Yellow Corp (YELL) 2004 Q4 法說會逐字稿

Good morning. My name is Rochelle (ph) and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Yellow Roadway Corporation fourth-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)

I would now like to turn the call over to Stephen Bruffet, Senior Vice President, Corporate Development and Investor Relations of Yellow Roadway Corporation. Please go ahead.

Good morning, everyone, and thanks for joining us for the Yellow Roadway Corporation fourth-quarter and full-year 2004 earnings call. With us this morning 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 Yellow Transportation; and Jim Ritchie, President of Meridian IQ.

Statements made by management during this call that are not purely historical are forward-looking statements 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 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 these risk factors, so for a full discussion, please refer to our 10-K and last night's earnings release.

For Roadway Express and New Penn, we provide comparisons to 2003 after adjustments for conforming accounting policies and calendar quarters. For all segments, operating income and operating ratios are presented after adjustments for property disposals to more accurately compare the results of our core operations among these periods. For more details, please refer to our earnings release and segment operating statistics, which are both currently available in PDF format on the Yellow Roadway Website under the heading of Earnings Releases and Operating Statistics.

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. With that, I will turn the call over to Bill Zollars.

Thanks, Steve, and welcome. 2004 was a successful year for Yellow Roadway by almost any measure. We earned 3.96 per share in our first full year as a combined company, with $1.24 achieved in the fourth quarter. That's a significant accomplishment, we feel.

The fourth quarter basically tracked closely to our expectations with a couple of exceptions. The first was a benefit from lower tax rate due to tax synergies; and the second was higher than anticipated Sarbanes-Oxley costs, which I'm sure you've heard before. Those two items largely offset each other, so we ended up pretty much where we expected.

Our operating unit set new records for revenue, operating income and margin. We continue to demonstrate substantial momentum and remain focused on delivering solid results. With that said, I would like to briefly recap some of our full-year and fourth quarter 2004 highlights and then move on to our expectations for this year.

In the revenue area, our 2004 consolidated total was $6.8 billion, representing an 11 percent increase over 2003 pro forma revenue, and is attributable to growth at all of our business units. Yellow Transportation posted its second highest quarterly revenue ever with 824 million in the fourth quarter. That's a 14 percent increase over last year's fourth quarter. For the year, Yellow Transportation revenue was 3.2 billion, and that was the highest in its history and an increase of 13 percent from 2003.

Fourth-quarter revenue of Roadway Express was 822 million, or about 13 percent more than last year's fourth quarter. And Roadway Express also posted its highest annual revenue ever with a $3.1 billion total, which was a 5.6 percent increase over the previous year.

New Penn continued its impressive revenue trends with a 26 percent growth in the fourth quarter of 2004 over the equivalent period in 2003 and a 20 percent growth for the full year compared to the previous year. These trends resulted in New Penn achieving its highest annual revenue in its history.

Meridian IQ posted a fourth-quarter revenue of 44 percent from fourth quarter last year and full-year increase of 77 percent from 2003. And we remain very pleased with the consistent revenue growth and progress at Meridian IQ.

Market demand for premium services also remained very strong. In particular Exact Express, which is the time (indiscernible) expedited service of Yellow Transportation, had revenue growth in 2004 of about 50 percent from the previous year, while Time Critical and Time Advantage, the premium expedited brands at Roadway Express, grew by about 60 percent for the same period.

Also contributing to our revenue increase was the favorable pricing environment, primarily in the fourth quarter. After adjusting LTL's yield for surcharge and mix, Roadway Express achieved improvements of about 3.6 percent and Yellow Transportation had an increase in yield of about 4.4 percent. So very strong pricing in the fourth quarter as well.

Moving now on to operating income, we had another really benchmark year on operating income, with our consolidated operating income of 357 million, which was nearly 2.5 times the 2003 pro forma amount of 149 million. In addition, our consolidated operating ratio was 94.7 for the year and 93.9 for the fourth quarter, which was our best fourth quarter in OR since 1988.

This strong performance is a result of a healthy economy, our significant operating leverage and of course our substantial cost synergies, which are really unique to our Company. In fact, we delivered about $50 million of cost synergies in 2004 with a run rate of 100 million; both of those numbers are consistent with our previous guidance. We continue to identify additional synergy opportunities for the next 100 million and are confident in our ability to capture those synergies this year.

Our primary area of focus for this year are network optimization, work on common technologies and also common equipment maintenance. Given the increasingly blended nature of the projects into our operations, we are not going to be providing synergy guidance and results on a quarterly basis, but we expect our results to adequately reflect the success of these initiatives.

Each of our business units made solid contributions to operating income in 2004. Roadway Express reported adjusted operating income of 53 million in the fourth quarter with an operating ratio of 93.5, so they caught Yellow Transportation, which (indiscernible) was a short (ph) goal. This was a dramatic improvement over the last year's comparable fourth quarter and even exceeded the results from third quarter of this year, which is typically the most profitable quarter.

For the full year, Roadway Express posted annual operating income of 157 million, an increase of 103 million from last year and the highest annual income in the Company's history. Full-year OR was 95.0, the best since 1988 and a big improvement from last year's 98.2. We've got a lot of admiration for the team at Roadway Express. They're obviously continuing to demonstrate their ability to manage the business in a very effective way.

Yellow Transportation achieved its highest fourth-quarter adjusted operating income ever of 53 million with an operating ratio of 93.5. That's the best fourth quarter at Yellow Transportation since 1983. For the year, Yellow Transportation reported adjusted operating income of 188 million, which was 50 million more than the previous year and was an all-time record, as I mentioned. The full-year operating ratio was 94.1; that's the best since 1986, and blows right past the commonly held benchmark of 95 as being a good operating ratio for a company of Yellow Transportation's size.

New Penn, as I mentioned, continues to excel. They contributed about $9 million of operating income in the fourth quarter at an operating ratio of 87.5. For the full year, New Penn made $34 million -- that was an increase of 15 million from last year -- and delivered an operating ratio for the year of 87.

Operating income at Meridian IQ was 1.5 million in the fourth quarter and 3.7 million for the year, and that's a $3 million improvement over last year's operating income at Meridian IQ -- a very solid performance there as well.

So in summary, we achieved solid revenue and margin growth throughout the year, we provided consistent service quality to our customers throughout the year and also delivered some significant shareholder value. We remain confident in our ability to effectively execute the strategy, capitalize on our operate leverage and benefit from our unique opportunity to capture additional synergies.

Now I'm going to turn it over to Don for additional financial comments.

Thank you, Bill. As Bill pointed out earlier, we earned a solid 3.96 per share in '04 from our core operations. This did not include the benefit of property gains of 6 cents a share, the third-quarter write-off related to the elimination of our secured credit facility of 24 cents a share, or dilution from our contingent convertibles of 3 cents. After taking these items into account, our reported EPS for 2004 was $3.75 a share, a substantial increase over the '03 pro forma EPS of 79 cents a share.

Now as you know, we pay a great deal of attention to return on capital, and with our solid margins in '04 and lower debt balances, our no cap (ph) return on committed capital of around 12 percent easily exceeded our benchmark 10 percent cost of capital. This is a significant accomplishment during the first year after the acquisition of Roadway, which doubled the size of our Company.

During the fourth quarter we were able to further reduce our debt by $70 million, bringing our 2004 paydown to 250 million. This is 50 million higher than our previous guidance. At December 31, our total debt was $658 million, and debt-to-cap excluding cash was 31.2 percent. This represents a 14.2 percentage point improvement since last year and puts us in our targeted range of the low to mid 30s and nearly a year ahead of where we thought we would be.

We continue to evaluate the best uses of excess cash, including any combination of reinvesting in the business, making further acquisitions, repurchasing stock, paying a dividend or further debt reductions. We understand your interest in this area, and expect to narrow our options in the near future.

Regarding our nonunion pension obligations, we contributed $42 million to our plans during '04. We expect to fund around $50 million in '05 and then have that level drop to the mid '40s in '06 and '07. Recall as of January '04, the defined benefit plans were closed to new participants. New employees now participate in defined contribution plans.

Our consolidated tax rate for '04 was 38.1 percent, slightly below our previous expectations of 38.5. This improvement in the tax rate was primarily a result of additional tax synergies that we executed in the fourth quarter and truing up some of our other account balances.

Now let me take a moment to review our recent exchange offers for our convertible securities. We completed the exchange on December 31st, and as expected, received a very high exchange rate, approximately 98 percent on a combined basis. The terms of the new notes are identical to the existing notes except for the addition of a net share settlement feature and an additional change of control feature. The net share settlement feature means upon conversion, we will settle the par value of the notes in cash and the excess value in stock.

Under current accounting standards, we must include the estimated shares from the excess value in our diluted EPS calculation based on the average stock price for the period. I went to emphasize that it is the average stock price, not the ending stock price. We must also include the shares from the two percent of the noteholders who did not convert, which is a fixed number of shares based on the par value of the notes not exchanged and the conversion price.

With the change in accounting for our contingent convertible notes, our EPS is now directly impacted by our stock price. As the stock price increases, our number of the diluted shares will increase. As a result we will have to make certain assumptions regarding our stock price when providing EPS guidance. Even with the change in accounting, we believe the contingent convertibles provide the best economic alternative and enhance our strategic flexibility. To better understand the sensitivity of our stock price on our diluted shares, we have posted a worksheet on our Website, which you make input a stock price and it will calculate the incremental shares. If you'd like to discuss the associated calculations further, please contact either Steve Bruffet or me.

I will now turn it back to Bill to discuss our expectations for '05.

Thanks, Don. We are proud of what we accomplished in 2004 and really appreciate the hard work of the over 50,000 employees here at Yellow Roadway. With that said, we are completely focused on 2005 now and we are not going to get complacent. We expect the economy to remain solid across the board and firm pricing trends to continue. Our economic consumptions include year-over-year growth in GDP of 3.5 percent.

Based on these economic factors, we would expect full year 2005 earnings per share of $5.10 to $5.30, which includes 24 cents per share for the contingent convertible dilution based on our average current stock price of $52.73. And as Don said, that's a year-to-date number.

First-quarter EPS should be between 80 and 90 cents, again including 5 cents per share for the contingent convertibles, using the same stock price that I just mentioned, $52.73. I would like to reiterate this dilution is strictly an accounting requirement and has no impact on our operational performance.

Our 2005 consolidated operating revenue is expected to be around 7.2 billion and (indiscernible) businesses and brands, which is about a 6 percent increase from 2004. You may recall, as I mentioned earlier, when a 95 operating ratio was considered a pretty good benchmark for good operations for a company of our size, we now believe that in a good economy we can operate with an OR in the low 90s. With our economic assumption in 2005, therefore, we expect to consolidate OR between 93 and 94, with both Roadway Express and Yellow Transportation in this same range, while New Penn should operate in the mid 80s. We also expect continued improvements and profitability at Meridian IQ.

Interest expense should be about 37 million based on our current debt structure, and depending on our short-term borrowings, between 90 and 100 percent of our debt is fixed, which is really a good place to be during a rising interest rate environment. We would also expect a full year tax rate of 38.1, in line with last year, and CapEx will be somewhere between 235 and 245, but it's important to note that our CapEx estimates primarily reflect replacement equipment with very minimal additions to capacity.

Our 2004 CapEx was around 200 million, which was slightly lower than our previous expectations, mostly due to timing, and we would expect some of this to spill into 2005. In addition to that we have about $25 million of CapEx planned for this year in an effort to get that 100 million of additional synergies this here. So if you take out the carryover and the money we are spending to get additional synergies, CapEx is basically flat.

Before I open up the call for questions, I would like to thank our customers, our employees and our investors for their support over the last year. It's been a great year for the Company, but we believe that the best is yet to come. And with that, we will stop and open it up for questions.

(OPERATOR INSTRUCTIONS) Edward Wolf with Bear Stearns.

Good morning, guys. You accomplished a lot this year, my God. Can you talk a little bit about January so far. We have been hearing from most of our companies -- not just LTL but across modes (ph) and realms -- that it feels like the world has slowed down and it's hard to tell how much of that is economy or weather or whatever. What are you seeing in January from a tonnage basis at your three operating companies and what is your sense of the economy?

I think, as you well know, we've had some pretty extreme weather this year in January in the Midwest and the East, as well as the West Coast. So it is a little bit tough to look through that weather. But we would say that the economy seems to us to be about the same as it was in the fourth quarter; it's still growing pretty well. And as a result of that, pricing continues to be very firm. We really don't see any change in trend if you take the weather out of the equation.

So tonnage growth was kind of 6 percent Yellow, 4.7 at Roadway year-over-year, those kinds of trends are containing?

I think the weather has had an impact on those trends, Ed, but we do our best to try and remove the weather impact from what's going on underneath it.

Okay. Are you seeing -- you said pricing is remaining firm. Yet we'd seen in some of the LTL reports -- it's hard to tell because the truckload's growing faster than the LTL -- it's oppressed some of the revenue for underweights as reported. Can you talk to the pricing and if it's different in the longer-haul markets versus the regionals, what you are seeing?

It's not really much different. 40 percent of our business is now in second day and another 30 percent in third-day markets. So we are straddling those markets now pretty significantly. And I would say that we've seen strength and pricing across the board, both in our contractual business as well as in the transactional business. And I think the fourth-quarter increase in yield of 4.5 percent at Yellow and 3.5 percent at Roadway Express has continued into the first part of 2005.

Directionally, if the economy holds up and you look out through the year in '05, would you expect yields to stay kind of flat where they are, improve or decelerate a little bit:

I think they are going to get better, I think they will improve. We're of the opinion that the economy is going to continue to grow, and without new incremental -- new significant capacity coming into the market, the law of the supply and demand would drive more firm pricing environment. So that's kind of our view of the world.

Can you talk to the trend -- this was a year where we saw the LTL carriers really take on a lot of truckload freight, I'm supposing because of truckload capacity constraints with drivers and hours of service and what not. Can you talk about that? That's going to grandfather to some degree in first quarter. Does that truckload as a bigger percent of your growth impact your margins one way or the other or change the way you manage the business and what do you expect from that going forward?

It doesn't really impact the margins materially, Ed. We are expecting a little bit less truckloads business this year in our plan for the year, but I would say that the impact will be on the margin in terms of profitability.

Are you seeing more competitiveness from your closest competitor, Arkansas Best? Their tonnage is growing a bit faster now than Yellow and Roadway. Are you seeing any difference in their historical, very kind of conservative rational pricing stand?

No, I don't think we've seen any change in behavior, but I would ask James and Jim if they've seen any difference in behavior there.

I really haven't -- ABF, as you said, is generally pretty conservative with their pricing and I think they are as good a competitor as they normally are.

I would echo those comments.

Glad to hear that. I wouldn't have expected them to have changed overnight. In terms of the quarter, you had some disbursements or some cash flow coming in from selling some facilities. I'm guessing that's kind of one of the untold stores here, is you have so many facilities from the merger you could be kicking these things out for a long time to come. Can you talk about the gains on sales, what they were this quarter and how you see that playing out as you go forward on an ongoing basis?

Don will give you some flavor on that, Ed.

The property gains for the quarter were a nickel, okay? And then for the full year, the gains were 6 cents. But that understates it's a bit, because obviously with purchase accounting on the facilities at Roadway we mark those to market. And we do expect that this year there will continue to be significant disposals of excess facilities -- and you're right -- that does help our cash flow.

Is kind of 5 cents as fair a guess as -- or 6 cents as fair as a guess in '05 as we saw in '04, or is that going to accelerate?

Probably that is as good a guess as any.

Just remember we exclude those property gains, though, from our adjusted operating income, so it shouldn't impact the guidance we gave you. Because we are going to take property sales out of that guidance -- or out of the earnings. The other thing is it did help us from a cash standpoint, and we paid down about $250 million of debt this year, which was about 50 million more than we expected at the end of the third quarter.

Okay. So the guidance includes co-cos (ph) and excludes the gains on sales?

That is correct.

Thank you very much for the time.

John Barnes with CSFB.

Good morning guys. Bill, can you talk a little bit about the planned rollout of your regional offering in Yellow Transportation? And I'm mainly interested in what do you view as the cost this year of that rollout, when do you expect that business to be breakeven and when do you envision maybe Roadway doing a similar type rollout?

Let me start and then James can jump in here. Our next-day offering is going to be rolled out beginning here in another couple of weeks. And there will be some incremental costs, but I don't think you'll notice it. We would expect the margins to be similar to our current margins, but it does really kind of complete the portfolio for Yellow Transportation and fills a hole in the offering that customers have been asking for. But I'll turn it over to James to give you a little more detail.

Not much to add, John. Certainly, we're working hard, and in our final stages of preparation for the next-day rollout starting on February the 13th. We've had excellent feedback from the customers that we've approached so far about utilizing this new service. We certainly intend to do well with it and then analyze our future opportunities and more than likely have another change later on in the year to expand the next-day.

As Bill said, there will be some incremental cost; we certainly have that factored into our business plan. We also have a targeted revenue number that we are going to try to seek out in this first rollout of next-day. We had some excellent meetings last week; I think our salespeople are extremely excited and focused to sell it. And again, the response that we're getting back from our customers so far is very good. And I think, as Bill said, it helps complete that one-stop shopping concept that we've had. So we are excited. It's something new and we've been looking forward to it and we are ready to go.

The change that you mentioned, another change at year-end, can you elaborate on that a little bit?

I really can't. I can just say that our goal is to get this first change of operations under our belt, and we are already working on where we want to go with the second one. But because of what we'll have to do to get the change of operations approved with the union, I wouldn't care to comment right now. But (multiple speakers).

Can you share the targeted revenue number?

No.

I've got to ask, you know. At least initially, are you focused on selling this to existing customers?

Absolutely.

Is that primarily where you're selling it or are you going to pursue other customers as well initially?

Certainly we are targeting our existing customers. But depending on what kind of start we get with it, we have about a three-phase approach to how we want to sell it. And we will go out and get business wherever we need to get it.

Don, can you tell us a little bit about where you see the balance sheet at the end of '05?

John, obviously we expect still to generate substantial cash flow. And the expectation is that the balance sheet will certainly be strong enough to support a credit upgrade. And as we commented in the talk, we will be giving you guys an update on what we expect to do with our free cash flow right here in the future.

The new synergies that you're targeting in 2005, I kind of know where the buckets were in 2004. Is it more of the same or are there new areas of focus? And specifically what are you pursuing with this additional systems spend that you've raised your CapEx for?

The three big buckets are network optimization, common technology and common equipment maintenance. And there are some others, but those are probably the three big buckets. The investment and technology is to move both companies onto a common platform where that makes sense. That is what most of that investment is for. There is not a lot of common operating technology in there, so there's not a lot of high risk; it's more administrative and support technology.

Bill, last question. Yellow has done a pretty solid job of digesting the acquisition. You've got to be getting a little bored -- I mean, what's next? Is there something else out there you would like to pull the trigger on soon or do you see '05 as being another year of just continuing to digest and process and did you put off other acquisitions until '06, '07? Are you willing to take a look at something now?

I would say that we would be opportunistic, John. We have done well here and we are probably a year ahead of where we thought we would be, as Don said. On balance sheet is very strong. Our operating companies are operating very well. And so if something comes along that is an opportunity, we wouldn't rule it out. At the same time, we are also looking at things like dividends, stock buyback and reinvesting in the current business. So all of those things are on the table.

Okay. That's a good situation to be in. Bill, congratulations to you and your team. Thanks for your time.

Jordan Alliger of Deutsche Bank.

Just a couple of quick question. As you sort of digested the first year with Roadway and got a look at the synergies and the ability to hit the run rate, can you maybe assess your visibility as to 2005, your confidence level? I know you indicated its high in terms of achieving it, but maybe how has it improved or stayed the same as you've gone through the Roadway synergy process in 2004? Basically visibility into 2005.

I think we have a lot of experience now on the process, and we've fine-tuned the process to have a very effective process now, I think, for identifying synergies and then executing a plan to get at those. And we've been very successful in 2004, so that gives us a lot of confidence about 2005.

The other thing I would say is that when we started here back in the middle of 2003 when we announced this deal, we thought the first 100 million would be reasonably easy to get and then the second hundred would probably be a lot riskier. I think as we've gone through the first year and a half, we've concluded that the second hundred does not appear to be risky. And that gives us a lot more confidence as well, because the kinds of things that we see in going after the second hundred million do not involve big operational integrations or anything like that. So I'd say the risk level is lower and I'd say our experience over the last year, both of the things raising our confidence about the 100 million for 2005.

And just a quick follow-up. I know you going to give sort of synergy expectations by quarter, but you mentioned the three buckets of what you are working on. Any sense for how you're going to attack it in terms of which buckets are going to come first and when we could expect to hear about each of those things you are looking at or are they all starting day one?

They are all in some form of implementation already. How fast they go depends on, obviously, the individual item. But there are multiple projects in each one of those big buckets, each of which has an implementation timeline and a target in terms of savings and they're all moving at different speeds. At the end of the day, they all get integrated into the operating organizations for the most part. So that is why it's pretty tough to break them out and talk about them as a standalone. But I think, as we said in the discussion earlier, that it will be apparent in our operating ratio and where we are in terms of our earnings whether we're on track or not there.

Thank you very much.

Jason Seidl with Avondale partners.

Bill, Don, Steve, how are you guys this morning? Quick question here. You mentioned the three buckets; I missed the third. Network optimization, common IT investment -- what was the third?

Comment maintenance.

Okay. And Bill, you talked about $100 million run rate for 2005. What are your sort of loose projections for '06?

We still think that there's another hundred million after this. We thought that at the beginning we ought to be able to take 5 percent out of the cost base. I think as we have gotten in this, we still believe that that is doable.

One of your competitors sort of threw the blame on weather in the fourth quarter, why they missed expectations. Do you have a sense on what some of the bad weather in the Midwest cost you guys?

It obviously impacted us, but as we've said many times, it's an outdoor sport. We try not to whine too much about the weather.

Fair enough. Good quarter and I hope you're as bored in '05 as you were in '04.

Gregory Burns with JP Morgan.

Just wanted to circle back on a few issues. New Penn is showing very strong growth. I know there's been some dislocation in the Northeast and I guess my question is, are the growth rates we are seeing there, do you think they are sustainable? And you maybe you could comment on what you saw in January in that division. And just seems like with the closure of a couple competitors, it's sort of an ideal environment, and I'm just wondering whether you think it will stay that way for a while?

Let me start and then Jim can jump in. Obviously, the closure of Red Star and GOD (ph) in the Northeast provided a real opportunity for New Penn and they took full advantage of that, and generated not only great top-line growth, but also managed to improve their margin significantly at the same time. So they've done just a terrific job.

I'm not sure that you're going to continue to see year-over-year comparisons of 25 percent on the revenue side. But there's going to be continued strong growth at New Penn. Jim, do want to add to that?

First half of the year should reflect very good growth rates. January has been a good solid month at New Penn. The year-over-year comparisons would obviously be much more difficult from the second half of the year. We've had good growth underway at New Penn before Red Star exited the market, and that underlying strength is something that we are building on. So we are very optimistic about New Penn's position in the Northeast.

It's clearly a key franchise and it's always had one of the lowest ORs, I think, in the industry. So if I'm hearing you right, the comps will get a little more difficult in the second half. For my own benefit, my understanding is that Red Star may not have had the most desirable freight. Does it mean that essentially someone else is absorbing that were you able to absorb some of that at higher prices, or was that my misperception that in fact they had much better freight than I thought they had?

I think it's all of the above, Greg. I think we have picked up a lot of the good business, we were able to reprice some of the bad, and then some of it went somewhere else.

Bill, on the Yellow Roadway piece, it seems like the spot rate of transportation pricing really spiked up in the fourth quarter -- you look at the railroads, you look at the LTL guys are all telling us that contract renewal pricing went up a lot. I guess I'm trying to figure out what that means for your book of business as contracts roll over. In other words, do you feel like pricing momentum, given the contract, is actually going to be better in '05 than '04, or you think it will be flattish with '04?

I think it will be similar. If you believe the economy is going to continue to grow, as I said earlier, we believe the capacity will continue to get tighter. Obviously right now we are in the weakest seasonal part of the year. So there is excess capacity right now, but once we get past March and move into the summer, I think you're going to see the same kind of capacity constraints in our part of the industry that you saw in 2004. So we would expect pricing to be at least as good this year as it was last year.

Is the list increase that we will see the summer, is that the best way to measure it, do you think? And should we look for something similar to what we saw last year?

I'm sorry. I didn't understand the question.

The GRI price.

I think you will probably see something in the neighborhood of what it was last year. But again, remember it's not what you announce, it's what you keep in this business.

On the premium product, where you continue to grow really rapidly, where it is that coming from, do you think? Is it coming from other LTL products, are you perhaps cannibalizing a little bit of your freight, or is a coming from the air freight guys. Obviously the economy is not growing at that rate. Where do you think it is coming from?

It is coming a little bit from upgrading standard ground in both companies. But a lot of it is coming from other expedited providers; in fact, probably the vast majority in both companies is coming from other expedited providers. And it's really a penetration of the existing customer base at both Yellow Transportation and Roadway Express that's driving that growth rate. Our penetration level now is about 12 percent. It was at about 10 percent at the end of 2003 and it's about a 12 percent level in 2004. That is really primarily responsible for the significant growth as we take that business away from the expedited providers.

Great. Just financially, you have taken down the debt to capital a lot, obviously taken a lot of financial risk down. Arkansas is sort of debt free and it seems like that is their position they'd like to be. How do you guys -- in an ideal word world, where would like to see -- what do you think the right debt structure is for the Company?

I think we are pretty much there now. We've always said that anywhere in the kind of low 30s from a debt to cap perspective is probably the sweet spot for us. So our challenge now is to keep from getting bored and decide what to do with that balance sheet as we move forward and generate more free cash. But we feel pretty good about where we are already.

Okay. Great. Well, boredom is not a bad thing based on what you did last year.

Derek Kribbs (ph) with Glenview.

Just a quick question on capacity. There have been a lot of notes written from the sell side recently that there is going to be a lot of capacity added this year, and it's going to hurt pricing. Just to confirm your belief on the industry, do think capacity will be tighter in '05 than '04, or the same?

I think it will be a little tighter depending on how fast the economy grows. I don't think I've heard any public company talk about increasing capacity in a material way, and that's kind of our view of the world. I know there has been some analysis done on private companies, but frankly, there aren't very many big private companies, so it would take a lot of them to add a lot of capacity to really change the equation. Our view is that as the economy continues to grow in 2005, that capacity will continue to tighten.

How many private national LTL companies are there?

I have no idea; there are lots of them. But they are little.

But you don't think they can add enough capacity to move the needle?

I don't really think so. When you add them all up, they would have to be moving in making lockstep and making significant investments in capacity, and they are not really the price leaders anyway. So it's hard for me to follow that logic.

Thanks a lot, guys.

Richard Hayden (ph) with Omega Advisors.

I am going to guess you are not bored.

We are really not, Richard. You are right.

Am I correct that the free cash flow this year will be approximately $190 million for '05? Is that a good number?

It's probably a little high, but probably not off by much. We've got, as we mentioned, some pension expense and our CapEx is up a little bit from the previous year for the synergy investment we need to make on the technology site. But it ought to be around there someplace.

I wonder if you could spend maybe the final 30 seconds and just thrashing out how you're thinking about dividends versus share repurchase?

I'm not really surprised by that question from you, Richard. We're looking at both. We've got a high-class problem here in terms of the free cash flow, as you point out. We've got a Board meeting coming up here in another month or so, and that's going to be one of the primary topics, is use of that free cash. And two of the usual suspects will be dividend and stock buyback.

Stay unbored and good luck.

Thank you. There are no further questions, gentlemen. Please continue.

Thanks very much for joining us and we will see you at the end of the next quarter.

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