Yellow Corp (YELL) 2005 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Yellow Roadway Corporation third quarter earnings conference call. (OPERATOR INSTRUCTIONS). I will now turn the call over to Phil Gaines, Senior Vice President Investor Relations, Government Relations and Corporate Development. Please go ahead, sir.

Good morning. And thanks for joining us for the Yellow Roadway Corporation's third quarter 2005 earnings call. With us this morning are Bill Zollars, the Chairman, President and CEO of Yellow Roadway; Don Barger, our CFO; James Welch, President of Yellow Transportation; Mike Smid, President of Roadway Express; Jim Staley, President of YRC Regional 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 is 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 10-K, 10-Q and last night's earnings release.

Unless otherwise noted, our operating income and operating ratios are presented in this call after adjustments for property disposals, acquisition charges and executive severance to better compare the results of our core operations among periods. For further details, please refer to or earnings release.

Bill Zollars and Don Barger will provide our comments this morning, and James Welch, Mike Smid, Jim Staley, and Jim Ritchie are available to participate in the Q&A session. With that I will turn the call over to Bill.

Welcome everybody. Yellow Roadway delivered another solid quarter of financial results in the third quarter. Synergies from the Roadway acquisition remain on track, while synergy initiatives from the USF acquisition are well underway. We effectively implemented one phase of our strategy for the regional companies and are positioned for the next. I will provide more details on this after reviewing our third quarter results.

Earnings per share of $1.53 was the highest quarterly EPS in Company history, and exceeded our revised guidance of $1.40 to $1.45. The upside here primarily resulted from a much stronger end of September at each of our business units, pretty much across the board. In addition, cocoa (ph) dilution and the impact of the hurricanes were each lower by $0.01 than we had projected in our $1.40 to $1.45 guidance.

In terms of revenue, third quarter consolidated revenue increased 41% compared to the prior year, and totaled about $2.5 billion. The acquisition of USF significantly contributed to that revenue, in addition to our organic growth of about 7%.

On the operating income side, we made $168 million and exceeded prior year by 48 million, or about 40%. These results reflect the significant leverage that we have in our business, the addition of the USF companies, and the cost synergies from the Roadway transaction.

Our third quarter consolidated operating ratio was 93.3. Our objective continues to be that in a good economy and with the full impact of our synergies we should generate an OR in the low 90s. We have been saying that for some time, and I think we are on track to do that. For 2005 we expect about 100 basis point year-over-year improvement in our consolidated OR. And that will put us in the upper 93 range and well on our way to that low 90s.

Let me now briefly recap our synergy progress before I give you updates on our segments. Regarding synergies from the Roadway acquisition, we still expect to exit 2005 with about a $200 million runrate. In 2006 we would expect another 100 million from the Roadway acquisition, and around 50 million from the USF acquisition. That means combined synergies should be about $150 million and should contribute that amount to operating income in 2006, or about $1.50 per share of incremental earnings. These synergies do provide us a unique opportunity, different from anyone else in our sector, and are primarily independent of the economy.

Let me move on now and talk a little bit about the segments. At Yellow Transportation they continued to break records by posting their highest ever quarterly revenue of 892 million, and operating income of 73 million. The Yellow operating ratio of 91.8 was the best quarterly OR since 1988, and about 70 point -- basis points better than the previous year.

Yellow had LTL yield increases of 7.2% when compared to the prior year. And after you adjust for fuel surcharge and business mix, it was about 1.6%. The yield analysis has become more complex, as I have mentioned before, as fuel surcharge has become a more significant component of the pricing equation. Yellow also had quarterly tonnage growth for the first time this year, reflecting their continued balance of volume and price.

Moving down to Roadway Express, Roadway Express had a good third quarter despite some productivity issues that we discussed before. Revenue of 858 million was about 6% higher than last year. Operating income of 60 million. And Roadway posted a 93 OR. And a 93 OR, even with the productivity issues they had, was a pretty solid performance, and a 50 basis point year-over-year improvement.

Roadway reported LTL yield increases of about 7% compared to the third quarter last year. And again after adjusting for fuel surcharge and mix it is about a 1.6% improvement. The LTL tonnage was down slightly against some tough prior year comparisons, but was in line with our expectations for Roadway Express.

As we mentioned in September in our release, there were some implementation challenges from some new processes at Roadway. And these processes were not synergy-related, but instead they were initiatives that were unique to Roadway Express, really kind of blocking and tackling issues at their distribution centers. During our July earnings call we mentioned some negative impact on the second quarter. And in the third quarter it became apparent that the productivities were continuing to decline.

To address these issues and improve the overall performance, Mike Smid was named President of Roadway Express. And Mike has been actively engaged at Roadway, as you know, for the last few years as the Chief Integration Officer for Synergy Initiatives and comes to the job with over 30 years of industry experience, although he looks a lot younger than that.

We were gratified that during September Mike and the Roadway team were able to improve the trends in productivity and implement other cost controls. We expect additional improvements in the fourth quarter. And then to completely close the OR gap between Roadway and Yellow we're going to have to have a change of operations to the Roadway network to improve efficiency, speed and reliability. And those changes we will begin in early 2006. Within nine months we expect Roadway and Yellow to be performing at a much more consistent level in terms of operating ratio and profitability. But Mike's team has done an excellent job in reversing some of the trends we had and in giving us a lot of momentum going into the fourth quarter at Roadway.

Moving to the YRC Regional Transportation, Mr. Staley's Companies, Bestway and Holland effectively realigned their service areas to cover the former Dugan territory. Overall the regional companies worked well together and made the transition as seamless as possible for customers. You might recall that this is the first time that we can recall where a closure was announced before hand to make the customer transition easier. We think that paid significant dividends. We are currently retaining about 50% of the Dugan business, which is about what we wanted, and about what we expected to retain.

With respect to the regional third quarter results revenue was 607 million and operating income was 34 million. Year-over-year LTL tonnage increased by 10.5%, which is a pretty healthy number. That is excluding Dugan in in both years. When you exclude Dugan from the -- I'm sorry, when you exclude 50% of the Dugan volume, which is about what we retained, and then make more like an apples-to-apples comparison, LTL tonnage still grew in the mid single digits. So pretty good volume growth as we consolidated the Dugan business into the other operating companies. The regional group posted yield improvements of 6% compared to the prior year. And then when you exclude fuel surcharge, it was about 1.5%.

We are pleased with these results, especially given the incremental cost of the network changes. You'll recall that we expanded Bestway's footprint to the East and Holland to the Southeast. We also spent some money on branding initiatives in the third quarter. All in all we think that the performance of the regional companies was solid, with a lot better results to come.

Regarding the regional service overlap in the northeast between Holland and New Penn, which we mentioned before, pricing improvement plans have been implemented and terminal consolidations will take place where necessary to provide better service and improve profitability. Due to Holland's limited northeast coverage, Roadway has elected to use New Penn as a delivering carrier. And it is anticipated that is why we will do the same in the fourth quarter. This really starts to bring New Penn into the family of companies here. And we're beginning then to leverage this group of companies effectively.

Many of the steps I just mentioned have already been taken. We expect the completion of the remaining actions by the end of the first quarter of next year. And though there are still some moving parts for the regional companies, we remain confident that as we continue to implement our disciplined strategy the regionals will reflect solid growth and profitability. The way I would summarize where we are with the regionals is we made some investments in the third quarter to implement the strategy of expanding Bestway and Holland. But we still feel really good about the volume growth and where they are headed from a profitability standpoint.

Moving on to Meridian IQ. Meridian IQ sustained its impressive topline growth with a nearly 150% increase in the quarter, including the USF logistics business. And even if you take that out, they were about 37% higher this year than last year. So really good growth at Meridian IQ. Operating income was 6 million. It was about 6 times last year's $1 million. This reflects not only strong organic growth in non-asset-based services and the USF acquisition, but also the impact of our global expansion.

Within the last year Meridian IQ is expanding into Latin America, the Netherlands and Asia. In addition, we recently announced the completion of our freight forwarding joint venture with JinJiang in China. And we expect to close our logistics joint venture with JinJiang in early 2006. There is just tremendous potential here to manage large shipments in China and connect China to the U.S. more effectively for our 800,000 customer base. And we're going to continue to focus on this area of the world because of that opportunity.

In summary, our operating companies are working well as they continue to seek ways to improve efficiencies and better serve our customers. I feel really good about where we are in each one of those operating companies today. I will turn now over to Don for further comments.

As mentioned earlier, our adjusted earnings per share for the third quarter was $1.53. This excludes charges that we do not consider when evaluating our ongoing performance. These charges were $0.05 a share related to the shutdown of Dugan, and really were the expense tail associated with shutting that down. And those costs cannot be classified into purchase accounting. In addition we had some minor other acquisition-related costs as well. We also had $0.04 for the executive severance to replace the President of Roadway Express, and then $0.02 related to property disposals which is our standard procedure. Before adjusting for all these items, our reported EPS was $1.42.

Regarding our debt position at September 30, the balance sheet actually reflects 68 million more in debt than at June 30. This was strictly due to the timing of our pension funding and the investment in JHJ, and was very much in line with our expectations. Typically our free cash flow is the largest in the fourth quarter as we're getting the cash benefit of the third quarter activity.

With that said, debt pay down continues to be a priority for us. And you should expect debt by year end to be reduced from the U.S. acquisition date by $100 million, excluding any stock buyback. Currently our debt to cap net of cash is 45.4%, and we anticipate being slightly below this by the end of the year. Regarding our announced $50 million stock repurchase, depending on the stock price, it is our intention to initiate the repurchase program by November 1, the day the blackout period ends. We will accomplish this through open market purchases.

We also expect our no cap return on committed capital to exceed our benchmark 10% cost of capital by the end of this year, which is a significant accomplishment given the capital committed that we had to use to acquire USF about four months ago. Interest expense should be about $63 million, which implies $20 million in the fourth quarter. Gross CapEx will be approximately $350 million for the full year.

Our diluted share count should be around $59 million for the fourth quarter, and -- I'm sorry -- 59 million shares for the fourth quarter and 57 million shares for the full year. The difference between these share counts is due to the 9 million shares issued for USF that were outstanding for about half the year. Because of this, our quarterly EPS may not add up to the full year EPS, though we would expect these differences to be within $0.05. I will now turn it back to Bill for a wrap up.

Before we open it up for questions, let me give you some guidance on the fourth quarter, and as a result of that, obviously the full year. We expect the economy to remain healthy with real GDP growth around 3%. We're still seeing a pretty healthy economy as we sit here at the end of October. LTL volumes at Yellow should be slightly positive in the fourth quarter. And Roadway should be slightly down when compared to the fourth quarter of last year. We expect volume increases at the regional companies to be in the upper single digits in the fourth quarter. Pricing is going to continue to be competitive, but disciplined. And the mix between yield with and without fuel surcharge will continue to blur.

With respect to EPS, we expect fourth quarter to be in the range of $1.30 to $1.35 and the full year 2005 between 5.18 and 5.23. And I might just stop here and remind you that our original guidance for 2005 was 5.10 to 5.30, which means that the speed bump we had at Roadway just kind of puts us back to our initial expectations, because the number for the year now is in that range of 5.18 to 5.23. Also I will remind you that our earnings growth in EPS over the last few years we think gives us really good momentum going to next year. We made about $1.00 in 2002, about $2.00 in 2003, about $4 in 2004. We will be over $5 this year, and as I said, feel good about the momentum that creates for 2006. With that I will stop and we will take some questions.

(OPERATOR INSTRUCTIONS). John Barnes with BB&T Capital Markets.

On the Roadway volumes, anything Yellow for that matter and Yellow Transport, when do you expect volumes to begin to tick back up and begin to show a little bit more growth, and especially at Roadway?

Yellow, as we said, they should be positive in the fourth quarter. And we would expect the volumes to be positive at Roadway by the beginning of the year.

And is that more of just an easier comp going into the new year, or is that reengaging in a more aggressive sales effort once you get the productivity issues and that kind of thing behind you?

No, I think it is more the comps that we're facing than anything.

Is there something with the units right now? Are you capacity constrained, or is there anything preventing a little bit better tonnage growth in each entity right now?

This is our peak season, so right now we're pretty full in lots of places. But obviously that changes at Thanksgiving, and we've got plenty of capacity following the Thanksgiving weekend.

Last year you indicated you were full and yet profitability wasn't quite as good as it is this year. Are you -- I don't know how to say this -- are you better full this year? Is it a better selection of freight? Is it a little bit less freight means a little bit easier handling and therefore more profitability?

No, I think it is really primarily an indication that we're continuing to improve our efficiency, and that is driven in part by those synergies that we continue to accrue. I think it is just more efficient operations at the companies. I think you can see that in the OR progress we're making.

In terms of the regional businesses, as you look out over the next, say, 12 to 18 months how much do you think the regional businesses will be able to close the OR gap with the two national entities -- X the issue you had at Roadway Express to take out that cost associated with the productivity? I'm getting that you're kind of -- that Roadway and Yellow were kind on equal footing in terms of the OR, kind of sub 92. What is the timeline for getting these regional businesses into that realm of profitability?

Let me make a couple of comments and then I'll turn it over to Jim Staley. But we think that fundamentally that group ought to operate at 90 or below. We think there's a lot of potential there. We have already got a couple of companies that are operating very well there. And there has been a lot of change, as you know, with the closure of Red Star, the closure of Dugan, the expansion of Bestway and Holland, and kind of a untangling what was done by the previous administration in the Northeast. There's a lot to do there and a lot of moving parts, but we think we're making solid progress, and our goal is to get that group of companies below 90. Jim, do you want to comment on that?

I think everybody is familiar with the excellent historical performance at New Penn and Reddaway. Holland has been in that ballpark as well, Holland and Bestway. Most impacted by the Dugan shutdown. We did make a marketing decision to protect some pricing from the Dugan customers for a period of 60 days. So those customers that were absorbed into Holland and Bestway -- that was the right thing to do for customer relationships. So that is behind us. We have improved pricing taking place, and we are certainly confident that Holland and Bestway can perform at levels more comparable to New Penn and Reddaway.

And then last question. Really the barricades on your stock right now, and the Yellow story, is that you know a tremendous amount of operating leverage in your business, but that can work just as fast against you as it works for you. Some clients I have talked to are concerned that $6.00 in earnings can go to $3.00 very quickly. What gives you the confidence that the business is still in good shape? People, I guess, are nervous about the economy. They're nervous about the synergies. Can you give us two or three things that give you a lot of faith in the numbers that are out there right now?

Sure. I think that first of all Yellow Transportation continues to improve every single quarter, and they have for a long, long time. And we have a lot of confidence that that will continue under Mr. Welch's leadership. Secondly, we think that Roadway can close that gap. Mike has already got them on a path that would lead there. From an efficiency standpoint, that is kind of the story in those two companies. The third thing is the regionals, as we have just mentioned, there's a tremendous opportunity there if we can get Holland where they should be and Bestway where they should be that that will drive the operating ratio down there so there is efficiency potential there.

Kind of overarching all of that, of course, is the synergy work. And we still feel that next year we can take 150 million out of the cost base independent of the economy. So that is a little bit of -- more than a little bit -- but that is significant insurance I think against downturn in the economy. And then finally, I would kind of refer you back to what happened in the last recession. And that was we were able to turn about 80% of our cost into variable cost, which gives us again a safety net should things go south. But a lot of operating efficiency opportunity at most of the companies, some significant synergy opportunity, and then our ability to manage cost effectively even in a downturn would be my answer.

Jason Seidl with CSFB.

A couple of quick questions here. Bill, you mentioned that there's going to be a change in operations coming at Roadway in '06. I was wondering if you, or maybe Mike, can explain the details behind that change in ops?

Let me let Mike give you the details there.

Just to give you I guess what I would call a high-level summary, there are several things we need to do. One, a portion of the change has to do with efficiency and speed. Those types of changes will involve the removal of some empty flows, some imbalances that occur, more significant direct loading in terms of the distribution network, and better connections of some of our transcontinental transportation lanes as well.

The second part of it is in creating those efficiencies it also allows us to significantly change the reliability. We will be able to predict freight flow and originate drivers at the front side of that freight flow in order to A., regulate empties and B., improve the consistency. In summary, much better connection kind of in our wheelhouse, some of the longer lengths of haul, and some enhancements that help us with the overall transfer touches of freight. And then finally, better connections and better balances in some of our shorter lengths of haul as well.

You mentioned you are going to do more direct loading. Am I to infer that you may sort of redesign the terminal network a bit, or are some of the terminals going to become obsolete now?

As we go forward, we're continuing to look at that -- the functions that go on in terminals. More of our larger end of the line facilities have already initiated direct loading. And we are in the process of evaluating what kind of capacity afterwards we going to need within our distribution centers. and continue to look at the dynamics of those distribution centers.

The bottom line here is after we get all that done, that will help us close the gap between Roadway and Yellow, because more direct loading, fewer touches requires less labor, and that allows us to reduce our cost base. This is a situation where this will give us faster, more reliable service at lower cost, which is always a good thing.

Am I to assume these changes are going to be implemented in '06 because you want to sort of get past these initial lean management blocking and tackling problems you guys have had?

On in an immediate basis there are some significant opportunities in the business to take a real short interval approach to get our actual utilization of labor in line, and make sure that our variable cost structure going into the final parts of this quarter and the beginning of next quarter are in place. Secondly, working to make a lot of the processes much more consistent, much more specific. All of those items improve the velocity to our network, help us improve the variable cost structure, and position us better to be as precise in our operations as we are going to need to be in order to execute the change of operations.

If I could switch gears here a little bit. Don, you mentioned gross CapEx is 350 this year. Do you have an estimate for net?

I'm sorry?

Net CapEx.

For net of CapEx?

Yes.

Net CapEx -- let me just give you a bridge this way. Gross CapEx was 231 and net CapEx year-to-date is about 213. So subtract maybe $20 million from that gross number, 20 or 30.

Sounds good. Don, on the gross number of 350 how should we think about '06? Is there anything coming up in the plans that is going to require a big investment or is the sort of a good runrate level?

We will obviously give you that insight into our CapEx when we announce fourth quarter results in January.

Fair enough. Bill, if I could step back and take sort of a bigger picture look on the economy, I know some of your carriers are more exposed to the retail market than others. Are we seeing any signs of weakness in the retail sector, or does not seem to be fairly stable?

Everything seems pretty strong right now. I don't know how the sell-through will be, but certainly the activity has been very strong across the board.

Ed Wolfe with Bear Stearns.

A couple of things. You said your fourth quarter guidance, I think, was based on 3% GDP?

Right.

We just got a reading for third quarter of about 3.8%. Assuming the economy were to stay, and who knows, in that kind of category, I'm guessing your sense is there's some upside to that kind of guidance at that point?

Yes, if the economy is stronger that always has an upward impact on our performance.

Looking at USF, we have had phenomenal reports from most of regional LTL carriers from Conaway, from Old Dominion, from FedEx Freight with tremendous margin improvement year-over-year. Yet with USF we have tremendous step back, even after you take out the adjustments from Dugan. What is not right, right now at USF that in an improving environment they are still spiraling, and it feels like the rest of the group is feeling better every day? Can you talk about that and what the steps are to go forward here to fix that?

I would probably look at this a little differently. I think given all the change that we have put the regional companies through since we have owned them, and put their customers through, to be able to grow the volume at the rate we're growing it is a testimony I think to the good work that is being done there.

We've got a lot of things left to do at the regional companies. I think one of the problems may be that it is difficult to pro forma some of these numbers. And I have seen some models that really are a little bit misleading in terms of how the regional companies are performing. But at the end of the day we had to make some investments in the third quarter to get Dugan closed down and to expand Bestway and Holland. We've got some more work to do, as Jim said, but we feel really good about where we are. 94.5 OR is not where we are going to end up with those companies. As we said, they're going to be 90 or below companies. But the fact that they are growing well, that the yield is good, I think if you looked at the volume growth you would only find maybe one or two companies in the sector that grew faster than the regional companies in the third quarter. So I think that is an indication that customers are responding well to our strategy. And as we go forward, we will get the operating ratio where it needs to be. But Jim might want to add to that too.

I think the two primary issues we faced in the third quarter, one was absorbing the Dugan territory at Holland and Bestway. The problem at Holland is we had to do that when their focus up to that point had been I would say an irrational focus on growing interregional business. Very erratic pricing in place there. We've had to take significant steps to correct some of that pricing activity. And that was the case at Bestway as well, where we had capacity tied up with business that had been improperly priced. So it is a matter of getting the capacity right and having the right price in place to support the business you want to attract. With that capacity being taken as it was on interregional business service performance suffered on the core business. And I think we have most of those issues behind us now -- a steady improvement in those areas as we go forward.

But you would expect an OR improved quarter over quarter in the fourth quarter?

Yes, I would.

When we look at what is going on with yields right now, you reported yields, even mix adjusted as you gave them at 1.5%, are down quite a bit sequential year-over-year. They were at, if I recall, 3 or 4% mix adjusted last quarter. What is going on in the pricing environment as you see it for the long-haul guys, and how do you see it over the next six months?

I think that the primary shift, as I have talked about before, is in the way customers are viewing the fuel surcharge. And it has always been sort of a separate item that people just kind took as part of the cost of doing business. But fuel surcharge moving past 15 and now 20%, customers are taking a much different view of that, and I think are no longer treating it as a onetime thing. What we're finding in our conversations with customers is that fuel surcharge is now an integral part of the pricing discussion. And as a result, as I mentioned before, I think it is going to be a little bit difficult to get a lot of insight by looking at yield excluding fuel surcharge. If you look at the yield including fuel surcharge we are at about 7% across the Companies. And that is still a pretty good yield. Now my guess is that as fuel prices drop and the fuel surcharge starts to go down, we're going to have the ability to be a little bit more aggressive on base rates. But right now it is all kind of marbled together.

So in other words, right now it is bundled, and as fuel comes down you think you'll be able to unbundle that going forward?

Yes, we think we will have a lot more ability to do that with lower fuel prices.

Can you talk a little bit about the next day rollout, where you are in the Midwest? And how many terminals, what the growth rate, or if it is meeting your expectations, and your timeframe for making that more national?

Sure. James, do you want to handle that?

Yes, we're still very pleased with the success that we've shown with that initial next day rollout operation. That is 41 terminals from Milwaukee over to Buffalo down to Knoxville, Tennessee, back around Northeast of St. Louis up to Milwaukee. Shipment growth is about 20% and the revenue growth is about 30%. That is still not material in the entire scope of our operations and revenue, but we are certainly picking up the pace with looking at our next six to eight sort centers. We've met with Bill and Don a couple of weeks ago. We're in the process of working through some of those proposals, and we anticipate expanding that out some more next year.

Are you seeing the growth with your existing long-haul customers, or is there new customers that you don't do long-haul business -- what does the mix look like with that?

That is a great question. We have looked at it both ways. One of the things that we did not want to do was secure next day business and trade-off long-haul business. And so we are tracking both with existing customers and new customers, and we are seeing success on both ends.

I noticed, shifting gears, there the corporate residual has dropped dramatically in the quarter down to less than 5 million. Historically US Freightways had a big number there. Is that some form or synergy? And is that an ongoing number, give or take 5 million that we should be looking at, or how do we look at that going forward?

It is impacted by synergies, as you have indicated. The other thing though that we have done from a tax planning standpoint is distributed a bit more cost out of the corporate reserve. Again, that is the right thing to do from a tax planning standpoint. But your number is not a bad number to assume going forward.

Is it fair to say that maybe U.S.'s -- the regional groups' OR, some of the issue with it is a redistribution from corporate -- a little part of it?

No, no. The net benefit -- there will be a net benefit to them from the corporate allocations.

If you're giving less to the corporate, you are giving more to the ORs or the regionals, aren't you in terms of expense (multiple speakers).

No, I am saying is that there is a net benefit to the regionals because of the reduction in the corporate overheads for them.

I thought what you said was, let's say just pro forma it was 14 million a year ago and it is 5 now. Some piece of that 9 million and change was stuff that just went away. Some piece was pushed out to the regional groups themselves.

Not on the regional side.

It went to the long-haul side?

No, no. On the regional side that is a pure reduction.

And on the long-haul side some was pushed out to the Yellow and Roadway's OR?

That's correct. On the regional side it was not material. So I think the way you ought to view the regionals is that you had got some investment costs in the third quarter as we continue to implement our strategy, and you'll see the OR in the regional companies begin to improve now.

One last question. We have seen a bunch of kind of adjustments related to the merger the last couple of quarters. When should we expect these to go away, and just assume a clean report? Is that a quarter away, two quarters away?

No, I think you've seen almost all of it. You may see a real small amount in the fourth quarter, but it is pretty much behind us now.

Brannon Cook with JP Morgan.

I was hoping you could provide a little more clarity or a little more color on the different regional operating entities in that certain ones that maybe aren't performing where you would like them to be. Others that are pretty well on track. Maybe to the extent that the ones that are underperforming is that really where the bulk of the OR improvement is going to come as we look at it over the next 12 to 18 months?

I can give you some qualitative stuff, and Jim already has, and he may want to add to this. But we've got two companies that are operating extremely well at New Penn and Reddaway. We've got two companies that are not where we want them to, and that is Holland and Bestway. We have already talked to the issues there in terms of what needs to get done. But really it is focused on those two companies and getting them back where they should be. Jim, do you want to add to that?

We have made it clear that those are the two companies that deserve the bulk of our attention now. And they're getting that attention. Holland is a large Company within the regional groups. A lot of issues to deal with there, but primarily on service performance, pricing and dealing with some capacity constraints due to taking on a significant amount of Dugan business. We know where the issues are and we know we have to due to correct them.

And you mentioned you were scaling back Holland a little bit in the Northeast, and I guess trying to grow tonnage more aggressively at New Penn. Are you closing down some Holland facilities up there? Is this kind of be an ongoing shift as we look over the next year?

We're looking at Holland's presents in the Northeast in various ways. Again, pricing is a key part of that. There was aggressive pricing that took place to build density into the Northeast. There is some parts of the Northeastern market that fit very well with the Holland franchise in the Upper Midwest. And we should protect and grow that presence in the Northeast. In Bill's comments we made it clear that some of the other operating companies that have interregional business are taking that business straight into New Penn's network, which is certainly a more cost-effective way to do business, and eliminates some unnecessary intermediate transfer work that was not compensatory for Holland in the Northeast. So multiple actions taking place, all of which are improving the Northeastern operation for Holland. And as we have said, there will be some terminal consolidations where it is necessary to improve profitability.

And then there have been a couple of questions on price. And obviously there are plenty of moving parts there with fuel, and maybe a little bit on the mix side of things. But I guess if you look at the new business contracts that you're winning or renegotiating with customers at your Yellow and Roadway operations, are the core price increases you're getting there pretty much in line with what you were saying in the second quarter, or has there been really much of a change there, adjusting for everything?

I think the overall pricing is still very good. Last year was probably the best of all worlds as the economy began to recover. And we hadn't seen pricing on that in a long, long time. So it is probably not quite as good as last year, but still good.

A question of clarification on the USF synergies. You mentioned you expected '06 synergies up 50 million? I guess coming out of the transaction you had talked about a 40 million runrate over the next 12 months on synergies. I guess I thought that the back half of '06 would be a little more back end loaded on synergies. Has anything really changed there, or are am I reading too much into that?

I think you you might be reading a little too much into that. I think this is a little bit closer now to 2006, and we're getting a little bit more specific about the areas and just trying to crisp up that number.

Jordan Alliger with Deutsche Bank.

In terms -- I'm not sure if I caught it -- in terms of the change of operations, some believe that needs some sort of union oriented approvals, or no?

Yes, it does.

Those are lined up basically or --?

We don't anticipate any issues around that. These are changes that Yellow has been through and the union is pretty familiar with them.

Second question. In terms of the Roadway process improvement, the impression is that things have stabilized there with the issues with implementation. I am curious if you could sort of describe or discuss a little bit, when Mike went in there, what is it exactly that led to the stabilization or the other cost types of improvements that recovered a big chunk of the profitability from the earlier preannouncement?

Sure. Mike, do you want to give him some detail?

A couple of different directions. First of all, an approach that took the management or application of labor to the workflow to very close interval and short interval planning type cycle. We literally are talking about staffing through all of our facilities every eight hours, and matching volume and planning volume in comparison to that.

The second part of it is an increased awareness in management of utilization of employees and their fringe rates. Watching very closely the number of hours and the utilization of that labor against the fringe rates structure has made a big difference. The third part of it is a different approach to planning the network and flow of the freight. Very short interval designed to create a new level of velocity through the system. So we have actually had some very positive benefit from a service standpoint. To make sure that the labor is just very, very closely matched with volume flowing through the system in any eight hour increment. That is probably, at the end of it, a little bit more detailed then you might expect, but at the root of that has been most successful effort.

And just to put that into context, we talked about the impact order from the productivity shortfalls at Roadway Express to be somewhere between 12 and 15 million. Mike got in there with his team, and in the last week they were able to modify that to the point where it was only a 10 to $12 billion impact. It is still had an impact on the third quarter, but I think we like the momentum.

Just as a follow-up on that, from a pure operational standpoint, given those three things you just talked about doing, is there a way to set what percentage you are there in terms of it running up to where you need it to run?

There are kind of two pieces to that. The first piece is operating the current network efficiently at Roadway Express. I would say we're making really good progress on that, and probably will be there before the end of the year, which is not too far away now. But then the second piece goes back to this change of operations. And really to further close the gap we need to get the network streamlined so that the velocity goes up and the handling goes down. And that is what will happen in the early part of next year.

Just as a quick aside, the first real chunk of the Freightways synergies hit next year. Presumably some of the things that you're doing with Holland and the expansion really have nothing to do with the synergies, I imagine. I'm just curious if you could quickly highlight again, and you have probably done this already, what is a first nugget you're going to hit away from some of these other operational expansion things?

It is kind of the usual suspects. We've got the opportunity to fold some of the processes that the regional companies have been doing into enterprise services. Things in revenue management, for example, and things in the technology area offer another bucket. And then we've got the procurement leverage. They are pretty much the usual suspects for that first slug at $50 million that will get out next year.

Jack Waldo with Stephens Inc.

I wanted to get my arms around what is going on an apples-to-apples basis. Looking at Yellow regional carriers you talked about tonnage growth on an apples-to-apples basis, what about operating income growth?

I think this is one of the things I mentioned in terms of some of the pro forma analysis I seen that is probably not quite right, I would say that we spent probably somewhere around between 3 and $5 million investing in the Dugan shut down to expand Bestway and Holland. And that was really the primary extent of the shortfall in the regional side.

Just correcting some of these numbers you have seen, what was the number? And then if you back out the investment, which I guess isn't extraordinary, but probably won't occur going forward, what would have been the number?

I think is pretty flat year-over-year. But we can work with you off-line on the numbers to make sure that we are in alignment here.

Is it fair to say going forward on this apples-to-apples basis that you're going to see operating income grow in the fourth quarter of '05?

Yes.

And then with the full Company, and maybe the previous question perceived this answer, but can you tell us on an apples-to-apples basis how much did EBIT grow in the third quarter '05 relative to the third quarter '04?

Not off the top of my head, no.

I'm coming up with somewhere around 13.5 million. Does that sound in the ballpark?

I can't tell you.

My biggest concern, and I think this is what is going forward as well is, if you're going to need synergies, and presumably I guess I should have asked about $20 million in synergies this quarter. I don't understand why there wasn't more growth?

We would be happy to work with you on that. The fact is we made $4.00 last year. We're going to make in excess of 5 this year. And if you put the numbers together for next year, it will start with a 6. A lot of that came from synergy, a lot of that came from better performance, but at the end of the day it is pretty solid earnings growth.

Okay. So synergies aren't -- synergies as you said before are well on plan?

They are pretty much on plan, yes.

And then one comment on your transformation conference. And I'm very much looking forward to it. But if I recall correctly in the first quarter of '03 I think we saw a charge pop in the numbers. Are we going to see that in the first quarter of '06 this year?

You'll probably see the charge, but it will be in the numbers.

Incorporate -- okay, it will be in your guidance?

Yes.

I understand. I appreciate it and I will get with you off-line. Thank you.

Connor MacLaughlin (ph) with JLS Asset Management.

Just a couple of quick questions. Just trying to understand -- basically you guys have decided to roughly kind of make the number be (indiscernible) this year. Is that correct?

Yes, 5.18 to 5.23 -- right.

And we have already said we've got about $1.50 in synergies coming, if I hear you correctly, $1.50 next year, is that fair?

Correct.

So before factoring in any kind of core growth you're talking about -- intuitively, I know you guys will give your (indiscernible) guidance later, but at least 6.70 in earnings next year is kind of the intuitive way to think about this. Is that fair?

I think it will start with a six, and we're going to give you guidance at the end of year.

Roadway, obviously we're looking at Roadway to start getting back to positive volumes in Q1?

Yes.

R. Hatfield with Morgan Keegan.

I just got a couple of quick question. Must my other questions have been answered. But first, and I don't even know if there is an answer to this, and it may not make sense given what you did at the regional companies in the third quarter. But is it -- can you look at the operating ratio in the quarter and say that you saw improvements in it from July to September?

Not with all the investment that we had to make in expanding the Bestway and Holland footprint to absorb the Dugan business. That is the 3 to $5 million I mentioned. If you took that out it would be a different story.

If you had taken out the investment dollars is it feasible that you weren't actually seeing sequential improvement (technical difficulty) moved along?

Yes, I would say flat to maybe up a little.

With that said, secondly, Bill, can you address the bear story that was brought up earlier on your stock and concerns about the earnings leverage. Can you address the issue of how you expect to see the industry from a different advantage point? Let me see if I cam phrase this properly. The fact that so much capacity has come out since the last bottoming of the economy, if in fact that should mitigate any leverage that you would see in your earnings as you move through the next downturn in the cycle?

I think there has been a lot of capacity that has exited the industry. And the other thing that I would just reiterate is our ability to manage our costs on a variable basis. We've got really, really good at that during the last recession. And so there's not as much downside leverage as there used to be. And then finally we've got the synergy opportunities here.

Buck Horne with Raymond James.

I was wondering if you could talk about the dynamics in the market we are seeing with regards to the surge in truckload type freight at Yellow? And maybe if you guys are possibly concerned that this may be a temporary type surge because of fuel prices driving smaller truckers out of the market?

It has definitely been an impact, particularly at Yellow. The truckload industry right now is in a little bit of disarray because of lack of drivers and the changes in the hours of service, which are impacting them pretty dramatically apparently. So we have had an influx of truckload type business coming in to Yellow. Not to the same extent that Roadway, but certainly is there. It doesn't really impact us too much overall. It is a little bit of icing on the cake in terms of some additional revenue and operating income, but the core earnings are still preponderantly driven by the LTL business.

Just wondered if you guys have heard anything from either your lawyers or people in Washington about the status of the House version of the Pension Protection Act? And have you guys looked at any potential impact if that get signed into law?

Yes, we're still monitoring that along with everybody else. The sausage machine in Washington is a very difficult thing to predict. We're hoping that that pension legislation passes, but with everything else going on in Washington right now, we're not sure exactly where that stands.

Jason Seidl with CSFB.

Just a quick one here on Dugan. When you guys took over Dugan from USF, what was the revenue runrate at the company?

250.

Mid 200's.

And if I look at this just kind of quickly on the regional basis, typically New Penn is well below 90 in an OR, and we have seen Reddaway well below 90 on the OR. Can we make assumptions about both Bestway and Holland were sort in the high 90s to sort of get to where you guys are?

We're not going to give specific numbers by company but --.

I can always try, right?

Yes, you can give it a shot.

All right, thanks a lot.

At this time there are no further questions. Are there any closing remarks?

Just thanks for joining us, and we will see you at the end of the year.

Thank you all for joining today at Yellow Roadway Corporation third quarter earnings conference call. You may now disconnect.