Yellow Corp (YELL) 2006 Q2 法說會逐字稿

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

Good morning and thanks for joining us for the YRC Worldwide second-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 to fully discuss all of these risk factors, so for a full discussion please refer to our 10-K, 10-Q and last night's earnings release.

Unless otherwise noted, our operating income and operating ratios are presented in this call after adjustments for property disposals and reorganization expenses 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 from New York and James Welch, Mike Smid, Jim Staley and Jim Ritchie are in Overland Park available to participate in the Q&A session. With that I'll turn the call over to Bill.

Thanks, Phil, and good morning. We feel really good about our second quarter and about the momentum that we've got going in the Company. We recently celebrated our one-year anniversary of the USF acquisition and, as you can see from this quarter's results, the integration is going well. We also implemented one of the most significant changes ever to the Roadway network and we have been extremely pleased with the progress.

Yellow Transportation made the necessary cost and business adjustments to improve their results and they are back on track. Meridian IQ continues to make progress in China and we are pursuing various opportunities to expand that effort. We're going to discuss each of our business units, but let's first cover some consolidated highlights.

Due to a combination of strong execution, our unique cost initiatives and a good economy we increased second-quarter earnings per share by 16% compared to last year. Our highest ever quarterly earnings per share of $1.62 was more than our revised guidance of $1.53 to $1.58 as all of our business units performed a little better than expected late in the quarter.

Consolidated operating revenue was $2.6 billion, a year-over-year increase of 23%. And operating income was $177 million, up $39 million and that's about a 28% increase over last year. Our consolidated operating ratio was 93.1 which is a 30 basis point improvement over the second quarter of 2005. If you compare these results to the first quarter when we were impacted by customer inventory adjustments and had customer mix and cost issues at Yellow Transportation, our consolidated operating ratio improved by 320 basis points. Normally the improvement for the first to the second quarter would be about 200 basis points. So you can see the amount of ground we made up in the second quarter.

As we mentioned on our April call, our business units made the appropriate adjustments coming out of the first quarter and the second quarter reflects these successful efforts. Let me move on now to some segment comments. Let me start with YRC Regional Transportation. That group reported second-quarter revenue of $654 million and, consistent with the first quarter, every company within the Group reported higher revenue than a year ago. On a comparable basis revenue was up 14%. Total tonnage per day increased by over 5% with LTL tonnage up 4.6% and yield up a very significant 9.4% in the quarter.

The USF integration is going well and the regional group is producing solid results. In fact, the acquisition was accretive for the second quarter of 2006 which is a significant accomplishment given the capital invested just a year ago. Second-quarter operating income for the regional group was $53 million and on a comparable basis the second-quarter of last year's operating income would have been about $35 million, so that's about a 50% improvement year-over-year in operating income.

The regional group operating ratio was 91.8 for the quarter. To put this in perspective, the last time the USF companies reported an operating ratio in this range was at least five years ago. This is clearly a big step in the right direction and shows what the regional group can do with most of the traditional issues behind us and a full focus on the business at hand. We would still expect that operating ratio to continue lower.

We indicated in the first quarter that Holland was improving and we can now report that productivity and service performance have returned to expected levels. Holland has improved its focus on core service offerings and resolved its position in the Northeast resulting in substantially improved financial results with considerable upside potential.

In addition, Reddaway and New Penn continue to run efficient operations with operating ratios in the 80s. Bestway is still working through density issues in the former Dugan territory. And although Bestway is making progress, they're not where we need them to be yet. It's important to remember from a financial standpoint, however, that Bestway is a small piece of the regional portfolio representing less than 10% of the Group's revenue.

Moving on now to Yellow Transportation -- as we expected, Yellow recovered nicely from the issues in the first quarter with revenue of $886 million and operating income of $69 million. The operating ratio of 92.2 was slightly higher than last year, but 410 basis points better than the first quarter, which is a good indication that their business is back on track. Yellow posted a 6.6% improvement in LTL yield when adjusted for mix with total tonnage growth of 1.2% and LTL tonnage consistent with last year after adjusting for Good Friday. And the good news there on the tonnage side was that every month in the second quarter got better.

As we discussed in April, Yellow has been addressing specific unprofitable accounts and that process has had a negative impact on the short-term tonnage in the second quarter, particularly in April. We expected this for the second quarter and we remain comfortable with our full-year tonnage expectations of low single digits for Yellow. We believe the yield and overall profitability at Yellow reflect the success of the initiative to better manage our customer mix and ultimately will result in a better long-term financial result.

Let me move on now to Roadway. Roadway posted a solid quarter even with the onetime costs associated with the change of operations that they went through in April. Second-quarter revenue was $877 million and operating income was $57 million or $5 million higher than a year ago. The Roadway operating ratio was 93.5 and 20 basis points better than the second quarter of last year. Mix adjusted LTL yield was up 7% with total tonnage up 2.5% and LTL tonnage up nearly 2% after the adjustment for Good Friday.

As you know, in March the Roadway team implemented a significant change of operations to improve speed, reliability and efficiency. We knew this change would result in some one-time costs that we mentioned on our January call and we included in our guidance. We estimate the month of April was negatively impacted by about $8 million. Without these one-time costs the Roadway operating ratio for the second quarter would have been 92.6 which would have been very similar to Yellow.

The team responded quickly at Roadway in May and June and were back on track with good momentum there. And again, in the second quarter every month got better at Roadway in terms of tonnage growth. We feel good about the first phase of the change of operations and expect the next phase to be successfully implemented during the second half of this year and probably a third change sometime in 2007. Those obviously are baked into our guidance.

And then moving on to Meridian IQ -- Meridian IQ continues to post double digit revenue growth against much more difficult comparisons. For the second quarter Meridian IQ reported revenue of $154 million and operating income of $4.3 million. Jim Ritchie and his team are successfully integrating USF logistics and have made significant progress on turning that business around. That business was not in good shape when we acquired it a year ago. As I said earlier, Meridian IQ also continues to make progress in China and we're pleased with the opportunities there for future growth. I'll now turn it over to Don for some further comments.

Thanks, Bill. Our adjusted earnings per share for the second quarter was $1.62 and our reported earnings per share was $1.58; both numbers well above our original guidance of $1.45 to $1.50 per share. As we mentioned in our June guidance update, we plan to exclude certain charges from our results because they were not part of our core business and we believe it is more accurate to evaluate our ongoing operations without these charges. Of the net $0.04 a share, the difference between $1.62 and $1.58 -- $0.04 related to gains on property disposals, which we always exclude, and $0.08 related to reorganization costs.

During the second quarter, after nine months of experience with the USF companies, we re-evaluated our structure and related staffing throughout the entire YRC Worldwide organization. We made changes that will allow us to more efficiently and effectively beat customer needs. The costs incurred primarily related to closing offices, personnel relocation and severance. This reorganization was not a specific part of our original synergy estimate, but does reflect the appropriate structure for our company following the USF acquisition.

As you may have noticed from our earnings release, we are now expecting our full-year tax rate to be around 38.3% or slightly above our previous projection of 38.1%. This change was primarily caused by a revised expectation that a greater percentage of our U.S. income will be generated in higher rate states. The slight increase should impact our earnings per share by around $0.02 for the year.

Our interest expense for 2006 is now expected to be between 90 and $92 million compared to our previous guidance of around $85 million. This change mostly reflects slightly higher rates on our variable rate debt which is about 42% of our total debt. The combination of the tax rate change and interest increase cost us about $0.10 a share.

Now let me briefly comment on free cash flow. Our expectations are that for the year free cash flow should be between $200 million and $225 million heavily weighted to the fourth quarter. We will use that free cash flow to pay down more than $100 million of debt and buy back up to $100 million of stock. The stock repurchases will be made on an opportunistic basis contingent on paying down more than $100 million of debt, the stock price and our free cash flow.

Regarding capital expenditures, we now expect full-year 2006 gross CapEx to be in the range of $375 million to $400 million, a little lower than the $4.25 to $4.50 we provided -- guidance we provided in April. The change in our expectations is due primarily to a combination of more attractive leasing options, additional asset efficiencies, and the timing of certain projects. We still expect disposals of property to be in the $35 million to $45 million range resulting in net CapEx of 330 to $365 million. I'll now turn it back to Bill to wrap up on our remarks.

Thanks, Don. In summary, we feel good about the progress made during the quarter at all of our business units. We expected to quickly get back on track after the first-quarter results and we did that. We anticipate a healthy economy over the balance of the year and look forward to a solid second half of the year and really have not seen any indication of softening at all in any of our business units thus far.

Regarding earnings guidance, we expect third-quarter earnings per share to be in the range of $1.70 to $1.80 which, again, will be our highest quarterly earnings ever, and the full year will be between $5.65 and $5.85. As Don mentioned earlier, we now anticipate a slightly higher tax rate and interest expense that totals about $0.10 for the year or $10 million and mostly offsets the $0.12 improvement in second-quarter actual results versus our original guidance. So another way to think about that is our operating income is going up in terms of the guidance by about $10 million, but we are going to be spending that money on interest expense and a little higher taxes. So the annual number stays at $5.65 to $5.85 but with about $10 million of higher operating income.

We still expect mid single-digit volume growth from the regional Group and low single digits at Yellow and Roadway for the year. There may be some slight variation in each quarter as we continually fine-tune our balance of volume and yield, but in aggregate for the year we're comfortable with these growth expectations on the tonnage side. We expect pricing to remain firm across the board with yield growth consistent with current trends.

And finally, in closing, it's important to keep in mind, this will be our third straight year of record EPS even while more than doubling our shares -- and we really have the 70,000 employees of the Company to thank for that. So we'll stop now and be happy to take your questions.

(OPERATOR INSTRUCTIONS). Jordan Alliger, Deutsche Bank.

Good morning. Can you talk a little bit more about the change of operations at Roadway? I obviously get the sense it's pretty significant -- exactly sort of what this first phase did and where you're seeing positive affect at this point? And then secondly, to that point, you mentioned a second and third phase. I'm wondering would that be as extensive as the first one or is it really just more of a fine-tuning? Just trying to get clarity on that.

I'm going to ask Mike Smid to walk you through that, Jordan. Mike?

Jordan, the first phases of the change of operations, actually one of the largest that we've done, repositioned about 1,100 jobs and about 8,500 pieces of equipment. The purpose of it was to reduce the handling structure in our network, to improve the velocity in markets that are 1,300 miles and less, and give us a new approach to the transcontinental transportation with just one touch.

The result of that in the first phase, it took about 15,000 to 18,000 transfers out of our system on a monthly basis. And in addition to that, just on the average, it took about 20 miles per shipment out of the transportation from the end to end. That's the largest portion of the change and kind of redesign of our network. The majority of the impact was in April. The second phase or one that we've begun to announce more recently begins to do some of the same type of things on the West Coast. You might call it an I5 or I5 type border change that begins to make that one more efficient and begins to kind of reduce our fixed cost, improve our capacity, velocity, those types of things.

The third phase, or the phase that probably will occur after the beginning of next year, really involves doing some of the same types of changes that we made in the eastern portion of our network to expand it, bring across the Midwest and connect even more markets that are in that 1,100 to 1,300 mile range. The change that occurs in the second part of this year is minor in comparison to that first significant change. The change next year would be sizable, but not nearly the same type of impact as this first one.

Great, thank you very much.

Jason Seidl, Credit Suisse.

Good morning, gentlemen. A couple quick questions here. Bill, when I'm looking at your regional group, and you gave us some pretty good color in terms of the improvement. You mentioned that Reddaway and New Penn are in the 80s and that Holland was fixed. If I recall, Holland used to get into the very low 90s. Is there anything stopping this regional group that you guys have from getting an OR in the high '80s going forward?

I don't think so, but I'll let Jim Staley expand on that. Jim?

Well, there's plenty of work yet to be done to get to that level. We have some pieces that still need improvement, specifically Bestway where we have a new management team in place and we continue to build on the density of improvement that we need in the old Dugan territory surrounding Texas. But Holland, due to their size within the regional group, obviously has the greatest impact and we saw a tremendous improvement there in the second quarter and I think we can continue building on that improvement. So I wouldn't predict when we'd be in the 80s, but I think that we can continue to make improvement from where we are right now.

Okay, fair enough. Could you remind us what percent of the Group Holland is now?

Holland is about 60% -- between 55 and 60% of the regional transportation revenue.

And has Holland gotten rid of most of that Premier Plus freight that they used to run at the end of the USF Group?

We haven't as much gotten rid of it as improved the pricing and improved the operating efficiency of that business. A lot of that yield improvement of 9.4% that we show in the second quarter is related to better pricing of the interregional business.

Okay, fair enough. If I can just piggyback on one of Jordan's questions with Mike. Mike, you mentioned that the changes here -- the second changes is much more minor. How should we think of that in terms of cost? Is it half of the $8 million or a quarter of that?

Less than a quarter.

Less than a quarter, okay. Thank you.

It is built into our plans and in our forecasts.

Perfect. I appreciate that. Also about Meridian IQ, it looks like there were some cost pressures in the quarter, the margins weren't what we thought here. Is there anything going on in the quarter, some startup costs or anything we should know about?

As I said, I think the primary drivers of that are, number one, we had a turnaround job to do at the USF Logistics Company; and secondly, we're continuing to invest in China. But Jim, you might want to give a little more color on that?

I think the assumption is exactly right. When we made the acquisition of USF Logistics a lot of you may remember that the logistics portion of USF Corp. had been put up for sale about a year ahead of time and they really couldn't find anybody to take it. But what that did cause was a lot of those customers to leave. We've worked real hard over the last year to correct the infrastructure and actually bring a lot of those customers back and we are in the middle of implementations, many of those customers being retailers and, as you know, were getting into peak season. And so putting them back into the system gave us an opportunity to do that at some increased expense.

That combined with the investments that we're making in China had some margin pressure on the business. But we're still confident in the outlook for the remainder of the year as well as with what we're doing in China from a long-term strategy basis.

And from a long-term strategy, how should we think about the margins at Meridian? It's always been tough for us to sort of try to model out because it has so many moving parts and because it's been growing so quickly?

The different business segments within Meridian really drive a lot of issues in regards to mix and where your business grows. Depending on what we do from an acquisition and organic growth perspective, you will always see those margins kind of move a little bit. As an example, as you know, the international freight forwarding segments don't carry the same kinds of margins that you see in some of your transportation management segments. And so, depending on the growth rates in each of those segments that margin should move. But you can rest assured that Bill has got his foot firmly planted on the back of my neck to improve the margins on a year-over-year basis and that's what we're committed to doing as an organization.

Well, good. Bill, don't press too hard. Real quick, just so I can make sure that I've got some of your comments down right, Bill. You said that there's been sequential improvement in trends moving throughout the quarter at both Yellow Transportation and Roadway Express?

Yes, the tonnage growth improved at both companies as we moved through the second quarter.

And we're seeing those sort of same trends in July?

Trends are similar in July.

Okay. Thank you, guys.

Brannon Cook, JPMorgan.

Good morning. I was hoping you could provide a bit more color on the reorganization expenses you had in the quarter. You mentioned they weren't part of your original plans, but you decided to make some changes. Was it related to back office functions or operations?

We've gone through so much change in the Company over the last few years. Once we had a chance to fully digest the USF acquisition we took a step back and basically looked at the infrastructure we needed to run the business. And I think every company needs to do that from time to time, it's just a healthy thing to do and discover that we probably didn't need quite as much infrastructure as we had. So we went ahead and made some changes there.

Now I will tell you that those changes were not built into any of the synergy forecasts that we had, so this is not really part of that. It's more a refresher of making sure that we've got the right size infrastructure to support the businesses that we've got. And after nine months of experience we felt like we had enough information to go ahead and make that change, so that's what we did.

Okay. And in the quarter there was nice sequential improvement at Yellow and it looks like you're doing a good job of changing some of your freight mix there that you said hurt you in the first quarter. Could you give us a sense of how long that's going to continue take to improve your freight mix at Yellow just in terms of when we think about the turnaround after the first quarter problems that you had? Is that something that's likely going to be cleaned up by the end of this year or is it something that's going to be a bit longer?

I think it will certainly be cleaned up by the end of year. But James, you might want to talk a little bit about that effort.

We're certainly pleased but not satisfied with the progress that we made between the first and second quarters, but it's an ongoing effort that we have at Yellow to continue to balance our cost service and pricing in order to get the right kind of mix. One of the things that really hurt us as we entered the second half of last year is we did lose a major customer due to some reorganization on their part. And the halo effect of that was probably more severe than what we really realized.

And we probably replaced that business with some less desirable freight, as we mentioned in the first quarter. And we've just really taken some very aggressive steps to change that and while at the same time continue to focus on growing or business. And so that's not something that we can fix in a month or two, but I would fully anticipate that we continue to make good progress throughout the second half of the year.

And from a total tonnage growth perspective at Yellow, tonnage was slightly up. Would it be reasonable to expect tonnage growth to accelerate a bit looking at the back part of the year?

Yes, I think for both Yellow and Roadway we said that we expect low single-digit tonnage growth for the year and that's still what we expect. It may be a little bit uneven between the third and fourth quarter, but at the end of the year that's about where we expect to be in both companies.

Okay, thanks.

Justin Yagerman, Wachovia Securities.

Good morning, gentlemen. I just wanted to get an update on intermodal costs. I know that you had spoken in the beginning of the year that -- at least at Yellow Trans you were going to incur a bit of cost related to getting a rail -- substituting the rail controlled equipment you used to have access to. Where is that right now and where to you project that for the rest of the year?

At the beginning of the year we said $30 million was what we were assuming as kind of a placeholder for the incremental rail cost. I'd say we're exceeding that slightly. But I'd rather have James and Mike talk a little bit about how we're handling that increase in intermodal cost. So James, do you want to start and then, Mike, you can add on?

Sure. That intermodal cost negatively affected us about $5 billion in the second quarter and we continue to find new ways to mitigate that and are making progress. We think by the end of the year we'll certainly be in a better position than we are right now, but we're trying to look for various forms of alternative types of trailers up to and including containers and forming some relationships with some companies that do have balance situations opposite of what we do.

And we think we're making some steady progress with that. Although sometimes the container flow doesn't necessarily meet the way that we would like to operate from a physical standpoint. But nonetheless, we are working very diligently in trying to find partners that have either trailer or container needs that are opposite of ours and we're making some progress there.

And in Q1 -- I could be wrong, but I thought that you guys had said 4 to $5 million of costs incurred. And so that leaves a little bit more than $20 million probably in the back half of this year. How should we be thinking about that in terms of Q3, Q4, how that breaks down? And then -- well, I guess that's what I'm wondering.

I want to be sure that I'm not misspoken here. That $5 million included just the associated increase in rail cost as well. So between the trailer utilization and the rail cost it was up about $5 million. So it wasn't just totally trailers.

Mike will have a chance to talk here in a second. But I think if you just kind of back away from this and say how does the $30 million compare with where we're headed now, we're probably $10 million or so more than that for the year. So we're probably going to have $40 million of incremental cost as a result of intermodal. So about $10 million more, but that's built into the guidance as well.

And is most of that at Yellow or is there any of that at Roadway as well?

That's actually at both companies. The impact in the quarter, a little bit greater at Yellow based on trailer allocations and the types of trailers that still are available in comparison to last year. But on a month-by-month basis continue to find ways to either offset the empty miles, find repositioned -- or equipment that does not require repositioning, containers, one-way type equipment and week after week, month after month continue to offset a greater percentage of that cost increase. It's having a positive trend.

And just to remind you that we're coming up on the anniversary of when this whole thing started. So we are going to start to have better comps, if you will, because we were really starting to get this incremental cost in the second half of last year.

That makes a lot of sense. When you look at your pilot programs, can you give us an update of where those are in terms of the -- one of your competitors is looking to greatly expand what they're doing in the next day and two day lanes within their long haul network. So I wanted to get a sense of where you guys are on that and if you've gotten any more approvals for work changes?

James, do you want to tackle that one?

Sure. As I spoke about this topic on our last conference, I mentioned that we certainly still intend to move forward with that. But we felt like we needed to get our performance back on track before we proceeded with that. And we feel like obviously we've made a lot of progress, as you can tell from our results in the second quarter.

We're still not satisfied totally with where we need to be from a core operating standpoint, but we still have plans in place at the end of the year to aggressively move forward with some additional rollouts of next day. And I'm sure Mike is probably thinking some of the same things that have hit Roadway. But it's still on our radar screen, we just didn't feel like we could go ahead and move forward with that with our core business not operating as good as it needed to be.

From Roadway's standpoint, the change of operations that we put in place and those that are planned clearly deal with that issue. A little bit more on the second day type transportation but designed to be a one touch network end-to-end in two days or less, a little bit better efficiency, a lot better velocity, better asset turnover. And I would say that with those changes as we moved into May and June saw accelerating growth where we were able to execute.

Within regional transportation, (indiscernible) the regional groups, when you guys look at a year out, two years out, you're obviously focused right now on improving the pricing and the yield on that freight. But how mature is that network with the level of density that you're running through it? So what kind of run rate tonnage improvement would we expect to see as you guys kind of right size this network and get the pricing to where you want it to be?

Jim, do you want to do that one?

Sure. First of all I think that we see great opportunities within the specific regions and that's why we continue to advertise to the marketplace that this is a group of regional companies that are very much committed to that specific region in which they operate. As such, within the Corporation I expect that we will push for continued investment to increase capacity at some of our more capacity stressed places.

Holland is a company that's had fairly limited investment in their network over the past couple of years and we see some opportunity there. So there's room within the whole regional network for continued growth, a few places that we need to address, but our emphasis will continue to be primarily on regional traffic with interregional opportunities addressed as they are presented.

Jim, should we be thinking about this eventually being a double-digit tonnage grower or is this going to be maxing out at high single-digit growth? What kind of level should we be thinking about for this?

I wouldn't speculate on that going out too far. We've said that we expect mid single-digit for the balance of this year and we'll be assessing where we are at the end of the year and give you some insight into that at the end of the year.

Bill or Don, I don't know if you gave this earlier, but I didn't get it. Did you give an update on where you guys are in terms of your cost synergies with both Yellow and Roadway and then with YRC?

Yes, we're still tracking very well at both of those buckets, both Yellow Roadway synergies as well as the regional synergies. And it's getting increasingly difficult -- almost impossible now at Yellow Roadway to separate those cost initiatives out. At the regional companies they're helping our momentum there, although I think the main driver of improvement at the regional companies is still the improvement in the underlying operating performance. But things are tracking pretty closely to where we expect them.

And I guess just with the GDP announcement this morning, I wanted to get a sense of -- you guys obviously put out full-year guidance. So you have a sense of the second half of this year. How much visibility do you see in the economy right now and what are you guys getting from your customers? Do you think 2.5% is the number that things grew in the second quarter?

I always hesitate to latch on to a number because they're going to amend that number probably three times before they actually put it in the book. I think the impression we get from our customers is that things are going okay. And both on the retail side and the manufacturing side I think anecdotally we're getting pretty good feedback from our customers.

There certainly isn't a "the sky is falling" kind of environment out there. People are struggling with these high fuel prices and that continues to be a major part of our discussion with them in terms of negotiations, but other than fuel prices I think everybody is feeling pretty good about where they are right now.

Okay, thanks a lot for your time. Look forward to seeing you.

Ed Wolfe, Bear Stearns.

Good morning, guys. Just a couple of follow-ups. Don, the 38.3% tax rate, I guess we should assume for next year if it's a change in your make-up that continues?

That's correct.

And the CapEx, you had said a net number of kind of -- a gross number of 375 to 4. What's a good net number to use?

We mentioned that in the script. I think -- just a second here. Let me pull the right number. I think we just did the straight (multiple speakers) 365.

And Bill, you talked about using some of the money to buy back stock, some of the free cash. Or maybe it was Don who said that. But you mentioned in your comments "at the right price". Is today the right price, is $40 the right price?

Well, it certainly is an attractive price. Without getting into too specific a price range, it's certainly a very attractive price.

Is that how you think about it? You think about it in terms of the stock price, in terms of a multiple of something?

It's always a matter of a combination of things that are going on. What our situation is from a free cash flow standpoint, where our balance sheet stands and then the relative stock price. So it's always an ongoing kind of organic discussion that we're having, but certainly the stock price we feel is a real deal right now.

You talked about Holland feeling better. Can you make some comments on some of the other regionals including New Penn, what are you seeing there?

Sure. Jim, do you want to go into more detail there?

Bill mentioned that New Penn and Reddaway continue to perform at historical excellent levels. You know where they've been in the past and they continue to perform there. And both of those companies have good revenue growth. I spoke to Bestway. Holland, as I said, has the greatest impact. Nice revenue growth there, excellent operating ratio improvement and put those together and they had very good operating income improvement.

The other piece to the regional group is Glenmore, the truck load carrier which is a nice asset that gives us excellent intercompany service reliability and also growing penetration in the regional truck load market. So I think we've got a nice group of assets there that are all showing significant improvement in the second quarter versus 2005.

And the regionals did much better than we were looking for in the core Roadway, Yellow did a little worse than we had been thinking. Was there any change in terms of doing business with each other or portioning some expenses or anything like that between the regionals that we should think about going forward?

No, not really. It's a pretty straight forward story. The regionals did better because they executed better. Roadway had $8 million of costs because of the change of ops. And Yellow made a great recovery from the first quarter but still more work to do there. But there's really no interrelationship there.

All right. And then the last one I just wanted to talk a little bit about was the tonnage. Yellow's tonnage -- 0.4 coming off 5.4 year-over-year and first quarter off a very easy comp that was down last year and Roadway still struggling at 1.6 with tonnage when Arkansas Best is putting up 6% tonnage. Why is it that you guys now are growing the tonnage so much less than your closest comparable that's public? What do you think is the difference or when is that even out again?

First of all, Ed, I think we need to be clear that Arkansas Best only reports total tonnage. And people are kind of confusing the two, but that's a very important distinction because you can fill up your network with a lot of truckload and distort the tonnage number. So that's kind of just a stake in the ground is that that's a total tonnage number from (multiple speakers).

But if I look at total tonnage for Yellow (multiple speakers).

Let me go on. I think that in Yellow's situation, as we said at the end of the first quarter, we were not happy with the customer mix. And we sacrificed some tonnage in the second quarter to get a better balance of business and more profitable business mix into the network. We've been doing that very effectively and, as I mentioned to you, even though April was not a good month from a tonnage standpoint at yellow, May and June showed some good momentum.

So when you readjust your customer mix you're going to have kind of a step backwards on tonnage which is what Yellow did. Since that time they've been kind of back on the trend that we would expect from them.

And so in July you're closer to the trends in June and May year-over-year than April is what you're saying?

Yes, July is much more consistent with the last couple of months of the quarter. And as I said, we still expect to be able to deliver low single-digit growth at Yellow and Roadway for the year.

And Roadway's tonnage hasn't been great either. Is there something that's going on there. Is it a similar situation?

Again, as I said, in April we had to step back because of the change of operation, but we had good growth in May and June there and continuing to see the same trend as we go into the third quarter. So again, some good momentum in the second quarter and we expect single-digit growth in tonnage at Roadway for the year.

Thanks a lot for the time. I'll see you at lunch.

Richard Hayden, Neuberger Berman.

Good morning. Bill, now that you've spelled out the CapEx for '06, do you have any sort of rough estimate for '07?

I think you can use the '06 number as a placeholder, Richard, until we get a little closer.

And is it fair to assume that given your debt metrics now and where they'll be at year-end that next year there will be no further debt paydown?

No, I think we'll continue to pay down debt. We're still looking for that mid to high 30s sweet spot from a debt to cap standpoint. And so until we get there we'll probably continue to pay down debt.

Do you want to give us some sort of framework as to where share repurchase might be next year?

Yes, I think it really depends, as I said before, Richard, on a combination of factors -- where's our balance sheet, where's the stock price and what's our free cash look like. But obviously as we get closer to our sweet spot from a balance sheet perspective, we've got other uses of cash. And it's all really relative to the stock price. So it's something we monitor really on kind of a daily basis and we'll continue to do that as we move forward here.

We expect, as Don said, to generate more free cash than we had expected a quarter ago. So that extra 25 or $50 million, whatever it turns out to be, will be free cash that we can use for other things.

Okay, thank you.

David Ross, Stifel Nicolaus.

I just had a quick question on Roadway's reorganization. Obviously it looks like you made some efficiency improvements, reduced cost there. Since it's such a similar network to Yellow, is that something you're looking at doing at Yellow as well, or is there something that Yellow already had going on for it that Roadway didn't have?

I think it's maybe a little more of the latter, although there are some unique things about the Roadway network changes that Mike had mentioned. But one of the things that we found when we acquired Roadway was that they were much more hub and spoke oriented than Yellow had become over the past several years and as a result touched the freight a little more frequently and as a result of that created a little higher cost and slowed down the movement of shipments.

And so, what Mike has been doing really is trying to address that by reducing the number of touches, taking distribution centers out of the network, improving the velocity of movement of shipments through. But most of that work had been done at Yellow previously. But Mike, you might want to talk about the unique aspects of what you're doing there?

There are some nuances in terms of the transcontinental movement of free, continued reduction of touches on the West Coast, one of those areas that is constantly an issue from a capacity and a transfer cost standpoint. And a number of the changes also lend themselves well to premium services that we provide. I think the final aspect of it is, in addition to the physical changes -- the reduction of distribution centers, the more rapid movement of freight -- a number of the processes and the actual processes around velocity have changed as well. And some of those certainly are unique in terms of our performance and the characteristics of our customers -- their requirements as well.

Okay. And then you said Yellow is getting back on track, made some improvements in the first quarter, but still down 30 basis points year-over-year in the second quarter in the OR. Do you expect a flat OR year-over-year in the third quarter in that segment?

We would expect that Yellow, once back on track, would improve their year-over-year performance. But I think if you look at the third-quarter OR for Yellow, it's probably a good placeholder from last year.

Okay, thank you very much.

Art Hatfield, Morgan Keegan.

Bill, if you could talk a little bit -- with all this talk and concern about the economy slowing down, could you talk a little bit about how the acquisitions of Roadway and U.S. Freightways and taking the cost out of those companies, the integration of those companies has kind of changed the potential cyclicality of your earnings going forward?

Sure, I think that's a great point and one we probably don't talk enough about, Art. But we still firmly believe that by the time all is said and done there's probably $450 million of cost synergy available to us that is very unique to our company. And we're tracking pretty well along that road. We've taken about $200 million out of the Yellow/Roadway combination. There's another $150 million at the regional companies and probably another $100 million at the Yellow/Roadway combination.

So you know, that really can mitigate significantly against an economic downturn as we continue to take the cost out -- even as the economy softens at some point. And it will soften at some point. It's just that we don't believe that that's a short-term event.

With that said, and that's helpful and I think that's a point that goes unlooked by a lot of people right now. Additionally with the consolidation you've also changed the competitive environment. Is that correct to assume?

I think that's right. I think that's right, yes. If you look at our share of market now, of the publicly traded companies we're about 40% of the LTL publicly traded base. So we're clearly in a much more significant market position than we were in back in 2003.

Great, thank you very much.

Jason Seidl, Credit Suisse.

A couple quick follow-ups here. Mr. Staley, can you talk a little bit about Bestway and did it get any freight from the recent closure of Super Transport? And also if you've been hearing anything about Central Freight?

As far as Super Transport goes, that was an interline partner that all of our regional companies use and we've replaced them as our carrier and actually utilize Roadway to handle some of that delivery. So it did not affect Bestway specifically. As far as Central Freight, they're a competitor, continue to be a competitor and where we see opportunities to attract business we work hard to do that. But obviously price and service as a combination are what drives business to or from Central. So we might reach one of those pieces of business very critically.

Now Jim, if I recall, you guys -- or the old U.S. Freightways used to interline with Dugan into Florida and then they got dropped and they picked up super transport. In the future would it be too bold to even start thinking about expanding into Florida yourself?

We have no plans to do that at this point.

Okay, fair enough. Bill, I know we touched on this briefly at one point, but could you talk a little bit about the Teamster negotiations for the contract. I know we're well ahead of time, but UPS has already started negotiating their contract a little bit early. What are your feelings about that?

Well, you know, it was interesting to watch what happened here recently with UPS granting the ability to do card checks at overnight; that certainly was a change in direction there. We are obviously in constant discussion with the Teamsters because they're a good partner of ours. And we think that anything we can do to make sure that we make customers feel good about the contract renewal that is coming up in 2008 is a good thing. So we'll continue to talk to the Teamsters as we move forward here and see if we can't start to move towards some common ground.

Okay? Appreciate the color, guys. Thanks.

Justin Yagerman, Wachovia Securities.

Just one last big picture kind of question. You always said when you made the Roadway acquisition that the brand equity was something you were exploring, you wanted to figure out the value of, and then going forward you would probably make your decisions about that and how the consolidation or potential consolidation of those networks would ever take place.

And I was just wondering, you were a few years out now, if you've gotten a sense of what kind of company Roadway is and what its value is to your organization? Do you see anything changing in your dual brand strategy going forward?

No, I don't. There are kind of two key points there, Justin. One is that there's not a lot of overlap in the customer basis today and there's pretty good differentiation in the marketplace already between the two brands. But the other point I would make to you is brands tend to evolve over time. And so I would expect that Yellow and Roadway, as we move forward here, will continue to evolve and that there will continue to be better differentiation between those brands in the marketplace as we go forward.

But I don't expect that we're going to do anything to alter the brand equity we have in those brands which is very significant. The same is true with the regional companies. Each one of those regional companies has great brand equity, tremendously loyal customer bases and we feel really good about those brands as well. So I don't think you'll see any change in our brand strategy in the foreseeable future.

I appreciate it. Thanks a lot.

Ladies and gentlemen, we have reached the end of our allotted time for the Q&A session. I'll turn the conference back to you, management, for any closing remarks.

Thanks very much for joining us and we'll talk to you at the end of the next quarter.

Ladies and gentlemen, that concludes the YRC Worldwide second-quarter earnings conference call. We appreciate your time. You may now disconnect.