Yellow Corp (YELL) 2007 Q1 法說會逐字稿

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

Good morning, and thanks for joining us for the YRC Worldwide first-quarter 2007 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, Jim Staley, President of YRC Regional Transportation, and Jim Ritchie, President of Meridian IQ.

Statements made by management during this call that are not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This includes statements regarding the Company's expectations and intentions on 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. For a full discussion, please refer to our 10-K 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 reorganization expenses and property gains and losses 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, Jim Staley, and Jim Ritchie will participate as we discuss each of their segments. I will now turn the call over to Bill.

Thanks, Todd. Good morning, everyone. Despite making good progress on our strategic initiatives, the quarter did not come in as we had planned. The Company's performance was impacted by the weaker economy, particularly in the upper Midwest, adverse weather conditions, and the operating performance of Bestway prior to the combination with Reddaway. The weather was the worst I've seen in my ten years in the industry and the economy clearly grew more slowly than any of us anticipated. In fact, the government just issued a report this morning that the economy is growing at about a 1.3% rate now, which is far lower than the 2.5% previously reported. The general consensus of most economists appears to be a pushing-out and improving economy by one quarter, which will continue to impact us as we move through 2007.

Before I address our operating results in more detail, let me give you an update on two of our strategic initiatives. First, the YRC National Transportation management team continues to make significant progress on providing a wider range of services and realizing capital efficiency. The group is on target to achieve our previously-announced growth initiatives and cost reduction targets. Second, the new YRC Enterprise Solutions group has been strongly received by our top-tier customers. We're encouraged by the potential growth prospects of providing a strategic point of contact and leveraging all of our capabilities in the YRC Worldwide portfolio of companies.

Now, let me briefly cover the first-quarter consolidated results, since you have the details in the earnings release. Our first-quarter earnings per share was $0.20. The impact of adverse weather conditions throughout the U.S. totaled approximately $17 million, and that translates into about $0.17 a share. These expenses included costs on the labor side and also the impact of missed revenue. Consolidated operating revenue was $2.3 billion. That was down almost 2% from the prior year. Operating income was $37 million and our operating ratio was 98.4. The impact of weather on the operating ratio was about 0.8 points, or about 800 basis points.

Let me move on to the results of our businesses. As we had previously stated with the formation of the YRC National Transportation group, we will now report Yellow Transportation and Roadway as one business segment. The quarterly revenue of YRC National was $1.6 billion, down 2.2% year-over-year. Operating income was $40 million, with a 97.5 operating ratio. The slower economy and adverse weather conditions heavily influenced the operating results, however the operating results improved by the end of the quarter. For the month of March, the operating ratio was 93.1 for the National group, compared to last year's 92.6, so only about a half a point off, from an operating ratio standpoint.

For the first quarter, YRC National Transportation LTL tonnage declined 3.8%. That was within the range that we had guided, saying we thought we would be down mid-single digits there. In spite of the slower economy and weather challenges, premium services continued to show growth, increasing by a total 8%, which we think is good news. On the yield side, we saw positive improvement year-over-year, with about a 2% increase. While the pricing environment is more competitive than it has been for a couple of years, the market remains disciplined, overall. As you know, we continue to balance the trade-offs between volume and yield and a good a way to test how well we're doing at that is to look at the deterioration in operating ratio from last year to this year between us and our competitors, and I think we fit pretty well in a comparison.

I now going to turn it over to Mike Smid to provide some additional comments on the YRC National Transportation performance in the first quarter.

Thank you, Bill. During the first quarter, most significant negative impact had to do with weather conditions. We did experience closures on 42 days in the course of this quarter across our national network, affecting 23 different states. The majority of those closures were between one and three days. That had negative impact on repositioning of equipment, driver utilization, load average, volume generated in those areas, and general equipment and fuel cost. The volume changes in the course of this quarter had a negative impact on labor mix. We did through the course of this quarter have almost 2400 employees in a lay-off status and in the course of that, it shifts our labor mix to some of the more expensive and lesser use of the lower wage and fringe structures.

We did in the quarter complete the National Transportation reorganization, as well as reorganization of the structures in Yellow and Roadway, shifting of focus toward growth, the quality of the services we provide, elimination of duplication, and most of all, efficiency. In the course of the change of operations that we completed in the Roadway network, had immediate positive improvements in March, resulting in reduced miles as well as greater efficiencies in handling. As we moved into March, we did see an improvement with the weather, the freight mix and were able to attain or exceed productivities in each of those categories that were measure.

I'm pleased with the new organization and positive results as we move through March and progressive improvement on the volume that we saw move through our system from January, February, and then through March. As I mentioned, the new organization is focused on growth. Some of the initial efforts within our business -- segmentation, development of new service and releases of new services as we progress into the second quarter, new efficiencies from an equipment standpoint, and overall management of utilization of equipment, resulting in fewer pieces of equipment in our business. We have optimized the sales organization, pricing organization, created new connections to support the growth in global supply chain and relationships with MIQ.

Thanks, Mike. Let me move on now to our Regional segment. YRC Regional transportation reported first-quarter revenue of $576 million, operating income $2 million, and an operating ratio of 99.7. Obviously, we're not pleased with the performance of this group. In addition to the economy and the weather, there were a couple of company-specific things, which Jim Staley will talk about in a second. The performance of Holland was heavily impacted by the economic conditions that we talked about previously in the Upper Midwest. Excluding the impact of the weather and the Bestway integration into Reddaway, the operating ratio for Regional Transportation would have been about 97.5. As for volume and yield, LTL tonnage per day was down 2.6% while yield was up 1.1% year-over-year. With that, I'm going to turn it over to Jim and let him give you a little more color.

Thanks, Bill. As everyone has learned, we had very poor operating conditions and results for all of our companies in January and February. The economic conditions in the core Holland area were very challenging. We continue to see volume and competitive pricing pressure in that key Midwest market. The consolidation of Bestway into Reddaway created some operating cost increases and business loss, primarily in the Bestway service area. The networks are now fully combined and improvement opportunities are being identified and addressed.

March results were much improved. Holland shipment count turned positive on a year-over-year basis, increasing in March by 1.2% over last year, but weight per shipment remains negative by approximately 2%, which translates into still negative tonnage comparisons versus last year. The Bestway corporate office has now closed and operating performance of the combined Bestway Reddaway network is showing steady progress. Bestway's stand-alone contribution was a $9 million loss for the quarter. However, we are now very comfortable with our regional alignment of New Penn in the Northeast, Holland in the Midwest, and Reddaway in the West and Southwest. Glen Moore remains a key asset for us in the truckload sector, operating in that market as well as providing line haul services to the regional companies.

We feel very good about the brand equity that each of these regional companies has. They are well-recognized and supported in the marketplace and, as I said, very comfortable that we have the right structure going forward after dealing with a lot of issues post USF acquisition. Thanks, Bill.

Thank you, Jim. Let me move on now to our logistics segment. Meridian IQ recorded revenue of $150 million, up 7.1% year-over-year as a result of organic growth. Operating income for the quarter was a slight loss. The softer economy and higher-than-expected costs also affected the results at Meridian IQ, but we did have, again, some company-specific things, which Jim Ritchie will address here in a second. We did see improved performance sequentially throughout the quarter, with the March operating ratio of 96.3. In addition, Meridian IQ made good progress on its strategic initiatives, including investments in China. I will now turn it over to Jim and he can give you a little more color on Meridian.

Thanks, Bill. Obviously, the quarter and results in the quarter did not meet our expectations and January and February, in particular, were disappointing. With the sluggish economic growth and lower volumes and yield pressures across all of our businesses, we we're just simply too slow in adjusting some of our costs out of the business. In particular, our flow-through organization suffered from some low labor efficiency, as well as further investment in our management infrastructure for growth in the Asia Pac region resulted in additional costs in the quarter.

In March we launched a very aggressive cost management restructuring program that will help us offset the impact of the competition pressures, as well as the economic pressures, and provide some structural advantage for future growth. We also recently announced the hiring of John Carr, who is a former president of BAX Global Logistics, as our President of the Americas and Europe. John brings a deep skill set and operational excellence, very good on the cost management side, as well as understands the global supply chain solution process and is a real expert in the industry. We're expecting great things from John.

In regards to China, over the past six months we have evaluated over 700 different companies and have narrowed that list down to a handful of solid companies that have excellent management-client relationships, geographic coverage, and technology. We have been in deep discussions with these companies that have gone very, very well and we would expect to finalize two acquisitions in the Q2-Q3 timeframe. Once those acquisitions are completed, we believe it will position YRC Worldwide to have the most comprehensive transportation and logistics network in China that focuses on large shipments, supported with some real solid technology, which is in direct feedback of our clients here in the U.S. in terms of what they're looking for in that marketplace. So we're pleased with that progress and we will have more to report in the future. Bill, I'll turn it back to you.

Thanks, Jim. I'm going to turn it over to Don, now, for some more color on the financial side.

Thank you, Bill. As Bill mentioned, our adjusted earnings per share for the first quarter were $0.20. Including re-organizational charges and gains losses on property disposals, our reported earnings per share was $0.02. Consistent with our past practices, we adjusted earnings by excluding certain charges because they are not part of our core business and we believe it is more accurate to evaluate our ongoing operations without these charges. In the first-quarter, these items include a restructuring charge for the formation of YRC National Transportation, a restructuring charge for the closure of Bestway, and losses on property disposals.

Turning now to free cash flow and our plans for its use, as you know, we normally generate about $200 billion in excess free cash flow annually. We are off to a very good start in that free cash flow for the first-quarter improved by $110 million over 2006. The primary drivers for that cash flow, even though net income was obviously lower and CapEx was higher, was an improvement in operating working capital, tax planning, and change in wage payables to less bonus earned in 2006, and that, by the way, is very consistent with our approach to variable compensation.

I would also like to make a comment on tax planning. We have very detailed plans to improve our cash flow through tax planning and we have been able to execute those plans for the past several years and fully expect to be able to continue to do so as we go forward.

For 2007, as I said, our excess expectation for cash flow is in excess of $250 million. Currently, our net debt-to-cap ratio is approximately 35% and we have stated over the past several years our target is in the mid 30s, so essentially, we are there. Now, potential users for free cash flow in 2007 continue to be the acquisitions in China, as Jim Ritchie mentioned, additional pension contributions, debt reduction, and stock buybacks. We have reduced our target for capital expenditures for the full year to 375 to $400 million and really that is due to the combination of better asset turnover than we initially anticipated and, obviously, the economic growth being pushed out a quarter. Finally, we have forecast our tax rate to be 39% for the year and, again, feel fairly confident in that rate at this time. I will now turn it back to Bill to wrap up our remarks.

Thanks, Don. Let me move to our updated view of 2007. Our guidance assumes a softer economy than previously anticipated, with an improving economy in the second half, but overall GDP growth of about 2% or maybe just slightly less. Given the first-quarter performance and the slower economy, we expect full-year earnings to be in the range of $4.00 to $4.20. As indicated in our previous full-year guidance, earnings are weighted to the second half of the year. Let me just kind of quantify that for you. Historically, we've done about 60% of our earnings in the second half of the year. This year because of the first-quarter weather impact and the fact that we're going to have more synergies dropped to the bottom line in the second half, we're going to probably be a little bit more heavily weighted in the second half, probably in excess of 70%.

The next quarter is going to continue to be challenging. If the economy continues to improve, we expect to see positive tonnage in the fourth quarter, now, rather than the third quarter and expect that earnings will be back-end loaded for the year, even more than they have been historically. So, tough second quarter based on the economic forecasts, but we're getting easier in the third and better comparisons even in the fourth. We expect the yield environments to remain competitive, but we still expect it to remain disciplined, as well, as we go through the balance of 2007.

So in summary, while the quarter was challenging for earnings perspective and did not really need our expectations, the financial position of the Company is strong and we've got the resources to execute what we need to get done in 2007. We will be happy now to handle your questions.

(OPERATOR INSTRUCTIONS) Jason Seidl, Credit Suisse.

A couple quick questions. Bill, in terms of your view for the economic improvement, X what all the other economists are saying out there, how much vision do you think you have? Do think you have a quarter? Is it a month, a month and a half?

You know, it is not very fat for out into the future, Jason, so we do not really have much of a horizon there. I would say, we can look out maybe a couple of weeks, but beyond that, it starts to get murky. We're really depending on what the economists are saying at this point.

Okay, and what does it look like for a couple of weeks? Do see things just kind of bumping along here or --?

Yes, I think Mike mentioned that we saw a bit of an up-tick as we entered March and that up-tick has kind of held. It is not gotten any better in April, but it has pretty much held where it was, so we see a little bit better business in March and April, but that may be a function of the weather more than anything else. We're still expecting to have negative comps in the second quarter.

Okay, I guess my next question goes to the Regionals. I just want make sure I heard Jim right. You guys did a 97.5, X the weather impact and X Bestway, as well?

Yes, that is correct. That is actually X weather. X Bestway, it would be 95.1.

95.1, okay. That makes a lot more sense. Thanks for clearing that up. I guess to compare and contrast between the National and Regional group, Bill, we have heard for the couple people that the National revenue per hundredweight holding up a little bit better on the pricing side than the Regional. Were you guys seeing the same thing?

I think we would say the Regional market is a little more competitive, yes.

Next question, I'll turnover to somebody else, for Don. Don, I was surprised to see depreciation fall again on a sequential basis. I know you guys sort of changed some depreciation schedules, I believe it was 3Q, but why the quarter-over-quarter sequential fall? Did you guys sell a bunch of assets?

No, the sequential fall should not have been that much. The year-over-year should have been about 13 or $14 billion. Jason, let me look into that and I will --

It was. It was only minor, but I was surprised to see it fall, because, normally, it does not from 4Q to 1Q and I was just curious if there was anything going on or did I miss anything.

There is nothing that I am aware of. As I say, let me look into it and I will, obviously, get back to you.

Always appreciate it. Thanks for the time, as always, guys.

Justin Yagerman, Wachovia Capital.

I wanted to just to dig in. What is driving the corporate overhead loss in the quarter? Was that just different allocation, given the re-orgs that you guys have been doing or how should we think about that?

We're having a little trouble hearing your question. You're talking about corporate overhead?

Yes, you had a $3.1 million loss on the operating income line and wanted to try to get a sense of -- I'm sorry, 2.7 and I wanted to get a sense of what was driving that. It looks like the expenses by division -- corporate overhead expense had gone up or something had changed during the quarter.

Jason, I think what you need to look at it is the adjusted line and you can see corporate for '07 at $2.7 million and for '06 it is $4.3 million. On the reported line, the major increase there is because of the severance associated with a couple of senior people at the National Transportation area, which is part of the, if you will, reorganization expense associated with the formation of National Transportation.

Got it. I think I was looking at it slightly wrong, so yes, that makes a lot more sense. I guess I wanted to dig in a little bit in the quarter. Bill, in your opening remarks you mentioned the enterprise solutions group and that you were getting decent feedback from your customers. Can you go into a little bit more detail on how you see that trending through the year, how long is it going to take you to get through your role of customers? When do you think some impact is going to come from this thing? Any kind of quantification of that would be helpful, in terms of the way you guys are thinking about playing a role.

Sure, the first thing I would say is that it has been very well-received. As we mention at the outset, customers, particularly the larger customers, are very happy to see us do this and, frankly, have told us we're the only ones really trying to get this done. The sell cycle here is a little longer, as you might expect, because we're talking about bigger customers, so we would expect that group to really start to get some traction in the second half of the year. Again, that is part of the back-end-loaded seasonality this year. We've got, right now, actively engaged, I think, Greg Reid is here and he can speak more to the specifics, but we've got a target list of I think of about 40 customers and, Greg, how many of those of actively begun talking to?

We have actively engaged at least 30 of that number and all have been very well-received and excited about the possibility of being a more integral part of their supply chain.

So we are off to a good start there. I think you'll see us begin to report some numbers in the third quarter that will give you some sense of how that is going.

Okay, and I guess hitting on the line, on the other things going on within the Company, can you talk about the progress being made at Roadway right now and what is going on with the re-org there and how we should think about that as we look out through the year and when the biggest impacts from that re-org should be taking place?

You're talking about the change of operations, Justin?

Yes, exactly.

Mike, do want a talk about that?

Yes, the change operations took place the middle of March. It has ramped up over the last several weeks. You might recall we did several network changes last year within the Roadway network. Each of them, as expected, reduced the circuity, eliminated some handling, and changed the speed and velocity through the network. This, the one we completed in March, almost as substantial as the first change last year. I will say that the transition and the planning and execution of this one with the experience of last year has gone better and as a result of that, we began to introduce the new transit times and services to our customers around the 15th of -- or we began to introduce them around the 15th of this month. It has progressed very well.

I would assume that if volumes improve sequentially, that should be felt in a bigger way than whatever you're feeling right now from in the kind of mediocre environment?

Yes, I think that we're kind of a victim of our own leverage here in the first quarter. We have a pretty good-sized LTL company with tremendous operating leverage. Unfortunately, it works in both directions, so as the economy recovers and we start to see volumes pick up, obviously the operating leverage becomes our friend again. And I think you'll see as we go through an improving economy the normal kind of 15% incremental margin on that business.

Can you guys talk for a minute -- I don't remember if you mentioned this or not, but just April, how it feels relative to March, and then kind of what customers are saying right now as you look out a month or two in advance?

Yes, as I have said, April is very similar to March. March was better than January and February. A lot of that probably had to do with the weather. We are still seeing negative year-over-year comps, although slightly improved over the first couple of months of the year and we would expect negative year-over-year comps to continue through the second quarter.

Don, do you guys have any specific debt paydown goals for the year?

We do not have specific goals. Obviously it will be a function of where we think the best use of our cash goes.

Okay. Thanks a lot. I appreciate it.

Brannon Cook, JPMorgan.

I want to ask you a question on the logistics, or Meridian business. You talked about seeing an improvement in March, with a slight pickup in demand there. Could you talk a little bit about any changes you feel like you need to make in that business on a go-forward basis to try to get a little more consistent profitability?

Jim, you want to handle that one?

Sure, as I had mentioned, we aggressively launched a cost management program that is looking at everything, from facility rationalization to overall management structure. We've announced one of the facilities in the flow-through network we are closing and we continue to evaluate the other facilities for profitability. And on a go-forward basis, nothing is off the table. So we are re-looking at the whole business to improve the margins and provide a better level of consistency.

Okay, then you guys spoke about a couple acquisitions you were looking at in China in the second and third quarter. Could you give us a little perspective on the size of those transactions and the relative level of asset intensity of them?

This is Bill and then I will let Jim add. We have really got two targets in mind, one on the logistics side, the other on the ground transportation side. Both of those are necessary for us to build the ground transportation network solution that our customers are asking us for in China. In terms of the investment, it'll be less than $100 million initially (technical difficulty) and we will roll those acquisitions into our joint ventures in China. You want to add anything to that?

The only thing I would add, Bill, is if you know the market at all, there are very few large companies in this space in China and the only ones of any size and substance are state-owned companies. So you have got to be very careful of how you engage with those organizations and with the companies that we have found, this $100 million investment, or less than, really represents getting into the market in a big way by comparison to the rest of the market because of the fragmentation. So this would be pretty substantial within that market and we're excited about that opportunity.

I might just mention that Jim is spending about 70% of his time in China now. He is actually living over there and then commuting back here to see his family, so we have got a lot of focus on making sure that we move the ball forward in China and get this done on a fairly timely basis.

Okay, then just my final question on the Regional business, you guys have done a lot of work integrating some of the regional operating companies and I guess X Bestway and weather, you said you had an OR of 95.3 in the first quarter. Looking towards 2Q, I realize that there is a continuation of soft demand trends, particularly with Holland in the Midwest, but is there any reason why we should not see and OR of 95.3 or a bit better in the second quarter for that group?

Let me start and then Jim can add to this, as well. I think it really depends on Holland and what goes on in the economy in the Upper Midwest. Holland is about 60% of the business in the Regional company, so so goes Holland, so goes the Regional group. Jim, I will let you add to that.

We have been encouraged by the shipment trend that I spoke to earlier. February we were down about 1.7% versus last year. March, plus 1.2. Here in April, plus 2.1%, so that is encouraging and, as Bill remarked, it does make about 60% of our revenue within the Regional group. The other issue, obviously, is the acceleration of the consolidation between Bestway and Reddaway and how we adjust those networks. So that will greatly influence our second-quarter results.

So maybe it sounds like you're still doing a little bit of work there in terms of adjusting those networks and streamlining operations?

Well, the consolidation is complete, but we see opportunities for improvement in many pieces of that now single network, so it will be a matter of how quickly we capture those improvements.

Okay, thanks for the time.

Edward Wolfe, Bear Stearns.

Bill, I have been asking this question for two years, so I've got to ask it (technical difficulty) able for when integration and restructuring charges are done and we don't see any more of them in the reports? Do you have any sense of that yet?

Well, I think that the restructuring at the National group is behind us and the Bestway integration with Reddaway is behind us, so there may be tweaks going forward, but I think the major changes are behind us.

I have that in my notes from almost six quarters ago about tweaks. When do you think there will be nothing reported that the GAAP and the adjusted are the same? Can you give some sense of that time frame?

I can't promise anything on that.

But it is not next quarter?

I think there will be much smaller difference between the adjusted and the reported.

Don, on the D&A that is down 20%, (technical difficulty) in third-quarter last year, when we grandfathered the change in depreciation, is there anything that we should expect that changes, or from then going forward in third quarter, is depreciation year-over-year fair to look at?

It should be consistent once we get to the third quarter.

What were the GRIs and when were they announced for Yellow, Roadway, and USF?

Mike, your GRI?

The GRIs were announced early part of March and they were about 4.99%. They include those accounts that are outside of contractual relationships.

Is it the same for all three groups?

Jim Staley?

I think we were March 12, if I recall correctly, and same relative percentage, approximately 5%

Effective date versus a year ago, will they move forward a couple weeks?

About the same.

Just on the pricing front, generally, yields were reported up two in the National and little over one in the Regional. When you look forward, how should we expect those yields to trend? We're hearing for shippers that pricing is coming down on contractual business little bit. Are you sensing that, too?

No, we're seeing about the same trend and we would expect the trends in the first quarter to continue. They may get a little bit better as the seasonality picks up and capacity gets tighter, but about the same trends.

So, so far, you get since March the 5% or so on the noncontractual business and it is your sense that the contractual business will be in line with where they were earning over last year?

Remember, Ed, that it is not what you announced, it is what you keep in this business. So it is a matter of the discounts off of the 5% change in the base rates that is really the most important part of that. Obviously that all comes out in the wash when we report our yield. All I can say is I think the net yield will be about the same as it has been, might get little bit better.

Fair enough. Don, the non-union pension obligation, according to your 10-K it indicates about $130 million expected cash paying into '07 and '08. Is that where the first $130 million goes, or is that not a hard and fast --?

It is based on our plans and our free cash flow. That is what our expectations are. You saw that in the 10-K and the drive behind that is to get that plan fully funded by 2011. It is consistent with our historical philosophy of, in fact, improving the funding of that plan over time. So there is no change in what we have been doing. It is just that with the additional free cash flow we have, we thought it was the appropriate thing to do to fund that pension plan. You can, if you like, a lot of you guys do treat that as debt, so if you will, we are taking a substantial whack out of our debt, on that basis.

So the 72 that you paid in '06 should be roughly the 130 in '07, and 130 in '08 kind of number?

That is correct (multiple speakers)

Then the other debt under other income, you had a $1.734 million gain. What is that?

On the other income, that could be a combination of things, Ed. That, in truth, bounces around and I'm not sure what the exact composition of that, probably some foreign exchange gains and losses and just some other minor things.

Pretty major, in that it is $0.03 on a GAAP number of $0.02 in the quarter.

1.7? I guess the point is that the way we look at this is that our adjusted earnings are $0.20 a share and that, obviously, weather impacted us by about $0.17, and you can slice these numbers however you want to make whatever story you want.

I think that is clear. Can we talk about the weather a little bit? $0.17 for $16 million pretax in weather, we have not heard other companies talk about that. Is some of that got to do with the union that restricts you if there is a closure or an opening? How should we think about that?

First of all, I would say I have heard it from other competitors and just in one of the calls yesterday. (multiple speakers)

We have not heard the magnitude, is what I meant.

Well, I've been fairly similar on a relatively smaller base, but the railroads have talked about it. Other companies in our industry have talked about it. It is a function of any network being out of sync because of weather, so you get dislocations of people and equipment and you have to get those things back where they should be and you have costs associated with that. You've also got costs to catch up on shipments that have been stuck because of the weather and then you've got just straightforward costs like snow removal and accidents and things like that. So the $0.17 is a combination of those things, with some impact of lower demand as a result of the weather, but the primary, the majority, the vast majority of that $0.17 is costs related to the topics that I just covered.

Is some of the volume being made up now, do you think?

It is hard to tell. We have generally concluded that once those shipments disappear, they never come back.

Thanks, guys, for the time.

Jon Langenfeld, Robert W. Baird.

Bill, on the Teamsters side, with the contractor negotiations, can you start that early or are you really dependent upon UPS getting done first?

Jon, I think we're not going to get any share of mind from the Teamsters until after the UPS contract is completed, so we will probably not even attempt to start talking to them until that is a done deal.

Do you expect any meaningful call on cash, relative to the Central States pension, as part of that negotiation outside the typical annual health and welfare benefit increase?

I don't think there is any question that there will be more focus on the pension, so we will be working pretty closely with the Teamsters on that and try to make sure that we've got the right focus on that piece of the equation. We have historically agreed upon a total all-in cost number for the Teamsters and they have decided which bucket it goes in. I think this time there will be an inclination to put more into the pension bucket than they have in the past.

Got it, okay. Then on the Regional margins, I just want make sure I understand it. So the 97.5 that you talked about, that is the OR excluding weather?

Yes, if you took the weather impact out of the Regionals, it would be 97, roughly, then if you took out the Bestway impact before we integrated them into Reddaway, and added that to the weather impact, you would be down at about a 95 OR.

Maybe my numbers are off here, but if I just look at that weather impact, it looked like about a 2 percentage point impact to margin in Regional, so --

Let's talk about actual numbers. The actual number we had for the Regionals was about $4 million or $5 million of impact from weather and the impact from Bestway was about $9 million, Jon.

Okay, so it seems like that 97.5, or 97, I have a tough time getting form the nearly 100 OR down to 95 with only taking $14 million out.

Well, if our math is right, and it usually is, if you took the $7 million and added it -- if you took the weather impact plus the impact of Bestway, you would end up with about, call it, $15 million of operating income and that should give you the number that we're talking about.

Okay, so just to clarify, you had four or $5 million on weather?

Yes, and about another nine on Bestway.

Okay, I will follow up with that. As far as the synergies go and the back-end loading of the synergies, can you just kind of bucket for us the biggest part of the savings that come in in the second half of the year?

Yes, I think if you wanted to put in general term around it, you would call it network optimization and Mike can talk little bit more about this here in a second, but there are lots of things going on on the National side, on both the revenue side and the cost side. We have talked a lot about the cost side, not as much about the revenue side, but on the cost side, I think the big bucket there is network optimization. Mike, you might want to talk more about that.

In terms of network optimization, some of the types of efforts that we have been able to put in place, we do now have an overarching, or an oversight, group. Our technology now is able to look down into both networks and optimize equipment, in some cases, drivers, our rail utilization, and offset of some of the rail expense changes with repositioning costs. Those are some of the earlier, more immediate pieces.

As we progress through this year, we actually have equipment that will be interchangeable between the companies to offset repositioning. And then as we progress through the year, different types of optimization that relate to remote service areas and more significant expense areas. Some of the other areas included in the initial efforts revolve around some of our exposures to both workers compensation claims, coverage claims, and associated expenses with those areas. Those groups, or parts of the organization are off and running, beginning to show positive data points. From a growth standpoint or development of new business opportunity, we have in the course of our redesign created an organization that is dedicated to advancing our ability to service elements of the global supply chain, including relationships and developments in using MIQ resources. It's kind of a three-pronged approach -- efficiency, improvement of the quality service and safety that we provide, and overall growth.

Good color, thank you. Just to be clear, I know those initiatives kind of span across both the Regional and National, but am I to assume that the bulk of the second half synergies would be on the National side still?

Yes, there will be some significant synergies on the Regional side, but I think your statement is correct.

Very good, thank you.

John Barnes, BB&T Capital Markets.

Bill, I just -- I really need some help understanding the guidance. My take is first quarter was severe enough that really gave you an ample opportunity to cut a number where you can consistently exceed -- cut to a number for the full year. If I go back and look at my notes for many years now, let's say it is a $0.37 number, okay, and I give you credit for the weather, and I start looking at on a historical basis kind of the low end of your earnings for the year have been like 10% under the first quarter. Now I'm talking about more of $3.70 number. That is still $0.30 to $0.50 risk.

Then you talk about this being a fourth-quarter event. Again, if I go in and give you $0.37 of credit for the first, I think I'm hearing you say second quarter is going to be very similar, so I'm kind of looking at a flat number. And then third quarter it sounds to me like you're saying it's similar. I am having to look at almost a $2 number or more to get to what you are guiding to. Can you just help me with my progression? Where am I off there?

Sure. Yes, I think that the secret to the guidance is really in the economy and how quickly it recovers. You know, the operating leverage in this business is, as we have just proven in the first quarter, very significant. And as the economy recovers and that 15% incremental margin hits the bottom line, there's a lot of lift provided there.

In addition, the synergy work that Mike is doing at the national group is going to impact more heavily in the second half. The synergy work going on at the regional group, the same thing is true. The Enterprise Solutions group that Greg has got going will start to kick in more heavily in the second half. So you've got the recovering economy which I think is the biggest single driver, and then you've got all of these other things that we have going on that are impacting the second half.

Now, if the economy is stronger than we are forecasting and we execute well, we will probably do something in the top end of that range. If the economy is weaker than we have forecast, then we will probably be in the lower end of that range. But we think it's a middle of the fairway guidance number, given the projections for the economic recovery.

Okay. I still have some difficulty building in, given your thoughts on you've only got a couple of weeks of visibility. The fourth quarter to me just seems like you are betting an awful lot on the fourth quarter.

John, we're not -- just to be clear, we're not saying the economy is not going to get better until the fourth quarter. What we're saying is positive year-over-year comps will happen now a little bit later than we expected them to happen. So it is a scenario that is based on an economic forecast as best we can calculate that right now, and as always if the economy is better or worse, it will have an impact on our business.

Okay. In terms of -- you're now communicating to the street a national and a regional business, and are you communicating the same to your customer base or -- it sounds to me like every time I get on one of these calls with you guys you're talking about your systems now can optimize equipment between the networks and you are going through these various issues.

Are you a step closer to putting these networks together? Are you a step closer to going to a single brand in the regional and national? Or is it just you're communicating that to the street and everything else to your customer base is still under the brand names and still a very separate system?

We would be pretty naive to think that customers don't know what's going on in our investor calls. But the reality is we're going to keep the brands in the marketplace because they have tremendous brand equity, and there is no reason to jeopardize that. What we have said right from the beginning is that we were going to start with our integration as far from the customer as possible and move toward the customer, and we have not changed that since the day we acquired Roadway.

We are now down the road there. We have got pretty much all of the easy stuff done, and we're now getting into the network optimization piece, which requires one view of the strategy and one team to execute it, which is why we made the change on the national side. That team is now working on the next step of integration.

Will we ever completely integrate the networks into one network? Probably not. Will we have more integration a year from now than we have today? Probably. So it is a continuum, but there is no end game of eliminating a brand.

Okay. all right, guys. Thanks for your time.

Jordan Alliger, Deutsche Bank.

Really, just one thing. You guys have a pretty diverse business base, so I'm just wondering what you saw from an industry perspective in terms of customers, whether it be retail, manufacturing, where you saw any pockets of life or lack thereof. Same thing from a Regional perspective.

Yes, I think that manufacturing has been pretty weak in the first part of the year. Geographically, the West has been probably the strongest area, relatively speaking. The Midwest, that kind of rustbelt, the weakest, but the Northeast has been weak as well. So geographically speaking, about the only area that is performing reasonably well is in the West.

For an inconsistent thing, sort of, I guess from a retail perspective, is any read on those customers?

That is really more of a customer-specific situation. I think we've got some retail customers doing pretty well, some that are not doing well at all. There is no, I would say, consistent trend there.

Okay, thanks for your time.

Tom Albrecht, Stephens Inc.

I want to ask about the pricing a little bit, because the revenue per hundredweight figures, 2% at the National group, 1.1% at the Regional, of course include fuel surcharges and also were favorably impacted by a decline in the weight per shipment. I know it does not move exactly in tandem, but it looks like when you adjust for the weight per shipment change, yields were flat to down at both companies, and that would be quite a bit worse than what the other carriers have reported. Is that an accurate read on what is going on with pricing?

No, it is not quite accurate, Tom. We are still positive, even adjusted for mix. I would say that, as I said earlier, the regional environment has been a little bit more competitive, but still positive. The fact is that the surcharge is now fully integrated into the pricing discussion and so just trying to separate those is probably not really meaningful anymore, but what we are seeing is, basically, an environment that is more competitive than it has been for the last couple of years, but still positive, still disciplined. We have got some fairly sophisticated and large companies and we continue to forecast that disciplined environment. If you take a look at the mix and take it out of the overall equation, it had a slightly negative impact, but not a major impact.

Okay, I guess that was my point. It feels like even if it is not done a whole lot, that your relative momentum versus others was not as good.

You know, the other thing you need to look is the balance between volume and yield I think our volume numbers were little bit better than some of our competitors. We were not down quite as much on the volume side and we're kind of in the middle of the pack on the yield. Obviously we try to balance those to maximize earnings and the best way, as I said earlier, to look at whether we're doing a good job of balancing those two is to look at the deterioration in operating ratio. I think if you put that into the mix, we stack up pretty well against the competition in terms of the operating ratio impact .

You, and that was another question I wanted to ask you about on volumes. I think in mid-February and again in mid-March, in public forums you discussed that your tonnage was running down more like five, 5.5% and yet it was only down 4.5% at the national companies, a little over three at the regional. Does that mean that you got a lot more aggressive on pricing in March to make that number a lot better?

No, I think what we've been saying is we expect to be down mid-single digits and that is kind of 4% is kind of mid-single digits, in my mind. So we have kind of ended up where we expected on the volume side. March was a little bit better than January and February, so it kind of depending on when you were talking to us, but the reality is that we have ended up about where we thought on volume, maybe a tad better, and on price, as I said, kind of the middle of the pack. So 3.8% decline in LTL tonnage, which is -- the tonnage number we talk about is always LTL, because we think that is reflective of our business. Some of our competitors talk about total, but that can be [whip sod] pretty dramatically by what's going on in the truckload markets. We try and stay away from talking about total tonnage and just talk about LTL tonnage. 3.8% down, little bit better than we expected.

Okay, and then on the whole issue of synergies, I am not faulting you for ongoing improvements to the Company, but we are 3.5 years into the Yellow-Roadway combination. I don't see how you can track synergies. I guess I am confused why you should get more credit or be able to even track synergies, versus just describing your efforts as normal business process improvements that most companies in America are trying to attain. So synergies seem to make sense for four to six quarters, but it just does not make a lot of sense to me, when a lot of what I hear is just normal business improvements.

Tom, I agree with you completely. If you guys stop asking about them, we'll stop talking about them. We really think that at the end of the day, the operating ratio and our earnings performance is the test of whether we are operating the companies efficiently. I think at the beginning of these acquisitions, people were very focused on the synergies as a way to track the value we would create, and so we started out by saying, in the case of the Yellow-Roadway combination, we could get $300 million out of the cost base and we get relentless questioning from investors about how we're doing against that $300 million. I would agree with you that it is becoming an integral part of the way we run the business and so, as I said, if you will guys will stop talking about it, we will too.

Okay, and then I don't know if you have a way to assess this or not, but when you look at Roadway and Yellow, a majority of their business continues to be in third-day and later deliveries. Do you have a sense as to how much excess capacity you have there? Given the fact you have got new competition in that market, or maybe I should say revitalized competition, do you need to really undertake a shrinkage in the long haul portion of those networks, a permanent shrinkage?

Well, let me correct you first. I think that about 60% of our business or more is now in the second-day and third-day markets. But --

I am defining long haul as third-day or later, and I was thinking it was 35 to 40 in the second day.

Third-day or later piece is how much? About 60, okay. I think that the reality there is that there are fewer providers in that market and that is really in the sweet spot of a lot of what Yellow and Roadway can provide, so that is a very valuable piece of our business and one that customers rely on us for. It is also a part of providing that kind of comprehensive LTL service portfolio, so I do not see us backing away from that. I think will become more efficient as we go forward on that, and maybe Mike can talk a little bit about that.

Yes, I think we have to be a little bit careful of what we call two, three, and four days, whether it is traditionally those time frames were in our system or where we are moving the systems to meet the market. As an example, s 1200 or 1300-mile-type shipment, now, is a two-day-type shipments. If you take a look at the efficiencies that we gain as we continue to take the days out, the Roadway network with this most recent change, if we go back two years ago, an average shipment was in the network about 4.25 days. With this most recent change, it is down to about 2.7 days. So there is a lot of efficiency that comes along with it, utilization of our capital and our resources, and the densities within the system are actually built on the escalating distances. So we look for more and more efficiency on the transcontinental pieces, but those distances that are less than our average length of haul of around 1100 or 1200 miles are still a significant part of our network and our capability range.

Okay, that's all I have. Thank you for the descriptions.

Will take one more, I think, and then we will call it a day.

David Ross, Stifel Nicolaus.

I have got a question I guess on New Penn. You talked about the western regionals in the midwestern regionals. What is the competitive dynamics like in northeast right now and how did that fair in the quarter?

Jim, you want to talk about the competitive situation in the Northeast?

It is competitive, always has been. New Penn is certainly doing all they can to maintain the market share that they have. They continue to have very good margins. They do not have quite the competitive pricing pressure that we have in Midwest, but it is definitely more extreme than it is in the West.

Okay, and then you talked earlier in your opening comments about some improved pricing systems at Yellow and Roadway, or the National group. Is Roadway and Yellow using the same pricing system or do they have still have two different pricing modules?

Yes, Mike?

We have multiple models that we look at pricing. We are taking a much closer look at how to maximize or optimize pricing across the market. As we begin to differentiate the carriers and become more aggressive with some of the new services, there are opportunities to make -- manage pricing and the development of our contracts optimized, I guess, a little bit better is the word for it.

With Meridian IQ, you said that the OR (inaudible) was due to higher-than-expected costs in the quarter. Could you just give a little more color on what those costs were and how they're going to be managed going forward?

Yes, specifically, in our flow-through network, we just had too much labor in there from a big retail push in the fourth quarter. We did not get it out fast enough and when the volume dropped off, it put us into a negative situation. That was probably the biggest component of that. That, as I already mentioned, drove us to make some decisions on one of the facilities and we are evaluating others to make sure that we're going to be in a position to maintain the profitability levels that we need as an organization.

In addition to that, we're looking at all of the business segments, which ones make sense for the business going forward that are going to deliver the right returns on capital and which ones don't. And will be making more decisions on those of the year goes on. So as I said before, nothing is off the table from a cost management standpoint. We are being very aggressive and it will help us significantly throughout the rest of this year and I think for many years to come.

Last question, Bill, I think I head you say earlier you had not begun talks with Teamsters yet about the upcoming NMFA expiration and you said you were waiting for UPS to get their talks done. UPS contract expires four months after your contract, so are you hoping that they get something done with the overnight group at UPS Freight and then go to the table? Is that what you were talking about?

Well, they actually moved up their negotiating process, UPS and the Teamsters did, so they're doing it early and we, obviously, will be very interested in what goes on at the old overnight company in terms of setting the stage for our discussions.

Okay, thank you very much.

Okay, Wes. I think we're done with the questions.

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

Thanks for joining us. See you next time.