Yellow Corp (YELL) 2006 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the YRC Worldwide first-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. Please go ahead, sir.

Good morning and thanks for joining us for the YRC Worldwide first-quarter 2006 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; 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 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 disposal 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. Good morning. Despite good year-over-year revenue growth in all areas of our Company, as you know the quarter did not come in where we had planned. Given the first quarter, we have taken aggressive steps to improve our financial performance going forward. We continue to see a healthy economy and expect it to remain solid for the remainder of 2006.

Now let me briefly cover some first-quarter results, since you have the details in the earnings release. Our first-quarter earnings per share of $0.72 was higher than our revised guidance of $0.65 to $0.70 due to a strong end of the quarter. Consolidated operating revenue was $2.4 billion, a year-over-year increase of 41%.

Operating income was $89 million, and our consolidated operating ratio was 96.3. Typically, the operating ratio is highest in the first quarter, as you know, though we would have expected it to be closer to a 95 OR in this environment.

For the asset-based companies our LTL tonnage results were 1% to 2% below our initial expectations for the quarter, largely as a result of inventory adjustments by several of our retail customers. The bulk of this volume shortfall occurred in February. January and March were much more in line with our original expectation.

While the pricing environment is slightly more competitive than it has been for a couple of years, it is still disciplined overall.

Now let me give you some revenue highlights from our operating units. Yellow Transportation had record first-quarter revenue $841 million, which was up 6% from last year. This was driven by a 2.8% increase in LTL tonnage and a 4.6% increase in LTL yield adjusted for business mix.

Revenue at Roadway was a record $805 million, up 5% over first-quarter 2005. LTL tonnage was consistent with last year, and LTL yield was up 5.2% when adjusted for mix.

First-quarter revenue of our regional companies was $592 million, with every company reporting higher revenue than last year. On a comparable basis, revenue was up 12% with LTL tonnage up 4.6% and yield up a very strong 7.3%.

Meridian IQ continued to increase its scale with $140 million of revenue in the first quarter, more than double 2005.

Let me move to operating income results now. Roadway had another solid quarter. Operating income of $38 million was slightly higher than last year, and the operating ratio of 95.3 was consistent with last year. In addition to keeping costs in line with business levels, Roadway implemented a significant change of operations in March without missing a beat. The changes to the Roadway network will improve efficiency, speed, and reliability going forward. Mike Smid and his team have some great momentum going at Roadway.

The regional companies also showed good momentum with first-quarter operating income of $21 million. If you put that on a comparable basis with the first quarter of 2005, the operating income last year would have been about $19 million. So good progress on the operating income side, and the regionals also had good tonnage growth and, as I have already mentioned, strong yield improvement. The synergy activities in the regionals are on schedule.

The overlap situation in the Northeast is largely resolved and productivities at Holland are improving. Bestway is still working through density issues in the former Dugan territory, but has seen strong revenue and yield growth in this new market. As we continue to move past some of the transitional issues associated with the USF acquisition, there are now fewer moving parts within the regional companies, and the team is focused on the business at hand.

Meridian IQ had solid first-quarter operating income of $2.5 million and continues to demonstrate consistent profitability and increase its scale while building a strong global network.

After 14 consecutive quarters of steadily improving results, Yellow Transportation had an uncommon earnings shortfall in the first quarter. Operating income of $31 million was $15 million below last year's record performance, and the operating ratio fell off accordingly. In addition to the lower volumes mentioned earlier, the major variances to our expectations were higher than planned rail-related costs, slightly lower productivity levels, and higher workman's comp cost. James Welch and the Yellow team are making cost and other business adjustments to improve results, and we fully expect better financial performance from them going forward.

I will now turn over the call to Don for further comments.

Thanks, Bill. As Bill mentioned, our adjusted earnings per share for the first quarter was $0.72. This excluded a penny of losses on property disposals that we do not consider when evaluating our ongoing performance.

There are really five primary messages that are important from a financial perspective about the first quarter. First, we are meeting our cash flow targets and will pay down $100 million of debt this year.

Second, we also expect to generate sufficient free cash to buy back $100 million of stock. These stock repurchases will be made in the open market on an opportunistic basis. Let me be clear on the stock buyback. It is contingent on paying down $100 million of debt and our free cash flow. As you all know, seasonally our cash generation occurs in the second half of the year. Consequently, the stock buyback in the second quarter could be small.

Three, our gross capital expenditures of $118 million in the first quarter was essentially on plan. We now expect full-year 2006 gross CapEx to be in the range of 425 to $450 million, slightly lower than the 450 to $475 million guidance that we provided in January. We also expect disposals of property to be in the $35 million to $45 million range, resulting in net CapEx of between 380 and $415 million.

Fourth point, if you look at the cash flow from operations, you'll notice that we generated only $700,000 this year versus $31.2 million last year. Now, we do know that all the information for you to try to analyze cash flow is not readily available in the data that you have, so what we would like to do is give you a summary bridge.

Net income and depreciation for the quarter is up $20 million versus last year. That is a source of cash. Other working capital is up $70 million, which is a use of cash, for a net usage of about $50 million. In the first quarter, we paid $55 million of tax that we normally would have paid later in the year. We took this option -- we took this action to preserve some options that we have with the IRS. Net-net or apples-to-apples, the operating cash flow for the first quarter was actually reasonable and a little bit stronger than one might have expected.

The final message is that, and this is very important, we expect our NOPAT return on committed capital to be greater than our cost of capital of around 10%. This will be our fourth straight year of delivering on this key objective. I will now turn it back to Bill to wrap up.

Thanks, Don. Although the first-quarter results did not meet our expectations, we have made the adjustments necessary to quickly get back on track. The economy still looks good; our brands remain strong; and our synergy programs are going as planned.

We expect second-quarter earnings per share to be in the range of $1.45 to $1.50; and for the full year we expect earnings per share between $5.65 and $5.85.

The first quarter speaks for itself; the second quarter will have a little recovery in it; and the second half of the year should be consistent with our original expectations.

To put this in perspective, this would result in a third straight record year of EPS performance even though our shares have more than doubled during the same time frame. That will conclude my prepared remarks, and we will be happy to take some questions.

(OPERATOR INSTRUCTIONS) Jordan Alliger of Deutsche Bank.

Can you just give some additional clarity or sense as to what gives you confidence that in the second half of 2006 the growth trajectory will be sort of back to the level you guys had talked about at the end of 2005? Is it -- ? Anyway, I will just leave it at that.

Sure. Let me start with the economy. We think the economy is going to continue to be strong, and that is obviously very important for our business. Then you go to the kind of more Company-specific things. I think that even though we had a lot of things go wrong in the first quarter, we feel that we have got the answers to those issues, and that gives us some confidence going forward.

James can talk to you a little bit about what happened in Yellow Transportation in the first quarter. I think that will give you some color and give you some feedback on why we feel more confident. So James, you want to talk about what happened there?

Sure. The first quarter was absolutely a strange quarter for Yellow. We started out the year very strong. In January we had positive shipment count growth of about 4% in January, and rolled into February thinking that that trend would continue.

Obviously the first part of each month is a little bit slow; that is very normal. But we did not see volume pick up during the second week and on into the remainder of February. We absolutely could not jerk our cost up quick enough. But then we rebounded very strongly in March, exceeded our plan, made nice operating income, had a good operating ratio.

One of the things that we think has hurt us somewhat in the first quarter is our mix of freight is a little bit out of whack, and we are working to adjust that. You may remember, we lost a pretty significant customer last year. We replaced that probably with some business that might not be fitting our needs the way we need it to right now.

So we're looking to adjust some of that business, and we think that we can get that accomplished relatively quick. It will take us a little while. But that is certainly our plan for the second quarter and the remainder of the year, is to get our mix back where we need it.

Jordan, I would just add to that that we think the inventory adjustment by the retail customers that impacted us pretty significantly in February, primarily, they have gone back to a more normal shipping pattern.

The other thing I would say is that the other businesses, Roadway, the regional companies, and Meridian, all have really good trajectory. So if Yellow can get back on track, which we expect them to fully do in the second quarter, then we have got every confidence that we will be within the range that we have guided.

Just a follow-up. On the regional companies' synergies, can you talk to sort of what you guys are doing now at US Freightways? Where does that stand? You are still looking for I think it was the $50 million a year type of number out of that business unit?

Right. Jim, do you want to take that?

Yes, the early activity has been on successfully implementing new interline relationships within the family, and that has gone very well and produced nice revenue retention within the family.

Within our budget, we did not look for significant synergy contributions in the first quarter. That activity picks up through the balance of the year, primarily in the areas of revenue management and risk management activities. Those will affect all of the regional companies through the balance of the year.

Thank you.

Jason Seidl of Credit Suisse.

If we could turn to Yellow Transportation a bit, and I apologize if this was mentioned. I jumped off another call. Could you break down sort of the shortfall in operating income for us and what sort of buckets? Because you did have pretty good revenue. I knew there were some cost things going on, including the transformation conference. But I just want to get a feel for the buckets.

Sure, let me try. James did give a little bit of color here a couple minutes ago. But about half of our shortfall came from volume, and that you can trace back to the inventory adjustment that has been talked about by lots of different people, primarily from the big box retailers.

Then we had a little bit softer than we would have expected yield. I think that is kind of what happens in this industry; when volumes get soft, people reach for the pricing lever. I think that happened for a short period of time there early in the year. So another 25% of it was related to a little softer than expected yield, which has come back.

Then finally was kind of a number of small things in the cost bucket. There was nothing very big in there. We had a little bit more rail cost than we had expected in the first quarter. We had a little bit less synergy at Yellow, maybe 1 to $2 million, than we were expecting in the first quarter.

But there was really nothing beyond those few items that was really major. Our productivities were off by maybe 1%, which generated another couple of million. So it was a bunch of smaller numbers that added up to that 25%.

Right. It's probably just me being ignorant here, I guess I don't understand the volume comment, though. Because your volumes were okay at Yellow transport, but yet, like I say, the operating profits were down. Is it just because you saw such a swing in February that you sort of were caught a little bit shorthanded with costs?

Yes, as James said a little earlier -- you may have missed it, Jason -- but we started off like gangbusters in January. And we got into February and it started very soft, and we just didn't react quickly enough to those significantly lower volumes in February. That is what got our costs a little bit out of whack.

We then recovered very nicely in March, hit the plan at Yellow in March, and finished the quarter pretty strongly. So that is kind of what happened in the first quarter.

So I am assuming in your guidance you are looking for up operating profits for Yellow Transportation, without getting specific?

Yes, we expect Yellow to improve in the second quarter and really be back to fully on track by the middle of the year.

Okay. If we could just turn our attention to the regional group, I had heard you make some mention that things are improving, you think you are back on track. But obviously a 96.4 OR is not where you want to be in a regional network.

Can you talk about where the weakness is? I am assuming a lot of it is still at Bestway. Could you tell us where Holland was in the quarter? Were they back on track, or were they just steadily improving and you feel good at the end of the quarter?

Sure, let me ask Jim to give you some more color on the regionals.

Yes, Holland did make significant improvement in the first quarter versus '05. As we look at their activity going into the second quarter, we have got excellent operating statistics there and very good service performance. So look for a very strong second quarter from Holland.

New Penn and Reddaway continue to perform very well, as does Glen Moore, the truckload carrier. Bestway does occupy our attention; making progress, but they still need to improve density in the expansion area that they inherited around Texas from Dugan.

They have done a good job of addressing some of the pricing issues there, but they still need to improve that book of business there on the eastern side of their footprint. So a lot of attention at Bestway, but see significant improvement sequentially, operating ratio-wise through the quarter, and very optimistic there for the second quarter as well.

Okay; thank you, gentlemen.

Ed Wolfe of Bear Stearns.

Don, just a clarification. You said that the share repurchase is contingent on paying down $100 million in debt. Is that actually physically having the debt paid down, or is it having the confidence that the cash flow is there to do that?

Because you're $100 million in the hole after one quarter. Does that mean you have to have a $200 million swing from here, pay down the debt, and then you start to buy back the stock? How should we think about that?

The way you think about it is your latter point. It's a combination of confidence and really the cash generation that we will make during the second, third, and fourth quarters. But we would expect to in fact be buying back stock as we go forward here.

My only point to you was that in the second quarter there probably will not be as much as it would be in the latter half of the year.

Okay. So again, it is not actually having physically paid down the debt, but just getting more confidence, more cash balance, that kind of thing.

That's correct.

Okay. Bill, could you give further guidance? Historically you have given a little bit more detail behind your earnings range, in terms of some of your tonnage and yield expectations for the different groups.

Yes, I think that we would still expect for the remainder of the year, particularly the second half of the year, to be back in the range that we expected at the beginning of the year. Which is a low single digit growth in tonnage at the two big companies, and mid single digit growth at the regionals. We still think that that is about where we will be.

That is tonnage?

Yes.

What do you see for yields?

Well, we think the yield is going to be pretty close to what it's been historically. We did go through a bit of a soft patch there. We are continuing to see the fuel surcharge pop into the discussion on all of our contract renewals. So the ability to separate those two has become very difficult. But we think overall, the yield is going to be about what it was a year ago.

Just maybe a question of positioning. After -- and I don't mean this with any disrespect, just I want to think what is going through your head -- two out of the last three quarters now there have been pre-reports, and (technical difficulty) been a little bit weak recently after a big run.

Why give such strong guidance above consensus when you didn't really need to do it? What has given you so much confidence after the last couple of quarters to do that as you go forward into this quarter? Is it that in March and April things have gotten that much better that you really feel like part of this is in the bank?

I guess we are not smart enough to be that clever, Ed. What we try and do is give down the middle of the road, kind of middle of the fairway guidance; and that is what we have done.

We think that it is going to probably to take a little bit longer for Yellow to fully recover, and that will happen over the balance of the quarter. But really with a good economy and with the trajectory we have in the other businesses, there is really no reason why we cannot perform at the level that we have indicated.

We have still got really good synergy opportunities here that are going to manifest themselves at the regional companies as we go forward. The rest of the companies I think we have talked about the trajectory. So we are pretty confident that we will hit our guidance in the second quarter; and if the economy holds up, we will hit our guidance for the year.

But there is no major change that you saw in maybe some of your competitors' pricing or your own tonnage in April so far? Anything different?

No. You know, this business is -- it doesn't take much to lose some fairly substantial momentum if you have the kinds of issues that we had in the first quarter. So that is something that you live with in the business. But that was, I think, primarily self-inflicted. We don't really see anything out there that causes us a lot of heartburn.

I will say that we went through last year with some ups and downs, but ended up basically where we said we would at the end of the year. We hit the guidance that we gave at the beginning of the year.

And we have, as I said before, delivered two record years in a row. We think this will be another record year. I think we have got about as much confidence around these forecasts as we had last year. So as long as the economy holds up, we feel pretty good.

Thank you very much for the time.

John Barnes of BB&T Capital Markets.

Could you talk about pricing in the sector in general? You know, you made the comment when you preannounced, you felt like things had been a little bit more competitive. You made a similar comment, I guess, just a moment ago. You know, about how the industry reverts to price when volumes are a little sluggish.

Do you feel like anybody has been pricing specifically against you? You hear people talk about it. At our conference, for example, people were talking about the opportunity to take advantage of marketplace disruptions. Is there anybody you feel has been specifically targeting you and your customer base?

You know, it is always very specific to a customer and to a geography, depending on what competitors are trying to accomplish. But we don't really have anybody that we think is specifically targeting us across the board.

I will say that the yield we ended up with in the first quarter, I should say, of 5.2% at Roadway, 4.6% at Yellow, and 7.3% at the regionals is pretty good yield. So our view of the yield part of the equation is that we have got a disciplined market out there, and we continue to think that that is the way it will stay.

Okay. Could you talk a little bit about this reduction in CapEx? You know, could you give a little color on where this $25 million revision came from? I think you have talked about synergies and that type of thing on the CapEx side; but could you get a little bit more specific as to where you pulled that out of?

More importantly, I just want to make sure that you are not doing this as a means of kind of communicating that, hey, we don't think things are really going to accelerate over kind of this low single digit tonnage; and therefore we just don't need it; or we are under some pressure on the tonnage side. I want to make sure I understand the message you're communicating.

Sure. No, it is really more of a synergy impact. When we put the capital budgets together for this year, we had only owned the USF companies for a few months. So my feeling I think I mentioned to you and to others early on was that we had some opportunity on the capital side, as we got closer to looking at the opportunity for synergy there.

And in fact, that is what is happened. It has allowed us to reduce our capital budget by about $25 million.

Okay, all right. Then in terms of the regional business, especially at Bestway, Jim, I'm being 50,000 foot here, but walk me through what we have got to do to see a significant improvement in density. I mean, is it a central freight failure? Is it a -- ?

I don't know, I'm trying to get an idea of is there going to be -- does there need to be some silver bullet in order to get the density repaired at Bestway? Or is this going to just kind of bleed in over time?

I don't think there is a silver bullet there, John. We did have a significant lapse in performance at Bestway over the past couple of years. We have gotten that back on track. That regains customers little by little.

There is a fair amount of business that moves between the regional companies. That was not being sold very aggressively on the service side, just because of lack of confidence in the performance there. So as people see the improving metrics there at Bestway -- I say people, that is our sales force and our employees -- they will be more active selling Bestway services in the Texas area.

It is not going to be slow going, but it will be good steady improvement, I think, in the density there and growing their overall business, not just in the Texas area, but within Texas, within California, and between those two major markets.

Just to add to that, we are seeing good top-line growth there and good yield improvement as well. So we are making progress there. We also, as I think you know, have a new leadership team in place at Bestway. So all of that is starting to take hold.

Okay. Then lastly, Bill, you're on record as saying that there were some issues within the USF businesses. Former management got enamored with that premium long haul business, and mispriced it to try to capture share, and that type of thing.

You have gone back and have been focusing on culling some of that underperforming. I think the yields this quarter in the regional business suggest you're doing a pretty good job. What inning are we on that process? Are we close to the end?

Are we going to see a pretty steady kind of mix of freight for the regional business going forward? Or is there a couple more quarters of this 7%, 8% improvement in yields as you go through this process?

I think we have done a very good job of addressing the pricing and yield issues there. Particularly on that premier plus business, the rate improvement in that book of business is significantly above the rate improvement in the core business. It is all pretty good, but that is leading the way. So I think we have done what we needed to do there on the pricing side.

Each of those companies individually are very focused on what we would refer to as their order of sell. They recognize that their most productive and profitable business is the regional business. That is what they are leading with and that is where we are seeing very good growth. So they have gotten refocused on what they were there to do in the first place.

Okay, all right. Sounds good. Thanks, guys.

Justin Yagerman of Wachovia Securities.

Most of my questions have been answered, but I actually have a few more. So anyhow, can you guys give yield net of fuel for each one of your divisions? For Yellow, Roadway, and for the regional guys?

Justin, we have stopped doing that because, as I said earlier, it has become integrated now to the point where it's really not a meaningful number. I would tell you that it is solidly positive, if you back out fuel surcharge. But we don't really think that is meaningful.

Okay. Just asking, just one of your regional competitors posted year-over-year decline (multiple speakers) yield this quarter. I was just trying to get a sense for -- I guess it was -- would you say that in comparison maybe regional was coming off of a lower base or had more improvement, versus that in the market? Or what are you seeing, I guess, in the regional yield market that (indiscernible)?

As I said, I think the yield environment is good. Particularly at our regional companies, I think the yield improvement was very, very positive. But overall, as I said, the yield environment is good; and even net of fuel, we still have solidly positive yield.

What percentage is premium plus of the regional business right now?

It is probably 20%.

20%? And you said that that was -- the yield there was trending well above the 7-or-so% yield improvement that you guys were seeing in the total group?

It is, (inaudible) because we have been very aggressive in addressing the issues that were there. We identified them and took significant pricing action on some of those [lanes].

On the insurance front, you guys have I guess combined that into the operating tax and license portion on the expense line. But it looks like it was up year-over-year. Can you talk to what is going on, on that line, and why those expenses are trending up?

We are looking. Yes, it's because we have added in USF companies.

But as a percent of revenue, it looks like it has gone from about 4-point-% a year ago to 5.5%. Just in terms of -- is there something different in the USF business that would cause insurance to trend higher generally?

Which line are you looking at, Justin?

Other operating expenses.

(multiple speakers) Operating tax and licenses and claims and insurance?

(indiscernible) 131 versus 72 versus last year.

Justin, we are going to have to get back to you on that, obviously. We will dig into those numbers and give you an analysis. But it is not because the USF companies have higher rates.

Okay, all right. I appreciate it. Maybe there is some reclasses going on there.

You guys have not talked much about Meridian IQ and what they were like in the quarter. Can you just give a little bit of a sense of how they are doing? Where you guys are in terms of putting some trucks on the ground in China and what the progress has been like there?

Sure. Jim?

Yes, we continue to make progress with our activities in China. But it has been focused around the integration of our organization in China and the JHJ joint venture that we formed in the third quarter of last year.

We continue to look at opportunities, and we have several proposals that are pending that will really launch our efforts for ground transportation. We are going to start mostly on the dedicated side with existing U.S.-based customers that have needs for intra-China transportation services that's more dependable and more reliable, with better information than they can currently get.

We don't want to enter into the market with a big asset requirement until we have got enough volume and business to justify it. So we're taking a conservative, prudent approach to that business. Like I said, there are several proposals that are outstanding, and we think that a number of those will start to come forward in the third and fourth quarters of this year.

Do you have a carrier base within China that you're using as third parties to move any kind of freight that you get?

Well, it is a highly, highly fragmented industry, much more than the U.S. is, in China. We do use many different carriers in China currently. Most of it surrounding our forwarding business and activities today.

Okay, I appreciate that. Maybe you guys could comment a little bit on the Next Day pilot at Yellow Trans and how that is going? Arkansas Best on their call talked about expanding that and having a work rule change now, having that roll out to maybe 25% of their terminals. And what your thoughts are on that market and how you have been doing, just if you'd be looking to grow that?

This is James at Yellow. We continue to be pleased with the growth that we are experiencing in our pilot area. Obviously, it does not have a material impact on our total results at Yellow, but we continue to perform at a very high range of service; and our customers have rewarded us with some new business.

We still have plans in place to roll it out to additional areas in the country, although it will probably be the third or fourth quarter before we really have a more meaningful change.

We really want to make sure that our core business is right where need it from a mix standpoint with our freight and be certain that our momentum is re-established with our operating income expectations. So our focus right now is to be sure that our core business is right where we need it, but you'll see us continue to move that forward later on in the year.

Okay, thanks. One last question and I will turn it over to somebody else. I wanted to give a sense for what you're looking at in terms of rail costs going forward. How you think that is going to affect the next few quarters; and basically, when does that cost grandfather?

Well, you know, we really started to get hit with incremental costs in the middle of last year, so we will start to run into that about the middle of this year. We did underestimate the impact in the first quarter slightly. We would expect that the second quarter is going to come in closer to what we had planned.

We had, I think, told you at the beginning of the year that we have got about $30 million of incremental costs built into the plan; and we think that number may be slightly low but should be fairly close.

How much of that $30 million incremental cost do you think you absorbed in the first quarter?

Probably 3, $4 million, something like that.

So a lot of it is still to come. I appreciate the time, guys. Thank you so much; and if you could get back to me on that insurance question (multiple speakers).

Brannon Cook of JPMorgan.

I had a question on the specific cost pressures you talked about at Yellow. I guess, part of the margin pressure was in February, the fact that costs were a little slower than you would like to respond to the slower freight environment.

I was hoping you could talk a bit about any changes you made in operations to be able to flex your costs a bit more quickly, if things were to slow down in the future.

Sure. I think it was not only the slowdown, and James can add to this, in February; but we were coming off a very strong January in terms of volume. So we got a little bit tricked by what we saw in January, in it took us a little bit longer than expected to react to that.

Just to put this in perspective, though, we probably -- when you're spending $400 million in a quarter on DOT cost and you miss it by 1%, it can have a fairly material impact. So James, you want to talk more about that?

Well, the strange thing about the first quarter is we were actually growing our shipments 4% in January. Then we went to a minus 2% decline in February. So handling that swing, again, caught us a little bit short on our moving cost.

Something else that we were working very hard on in the first quarter and something that has been a focus point of Yellow's for a good while is improving our on-time service. We were very strong with our service performance in January, and we were continuing to really focus on that in February.

So we had all of our resources intact and ready to handle the expected volumes in February that just never materialized. Like I said earlier, after about that first five days of typical slowness in the first part of the month, the next couple of weeks just did not come on. We didn't even have a real strong end of the month close, so we were gearing down, obviously, as fast as we could.

Then we dropped back into March and we were relatively busy again and had a big month. So we were a little bit short of our plan in January; exceeded our plan in March; and just fell on our rear end in February. That is the best way to describe it.

Okay, okay. One of the things you talked about was mix of freight at Yellow that is a little out of whack from where you want it to be. Could you provide a bit more color on how the freight is different from how you would like it? Is it more retail oriented? Is it different lengths of haul?

Our length of haul is down about 1%; but our weight per LTL shipment is up about 22 pounds; and that certainly have an impact on our mix.

As I said earlier, we lost a substantial retail account last year that was very good for us, due to a logistics change in their distribution patterns. We worked hard to replace that business, but I think we have probably didn't replace it with as good a quality business as we lost, number one.

Number two, we're probably handling a little bit too much truckload; and our truckload revenue per hundredweight is not where we need it. So that is the part that we are trying to adjust.

Unfortunately, some of that is in our contractual accounts, and we're going to have to take a little while to go back and get that adjusted. But that is certainly our number-one priority from a sales perspective right now. So I think when we get that adjusted to where we want it, our mix will be back in pretty good shape.

Yes, that is why I made the comment that we have still got some recovery to do at Yellow. In the second quarter it is more around this mix management issue. The costs are under really good control at this point, so it is more on this mix management side, that we will work our way out of that over the next couple of months.

Okay. In terms of thinking about the though OR improvement at Yellow, it is probably reasonable to expect margins to be down year-over-year in the second quarter, as you continue to work on some of these mix issues. But would it be reasonable to expect margins or OR to be flat year-over-year looking at the back half of the year?

Yes, I think that we would fully expect that in the second half of the year we would be back on the improvement track at Yellow in terms of year-over-year operating ratio improvement.

Okay, thanks for the time.

David Ross of Stifel Nicolaus.

I wanted to know what the difference was in Yellow and Roadway's tonnage numbers. Because they had similar increases in yields; so it is not that one was cutting price to get volume. But you showed Yellow with tonnage gains of 5.4%, Roadway only 0.4%.

They're very similar companies, overlapping networks. Was it service that James talked about that allowed Yellow maybe to get a little more tonnage? Or what was going on there?

Let me turn it over to Mike Smid here in a second. But first of all on an LTL basis it was about 2.8% year-over-year growth at Yellow; and pretty much flat at Roadway. But, Mike, you might want to talk about what is going on at Roadway.

Yes, I think you really have to look back just a little bit further. Our actual trajectory through last year was below year over year comparisons. As we began to make some progress late last year and into this first quarter, from a plan and progress standpoint, encouraged about the fact that we did have the flat tonnage.

We did experience a very similar situation in February, tonnages and shipment counts that were well below what we had projected they would be. Going into March saw a nice recovery, and actually some growth year-over-year for the first time in quite some time.

I think there are several things to attribute it to. A little bit different organization design and approach to our market from a sales standpoint.

Then secondly, continued progress on the quality of service that we provide. We were able to implement our change of operations, or network change, in the middle of March. It certainly performed as we would expect. As we progress through the next several months we would anticipate seeing continued improvement in those areas.

Can you just talk a little bit more about that network change and what exactly that entailed? (multiple speakers) direct route, or changing the way freight is handled at certain terminals?

Sure, it really entailed several things. The approach was to take some of the circuity out of our network, to improve the efficiency of our line haul operation between cities, to begin to change the speed, the movement through our network. Certainly moved us to where approximately half of our freight now moves in a two-day or less type standard. Two-day primarily.

And it tightened the time frames on all of our transportation services to we are able to provide coast-to-coast transportation in four days; from the middle of the country to the coast in three.

In addition to that, it changed a lot of what in our network was inefficient, a meet and turn type philosophy. Repositioned almost 1,100 jobs within our organization in order to more effectively apply our labor and more effectively apply our assets to it.

Reduce the handling. We eliminated 2.5 of our distribution centers and forced more of that handling to the origin points, adding speed and efficiency at the same time.

Thank you very much.

Chad Bruso of Morgan Stanley.

Great, thanks. Just a couple of questions on some of your comments regarding fuel. Bill, for a few quarters now we have heard you talk about how fuel and rates are kind of being rolled together. Historically recovering fuel has not been a problem. But I guess, have any of these actions maybe hindered your ability to fully recover rising fuel costs on a real-time basis?

No, not really. The fuel surcharge is still working very efficiently for us.

So even though these two have been rolled together in terms of the negotiations, there is still variability of terms of -- if fuel were to rise another 10 or 20% here we should not expect a negative impact on earnings?

No, I think that the [lobe] of this, as I have said before, depends on how fast fuel prices go up and how good we are at buying fuel for that particular period of time. So there could be a period of time where we are not real good at buying and the fuel goes up slowly and/or quickly. But generally speaking, the fuel surcharge is very efficient and works very well.

Okay, maybe I misinterpreted this, but I thought I heard earlier in terms of the yield for the full year, I think you said you were going to get back on track.

But I guess with fuel up again, is the 2% to 3% that I think we threw out initially, is that probably too low now, since we're looking at both of them together? And that is -- again just in terms of the way we look at it to model more than anything.

Sure. No, I think the net yield if you took a look at that is still going to be within that historical range of kind of 2% to 3%.

Okay. Then just one last one for you. At a recent industry conference here a manager of yours was talking about how you guys were going to be rolling out a parcel consolidator product. That is an industry that is going through a bit of a shakeup right now. I guess I was a bit surprised, just with everything that is going on, everything you have on your plate right now, that you would be interested in getting into this new line of business.

So could you give us a sense for what the timing of this might be and maybe what some of your longer-term plans are?

I'm sorry I didn't hear; the service you were talking about is what?

Yes, it was a parcel consolidator product.

I'm sorry, I thought you said personal. Parcel consolidator, yes; we (multiple speakers) have had some opportunities from time to time to look at this. This is another opportunity for a growth segment; and we have been talking to the Postal Service about this potential service. So not sure what the timing of that will be. But we are talking to them about that.

Great, thanks for the time.

Richard Haydon of Neuberger Berman.

Could we stretch our thinking out a bit into the year '07? Provided you achieved a $100 million debt paydown, what sort of calls will you have on cash flow in '07? What sort of priorities will you assign to that?

Yes, I think we are assuming, Richard, that by the end of the year our balance sheet will be back in sort of our sweet spot, which is the mid 30s debt-to-cap. At that point, we have kind of the usual suspects for free cash flow.

I doubt that we're going to be making any big acquisitions going forward. So then the usual suspects become dividends or stock buyback. It will obviously depend on a lot of factors. But we don't, at this point, foresee any major acquisition next year, so there is a lot of free cash flow to be used.

Okay, thank you.

[Elliott Waller] of Vardon Capital.

Just wanted to get an update if you could on a couple of things. I don't think you mentioned your cost synergy goals for the entire Company for the year. Any updates on that?

Yes, I think we're still feeling that we will be able to deliver about $80 million in cost synergies this year. About $50 million of that is coming from the regional companies, and that is well on track. Most of the remainder of that is coming from the network design changes that Mike talked about at Roadway. So we are still comfortable with that number.

Okay, if you could also talk about Meridian, what kind of expectations or how we should be think about the top-line growth for this year, and also margin expectations.

Well, we expect Meridian to continue to grow at double-digit rates on the top line. Our goal for Meridian is a 10% margin. A little bit of how fast we get to that 10% margin is dependent on how much investment we make in China and how quickly. But those are our goals.

Okay, obviously we are a bit aways from that. Any shorter-term goal or something more achievable for this year?

Well, the plan this year is to grow the top line aggressively and expand the margin; and I think you'll see both of those happen.

Let me just go back to the synergy because I think I misspoke on that. The $80 million that I talked about was really the Yellow-Roadway combination; and then there is $50 million coming from the regionals. So I think I said 80 in total; it is really 130 in total for this year.

Finally, obviously, there has been some tumultuous quarters the last few quarters. I'm trying to get a sense of your guidance is relatively strong relative to what expectations had been. What should we be focusing on in the next few quarters to see that things are back on track, and the synergies you're looking for and the growth you had talked about at the end of last year are really starting to come through?

Sure, we have tripled the size of the Company in the last couple of years, so we have had a lot of moving parts here, which I think has impacted our ability to forecast as accurately as we would have liked. But I think the best overall metric for whether we are getting the job done here is to look at our OR and our earnings.

I think the fact is that the guidance that we have got for this year would basically mean that we have got to do just a little bit better in the second half than we did in 2005. When you think about the synergies that we have got coming, and look at the fact that we still think the economy is going to be good for the rest of the year, we think that is very doable.

Okay, so from that should we assume that the OR will be slightly better than last year for all the groups?

Should be.

Okay. I know you didn't mention it today. Is there any particular numbers we should be thinking about from the Yellow, Roadway, or the regionals?

I think at the beginning of the year, we said that we expected that the big companies would operate somewhere in the 93, maybe a little bit lower, range; and that the regionals would catch the big companies in the second half of the year.

And same feeling there?

Yes, still the same.

Very good, thanks a lot.

At this time, I'm showing no further questions. I will turn the conference to Mr. Zollars for any closing remarks.

No, I think we appreciate your participation and we will see you at the end of next quarter. Thanks.

Ladies and gentlemen, that concludes today's conference call. We appreciate your time. You may now disconnect.