Yellow Corp (YELL) 2005 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the YRC Worldwide fourth-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) I will now turn the call over to Phil Gaines, Senior Vice President Investor Relations, Government Relations and Corporate Development.

Thanks, Lee. Good morning and thanks for joining us for the YRC Worldwide fourth-quarter and full-year 2005 earnings call. With us this morning are Bill Zollars, the Chairman, President, and CEO of YRC Worldwide; 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 Securities Litigation Reform Act of 1995. This includes statements regarding the Company's expectations and intentions on the 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 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 our 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.

Thanks, Phil. Welcome to our first earnings call as YRC Worldwide. As you aware, we recently changed the name of our holding company to better convey the breadth and depth of our enterprise. We will continue to invest in our individual brands while expanding our transportation services and logistics capabilities; and we welcome the opportunity this morning to give you a little bit more color on the fourth quarter.

We earned a record $5.28 per share in 2005, which is $1.32 more than 2004. You need to keep in mind that 2005 also includes an $0.18 per share of dilution from our contingent convertibles, which were not included in last year's results and are not a reflection of our operational performance.

Our fourth-quarter earnings of $1.39 per share would have been about $0.13 higher if not for some operational changes recently implemented by the railroads and a onetime workers' comp catch-up at Yellow. I will discuss these a little bit later. But first I would like to briefly recap some highlights in 2005.

Our full-year consolidated revenue of $8.7 billion was a 29% increase over last year. This solid revenue growth was due the May acquisition of USF and organic growth in all of our business units.

2005 operating income of $544 million exceeded 2004 by 187 million or 52%. This is the second year in a row that we have increased our year-over-year operating income by more than $185 million. Our 2005 results reflect the significant scale and the operational leverage in our businesses, the addition of the USF companies, and cost reductions from our recent acquisitions.

Regarding the cost reductions from the Roadway transaction, we exited 2005 as we said we would, with about a $200 million run rate. I will provide some expectations on our 2006 cost reductions later in this call.

Our consolidated operating ratio was 93.8 for the year. That is 90 basis point improvement over last year; and that is our best full-year OR since 1986, which must have been a great year. We keep comparing ourselves to that year. So we are well on our way toward an OR in the low 90s, as we have said in the past, assuming a good economy.

Let me move on now and talk about each of the business units. Yellow Transportation had an exceptional year in 2005 with record-breaking revenue of 3.4 billion, an increase of 7.6% over last year's record results. Yellow generated $248 million of operating income, a year-over-year improvement of $60 million and another record performance.

The Yellow operating ratio of 92.7 was the best full-year OR since that 1986 year, and 140 basis points better than a year ago. For the fourth quarter Yellow posted 60 million in operating income and an OR 93.2.

These are solid fourth-quarter results that would have been even better if it were not for two notable items. The first was a onetime workers' comp catch-up from unfavorable development of prior-year claims of about $4 million or $0.04 a share. Second were the rail charges that reduced fourth-quarter operating income by about $5 million; that is about a nickel a share. Excluding these, Yellow would have posted a 92.2 OR for the quarter. So that is a full percentage point better than the actual results.

Let me talk a little bit about the rail charges and the changes in that part of our business. During the middle of 2005, the railroads, and that is really all of the railroads, changed their business practice of providing us with rail loan trailers for intermodal movement. This meant that we leased and purchased additional trailers from third parties, had to make arrangements to get trailers repositioned, and experienced a decline in productivity over the second half of 2005.

In addition, on-time rail performance continued at well below acceptable levels, which has caused additional inefficiencies in our networks. In the past, we could use rail loan trailers at minimal cost, and the rails would arrange for them to be repositioned.

These changes are being fully phased in by the railroads and by the end of 2006 will be fully implemented. So we will not have any use of rail loan trailers. We are evaluating alternatives for a long-term solution, but do not expect the issue to be resolved in the near future. We are going to discuss our estimates of the impact of those changes from the railroads on our 2006 guidance in a few minutes.

Back to the business levels at Yellow. Tonnage, LTL tonnage per day was up 2.3%, compared to last year's fourth quarter. That is a little better than we expected. LTL yield was up about 4.5% when compared to prior year; and again, we feel the pricing environment is still very firm.

Let me move on now to Roadway Express, who also had a record year in 2005 with revenue of 3.3 billion and an operating income of $210 million. That 210 million is an increase of 53 million in operating income from 2004. Roadway improved its full year OR by 130 basis points and posted a 93.7 for the year.

For the fourth quarter, Roadway reported operating income of 61 million, and an OR 92.9. Similar to Yellow, the Roadway results were impacted by the rail changes. We estimate this reduction in the fourth-quarter operating income of about $4 million. So the rails hit us to the tune of about 9 million in the fourth quarter.

If it were not for this change, in other words if you took the rails impact out, Roadway would have been a 92.4 OR, reflecting similar fourth-quarter results to Yellow. So the only difference really in the performance between Yellow and Roadway in the fourth quarter was the onetime hit to operating income at Yellow as a result of the true-up on workman's comp claims.

Back to the business levels at Roadway, tonnage was down slightly but in line with our expectations and, again, a very healthy yield increase of 5.9% compared to the fourth quarter of a year ago.

Let me just take a moment here to recognize the efforts of Mike Smid and the entire Roadway organization for these solid fourth-quarter results. Most of you may recall we talked about productivity issues on our last call at Roadway Express. The Roadway team was able to make more improvements in the fourth quarter than we expected; and the upcoming 2006 changes in the network will improve efficiencies, speed, and reliability, and further improve our profitability there.

Let me move on now to the Regional companies. Fourth-quarter revenue there was 584 million and an operating income of 34 million. On a comparable basis, we estimate fourth-quarter 2004 operating income would have been slightly above 30 million, so progress at the Regional companies.

Having said that, these are not the results we expect going forward. But you also need to remember that 2005 reflects investments that we made to realign Holland and Bestway due to the closing of Dugan. We believe over all our Regional companies are well positioned to make significant OR improvement in 2006.

Good leading indicators there. Service levels and growth are solid, as reflected by the quarter. Year-over-year LTL tonnage per day increased 8.5% at the Regionals, which I think is pretty competitive with any of our peers, and LTL yield improvements of 5.8%.

Our Regional companies continue to work on density issues in the Bestway network and productivities at Holland. Those are our two biggest challenges going forward. There has also been significant progress on the overlap in the Northeast between Holland and New Penn, and the remaining actions there should be complete by the end of the first quarter.

With new leadership at Holland, Bestway, and New Penn, we expect considerable improvement on these issues during 2006.

Then let me move on to talk a little bit about Meridian IQ, which continued to demonstrate strong growth, with 2005 revenue increasing over 100% from 2004 when including USF Logistics in the current year. But even if you take out USF our year-over-year revenue increased by about 31%, reflecting solid organic growth in our global expansion.

Operating income in Meridian IQ in 2005 was $15 million including USF, and exceeded the partner year by more than $11 million. In the fourth quarter, Meridian IQ reported operating income of 4.2 million, which nearly tripled in last year's fourth quarter. Meridian IQ continues to provide our strategic foundation for a strong global network, including the establishment of our two joint ventures in China.

To summarize 2005, our business units performed well and delivered solid revenue and margin growth. We remain confident in our ability to execute our strategy and capitalize on our substantial operating leverage. I am going to now turn it over to Don, and then I'll come back and talk about the outlook for this year. Don?

Thank you. As Bill mentioned, our adjusted earnings per share for 2005 was $5.28. This excluded $0.16 of charges that we do not consider when evaluating our ongoing performance. These charges related to the shutdown of Dugan, executive severance, property disposals, and an increase in our effective tax rate. Before adjusting for these items, our reported EPS was $5.12 for the year or 37% higher than 2004.

Let me comment briefly on the adjustment to our tax rate. The effective tax rate for 2005 was 39%, compared to our guidance of 38.1%. The primary reason for this increase was a change in our interpretation of the accounting treatment for a benefit related to the Roadway deferred taxes established at the acquisition date. We initially believed this benefit would flow through the income statement; but it ultimately impacted goodwill.

I need to emphasize that we in fact did achieve the benefit. This will not affect our tax rate going forward, and we are comfortable with a 38.1% rate in 2006.

We have stated that since our USF acquisition debt reduction has been a priority for us. In fact, we reduced debt by $75 million since June 30, in addition to completing a $50 million stock repurchase. This is about $25 million more than our debt reduction guidance.

Currently, our debt-to-cap net of cash is at 42%. We expect to reduce debt by another $100 million in 2006 to get our debt-to-cap near our targeted range of the mid 30s. Our 2006 free cash flow should be around $200 million before planned debt reductions. We will continue to evaluate the best use of additional cash, including further debt reduction, additional stock repurchases, and nominal dividends.

Regarding our $50 million stock repurchase, we completed the purchase program during the fourth quarter. (technical difficulty) the open market we purchased [1,640,000] shares at an average price of $46.95.

Our 2005 [no-cap] return on committed capital of about 12% exceeded our benchmark 10% cost of capital as we expected. This is a significant accomplishment given the capital commitment to acquire USF. We expect gross capital expenditures in 2006 to be between 450 and $475 million. This number reflects a full year of CapEx for the USF companies, compared to only about seven months for 2005.

We are currently finalizing our 2005 balance sheet and cash flow for final purchase accounting valuations related to USF. However, we expect gross capital expenditures to be close to our previous guidance of $350 million; and if you included USF for the entire year, it should be around 425 million.

The increase from 425 to 450 million is related primarily to technology investments for our cost-reduction initiatives, and replacement of revenue equipment, including some catch-up at the USF companies.

I will now turn it back to Bill to provide further 2006 guidance.

Thanks, Don. We had an excellent year in 2005 both financially and strategically. Our focus now is on 2006 and delivering another year of record results. Our strategic initiatives will continue, as we further improve our networks and expand our investments in Asia.

Some of our expectations for 2006 include year-over-year growth in real GDP and IPI between 3 and 3.5%. So a good economy again this year. Consolidated operating revenue of about 10 billion. Consolidated operating ratio in the low 93 range, with all of our asset-based companies in the 92 to 93 range as we continue to make progress there.

LTL volume growth for the year at Yellow and Roadway is expected to be in the low single digits and for the Regionals in the mid single digits. Yield growth at all companies should be around the historical average of 2 to 3%.

Full-year 2006 earnings per share will be between $6.15 and $6.30 a share and first-quarter EPS should be in the range of $1.00 to $1.05.

I might just point out here that we are pretty comfortable with the first half of the year estimates on the Street right now. But we do think that the estimates that are out there are too high in the first quarter and too low in the second quarter. A bit of a seasonality problem there. But for the first half of the year, we think they are about right.

Our EPS guidance may seem a little conservative based on our 2005 performance and our continuing cost reductions. I wanted to give you the primary reasons for this.

First, the [picking out] of rail loan trailers at both Yellow and Roadway will have a sizable impact. This cost relates to the additional lease expense, the repositioning of the trailers, and the resulting impact on our productivities. We currently estimate this will increase our cost in 2006 by about $30 million.

This change is unfortunately beyond our control, but it is one example of how our synergies allow us to offset the changes in our business and provide more shareholder value as one organization. As I mentioned earlier, we're still formulating a long-term solution to this change, but do not expect a significant offset in 2006. That is about a $30 million impact.

The second item relates to the changes in the Roadway network and the expansion of the next-day services at Yellow. Combined, we estimate the implementation cost of these changes will be about $10 million. The long-term benefits of these changes obviously is well worth that short-term investment.

Then because of a delay in some of the operational changes at Roadway, a portion of our cost reductions initially expected in 2006 will stretch into 2007. So we now expect about 80 million of the 100 million that we talked about getting out of the Yellow Roadway combination to hit the bottom line in 2006. And the other 20 million will stretch into 2007.

We still expect to get about $50 million of cost reductions related to the USF acquisition. Given the increasing blended nature of these cost reductions into our operations, it is becoming more difficult to segregate these dollars. But we continue to track them to make sure that we are on target there. We think that our results going forward will adequately reflect the success of these initiatives.

Another investment that will impact 2006 is expenses for our China expansion. As we have said, there is a tremendous amount of potential in China, and we will continue to focus on this area of the world.

That will conclude my prepared remarks. We will be happy to answer any questions you have.

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

Nice effort in the quarter. Can you talk a little bit about cash flow next year? I think there is some concern about the CapEx dollars going up. Don, thanks for the explanation of an annualized '05 number. But can you talk a little bit about cash flow generation?

With this increase in CapEx, are you still going to be able to meet those parameters you have set out in terms of debt reduction? Where do you stand now? When do you think you would look to maybe get a little bit more involved in a share repurchase or contemplate dividends? Is that at the next Board meeting, or would you likely do that closer to the back half of the year?

Yes, I think our plan, John, really hasn't changed. We plan to get back into that kind of sweet spot from a balance sheet perspective in the mid 30s by the end of the year. We should have about 200 million plus of free cash flow for the year. As we approach about target we will, as we always do, start looking at the best use of cash.

Things we always look at are reinvesting in the business, dividends, or stock repurchase. Obviously, that depends a little bit on where the stock price is. So I would look at the second half of the year to start to address some of those questions.

Okay, secondly, in terms of the volume numbers, as you go into 2006, at what point do you anticipate that Roadway's volumes begin to turn positive and we start to see growth, top-line, good top-line growth out of that company again? Not only from obviously yield, but from the volumes.

Yes, we would expect for the first quarter we will start to see positive growth year-over-year at Roadway.

Okay. So volume tonnage growth at Roadway in the first quarter?

LTL tonnage growth, right.

Where do you stand in terms of the Bestway and the Holland kind of moving into the former Dugan territory? Where do you stand in terms of Holland being pulled out the Northeast and ceding that over to New Penn?

Let me turn that one over to Jim Staley. He can give you an update on that. Jim, do you want to talk about that?

Yes, the density issue at Bestway is real. We do need additional business into that five-state area around Texas that we expanded into with the Dugan closure. But we have a lot of sales activity to address that.

In regards to Holland in the Northeast, we do have a pending change of operations to close their New York State facilities and realign their freight interchange points into the Northeast. As I have told you previously, we have established interline relationships between our Western carriers, Bestway and Reddaway, and New Penn in the East, and eliminated some unnecessary handling and delay in the Holland system. So I think we have got all the right activities in place to address Holland's situation in the Northeast.

Okay, and New Penn is ready to assume more of that market share in the Northeast?

I'm sorry.

Yes, John.

Very good. All right. Then lastly, in terms of yield performance, both in the quarter and going into 2006, that has obviously been a little bit of a mixed bag. I know you're getting fuel, and that is probably a pretty good way to look at it.

But just on pure rate improvement, could you give us a little bit of feel for what Q4 will look like? Just make some comments in terms of what you see as the competitive landscape? We're getting mixed results. Some are saying that things look a little rational; some are talking to things that have heated up on the competitive side; and some are using prices as the lever.

I think an overall comment would be that we still see the pricing environment as firm and the pricing environment as good. We do believe, because of the fact that the fuel surcharge is now on the table in every pricing discussion, that the numbers excluding fuel surcharge are probably not meaningful.

But I will tell you that, excluding fuel surcharge, we still have very positive yields. We really think that is a reflection of continuing discipline in the marketplace.

All right, very good. Again, nice year and thanks for your time.

Ed Wolfe, Bear Stearns.

Just a follow-up to John's last question. Can you give us what the revenue per hundredweight net of fuel were for Yellow and Roadway?

Yes, I think if you took an average of the companies we are between 1 and 2% positive, excluding fuel surcharge.

Are you going to report those numbers at all, or not?

No. The problem, Ed, is we just don't think they are meaningful. So we will talk about them if we have to; and it looks like we have to. But frankly what is more important in the marketplace today is the total yield, because it's more reflective of what is really going on out there.

But I think it is fair to say that we still have that 1 to 2% positive even if you exclude fuel surcharge.

There is no difference between Roadway and Yellow?

There is a little bit of difference between all the companies; but that is kind of an average.

Even on the Regional side? Because we had Conway, which has historically been USF's closest competitor, [the] yields net of fuel that were down 1.6.

Solidly positive at the Regionals.

Okay. You talked about the rail charges and the workers' comp to true up in fourth quarter. I am guessing the workers' comp aren't ongoing issues. But the rail charges are going to continue going forward; is that fair to say?

Yes, that is why we gave you kind of the placeholder of 30 million of incremental costs for 2006. Because in the short term, those costs are going to be there. Now longer term we need to find a way to make those neutral. But in the short term they will be there.

Isn't the way that the railroads do business going to change forever? I mean this isn't going back the other way.

No, that is right. We just have to figure out a different approach to make sure we can eliminate as much of that incremental cost as possible.

Okay. Can you talk about the trends throughout the quarter and what you're seeing in January at the different groups?

January started out pretty well and about as we expected it to, both on the volume side and on the rate side.

Can you take us through the quarter also? If we look at kind of October, November, December, January in terms of tonnage trends.

It's a little bit of a mixed bag in terms of the trends among the companies. But I can tell you that in the fourth quarter the volume was a little bit better than we expected. The first month has started out okay and maybe a little better than we expected on the volume side.

But of course January is a very difficult month to extrapolate because of volumes are traditionally pretty low from a seasonal standpoint. But we are feeling good about the volumes, and as I said the pricing seems firm. We would expect that the economy from what we have seen will continue to be solid.

Okay. Don, can you give us what the cash flow from operations and CapEx in the quarter were?

We're still, as we indicated in the call here, that we're still obviously finalizing our balance sheet and cash flow. We do expect to be putting an 8-K out here within two weeks that will have all that information in it.

Is that fair to say, based on the fact that debt ratio has come down from the third quarter, that you did generate cash in the quarter, though, in fourth quarter?

Absolutely, and remember we talked about we paid down $75 million of debt in the second half, which was better than what we had told you we would do.

And we bought back $50 million worth of stock as well.

Your guidance for interest expense for '06 is 20 million a quarter, or it's 80 million for the year. In fourth quarter it was 20.6. So you said in your comments, Don, that you were going to pay down 100 million in debt. Should we infer that that is back-ended, the paydown of debt?

You can infer that. That is correct. And also remember there is probably an increasing interest rate environment, and we have a fair amount of our debt that is floating.

Fair enough. Thanks, guys, for the time. I appreciate it.

Jason Seidl with Credit Suisse.

Let me get back to the comments, Bill, you made about the railroads. You obviously have increasing costs to ship on the railroads, increasing rates, and declining service levels. At any point is there a solution where you don't ship on the railroads and you try to move that long-haul stuff yourself?

It is certainly one of the options we have got to look at, Jason, yes.

Fair enough. In the CapEx number you provided, is any of that related to China and putting assets on the ground there? Or is that out longer term?

That is primarily revenue equipment; and there is not much in there for China.

Okay, great. If I look at the Regional group, Jim, I think you made the mention that there is a density problem down there at Bestway in the new areas it went to in Dugan. Can we assume that some of the other regional competitors in that area were aggressive in winning some of that Dugan freight from Bestway?

I'm sure some of it did migrate to them, no question about that. So we changed the Bestway footprint. We didn't have a lot of time to give advance notice to our customers on that. So as usual, when a carrier closes there is a scramble for the freight.

But we're confident that we can build that back up. We retained about what we thought we would overall, but there is a little density issue around the Texas market.

We did encourage some of that freight to migrate to other carriers as well, because the Dugan pricing on some of the business was just too low to be profitable.

Okay. And Jim, in any of the regional areas, any of the carriers, is there any particular area that is doing better than another? Are there any particular areas that are seeing more price pressures than any other ones?

No, I think the market is pretty consistent through the country. We don't see anything different between the areas.

Okay. For whatever it is worth, Bill, I would recommend you guys put back in the yields excluding fuel surcharge; otherwise you will probably end up answering all our questions every single call.

I hear you, Jason.

Thanks, guys.

Jordan Alliger with Deutsche Bank.

Can you maybe just walk through the two sort of process improvement focuses on Roadway? I guess both where you are from sort of the Roadway stand-alone stuff; and then sort of where you are in the synergy process. What should we look for? What are the steps we're looking for at Roadway over the course of this year?

Mike, you want to do that?

Yes, I can. The efforts, really beginning in September or during the fall, have taken on a couple of different levels. The first piece was to take a real close look at the utilization of labor in our business. To take a look at the number of people involved in moving freight.

We initiated some real short interval work designed to not only better match the labor with the volume entering and exiting the system; but also to allow us to do a little bit better planning as we look forward.

Two aspects of it. One, the right amount of labor and the right amount of effort given volume entering and exiting the system. The second part is just this real short interval effort to look forward. A lot of work done on the labor mix, the balance of trend rates, labor hours, labor dollars.

Then the speed through the network, and with the speed comes reduced need for capacity, better use of the capacity, and capital in the business.

Coupled with that, some real significant efforts on the quality of what we do, some of our day-to-day expenses, and making sure that the capacity in our business at any given time matches with the actual volume.

The second stages of that as you look forward are to begin to make some more substantial changes to the network itself. We have a change of operations planned for the first quarter that begins to reduce the number of times that we touch freight in our system. More direct routing, more direct loading, fewer distribution locations in our business. And to leverage that from two directions.

We are in a nice position in that most of these changes will allow us to provide a better market-facing service and at the same time more efficiency.

To correlate that to the synergy work or the last part of the question, between these companies, as we looked at some of the initial opportunities several years ago, there is everything from technology tools to people to philosophies that were opportunities to compare between the companies, utilize them back and forth.

A good number of our network changes leverage what we have learned from each other as carriers; and a good number of the technology tools that we are currently using to drive and operate our network relate to the synergy work as well.

Those changes will continue. The significant changes that begin to hardcode the work that we have done in the first few quarters will occur in March; and impacts begin to improve as we move through April. Then as we progressed through the remainder of the year, additional changes and constant effort to upgrade and change the speed and efficiency of our network.

Great, thank you very much for that.

Brannon Cook with JPMorgan.

I had a question, if you could provide a bit more detail on your capital spending plans this year? You know 450 to 475, it sounds like it is a lot of technology and rolling stock. How are you feeling about your network in terms of number of doors and locations? Do you feel like you need any expansions there in terms of buildings, plants, etc.?

Let me start and then Don can give you some numbers. We're going to making some changes at both Yellow and Roadway. Roadway probably to support a more efficient network, and we will be doing that later in the first quarter, probably at the end of the first quarter. At Yellow it is all about expanding the next-day service offering there.

So those will be the changes that we will make of any major significant to the networks. Then Don can give you some specifics on the numbers.

What you want to assume is about 65% of our CapEx will in fact go to equipment for moving freight over the road and relocating stuff within the yard. You are only looking at about 15% for land and structures, and then 20% for technologies.

Okay, thank you. Looking out through this year, the Regional companies are still -- they are at an OR not quite where you want it to be longer term. What kinds of things, in addition to as you iron out kind of the situation in the Northeast between Holland and New Penn, look to increase the density at Bestway, what are the other key things you feel like you need to do on the Regional businesses to get the OR where you feel it should be?

Let me start this, and then Jim will have more to say. But I think that we need to kind of bound the issues here. We have got two companies that are operating very well, New Penn and Reddaway, so we have got two companies where there is still work to do.

But even at those companies, I think the good news is that we have got solid growth and we have got good yields. So these are blocking and tackling issues, building density at Bestway and improving productivity at Holland is probably the best way to describe what we need to get done to get the operating ratio down in total. But, Jim, you might want to add to that.

The first thing I would say is that the service improvement at all of the companies has been terrific. We have outstanding service performance at each of those four companies right now.

The opportunity we have that will add the most to the bottom line is productivity improvement in the Holland network. We have revamped management, field management structure, at Holland. We have close attention being paid to daily productivity metrics. I think that we are seeing and will continue to see significant productivity improvement in that company, and that will drive bottom-line improvement for them.

Okay, thanks for the time.

Art Hatfield with Morgan Keegan.

Most of my questions have been answered. But Bill, if I can ask you a macro question, you probably saw that GDP for fourth quarter came in about 1% this morning. Can you talk about what you saw in the fourth quarter, if anything, that leads you to believe that that was an anomaly? And what gives you confidence about the growth outlook for '06?

First thing I would say is they haven't adjusted it three times yet, so I think (indiscernible) watch this space. Because they have a tendency to change the number as they get more data in.

I don't know which sector is driving that apparent slowdown. We really haven't seen that. Both in retail and manufacturing, volumes in the fourth quarter were good; and they have started out on the same trend in the first quarter.

So it's a little bit of a conundrum to us to look at some of this data and make sense out of it, comparing it to what we're looking at internally. But I would just reemphasize that that number will probably change.

Right. Thanks.

Chad Bruso with Morgan Stanley.

Most of my questions have been asked too, but just one quick one. I was wondering if you could elaborate on your pricing comments as it relates to fuel. Oil is a volatile commodity here, and it sounds like you're kind of negotiating that in closer conjunction with the base rates than you have in the past.

What should we expect here if fuel were to go down quite a bit, go up quite a bit? If it were to go down could we see a few quarters of pretty weak pricing while you go back to customers and maybe change the mix and your negotiations a little bit? How should we think about that?

I would think that kind of the headline comment there would be, as oil prices fall we will have the ability to get better base rate increases. We have tried to make sure that we focus our attention on base rate increases, as opposed to doing a lot with the fuel surcharge.

But the fact is that the fuel surcharge has been high enough for long enough that it's becoming a very visible part of the cost of transportation to customers; and as a result of that has become a central discussion point in our negotiations.

But back to the headline comment, we would expect as fuel prices fall that we will be able to get better base rate increases. Also, the lower fuel prices should impact the economy in a positive way, which would also be good.

If you are correct on that, how long would that take you? If you have generally half your business on annual contracts, should we expect it to take a year? Or can you go back to the customer in a shorter amount of time?

The real bottom-line answer to that is our contracts come up randomly throughout the year, so we're constantly negotiating new contracts. So we have got kind of a real-time impact of fuel cost.

The other thing I would say is that if you have a very significant change in any of the business profiles with any of your customers you can always go back and open the contract negotiations again.

Great, thanks for the time.

[Elliott Valler] with Vardon Capital Management.

Very good quarter. Got two questions for you. Obviously you guys have made some great headway in some of the initiatives at Yellow, Roadway, and also the Regionals.

I am just trying to get a sense if you could give us beginning, middle, end in terms of where you are in those processes for each one of the three divisions? Are you in the beginning of the turnaround there? Middle, end? Just kind of a sense of where we are.

Sure. At the risk of upsetting Mike and Jim, let me take a whack at that first and then we will have them tell me where I am wrong. But I would say at Roadway, we are still are still kind of early-middle.

I say that because we have made a lot of strides at Roadway in the last several months, and even before that. But until we optimize the network and take out some of the extra handling that is in the network at Roadway we're not going to be able to fully develop efficiencies at Roadway. So I would say early-middle.

For the Regionals, I would say early. I say that because the first thing you need to do in any company is improve your service. Jim and his team have done an excellent job of getting that done. Now we have got some issues that I think we have talked pretty specifically about; but I would say that we are still early in the things we need to get done at the Regionals. But Mike and Jim, you probably have your own perspective there.

Bill, I think from a Roadway standpoint, the group and team at Roadway has done a nice job making a number of adjustments over the course of the last several months. They have been through a series of synergies. But I would say the assessment is right, early-middle.

Some of our more substantial opportunities from a network standpoint and then the great opportunity to leverage it toward the market from a value standpoint, we have got a lot of headroom.

Jim?

I would say at the Regional companies, they're certainly mature as operating companies. These are old, well-known brands. But we are very early in the synergy process, and that is where we see great opportunities.

Very good. Secondly, if you could just -- I guess the Street or the investment community [had] a wide disparity in terms of the opportunity at Meridian IQ, in terms of revenue or EBIT contribution in '06 and going forward. I don't know if you could give us any clarification on that or what your, I guess, hard targets or estimates are for '06.

Again, let me start and then Jim Ritchie can give you his perspective. To a certain extent, Meridian IQ is the hardest to predict in terms of a growth rate, because we have got a target-rich environment; we've got a lot of things going on there. Not the least of which is an opportunity in China that is difficult to size, particularly in the short term.

So we're going to continue to see very fast growth at Meridian IQ. The question is, how fast? But I think we're going to be kind of doing the run and shoot offense, if you will, with Meridian IQ, because things are developing quickly there.

We have built some really significant capabilities and we do have an opportunity in China that we believe is very significant for our long-term growth. So Jim, you want to add to that?

The only thing that I would add is, in concurrence with what Bill said, as we grow and continue to grow quickly there is a cost to that growth, from implementations that you have to invest in before the revenue comes on board, as well as investments in infrastructure and overseas operations.

We are continuing to focus on being a growth organization. As that growth starts to taper, obviously you'll start to streamline those processes and you will see a greater operating ratio. But right now, the focus is on growth and making sure that our customer service levels are high.

Very good. Is there any target OR you guys have in mind?

We have always thought that on a settle-down basis, we ought to be able to approach 10% operating margin. But settle-down is a long way from where we are. So (multiple speakers) that helps or not, but is how we think about it.

Do you have a target for 2006 to get it from one level to another or anything like that?

I think it's going to be a trade-off between margin and revenue growth. As Jim said it depends on how much investment we need to make to get the growth. So it is something that I think rather than try and pick a set target, we're going to continue to look at our opportunities there. But it will be solidly profitable and we will improve year-over-year on both the top line and bottom line.

Super. Keep up the great work. Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Your final question does come from Jack Waldo with Stephens, Inc.

Bill, what type of yield growth should we expect in FY '06? Did I hear you quickly that we should model 2 to 3%?

Yes, that is historically what we have taken out of the yield equation every year, if you take out what is announced, which in our industry is not as important as what you keep. But what you keep has been historically in that 2 to 3% neighborhood; and we would think this year would be pretty typical of that.

Does this include fuel surcharge as well?

Yes. It is kind after discounting in the industry, that is usually the result. We would expect this year to be fairly typical in that regard. Now year-over-year, fuel surcharge is pretty flat. At least our perspective is it's going to be pretty flat year-over-year.

And what was yours -- what are we comping this against in '05 at Yellow and Roadway? I thought growth in Yellow and Roadway was 5 or 6%. Is that right?

Yes, in gross terms it is right. Yes. But you know, that was with a fuel surcharge in 2004 that was a lower than the one in 2005. What we're saying is, if you assume fuel surcharge to be about flat in 2006, which is our current kind of perspective, then we will get that 2 to 3% on top of that.

What about tonnage growth at Yellow and Roadway? Should it be in line with GDP discount or premium?

I think I said that we're looking for single digit growth at the two big companies, and mid single digit growth at the Regionals.

So at the big companies is GDP a good proxy?

Yes, GDP plus a little bit, probably.

Okay. Then how did REX and [YTS's] headcount change in fourth quarter '05 as it did?

Well, I think at Yellow it's probably fairly flat. I think the big change at Roadway was going to what Mike has described here, in terms of the short interval scheduling and more efficient handling of the freight. So there was a fairly significant reduction in the front-line workforce at Roadway, as we got much more efficient there. But at Yellow probably about the same.

Do you have any numbers or direction, 5%, 10%?

At Yellow as I said flat; at Roadway I don't know what the percentage reduction in the front-line was. But it was maybe 5%.

5 or less.

Yes.

Okay, then two more questions here. One, on the USF acquisition, do you still expect that to be accretive in the first year? And by how much?

Yes, we still expect it to be accretive in the first-year.

Okay, and is it running accretive right now?

It was about $0.02 to $0.03 dilutive in the fourth quarter.

Okay, then the last question. You used to provide growth rates for the [exec] express service. I think we have got so many moving parts now it kind of gets bumped to the side. Could you tell me the growth rates in fourth-quarter '05 and FY '05?

We're still growing double-digit at both companies. Both Yellow and Roadway.

Okay, okay. Appreciate it. Thank you. Sorry, one more question. What is your transformation conference going to cost in the first quarter?

About $0.04. About $4 million.

Okay, thank you.

Back to management for closing remarks.

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

Ladies and gentlemen, thank you for participating. This does conclude today's presentation. You may now disconnect.