Yellow Corp (YELL) 2006 Q4 法說會逐字稿

Good morning. My name is Page and I will be your conference facilitator today. At this time, I would (technical difficulty). (OPERATOR INSTRUCTIONS)

I will now turn the call over to Todd Hacker, Vice President, Treasurer and Investor Relations.

Good morning and thanks for joining us for the YRC Worldwide fourth quarter 2006 earnings call. With us this morning are Bill Zollars, the Chairman, President and CEO of YRC Worldwide; Don Barger, our CFO; Mike Smid, President of YRC National Transportation; and Jim Staley, President of YRC Worldwide Regional Transportation.

Jim Ritchie, President of Meridian IQ is currently in China and will not be available for questions.

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 in 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, the sale of a subsidiary, impairment charges and acquisition related charges 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 Mike Smid and Jim Staley are available to participate in the Q&A session.

I will now turn the call over to Bill.

Thanks, Todd. Good morning, everybody. Let me start by covering our recent organizational changes.

We announced a few weeks ago the next phase in our strategy to bring the Corporation's two largest subsidiaries -- Yellow Transportation and Roadway -- under one management structure established as YRC National Transportation.

Mike Smid has been named President and CEO of the new company. Yellow Transportation and Roadway will maintain their strong independent brands in the marketplace. The new management structure will allow us to operate more efficiently and more effectively leverage our resources. We expect to increase the speed through the networks which will improve service, capital efficiency and enhance our growth opportunities. The new structure will bring added value to customers for both brands through differentiated and enhanced services.

We also announced the establishment of YRC Enterprise Solutions Group. This group has been created to meet the needs of a targeted group of growth opportunity accounts, using a single point of contact within YRC Worldwide. The group will allow our customers to more easily access the capability of all the YRC Worldwide companies creating seamless service for them and an additional growth opportunity throughout our organization.

Finally, we announced USF Bestway and USF Reddaway will consolidate into one organization operating under the USF Reddaway brand. USF Reddaway, a recognized leader in regional and on-time performance, will provide direct service to a larger geographic area, increasing speed and service throughout the network. The consolidation into the USF Reddaway brand creates a more streamlined organization and a very formidable Western service provider.

At the same time USF Holland will expand its coverage into two new states and pick up three new terminals from Bestway.

A single management team at YRC National Transportation, the establishment of YRC Enterprise Solutions Group and consolidation of USF Bestway and Reddaway will provide better efficiency and a broader service offering for our customers. These organizational changes will enhance growth and profit prospects for the Company.

Turning now to our results and the economy, our operating companies continue to execute well and responded aggressively to lower volume. While we expected softening in the fourth quarter it was more significant than anticipated. As we move into 2007, the economy is still growing but at a slower pace.

I will cover results from an operating perspective then Don will provide a bridge from adjusted to reported results and address the tax rate change.

Our fourth quarter earnings per share was $1.02 on an apples to apples basis. Consolidated operating revenue was $2.4 billion and operating income was $113 million. Our consolidated operating ratio was 95.3. The bottom line is results for the quarter were driven by the weakening economy and made worse by more softness in the upper Midwest.

Our full year consolidated revenue of $9.9 billion was a 14% increase over last year and a record for the Company. This solid revenue growth was due to the USF acquisition in May of 2005 and organic growth in all of our business units. Our earnings per share for the year was $5.09. 2006 operating income of $563 million exceeded 2005 by $19 million and that was also a record.

Our consolidated operating ratio of 94.3 was up slightly versus a year ago.

Let me move on now to our business units. Regarding the national companies Roadway and Yellow Transportation each reported quarterly revenue of approximately $840 million. Roadway had $54 million on operating income with a 93.6 operating ratio while Yellow had an operating income of $42 million with a 95 operating ratio. The lower operating income for both companies was impacted by the slower economy.

Regarding volume for the fourth quarter Roadway LTL tonnage declined by 1.7% while Yellow declined by 4.2%. On the yield side, the national companies both recorded slightly positive LTL yield improvements year-over-year.

For the full year, the operating results for the national companies were almost identical. Both of the companies recorded approximately $3.4 billion in total revenue and operating income of $211 million with operating ratios of 93.9 at each company.

Given our strategic initiatives in the announcement of the establishment of YRC National Transportation, going forward we will provide consolidated finance reporting only for YRC National Transportation. YRC Regional Transportation reported fourth quarter revenue of $570 million, an operating income of $16 million and an operating ratio of 97.1.

As we previously mentioned, the performance of Bestway has negatively impacted results. In addition, during the fourth quarter YRC Regional Transportation adjusted their insurance claim reserves practices to be consistent with the other operating companies. This was something that we did across all of our processes and we did the insurance reserves in the fourth quarter at the regionals. The result of these changes in the insurance reserves impacted YRC regional income by about $10 million.

So if you exclude Bestway and these reserve adjustments, the YRC Regional Transportation operating ratio would have been about 94.2.

LTL tonnage per day was down 3.2% at the regionals while LTL yields was up 1.1% year-over-year.

Holland, the largest regional company, has continued to feel the effects of softness in the Upper Midwest which is the Company's largest market area. As we've said, direct exposure to automotive is limited in Holland but as the industry has materially declined, it has affected the overall economy in that part of the country -- the ripple effect from automotive.

For 2006, the YRC Regional Transportation Group had record revenue of $2.4 billion, operating income of $139 million and an operating ratio of 94.3. Again, excluding Bestway and the reserve adjustments, the operating ratio for the full year would have been 92.5 compared to about 92.8 for 2005.

Meridian IQ reported fourth quarter revenue of $163 million, up 6% year-over-year and its highest ever quarterly operating income of $7.8 million, up 85% from the previous year. Meridian IQ continues to show solid improvement, posting a 95.2 operating ratio in the quarter which is 210 basis points better than the previous year.

For the full year, Meridian IQ had recorded revenue of $610 million as a result of both organic growth and the acquisition of USF Logistics. Operating income for the year was $21 million, up 38% from the previous year with an operating ratio of 96.6% for the year. On balance for the full year we were satisfied with Meridian IQ results and anticipate further improvement in 2007.

I will now turn over to Don for further comments.

Bill, thanks. As Bill mentioned our adjusted earnings per share for the fourth quarter was $1.02 and this excludes an increase in the tax rate. Including the tax impact, our adjusted earnings per share was $0.94 and our reported earnings per share was $0.80. For the full year adjusted earnings per share was $5.01 and reported earnings per share was $4.74.

Consistent with our past practice, we adjusted earnings by excluding certain charges because they are not part of our core business and believe it is more accurate to evaluate our ongoing operations without these charges. In the fourth quarter these items include acquisition-related charges, loss on the sale of subsidiary, impairment charges, and gains on property disposals.

The other item impacting the quarter and the year is a change in the tax rate. The expected 2007 tax rate was 38.3% while the actual was 39.3%. Obviously we did not anticipate a full percentage point increase in the rate but with our acquisitions and our tax planning strategies, there has been a lot more complexity recently in estimating our rate and a final true-up is not unusual.

We will tell you that we have focused on simplifying and better managing our tax estimation process; and based on a detailed analysis and tax planning actions for 2007, we are comfortable with a tax rate of 38.6% for the year.

Regarding free cash flow and our plans for [a jus], as you know normally we generate about $200 million of free cash flow annually and that was our expectation for 2006. For the year, we targeted to pay down $100 million of debt and potentially buy back up to $100 million of stock. Free cash flow was a bit better than our plan and we were able to reduce debt by $205 million and buy back $20 million of stock.

Currently our debt-to-cap ratio net of cash is about 35.5%, about where we expected it to be on entering the quarter. We have stated over the past several years that our target debt to cap ratio is in the mid 30s so we are essentially there, based on this measure.

Our 2006 net operating profit after-tax return on committed capital of 10% matched our benchmark and which, by the way, I think you know was a bit greater than our weighted average cost of capital. While we are pleased with this significant accomplishment, given the capital committed to acquire USF in 2005 and the slower economy, we still think there are great opportunities to improve our capital deficiency, and the organizational changes Bill mentioned will help us here.

[Gross] capital expenditures were $378 million versus the last estimate we gave you, about $385 million. Disposals were $75 million, a bit better than expected and as a result net CapEx was 303 million.

Now to conclude. Financial position of our Company is strong and we have the economic resources to execute our tactical and strategic plans. I will turn it back to Bill to wrap up our remarks.

Thanks, Don. On an absolute basis our financial performance in 2006 was solid but was below our expectations. Strategically we made good progress both here and in Asia. Our organizational changes have positioned us to improve both costs and growth to deliver strong results in 2006. Our strategic initiatives will continue as we further improve our networks and expand our investments in Asia.

Specifically in Asia, we plan to complete a couple of acquisitions in 2007.

Now let me move onto our view of 2007. Our guidance is based on a challenging economy in the first half of the year with an improving economy in the second half. LTL volumes will be negative during the first half and improve sequentially with year-over-year positive comparisons in the third quarter and beyond. Consolidated operating revenue in excess of $10.2 billion and a yield environment that is expected to remain competitive but disciplined during 2007. Gross capital expenditures will be in the range of 425 to 450 with disposals of about $50 million.

We are going to be following the lead of some of our competitors and change our practice regarding guidance. Going forward we will provide only annual guidance and updated quarterly. More and more, this is becoming the standard practice and we agree with it.

We expect full [year] earnings to be in the range of 470 to 490 versus the First Call consensus of 446 and I think the biggest difference between the First Call consensus and our number is that we will continue to get the synergies that we had projected and have been projecting over the past several years. Those synergies will accrue not only at the national companies under Mike Smid's leadership but also continue to accrue under Jim Staley's leadership at the regionals.

So there is more to do there and we are on track to go after that $450 million we talked to you about when we first started tracking these synergies.

We do need to emphasize, though, that expectations are that the first half of the year will have negative comps versus the prior year and, therefore, earnings will be somewhat back end loaded versus our normal seasonal patterns. In addition, most of the benefits of the reorganization will occur after the first quarter and the way to kind of think about this in the near-term is that our first quarter has ranged anywhere from 8.5% to 15% of our annual earnings.

This year we think that we will be closer to the low end of that percentage because of the economy weakness that we anticipate early in the year, and because of the opportunities that we will get from our restructurings that will occur a little bit later in the year. So the seasonality will be a little different this year than it has been the last couple of years.

Let me summarize by saying that, although 2006 was a challenging year, we made significant progress on implementing our strategy. The organization actions we have taken better position our Company to improve service, our cost structure and our capital efficiency and at the same time increase our growth opportunities.

We will now stop and take some questions.

(OPERATOR INSTRUCTIONS) Justin Yagerman with Wachovia.

Just wanted to, possibly, if you could take us through tonnage in the quarter and how it is felt in January so far? I wanted to get a sense for how that trend has gone. We have heard from some of your competitors and looking at the ATA truck tonnage index that potentially saw bottoming in November, and was curious to see if you have experienced the same thing?

I think we have, Justin. Let me give you a little color on that. We started the fourth quarter. October was a little weaker than we expected. November was significantly weaker than expected. December didn't get any worse than November but was about the same and we have kind of seen the same trend in January.

So the way I would describe it is it looks like we have bottomed out. I think our tonnage declines were a little less than maybe some of our competitors but in the first quarter we would still expect to see probably a mid single digit reduction in year-over-year tonnage.

Gross of fuel surcharges looks like yields have stayed in the positive territory as some of that is probably favorable mix shift with TL tonnage coming down a little harder than LTL. But can you give us some insight? I know that you don't break it out but directionally, how are yields net of fuel? Real pricing feeling as you went through fourth quarter and as you stand in January?

It's feeling again competitive, but very rational. And probably the best example is that our contractual renewals have been at a slightly higher rate than we expected. Our theory had been that as the fuel surcharge came down, we would be able to get more in our base rates and that is the way it is playing out.

So you really think it is the relief on the fuel? Have shippers talked to you about any worries over the second half capacity or is that something that they are not even focused on yet?

I think some of them are focused on that, but I think in general it is more the fuel search coming down -- fuel search charge coming down and the year-over-year cost of transportation being maybe a little bit less because of that.

The run rate -- I guess, backing up, Meridian had I guess one of its best quarters in terms of operating ratio last quarter. What should we be expecting in terms of run rate out of that and in terms of topline growth going forward in 2007?

I don't think we'll get there in 2007 but we have said, and still believe, that this is a 10% margin business when it's mature. We are going to be making some investments in China and other places on the Logistics side of our business. So I think you'll see continued improvement with the ultimate goal being to get that margin up to about 10%.

Can you talk a little bit about the kinds of things going on in the quarter that led to the better OR this time around? I mean, is some of that optimizing USF Logistics business or is it more on the organic side of what Meridian is doing? Just curious, because it is materially better than what you have posted in the past.

A little of both. We obviously had some work to do at the USF Logistics side of the business and that has been coming along well. We also are now getting the benefit of growth on a fixed cost platform in some of the other areas of Meridian IQ that generates good incremental income and helps our margin. So it's really a little bit of both.

I'm assuming that is an area that is going to be fed also by this new Enterprise Solutions Group that you guys have formed?

Yes. That's exactly right. For some time now our customers have been saying, "Can't you guys organized yourselves in a way that makes it easier for me to do business with all of your companies?"

And I think for many of our customers this Enterprise Solutions Group will very well-received new approach and should generate an ability to grow the business faster and higher margins.

Am I right to think about that Enterprise Solutions Group is -- you have different cost basis in your different brands in different parts of the country. Maybe Roadways' network is more profitable in some places and Yellow's is more profitable in the other. With your larger customers who may be using both brands you can then kind of rejigger their spend so it's probably cheaper for them and more profitable for you?

I think, yes. The way we will start obviously is we will try and optimize our capabilities to meet whatever strategy the customer has in that process. I think we will generate more growth and better margins.

Okay. I appreciate your time. Thanks.

Jason Seidl with Credit Suisse.

Couple of quick questions. Bill. As I listen to your guidance you said that the 1Q is going to be towards the lower end so if you just call it 10% that's about 47 to 49. You guys are comping against probably your easiest comp of '06 from a margin basis, given what went on at Yellow Transport. I guess I'm a little surprised that 1Q would be so low. Is this just purely a volume issue going on here with you guys?

Well the biggest driver there is, obviously, the negative tonnage year over year. Even last year we were still operating in a very robust environment from a market standpoint. So that is the biggest single driver here. Some of our other businesses, obviously, had very good first quarters even though Yellow didn't. So there is a little bit of a mixed bag there but at the end of the day I think the economic activity is the biggest lever there.

Okay. Bill, real quick you mentioned China. Are those going to be more the non-asset-based side of the acquisitions or are you finally going to put some assets in the ground this year?

Probably be a little bit of both.

Fair enough. Don, couple of quick questions. CapEx, you are probably the first company that I've heard that is raising CapEx from '06 to '07. Could you give us some of the buckets and the reason why you guys are picking up CapEx?

Yes, Jason, be glad to. We have got if you will if you look at things on an apples to apples basis, recall that we have mentioned in the past that we leased about $45 million worth of agreement this year due to attractive leasing rates. So if you recognize that next year in '07 we are not going to be doing that, the actual gross CapEx ends up at about the low end of the range that we have.

But if you talk about where we are spending money, we -- basically what is happening is, we are -- we have some growth initiatives on the rolling stock side. Some of that is being offset make better capital deficiencies. In addition we are continuing to optimize the networks and so, we will be spending -- increasing the spending there but over the entire project those that will actually be cash flow neutral.

Then finally we are increasing our IT spending to really help us on the logistics and the end to end strategy that we have there. So what you're seeing is rolling stock not as much of an increase, because of the capital deficiency and then increases on the technology and the land and structure side.

But if you added in the leasing from 2006, it's basically flat year-to-year.

That explains it. I appreciate that detail. Also, Don, the vacation accrual that you guys took with, I guess you conformed to the [practice's] subsidiary. One, could you tell us whose subsidiary it was and, two, could you walk us through how and why you did that?

Yes. This is Bill. This is in the bucket of getting consistency across all of our operating companies. Roadway had a different process and a different way of accruing for vacation than Yellow did. So we got basically Roadway on the same process as Yellow and that's what that was.

And this is going to the sort of like when you change the depreciation schedule the third quarter you will continue to benefit until you lap it?

No. It is a onetime thing.

A onetime thing?

Yes. Onetime.

Tom Albrecht with Stephens Inc.

I want to talk about that Enterprise Solutions just a little bit more. I guess I'm a little confused how it makes the shipper easier to do business with your Company because aren't they still going to be dealing at the local level with a sales person discussing their traffic needs?

Yes. I think it is really at the buying and strategy part of the interface between our Company and theirs. The bigger, more complex companies have basically said, "Rather than having eight people come at me each with a business card and a different value proposition, can't you organize yourself to come at me in a more consolidated way, so that it is easier for me to figure out how I can use your capabilities and how you can help me?"

This is not going to be for every customer. It will be for a targeted group of customers, probably the larger, more complex customers. They are the ones that see real value in this.

And indirectly is this a backdoor way to better bundle your services, too, given what some of your competitors are able to do with the bundling in their varied products?

I don't think it is a backdoor way but it's definitely a way to put all of our capabilities in front of the customer and let them see what we can do for them and pick out what has value.

Then just on the tonnage. First, second -- I mean the declines are kind of what typically happens when things slow down. Particularly at Yellow and Roadway, but it always seems like the declines end up being more than recovery down the road and I'm wondering if you still believe that is the case? Because your declines will be 3, 4. Sometimes greater than that. And rarely do we see 4, 5% rebounds of tonnage. So do you need to be thinking now about costs that need to be taken out permanently if the recovery is more consistent with lagging the declines?

Yes. We always plan for the worst and hope for the best, Tom. And part of what we are going to be doing this year obviously is looking for that next 100 million in synergy so we will be aggressively taking cost out while we hope the economy starts to turn. The economy will get back to where it was eventually. Sometimes it takes a little longer.

But I think the way we run the business is really to assume that we are not going to see the turnaround until we are actually in the middle of it.

And then as you look at the second half, you did state that you do expect volumes to turn positive as early as Q3. Can you share with us the magnitude of the range of your expectations for the tonnage recovery? Even if it not exactly Q3?

Yes, I think we are looking for low single digit kind of modest year-over-year improvement in the third quarter and then, hopefully, getting better in the fourth quarter.

Okay, because when I think of you guys I think of low single digit literally being that 1 to 2% range more then I think of a 3 to 4 type of number. But I guess only time will tell.

Yes. It depends a little bit obviously on the comparisons, Tom, and also we have gotten some regional companies that are in faster growing segments. So when the economy comes back they should benefit from that. But overall we are not expecting this thing to take off like a rocket.

We are expecting year-over-year comps in the third quarter to start to become positive but as I said at a low single digit kind of level.

Then lastly, what is the latest update on Yellow's attempts to do regional overnight business?

We are still working on the details of that. Obviously we have to go through a change of operations to get that done. As we get closer to that we will talk more about it.

Thank you.

Jon Langenfeld with Robert W. Baird.

Can you talk about the synergies? Just kind of the buckets we're looking at and don't want to quantify the exact size. Maybe discuss some idea where and when we're going to see those?

Sure. I already talked a little bit about when. We will see a little bit of a back end load on some of those but they really follow into the whole category of optimization of our networks and better use of our resources. We are just going to be able to take a much more comprehensive look at that with one management team than we would've been able to do with the two separate management teams.

But just in general terms, most of the opportunity there falls in the network optimization and leveraging of resources kind of category.

And is that -- ? I mean if I look at your full year guidance does that end up being 10% of your earnings estimates? 20%?

Well, again, going back to this whole synergy discussion it's really hard to quantify exactly what's a synergy because some of the stuff is so marbled into the operating processes we've got in the two companies. But it's consistent with what we've been saying all along about getting the next 100 million out over the next couple of years.

And there's not -- I mean when you look at it relative to what you have been saying, we are not talking about the bigger pie of these synergies based on some of these initiatives you are doing? It is more just relying on the groundwork that has been laid over the last year and a half?

Yes. What this has been is obviously something we had planned to do at some point in time and this gets us the ability to go after the next level of synergies. And it is part of the $450 million we have been talking about right from the beginning.

And then as far as free cash flow, I'm assuming you think kind of a couple hundred million in free cash flow this year. Is that back end weighted again like it was in '06?

Yes. It will be every year in our business. Most of the free cash flow we generate is in the second half of the year.

Then are you assuming, just based on your interest expense assumptions for '07, it doesn't seem like you are assuming a whole lot in the way of debt paydown.

We have got $200 million of free cash flow, probably more than that, and we will decide what to do with that free cash flow as we go through the year.

But the $90 million interest expense, is that assumed no debt paydown?

It's a modest paydown in debt. As we said we are pretty much in our sweet spot from a debt-to-cap standpoint. So there's no real impetus to pay down a lot of debt at this point.

And would you access the balance sheet early in the year to buy back the stock?

Everything is relative and it just depends on stock price and relative use of cash and that kind of thing.

Good enough. Thank you.

Jordan Alliger with Deutsche Bank.

You made some organizational changes that you've talked about. Are there any other sort of initiatives along those lines? Or is pretty much the die cast in terms of where you want to be from a structural standpoint now?

I think we are in pretty good shape. We will probably do a little bit more tweaking at Meridian IQ but other than that I think we're where we need to be.

Then, just a final question. Then talk about back half, things looking better and bottoming; and just based on what you saw in the fourth quarter where tonnage was obviously for most of trucking below that of economic growth generally speaking. Is there something you could point to and talking with your customers or otherwise that gives some comfort that we will sort of start this gradual upslope? Or is it really just the easier year-over-year compares that are coming up?

That's certainly a part of it. The reality is that all these economic numbers will get adjusted at least three more times before they put them in the book. So it is kind of hard to know exactly what the economic activity was in the fourth quarter.

But I think our customers still much differently than they did in the 2001, 2002 timeframe because the drop there was so precipitous and it didn't look like things leveled off until a couple of years later. Here it looks like things have reached a lower level but have leveled off and that is why we expect that, over time, as the comps get easier and the economy starts to grow again, that we will be tracking that.

Thanks very much.

John Barnes with BB&T Capital Markets.

Most of my questions have been answered but going off of what Jordan just asked in terms of more reorganization -- I know you have gone through a fair amount on oppositions and bringing it under one management team and things like that. But from an operations standpoint, I think when you first bought Roadway there was some discussion maybe once you were two, three, four years into the process there would be an opportunity to begin to do things like maybe consolidate some of the line-haul business. Or begin to do more aggressive at [sharing] facilities and bring it more under one umbrella. Can you give us an update on from an operation standpoint, where you think you are today and what opportunities do you have? Are they available in '07 to do things like that? Or are we still a couple of years away from being able to integrate any more of Yellow and Roadway together?

Let me start and I'm sure Mike Smid will to add, but obviously this leadership change where we have consolidated the management team is focused on being able to do those kinds of things. When I talk about network optimization and leveraging our resources more effectively, we are looking at things like line haul and seeing if there are ways to do that more efficiently with fewer assets. So those are definitely in the mix for 2007 but I will let Mike talk about that.

There are a number of changes that probably not quite as evident as you read the external announcements. But within the Roadway organization as well as the Yellow organization, there have been substantial realignments of those types of resources. And then within the National Transportation Group, the development of a series of resources that we'll get involved with direct responsibility for executing and in some cases managing those areas as we go forward. Very rapidly putting together a group that will have oversight and optimization responsibilities for network equipment assets and really the velocity and movement through our networks to improve our utilization of both facilities and equipment.

The opposite side of that is, this does offer the opportunity to move much more rapidly into some areas of common technology, common technology development, rollout of real-time information, tools and our equipment. At the same time, from a little bit different perspective take a different approach to quality, safety performance as well as a little bit different approach to the development of new services, new business opportunities and deal with the different segments of our business a low bit differently to prevent some of the duplicate or overlapping efforts.

I think that will allow us to be much quicker in terms of delivering new services and new capabilities.

Mike, you've had to go to the Teamsters a couple of times here in the last -- what? -- year, maybe a little longer, but you have had to go through a couple of requests for change of operations. Are you done at Roadway with that or --?

No.

Are you still having to go through some of that?

We have significant change of operations for the Roadway network planned and in process right now. It will occur yet in this first quarter and it is a significant step toward taking that network to the next step of one touch type distribution. A lot more straight lines between points enhance their performance and utilization of equipment and facilities; and throughout this year, there are additional changes planned.

We are going to take a look at those changes and changes that occur in both networks much more closely and with a lot more side-by-side analysis than we may have in the past, looking for more significant opportunities to leverage that size and scale overall.

Bill, if you are going through that kind of change in the first quarter, two questions. Number one, is it a good quarter to be doing it? Because one, you are seasonally a little quicker on volumes; two, you are cyclically I guess right now a little weaker. And then I guess the second part of that is, have you been able to quantify and is it in your guidance what the cost of that change is? And what kind of EPS impact are we talking about in the first quarter? Because I would like to get an idea of X that kind of event what would your earnings power look like in the first quarter?

Yes. I think, first of all, the best time to do any kind of a change of operations is any time you are not in a peak from a seasonal standpoint. So first quarter is a good time to do some of these things. And we have built in the cost associated with the change of operations as well as some other changes that we'll make later in the year in our guidance. So everything is in there. In terms of the cost of this one, Mike, what do you think?

The total cost of it, embedded in the plan, is in the $5 to $7 million range. But I will say that as we take a look at the change that we made last year, the majority of the significant change and how we handle volume and how we handle our distribution network went into place. Each of the changes we make as we go forward has some fairly instant benefit and those benefits are built into our plan in that once we commit to handling shipments at the point of origin, now each time we make a change and bypass intermediate distribution, we have benefit to it. So the benefit follows very, very closely with this one in comparison to the very first change we made.

So Bill, $5 to $7 million in the first quarter. You are treating that as an expense. This isn't a onetime that you are going to make a change to your adjusted number? This is fully expensed and in your EPS guidance for the first quarter?

No, that's right. Yes. The cost is in there and the benefit we expect from the change is also in there.

All right. Can you quantify what kind of EPS benefit we are looking for? I guess I imagine it is over second, third, and fourth quarter and probably ramps up over that period of time?

Yes, there are so many things that are going to be happening here this year to try and split out exactly what is driving each piece of the earnings growth would be pretty difficult to do and I'm not sure we want to do it. But I can tell you that the plans that we have for improving our networks, both the cost of those plans as well as the benefit derived from those plans, is built into the guidance for the year.

Very good. And then, last question. As you look at Yellow and Roadway side-by-side today, when you bought Roadway I think there was a very stark difference in the way you were handling LTL business. Where are you in terms of similarity today? Does Roadway look 90% like Yellow looks or is it much closer than that?

I think by the time I get through this change of opposites, Roadway will be very close. Mike, would that be a fair statement?

It will look more similar. There are differences in the network and there will continue to be some differences in the network based on different densities and different flows and different development over the years. But the concept of reduced handling and more direct routes and reduced acuity from a standpoint of our line haul networks, those -- by exercising those types of contests it does create a pretty strong similarity.

And some of those similarities as they become aligned also offer some of the next benefits and opportunities as we start to look at the networks a little bit closer from a common point of view.

Do you have anything planned similar for the regional business, Bill? Or is that get through Roadway and then attack the regional businesses a similar way?

It is similar but different. And I will let Jim talk about this in a second but the regional companies have been working on really providing the opportunity to operate those businesses as a portfolio and a family of brands, as opposed to completely autonomous separate brands. So that work is continuing to go on but, Jim, you might want to give some color to that.

We think with the consolidation of Bestway into Reddaway, as Bill mentioned, in his remarks gives us a very strong Western regional footprint. I think everybody acknowledges Holland's key role in the Midwest; and New Penn continues to offer terrific service in the Northeast.

So we now have three very good operating companies that are first and foremost are regional performers dedicated to that regional market. But we have also by consolidating the regional companies from four down -- from five to four to three, we have eliminated some of those natural barriers that were there in terms of freight moving between the regional companies.

So I think what we have now within the regional family are three very good companies that perform very well in their distinct marketplaces, but also have good advantages on inter regional businesses.

Just to kind of quantify that, you know we started out thinking there was about $150 million worth of opportunity at the regionals from a synergy standpoint. We are tracking very well against that.

And do you have anything planned? I know you don't have to do the same kind of formal change of operations but do you have anything planned of a similar magnitude as what you're doing at Roadway. Or any kind of expense associated with making some changes in that operation?

Not to the same level as changes that Mike was talking about with the Roadway network.

Ed Wolfe with Bear Stearns.

Couple of different questions. Don, can you just go over depreciation guidance and interest expense which I think you said was going to be about $90 million a year. Is that right?

That's correct. Depreciation for next year should be around $250 million and the interest expense is, Ed, as you said, 90 which is what we obviously guided to. If you take a look at what we have this year, interest expense is about $88 million and that's at about a 5% interest cost. And we expect that the interest rate will actually go up a bit next year somewhere in the 5.5 to 6% range.

Recall, remember, we did mention or Bill did mention that we are looking at acquisitions in China. So it is one of those cases where you tell me what the industry environment will be and we will be able to give you a better estimate on the interest expense.

Are Chinese acquisitions in the CapEx guides?

Chinese acquisitions are not in the CapEx, but they obviously are in the -- it's a use of free cash flow.

And in the EPS guidance for '07 obviously fuel impacts that quite a bit. What kind of assumption do you have for the price of fuel on that?

We are kind of assuming it is where it is for the year.

So it's at where it will average the fourth quarter kind of thing?

Whatever levels we have got right now we are assuming that those carry on through the rest of the year.

In terms of restructuring, Bill, have you gotten to the point where at some point you would entertain doing something more aggressive? I mean you have so many terminals and so much real estate. Is there anything that would permit you from deciding to shut down a good majority of them if you wanted? Not a majority of the terminals, but a good amount, a real amount and have some real estate gains on these things? And risk losing some business if that's what it took to sell some real estate? Is that something that you can do or would the Teamsters not allow that to happen and that is just not in the cards and I'm thinking about this as an impossibility?

No, I don't think it's really relevant from a Teamsters standpoint, but what is relevant is we want to grow earnings as fast as we can. We want to grow the business. So I think we will be looking at excess assets or better use of existing assets as we work our way through 2007.

There is really nothing to prevent us from doing whatever we need to get done there. But at the into the day we are focused on making the Company as successful as possible long-term and growing the Company and particularly earnings of the Company as quickly as possible. So all that goes in the mix. As we said we've got about $50 million of disposals in this year's guidance. It could end up being more than that if we find some things that we really don't think we need but that's probably a pretty good placeholder.

Because you've said before in releases and publicly that there's the ability to maybe swap a Roadway terminal for a Yellow terminal where one is overutilized and one is underutilized. But I'm guessing there -- in the 50 million there's also an opportunity to shut down a couple. Is that fair?

Sure. Let me grab Mike to talk a little bit more about that.

In the last year and a half, for example there are some 22 facilities in the Roadway network. We have a process where we constantly -- not just between Yellow and Roadway but across the entire enterprise -- are looking to optimize pieces of properties. In lieu of expending additional capital, we do swapped companies in a facility. We have continued to look and add shared facilities. The overall plan that we are involved with right now as you see this second phase of the Roadway change really the net goal of that was to reduce the terminal count by between 40 and 50.

However in order to do that we also had some offsets where we have to make some facilities a little bit larger.

So that process does go on continuously. Over the last several years we have had more than 50 fewer pieces of property than we had. But we have a few facilities that are a little bit bigger than we had at one time. Majority of our buildings, although we have identified some where we can add some volume or continue to swap, operate in the 90% range in terms of capacity and some that operate in the 120s, so well above the capacity that they were built for.

So it's a constant process. We do it all the time. It's got some detail calculation and modeling that goes into capacity and those capacities are quite different between a company like Roadway and Yellow and perhaps a regional business. Different capacity and door requirements for different parts of our business.

Thank you. That's helpful. I think it was your '05 10-K that listed a potential $2.5 to $3 billion pension liability for the Central State Teamsters. Do you know roughly if you add the other 20 smaller Teamsters funds, what that number could look like?

Yes. That's the total for all of them and, again, that's a contingent liability. With the legislation that has been passed and the ruling by the IRS we have got about a ten-year runway to meet any of the requirements there. We think that is a very low-risk kind of contingency.

In terms of operations, if I just look at yields on an LTL basis, Yellow, 0.3 roadway 0.5, obviously, gross of fuel so maybe add a point to that. The Regional Group saw a little bit better yield and I'm trying to understand. Is it a little bit more competitive in the long haul business right now just because tonnage is worse than the regionals or shouldn't I read too much into one quarter?

I think it is tough to read too much into that. We constantly balance volume and yield and I think our volume numbers are a little bit better than our competitors'. Maybe the yield a little worse but it is a constant balance between volume and yield. The regional companies had a little bit better yield than the nationals but it is hard to read too much into that.

And what is the timing right now for the rollout of your next eight products in Yellow? Can you give an update on what terminals you are in and when you are really going to take that to market in a bigger way and how big that opportunity potentially could be?

We are working through that right now. So we really don't have the specifics. We are putting together the change of operation language for that so I can't really be any more specific than that at this point. We would expect to have some positive impact but I don't think it is going to be material to the earnings for the year.

Okay but last I heard you were testing in 55 centers. Is that right?

Yes that would be correct and based on the results of the testing we are, I think this is a good example of one of the items to take a much closer look in a side-by-side view in comparison of the networks and for us to really understand how do we approach this between the brands and how do we approach it going forward. So it's still a subject of a fair amount of research and analysis. We still would hope this year to make some progress with it.

Might this start to go over to the Roadway side too or is this all going to be on the Yellow side?

That's the type of work that we are taking a look at right now.

It is a good example of being able to optimize and support differentiation of the brand. That and the type of services that you begin to introduce between the brands offer a little bit of diversity as you go forward.

Thanks for the time.

Brannon Cook with J.P. Morgan.

Couple of additional questions. First off, I was trying to get an order of magnitude of the size of the Enterprise Solutions Group that you're starting. What percentage of your LTL revenues are going to be sold through that to that group? Should we think about it 10 to 20 or is it going to be a bigger component than that?

First of all, the size of the group is not very big. We are talking about 25 people or so. So it is not a huge group but it is a group that obviously reaches down in all the operating companies and has a team that really supports specific customers.

So from a number of people standpoint it is not a big number. From in terms of the potential from the target and account group that we are looking at, there are billions of dollars worth of potential in that targeted account group.

So we should think about that ramping up over time in terms of the amount of your revenues that flow through that group?

Yes. It should ramp up over time although the earnings and the revenue will flow through the operating companies. So there won't be any separate P&L for that group.

Okay. Then just a question on price. Obviously we saw the fourth quarter volume weakness and broadly speaking it looks like pricing held up pretty well in the LTL space. As we get into January here and you guys are competing on new business wins and different bids, are you seeing the industry continue to act pretty rational or are using some of your competitors get a bit more aggressive on price?

No, it's been pretty consistently rational. Obviously, you are always going to have pockets of crazy behavior. But, overall, I think we are still seeing what I kind of described earlier which is, as the field search surcharges come down we have gotten basic rates or increases in our base rates at a little bit higher level than expected.

Obviously FedEx [buying] walk-ins UPS is looking to be a bit more aggressive with overnight. Are you seeing them in the marketplace more so than you have in the past?

No, I think it has been fairly consistent. Those competitors have been out there for a long time. They're still out there so I don't think there's been a material change there.

Thanks for the time.

David Ross with Stifel Nicolaus.

I have a question. I was reading the third quarter '06 release from October and it said that YRC Worldwide employs 70,000 employees and then this release came out and said that YRC Worldwide employed 66,000 employees. I was just wondering where the 4000 employees went and what segment they came out of?

Well you know the issue here is one of partially of seasonality because we have a lot more people working for us in the summer than we do this time of year just because of the volumes that we support. But we also are becoming more efficient and have had a couple of companies that we've consolidated. So all of that plays into the lower number.

Then on the yields, yields -- obviously not just pricing but it is also a mix issue. Could you give me some color on I guess the length of haul changes at Yellow And roadway year-over-year fourth quarter '06 versus '05?

Yes I think both length of haul and weight for shipment we had what I would call the Katrina Effect in last year's numbers and if you take that out there has been no significant shift in either length of haul or weight for shipment.

Weight for shipment was down over 3% in just LTL for Yellow and Roadway?

Yes and that's what I was talking about in terms of the Katrina Effect. If you take that out we are fairly consistent year over year.

So is length of haul flat year over year then or is that slightly up our down?

It is pretty consistent.

Okay, just roughly flat.

Right.

Also you mentioned in your CapEx guidance but there was some growth initiative done in rolling stock. I was just wondering why you'd be growing the rolling stock when tonnage is down?

Yes. That is primarily on the regional side of the business where we would expect faster growth.

You would just shift assets from the nationals over to the regionals?

We will be doing some of that is well.

Overall you expect, actually, due to the capital efficiency initiatives apples to apples or actually be less CapEx on rolling stock. That is why I've mentioned goes into some of the land instructors for network optimization in some of the IT as well.

Then, just talk a little bit about rail costs in the fourth quarter. Obviously you probably put a little bit more on the rails last year in the capacity environment for this year?

Yes I think there are a couple of pieces to the rail discussion. One is we been able to mitigate some of the cost but there still was a significant delta year-over-year and in our rail cost. The second piece of that is we are in the middle of negotiating a new contract with the rails and much to our surprise they want to give us a price increase. So we have got that going on right now. There will be a delta in rail costs 2007 over 2006 and, again, that is built into the guidance.

Is there any service improvement that's going along with that price increase?

Not that we've seen.

Last question is, you have the two different brands Yellow and Roadway that are not going to be managed under Mike. In your view, what is right now the stronger brand in the marketplace? Yellow or Roadway?

I think they are both strong brands. Depending on the set of customers you pick you get either Yellow or Roadway coming back as the stronger brand and that is why they are so valuable in the marketplace. They have both got great brand equity and they both got a set of really loyal customers.

Thank you very much.

Art Hatfield with Morgan Keegan.

I think most of my questions have been answered but just a couple of quick ones. The Teamsters were brought up at one point. And I was wondering how receptive have they been to your efforts to kind of consolidate things and improve the operations at both Yellow, Roadway, and even the regional units?

They have been very supportive of everything that we are trying to do to grow this business and I think part of the reason that we work well together is that we have done exactly what we said we were going to do in terms of trying to continue to grow the business and add more jobs. We have had a couple of companies that were pretty badly damaged on the non-union side of our business that we took action to close. But, overall, I think we're getting good support from the Teamsters and basically are being driven by the fact that we do what we say we're going to do with them. And we have grown the business and grown a number of Teamsters over the last few years.

Then, finally, Bill and you may have mentioned this so I apologize it if you did and I missed it. Your guidance for '07 when is it do you expect volumes to turn positive year over year?

Probably sometime in the third quarter.

Do you have a feel if that is like early or late in the quarter?

I wish I knew. It's pretty much a wish and a hope at this point. I think what we are trying to do is model what most of the economic experts are saying which is, the second half should be stronger than the first. And based on the economic forecast that we are using it looks like that's about when the year-over-year counts will start to become positive, but there's certainly no specificity around that either in terms of when or how much.

So just for your modeling purposes, the midpoint just at some point in the third quarter, things should get better?

Yes. And as I said a little earlier we are in the third quarter, I think we are talking about low single digits as being sort of the year-over-year comparison and then it should get better in the fourth quarter.

That's fair. Thank you very much.

Mr. Hacker, do you have any closing remarks?

Not today. Bill?

Thanks for joining us and we will talk to you at the end of the first quarter.

Thank you. This does conclude today's conference. You may now disconnect.