bill, can you talk about rate increases at both Yellow and both Roadway on a separate basis and how you guys are signing new contracts right now? I know in the past you said you had pretty good success in the fourth-quarter adding (ph) contracts at higher-than-expected rates. I was wondering how the market is looking now.

It's really more of the same, Jason. Two key points here, we have several thousand customers under contract and most of those are annual contracts that come up for renewal randomly throughout the year. As we've gone through that process in the first-quarter the response has been very similar to what we saw in the fourth-quarter which is we haven't lost any customers and the price increases we're getting are generally slightly higher than our goal.

Does that go for both Yellow and Roadway, Bill?

Yes, it does.

I guess a question about freight diversions. It doesn't appear that we've seen any significant diversions from you guys other than maybe a little bit of business Roadway lost in the fourth-quarter. The more shippers I speak to they more they talk about the fact that they're not going to be willing to divert any freight from the combination unless they see some service degradation. Would you say that would be a fair assessment of what shippers are telling you?

I think so. I'd like James and Jim Staley to comment, but let me make a couple of summary comments. We right from the beginning have said that our focus is going to be on making sure that we don't give customers any reason to change, and that means we need to focus on service and continuity of support that we've been giving at both companies. So we have not seen any diversion and we don't expect any. And I'll let James and Jim comment.

In being in several different meeting so far this year, mass track, steel (indiscernible), I was at a transportation conference yesterday at the University of Indiana; and then interacting with customers, they repeatedly tell us that we're doing a very good job for them, that they're very satisfied with us. They obviously at first were questioning are we really going to keep these networks separate? And I think it's finally sinking in that, yes indeed, we're going to keep Roadway and Yellow separate and I'm just receiving absolutely no negative feedback from the marketplace and I've been in front of a lot of customers so far this year. As Bill said, as long as we keep providing the service that our customers expect us to, we feel like we're going to grow and be very positive with our going forward position.

At Roadway our customer base is quite comfortable now with our position within the Yellow Roadway Corporation. They know that we're committed to serving them as we have in the past and we have seen no incidents of customers taking business elsewhere because of discomfort with that situation.

Jim, I know you guys had a little sales shakeup in the fourth-quarter. From what you've seen so far and the improving trends at Roadway would you call that a success?

It's early in the implementation but we've got all pieces in place. We're very pleased with what we have done, both in the sales reorganization and the establishment of our regionalized customer care centers. I think we've done some good work there and I think it we will pay big dividends for us in the years to come.

Bill, just a real quick question and I'll was somebody have at it here. Regarding your guidance for the year, you mentioned that if things break your way you could exceed even the top end of that range. What I want to know is what are you sort of forecasting for volume growth at Roadway? I know we're still about -- you said about 1 to 1.5 percent below the prior year now. But for the year I would imagine you're forecasting that they do sort of break into the positive range maybe mid second-quarter or the early third?

We would expect Roadway to get into positive territory here before too much longer. The things that are really driving my comment really are the economy and how strong the economy is over the balance of the year. We had assumed about a 4 percent growth in GDP in our numbers. We also are now assuming that we'll end up somewhere in the high end of the synergies. And depending on how well we do there that also could add some more momentum to the earnings per share. So those are really the two that give us some opportunity for upside above that range.

Thanks a lot, gentleman.

Derrick Cribs (ph), Glenview Capital.

I have kind of a big picture question. Given that you paid back $81 million of debt in the quarter and now we're down to only about 800 million of debt and given that our goal is 40 percent debt to cap by the end of the year; I think, Bill, that the management team shares our view that the stock is attractively priced relative to the future earnings potential of the company. When can we be more aggressive with our free cash flow in terms of stock buybacks, etc.?

I think once we get the balance sheet back closer to where we'd like to see it, Derrick, we'll look at other options for the cash. We've said that we want our debt to cap ratio for the company on a long-term basis to be in the 30s and when we get there I think we'll have to figure out what the best use of cash is. But I would say that for the rest of this year our focus, number one, is going to be on debt paydown.

Right. But given that at some point next year we probably are in the 30s then it will be a possibility, correct?

Yes, absolutely. We'll look at the best use of cash at that point.

Okay, thanks.

Greg Burns, JP Morgan.

Very solid quarter on the tonnage front which is in Yellow. Bill, I just wanted to -- a couple of things. The turnaround or the improving trend that we saw at Roadway which is very encouraging, how much of that would you attribute to just the economy strengthening? How much would you attribute to maybe perhaps an improved competitive posture relating from the sales reorg? And how much would you just attribute to the comparison issue with the consolidated freight?

Let me make a couple comments and I'm sure Jim will want to add to this. I think that obviously the economy helps, it gives you the wind at your back, but I really think most of the credit here goes to the team at Roadway. I think the sales restructuring and the reorganization of the customer service functions were clearly the right thing to do. And now that those that taken hold I think you can start to see the impact of that. I also, just to reiterate, think it's really important to note that while the growth has been returning to Roadway, it hasn't been at the expense of yield. They've done a very nice job of focusing on service as a way to grow the business on the top line without sacrificing anything from a margin standpoint.

So I think most of the credit belongs to Jim and his team, although the economy and wind at the back didn't hurt. I would also say that we won't use CF as an excuse anymore. You didn't hear us talk about that in this call and we won't talk about that going forward. Most of that's now behind us and I think you can look for Roadway to break into positive territory here, as I said, in the not too distant future. Jim, do you want to add to that?

We're certainly not satisfied with our current tonnage levels but we are committed to pricing the business responsibly and returning business on to Roadway trucks that we've lost through good service and good customer responsiveness. I think the other part of the picture at Roadway is excellent cost control in the first-quarter. Our unit costs and dock pickup and delivery and line haul costs were all improved versus first-quarter of 2003. So even as we had declining revenue we had excellent cost controls in place to offset that. We've got good fundamentals in place and we're absolutely committed to growing the business but doing it the right way.

And just one, Bill, on your comments on customers and your feeling that you haven't lost any. Certainly Yellow's performance looks quite strong. My understanding is a lot of your customers use Yellow Roadway and multiple other carriers. And if they were say up 6 percent and decided to allocate an additional percentage to Old Dominion or someone else out there, they would technically still be your customer, you would technically be still getting plenty of volume. But I guess how do you know that you're not losing share of wallet within your existing customer?

Sure. I think there are two answers to that, Greg. One is at a microlevel; we track all of our major customers pretty carefully so we would see any leakage there. Secondly, in a microlevel we do a lot of market share analysis. We just completed this morning the latest analysis based on all the companies that have reported and there has been no material shift in our share for the core business. We're in kind of that 30 to 35 percent range which is where we've been for some time. Now Roadway did lose business in the fourth-quarter obviously, and they're in the process now of regaining that volume. But we track this not only at the microlevel but at the macrolevel as well.

And one question for Don. On the free cash area, what are you looking at for CAPEX this year and what is -- given your growth rate on the pro forma basis looks to be sort of pretty stable, not a lot of absolute growth here. Is what we see in CAPEX this year really a maintenance CAPEX type number? And maybe how much capacity is out there?

On the CAPEX side we'll spend around $200 million. Obviously there is a growth component in there but it is a small piece of the CAPEX. As Bill has said many times, we take a look at improving conditions and we will, in fact, upgrade our customer mix as capacity improves. Going forward I think you can count on around $200 million of CAPEX on a steady-state basis for the company.

How much spare capacity would you estimate is in the combined network at this point? In other words, how much more volume could you handle without having to really bump up that CAPEX target?

I think we've still got a significant amount of head room, probably a little more at Roadway than we have at Yellow transportation. But we're in the 90s in terms of capacity utilization most of the months now. I think that capacity will start to fill as we approach the summer, not just at Yellow Roadway but as an industry I think the capacity is going to significantly tighten by the summer. Obviously our first reaction to that is to look at our customer mix and make sure we've got the best possible mix of business in our networks from a profitability standpoint before we add capacity. And then as we add capacity it's pretty easy to add trucks and trailers and not really miss a beat. Really the more constraining thing is the terminal infrastructure that we have, but even there now we have the ability to move shipments around bottleneck areas. So there's a lot of upside here before we have to make any kind of significant capital expenditure.

And one follow-on question on the truckload hours and service issue. It probably doesn't apply to you, I just want to make sure. Some of the regional LTL guys have indicated that there's been some flip over in the truckload business because the multiple stop business is not as economic. I assume that you're not really participating in that because you're like the haul (ph) but I just want to make sure. Are you seeing anything there?

No, we are seeing I would call it a significant amount of business coming from that direction. If you look at our weight per shipment trends at the two companies you'll see a pretty significant change in rate per shipment, and I think there are really two factors driving them. One is obviously as the economy recovers traditionally we've seen an improvement in our weight per shipment and I think that's a piece of this. But the other piece of it is hours of service and we've seen some fairly significant increases at both Yellow transportation and Roadway Express as a result of this. James, Jim, you want to comment on that?

Our fastest-growing weight segment was over 5,000 pounds for the first part of the second-quarter, that's up about 20 percent. So as Bill said, we are seeing some significant diversion, and obviously we're trying to make sure that it fits our system from a balance standpoint, that it fits our back haul situation and that they're not creating empties (ph) running against increased volume that way. But it is making some difference in our operations.

Is that heavier weight truck load stuff, is that shorter haul than your overall system or is it in line with length of haul?

I'm looking at it, it's pretty much in the same length of haul, so I can't tell much difference in that.

Great. Thanks a lot for the time. Good quarter, guys.

Dan Moore, Stephens Inc.

This is Jack Waldo. I had a few housekeeping items first. Your interest expense for the year, what are you guys projecting?

I think you can assume around 12 million a quarter is not a bad estimate at this point. And that's consistent with what we've said before.

Okay. And then a tax rate -- of 38.5 percent, correct, for each quarter going forward?

That's correct.

And then diluted shares outstanding of 49 million?

That's a good number to use, sir.

And then on the incremental margin basis do you still expect 15 to 20 percent at Yellow and then 15 percent at Roadway?

I think over time, Jack, that's right. From quarter to quarter you going to have numbers that are slightly different, but over a full year we should be very close to those numbers.

And then my last question has to do with Canadian operations. There was a significant strike in Canada. Were you guys affected by that in your Canadian operations?

We did pick up some domestic business, it did not affect as much on the international side. But that strike was a couple of weeks duration and we did increase some LTL business domestically.

And what it -- what's your operating strategy with Canadian operations? A competitor made a statement in a conference call that you guys are consolidating operations there. Is that correct? Could you add some light on that?

That is not correct. Our operations at Reimer (ph) are fully integrated with those of Roadway Express separate and apart from Yellow Transportation.

And you don't have plans on integrating those?

Correct.

Okay, thanks a lot.

(OPERATOR INSTRUCTIONS) Edward Wolfe, Bear Stearns.

A couple thoughts. One, can you talk us through why you have confidence in the 50 million in synergies and what you've seen to date, some concrete examples of where cost savings have come from?

I guess the confidence level comes from the fact that we've now got about 80 teams working on specific areas of cost synergy and they're all in various stages of implementation. Some of them are done and we've got a few million dollars in the first quarter as a result of those synergy efforts. And really those have come primarily in the category of what I would call purchasing leverage; things like Don mentioned on the insurance side. So we've got some pretty concrete plans now which gives us a lot of confidence that we're going to be at the upper end of the range of that 30 to 50 million. We've also got a few million dollars in the bank already.

Are there any networks or terminals that have been shut down and how many do you expect to shutdown during this year?

We have a plan to move the two companies under one roof with a fence down the middle in about 30 location I believe. And we're well in the middle of the implementation plan there. I think we've already done a couple of those. Those will be either saving payments where we lease or give us some excess terminals where we own those terminals. But really that's kind of at the margin and it'll generate a few million dollars. But again, it's putting both companies under the same roof but continuing to run them separately.

And are the teamsters -- have they given any comments on that?

No, they don't have any issue with that at all. There's really no change other than they're parking in a different parking lot.

All right. Can we talk a little bit about margins? I think you mentioned Roadway in March was 93.28, is that what you said?

Yes, Jim wanted me to get specific. Because I think one of our competitors was (multiple speakers).

Where was Yellow in March just for some idea here?

I think it was close.

If I look out at $3 of earnings it implies something in the neighborhood of slightly below 97 for Roadway and something below 95 for Yellow. Where can these margins get this year as you see it in your head? Could Roadway it it's doing 93 and change in March, is that a fair run rate for a year for them? Is that potential? (multiple speakers) is obviously not in your guidance, but is that possible out a year or two?

I think out a year or two, sure. I think you have to -- obviously March is a great month from a seasonality standpoint. It's a month where we really don't have any holidays, it's a long month, the way it started and ended this year from an operating standpoint was good. So both companies turned in pretty sparkling operating ratios in March, but I think on balance for the year they'd be hard pressed to do what they did in March on an annual basis. But I think as you look out a couple of years, obviously we think that we'll be able to operate both companies in the low 90s.

Okay. And in terms of cash flow, is there some cash flow events as you get out of I guess this 30 terminals that are small to put two in one? I'm guessing some of this real estate was bought a while ago and there's some gains on sales and those kinds of things and some cash coming in from the sales. Are we going to start to see that funnel through the income statement and the cash flow statement?

Yes, you will see that. In fact, we're being pretty careful to separate property gains and losses specifically so you can to take a look at what those are.

Was there anything in the quarter?

There was about a half-million dollar combined loss on the property disposal for the quarter.

Would you expect that to become gains as we go throughout the year or are those going to stay losses?

There are two perspectives or two aspects to understand. One, obviously from a purchase accounting standpoint terminals at Roadway will be marked to market. So to the extent there are surplus terminals there you should not see a significant gain or loss. On the Yellow side there are some -- there are surplus terminals that are older we would expect, in fact, to see a gain here. So it depends on what the mix of disposals are Yellow Transportation versus Roadway Express.

(indiscernible) is that some of these facilities are leased as well, so there would be no gain or loss on disposal, it would just be reduced lease expense going forward.

But it's also safe to say that it's going to be a source of cash just looking at the cash flow.

That would make sense. If I do a little back of the envelope, $50 million is 65 cents of your $3. So your ongoing guidance is 2.35 off of a year of 2.05 or so into an improving economy it feels pretty achievable at this point. Is that a fair way to look at it?

We're feeling pretty confident, although you've already jumped to the 50 million and I don't think I guided us quite to 50. But yes, we think it's very achievable.

Well, you said the high-end.

Well, that's certainly the high-end.

That's what we're here for. It feels to me in listening to the conference calls over the last couple of days, even one of your close competitors, that there seems to be on other uptick in the economy in the demand side of things in March and April. Are you feeling that? You guys started to feel demand a little bit before others, have you also seen this other pick up or is it pretty consistent?

Ed, the way I would describe it is we've seen the economy continuing to strengthen over the last several months. And as you said, we started to see it at Yellow Transportation in the fourth-quarter and it has continued to build since then. Obviously Roadway had a little different kind of experience in the fourth-quarter, but I would say it's continuing to strengthen would be the way I would describe it.

And how about on the rate side? Your yields are actually a bit better than most of the LTL guys who've been reporting. It's hard to tell; there's a lot of mix changes with everybody's weight getting a little heavier and so forth. But what are you seeing on real rates and what do you expect directionally for rates for Roadway and Yellow going forward?

We've been very happy with our ability to balance improvement in yield and improvement in volume. We've had a very disciplined pricing environment in the first quarter. We would expect that not only to continue, but as the capacity tightens we think the rate environment will actually improve.

And in terms of your GRI, are you going to go at it earlier than July this year or are there any plans on that? And are Roadway and Yellow going to go out together or separately?

We don't usually preannounce our GRI. We're in the process of looking at that right now, Ed.

And how about -- do you know at this point whether you go out separately or together as Roadway and Yellow?

We'll probably continue to operate these companies separately and part of that would be that each company will look at the timing and the amount of the GRI separately.

Thanks a lot for the time, guys.

Greg Burns, JP Morgan.

Just wanted to follow-up on the Roadway OR in March. What was that exact operating ratio again?

In March at Roadway Express, 93.28.

How is that possible or I guess what was going on because your tonnage was -- Roadway's tonnage was down in March, correct? And it's a fixed costs business, isn't it? So I mean, were you just able to squeeze that much more cost out? I usually associate higher tonnage with lower OR's and lower tonnage with higher OR's. So what am I missing here?

I think Jim mentioned this and I'll let him talk here in a second. But they had a really effective focus on cost control and a very disciplined approach to discretionary spending in the first-quarter. About two-thirds of the cost in our business is labor. So really a lot of the improvement in cost is really a very good approach to labor management. Jim, why don't you expound on that?

On the cost side we were able to achieve real cost reduction in our unit costs in all three of our primary operating categories of dock pickup and delivery and line hauling. That is a significant achievement in the face of falling tonnage. We talked about pricing discipline and our commitment that we're going to grow our business but we're going to do it responsibly and I think that's reflected in the improving tonnage, absolutely not where we want it to be but a reflection of good results initially from our sales reorganization and service improvement and sequentially improving tonnage levels through the quarter. Yes, you're right, it's easier to improve your operating ratio when your business is improving, but if you've got the right management focus you can improve your operating ratio when the business is declining as well.

Just following up for Jim and Bill in that. When I hear the words "discretionary spending" I think of something that's delayed and can be altered quarter-to-quarter but ultimately needs to be spent. Does this mean as tonnage picks up hopefully at Roadway that maybe the OR does improve going forward because some of these pent up costs have to be spent?

No. I think in our definition discretionary means you can either spend it or not spend it. And we didn't spend it in the first quarter. And we're always pretty focused on that across the company, but I think we were particularly disciplined in the first-quarter. I would expect that our focus on cost is going to continue throughout the year there.

Okay. Thanks, guys.

Jeff Kaufman (ph), George Weise (ph).

Congratulations, everybody. I want to play Devil's advocate here. Just kind of thinking out loud, you mentioned that you think the companies, I guess based on Ed Wolfe's comment, could get into the 95-96 OR range this year with a long-term goal in the low 90s, but you're talking about OR's that the industry and your companies haven't seen in 15 or 20 years. It hasn't gotten easier to make money in the trucking business between fuel costs, benefit costs, insurance costs; we've had a lot of manufacturing capacity move to China and you are managing a merger. I mean, what is different this time around that makes this business so much more profitable? Is it the way you're managing it or is there a change in the industry?

Yes, it's all leadership, Jeff.

That's what I figured.

No. I want to be serious here for a second year. Yellow Transportation last year turned in a 95 operating ratio and for much of the year they were below that. So it can be done. I think the big Quantum leap in performance comes from this $300 million of cost synergy that we've been talking about as being achievable over the next couple of years. If you start to do the math and assume that Yellow Transportation and Roadway Express kind of on a stand-alone basis can operate at or near 95, and then you start to factor in $300 million of cost reduction then you get operating ratios down in the low 90's and that's what we would expect.

The history is, though, that when companies in this business get those cost savings they typically give it back to the customer in some way, shape or form. Is it just that you guys are going to be a lot more disciplined about retaining that within the company this time?

I think we are going to be focused on balance as we've said before, and there's no question that if we took all 300 million and moved that to the bottom line we'd be probably in the 80s from an OR standpoint. Part of this is going to be a judgment about competing in segments where we haven't competed in the past and growing those more quickly versus taking it in margin. But we'll take a balanced look at that as we move forward just as we have in the past.

Congratulations and best of luck to you.

Herb Buckvender (ph), Wachovia Securities.

Just two quick questions. Did you give the operating ratio on Exact Express and can you discuss briefly the claims experience, accidents, what not, during the first four months of the year?

Sure. We don't talk about the margin on Exact Express other than to say it's really good. Hope that's specific enough. And then from a claims perspective, I'm going to have to turn that over to somebody who has that information because I don't have it here. I think generally speaking it's probably about the same as it was a year ago. Everybody is nodding so that sounds about right, Herb.

All right, thanks a lot.

Jason Seidl, Avondale Partners.

Bill, you mentioned a little bit -- I think it was Ed who asked a question about facilities that will be coming up for sale and it sounds like although you look to gain a loss in this quarter, that there is a potential for some gains at some of the Yellow terminals. Would I be correct in assuming if any of these are large gains that they are not included in your forecasts for EPS for the year?

That's exactly right. Yes. Everything we talk about excludes what we would call unusual items and property gains and losses are unusual items.

Fantastic. And let me pose a question to you that I posed to some other carriers in some conference calls -- it relates to fuel. Now I know there's historically been a near 100 percent pass-through for higher diesel prices, but unfortunately diesel is going in the wrong direction as it went last year at this time and you have a pretty big spread year-over-year. Shippers are paying more on a percentage basis for a fuel surcharge. Do you think that will give some more pushback when the LTL world releases the GRI's sometime in the June/July period?

We don't think the experience is going to be any different, Jason. But just to your point, we were looking at this last night and actually the fuel surcharge is about at the same level it was a year ago. It's just recently had a run-up here in the last couple months. But if you look at the first-quarter of 2003 it's about the same as it was this year.

But is it higher in the second-quarter now?

You mean forecasted to be higher?

No, like currently? If you have a forecast for diesel fuel I'll take it.

We don't get too much into the business of forecasting fuel since it is a straight pass-through for us. But the only point I was trying to make is that from a customer perspective it's about the same impact as it was last year.

Fair enough. Thanks, gentlemen.

Gentlemen, there are no further questions.

Okay. Thanks a lot for joining us. We'll talk to you at the end of next quarter.

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