Con-way Inc. Q3 2008 Earnings Call Transcript

Con-way Inc. (CNW)

Q3 2008 Earnings Call Transcript

October 23, 2008, 11:00 am ET

Executives

Patrick Fossenier – VP of IR

Doug Stotlar - President and CEO

Steve Bruffett − SVP and CFO

Bob Bianco – President, Menlo Worldwide Logistics and SVP

John Labrie – President, Con-way Freight

Herb Schmidt – President, Con-way Truckload

Analysts

Ed Wolfe − Wolfe Research

Jon Langenfeld − Robert W. Baird

David Ross − Stifel Nicolaus

Tom Wadewitz − JP Morgan

Justin Yagerman − Wachovia Securities

Ken Hoexter − Merrill Lynch

David Campbell − Thompson Davis & Co.

Presentation

Operator

Good morning, my name is Jodi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Con-way Inc earnings review conference call. All line haves been placed on mute to prevent background noise. (Operator instructions)

I would now like to turn the call over to the Vice President of Investor Relations, Patrick Fossenier.

Patrick Fossenier

Welcome to the Con-way third quarter 2008 conference call for shareholders and the investment community. In a minute, I will turn it over to Con-way's President and CEO, Doug Stotlar. Before we get into the call, I would like to read the following Safe Harbor announcement. Certain statements in this conference, including statements regarding anticipated results of operations and financial conditions constitute forward-looking statements and are subject to a number of risks and uncertainties and should not necessarily be relied upon as predictions of future events. Actual results of operations and financial conditions might differ materially from those projected in such forward-looking statements and no assurance can be given as to future results of operation and financial conditions.

Additional information concerning factors that could cause actual results of operations and financial conditions to differ from those in the forward-looking statements is contained in our Forms 10-Q and 10-K and other filings with the SEC.

Now, without further ado, I'm pleased to turn it over to Doug Stotlar.

Doug Stotlar

Good morning to all. I apologize in advance for my voice. I'm getting over laryngitis, so please bear with me. It might be painful at times.

Good morning. On the call today, I'm joined by several members of our senior leadership team including CFO, Steve Bruffett; Con-way Freight President John Labrie, and Logistics Bob Bianco, and Con-way Truckload President Herb Schmidt.

A bit later, Steve will provide some commentary and financial matters. And Bob, John, and Herb will be available to participate in the Q&A portion of the call. On October 1, we updated our earnings guidance based on a demand and pricing environment. It became increasingly challenging as the quarter progressed.

When the books were closed, results came in slightly better than we anticipated at the time of the update, primarily due to lower than anticipated employee related costs and a lower tax rate. Operating results for freight, truckload, and logistics finished the quarter consistently with the performance we expected when the guidance was updated.

Turning to our results for the quarter, consolidated Q3 revenues of $1.37 billion were up 23.3% from last year's $1.11 billion, driven by acquisitions in the second half of last year, complemented by organic growth. Total diluted earnings per share from continuing operations was $0.81, including a $0.04 benefit from discreet tax adjustments.

Now I'll review key operating -- key results and operating statistics for our business units starting with Con-way Freight. Quarterly revenue at Con-way Freight was up 9.1% over the last year. Tonnage per day increased 2.3% over the third quarter of 2007. Contrary to historic trends, July was the strongest month of the quarter, with tonnage flat through August and decreasing in September; very unusual occurrence.

We checked our records and could not find any time in Con-way's 25 year history where September's tonnage per day was actually below that level in August. This underscores the effect the declining economy is having on freight demand. Even though we recorded a year-over-year tonnage in the third quarter, demand was much shorter at the quarter's end compared to the beginning.

Revenue per hundred-weight increased 7% compared to the third quarter of last year. Excluding the affect of fuel surcharge, our yield was down 1%. Price competition increased as the quarter progressed, and when yields are adjusted for a longer average length of haul and some shift in the mix of freight, pricing was clearly weaker than at the same point last year. However, in this competitive environment, Con-way Freight's superior transit times and on-time performance will continue to differentiate our product and support our sales effort through the period.

Operating income for Con-way Freight was $61.1 million in the quarter, a slight increase over the 2007 period, again reflecting the weak demand environment and the consequent pressure on pricing. The operating ratio was 92.6 in the third quarter compared to 92.0 in the prior year, which included expenses related to Con-way Freight's rebranding and business transformation initiative.

I'll now turn to Menlo Logistics. Menlo Logistics revenue net of purchase transportation was $127.9 million, up 16.8% from the third quarter of last year reflecting organic growth in revenue from warehouse management services and the contribution from our acquisitions in Asia.

Menlo generated operating income of $3.7 million, a $2.5 million decrease compared to the same quarter of last year. There were two principle factors behind the shortfall. First, our China operations recorded a loss for the quarter related entirely to operational integration issues. We are making progress on this and expect to resolve the issues by the end of the year.

As we mentioned last quarter, our profit timeline for China is longer than we anticipated, but we expect to turn the corner early next year. Results were also affected as customers' experienced continuing pressure to reduce supply chain costs in response to the economic downturn.

Overall, the strategy of expanding Menlo's global footprint continues to provide new business opportunities, which was one of the primary objectives with the acquisition. Menlo has been able to retain 100% of the China based customers it gained in the acquisition and is winning new intra China business consistently. We are also seeing a positive effect in Singapore, where new capabilities from the Cougar acquisition has strengthened our product offering and created new revenue streams.

Now, I'll review results of Con-way Truckload. Truckload has revenue of $140.9 million, after elimination of $42.7 million of revenue related to its intercompany business. Truckload unit contributed a very strong operating profit of $15.2 million. These results continue to illustrate the strength of our enterprise strategy and the substantial benefits that Con-way Truckload is earning from the internal business opportunities presented by its sister companies. These enabled Con-way Truckload to improve asset utilization and reduce empty miles.

Operating ratio was 91.7 on total revenue including intercompany business and was 88.6 on the same basis excluding fuel surcharge revenue. Stabilization of pricing and lower fuel expense also supported Con-way Truckload's earnings in the quarter.

Now, I will turn it over to Steve Bruffett for additional financial perspective.

Steve Bruffett

Thanks Doug. Good morning everyone. In this challenge environment, I know many of you are increasingly focused on balance sheets and cash flows of the companies you follow. We do enjoy a strong balance sheet and we are taking steps to further strengthen our financial position. We are also stepping up our emphasis on free cash flow generation and return on capital to complement our existing cost management disciplines.

As a reminder, all of our debt is fixed rate, and there are no significant maturities until May of 2010. Our existing cash position of $226 million is already sufficient to cover that $200 million maturity. Total debt at the end of the quarter was $953 million including a $22.7 million current maturity that we will pay in January 2009. Average diluted shares outstanding for the quarter were 48.3 million. That’s slightly above the prior quarter. And our interest expense was $15.6 million for the quarter and investment income was $1.3 million. Our tax rate during the quarter was 36.5%. Excluding some discrete tax adjustments, it was a more normal 39.4%.

Now, as for guidance, as you have noticed, we are maintaining our current guidance for 2008 diluted earnings per share in continued operations, which we expect to be in the range of $2.60 to $2.80 a share. This is a all-in number that includes the 7/10 business transformation expense we recognized in the first quarter.

We are clearly in an uncertain environment and it’s decelerating, so this guidance reflects our expectation for a full quarter of negative tonnage, particularly at the Freight division, competitive pricing across the board, and significantly reduced fuel surcharge revenues. The rapidly declining fuel prices have a modestly positive effect on Truckload, but a negative affect on our LTL results.

We guide you to use an average of 48.3 million diluted shares outstanding in the final quarter of 2008. And for the full year of 2008, we now anticipate the net capital expenditures net of asset dispositions to be right around $200 million. This full year number is about $20 million lower than the $220 million we gave you on our last call. And as we look forward into 2009, we will be prudent in our outlays to ensure positive cash flow generation in this challenging environment.

For 2008, full year depreciation and amortization is expected to be around $200 million. You should model our tax provision of approximately 38.5% for the fourth quarter, and that's also the projected rate for the full year and that does include the discreet tax items mentioned within this third quarter.

And now, for some operating guidance, starting with Con-way Freight. We anticipate the first quarter 2008 tonnage will decrease at a low single digit percentage rate right below the 2007 level. Though fourth quarter revenue per hundred-weight is expected to be approximately flat versus the prior year, and excluding the fuel surcharge, we expect yield to decline by a low single digit percentage.

At Menlo Logistics, for the fourth quarter, we expect net revenue to increase by a mid-teen percentage over the same period of last year, while improving operating income over the 2007 level. At Con-way Truckload, we look for fourth quarter revenue per mile to remain about flat compared to current levels.

And with that update, I will turn it back over to Doug.

Doug Stotlar

Thanks Steve. Despite the fact that we have had to reduce earnings expectations to account for decelerating demand environment, I'm pleased with the operational execution at Con-way. Margins are still among the best from a financial perspective. Our balance sheet is solid and we have a good cash position to support working capital needs.

The direction of the macroeconomic environment continues to be the wildcard, one which seems to defy anyone's ability to predict with any degree of certainty. We have seen no indicators that point to any meaningful recovery or improvement in economic activity in the near future. The Uncertainty around the economy's performance and its direction in 2009 makes it particularly difficult to provide meaningful guidance for earnings expectations.

Therefore, as we approach 2009, we are considering suspending our practice of providing annual earnings guidance. We just don't have any confidence of reliable visibility into the direction of the economy and how that will drive our business. We choose to adopt this change and will advise you accordingly. Regardless of the difficult business environment, I remain encouraged about the strength of our platform and the quality of services we bring to the market.

We have three good solid businesses, we’re getting synergies through them and they are all executing well in some unprecedented market conditions. Our strength in the value that wins and retains customers is a significant service differential and competitive advantage these companies provide in their respective markets.

Now, I will conclude the prepared remarks portion of this call. With that, operator, we would like to open it up for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question from Ed Wolfe with Wolfe Research.

Ed Wolfe − Wolfe Research

Hey, guys, just a quick -- I had trouble hearing what you said, Steve, and congratulations on your new position. What you said about the Menlo guidance, did you say mid-teen revenue growth and what did you say about operating income?

Steve Bruffett

Said that it would improve over the same period of 2007, over the fourth quarter of 2007.

Ed Wolfe − Wolfe Research

So, off year-over-year operating income for Menlo on that basis by $49 million?

Steve Bruffett

Correct.

Ed Wolfe − Wolfe Research

What's going to change so much from the 3.7 this quarter to the 5.9, is it just China again effect or is there more beyond that?

Doug Stotlar

I will ask Bob to answer that question.

Bob Bianco

Yes, primarily, Ed, it's going to be China. We are seeing improvement in China. We brought on a lot of new business, not only in China but throughout the whole company of Menlo in the first and second quarter, that was in start-up mode in the third quarter. And so, we are going to see that, those full run rates drive the performance that we expect in the fourth quarter.

Ed Wolfe − Wolfe Research

Is the Menlo issue in the third quarter related to I mean just based on how big the revenue is and how weak the EBIT is, fallout of the DoD stuff, and is that going to catch up at some point, is that part of this too, or am I looking --?

Steve Bruffett

No, it has nothing to do with the DoD. It's really the increase in that revenue. A lot it has been driven by the acquisitions in China we had a negative EBIT, and so that's (inaudible).

Ed Wolfe − Wolfe Research

Doug, by sticking with the guidance and the implication that you're going to go from, let's call it, $0.75 ongoing this quarter down to $0.40 or so, $0.45 next quarter at the mid range, that 40% sequential decline is very unusual, probably never happened before for you compared to fourth. Besides from what you said which is weaker tonnage and weaker pricing, is there some aspect of you're expecting that the fuel benefit kind of wears down a little bit as you go out? Is that (inaudible) too?

Doug Stotlar

Certainly, it's all three of those factors, Ed. We are going to see fuel revenues decline, we are going to see our tonnage be negative for the entire quarter and we are seeing the current base rates continue to be under pressure from the competitive pricing environment. This environment that we have been in now, specifically you want to talk about the overall pricing environment, it's been a two year struggle for freight demands in a declining demand environment since 2006.

And as you know Ed, we have talked on some shipments on previous calls, fuel surcharge rates and base rates have really become interconnected in every negotiation that we’ve held. And as energy prices surged over the last year specifically but – as energy price continued to move up, the dynamic of fuel surcharge and base rates got out of sync. So, while I believe that the lower energy prices will be good for our economy overall, it's going to have an impact on reducing revenue in the near term and which will have a profit impact.

But when you couple that with tonnage declines and the negative leverage associated with that and a continued pressure on the regular base rate environment, we are entering a very, very difficult period where it's kind of a perfect storm. Just to give you an example, Ed, again the yield problem that we see that's been created by two years of the declining demand environment, we went through and looked at our revenue per shipment normalized for length of haul and weight per shipment, and this example is going to be Q3 2006 to Q3 2008.

Average revenue per shipment Q3 2006 normalized was $177.43. And here we are in Q3 2008 with a normalized revenue per shipment of $177.39 with essentially flat revenue per shipment two years later with higher costs all the way across the company.

Ed Wolfe − Wolfe Research

Should we be looking at −

Doug Stotlar

Ed, one other thing, I want to make a point. That excludes any fuel -- any costs of fuel, for the cost of fuel and the cost of fuel that we paid outside providers to move linehaul. So that's a real pure pricing comparison.

Ed Wolfe - Wolfe Research

I noticed you used revenue per shipment and not revenue per hundred-weight. Is that the way with shipment size getting larger, fuel and people slowing things down to build shipments or whatever the reasons are, is that the way you're running the business now? Should we be focused on revenue per shipment more than revenue per ton?

Doug Stotlar

I'll let John talk a little bit more – give a little more color about rate per shipment and how it’s moving around. He can also talk about that subject.

John Labrie

Sure. Ed, relative to the comment that Doug just made about total revenue less fuel expense, the issue would be the same whether you're looking at revenue per shipment or yield. We look at revenue per shipment internally as a way to gauge what is happening in the environment. But regardless if you were -- if you were looking at that same issue from a yield standpoint, the issue would be the same. To the comment that Doug just made about what is happening with weight per shipment, we are seeing this month in October weight per shipment come down in a pretty dramatic fashion. So, where we had been running in the 5% to 6% higher weight per shipment range year-over-year for the last several months, really since March of this year, we have been in the situation now for about the last six weeks where weight per shipments are starting to come down. And if the trend were to continue the way it’s looked in October, we could be from a run rate standpoint in a situation where average weight per shipment by the end of the quarter looked like it did in Q4 of 07.

Ed Wolfe - Wolfe Research

So, what are you attributing that to, just weakness in the economy over something -- those other things, fuel coming down too I guess?

John Labrie

Well, this is a guess, but my sense is that the movement that we saw in weight per shipment up really starting in March of this year was directly connected to fuel prices and the higher fuel surcharges. And now that fuel has taken a dramatic step back in fuel surcharge, it is a smaller portion of the total transportation bill that customers are actually less focused on consolidating shipments. So, I think there is a direct correlation between what is happening with the fuel markets and what is happening with weight per shipment.

Ed Wolfe - Wolfe Research

That makes sense. Is there any guidance with Truckload just because we don’t have a long history with them, they did a tremendous, a lot more than we were expecting with $15 million of operating income this quarter? How do we think about fourth quarter seasonally, and with fuel adjustments and other things, that $15 million in fourth quarter relative to what they should be doing in third quarter?

Doug Stotlar

Herb, I will let you talk about the environment that you're facing.

Herb Schmidt

The environment is relatively flat. We are still seeing ahead some traction to be gained with respect to the integration. We currently only handle about a third of Freight's business and a fraction of the Menlo Truckload spend. And I think there is ongoing, while it's a tough environment, there is still some niche opportunities for growth with non-affiliate customers given our foot print in Mexico, our foot print in Canada, the increasing percentage of Hazmat certified drivers, our success in recruiting and retaining teams which insulates us from rail competition, we still have some things to do with respect to integration and synergy opportunities over the next 12 to 18 months.

Ed Wolfe - Wolfe Research

So, just because we don’t have a history here, seasonally assuming things that are kind of flattish in pricing and demand kind of stuff, should historically fourth quarter be much different from third quarter from an operating income perspective?

Herb Schmidt

No, not appreciably different.

Ed Wolfe - Wolfe Research

And so that would be your guess as good as any right now, it’s similar to Q3?

Herb Schmidt

Yes.

Doug Stotlar

Will demand change though?

Herb Schmidt

Yes, assuming we don't get thrown a curve. But I would say similar to third quarter. I wouldn't see any drastic changes.

Ed Wolfe - Wolfe Research

Last one, I'll let others have it. Can you just kind of go through the tonnage throughout the quarter if we look sequentially year-over-year to July, August, September and then October?

Steve Bruffett

Sure, Ed. In July, it was up 4.2% year-over-year, August up 3.5% year-over-year, and September down 1% year-over-year.

Ed Wolfe - Wolfe Research

In October so far?

Steve Bruffett

October, it's down about like September was, maybe a little less year-over-year.

Ed Wolfe - Wolfe Research

Thanks a lot for the time everybody.

Operator

Your next question comes from the line of Jon Langenfeld with Robert W. Baird.

Jon Langenfeld - Robert W. Baird

Good morning all. Doug, you’ve seen a lot of freight environments in your day, how does this compare -- the severity of this compare on the demand side to what you’ve seen? And I can appreciate kind of the dramatic drop off September was versus August. But, I'm just thinking more in context of what you’ve seen over the last six months.

Doug Stotlar

Jon, this is really different than anything I've ever seen because of how long and protracted this freight demand environment has been declining. And while it seemed like we were bouncing along the bottom for quite some time, this is definitely a whole another leg down. And to be honest with you, what we saw in September was a bit startling compared to where we had been.

Jon Langenfeld - Robert W. Baird

And how does the – I mean, on one hand, yes I understand pricing is getting more aggressive. But given we are in unprecedented demand times, how did you do pricing relatively, to me it seems like you've actually held up probably a little bit better than one might have expected given how dramatic freight has dropped off?

Patrick Fossenier

I think the thing is it's been -- can't say it's held on well. It's been a struggle for the last two years, I mean it really has been. And we have been able to benefit from some market share gains along the way. Certainly, any gains have come at some kind of cost to pricing. I think our service differential and the things we are doing are showing the value and we are getting the opportunities with customers, but this pricing environment has gone on for a long time. We've had two years of increased costs whether it is labor wage rates or higher equipment costs, et cetera. As the example I gave demonstrates, when you look at revenue per shipment over a two-year period, it's down slightly, with all the cost increases, so the pricing environment, it has been flat for two years.

Jon Langenfeld – Robert W. Baird

Qualitatively, does it feel as bad as it was back in '01?

Doug Stotlar

'01 was different from the fact that it was a significant fast drop off. And we adjusted to it relatively quickly by simply shrinking our company, reducing the size of the fleets. The industry did the same thing. But it also had a V-type bottom where it came back relatively quickly. And this, we don't know whether this is a prolonged U or what this looks like but just the sheer duration of how long we have been in this (inaudible) is kind of disturbing.

Jon Langenfeld – Robert W. Baird

How do you reflect on the smaller LTL carriers out there, say the lower quartile or lower third provider in terms of size? Do you see them struggling in this environment either directly or indirectly, more so than well-capitalized companies like yourself?

Doug Stotlar

I really don't have any visibility to that, Jon, we simply as we compete and whether it's in the next day lane or second day lane or transcontinental, the players shift in each market. So we look at the marketplace in total as our competitive side.

Jon Langenfeld – Robert W. Baird

Okay. And then last thing I had just in terms of labor costs, how similar is it in your market, in your environment where as you scale back hours and scale back people on a variable side, is it such that the more senior people keep the hours, and so then your effective labor rate goes up as you cut back on people and hours?

Doug Stotlar

Absolutely. Typically when we have to pare back our variable labor, our supplemental labor pool on the bottom of the port first and then it moves up by seniority, so certainly our most senior drivers continue to work at higher wage levels.

Jon Langenfeld – Robert W. Baird

Okay. So you face that headwind in the near term as well?

Doug Stotlar

I mean we are managing our cost as diligently as we can. I can't say it's going to be a huge headwind, but it's just one more factor.

Jon Langenfeld – Robert W. Baird

One more thing. Okay. Good enough, thank you.

Doug Stotlar

Thanks Jon.

Operator

Your next question comes from the line of David Ross with Stifel Nicolaus.

David Ross – Stifel Nicolaus

Good morning, gentlemen.

Doug Stotlar

Hi, Dave.

David Ross – Stifel Nicolaus

First question on freight – I apologize, I hopped on a little bit late and if you answered this in your opening remarks, I will catch it later. But you talked about the inter-regional versus regional growth or the different length of hauls within your LTL network, now that it's kind of the one network and you've restructured the operations a little bit, are you seeing more growth in longer haul lanes, shorter haul lanes?

Doug Stotlar

Our length of haul is up 3.6% year-over-year. And that's really driven by a growth that we have seen in our two-day market specifically. A little bit of three-day plus growth as well. But just some slight mix change, I think that probably is a reflection of the fact that we have a single company brand identity out in the marketplace throughout North America today and people are more aware of the fact that we offer not only regional and interregional but long haul service.

David Ross – Stifel Nicolaus

On the Menlo side, a lot was talked about China, but how is kind of the rest of the business ex-China? If you think about the Menlo story, it once was going from customized solutions to repeatable solutions for customers. Can you just talk a little bit how that business is going?

Bob Bianco

Dave, we are optimistic about Menlo going forward. We are continuing to win new contracts and new business at a record level. But when you temper in these economic times, the effect it has on Menlo is primarily on the existing base business where you see typically volumes down on the existing customer base. The trick in the 3PL road is can you bring on your new customer business fast enough to outweigh the drop that you see in the volumes of your existing business.

David Ross – Stifel Nicolaus

When you're winning that new business, usually do you win it because of Menlo's technology, expertise in certain type of logistic solutions or does your asset base having a truckload carrier and an LTL carrier come into play much?

Bob Bianco

It all depends on the type of solution. We approach each solution with a different value proposition. And some of those relate to Menlo's core competency of technology operation to excellence and supply chain engineering. And other solutions are enterprise-wide solutions where we are bringing the assets of the corporation to bear in providing the value for the customer.

David Ross – Stifel Nicolaus

Okay. Let's switch here over to truckload, now that the average of the truckload fleet has gone up fairly significantly over the few quarters, is there a specific reason for that? What's the target average fleet age?

Herb Schmidt

David, we have experimented over the years with three, four, and five-year trade cycles. We had the opportunity to shift some of the older equipment into shorter haul business and again that just kind of depends on what we decide to spend each year with CapEx and what our freight needs are. So, if you look at our 20-year history, you will see that we have vacillated between three and five years several times. So right now, at this particular time, we're right in the middle. We are on a 4-year trade cycle today.

David Ross – Stifel Nicolaus

Thank you very much.

Operator

Your next question comes from the line of Tom Wadewitz with JP Morgan

Tom Wadewitz – JP Morgan

Good morning. Wanted to get your sense of I guess the market obviously is weak and pricing is difficult but is there a certain point where you maybe recalibrate and say, we are better off giving up a little bit of freight instead of taking a reduction on it and perhaps that's something to consider or is this the type of market where you can't -- you pretty much just fight to hold on to freight and you have to offset whatever discounts the competitor is going to offer.

John Labrie

Tom, yeah. I mean there are a lot of factors to consider. Obviously volume is important given the fixed cost nature of our business. That said, price premium is as well. So we are constantly juggling the price premium that we have in the marketplace and working to hold on to that as well as making sure that we hold on to market share and keep volume in the network as well and really trying to strike the proper balance between those three things.

Tom Wadewitz – JP Morgan

Okay. And as you look to 2009, what type of mix do you think you need? I guess it is more for Doug or for John, but if you're looking at trying to hold the margins stable, the best you can in a tough environment, what kind of a mix of price and volume do you need in order to do that? And what opportunities do you have on the cost side to really more aggressively take cost out if you're in a down 2%, 3%, 4% tonnage environment next year?

Doug Stotlar

Tom, we've been taking advantage of opportunities to reduce cost in the business over the last year, starting with the back office consolidation that we did as part of our single company reorganization last year. And that was successful in removing some cost. In addition to that, we have been experiencing all-time high performance levels across the business and in all of the areas of productivity, a lot of those improvements from a line haul standpoint have come from reengineering efforts that we have been able to put in place really as part of the single company work design that we put in place last year.

And that said, we believe there are more opportunities to continue to improve the efficiency of the business. Obviously volume does have impact on cost. You need density in this business in order to have good cost performance. So as I said, we are constantly trying to weigh the balance of price premium and volume while at the same time looking for opportunities to become more efficient in our operations.

John Labrie

That being said, Tom, just to add a little more to that, tonnage declines and continues to decline at a very rapid rate, you can't take cost out fast enough to offset it. It's very much a leveraged network. We do the best we can. There is a point where you can't keep up with it.

Tom Wadewitz − JP Morgan

Right and in terms of inflation, if you were to look at labor cost on a per hour basis next year, would that maybe ease up a bit or is that pace pretty similar to what you've seen this year and the last few years?

John Labrie

We won't determine what wage scales are going to be until we are well into next year, at this point as part of increases for hourly work force. So, it'll be premature to speculate on what that might be.

Doug Stotlar

The only thing I would add to that, Tom, is obviously benefit costs play into that as well and health care costs in particular continue to climb at a pretty steep rate. So that will certainly have some impact on the inflationary aspect of our business.

Tom Wadewitz − JP Morgan

Right. Okay. Great. Alright. Well I appreciate the time, thank you.

Operator

Your next question comes from the line of Justin Yagerman with Wachovia Capital.

Justin Yagerman − Wachovia Capital

Hey. Good morning, guys. How are you doing?

Doug Stotlar

Good.

Justin Yagerman − Wachovia Capital

Maybe it's a good question for Bob, you guys touched on this with the fuel having come down and shippers maybe changing with the weight per shipment in the LTL business, I think that's pretty interesting that you are the first ones who said that shipper behavior maybe readjusting to fuel prices coming down. But are you guys seeing that on the Menlo with how your customers are thinking about their supply chains now versus this summer as fuel prices escalating, do you have examples of that that you can point to?

Bob Bianco

When fuel was going up, Justin, we were seeing our supply chain engineering teams working a lot on moving shipments one in 600 miles to intermodal from over the road but now we haven't really seen a big change (inaudible) dropped down, I thing customers are still thinking that the variability will be out there because it relates to fuel and they have to have contingency plans regardless.

Justin Yagerman − Wachovia Capital

John, I guess on the LTL side, are you seeing some of the contributing factor in this weight per shipment more full distribution maybe or full truckloads coming in to your terminals that are then being distributed by Con-Way, and how does that margin on that business, if it is up or down, impact your overall margin when you think about the LTL business?

John Labrie

We haven't seen any real change in the distribution business that we handle. We do handle a decent amount of distribution business, but I can't tie any of the change that we are seeing in weight per shipment or overall mix of business in the company to changes in distribution.

Justin Yagerman − Wachovia Capital

When you look at the weight per shipment being up as much as it was in Q3 and in the last couple of quarters, you'd attribute that to maybe if I was doing five shipments a week, I've consolidated them into three and there's some freight drop off in the total pie but not as much as going from five to three shipments?

John Labrie

Exactly.

Justin Yagerman − Wachovia Capital

All right. And I think (inaudible). Although actually Herb maybe touching on this theme of near sourcing or how fuel influences freight changes. When you look at CFI's biz, you guys have always been, being in the Mexico and cross-border business, how has that been trending right now? Have you seen any customers coming to you and talking to you as maybe part of the some of these contingency plans with what John was talking about in terms of thinking about how they manage their freight and are there new freight opportunities coming out of Mexico right now, has that grown?

Herb Schmidt

I would say Mexico represents slightly over a third of our business as in origin or destination. It's been relatively flat all year which is somewhat surprising in light of the economic conditions. So and what I'm seeing in Mexico is a bit of a migration from Asia to Mexico. I'm starting to see a lot of bricks and mortar fly to Mexico that I haven't seen for the last decade. So I anticipate that we're positioned well to take advantage of a migration of business from Asia back to Mexico over the course of the next couple of years. But, this past year, the pricing has been relatively flat and growth has been flat. It's been very similar to what we are experiencing domestically.

Justin Yagerman − Wachovia Capital

Maybe a lot of talk there and not a lot of action yet?

Herb Schmidt

Well, it takes time. As the price of energy has gone up and the migration began, it takes time to complete the facilities necessary to actually move production to Mexico. I think that we're probably at the midpoint in that time line. But over the course of the next two years, we will see more opportunities in Mexico than we have seen in the past two years.

Justin Yagerman − Wachovia Capital

Right. So maybe that's the catalyst to come. All right. Thanks for the time guys, appreciate it.

Operator

Your next question comes from the line of Ken Hoexter with Merrill Lynch.

Ken Hoexter − Merrill Lynch

Good afternoon. If I can just follow up, John, on the questions that Tom was asking before about the cost side, it sounded like you listed of a bunch of things that you've already done as far as eliminating the – or joining the cost of -- the back office reorganization. Are you saying that it's good as it's going to get. Are there more leverage you can pull in in the down environment or you're starting to pull on employee counts or on facility rationalization, anything to do now to start getting maybe a bit ahead of this curve that you see coming especially with volumes down recently?

John Labrie

Yeah, we definitely have opportunity not only to continue to improve our cost side performance but also to improve service for customers in the future despite the fact that we've got what we believe is the best offering in the marketplace and we're going to continue to attack those opportunities one by one and that I think you just need to balance that with what Doug said which is right on the money in that a lot of the cost side of our business is driven by volume in the network.

Ken Hoexter – Merrill Lynch

Okay. And then when you're out looking at these -- at bidding, you said you're constantly out getting bids in this environment. Can you comment on which of the competitors, whether Yellow, Fed Ex, UPS, are being more aggressive in trying to take some of that volume in this environment?

Doug Stotlar

There is no one that stands out, Ken. It is, as we’ve said on the calls earlier this year, it's been an aggressive environment, not just this year but for the past 24 months, and there is no single company that really stands out.

Ken Hoexter – Merrill Lynch

Okay. Steve, in the forecast, you said -- what target do you have for fuel built into that expectation?

Steve Bruffett

We have assumed that fuel, or oil I should say, is in the mid-70s per barrel for lack of a better guess.

Ken Hoexter – Merrill Lynch

Okay. Now if there were to be, I guess Doug a question on kind of the strategic view here, but if there was to be a large scale bankruptcy within the sector. And I know we’ve seen a couple of smaller ones with (inaudible) already in this rotation, what kind of steps would you do – would you look to invest more on a capital side? Can you do that? Are there levers you can pull quickly to be able to handle kind of a rapid absorption of volumes?

Doug Stotlar

First of all, we’d be very disciplined about how we took on new business. In the past, we've had surges like that. We have been disciplined about the type of business we take under our network. We would also look at where we have some potential capacity constraints on our network and we’ve tried to buy brick and mortar infrastructure to help alleviate those restriction points, so freight could flow through freely in the linehaul networks or in the P&D environment and then certainly tractors and trailers are the easiest piece of the equation. A more difficult and challenging piece would probably be ramping up the labor component necessary to meet the demand.

Ken Hoexter – Merrill Lynch

Okay. Great. Thanks for the time, guys.

Doug Stotlar

Thank you.

Operator

Our last question comes from the line of David Campbell with Thompson Davis and Company.

David Campbell – Thompson, Davis, & Co.

Yes, thank you very much and good morning. I just want to, first of all, applaud you for your tentative decision or perhaps the way you're going in explaining that you may not estimate earnings for next year. I think that's probably a very good tentative decision. The thing is that you really can't predict earnings and years ago, years ago companies didn't try to. It's never more obvious than right now when you're giving us a tremendous range of fourth quarter earnings and you’re already in the fourth quarter and yet you still can't predict it. Was there anything unusual besides the tax rate that made you earn significantly more in the third quarter than you were estimating in early October?

Doug Stotlar

I think this thing David had to do with some employee fringe rights that we didn't work as, get to benefit from that we didn't expect. Otherwise it was -- on the operating standpoint, we came in where we expected to come in.

David Campbell – Thompson, Davis, & Co.

All right. And certainly those employee benefits and so forth can change significantly from quarter to quarter, obviously that's one of the leverage factors in your business I guess. But that was the only unusual situation in the quarter other than the tax rate?

Doug Stotlar

That's correct. And you’re also correct that these things can change pretty dramatically in today’s environment where every quarter we true up all of the reserves to actual requirements.

David Campbell – Thompson, Davis, & Co.

And finally, I would -- most of my questions have been answered. But you mentioned the fact that lower fuel prices, if they continue, would help the consumer but I guess you can't estimate what help it will be on your tonnage?

Doug Stotlar

No visibility of that at all.

David Campbell – Thompson, Davis, & Co.

Right. Okay, thank you very much. I appreciate your answers.

Doug Stotlar

Thanks, David.

Patrick Fossenier

Thank you. Operator, could you give the replay information?

Operator

Yes, sir. Thank you for participating in today's Con-Way Inc. third quarter earnings review conference call. This call will be available for replay beginning at 2:00 pm Eastern Standard Time today through 11:59 pm Eastern Standard Time on Thursday, November 6, 2008. The conference ID number for the replay is 65546269. Again the conference ID number for the replay is 65546269. The number to dial for the replay is 1-800-642-1687 or 1-706-645-9291. Thank you. You may now disconnect.

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