Yellow Corp (YELL) 2004 Q2 法說會逐字稿

Good morning, my name is Miles and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Yellow Roadway Corporation second quarter earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speaker's remarks there will be a Question and Answer period. If you would like to ask a question during this time, simply press star, then the No. 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

I would now like to the call over to Mr. Stephen Bruffett, senior vice president, corporate development and investor relations. Mr. Bruffett, you may begin your conference.

Thank you, Miles, good morning and thanks for joining us for the Yellow Roadway second quarter 2004 earnings call. With us today are Bill Zollars, the chairman, president and CEO of Yellow Roadway.

Don Barger, our CFO, Jim Staley, president of the Roadway group, James Welch, president of of Yellow Transportation, and Jim Ritchie, president of Meridian IQ.

Statements made by management during this call that are not clearly historical or forward-looking statements within the meeting, of the Private Securities Litigation 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 results could differ materially from those projected in such forward-looking statements due to a variety of factors. The format of this call does not allow us to fully discuss all of these risk factors, so for a full discussion, please refer to our anal report and 10-K, 10-Q and last night's earnings release.

The Pro Forma information that we provide you on this call represents a reported results of both -- Roadway corporation and Yellow corporation for 2003 with certain adjustments that reflect the combination of the companies.

For Roadway Express and New Penn results, we provide comparisons to 2003 as adjusted for conforming accounting policies and common quarterly accounting periods.

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.

Thanks, Steve, and welcome. Our second quarter 2004 Earnings per share of 97 cents represents we think excellent execution at all of our business units. Turning nearly a dollar during our second quarter as a new company, we think is also significant accomplishment.

The fact that we increased our earnings guidance twice during the quarter is a reflection of the leverage that we have in our operating companies.

And while we along with most of the other transportation companies are earning the benefits of a strong economic environment, what is unique to us is that we also have substantial cost synergies available. Our synergy efforts to date are also ahead of schedule and we have many more opportunity ahead.

During the second quarter we were able to capture about $10 million of cost synergies and we remain confident in delivering somewhere between 40 and $50 million worth of synergies in 2004, with a run rate of somewhere between 80 and a 100 million as we exit the year. And we have developed specific plans for the next $100 million worth of cost synergy.

So just to recap the synergy situation, we had about 2 million in the first quarter, 10 million in the second, we're expecting about 15 million in the third quarter and in the fourth quarter we should be in 20-25 million neighborhood.

As a result of our operational execution and these cost synergies, we've posted a consolidated operating ratio of about 94.7% for the second quarter.

Let me talk now about the individual business units. At Yellow Transportation we posted an operating income of 45.7 million, this is the most profitable quarter ever at Yellow Transportation.

Last year's second quarter operating income was 36.4 million. Yellow Transportation also achieved a 94.2 operating ratio, which was the best since 1989, after you adjust for property disposals.

On the surface, the incremental margins at Yellow Transportation come out to be about 9 %, however last year many of you may recall that our second quarter included a pretax benefit of $3.7 million for an insurance recovery.

In addition to that about $3.5 million was accrued in this year's second quarter as a result of a specific accident. If you take those two events out, the incremental for Yellow Transportation was about 16%, which is within our targeted range of 15 to 20.

Second quarter revenue at Yellow Transportation of 793 million set another record and was the highest quarterly revenue in the history of the company. Compared to the second quarter of last year, revenue increased by nearly 15%.

We also continue to experience rapid growth at Exact Express, the expedited time definite service at Yellow Transportation with second quarter revenue increasing by about 60% from last year's second quarter.

After excluding for fuel surcharge, our yield, LTL yield improved by 2.5% when you adjust to put it on an apples to apples basis for shipment size [INAUDIBLE], yield was up about 3.7% at Yellow Transportation.

Yellow Transportation implemented a 5.9% general rate increase on July 5th and all of the indications so far that that retention has been high on that general rate increase, and much higher than historically it has been in the past. LTL tonnage per day at Yellow Transportation was up 9.3% in the second quarter compared to second quarter of last year.

And what's a little bit unusual is that July business volumes are holding level and are actually slightly above June, which is not consistent with normal seasonality.

Normally July tonnage levels fall off a little bit from June, and we haven't seen that this year, and they continue to run at about the same level as the second quarter tonnage on the year-over-year basis. We move now to Roadway Express. Roadway Express achieved an operating ratio -- sorry, operating income of 36.4 million, in the second quarter. That was up 185% from last year.

The Roadway Express team continues to focus on improving profitability and obviously the results speak for themselves. Further evidence of the successful efforts at Roadway Express evidenced by the operating ratio improving to 95.3 in the second quarter of this year, which is a full 3-point improvement in the operating ratio.

Just to put that in perspective, the operating ratio improvement alone translates to about 30 cents a share. So again a great job by the Roadway team there. Revenue was up 3.5% to 768 million at Roadway Express.

The Roadway Express premium expedited services time critical in the newly introduced time advantage also, performed very well during the quarter, combined revenue of those two services was up 58% over the previous year.

And there is significant opportunity for further penetration of those two expedited time-definite services at Roadway Express.

Incremental margins were about 90% at Roadway Express, which is not bad and operating income improved to about 24 million compared to revenue increase of 26 million. So they were able to take tremendously high percentage of the improvement in revenue to the bottom line.

Pricing environment during the quarter at Roadway Express continued to strengthen. They recognized favorable yield improvements with LTL yield excluding field surcharge up 2.7% . If you adjust for weight per shipment and length of haul the yield was actually up 5.8.

Roadway Express also had a general rate increase. Roadway Express introduced that on June 1st. It was 5.8% and again the retention has been very strong.

In both the case of the Roadway Express and Yellow Transportation we expect improvement in the pricing environment as capacity continues to tighten during the peak shipping season, which is fast upon us here.

LTL tonnage, at Roadway Express continues to show month-over-month trans that are consistent with Yellow Transportation, just as a bench mark there, since the end of the year, LTL tonnage has grown by 10% at Roadway Express, and by 12% at Yellow Transportation. So very similar trajectory there.

To date in July LTL tonnage is about 2% above 2003 levels so Roadway Express has broken into positive year-over-year comparisons there, and that trend is strengthening.

We do expect continued tonnage and revenue growth at Roadway Express in the second half of the year, and are very comfortable with the plans in place to accomplish those objectives.

We're obviously very pleased with the margin improvement, which has been the primary emphasis at Roadway Express, and look forward to further growth in the volume of the business.

We move now to New Penn. New Penn also achieved a very profitable second quarter earning and operating income of $ 9.2 million, which represented an 83% increase from last year.

The team at New Penn has been effective in securing profitable business, as demonstrated when one of its Northeast competitors, Red Star closed on May 24th.

New Penn recorded its second quarter operating ratio of 85.7, which are included just one month of benefit from the Red Star closure, and that is about a 5 point improvement in operating ratio at New Penn.

Revenue of 64.3 million was up almost 18% from the second quarter of last year and that was a 15% increase in tonnage and a 1% improvement in LTL, excluding fuel surcharge and again, if you adjusted that for weight per shipment, length of haul, that number goes up to closer to 1.5% on the yield side.

Today, [INAUDIBLE] in July tonnage is up about 24%. That is a tonnage number from last year. Meridian IQ results continue to improve and remain in line with our expectations.

Revenue of almost $51 million, more than doubled from the second quarter of last year, that's a result of both organic growth and recent acquisitions that we've there. Operating income also a good story of 600,000 was a significant improvement from last year's second quarter operating income of 100,000.

And Meridian IQ is now recorded five straight quarters of profitability, so I'm very happy with their progress. In summary, then, for the business units, we're very pleased with our second quarter results, along with the operational synergy and economic momentum that we are taking into the third quarter.

We achieved growth and significant margin improvements at all of our business units during the second quarter. Our cost synergy efforts are ahead of schedule, and plans are in place for the next phase of those synergies.

The more experience we gain in capturing synergies, the more confidence increases around our $300 million target on the cost synergy side. I'm now going to turn it over to Don and he can cover more of the financial highlights.

Thank you, Bill.

Our second quarter results were indeed very strong with consolidated revenue of 1.67 billion, operating income of 88 million and earnings per share of 97 cents. Further measures of our financial success include accretion of the Roadway acquisition, return on invested capital and debt reduction.

Now consistent with our objectives, the Roadway acquisition became accretive during the second quarter. This is a significant accomplishment in a very short period of time, especially for a transaction that doubled the size of our corporation.

Return on capital remains an important financial measure for us and through the first half of of the year we're slightly ahead of our internal expectations. We still anticipate exceeding our cost to capitol of 10% on a run rate basis by the fourth quarter.

Our debt was reduced by $35 million during the second quarter, and this was in addition to funding a 41million deposit with the IRS regarding the timing of prior year's union pension deductions at Roadway Express. We had previously established reserves for this settlement and did not recognize any income statement impact.

You may want to refer to our 8-K that we filed on June 18th for further details on this. At June 30, our total debt stood at 792 million, which represents a reduction of 117 million since year end.

We obviously are running well ahead of schedule and now expect reduced debt by about 150 million this year. This is up 50 million from our previous guidance of 100. Again we believe a meaningful accomplishment.

Our debt-to-cap ratio, excluding available cash is now at 41.4%. This is down from 44% at March 31, and 45.4% at the end of last year. And we expect to reduce our debt-to cap ratio to the upper 30s, is our targeted level by year-end 2004. This is about six month ahead of schedule.

As we reach target capitalization, we will resume our considerations for the best use of cash. This could include any combination of reinvesting in the business, making further acquisitions, repurchasing stock, paying a dividend or further reducing debt. During the second quarter, we decreased our term loan by $75 million, partially through borrowing under our asset backed securitization facility, and partially by debt repayment.

This leaves only 75 million of the original 175 term loan outstanding. As such, we are exploring opportunities to replace our secured financing agreement with an unsecured credit facility containing more attractive rates and covenants.

Our target is to act on this during the third quarter. If so, there will be reduced interest expense going forward, but also a non-cash charge of about $17 million associated with the unamortized portion of the initial acquisition debt that we put in place.

One final comment on capital structure; nearly 80% of our debt is fixed rate, which is exactly what we want and what we believe it to be an increasing interest rate environment. We largely completed our purchase adjustments during the second quarter and there was at very little net impact on our income statement or balance sheet from this activity.

Further details will be available in our second quarter 10-Q. On July 1st of this year, the emerging issues task force of financial accounting standards board, reached a tentative conclusion that companies should account for contingent convertible notes, as if the notes were converted into common shares at the time of issuance. This is known as the F converted method.

Currently companies account for the potential shares when the conversion trigger is reached. As you well know, we have $400 million of convertible contingent notes outstanding. The proposed accounting rule would increase our shares outstanding by 9.6 million.

Now, partially offsetting this increase in shares would be a credit in the EPS calculation for the amount of interest expense associated with the notes. The annual interest expense on those notes is $17.6 million pretax or $10.8 million after tax.

The ITS tentative conclusion does not alter the attractive economics associated with these financial instruments or our strong operating performance.

We continually evaluate our capital structure to provide optimal shareholder value and we are analyzing alternatives that could mitigate the impact of this proposed accounting change.

It's also important to note that our stock has increased about 60% since our first convertible notes were announced less than a year ago in early August, 2003. Therefore, 250 million of our convertible notes are already near the point where they could be converted to common stock.

So this issue for us is not as significant as it is for other companies since obviously our expectation is that sooner rather than later, we could experience the Coco trigger.

With that, I'd like to turn it back to Bill for closing remarks.

Thanks, Don. Let me conclude my comments by providing guidance for the third quarter and the full year.

In the third quarter we expect to earn between $1.20 and $1.25 per share which includes approximately $15 million of cost synergies as I mentioned earlier. Our full year guidance is increasing to 370 to 375 on the strength of our second quarter operating performance, the momentum were carrying into the third quarter and our synergy work.

Our third quarter and full year guidance is based on the current accounting for contingent convertibles and does not incorporate possible changes in the accounting treatment as Don mentioned.

We expect our 2004 consolidated revenue to be about 6.7 billion, which is up about 200 million from our previous guidance.

Our tax rate for the full year will be 38.5% and our capital expenditures are still expected to be about 200 million, although they might go a little bit higher maybe another 5 to 10 million for growth capital to take advantage of some of the momentum we're seeing in the marketplace.

We are committed to continuing to execute the strategy that we define for about a year ago, which includes focusing on the customer through service quality, and operational excellence.

Continuing to invest our full portfolio of brands, further market growth and penetration of our premium services, and of course the continued focus on achieving the significant cost synergy opportunities which are available. We'll be happy to take your questions now.

At this time, I would like to remind everyone in order to ask a question, please press star, then the Number 1 on your telephone keypad. Again, star, and the Number 1.

Your first question comes from the line of Edward Wolfe with Bear Stearns.

Good mornings guys.

Hi, Ed.

Hey, Don. The third quarter debt swap you talked about, not the Coco but the one where there'd be a non-cash charge of 17 million to extinguish it. I'm assuming based on that you're pretty far along and you might have a lock in on the interest rate. What's the reduction of interest going forward?

Ed, first of all we are obviously discussions with our banks, but we feel very confident that we can execute getting out of the secured financing otherwise we wouldn't be discussing it.

The interest rate reduction for this year, I know could maybe be within this guidance, could be around a penny a share.

Okay. And kind of double that for full year next year?

Probably a little bit more than that, but it's more like three or four times that.

Okay. In terms of the synergies, where do we see them in the financials? When you look at yellow, when you look at Roadway, when you look at corporate numbers, where are they flowing through in the model?

They're kind of marbled, Ed, throughout the operating companies, obviously primarily Roadway Express and Yellow Transportation, not so much New Penn or Meridian IQ, and it's pretty tough to get to definitive about exactly where they're impacting, but they're in both of the operating company results.

Okay. Could you talk a little bit about Roadway, I mean there's still tremendous leverage look at your guidance with Roadway. If Roadway's going to start to grow like Yellow, and get to the margins that Yellow's at, there's still tremendous leverage here.

In your 370 to 375 guidance, what kind of assumptions do you assume about Roadway's volumes and yields going forward?

We're not going to get to specific about that Ed, as you would expect. But, let me have Jim talk about that in a second.

What I will say is that the first priority Roadway Express has been improving the profitability of the business which they've done an excellent job of over the last six months and they've now, as I've said broken through into positive territory, and we feel pretty comfortable that they'll be growing that business now over the second half of the year. But Jim you might want to talk a little bit more about that.

Yes, second -- or third quarter [INAUDIBLE] expectations on the LTL side. We are slightly positive now and I expect this to end the quarter up maybe 1% on tonnage. It's improvement over where we've been through the first half of the year.

4th quarter of the year we expect LTL tonnage improvement in the 4-5% range and we expect to preserve the yield of gains that we've seen so far this year.

And those are per day? Not per quarter? When you say tonnage up, you know, 4 or 5 in the second half per day?

It will be per day as we convert to the corporate quarterly accounting as opposed to the period accounting that we had at Roadway.

Hey, Jim, it feels there's a clear effort, at least it shows from the financials of improving the yields at Roadway. Is there something going on specific, other than just the tight LTL market where you're maybe getting rid of some of the lower hanging customers and yielding people up, or is it just the market that we're seeing here?

I think it's a reflection of good disciplined approach to pricing, recognizing that margin improvement was the most important thing we needed to do and we need to do that with responsible pricing.

The demand within the marketplace certainly helps that effort.

Bill, could you talk a little bit about the pricing market out there? You put your GRIs in a little early this year. What you're seeing and what you expect to see throughout the year with pricing, and maybe even if you could break it down from the longer lanes to the more regional lanes where pricing's more or less firm?

Well, first of all, as you have heard me say before I think the laws of supply and demand work pretty effective and as capacity tightens, we head into the higher shipping season, we think that the impact on pricing will be affirmative and even more.

And the fact that we are seeing excellent retention at both transportation and yellow express confirms that to us. So we think that the pricing will only get better here over the second half of year.

In terms of differences we really don't see too much difference between the regional markets and the national markets here.

It seems to be a firm pricing environment across the board and again I think it's a function of supply and demand.

Is there any impact right now, I know as you get to peak season, the rails become a bigger part of what you do.

Right.

Is there any impact right now with the rail service and log jams? Are you having any issues?

There is and what we've had to do is take more and more freight off the rail and put it on the road. And that's really a direct reflection of the poor service from the rails.

We've still been able to use a reasonable amount of rail over the weekends, primarily going to the west coast. But we have had to be much more selective.

When did that start about and directionally is it getting better or worse, or is it flat right now?

I guess it started maybe early in the year in terms of the start of the deterioration. There has been no sign of improvement. It's been consistently lousy for quite a few months now.

And when did you start materially pulling things off the rails.

Well, I'm not sure you would call it "Materially", but we have been selectively been pulling stuff off the rails for several months now.

What percentage roughly of line-hauls on rails right now versus a year-ago?

It's a pretty similar percentage. We just had to be a lot more creative and more careful.

Thanks a lot for the time guys, as always.

Your next question comes from the line of John Barnes with CSFB.

Hey, good morning guys. Bill, I know you guys have been a little bit busy the last several months, could you give us an update on where you stand?

Obviously, you're making moves into the regional markets making a little bit better push there. Can you give us an update on where you stand in trying to formalize a more cohesive strategy, utilizing some of the benefits of the last contract and just update on what your plans are there?

Sure. We really have two separate strategies there, and I'm going to let James and Jim talk about strategies at each of their companies, because they are different.

Obviously, at Yellow Transportation we've been talking for some time about moving into the next-day market through the existing network. We have plans in place do that. And that should happen sometime around the end of the year.

At Roadway, we've been serving the regional market through New Penn; obviously, you see the results from the New Penn second quarter performance, and they're doing an outstanding job of serving that Northeast market.

So different strategies. We don't see any problem with that. Both are working effectively -- and I'll let the individual business unit leaders talk about their plans there.

James, you want to talk about Yellow first?

This is James. You'll see us follow operations later on this year with an implementation sometime after the first of the year.

We want to be sensitive to our employees as we go into the holiday seasons, number one. Number two, we're obviously in the process of refining and returning our change of operations, and you'll see a midwest to northeast-type of scenario play out in our first move. And there's no doubt that we can compete, and operationally we feel we can provide the service.

It will have several things that will help us, number one we will definitely be able to compete in the overnight market, but it will also improve significantly our ability to compete in the second-day markets and some of our smaller terminals, so it's two-prong attack that we'll be making; and again, we have a lot of confidence with it.

You know, just to add to that -- this is Bill -- the way we're getting into that market at Yellow is by taking the foundation that we built in the regional advantage service wash that we had a couple of years ago, and really taking a subset of the hubs, quarter hubs we created when we announced regional advantage, where we have got the density to provide next-day service within those regional advantage lanes.

And we believe that not only will it allow to us enter the next-day market effectively, but also improve our ability in the second-day market. So it's really building on a foundation that has been in place for a while.

Jim, you want to talk about New Penn?

Yeah, Roadway -- within the Roadway group, we have looked at New Penn as the perfect platform for our participation in the regional market.

Obviously, they've got their hands full now, post-Red Star closure, so whatever plans we may have had for expanding the New Penn market are secondary to them taking advantage of the opportunities they have now, which seem to be quite significant and will continue to be there.

Within Roadway Express, we are -- remain a significant participant in the regional market, and do on on an opportunistic basis.

Do not have plans for a change of operations right now to more fully develop a regional model within Roadway Express.

Okay. And Jim, as you look at New Penn and what they have been able to do in the northeast with the closure of USF Red Star, and the USF guys talking on a conference call just an hour ago about taking the Holland brand and move aggressively back into the northeast, you know, into eight terminals.

You know, what is New Penn doing in order to ensure they keep a lot of the market share that they have picked up with the absence of Red Star, and are you worried at all about, you know, some aggressive pricing in the northeast as you get, you know, this competitor coming back into the market?

As you would expect from New Penn, they have been very disciplined in their approach to taking on additional business.

Even so, their tonnage gains, as Bill pointed out, are right at 24% July to July. So we are cognizant of Holland moving back into the northeast, but their absence is significant, and the fact that they have been gone for a while is significant.

They are going to have a challenge on their hands regaining market share and it's with a different business model that existed within Red Star, and certainly different that the services that New Penn provides. So Holland will be less of the traditional-type competitor in that market than Red Star was.

So we feel very good about the footprint that New Penn has and how they execute on a daily basis.

All right. Do you think, you know, when you hear comments about, you know, hey, former Red Star customers have asked us to come back into the market -- you know, do you think that is, you know -- customers are uncomfortable with the service they are getting in the northeast?

Or is a more a reflection of capacity's gotten super tight and shipper here -- or you know, who will do and say anything to get their rates a little lower?

New Penn has provided an excellent service, as they always have. Their on-time service performance post Red Star has been 97% on time, which is a tremendous accomplishment when business is growing 25%.

So customers do -- are looking for capacity in the northeast, but it's not because of service considerations.

Okay. Bill, a little bit on Meridian IQ -- again, obviously you have been busy with some other things, but you've made a couple of tuck-in acquisitions, you've got a very clean balance sheet and only getting clean. You know, cash and free cash flow is certainly there.

You know, have you returned your focus yet to trying to identify what is the next building block for Meridian, or is it still, you know, kind of everything is focused on getting this acquisition right?

Well, we are capable of walking and chewing gum at the same time; so while we're working on this acquisition integration, we have been continuing to focus on how to Meridian IQ as valuable as possible.

And so we have been looking at additional acquisitions. Jim Richie is on the call -- and Jim, you might want to talk a little bit about Asia.

Thanks, Bill. Yeah, we are diligently negotiating an acquisition in Asia right now that will give us a footprint with about 32 offices in about 13 countries.

There's -- for obvious reasons -- a limit to what we can say about it in detail, but probably in the next 90 days, we'll be making an announcement that will provide some more details there, as well as a small footprint down in Latin America, as we continue to expand the geographic coverage.

Very good. And are you finding it -- you know, are you finding the negotiate and identifying these potential candidates and negotiating with them to be a bit of a struggle?

We have heard from others who are utilizing a similar strategy that, you know, if you are the owner of a small freight forwarder or small logistics business these days, you are in a great position, because the number of acquisition targets are drying up and there's a lot of people that are looking at them. Are you finding that to be the case?

Well, John, I think that there is a number of still solid opportunities out there.

The market's fairly hot with people wanting to come in and take a look, but finding a company that's got a solid customer base and provide the right level of service with the right kind of technology infrastructure is easier said than done when you start to pull the covers back.

We feel very fortunate that the company that -- or companies, I should say -- that we are in discussions with right now, appear to have all of the things we would look for in making a move forward into that market. So we are pretty comfortable with our position with what we have got.

We always look opportunistically. We have a ton of things that come at us, obviously, because of the Yellow Roadway brand. We give and become an attractive partner to some of those companies, because we provide the U.S.-based network and access to, when you look at it on a combined portfolio, probably 500,000-plus customers.

Okay, all right. And Bill, last question. As we come through this downturn and we're now beginning to see this recovery take off, where would you say your business is? You know, and Jim Staley, maybe you can, you know, kind of speak to Roadway -- where you think the business is versus where it was in the peak in kind of late '99, early 2000?

Let me start, and then James and Jim can comment. We got a situation at Yellow Transportation where in July, we will be above the 2000 level tonnage basis, so we have broken through what we consider to be one of the best years in the history of the business in 2000. And we are not quite there yet at Roadway Express, but we are closing the gap.

So anything you guys want to add to that?

Our volume at Yellow Transportation is certainly on par with with '99 and early 2000 -- primarily more '99 would be the case. I think the difference would be the fact that the capacity and the industry is a little bit different.

Obviously, Consolidated Freight Ways is out, and I think that is having a definite impact on the entire industry, but we are right where we are were in '99 when it was very busy.

At Roadway, we are confident in the business environment that is more solid, we think, than the bubble that we had in '99 and 2000 that we couldn't maintain.

So we are not growing as fast as we would like, but we feel good about the second half of the year in terms of growth opportunity, and the economy will help us with that.

But also, the service that we give the customers will help that as well.

Very good. Guys, greater quarter and thanks for your time

Thanks, John.

Your next question comes from Jason Seidl with Avondale Partners.

Bill, Bob, Steve, guys, how is everything?

Pretty good.

Some quick questions, just in regard to mix, Bill, going through both Yellow and Roadway in the results, but the only thing you didn't talk about, was there any material mix shifts that would have impacted your [INAUDIBLE]?

Well, we continue to have more heavy LTL than we had last year, and the second quarter, if I remember the numbers correctly, we had about a 24-pound weight per shipment increase at Roadway in 19 at Yellow.

But other than the weight, mix doing anything else?

Not really.

Okay, so most of that 3.7 is probably all pricing then?

Yes.

That's very impressive.

In terms of New Penn Motor Express -- you know, great results there at an 85 OR; and if my memory serves correct; in the past, New Penn has posted quarters that were actually sub-80 many years ago.

Two questions: One, can they get there again? And two, what will it take?

Well, first of all, 5 point improvement in operating ratio, we think, is pretty stout this quarter. But Jim, you can talk to the potential there.

Well, so much of New Penn's performance is driven by volume, and they have a good network in place that provides a highly reliable service on a daily basis.

So the volume that they are seeing is certainly driving results, and my expectation is that volume will continue, and seasonality will help that in the third and fourth quarter.

Doubtful that they'll be below 80, but I expect performance in the low 80's for the remainder of the year.

Okay, fair enough. No, I did not mean to imply that it wasn't impressive, but going off of historical basis here. Also, just a quick question on your outlook now. I know you said in your guidance does not include any potential impact for the accounting changes, the contingent -- excuse me, contingent convertibles.

However, you know, as you edge closer to the -- I believe your convertible price is going to be up $47 or slightly over that on the 250, is that in your guidance, or no?

No, we haven't done anything with the guidance there.

And as we have said, you know, we are looking at different alternatives to mitigate that, if in fact those rules do go in place.

And if I'm correct, we have some sort of like a 60-day comment period?

That is correct.

And that starts July 1st, though?

I'm not sure what the clock started on that.

Okay, fair enough. Thanks, guys.

You betcha

Your next question comes from the line of Ken Hankster of Merrill Lynch.

Hi, this is Jeff [INAUDIBLE] for Ken Hankster.

I just wanted to go back on to the next-day service that John asked about earlier, and just wondering -- I know you targeted for Yellow in the northeast region. Just wondering what it takes to negotiate with the Union and what changes you have to make to get that done, and sort of what's the focus after that region?

James, do you want to take that one?

This is James. We're certainly cognizant of changes that we have to make in our operation, and we have been having talks with the Union for some time now, obviously trying to utilize some of the advantages that we did receive in the last contract.

But when you get into that next-day business, obviously, you have to have a very disciplined operation, from cut and run times, and certainly providing the service.

So we're having to work on things such as different start times and flexibility with that and reconfiguring some of our [INAUDIBLE]. And as Bill said earlier, continue to build on the foundation that we put in place several years ago with regional advantage, basically, east of the Mississippi. So there is a lot of things that we are working on to put this forward; and again, we are very confident we can do it operationally

And could you just remind me of the break down from this quarter, at least, between sort of the two-day lanes and then three-day and greater lanes, where -- which is growing faster? You know, we heard from Arkansas [INAUDIBLE] two-day lane is growing faster. I wonder if you can comment on that?

Yeah, we don't see really much difference between the growth in our different lanes.

So pretty much the same.

Now, I just want to switch over to just utilization really quickly. I know when you spoke at the conference that you were running about 90%. With these volumes, especially the Yellows, you commented earlier, you know, reaching above the 2000 peak level, and where does utilization stand now and sort of capacity that you might need to be adding?

We've got a little different situation between the two big companies. And at Yellow, we are probably in the mid 90's in terms of capacity. utilization; and obviously, some days we are higher than that at some locations.

But we still have some flexibility to grow the business there, and part of the potential increase in capital for the year will address needs -- the need for capital there.

At Roadway, we've got a little bit more capacity, probably maybe in the low 90's from a utilization standpoint right now.

And it sounds like, obviously, with the synergies running better than expected, kind of just wanted to ask a quick question on, is there anything, as far as like facilities or closures, consolidation wise, that's sort of running a little bit slower than anticipated?

Nothing is running slower than anticipated. Everything is either on track or running a little bit ahead of schedule.

Great, thank you.

You bet.

Your next question comes from the line of Greg Burns with JP Morgan.

Hi, guys.

Hi.

Bill, I just wanted to clarify a couple of things. The premium product, which you guys are obviously growing quite successfully, where is that coming from? Are you cannibalizing airfreight product?

Are you perhaps cannibalizing some of your existing LTL product? And obviously, the transport markets are growing 58%, so maybe just give me a little color there.

Yeah, the biggest place that we are getting that business from both companies is from competitors who offer expedited and time-definite service. And, it's coming from penetration of our existing customer base.

It's really part of the strategy that we have to be able to provide broader portfolio services, more capabilities to customers. And as an example, Exact Express, which has been around now for a while, even though it's growing at 60%,, we have only penetrated the customer base at Yellow by about 9%.

So that's really the tremendous leverage we've had, and the growth of those services is that we have a very large customer base that is interested in having us do more things for them, and that is driving these very significant growth rates -- and the same is true at Roadway.

So it's sort of a one-stop shopping trend coming at the expense of smaller LTL competitors?

Anybody that offers expedited or time-difficult services really is an opportunity for the customer to get rid of a niche player, and the time and effort required to maintain those relationships and do their one stop shopping with us, exactly.

Got you. And looking at capacity, obviously, things are extremely strong and it sounds like they're staying that way. I mean, I guess as you look out to '05 -- and I had always been thinking about potential capacity reductions -- but maybe I need to think about capacity expansion.

What are you guys thinking in the way of capacity for the way of overall network next year. Do you think you have to expand capacity? Do you think you have to turn business away more aggressively, raise prices more aggressive? What -- I mean, you know, especially with Union Pacific's and the other problems out there. So what's your capacity outlook next year?

Well, obviously, that's driven primarily by the economic forecast; and fortunately, we don't have to start to grapple with that for a little while yet.

But if the economy continues to grow, obviously, that's going to require additional capacity. We have some flexibility there as we continue to improve our productivity at all of our companies, but that is an equation we'll take another look at as we get closer to the end of year. We're always looking at our customer mix.

That's an ongoing effort that we have. That effort gets a little bit more intense as we start to reach full capacity at our companies. But you know, that is an equation we'll be looking at pretty closely as we near the end of the year this year.

But then on -- I guess on the terminal side, that doesn't really require much advance planning, or I guess you have enough terminal capacity? I mean, my impression was that sort of there is some lead time in that part of the business?

Right. No, we've -- if there is a requirement for new terminals, we certainly would have to open those up sometime next year.

The reality is, though, that the first quarter, from a seasonal-standpoint, is the lowest of the year, so that kind of a need for additional capacity would not be required until we got deeper into 2005.

And Bill, if I could just -- a question on the economy. There has been some commentary out there with, you know, retail sales being weak, and other people are saying business looks pretty good. What's your thought on the economy? Because we do seem to see some conflicting indicators out there?

We don't see any sign of weakness anywhere. It's been consistently strong across all of the industries we serve for some time now.

And that includes relates?

Yes.

Thanks.

You bet.

Your next question comes from the line of Derrick Cribs with Glenview Capital.

Hey, guys.

Hey, Derrick.

I've got two questions for you. The first one is, Arkansas Best reported, I think like a 91.3 OR the other day. Is there anything structural in either business that wouldn't allow you to eventually get to that type of operating ratio?

I think there are differences in the businesses that -- between the companies.

Arkansas Best tends to be more concentrated in medium to small customers. Both Yellow and Roadway have not only lots of small-medium type customers, but lots of big customers, as well.

And I think that might have been one of the reasons why Roadway and Yellow grew faster earlier in the year than ABF did.

So there are differences in the customer bases. Having said that, as I said a little bit earlier, we don't see any reason why we can't get our operating performance down in the low 90's as we continue to take this cost synergy out of the -- out of the businesses.

Okay.

And given that and what that implies for EPS and et cetera, on our numbers, I think your debt-to cap at the end of the quarter was something like 40%. If you assume the convertibles convert at some point, it actually takes your debt to cap to 20%. Does this allow us to be more aggressive in uses of free cash flow in terms of buying back stock, et cetera?

Certainly gives us a lot more in the way of options, Derrick, and as Don said, that's one of the things we'll be looking at as we get our debt-to-cap back into the range that we feel comfortable with, which is in 30% kind of range, we'll be looking at alternative uses of cash for share.

Okay, thanks a lot, guys.

Your next question comes from the line of Richard Garamone with Argus Research.

Good morning, guys, and congratulations on a good quarter.

Thank you.

I have a couple of questions, if I could. One. if you could provide a -- more of a detailed macro economic overview.

Where you think the U.S. economy is headed and what is your crystal ball really telling you? And then with respect to some stuff that you and I have spoken about before, Bill, regarding the retail versus the manufacture activity at either Yellow or Roadway, and who's really doing the good shipment activity there?

Well, first of all on the economic front, we've got a fairly optimistic view of the second half of the year, with GDP continuing to grow at over 4%, and that's part of the calculation in our guidance.

So we see the economy continuing to be strong across the board, both in manufacturing and retail. In terms of the data that we're looking at today, there's a lot of customer-specific data, I think, particularly on the retail side. And it depends, when you're talking about retail, who you're talking about. But the customer base that we have in retail continues to be strong, and we would expect that trend over the balance of the year, as well.

Manufacturing, I think you've seen most of the data there, but we are expecting manufacturing to also stay strong and probably pick up a little bit over the balance of the year.

Are you experiencing any bottle necks or any hiccups? Do you see any of your vendors telling you that maybe they're a little hesitant to do some activity?

No, we are -- actually, it's going the other direction. Because of the issue that the railroad had and some of the port issues, you know, I think our service has been consistently good.

We do have occasional bottle necks, depending on the location and time of the month; but overall, our service has consistently been good and we are actually attracting business from other modes of transportation as a result.

All right, that's great. Thank you very much

You bet.

Your next question from the line of Connor McLaughlin with JLF Asset Management.

Nicely done, guys.

Thank you.

Just a couple of clarifications. You mentioned some about a rate increase -- pay increase -- at Yellow division, I think you said in July, is that correct?

That's right.

Did you quantify how much was that?

That was 5.9%.

Okay, so you say 5.9% and I think you said a little over 2 in June at the Roadway division, is that right?

No, the Roadway general rate increase was at about the same level, it was just a month earlier.

Okay, so roughly around 5-6 percent also?

Yeah, 5.8, I think.

Okay, great. Okay, and then in terms of [INAUDIBLE] when somebody asked in Q&A about the tonnage, you had said roughly up 1% in Q3, then you thought Q4 could be up 4-5 -- [OVERLAPPING SPEAKERS]. Were you talking about just Roadway or was that consolidated?

No, that was a Roadway comment.

So that was just Roadway in general. Do you have any thoughts on Yellow for Q3 and Q4?

Yeah, Yellow should be much better than that and can -- probably a continuation of the trend that we've seen through the first couple of quarters.

Maybe a little bit of a lower trend in the fourth quarter as we get into tougher comparisons year-over-year.

Okay. And then when you're talking about the strengthening in the price environment -- and obviously, you are seeing that now -- and I'm curious, when you say "strengthening" are you speaking towards just from the rate increases that we have gotten in the last month or two in each of the divisions, or are you actually talking about the potential opportunity to continue to raise rates in back half of the year?

You know, in our business, Connor, it's not so much what you announce, but what you keep; and I think, you know, what we are saying is that the retention that we're seeing from the general rate increase and the results of our contractual negotiations would indicate that, as I said earlier, supply and demand is working pretty well. Now, as we continue to get into the higher peak shipping season, that will continue to provide some momentum on the pricing side.

So we think the pricing environment will only strengthen over the second half of the year.

Fantastic. Very exciting, thanks so much, guys.

Your next question comes from the line of Jack Waldo with Stevens, Incorporated.

Good morning, gentlemen.

Hey, Jack.

My first question on incremental margins. If I back out the $10 million in synergies that you had discussed just from REX's results -- and I realize some of those fall into other subsidiaries -- but is it -- you know, I just [INAUDIBLE], it looks like Roadway Express generated incremental margins that were well north of 20%, which to me seems real impressive in my -- as the fact that revenue just increased 3.5% . My question's for Jim.

What are you doing at [INAUDIBLE] REX to improve employee productivity? It appears that your incremental margins are little bit more than just a factor of operating leverage.

We have done several things. We have restructured some of our field organization, flattened that out a little bit.

We have a high performance network in place that I think is reflective of the full engagement of our employees, something that we have been working on several years. One of the things we are most pleased with is on the dock and P&D both, we've been able to more than offset contractual wage increases with actual real unit cost decreases.

So I think that's a significant reflection of the engagement of our employees.

You guys be willing to give an estimated range of incremental margins might be at Roadway Express if you kind of take out the synergies?

No, I think we'll stay away from getting too specific about that, Jack.

I thought that that might be the case. On the pricing front, although units improved year-over-year, if look at them on more of a sequential basis, it looks like they relatively low to negative in some areas, especially compared to your peers.

Can you talk a little bit about your pricing strategy. I mean, it seems to me that you guys had less opportunity for yield increases on the table in this quarter, and in light of the GRI that you guys probably will change coming into the third quarter?

No, I think, you know, our strategy has always been to grow both volume and yield at the same time, and we think we have done a very good job of that over the last several years, and that's going to continue to be our strategy going forward.

So we think that the performance in the second quarter was solid in terms of that, and we would expect to continue to try to balance that as we go forward.

And that's for both Yellow and Roadway?

Correct.

So when we model year going forward, given the change in your shipment profile, do you think we should focus more on sequential improvement to reflect year-over-year changes?

You know, I think you could look at it either way, and it'd probably good to look at it both ways.

Okay. And they should be positive in both?

Right.

In both situations, right?

It should .

Okay, with regard to entering the next-day market, how has the Union reception been? I know you issued a press release earlier in the second quarter, but has anything changed since then?

Not really. No, I think the reception has been good, as James indicate, and we are working on detailed plan right now, but things are going along according to plan.

Could you give us a little more more color on how the utility worker will be utilized? How do their day to day activities change?

Well, the biggest difference is that the contract now allows us to use what's called a "premium worker," which really means that we can operate using one person to load and unload the truck and drive the truck, and that gives us the flexibility we need to do the next-day business process.

And then on the acquisition front, I know you guys are looking for some non-asset-based-type corridors, but are there any asset-based acquisitions that might interest you? I'm kind are thinking in the terms of maybe your TL carrier, somewhat like Conway did, you know, in building a dump/field carrier?

I think in terms ever acquisitions, we'll be opportunistic; and I wouldn't rule anything out, but we've said in the past that one area we will definitely be looking for is non-asset, but I wouldn't rule out an asset-based acquisition, either.

Okay, and then on -- last question on the guidance. We used to have pretty big headaches when -- with -- when Roadway would release results when it was stand-alone, and now it, you know, it seemed to me it just had a hard time accurately providing guidance, as actual results would come in a lot different than what -- from management's original guidance.

However, despite the fact that you guys have changed some guidance, overall it seems to me you're doing a lot petter job at predicting where Roadway's results were coming in. Is that a factor of different IT systems at Yellow, or intellectual property, or -- and I guess the question is, why is it you guys are so much better at predicting Roadway's results as opposed to previous times?

And you know, it's really difficult to look back. You know, there were some times where we didn't do a very good job at Yellow in terms of forecasting, either.

And just I think it's, you know, we really focused in a lot on the forecasting process, so the Roadway team has done a great job, not only in forecasting, but probably more importantly, they've done a terrific job of executing.

So I think over time, our ability to forecast will continue to improve.

Thank you guys very much.

Sir, your final question of the day comes from the line of Edmond Griffin with Black Rock.

Yeah, actually, the question has been answered. Thank you.

You bet.

Sir, I am showing no further questions at this time. Are there any closing remarks?

No, just thanks for listening and we'll see you at the end of the next quarter.

Ladies and gentlemen, thank you for participating in today's conference call. This does conclude our Yellow Roadway Corporation second quarter earnings conference call. You may now disconnect.