Yellow Corp (YELL) 2006 Q3 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the YRC Worldwide third 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. If you would like to ask a question during this time, (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 third 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 through 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, operating ratios, and earnings per share are presented in this call after adjustments for property disposals, reorganization expenses, and the sale of a subsidiary 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, James Staley, and Jim Ritchie are available to participate in the Q&A session. I will now turn the call over to Bill.

Thanks, Phil. Good morning. Let me start by saying that YRC Worldwide reported a solid quarter with another quarter of record earnings per share. Our operating companies continued to execute well while effectively reducing the cost base. With that said, we have seen a slowdown in the economy that's still growing but at a much slower pace than it was over the last year or so.

In particular, the upper midwest has been especially soft across all of our companies. I will now briefly cover some of the third quarter results and then talk about our expectations for the fourth quarter.

Our third quarter earnings per share of $1.72 was the highest quarterly earnings in our history and represented an increase of 12% over the third quarter of last year. Consolidated operating revenue was $2.6 billion, and operating income was a record $185 million, up $18 million from last year. Our consolidated operating ratio was 92.8, which is 50 basis points better than the third quarter of last year and I think compares favorably with our competitors in terms of year-over-year improvement in operating ratio.

These results were primarily due to a combination of costs and pricing discipline along with continued growth in our premium services. We had a couple of accounting adjustments this quarter that netted to an unfavorable impact of about $4 million.

First, our depreciation expense was about $12 million less than we initially expected in the quarter, and this is really a result of the synergy activities that we continue to talk about. We did a thorough review of our asset utilization over the last few months and during the quarter, that analysis was done and we implemented our practices that would allow us to more effectively utilize our equipment across all of our asset-based companies for a longer period of time.

Our depreciation policies were appropriately adjusted on a prospective basis to reflect how the equipment will actually be used. We expect to review -- or receive, I should say, a similar benefit from these changes going forward. More than offsetting this depreciation was about $16 million of catch-up costs related to insurance claims. We've got about a $400 million accrual pot for Workman's Compensation claims, and this quarter we received the most recent actuarial estimates which indicated that prior year claims development for Workman's Comp had deteriorated at several of our companies. So we had to play catch-up and put about $16 million more into that $400 million pool.

On the positive side, we continue to implement initiatives to reduce future claims throughout the enterprise as well as actively manage existing claims and we do not expect any incremental impact in the fourth quarter. Just to point out without this catch-up on Workman's Comp, that would have been an extra $0.16 to the earnings per share this quarter.

I will now move on to the business units. Yellow Regional Transportation reported third quarter revenue of $625 million with an operating income of $48 million. That's 47% higher than the third quarter of 2005. The operating ratio at the regional companies was [92.3]. That's a 230 basis point improvement over the prior year. So really good progress there.

Yield was up 5.3% year-over-year, and although tonnage per day was down 1.8%, there are a couple of distortions in there. First, you may recall that in the third quarter of last year, Dugan ceased operations and most of the business that we transitioned to Holland and Bestway was honored in terms of pricing for a transitional period. Since then, some of that business has left due to price increases in network coverage. So that's one of the distortions.

Also impacting the per day volume growth was the Fourth of July holiday occurring on a Tuesday this year. Our business units counted Monday, July 3rd as a workday even though we didn't fully staff our operations and our business volumes are only about half the normal levels. So after adjusting for the holiday impact, you get more on an apples to apples basis. The regional tonnage was down about 1% compared to the third quarter of last year, and that includes the impact of those transitional Dugan customers we mentioned.

Holland, the largest regional company, has felt the impact of softness in the midwest, which is Holland's largest territory. As we have said, direct exposure to automotive is limited at Holland, but as that industry has materially declined, it has adversely affected Holland's largest market.

The regional year-over-year operating income improvement is significant, but fell short of expectations following the strong second quarter performance. And while operating income in the third quarter was impacted by the revenue softness I just mentioned, the biggest concern with the regional group remains the performance of Bestway, which continues to suffer from density issues and the lack of investment from the former USF Corporation.

Although Bestway represents less than 10% of the regional group revenue, it accounted for the majority of the shortfall in operating income from the second quarter to the third quarter. Bestway does have a completely new leadership team and they are executing a detailed plan to return them to profitability and Jim Stanley may talk about that a little more in the Q&A period.

Regarding the national companies, Roadway and Yellow, each reported record quarterly revenue of around $900 million. Operating income was $69 million at Yellow with a 92.3 operating ratio, and Roadway had $61 million in operating income with a 93.2 operating ratio. Just as kind of an apples to apples comparison, if you remove the Workman's Comp, a catch-up and the change in depreciation, both companies would have been about flat from an operating ratio standpoint when compared to the third quarter of last year. Yellow would have been at a 91.9, Roadway at a 92.9.

Operating income for the quarter at Yellow and Roadway was negatively impacted by about $3 million each, due to that net adjustment from insurance claims and depreciation. Also, Roadway had implemented a second change of operations this year that had a slight negative impact on the quarter, but will further advance the network and make Roadway more comparable to Yellow.

For the third quarter, the nationals posted solid yield improvements with 4.6% mixed adjusted LTL growth at Yellow and 5% growth at Roadway. Regarding volumes, after adjusting for the Fourth of July, Roadway increased tonnage per day by 2.8% year-over-year, and that's a reflection of the changes in the network that Mike Smid and his team have made and the fact that they're now benefiting from a more efficient network there.

While Yellow recorded a decline of 1.7% per day, both companies had tough year-over-year comparisons due to the impact of Hurricane Katrina in September of last year and the overflow from some truckload business that became LTL.

Then finally, Meridian IQ reported third quarter revenue of $154 million and operating income of $6.3 million. MIQ continues to show solid sequential improvements, posting a 95.9 operating ratio in the quarter, which is 130 basis points better than the second quarter. I'm now going to turn it over to Don for some further comments.

Thanks, Bill. Our adjusted earnings per share for the third quarter was $1.72, and our reported earnings per share was $1.64, in line with our initial expectations. Consistent with our past practice, our adjusted earnings excluded certain charges because they were not part of our core business, and we believe it is more accurate to evaluate our ongoing operations without these charges.

The primary difference between the $1.72 and the $1.64 related to reorganization expenses at Meridian IQ that started during the second quarter and will be completed by year-end in addition to the sale of our China freight forwarding operations to our JHJ joint venture.

Let me give you a little more detail on this sale. We acquired the Asia freight forwarding operations of GPS Logistics in early 2005, which included locations throughout Asia and multiple offices in China. In late 2005, we completed the purchase of 50% of JHJ, one of the largest freight forwarders in China. In order to integrate our freight forwarding capabilities in China, we sold the mainland China portion of the GPS business to the joint venture. As a result, we recorded a onetime write-off of $2.8 million for the difference between our investment on the books and the selling price.

Going forward, the revenue and operating income of GPS China will be recognized by JHJ and we'll record our 50% portion in nonoperating. Although this business has been profitable for Meridian IQ, it was not a significant portion of the operations and will have very little impact on future revenue and operating income [cost].

Let me touch briefly on the former USF companies. They were accretive in the second and third quarters, and on a cumulative basis, they will now add to earnings going forward. This was accomplished in roughly five quarters which is about what we expected.

Now regarding free cash flow and our plans for its use -- as background, our September 30th debt level was basically the same as the December 31, 2005 level and we bought back $20 million of stock. During the quarter, we did generate $82 million of free cash flow and that was consistent with our expectations.

Going forward, we should have sufficient free cash flow to pay down $100 million of debt and buy back an additional $80 million of stock in the fourth quarter, which is what we said we would do back in April when we announced our $100 million stock repurchase and reaffirmed our debt paydown target.

Specifically regarding our stock repurchase program, during the quarter we purchased 521,000 shares at an average price of $38.34. We expect gross CapEx to be around $385 million with disposals now around $60 million due to some sales occurring earlier than expected. This should result in net CapEx of approximately $325 million, a little lower than our previous guidance of $330 million to $365 million.

I will now turn it back to Bill to wrap up our remarks.

Thanks, John. Regarding fourth quarter guidance, we expect earnings per share to be in the range of $1.40 to $1.50 resulting in full-year expectations of $5.45 to $5.55. This is about a 5% reduction from our previous annual guidance and is attributable to our expectations of lower economic growth in the fourth quarter than we originally anticipated. It's important to keep in mind that even with the $5.45 to $5.55, this will be our third straight year of record EPS even while more than doubling our shares. That's the extent of our prepared remarks. We'll be happy to take your questions.

(OPERATOR INSTRUCTIONS) Jason Seidl, Credit Suisse.

A couple of quick questions for you guys. Specifically, in the quarter, Don, could you tell me what's in other income? There's a slight profit there about $800,000 compared to a loss of over $4 million last year.

Yes, that other income number is basically the joint venture earnings on JHJ as well as just some foreign currency gains and losses, if that's the number that you're looking at.

Are you looking at the Corporate Expense or the Other Income?

I am looking at the Corporate and Other line on your adjusted operating income.

That's different. I'm sorry. You're talking about the fact that that's lower than what we have had in the past. And that really relates to the true-up of our incentive accruals and that principally is the accrual for our long-term incentive compensation, and there was about a $4 million improvement in that accrual.

That's only a onetime thing in the quarter? We didn't expect that to be positive going forward, because it's been like negative for the last 18 quarters.

You should not expect that to be positive going forward, but remember, we do have to periodically review what those accruals are and make adjustments based on our performance that we have recorded and that we expect to achieve.

Don, in relation to the change in depreciation that you had, can we expect about similar levels in the fourth quarter in terms of being lower for the prior year?

That's correct.

Bill, just some overall questions sort of about the health of the LTL industry. Obviously you're not the first person to say things are slowing and I'm sure you won't be the last, but when I'm looking at tonnage levels, there were some puts and takes in the quarter that you mentioned. Can you talk to us about trends in October at the different carriers that you have?

Yes, I think we would say that the economy is continuing to slow, but this doesn't feel anything like the 2000 timeframe as we were going into a recession there where it was a very dramatic and very rapid drop-off. This feels a lot more to us like a soft landing and that we'll end up maybe at the 2.5% GDP growth level; still significantly lower than where we were, but a lot better than the last time we saw a slowdown like this.

Bill, if it is a soft landing for '07, given that you probably have about net $65 million in savings there, do you expect to grow earnings on a year-over-year basis?

2007, we should grow earnings even with flat tonnage. That's really a function of the power of the synergies that we continue to get out of the business.

Question back to Don for one more and then I'll get to the back of the queue and let somebody else have at it. Don, how should we look at CapEx, both on a gross and net basis for '07, just directionally?

You know what, we have not provided that guidance yet. Obviously when we announce our full-year results, we will give you some information on that.

Jordan Alliger, Deutsche Bank.

From our understanding, the retailers have had a rather flat inventory build compared to past years going into the peak. Are you seeing any signs of life in terms of the shipments and in terms of this whole delayed peak? And are you hearing from your retailers that perhaps they were cautious going into the peak, given worries about oil prices and maybe their mindset is changing a little bit leading into the next three or four weeks?

Yes, the way I would describe it is that we had the peak, it was just lower. The seasonality looks about the same. It's just at a lower level of activity than we had last year and I don't think we've seen any indication that the peak will be later. We're just looking at a lower peak as a result of lower business activity.

And then just another question. Understanding your point about tonnage next year and the EPS even in a flat [turn-ish] environment. Can you maybe talk a little bit about some of the synergy things that you will be able to do that might be separate from whatever you may be facing in terms of the economy? In other words, how could we get comfortable that even if things were kind of flattish, there's enough there that will drive the potential expectation for up earnings?

Sure. Let me divide it into two piles and then we can get into more detail you're interested. But on the Yellow/Roadway combination, I think one of the biggest areas of opportunity next year is the next change of operations at Roadway, which will generate a significant amount of savings by really using the engineering and the tools that we learned when we built the Yellow network over the last few years. So there's a big chunk of cost that should come out as a result of that.

Then we've got the other pile which is the synergy work that's going on at the regional companies and they were in still what I would call Phase I. We're implementing best practices, we're putting some technology in place across the regionals to help them be more efficient. We're reducing redundancies. So all of the things we did in the first 18 months or so with Yellow and Roadway were in the process of doing it at the regionals. And then the combination of those two things is about $115 million of incremental synergy, some of which we will spend on higher costs and other areas, but those are some examples.

Jon Langenfeld, Robert W. Baird.

Bill, I know you mentioned that earnings should be up in flat tonnage, but once things normalize here and assuming that the economy stabilizes, is the current environment enough to support up tonnage in the three LTL groups?

I think that kind of remains to be seen. The question is do we see a leveling of activity here? Does the economy continue to deteriorate? Right now it looks like it's leveling, but a lot can happen between now and the end of the year. So I would say that our view of the world right now is a decent economy in 2007 that would support some growth.

And then just looking at the truckload tonnage within your groups, how much of that do you think is susceptible, independent of the economy again, but how much of that do you think is susceptible to go back to truck -- I know your track tonnage in Yellow, for instance, is up 40% from its trough. How much risk do you see to that part of the business?

Well, let me start by saying our truck tonnage is down significantly year-over-year and there are a couple of pieces to that. One is the Katrina piece. As you'll recall last year, we had a very tight truckload situation and we attracted a lot of what truckload carriers would normally have handled that came our way and gave us some really significant increases in truckload tonnage.

Over the year, that tonnage has moved back into the truckload market and now with the economy softening, it has increased the speed with which that business has moved back to truckload. So it's hard to predict. There are a lot of moving parts there. You've got driver shortages. You've got the underlying economic activity. You don't have Katrina this year, but at the end of the day, we think that the truckload tonnage that we now have is maybe more of a steady-state truckload unless we have some sort of a shock to the system again.

And then on Meridian IQ, how much of the lack of profit growth is due to the investment phase versus the core operation?

I would say that we are continuing to invest pretty heavily in MIQ so that a good portion of the lack of margin expansion is as a result of that.

Is that something we should expect here in the near-term?

I think we're going to continue to invest in MIQ as we continue to globalize our business. So we've said all along that we think in the long run on a settle-down basis the MIQ business is a 10% margin business, but I don't think you're going to see that over the next couple of years.

Justin Yagerman, Wachovia capital.

Can you run through tonnage trends in the quarter? How it trended July, August, September basically and then kind of what you're seeing now in October in each of the different LTL divisions?

It was kind of different depending on the Company. I think at Roadway we had positive growth throughout the quarter and as I said, I think that's a reflection of the improvements in the Roadway network that have been a result of the operations changes we've made there. So, Roadway was positive throughout the quarter. Yellow was negative throughout the quarter, but no real pattern there. And then, at the regionals, we've got this kind of special situation at Holland where the midwest has really softened more than the rest of the Company.

So there really isn't a common trend through the third quarter that you could look at. In October, I think all the companies are experiencing continued softness in the economy.

I'm just trying to get a sense of -- the comps get more difficult going forward in Q4 and then again in Q1 for most of the groups. And given the guidance, would you expect down year-over-year EPS then in Q1 as a result of that, if you're not able to get positive tonnage in a few of the divisions?

No, two factors there. One is we had such a lousy first quarter last year we should do better this year and secondly, the synergies will continue to add to the bottom-line.

And I guess piggybacking on that, from the DNA standpoint, I don't know, maybe you guys said this and I missed it, but can you quantify -- I'm assuming some of that is ongoing, at least for the next year and will flow through the model. What is the level of that DNA help that you are expecting now for the next few quarters?

You should assume roughly about the same in that $0.11, $0.12 a share area.

So that's kind of a demonstration, I guess, of a significant synergy potential outside of volumes and what have you.

Exactly.

And then I guess one last question here. Looking at the regional group, when you are targeting market share regains, I guess, within that market, what's your target customer? Who is your profile customer? And I guess it probably depends on the different regions and how they are performing, but I mean, who are you really going after when you're looking at those companies?

At the regional companies?

Yes.

Jim, you want to talk about your target customer?

Each of the companies is different. Holland, which is the largest of the regional companies has very little presence in the retail market and that's why you'd see the significant impact of the manufacturing downturn in the midwest. We've got a little more retail presence in the other companies, but our target is more geographic and market in terms of next day service and what customers will be looking for very precise delivery times, more so than any specific customer.

Edward Wolfe, Bear Stearns.

Don, you talked about a share repurchase at fourth quarter, I thought I heard you. What was the amount you said?

We did not say that we would be rebuying shares in the fourth quarter. What I said was there's -- with the free cash flow we have, we can both paydown our target level of debt as well as buy back stock if that's what our decision is.

We've got $80 million left of authorization under our program.

So what I heard was in fourth quarter you intend to pay down $100 million of debt. Is that correct?

That's correct.

That will be --

And the $89 million in share repurchase is out there, but you don't intend to do the whole thing in the quarter is what you're saying.

No. I think the way we would look at it is we're going to pay down at least $100 million, probably more than that in debt and then we will look at the rest of the free cash flow and decide whether the best use of that is stock buyback or paydown more debt.

I thought I heard you say, Bill, that the real weakness third quarter over second quarter in the regional group which felt like it was getting some momentum was Bestway. But when we spoke yesterday, I also thought you had said in October that there's been some slowing in the midwest which affects Holland. Can you talk about Bestway and Holland and kind of what's going right and what's going wrong in third quarter versus October? Is there a difference there?

Sure. Jim, why don't you take him through the two situations.

In the case of Holland, even with the soft tonnage levels they had, they had a terrific quarter versus third quarter of 2005. We did point out that Bestway did contribute more to the shortfall in Q3 versus Q2, but even saying that, Bestway had about a 10% improvement in operating performance versus Q3 of '05.

So, we've got improving results at both companies. The concern is how quickly we can get to where we need to be at Bestway and whether or not -- and I think we can -- continue to experience the same kind of cost performance in light of soft tonnage levels at Holland.

But I guess my question is the soft tonnage levels and the later size of shipment, are you seeing that disproportionately at Holland in the midwest versus other regions or is it everywhere?

Disproportionate to Holland in the midwest.

And then, are Roadway and Yellow seeing that more in the midwest than other parts that they operate in as well?

Yes, I think there's an indication that that part of the geography is under more stress across all the companies.

On the depreciation side, going from $75 million to $65 million quarter-over-quarter or year-over-year, however you look at it, how is that a synergy? I understand if you change how you're accounting and you account for things over a different lifespan, but how is that a synergy?

Well, we're taking a look now at all of the assets in one bucket as opposed to each company had a different asset utilization model and we were able to -- because we've now got all of the assets under our control -- to improve the asset utilization across the Company and change the depreciation model as a result. So it's really a result of the acquisitions that we've made that we've been able to do that.

I'm just playing devil's advocate here, but if I look at your earnings guidance for '06 and add up the year, give or take I get $435 million in operating income combined at Yellow and Roadway, which is below the $460 million they put up in '05. So where am I missing the synergy there? I just --

Well, first of all it's not for the full year. We've only got it for the third and fourth quarter this year. So it's only a --

I'm not talking about depreciation. I'm just talking about the total synergies -- Roadway and Yellow's total operating income is less in '06 than '05. Is the implication that they would have had a very severely down year without the synergy?

No, I don't -- I'd have to look at the numbers, but remember, there were a lot of incremental costs this year that we didn't have in previous years as well. The most specific of those is rail. But this is a synergy we had planned to have impact us in 2007. We got the work done early and so we [moved] it into 2006, but it's always been a part of the plan.

And that $11 million a quarter we should extrapolate as $44 million a year kind of thing?

Right about that. Yes.

Brannon Cook, JPMorgan.

Bill, you talked about the economies slowing a bit in October and it's led to decelerating tonnage growth. Can you talk a bit about the pricing environment and what you're seeing in the market? Some of your competitors have talked about the pricing environment becoming a bit more competitive here in October.

Yes, I think in general we see the pricing environment continuing to be firm, which is another indication I think that the economy, although it slowed is still in pretty good shape.

And then, a question -- you talked about improving Roadway operations looking towards 2007 and that being one of the drivers of synergy there. And you've been streamlining operations through the year, in the second quarter I think you improved some of the operations on the East Coast and you were planning on rolling that out on the West Coast. Did that happen in the third quarter or is that still ongoing? And what kind of cost impact did that have?

Mike can give you an update on that.

We did the first change in March moving into April. Saw positive results from a service and a market-facing standpoint and growth in those [lines]. We did a second change late September moving into October that involved transportation up and down the West Coast. Relatively minor in comparison to the big change we did early in the year. But did or have seen some initial positive results from it.

We intend to do another significant change to the network early next year somewhere in the February timeframe. It takes advantage of a lot of the work that we've done so far -- a lot of the direct loading, some of the same concepts that we utilized in the last change of operations to reduce the number of touches, improve the [secuity] or reduce the [secuity] in our network, improve the service that we offer in the marketplace and expand that coverage to some of our longer lengths of [haul].

And then just a final question on rail costs. I guess rail costs have been one of the headwinds this year in terms of margin and cost perspective. Can you refresh our memories to when you anniversaried those higher rail costs? And if you have any sense of if you think that's going to continue to be an incremental drag looking towards next year?

Yes, we are at about the anniversary date here and I think we've got a reasonable handle on the rail costs now, they were fairly close to what we expected in the third quarter. So, I think it's something that we can handle going forward although the cost will increase next year as well, as the rails continue to follow their plan of removing equipment from their network.

The other big impact we've had this year has been on Workman's Comp. It's really those two are probably the two biggest costs that have been hitting us from a headwind standpoint year-over-year.

And is it fair to think about the incremental rail cost being of a smaller magnitude in '07 versus '06?

Hard to tell at this point, because we're still working with the rails on what their plan is for next year.

David Ross, Stifel Nicolaus.

I want to talk a little bit about the Roadway network changes again. I know you talked about at the regional --

David, would you mind speaking up a little bit? We can't hear you very well here.

Phil, is that better?

Perfect. Thank you.

With the Roadway network changes you talked about, at least on the regional side, those synergies being in Phase 1. You had some changes this year and you have more coming next year. How far along are we and where do you want to -- I guess, when do you plan on finishing those?

Mike, you want to talk about the changes?

Yes, in terms of the Roadway changes, we're probably a third or so a way along with what all the opportunities are. And really to implement all of the opportunities would still take a good year and one half to two years to really refine and get to our ultimate solution.

And then the cost of the February '07 network changes, do you have an estimate about what those will be versus the cost of the changes that took place this year?

At this point right now, we would project them to be a little bit less, somewhere between $5 million and $7 million.

If Roadway is trying to get closer to Yellow in terms of operational efficiency, margin and performance, and LTL tonnage at Yellow is down 2.5% on a per day basis in the quarter, how does Yellow get back to flat tonnage comparisons? Does it get back to flat tonnage comparisons?

James, why don't you take a whack at that?

One of the things we continuously work on at Yellow is our volume, yield and cost trade-offs and that has served us well over the last several years. Obviously we struggled a little bit in the first quarter of this year and have worked hard to get our yield in the shape that we want it and much kind of like Conway did, we certainly have exited some business out of our system this year that didn't contribute.

But unfortunately, we haven't been able to replace it as fast as we would like and then with maybe the economy starting to hit us a little bit, it's kind of caught us a little bit short, but I'm confident going forward with some of the changes that we're going to make that we can certainly find our way back to an even tonnage growth at some point here.

And lastly, I don't know if you guys have a handle on this or not, but since the two sales forces have been able to compete against each other from a Yellow and Roadway perspective, how much cannibalization has been taking place? How much of Roadway's gain is Yellow's loss, et cetera?

I think it's on the margin. We've been pretty careful not to get in each other's way as much as possible. Now, there are still situations where we do get in each other's way, but I think it's really on the margin and hasn't had much impact on us overall.

Richard Haydon, Neuberger Berman.

Bill, could you spend a little bit of time talking about whether or not you pre-bought trucks to avoid the '07 price increase? And the implication, if that were the case, for CapEx next year? And just in broad outlines, given that your debt level [pilot] year-end is where you want it to be, what you will be doing with the free cash flow next year.

Sure. Well, first of all, because of our cradle to grave philosophy on equipment, we don't do prebuying to any great extent. We can bleed in new technology over a period of years, really, so there's really no bubble in our CapEx. So what you're seeing is kind of an ongoing CapEx level for us.

The numbers that we have for this year are a little bit lower than we expected and we've modified our CapEx budget consistent with the economic outlook, which has been a little bit softer in the second half than we anticipated. I think you'll see our CapEx to be fairly stable.

In terms of free cash flow for next year, it's always an option to spend that dollar in a number of different ways and there will be the usual suspects. We'll continue to pay down debt until we get into our sweet spot from a balance sheet standpoint, which is kind of that mid-30s debt-to-cap ratio. There's the option to buy back stock if it looks like the stock is still undervalued as we move into next year, and then we've also got the option to invest more money in the business. That would likely happen in China as a way to accelerate our progress there. So those will probably be the three big opportunities.

Without attaching numerics to it, would it be reasonable for someone on this side of the phone to assume that the share repurchase level next year should be greater than it is this year?

Depends on the stock price.

[Thano Hasiotas], Carlson Capital.

I just wanted to follow up on this depreciation thing. Since instead of the year-over-year comparison, just what's the absolute number, Don, that I should use going forward?

The number this year will be around $277 million and you should assume that in the normal course, that that depreciation could grow around 5% a year if you wanted to have a baseline. Remember we still have to get our equipment lives where we need them to be. So you will see a growth in depreciation. Is that --

On a quarterly basis, is it going to be $64 million in the fourth quarter or $70 million?

I'm sorry? It will be about what you've got today.

I think you can take our third quarter depreciation number, that's a good proxy going forward for our quarter depreciation.

And we talked about this about a month ago, but how is the process going now that fuel surcharge revenue is down year-over-year? How is the process going in terms of kind of feeding that back into your base rate and what that's conversation like?

Yes, early indication is that things are going pretty well. We're getting a little bit more increase in our base rates than we had in the plan. So, our theory was that as fuel surcharge fell, we would be able to get a little bit more base rate. That seems to proving out, but it's early days.

Elliot Waller, Varnan Capital Management.

Just a quick question. Most of my questions have been answered. Following up on the pricing question. If you could look into your crystal ball and with the expectations you have on the economy going forward, how do you see pricing Q1 next year moving into '07 on a year-over-year basis?

Well, we expect it to continue to be firm. There are a couple of factors at work there. One is, with the consolidation that's happened in our industry, the players left in our industry are very sophisticated, high-value service providers, so that helps in the pricing discipline arena.

Secondly, we haven't had any new capacity come into the industry in terms of the new entrants in probably 20 years. So, the capacity situation is fairly similar to what it has been. And so the combination of those two things I think is going to provide for a fairly firm pricing environment as we go into 2007, and it looks like it's tracking that way right now.

And would you say that where things stand so far in the quarter that you haven't seen anybody be irrational, anybody being excessively aggressive?

No, I think we only see irrationality in one specific customer case or one particular geography as the Company tries to expand their footprint, but overall, the pricing environment is still very firm.

Chris Weatherby, Merrill Lynch.

Just following up on that line. Just curious if you guys did give a little bit of color on pricing by region, if you're seeing -- I know you said things have been relatively firm. Just curious if that is the case across the board even in areas of weakness, like you mentioned the upper midwest.

About the only area where we've seen some softness in pricing is back in this upper midwest area that Jim talked about, which is sort of the core business area for Holland. That's probably the only area where we've seen weakness.

And then just mention that even in a flat growth environment, I think that you can continue to generate positive EPS going forward. Assuming that volumes are maybe a little bit softer than flat, do you think that pricing can continue to maintain, even in a flat environment, maybe two quarters down the road?

Yes, I think so. If you go back and look at 2001 and 2002, which is a really severe recession. We were looking at shipment volumes that were the same as 1985, '86, down 15% from a tonnage basis. And even in that environment, we had very positive yield. So we would expect the pricing discipline to be better than that because as I said, we don't have some of the more promiscuous pricers in the environment that we have today. So if you even compare it to that significant downturn, we still had good solid pricing.

That kind of follows up with the next question I was going to ask, the difference you mentioned before doesn't really feel like 2000 when things really slow down dramatically. Was that the difference -- was it just volumes really completely went away at that point or was there anything else?

No, it was mostly volumes. When we hit kind of the Fall of 2000, things just went into the ditch very, very quickly and it doesn't feel like that this time.

Jason Seidl, Credit Suisse.

Bill, just a quick follow-up on the pricing side. Could you give us a feel for the percent of contracts that roll over at the regionals at Rex and at YT?

Yes, I'll let the President speak to that, percentage of contracts in the fourth quarter.

The number would be closer to 35% between October and January. Really high.

That was Mike at Roadway.

We're basically dealing with the same customer base. I don't think there's any difference among the operating companies and how the contracts flow through the year.

This is James at Yellow. About 32 to 35%, so in that same range.

So you guys are all about the same range -- between October and January. Maybe you guys could all answer this individually or Bill, maybe collectively, but you talked about now you're starting to get more on the base rates with the fuel surcharge coming a little bit. How long before that works through to sort of offset the decline in fuel surcharge? Are we talking about maybe two quarters or can it be done in a quarter?

Well, that really depends. I mean, obviously it depends on which customers we're talking about and how significant they are and what happens to the fuel surcharge. The fuel surcharge is still at a relatively high level in the 15%, 16% neighborhood. So, it isn't like it's fallen to anything close to zero. But I think we feel pretty confident that we can manage the fuel surcharge decline with higher base rates as long as there isn't a precipitous drop.

Justin Yagerman, Wachovia Capital.

Just a quick follow-up, guys. Given where we are with GDP announced today and all, how are you planning in terms of your labor in the fourth quarter and how does that compare to what you've done in the prior few years?

Yes, the kind of normal model for us is to get very aggressive on labor reductions at Thanksgiving. That's when the demand would typically start to drop significantly and we want our labor to be in a position to follow that drop in demand. So we are very aggressive. We have very detailed plans that go by location. We will be in the process of implementing those plans here shortly and we are very aware of what the business volumes are likely to be, so we will be able to get in front of that pretty effectively.

As we stand today, kind of four weeks [throughout] I would imagine that probably have been overstaffed at a lot of your terminals or is that a false assumption?

No, we're in a position with our technology to be able to match the labor level with the business levels on almost a daily basis. So our productivity numbers have held up very nicely even as the economy has softened because we're able to react very quickly.

We have reached the end of the allotted time for questions and answers. Gentlemen, do you have any closing remarks?

No. Just thanks for joining us and we'll see you at the end of the year.

Thank you. This does conclude the YRC Worldwide third quarter earnings conference call. You may now disconnect.