Yellow Corp (YELL) 2005 Q2 法說會逐字稿

Good morning. My name is Marvin and I'll be your conference facilitator today. At this time, I'd 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 speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Stephen Bruffett, Senior Vice President Corporate Development and Investor Relations.

Thanks, Marvin. Good morning and thanks for joining us for the Yellow Roadway Corporation's second-quarter 2005 earnings With us this morning are Bill Zollars, the Chairman, President and CEO of Yellow Roadway; Don Barger, our CFO; Jim Staley, the President of YRC Regional Transportation; 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 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 is important to note that the Company's future results can 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, 10-Q and our recent earnings release.

We have completed the acquisition of USF Corporation on May 24, 2005. As a result, our consolidated financials include the USF companies from May 25 through the end of the quarter. Our operating income and operating ratios are presented after adjustments for property disposals and acquisition charges to better compare the results of our core operations among periods. For further details please refer to our earnings release. Now Bill Zollars and Don Barger will provide our comments this morning. 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 the call over to Bill.

Thanks, Steve. Good morning. Second quarter continued our transformation as we welcomed the 20,000 employees of USF and further expanded our portfolio of strong brands. The acquisition added significant scale in our nationwide footprint in the next day and second day markets in addition to increased size and capabilities in our logistics business and expanded truckload services. We have already implemented strategic actions of the regional companies that improve service to our customers and increase network efficiencies. I will talk a little bit more about that later.

At the end of the call, I will provide an update on the realignment and also provide some guidance. But let me talk about our second-quarter results first. We earned $1.40 per share in the second quarter which represented a 44% increase from last year's second quarter EPS of $0.97 and was at the top end of our updated guidance of $1.35 to $1.40. You remember that during the quarter we raised our guidance. The addition of USF companies diluted our earnings by about $0.01 per share for the quarter since they were only with us for about five weeks.

You might recall that our stand-alone guidance at the end of the first quarter was a range of $1.25 to $1.35. So we exceeded those initial expectations as I mentioned. Our performance was driven by a good economy, firm pricing and solid execution as well as continuing to deliver synergies. Our consolidated operating ratio of 93.4 was our best second quarter OR since 1986 and was a 130 basis point improvement over the same period a year ago period. We continue to progress toward our long-term goal of the low 90s and expect a full year OR in the mid 93 range for this year.

Consolidated revenue increased by nearly 25% in the second quarter to 2.09 billion when including the USF companies for the stub period that Steve mentioned. If you exclude USF, our revenue was still up about 9% over the prior year. Let me give you some brief highlights on the revenue side. This was the highest quarterly revenue ever at Yellow Transportation with 851 million and the highest second-quarter revenue ever at Roadway Express with 831 million. Both companies posted strong second quarter year-over-year LTL yield improvements of almost 4%, 3.9% after adjusting for fuel surcharge and business mix.

Premium service growth also continued to be very strong on a much larger base. The premium expedited brands of Roadway Express and Yellow Transportation increased by a combined 30% for the first half of 2005 compared to the first half of 2004. Meridian IQ had top line growth of 89% when you include the USF Logistics revenue and 38% if you exclude that USF revenue. So very strong growth at Meridian IQ as well. This revenue growth at Meridian IQ is attributable to all of Meridian IQ's services and reflected a good balance between organic growth and acquisition.

Let's now talk a little bit about operating income. We earned 138 million for the second quarter. That's a $50 million improvement over last year's second quarter and it was driven by all of our business units, including the addition of the USF companies. If you exclude USF, our operating income increased by 40 million with an incremental margin of 27%, which again is well within our expectations for incremental margin. These results reflect a sustained performance on the operational execution of all of the Yellow Roadway companies along with the cost synergies related to the Roadway acquisition.

Regarding the Roadway-related synergies, we still expect to exit the year with about a $200 million run rate. So we are on track for that second 100 million that we have been talking about. We have also been actively pursuing the new synergies available to us through the acquisition of USF and we remain confident with obtaining the $40 million in the first 12 months and $150 million within three years that we originally talked about.

Keep in mind the majority of the cost synergies from both the Roadway and USF acquisitions exist regardless of economic conditions and that is where we think we have a very unique opportunity at Yellow Roadway that does not exist in any of our competitors.

I'm now going to cover a few highlights on the operating income of the various segments. First, Yellow Transportation posted second- quarter operating income of 68.6 million, which was the most profitable quarter in its, I guess, 80 year history now. This also marked the twelfth consecutive quarter of year-over-year improvement in revenue and operating income at Yellow and James Welch and his team have done just a fantastic job there. The second-quarter operating ratio was a pretty stout 91.9 and that was 230 basis points better than last year and the best OR of any quarter since 1988. So again, terrific performance at Yellow Transportation.

At Roadway Express they had record second-quarter operating income as well of 52.2 million and an operating ratio of 93.7. This represented a 160 basis point improvement from the second quarter of last year. We were a little bit disappointed in the Roadway performance but it was really a result of them implementing some new lean processes in their distribution centers resulting in a little bit steeper learning curve as we got onto those new processes than we expected. As a result, our productivity took a bit of a hit at Roadway in the second quarter. Bob Stull and his team are working very hard on getting back on track there from a productivity standpoint.

The new processes there are the right thing to do. We took one step back and two steps forward now with this lean process. But it did have an impact on the second-quarter productivity and did impact Roadway Express' earnings in the second quarter.

Turning to Meridian IQ. If you exclude USF Logistics, we still had a significant increase in operating income in the second quarter of 2.5 million this year compared to 600,000 last year. This accomplishment reflects the benefits of the increasing global scale of Meridian IQ, most recently through the acquisition of GPS Asia and our international presence is going to be further enhanced by the joint venture, which is in the process of being completed, JinJiang in China.

Moving now to the newly formed YRC Regional Transportation companies. They contributed $20.2 million of operating income in the second quarter. This figure is comprised of New Penn's results for the full quarter and the USF brands for the stub period, which as we've already said, was only five weeks.

I know there's some interest in how USF did on a stand-alone basis. So let me give you a couple of highlights there. They came in about $3 million below the forecast that USF had given to TheStreet. That $3 million was made up of larger than expected losses at Dugan and part of that, I think, can be attributed to the fact that we preannounced the Dugan closure. But as you'll hear in a minute, we think that that was really the best way to handle that and has turned into a really good result. So half of it came from a little bit more losses at Dugan than were in the forecast that USF provided. The other half came from larger than expected losses in the Northeast at Holland where we have overlap between Holland and New Penn that we are also working on eliminating.

All in all, I would say we're happy with the performance of the USF companies. You can see in the pro forma numbers that we have provided, which exclude Dugan and Red Star from both years, that tonnage is up 6.7% and revenue is up 13.4%; pretty stout growth really against any of our competitors. We are feeling pretty good about the momentum that the regional companies have and particularly now that we have gotten a chance to get our hands on the USF companies, we are very optimistic there. Work to do, but optimistic. New Penn continues its solid performance; achieved an 84.9 operating ratio for the quarter. They just continue to hit on all cylinders there. With that, I'll turn it over to Don for an update on our financial position.

Bill, thanks. With the addition of the USF company, our balance sheet reflects some significant changes from the first quarter. We increased our assets buy over $1.5 billion related primarily to property, goodwill and intangibles and increased our debt position by a net 950 million to $1.6 billion. Given the scale of our organization, we are comfortable with our financial position but we will continue to make debt pay down a priority over the next year or so. We expect to reduce debt from current levels mostly in the fourth quarter by about $100 million.

You should note this is after our $45 million investment in the China joint venture. Our debt to cap net of cash is currently 45.5% and we expect to be a bit below this level by year-end. We estimate 2005 interest expense of about $64 million as the debt reduction is expected late in the year and may be partially offset by higher interest rates. Interest expense in the third and fourth quarters should be around $21 million per quarter.

Capital expenditures on a consolidated basis should be in the range of 350 to 375 million for the full year and that is consistent with our previous guidance. Our second half CapEx will be in the 210 to 235 range and for modeling purposes, you should assume depreciation in the 75 to $80 million range per quarter. Now based on our projected income for each subsidiary and some tax planning initiatives, we expect our full year tax rate to be about 38.1%. Our diluted share count for both the third and fourth quarters should be around 61 million shares and for the full year, which is a weighted average of pre and postacquisition shares, diluted shares should be around 57.5 million.

To summarize, from a financial position prospective, we are about where we expected to be and we see a clear path to getting to our financial ratios to target levels within a 15 to 18 month period. I would now like to turn the call back to Bill for a wrap-up.

Thanks, Don. Let me come back to the USF companies for a moment and give you a little bit more color there on the realignment of the regional companies that we have just undertaken. We were working very closely with the USF operating management to determine the best alternative to serve our customers and improve efficiencies at the USF companies. Our approach of preannouncing the closure of Dugan and the region alignment has really been well-received by customers. The revenue retention is slightly ahead of our expectations at this point realizing that there was significant book of business at Dugan that we were not interested in retaining at the price levels that existed at Dugan. So we weren't anxious to hang onto all of the business there but we are running a little bit of ahead of where we expected to be at this point. I think providing the soft landing for customers by preannouncing the closure was really the right thing to do there and is playing out very well.

We really appreciate the hard work and the dedication of all of the USF employees that worked on making sure that this transition is successful. The realignment of the regional companies allows each of them to serve a natural market. That was another problem with the previous configuration of USF companies was the fact that we had some companies that weren't really set up to serve natural markets. They are now. That also allows us to focus our efforts on service quality within each one of those natural markets and not unimportantly, the reconfiguration will allow us to improve our profitability of the USF companies and also build increased shareholder value as a result. So a lot of work to do there. Jim can get into more details if you're interested. But I think we feel very good about where we are at this point.

Let me talk a little bit about guidance now. Guidance for the consolidated company is based on GDP growth of around 3% for the second half of the year and a continued firm pricing environment among other things. We are going to be continuously fine-tuning our balance as we always do between volume and yield. While year-over-year comparisons from a tonnage standpoint are challenging, our business levels are very healthy and we are delivering synergies while we are improving efficiency. So even though we may see some negative numbers as we did in the second quarter for the next month or so, that is not going to impact our ability to generate incremental earnings. I will say that over the balance of the year, the comps get a little bit easier. But we would expect the trends from a tonnage standpoint to be about where they are now as we go through the third quarter.

As a result of all that, we expect third-quarter earnings per share to be in the $1.60 to $1.65 range and for the full year, we are remaining on the 535 to 550 guidance. There are a lot of moving parts here. We have got work to do still at the regional companies in terms of some more realignment. We have also got to get the productivity issues solved at Roadway Express and we have got some accounting issues obviously around what goes into GAAP accounting and what doesn't. So for now we're going to stick with our annual number of 535 to 550.

In summary though, we are confident in our ability to execute our strategy and benefit from this unique opportunity that we have to capture the significant synergies. As I mentioned, were on track for both the second 100 million as a result of the Roadway acquisition and we are on track for 40 million in the first 12 months as a result of the USF acquisition. So we're pleased with our growth with what we think was a very solid quarter from all of our operating companies and with that, we will take some questions. +++ q-and-a.

(OPERATOR INSTRUCTIONS). Ed Wolfe with Bear Stearns.

Bill, can you give more details on the realignment? As I understand it, the plan was you announced Dugan is going to shut and then you move in some of the other regionals, mostly Holland. Can you talk about how much revenue you expect to keep of the 260 of Dugan?

Sure. I think what I'll do is turn it over to Jim and he can give you a little bit more details on that.

Thanks, Ed. In terms of shutting down Dugan and then the expansion into some of that territory of the other operating companies, Holland picked up a fair amount of business in the overlap areas where they were both serving the same area and that is primarily in the Southeast. Holland did expand into the Kansas City area and part of Missouri. So that was new expansion for them. The biggest expansion area was in what we refer to as the Texas five state area and that is where Bestway expanded into that previous Dugan area. So they have got 18 new facilities in the states of Oklahoma, Arkansas, Louisiana, Mississippi and Kansas.

In terms of revenue retention, our early thoughts were based on the pricing that we saw in place and what we assumed would happen in the marketplace. We would be in the low 40s in terms of revenue retention. Right now, it looks like we're between 45% and 50% which is certainly acceptable given the analysis that we did on the price levels that were in place.

That's helpful. And then in the Northeast with New Penn and Holland, is the idea to roll Holland back and leave New Penn there or is that not decided yet?

We are still working on that. They are several issues to deal with there. There is customer implications. There are labor issues. But we have a team that is working diligently on that. We wanted to get the Dugan situation out of the way, which we have done and now full attention is on the Holland situation in the Northeast and what sense that overlap with New Penn makes or doesn't make.

Just to wrap on the regionals, to get a sense of a run rate since it's hard to know from the stub period. Is there some kind of good quarterly run rate for what is left at -- with New Penn plus what is left at the regional groups post Dugan that we should be thinking in terms of working from?

I think if you just looked at that pro forma number that we provided, that's probably a pretty good baseline. You had 6.7% tonnage growth and 13% revenue growth and that is apples-to-apples excluding Dugan and Red Star. So it's probably a good place to start.

So take all of the Dugan revenue out, don't assume 45% or any of that and the grow the tonnage 6%?

Just to put it in perspective, Ed, I would say third-quarter revenues might approach 600 million or just a little lower than that to give you an order of magnitude.

Then Bill, on Roadway, can you talk a little bit -- you talked about our productivity hit and some new processes. Can you give a little bit more meat on what that means, what occurred and what the timing that you think you can overcome that and start to show what you thought was even more improvement at Roadway?

I'll let Bob talk about that.

Ed, we had implemented across all our DCs in mid first quarter this new lean operating system at all of those. So that was all working in the second quarter and our shortfalls came from productivity and load average issues as we work through those processes. So it is trending up but at the start of the quarter that is where we put this stuff in place.

Is it possible to quantify what the impact was? Operating dollars?

I would say productivity shortfalls in the range of 3% to 4% during that quarter.

Is there a way to put a dollar number on what that means?

That's hard to say.

Several million, I would say. That's probably about as accurate as we can get, Ed, at this point.

Is there any cash flow numbers at this point? Can you give us a cash from operations and CapEx in the quarter or do we need to wait for the Q?

You're going to have to wait for the Q on that. We're still working on those, Ed.

You have got a lot of numbers going. I understand. Thanks for the time, guys.

John Barnes with BB&T Capital Markets.

Bill, if I go back to look at the history since you bought Roadway, Roadway trailed Yellow for a couple of quarters on volume. You have got that fixed. Roadway trailed Yellow on pricing for a couple of quarters. You got that fixed. Can we expect the same trend lines? Do you expect Roadway's operating ratio to get to the Yellow rate or is there something inherent in their business that would prevent them from achieving that level of profitability?

John, I think we still feel that Roadway and Yellow ought to operate very closely from an operating ratio standpoint. I think Roadway has taken maybe one step back because of the implementation of these lean processes. But we would expect over time that that gap will narrow.

Given the performance out of Yellow Transport this quarter, declining volumes. So you could argue that there was some loss of operating leverage through the quarter from a tonnage standpoint. Yet they still put up the best OR since the third quarter of '88. Have you rethought -- you made the case when you bought Roadway that if you all could not broaden (ph) the load 90%, you had to go get a new management team. Now are you willing to step up and say if we can't operate at below a 93 that maybe we're not doing our jobs? I mean can you get better than you thought?

You're really making this personal, John.

I'm not trying.

I'm just kidding. I think the addition of the USF companies really gives us more leverage to get the OR down. We would still expect to be able to operate the big companies in that low 90's range. I think we're on a pretty good path to get that done; notwithstanding the productivity issues that we have got at Roadway. The regional companies ought to operate under a 90. So when you add all that together, you ought to be looking at a number for the consolidated company that should be around 90. So we're still confident that we will get there. I think the progress we have made just increases our confidence on the big companies and I don't think we have seen anything at the regional companies that would make us think that they shouldn't operate in that sub 90 category.

Is that assuming that all the synergies are achieved? That requires you to have stripped out all the excess cost?

I think that does assume that we deliver what we've said we're going to deliver from a synergy standpoint.

Pricing in the regional markets was a little bit weaker than I would have anticipated for this quarter. It seems to be a little bit more competition. It's always competitive but it seems to have heated up. Can you give us some color there? I mean are you concerned at all that things are getting a bit irrational on that front?

No. I think one of the things that makes it a little tough to look at this past period of time as a snapshot is just all of the moving parts we had internally but I don't think there is any feeling that the pricing environment has deteriorated significantly.

Last question and I'll turn it over. Free cash flow generation -- I'm still looking for healthy cash flow generation this year. You're talking about reducing debt by $100 million. Is debt reduction still the most important idea or opportunity for you or if you were making progress, steady progress, on that front, would you redeploy some cash into something else, maybe another share repurchase or something along those lines?

I think for now, John, debt pay down his job number one and we will focus pretty heavily on that until we get our balance sheet back where we want it.

Sorry to put you on the spot earlier.

No problem.

Jason Seidl with CSFB.

A couple of quick questions. Can you talk a little bit about how the tonnage levels trended through the quarter at Yellow Roadway and the regional group?

Well, it has been an interesting year. I believe that we have seen a shift in the shipping pattern of our customers. In the old days, which I would consider before this year, we used to get a real big pop at the end of every quarter. So March was a really big month. June was a really big month. What we have seen this year is a little bit different pattern and that is the month end or the quarter-end months have been a little softer than expected. But then the following months have been stronger. So for example, in the first quarter, March was a little softer than we expected but April was stronger. We have got the same phenomenon occurring in the second quarter with June closing out a little softer than we expected but July been stronger. So it looks to us like maybe all of these logistics concepts that have been put into place over the last few years are really starting to smooth out the shipment pattern to a much greater degree because if you look at the seasonality this year, you got much more of a straight line increasing volume every month without the big end of quarter pops that we used to get. Other than that though, we haven't seen much change.

Can I switch the question a little bit here to pricing? Can you talk a little bit about the individual GRIs at the subsidiary companies and how the retention has been?

I think the GRIs have gone very well. We had kind of three separate timings of the GRIs and Yellow went on May 9th, Roadway went on April 25th and New Penn went on April 4th. In all cases, the retention has been good.

Also in terms of competition, is there any sense that with Estes acquiring the assets of GI and publicly stating they want to go after some of the long-haul market. Is there any sense that you're going to get increased competition from them?

Well, there is plenty of competition out there. Estes is a good company. GI is a good company. I think we will just have to wait and see how effective they are. But we fill pretty confident about our position.

Brannon Cook with JP Morgan.

A question on the synergies, going into the USF transaction, you talked about four buckets of synergies; back office, technology, procurement, and operational optimization. Has anything changed once you have gotten in and started operating the USF companies? Might there be more opportunities in one of these buckets verse another versus your expectations going in?

No, things have been pretty consistent. I'll say that, in general, it's going a little bit better than we expected. Maybe it's because it's our second time through this. But those four buckets are still the major buckets. I think, in general terms, it is about what we expected to find.

I have a question on Meridian IQ. Obviously you're busy with integrating with USF Logistics. You made the joint venture investment in the Chinese air freight forwarder in June. Could you talk about some revenue versus cost synergy opportunities on that business? Do you view it primarily as it's revenue synergy opportunities and then maybe give us some color on your outlook going forward. Are you pretty content with where you are in that business or might we look for some continued smaller transactions?

Are you specifically talking about China now when you say the revenue costs or are you talking about a broader question?

Well, you have got USF Logistics as well as Meridian IQ and the Chinese investments. So I guess obviously mostly revenue synergies on the Chinese business but if you could touch on USF Logistics as well.

I think we feel, and I'll let Jim talk about this in a second, I think we feel really good about the possibilities of the combination kind of on three fronts. Probably the most important is the breadth of capability that it gives us. It's really a nice fit between the capabilities that Meridian IQ had and the capabilities that USF had and the portfolio of the combined companies now gives us terrific value that we can bring to customers. So that's probably the biggest single advantage. We will also get revenue synergies in addition to just the coming together of the two customer bases because of that additional capability. Then we'll have some cost synergies as well. Jim, you might want to add to that.

I would concur with what Bill had just said. There is more revenue upside than probably on the cost synergy side just simply because the businesses that USF Logistics and Meridian IQ are fairly complementary in terms of the service portfolio. They specialized in distribution and flow through. We specialize in the global transportation management components of that. So they fit together real well and there isn't as much redundancy as you may think other than perhaps in some of the management areas, which we have already taken some steps to address. But also in looking at reinvesting some of that synergy dollars back into that business in order to make sure that we maximize the growth potential is primarily what our focus is right now.

In terms of China and on the air freight side with JinJiang, they have also got an emerging ocean business. But primarily what we are really focused on is really maximizing the trade lane between China and the U.S. and trying to bring together a very powerful and famous brand over in China and connecting that to all of the customers within the Yellow Roadway portfolio that do business in China and being able to almost seamlessly bring their products and goods into the United States faster than they have been able to do it before. So we're optimistic once we get through the regulatory approval process that we will be able to focus on growth within that business segment as well.

Jack Waldo with Stephens Inc.

First question is on operating leverage. You know there has always been a concern that operating leverage works against you when tonnage levels start to fall. If you take out the synergies, if we continue to see tonnage comparisons that are slightly negative, call it better than down 1%, do you anticipate any margin compression without those synergies?

Not really. I think there are a couple of things maybe that are misconceptions. One is that negative tonnage necessarily drives lower margins. I think maybe a better way to think about it is healthy tonnage levels allow you to operate efficiently and as long as you can continue to improve your efficiency, you're going to drive better margins. So right now, if you look at our companies, we have got very healthy tonnage levels even though they maybe slightly lower than last year. Last July, for example, was the best month in the history of Yellow Transportation and so that is a pretty tough comp but even running a couple of percent below last year still gives us very healthy tonnage levels at our operations and allows us to operate very efficiently.

In addition to that, we've had a very firm pricing environment. So we have been able to continue to improve our yield with these healthy tonnage levels and the synergies are sort of a little bit of an extra kicker to that formula. So unless tonnage levels fell off dramatically, I would expect to see us continue to improve our margins as we go forward.

You mentioned pricing and looking at that relative to tonnage levels, maybe it's better to not look at just what tonnage is doing but maybe what revenue is doing. If we continue to see negative tonnage trends, do you think that will lead to significant pricing pressure, i.e. do you anticipate -- is there a possibility of yields being negative year-over-year over the next call it four quarters?

Even in the worst of times back in the last recession, we had pretty good yield growth. So I would never contemplate a situation I don't think where yield would go negative. Obviously, the laws of supply and demand work pretty well. So if the demand fell off dramatically, that would have some impact on pricing. But even in the 2001-2002 recession, we still generated some pretty good yield improvement.

On the capacity pricing issue, how do you feel about the industry? Have you seen many full capacity come in? Are you worried that maybe some of your private competitors are putting too much capacity in the market right now?

No. I think what we've seen is capacity being added on the margin. Overall, you're not going to get new LTL companies coming into this industry because of the barriers to entry are just pretty staggering. So what you are seeing is existing companies expanding their geographic reach. You are seeing acquisitions and mergers and I think you'll see all of that continue. But at the end of the day, the capacity equation is probably not going to shift very much.

And then more on a nuts and bolts question. Yellow and Roadway are the only LTLs we saw with negative weight per shipment trends. Is there something at work there that might not meet the eye?

I don't think so, Jack. That's kind of a lumpy metric and it depends a little bit on your business mix. If you ship more retail during any given period of time, sometimes that lowers your weight per shipment. It's really more a function of the business mix and I don't think there's anything to read into that.

So it's not indicative of any economic trends or anything of that nature?

No. We don't think so.

Last question. Did you have of any change in your length of hauls at Yellow and Roadway that would skew any of the margin improvement we're seeing?

No. I think, again, we have got the next day at Yellow Transportation, which is not big enough yet to have a dramatic impact unlike the haul. But we have been more and more successful in the regional markets and the big companies and obviously over time, that drives down your length of haul. But I don't think it is anything more than --.

It's a very nominal change at both the Yellow Transportation and Roadway Express, Jack.

Jordan Alliger with Deutsche Bank.

Just a quick question. In terms of the synergy buckets that were talked about again on the call, what do you go after first for that first 10 million? What -- where does that stand and then where do you go from there from a priority stance?

Well, it's kind of the four buckets we talked about. But initially there is purchasing leverage to be had. There is obviously duplicate infrastructure where you had a corporate headquarters and the associated costs at USF that most of those costs really don't need to be there. So there are those things. Then there is some early wins on the technology side just in terms of the way we support technology through data centers and that kind of thing. So those are probably three of the earliest areas.

So it's distinct from any of the realignment stuff that you've been talking about?

Yes, it's all completely separate from that.

What about some of the USF standalone initiatives that they were working on? I know there were trying to get at more profitable tonnage growth through better pricing mechanics, etc. Are some of those things still on in existence and what have you found in that regard?

I think maybe Jim ought to comment on this. But we, obviously, are very focused on yield management as one of the key areas going forward, very consistent with what we have done at Yellow and Roadway. It's obviously an area of focus for Jim and his team.

What initiatives were under way, we're just trying to supplement those with some ideas that we bring to that group. They did have a lot of things going on. But at the same time, a little preoccupied with reorganization of those companies which we have accomplished. Now I think we really can concentrate on putting the right product in front of our customers at the right price.

So again, the yield, things that you're working on from US Freightways are augmentative to the synergies that you're working on. It's a separate bucket in other words.

Yes, absolutely.

Richard Haydon with Omega Advisors.

Could you remind me what your target debt ratio is (ph)?

Our debt to cap, we like to be in the mid 30s, Richard.

I was just doing some numbers. I'll assume for the sake of just a framework. If you receive the 100 million this year and 250 million next year, would you see right around 35% by the end of '06? Is that right around --?

That's correct. That's where we think we will be.

Beyond the 18 months, you will have a lot of free cash flow.

Yes.

We have a follow-up question from Ed Wolfe.

My question was answered. Thank you very much.

There seem to be no further questions.

Thanks for joining us. We will talk to you at the end of the next quarter.

This concludes today's conference call. You may disconnect at this time.