Yellow Corp (YELL) 2005 Q1 法說會逐字稿

Good morning. My name is Bill, and I'll be your conference facilitator today. At this time I would like to welcome everyone to the Yellow Roadway Corporation First Quarter Earnings Conference Call. [Operator Instructions] I would now to turn the teleconference over to Mr. Stephen Bruffet, Senior Vice President, Corporate Development, and Investors Relations of Yellow Roadway. Please go ahead, sir.

Thank you Bill. Good morning everyone, and thanks for joining us for the Yellow Roadway Corporation First Quarter 2005 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 Regional Companies; James Welch, President of Yellow Transportation; Bob Stull, President of Roadway Express; and Jim Ritchie , President of Meridian IQ.

Statements made by management during this call that are not purely historical are forward-looking statements within 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 of these risk factors. So for a full discussion please refer to our 10K, 10Q, last night's earnings release and our registration statement on form S4 with respect to our pending acquisition of USF Corporation. Our operating income and operating ratios are presented after adjustments for property disposals to better compare the results of our core operations among periods. For further de -- details, please refer to our earnings release.

Bill Zollars will provide our comments this morning and Don Barger, Jim Staley, James Welch, Bob Stull and Jim Ritchie are here and available to participate in the Q&A session. With that, I'll turn it over to Bill.

Thanks Steve, and good morning. We're feeling pretty good about where we are right now. We're going to provide some perspective on the Yellow Roadway first quarter performance and then I'll comment on the USF acquisition, and after that we'll open it up for the call -- for questions.

Our first quarter earnings per share of $0.92 reflects our continued focus on earnings growth with 142% increase from last year's first quarter EPS of $0.38 a share. The record performance at all of our business units was driven by a good economy, disciplined pricing and synergies and also the sharing of best practices. As we announced in March our earnings exceeded our initial expectations of $0.80 to $0.90 per share. This marks the fifth consecutive quarter since our acquisition of Roadway that we have exceeded expectations. Our EPS results included $0.05 dilution from the contingent convertibles whereas the first quarter of last year did not include any [coco] dilution. And consistent with our past practice, as Steve said, our results exclude property disposals which were $0.04 making reported EPS $0.96 for the quarter.

Our consolidated oper -- operating ratio was 94:8 and that's a -- a really important number since we've managed to break through the 95 mark there in the first quarter which as you all know is the toughest of the year for us. This is the best first quarter OR since 1989 and it's a 2.5 point improvement over last year's first quarter. Consolidated operating ratio before that 95, as I said, is a significant accomplishment and also demonstrates our continued progress toward our full year goal of low 90s for the company. Record first revenue at each of our business units resulted in a consolidated revenue increase of 8% from last year. With $1.7 billion in quarterly revenue we believe this increase is a very positive achievement.

Let me give you some revenue highlights from each of the operating units. Yellow transportation achieved its highest first quarter revenue ever with 791 million, that's up 8% from last year which was also a record. Yellow transportation posted first quarter year-over-year LTL yield of 4.6% after adjusting for fuel surcharge in business mix. In addition premium service growth continues to be strong at Yellow transportation with Exact Express revenue growing over 20% on a much larger base from the first quarter of 2004. At Roadway Express record first quarter revenue was 760 million -- 767 million I should say, up 7% from last year's first quarter. In addition to increases in LTL yield after fuel surcharge and business mix they were up 2.8%. Road -- Roadway also continued to post significant growth in its premium expedited brands, Time Critical and Time Advantage revenue was up 68% cared to the first quarter of last year.

At New Penn for the fifth consecutive quarter they delivered double digit year-over-year revenue growth. That's 17% increase was a result of the team's ability to absorb more business while maintaining excellent service. Just to quantify that their LTL tonnage per day was up 9.7% while their on tim -- on time service was in the 98% range. New Penn also had yield improvements after surcharge and business mix up 3.5%. Meridian IQ reported double digit revenue growth during the quarter as well. 24% increase from the first quarter of last year and that reflects a combination of organic growth and our recent expansion in the South America and the February acquisition of GPS Asia. Meridian IQ continues to increase it's global presents and offer complete transportation solutions.

Let me move on to to operating income for the quarter where we more than doubled our consolidated operating income earning 87 million in the first quarter this year compared to 42 million in the first quarter last year. Also on a consolidated basis our incremental margin which is very important was 36%, which reflects excellent execution around all of our operating companies. And we're well on our way to capturing the second $100 million of cost synergies.

All of our business units contributed to increased operating income in the first quarter. Let me give you a couple of highlights. Yellow Transportation posted 46 million in operating income which was the highest first quarter operating income in its history. This was also 19 million more than the first quarter of last year and 18 million than the previous record which was set back in 1989. Yellow transportation first quarter operating ratio of 94:2 was more than two points better than last year and the best first quarter OR since 1986.

Moving on to Roadway Express, they had a record first quarter operating income of 37 million which was up 21 million from last year and the Roadway operating ratio of 95.2 represented nearly a three point improvement from the first quarter of the last year. New Penn continues to achieve strong earnings growth as well. Operating income for the first quarter was 8 million with a operating ratio of 87.7. That's 40% growth in operating income and more than a two point improvement in an already impressive operating ratio when compared to last year. Meridian IQ also excelled during the quarter even with the integration of GPS Asia and other recent global expansions. Meridian IQ's first quarter 2005 operating income was $1 million or nearly double the first quarter of 2004.

In summary we had a solid first quarter and remain gratified with our substantial and sustained performance in every business unit. We're focused on operational execution and delivering the synergies while we continue to effectively execute our strategy.

Before wrapping up this part of the call let me provide some comments regarding our future expectations. From our viewpoint the operating environment is good. Our absolute business volumes are healthy and pricing remains firms. March volumes are slightly softer than we expected but April volumes to date have been stronger than our initial projections. We -- we think there might be something that's changed there shipping patterns because the same thing happened last year. Last year we thought it was a -- maybe just an an anomaly. But it looks like, maybe there has been a shift and March will continue to be a little softer than it has historically been with April being stronger than it has -- it has historically been. As a result of a good economy and good pricing, synergy execution, we expect second-quarter earnings per share to be in the range of $1.25 to $1.35, and we haven't changed our full year guidance. I might just mention that we didn't think it made much sense to change our full year guidance and then come back to you after the acquisition of USF and give you another number. So for the guidance we have a 510 to 530 we will adjust in about a month after the close. Our guidance does include the impact of contingent convertibles so you need to refer to our earnings release for the details on that. These expectations as I said don't include any impact from our pending acquisition of USF, but we will update you on that as it happens.

Moving on to capital expenditures our gross CapEx was lower than expected in the first quarter due to the timing of equipment purchases but we still expect our gross CapEx for the year to be 235 to 245 and again that does not include any impact of the acquisition of USF.

Let me now move on to the USF acquisition and start by saying that the delivery of $0.18 in the first quarter was disappointing to us as I said earlier, but we are encouraged by the business trends at USF and their guidance of $0.50 to $0.55 for the second quarter we're very encouraged by. Our enthusiasm, therefore, for the transaction is really the same today as when we announced the deal. Gaining a nationwide presence in the Next Day Market is of significant strategic importance to us and in addition to that, the ability to capture $150 million in cost synergies should generate substantial shareholder value. Let me just put that in perspective. The $150 million in synergies about $1.40 a share on a pro forma basis based on the number of shares that will be outstanding after the acquisition. And just to calibrate that, last year USF had full operating income of 120 -- 112 million. So 150 million is a very significant number and one we think is a very doable. And that means we can more than double the value of the USF companies through our perspective synergies.

Let me give you an overview of the timeline for the transaction. Yesterday was the record date for shareholders of both companies and a joint proxy statement will be mailed out today. The shareholder votes are both scheduled for May 23rd. And in accordance with the merger agreement the transaction will close one business day after all conditions have been met. So it's our expectation that the deal will close on May 24th. And by the way we're planning on being in New York that day to -- to give you a little bit more detail on where we stand at that point.

Just one other additional comment and that is we believe that after the closing of the USF transaction we will have sufficient cash flow and balance sheet to allow us to support a stock buyback to the 150 million to the $200 million range. That concludes my prepared comments and I'll be happy to take your questions.

Ed Wolfe, Bear Stearns.

Good morning, Bill.

Hi, Ed.

Tonnage flattened out for Yellow and Roadway in the quarter. Do you think this is it economic driven? Is it some -- some maybe diversion now that we're later in on the deal because some of the certainly the regional guys have reported have reported much stronger tonnage and what are you seeing in April as you go out?

Well, as I said March was a little softer than we expected. April a little stronger but all and all, pretty much on our expectations. I think one of the things you -- that we always try to do is look down the road a little bit and balance yield improvement with volume gains. We expect to be in a tight capacity situation again this year. So we didn't want to get too crazy about going out there and trying to buy market share making sure our business mix is as profitable as possible as we enter the higher periods of the year.

With that being said and clearly you can't argue with the margin you had expected for some tonnage growth and you didn't get any this quarter and what I'm trying to understand is there a little bit of division going on now, or do you think it was just all slow down in the economy and we'll probably similar results from your closest competitor?

Yes, we don't -- we don't see any division. What we have seen is a lumpy economy and the difference between March and April, in terms of our expectations, kind of puts us back right back where we expected to be so no diversion that we're aware of.

Okay. And then, when -- when you came to town at the announce announcement of the merger or after the merger was announced, you talked about synergies of 40 million in the first year and 80 million in the second year.

Right.

I asked you at that time are you comfortable with kind of $2.50 and $3.00 consensus for USF. Since then in my own model and I'm a little bit lower than the street I've reduced my operating income assumption for USF stand alone by 50 million this year. Consensus numbers reduce it by about 40 million. So I guess my question would be, are you basically now saying there's 80 million of synergy based on current consensus from where you are or are you sticking to 40 just off a lower base in the first 12 months?

Well first I would say that, the new guidance from USF is well above consensus for the second quarter. So, we feel more comfortable with that number maybe than we do with the consensus numbers that are out there. I think the consensus numbers for the second quarter are $0.44 so I think those probably will be adjusted based on -- on the guidance. We still feel very comfortable we will get 40 million out in the first 12 months of this acquisition. And still feel very comfortable that 150 million is doable.

Just getting back to the guidance of 50 to 55. The guidance was 40 to 45 and I don't think at this point in the stage given their stake in this deal it's all that credible given the recent trends. But in that 50 to 55 if you add a dime they're red star shut down costs most of which happened last year so -- and if I -- we assume everything went right and you bet the 55 that's down from $0.68 before the deal was announced for -- for -- for guidance or for consensus.

Right.

But I got to think just given what you saw you did mention in your opening remarks we were a little bit disappointed.

Right.

My point is are you still at the same synergy levels or should we see more than 40 from when this deal closes and where USF is at that point?

Well remember that our initial analysis of the deal said it would be accretive at a $20 million synergy level and obviously we were using our own forecast there and not the forecast provided by USF. So we're still very confident that this deal will be accretive within 12 months. We also have said I think in -- in previous conversations that we feel the shortfall in the first quarter could be mitigated by some of the things that -- that we are planning. So I think that the bottom line on all of this is that we still feel it will be accretive in 12 months and we still feel really good about the synergies both short term and longer term.

Okay I just want to make sure I'm interpreting this right. It sounded like you also said in your own internal thoughts they're probably a little higher than consensus right now for what USF is going to do.

I think that's right.

Okay. Thanks for your time.

You bet.

Jordan Alliger, Deutsche Banc.

Hi. Just out of curiosity, just on the Roadway synergy side you said you're w -- well on you're way. Anyway to quantify how far into that second hundred million you are?

We're well -- well over halfway in and as we said, we will hit the 200 million run rate by the end of 2005, and we're well on track to do that.

Okay. One thing that came up on the call is with US Freightways is, they put some things aside as they focused on doing the transaction. They had had a -- a synergy target range, I think or their own internal improvement range of something like 30 to 50 million over a 12 month or so period. And just curious, separate from your synergy opportunities how comfortable did you feel or do you feel what Freightways was doing on their own?

We were very comfortable with the kinds of things that they were doing but, frankly, because we've been through this before we have a lot more confidence in our own ability to recognize synergies and know how quickly we can get them. So our analysis was independent of the work that they had been doing, but I think some of the work that they had been doing will obviously help us get to the synergy numbers that we've got in place. Bottom line though is we're very confident on the 150 and very confident we'll get at least 40 million the first year.

Thank you.

You bet.

John Barnes, BB&T Capital. Please go ahead.

Good morning, guys.

Hi, John.

Following up on what Jordan talked about,USF management, said straight up on their call that there was a lot of things that they were pushing off. There were some strategic ideas that -- that they were putting off until after the deal is consummated. Two questions. Number one, given what you ran into with Roadway, allowing them to go through a strategic initiative that kind of backfired and resulted in some pretty poor performance. How much pressure are you putting on USF to -- to kind of hold off until the deal is done on -- on pursuing these? And then number two, of the things they've talked about doing, how many do you think you can attack very quickly or are you going to back burner most of what they have and focus on most of your own stuff, your own ideas?

Without getting into our strategy, we have a very definite strategy to go forward with this deal. I would say that, the things that USF had in place really where part of their plan and we've been doing very intensive due diligence all along the way. Probably increased the due diligence following the -- the shortfall in the first quarter. So we have good visibility in what's going on at USF, and we're comfortable with the trends, and we also have a very definite strategy that we will put in place as we go through the process of acquiring them.

Okay. And, you know, not to call in to question your due diligence abilities but I just want to know what makes you confident that you have good visibility into their numbers right now? Because I think, going back to Ed's point their credibility, is not the greatest in terms of hitting expectations.

Yes, I think that -- that's probably a fair question, John. And I think all I can tell you is that we're looking at data at a fairly fine level of granularity on a fairly real-time basis and the other thing I would point out is our track record over the last five quarters has been pretty good in terms of being able to deliver what we said we're going to do and we think that's going to continue. So we're doing a lot of due diligence as I said at -- at a fairly fine level of granularity and feel like we have a good handle on what's going on.

Okay. They made mention of the competitive environment and especially in the southeast and these are things that -- that nobody is surprised to hear. I'm curious, did you see, any kind of increase in the competitive environment? I mean, did you see anybody, specifically out there trying to buy freight where -- where you guys took a different tact? Or is it kind of same environment that -- that we experienced in the back half of last year where everybody's being fairly rational on price?

Yes. I think it's been a very firm environment, John. The economy is still good. I think there's been some lumpiness, as I said, and obviously fuel prices have had a dampening impact on the economy. So it's not growing as fast as it was last year. But it's still a really good economic environment. We're still looking for 3% GDP growth this year so we're still feeling good about the economy.

On the share repurchase that you -- that you mentioned, I mean, do you have shareholder approval for that yet or is that something that once the deal's consummated you'll go to the board and look for -- for some authorization?

Yes. We can get that pretty quickly. The answer is we don't have it right now but we can go to the board and get it fairly quickly.

And you would rather go the route of share repurchase versus dividend?

I think it depends on a lot of the parts that are moving around right now but that is certainly at the top of your list to look at.

Okay. Very good. Thanks for your time, Bill.

You bet.

Ivan [Kristovic], Elliott & Associates.

Yes, thanks. I guess I had a similar question that Ed had before so I guess I know what the answer is but I have more of a comment I suppose. Elliott Associates is a significant Yellow shareholder and we've done an extensive amount of work on the USF acquisition and it's potential benefits to Yellow shareholders including speaking with a number of people in the industry, research analysts, your company and former USF employees.

At this point we have several concerns regarding the acquisition not limited to the fact that USF is a company with proven execution issues that have suffered from high management turn over and had just announced a sizable miss in their first quarter numbers. We're not alone with these concerns and as Bear Stearns equity analyst has done a lot of work on USF and obviously has lowered his numbers for both '05 and '06. I think some of the other numbers that are out there on the street, my -- our census have not been done with as much due diligence or detail as Ed's numbers. More over if valued purely on fundamental basis it is our belief that USF stock is worth in the mid-20s. While it is apparent that there exists real synergies in corporate back office and purchasing the network optimization and best practice synergies will take much longer and involve substantially more risk in our view. We appreciate what you have done with Roadway but stating that this is accretive deal after assuming 150 meal -- $150 million of synergies or even a significant lower number than that does not paint the full picture when half of the transaction is done in cash and you're additionally incorporating a post-deal buy-back into your analysis.

We, therefore, do not believe that the reward you have described from the transaction justified the associated risk. Instead of spending 640 million to pay premium to USF shareholders why not look to your shareholder base. Buying back 640 million worth of your stock at a currant price would be 24% accretive and would bring your 2006 EPS to 742 based on Street's estimates. This 24% accretion already includes an assumption of higher interest expense than assumed for the USF acquisition. In order to obtain this level of accretion with USF transaction our analysis shows that more than $200 million of synergies would need to be realized with USF transaction. This is greater than 33% above your high end long term estimates of synergies. Moreover a share buy-back is risk-free and immediate whereas the realization of that sort of value in the USF transaction entails numerous risks and will occur over the course of many years. In light of all this we cannot support this transaction and will vote against it. Thank you.

Thanks for the speech, Ivan. Especially to the [seemed to be] very extemporaneous. I can only tell you that part of -- of our job here is to make sure that we position the company to be as successful as possible in the long term. This deal does that, and in the process creates shareholder value. As I already said it's $1.40 per share based on the new share numbers we will have. So we are very comfortable with the fact that this does put us in a position to be more successful longer term, the ability to enter the next day market in a comprehensive way across the U.S. and at the same time deliver incremental shareholder value.

I appreciate your comments. I guess it's at the end of the day in our view it's sort of analysis of risk/reward and we feel a share buy-back with the amount of cash that's going to be spent at this acquisition is giving shareholders an immediate 24% type accretion without introducing any risk elements in this deal.

Right and the real question, Ivan, and we've got to move on is what's the company going to earn three years down the road? Because we're not in this for the quarter-to-quarter performance. We were in this to create value long term.

Okay. Appreciate your response, thank you. I don't think our answer changes by the way but I appreciate your candidness.

Okay.

Thank you.

Greg Burns, J.P. Morgan.

Two questions. Bill, on the tonnage issue, tonnage issue on the -- on the Yellow side below your expectations a little bit, when we were out there, you indicated that maybe you hit the price side of the equation perhaps and that hit your tonnage. But I guess looking at our model, the comps from a year-over-year tonnage basis get significantly harder in the back half. So if you're essentially flat now should we be thinking that, absent a major pick up in the economy or change in your price volume trade off that, tonnage could start to really slip here? Because the comps in the back half look significantly harder.

Yes. I would think the way that we would describe it Greg is that the volume should be about the same going through the second half of the year. They may be a little bit higher than that if the economy picks up but our view of the world is they'll be about the same.

And will you change? Why is that? Because, if I look at first quarter, your tonnage on Yellow only was up nine four and second quarter you're up sort of 12% in change. I mean, just -- just the comps alone it looked like you had a stronger second quarter than you did a year ago first quarter.

Yeah, I've not tracking on the numbers, Greg, but what I can -- I can tell you is that the projections that we have in for yields and tonnage growth would show us a continuing to improve our margin as we go through the second half of the year. And having business volumes at about the same level as last year. We're still feeling pretty good about being in an OR for the combined company that's below 94.

On the USF situation, I guess the way we're looking at it is we're focused on the revenue line and any shortfalls falls there. Figuring that USF was not run well and that given your track record and improving OR, do you guys look at it the same way? In other words, does a OR shortfall bother you the same way a revenue shortfall does? And just talk in terms of as -- as you monitor the results what you consider the most important metrics and what perhaps are the least important metrics?

Sure, I think the things that are -- that are not as important to us are things that we think we can mitigate fairly quickly. The things that -- that are encouraging about what's going on in U.S. Freightways are the growth and tonnage and the improvement in yield. Those things I think are very good leading indicators of future success if we can take care of some of the other issues that are there. So it's encouraging to see them growing the top line, growing the tonnage line and improving their yield. And really those are some of the most important indicators to us on a -- on a going forward basis.

Great, thanks a lot.

You bet, Greg.

[Nano Hasiotis], Lockhart Capital.

Hey guys. Just a quick question on your guidance. I notice the LTL tonnage is well up for both US Freightways -- I'm sorry, for Yellow and Roadway. For your guidance in the second quarter can you get there with flat tonnage and just sort of very good mix in pricing or -- or do you need any growth in tonnage for the quarter?

Year-over-year growth I think will be about the same level and on volume but remember the power of synergies here.

Right.

And I think that's one of the things that kind of sets us apart and we've talked about it before, but, if and when the economy does soften which it will eventually we've got an opportunity here for another 200 million at synergy at Roadway -- Yellow Roadway and then 150 million at -- at USF. So the answer is yes, we can get there on flat volumes through the combination of good pricing and synergies.

Okay. Thank you.

You bet.

[Rusty Raycov], John Levin.

As you know, guys, we have recently become a significant shareholder of your company.

We appreciate it.

And we have taken a very careful look at the USF deal as well, the economics of it, the potential synergies, the -- and we sort of concluded that we cannot support this deal at this price. We find it to be meaningfully value destructive. We also believe a share -- a share buy-back with the previous caller would be significantly more accretive and lot more for value than the cash portion being paid in this deal. We have struggled to understand how -- how is it that USF first quarter numbers did not constitute a material adverse change in their business? Even to their guidance we estimated they need at least 93% operating ratio to meet the $0.55 guidance that they just came up this morning which is a pretty high hurdle for them. And maybe you could help us understand why are you guys doing this deal at this price?

Well, all I can do is reiterate what I've already said and that is strategically it's a -- it's a terrific fit for the Company and the power of the synergies, at 150 million is $1.40 a share, USF made 112 million of operating income last year. So if you just do the numbers and you believe we can deliver the synergies which we've had some credibility on based on what we've done in the last year and a half with the Roadway acquisition then it becomes a very accretive deal for the shareholders and puts us in a position to strategically be successful for a long, long time. And really that's got to be our view what's going to put us in the best position to be successful long term. The fact that this creates short-term shareholder value is a -- is a plus.

We -- we frankly disagree at the price you're paying for this assets and we hope that -- that you're able to consider this in the coming months. But it's under disturbance we're not supporting this transaction and thank you for your time.

You bet, Rusty.

Jason Seidl, CSFB

Bill, guys, how's everything today?

We're feeling pretty good, Jason.

Good I like to hear that. Well I don't have any prepared remarks but I'll ask a few things. The New Penn numbers and I don't want to focus on a smaller piece but a 87 7 in the first quarter, as we move throughout the year and get the peak season, where do you think those numbers can could go? I know historically New Penn has boasted some pretty eye popping numbers in the past, but I'm just kind of trying to figure out how to model going forward the margins on New Penn.

Well, we have Steve O'Cain here and I may turn it over to him in a second. I think that we're feeling really good about New Penn's performance, they obviously took great advantage of some of the companies that have gone out of business in the northeast but they've executed extremely well. I think Steve has seen in April the same thing. The LTL companies have seen which is a pickup in volume and I think they're well-positioned for the balance of the year but Steve, you might want to add to that.

I think you've said it. There's -- there's a little room to get better and we hope to show that in the second and third quarters.

Okay. That -- that's fair enough. And also going forward, your margin for Yellow and the Yellow transportation was better than I had modeled for. It clearly -- I know you had some --some tonnage issues that people are bringing up. But it looks like it could have been a seasonal shift towards the end of the quarter. Where you guys able to adjust in terms of the pricing tonnage mix, I mean, could you have taken on more tonnage if you wanted to? Is this just a case of you'd rather do it through price and create larger margins?

I'll start and I'm sure James Welch will want to add something. Yellow did a -- just a tremendous job of cost management in the first quarter through some pretty horrendous weather and kind of this lumpy demand we saw in the first quarter. But we are always adjusting the relationship between price and volume and what we found in the past is that it's easier to get volume than improve margin sometimes. So we -- we always try to make sure that we're happy with the margin on our business. But, James, you can -- .

(Inaudible) We constantly are working on balance of volume and yield. And we think we've got it down and pretty well right now, we probably could use a little bit more business but we're certainly working hard to get some additional business. But it's at -- it's got to be at the right yield. And so we're constantly adjusting our cost and dealing with what we're working with, but we're very confident in the second quarter that philosophy will work and as Bill said earlier April is off to a little better start than what we taught it would be. So that bodes well for Yellow Transportation in the second quarter.

This next question is going to be across-the-board at all your operating companies. Have you been able to discern any difference between your industrial customers and your retail-related customers in terms of demand or is it pretty much across-the-board the same?

It's pretty much across-the-board the same.

This next one's going to be kind of unusual but I have a client e-mailing apparently can't ask a question somehow. They want to know about your guidance, he's saying it implies a much higher number for 05. And excluding the synergies you'll get in year one from USFC. Is this, Bill, is this going to be related to -- you're going to update us later on after the close of the USFC transaction for an updated guidance?

Yes, Jason. We just didn't think it would make much sense to give you a number now and then come back on May 24 and talk about what -- what the year looks like with USFC in it for the second half so that's really the only reason we didn't address that.

Okay that -- that's fair enough. I'm sure my client's listening in, thanks a lot, Bill.

You bet Jason.

Ken Hoexter, Merrill Lynch.

Hi. Good morning. Bill and Don, I don't know if Jim is with you there as well. I didn't catch the beginning of the call. But --.

Jim is here.

Great. Just, I guess looking at Roadway, is there something we can see where -- where it can kind of meet what Yellow's margins is going to do. Is there anything else beside the synergies you've talked about just at the core business where you'll can continue to pull expenses out there?

Yes, I'm going to turn it over to Bob Stull here in a second. But I think one of the things Roadway did in the first quarter was a lot of process change. They went to a lean concept and their distribution centers didn't get quite the productivity improvement as quickly as they -- they wanted to. And that was really the primary driver for the difference between the OR at Roadway and the OR at Yellow Transportation. But that's now getting back to where it was originally scheduled to be and I think they feel much better about being able to close that gap in the second quarter. But Bob Stull, do you want to add to that.

Sure, I think Bill really hit on it there. In February and March we implemented the Roadway Lean System at all our hubs across the country which was an aggressive plan to pull out costs and the fruits of that labor just starting to show. So our first quarter was pretty flat from last year from a productivity standpoint, but we're expecting some significant improvements from that, see some good upside with it.

Just to kind of cap that thought, Ken, I think our feeling is that by the end of the year, Yellow and Roadway will be operating at about the same operating ratio.

Great, that was my next question if there was anything structural there. And then, Bill you threw out at the -- at the beginning there was a bit of a shift in -- in -- or maybe you thought there might be a shift in trucking patterns where -- where March might be a little weaker going forward and April a little stronger. Or do you think this is just an Easter shift that really caused that? I guess was there something that you're seeing, products or commodities moving at different times now that -- that get you to -- too think that way?

Yeah, I think, Easter was about a 1% difference, and it was in March this year but it was in April last year. But even if you take out The Easter impact there's something else going on there between those two months. Because even though Easter was in a different month last year we saw the same shift so we definitely think there's something going on there but we haven't been able to identify any specific industry or any specific geography there.

So it's not a shift between that either, just solely retailer or on the manufacturing side?

No it's not. It's not anything significant but it -- but it has shown up now and there's seasonality over the last couple years so we think that there is some sort of a modest change in shipping patterns going on there.

Thanks for your time.

You bet.

John [Mershacarri], Fidelity.

My question was essentially if historical seasonality patterns have changed as a result of the cost synergies?

Well, yeah, the synergy impact has been reasonably significant on -- on some of the -- kind of normal seasonal patterns for earnings. For example, the fourth quarter last year, we had kind of the first full year of synergies accumulate in the fourth quarter. So we had probably a little better quarter in the fourth quarter last year than we historically would have had because of that. So they do have an impact. I would think that the impact is probably not going to be as significant as we -- as we have a -- a bigger base of synergies from the previous year to draw on. But obviously the second hundred million that we get out, the majority of that will come in the second half of the year.

If I look at the past four years, it looks like on average about 35% or so of operating profits for the year have come from the first two quarters. Would you expect that this year would be similar to that, or would there be any reason that it would be different with the synergies?

Probably be a little bit higher this year.

Okay. Any sense for how that might change?

I'm not sure what the -- what the overall impact of that is going to be but it should increase the percentage of earnings in the first half of the year.

Thanks.

You bet.

Larry Robbins, Glenview Capital.

Hi, I didn't I guess anticipate making these comments coming into the call but the call kind of sparked my interest. If anybody else is going to use this forum to make public admonitions of the Company for -- for the USF acquisition, shou -- can we please require them to disclose their short positions in US Freightways? Because it occurred to me that perhaps people are buying stock in Yellow shorting the target so that they can vote against the deal it's simply to make a short position go down. And I'm not sure, therefore, that there's not a conflict of interest in the advice that they may not be -- that they may be giving Yellow and its management and its board of directors. And so it would just seem as if anybody else is going to use this public forum in order to advance their views on -- that they should probably disclose any potential conflicts including the size of any short positions in USF. So if anybody else asks you those things, could you please request to disclose that?

That's a very good point, Larry. The same thought occurred to us, and we will definitely do that.

Thanks, I really appreciate it.

You bet.

Jack Waldo, Stevens Inc.

Good morning, guys.

Hi, Jack,

I wanted to -- I know you're not disclosing the synergies on a quarterly basis any more. I was trying to kind of cut to the -- to the chase on some of Yellow and Roadway's numbers. Could you give us some type of range of what incremental margins would have been sans the synergies?

It would be difficult for us to do that, Jack, and I'll tell you why. A lot of the synergies are now marbled into the business to the point where it's almost impossible to cut them out. And so I think the best way to track whether we're doing what we said there is just to look at the operating ratios of the Companies and make sure they're tracking where they said -- where we said they were going to track.

What type of guidance would you give on -- or what would you expect incremental margins to be on kind of an apples-to-apples basis just going through? And I kind of know what they were when your tonnage is growing, I'm just wondering how much they're impacted if tonnage is flat?

Our rule of thumb has always been 15 to 20%, and that will vary by quarter based on the previous years comparison and a whole bunch of other stuff including synergy work. But -- but the baseline is probably in that 15 to 20% range.

Could you talk a little bit about the progress in the next day market at Yellow?

Sure. I'll -- I'll start that and turn it over to James, but that's off to a very good start. It's in a very limited graphic area but both the growth of that service as well as the on time performance have been very good. But James, you might want to add to that.

We kicked that next day service off February 14. And we have started off almost flawlessly from an operational standpoint providing very, very high levels of service. And our growth numbers have been meeting our expectations during the -- the mid 20% range. So we're pleased where we're off and running at, and we'll look for future opportunities to -- to do more of it. So we're very pleased with where we're at.

Given your -- your, I guess, success over the last couple months, how much do you anticipate growing that? And when do you think it'll be a meaningful drop in the bucket with regard to, all of Yellow's results?

I don't think it's going to be a big part of overall Yellow results for a while, but our goal is to -- to -- to continue to learn from it and expand it as -- as we can. But I don't think you'll see it being a large part of even Yellow Transportation's portfolio for the -- for the near future?

How is, and getting back to the USF deal and kind of a seesaw battle we're seeing going on, what -- what's the reaction you've got from the union so far? What have been -- what have been their comments and their concerns?

Let me start that and then Jim Staley is here, and he can add, but I think, we've had historically a very good relationship with the IBT and have committed to them that this acquisition will result in -- in us growing teamster jobs. We still feel very strongly that that will be the case and so our conversations with them so far have been positive. I think they will be looking for us to do exactly what we say we're going to do and I think if we do that we'll probably continue to have a really good relations ship but, Jim, you want to add to that.

Sure, in my discussions with the IBT they've been very supportive. They acknowledge the good relationship that Yellow Roadway have with the present operating companies. Everybody's aware of the labor relations problems that USF has had and I think we'll have a positive impact on that. And that's our expectation as well as mine.

So is it fair to say you think you'll be -- there'll be a net addition to teamster jobs as, looking at the combined entity?

We're going to grow our business and that'll go across all -- all operating companies, and given the fact that we're overwhelmingly IBT represented, I would expect there will be a net increase in teamster jobs.

Bill, your focus, it seems to, on the USF deal is long term, looking at the long-term health of the company and I'm kind of wondering how does that tie into synergies or -- or where Yellow will be three or five years from now? Do you see, do you see some power in -- in maybe some synergies in sales force? Or pricing strategies? I mean, is -- is Yellow going to be three, five years from now the one-stop shop for all needs and will it be something where you might be able to -- to factor in what type of long haul business you're getting with what traditionally be USF's business when bidding on contracts.

Let me starts by saying that we feel this deal is both good from a long-term strategic positioning perspective as well as from a short-term perspective. We keep going back to the fact that this deal will be accretive in the -- in the first 12 months so this is not a deal where you have to kind of bid on the long-term come here. It's a deal that should return value in the short term as well as create a better competitive position for us in the long-term. Having said that, this is an opportunity for us to continue to build our capabilities. We started doing that back in 1997. This is a continuation of that same strategy. We were convinced that the consolidation in our industry will continue and at the end of that consolidation there will be four or five big players with very broad capabilities and we plan on being one of those.

Do you -- and -- so is it fair to say that you wouldn't be doing the USF transaction if you didn't think it was accretive in the first year? I mean, is that a make-or-break point in your thought?

That was the bar we set for ourselves with the Roadway deal and that's still the bar we've set for our ourselves. Yes.

And will the proxies be sent out next week? Is that right?

They're having them being mailed even as we speak, Jack.

As you speak?

Yes.

Thank you very much for your time.

You bet.

Dan Moore, Morgan Keegan,

Good morning guys. Great quarter by the way.

Thank you.

A couple of questions just off the cuff here. How would you characterize, just looking back, how would you characterize '04 in terms of tonnage growth and historical business trends? Best year you've ever seen or something less than that?

No, I don't think it's the best year we've ever seen. I do think the capacity situation in 2004 was probably as tight as it's been in a long, long time. The economy certainly was doing very well and obviously in a recovery, that's -- that's what you would expect. But I'd say that, in terms of underlying demand there probably have been, better years. 2000 was probably a better year in terms of underlying demand. In fact, well, probably at least the first three-quarters of 2000. So good year from an economic standpoint. The thing that really gave us sort of an after burner boost was the synergies, bringing in $100 million of cost synergies really took us to the next level in terms of performance. So, as that second hundred million comes in to play this year, we're going to continue to get that kind of wind in our back.

Sure. And then I'm just curious, there's been a lot of questions about the merits of the deal, I guess with USF. The question I'd like to ask what would cause to you potentially reprice or cancel the deal in the coming weeks or months, what sort of event from a business level standpoint or -- or something else for that matter would cause to you reevaluate your -- your pricing on the -- the proposed transaction?

It's really pretty simple. If we didn't feel this was going to create shareholder value, we wouldn't do it.

And then what sort of economic environment assumptions have you modeled in for the 150 million in synergies that you're assuming on a go-forward basis. What sort of GD -- GDP growth environment?

Yeah, that he's really one of the -- one of the most attractive parts of this is that 150 million is independent of economic activity. As is for the most part the -- the second and third hundred million at Roadway. The things that we're doing there are not volume-related. At least for the most part. So we would expect to get that 150 million out even if the economy does turn down.

Would it be fair to say though that if the economy does turn down, that you would probably see some margin contraction in your core business excluding those synergies and you would expect that, right?

Well, yes, in any previous downturn I think all the companies in our business have experienced a contraction. However, I would say that in the last rescission, we were able to turn 80% of our cost into variable costs. So we didn't you suffer the same amount of contraction in our margins as some of the other competitors did. But the unique position here is that while everyone else is -- is struggling with that and we will too if the economy does turn down, we've got $350 million opportunity here to continue to grow earnings even in a down economy.

Sure. Well, I'm sure the jury's going to remain out in the near term but good luck, guys.

Thank you. Well that's the end of our question-and-answer period. Really appreciate everybody's interest or at least most of your interests. And we'll see you at the end of the next quarter. Thanks.

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