Con-way, Inc. Q4 2008 Earnings Call Transcript

Con-way, Inc. (CNW)

Q4 2008 Earnings Call

January 27, 2009 10:00 am ET

Executives

Patrick J. Fossenier – Vice President of Investor Relations

Douglas W. Stotlar – President & Chief Executive Officer

Stephen L Bruffett – Chief Financial Officer

John G. Labrie – President, Con-way Freight

Robert L. Bianco, Jr. – President, Menlo Logistics

Herb Schmidt – President, Con-way Truckload

Analysts

Jason Seidl - Dahlman Rose & Co.

Christopher Ceraso - Credit Suisse

Jon Langenfeld - Robert W. Baird & Co., Inc.

Thomas Albrecht - Stephens Inc.

Edward Wolfe - Wolfe Research LLC

David Ross - Stifel Nicolaus & Company, Inc.

Justin Yagerman - Wachovia Capital Markets, LLC

Thomas Wadewitz - J.P. Morgan

Ken Hoexter - Merrill Lynch

Presentation

Operator

Good morning. My name is [Brooke] and I will be your conference operator today. At this time I would like to welcome everyone to the Con-way, Inc.’s fourth quarter earnings review conference call. (Operator Instructions)

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

Mr. Fossenier, you may begin your conference.

Patrick J. Fossenier

Thank you operator. Welcome to the Con-way fourth quarter 2008 conference call for shareholders and the investment community. In a couple of minutes I’ll turn it over to the Con-Way President and Chief Executive Officer, 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 operation and financial condition 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 operations 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.

Douglas W. Stotlar

Good morning. On the call today I’m joined by several members of our senior leadership team, including CFO Steve Bruffett; Con-way great, President John Labrie; Menlo Logistics President, Bob Bianco; Con-way Truckload President, Herb Schmidt. A bit later Steve will provide some commentary on financial matters and John, Bob and Herb will be available to participate in the Q&A portion of the call.

On December 8, we updated our earnings guidance based on a demand and pricing environment that had become increasingly challenging as the quarter progressed. Operating results came in at the high end of the guidance we provided in the December update, but today’s recessionary economy has led to a demand environment for freight services that is the worst I’ve seen in my career.

We’ve taken a number of steps to respond and manage for these extraordinary economic times. We have reevaluated our financial plans, and have aggressively cut expenses. We made the hard decision to reduce our employee count to bring workforce costs more in line with business volumes. And in a step that would have occurred even in a stronger environment, last November we reduced Con-way Freight’s service center network by 40 facilities and redesigned its line haul operation to improve service, accelerate transit times and gain efficiencies.

This was the outcome of an engineering project that was initiated earlier in the year. The re-engineering project built upon and was facilitated by the changes we made at Con-way Freight during the second half of 2007 though we culled this business transformation for Con-way Freight from its original, regional management structure to a consolidated, single operating model.

Turning to our results for the quarter, consolidated fourth quarter revenues of $1.13 billion were down 6.2% from last year’s $1.2 billion. The revenue decline was predominantly from the LTL business and was driven by a combination of declining demand, downward pressure on pricing, and lower fuel surcharge. The decline in LTL revenue more than offset the growth we achieved at Menlo Logistics.

Excluding the special charges we outlined in our news release, we earned $0.10 per share from continuing operations or $6.3 million in the quarter. Including the special charges, which Steve brought that we’ll discuss in more detail shortly, we reported a loss from continuing operations for the quarter of $1.09 per share or $49.7 million.

Now I’ll review key results and operating statistics for our business units, starting with Con-way Freight. Quarterly revenue at Con-way Freight was down 13.4% versus last year as volumes, base rate and fuel surcharge revenues were all below fourth quarter 2007 levels. Tonnage per day decreased 7.7% compared to the same quarter of the prior year. Most concerning was the rapid and unprecedented rate of decline as the quarter progressed. Tonnage was down 3.8% year-over-year in October, 9.1% in November and 10.6% in December.

Revenue per hundredweight decreased by 2.2% compared to the fourth quarter of last year. Excluding the effect of fuel surcharge, our yield was down 1.4%. Fuel surcharges were above last year’s levels in the first half of the quarter, but below them in the second half, greatly reducing the year-over-year yield comparisons as the quarter progressed.

Excluding the restructuring charges, operating income for Con-way Freight was $11.9 million in the quarter, again reflecting the weak demand environment and the consequent pressure on pricing. Absent the effect of the restructuring charges in each year, the operating ratio was 98.2 in the fourth quarter compared to 91.6 in the prior year. All in, the respective operating ratios were 101.4 and 92.6.

The aggressive cost reduction steps we’ve taken at Con-way Freight were prudent and well executed. We positioned our LTL company to work through what is clearly becoming a worsening economy and a freight marketplace that will present a very difficult operating environment for all players in the foreseeable future. Having said that, we’re maintaining a strong focus on service.

We remain a provider of extremely reliable and clearly differentiated service, even more so in difficult economic times. The ability to provide through superior service, which is Con-way Freight’s strongest attribute remains critical for our customers and is the foundation for the long term success of our business.

Now turning to Menlo Logistics. Menlo Logistics revenue net of purchased transportation was $129.3 million, up 2.5% from the fourth quarter of last year. The company saw new contract revenue as well as organic growth from warehouse management services and revenue contributions from its acquisitions in Asia. Excluding the Chic impairment charge and the write-down of the acquisition-related receivable, Menlo generated operating income of

$4.2 million, a $1.0 million decrease compared to the same quarter of last year.

The same primary factor we’ve seen in previous quarters was again behind this quarter’s shortfall, a quarterly loss from China. We’re making progress and the issues are getting resolved. As we mentioned last quarter, our profit timeline for China is longer than we anticipated, but we expect to turn the quarter in 2009.

Now I’ll review results at Con-way Truckload. Con-way Truckload operated well in this tough environment. The strength of this organization, combined with the benefits of growing business cooperation between Truckload and its sister companies and lower fuel expenses produced strong results. Truckload had quarterly revenue of $110.9 million after elimination of

$38.4 million of revenue related to its sister company business.

The company contributed operating profit of $14.5 million, a 67.4% increase over last year’s fourth quarter profit, which was reduced by $2.3 million from integration costs at our old Truckload unit. Comparing 2008 against 2007 without those charges, Truckload’s profits were up 30.8%. Demand and pricing in the truckload industry have also become increasingly challenging as the quarter progressed, making the internal business opportunities presented by its sister companies even more important as they benefited Con-way Truckload in the areas of asset utilization and empty mile reduction.

The operating ratio on total revenue, including inter-company business was 88.1. Excluding fuel surcharge revenue it was 92.7 on the same basis last year.

Now I’ll turn it over to Steve Bruffett for some additional financial perspective.

Stephen L Bruffett

Thanks Doug and good morning everyone. I’ll begin with cash flows since that’s the key focus across the company. For 2008 we generated $274 million of cash from operations and that included $202 million of depreciation amortization. Our net CapEx for the year was

$195 million, so we were able to generate free cash flow of $79 million for the year. And at year-end our cash position was $248 million.

Moving to the balance sheet items of note, total debt at year-end was $950 million. This amount includes a $22.7 million surety that we paid off earlier this month in January, so our debt balance as of today is $927 million. All of our debt is fixed rate and it’s comprised of three tranches. There’s $200 million that matures in May of 2010, $425 million in 2018 and $300 million in 2034. So we have a well structured debt portfolio with staggered maturities.

The next balance sheet item involves our defined benefit pension plan. We entered 2008 with a fully funded plan but like most other pension plans the funded status deteriorated throughout 2008, particularly in the fourth quarter, primarily due to investment losses. These reductions in asset values were roughly proportionate to the declines that brought equity into exit, such as the S&P 500.

In addition, discount rates dropped sharply during the fourth quarter and that resulted in higher calculation of pension liability. So we recorded the unfunded pension obligations as a liability on the balance sheet and with the corresponding decrease in shareholders equity. The tax effect amount on the fourth quarter adjustment was a $363 million reduction to shareholders equity.

Moving to the income statement, our interest to expense was $15.1 million and investment income totaled $1.7 million during the fourth quarter. Our tax rate was 3.3% for the quarter and that’s primarily due to the fact that the majority of the special charges at Menlo involving the impairment are not tax deductible.

Our diluted shares were equal to our basic shares outstanding at $45.6 million, and that’s a result of being in a net loss position in the fourth quarter. There were a few special charges during the quarter which Doug referenced earlier in the call.

In November and December at Con-way Freight we had some network rationalization and company-wide workforce reduction. So these restructuring charges totaled $21.3 million pretax. As previously disclosed, we recorded a non-cash $37.8 million charge for the impairment of goodwill and intangible assets related to our 2007 acquisition in China. We also took a $4.9 million charge for the write-down of a receivable associated with the Chic acquisition.

Now for some forward-looking comments. As we noted in our last conference call the uncertainty around the economic environment and its direction in 2009 makes it particularly difficult to provide meaningful earnings guidance, so we are suspending our practice of providing annual earnings guidance. We will, however, continue to provide forward-looking information on items for which we have visibility.

Due to the 2008 investment losses in our pension plan, we do expect a significant increase in our 2009 pension expense. In 2008 we recorded a $23 million income from the pension plan, while in 2009 we expect a $55 million expense. So there’s a $78 million year-over-year increase in pension expense. We’ll have to live with that for the next year and then we’ll see how the pension math works out at 12/31/09. The point is that pension expense will be somewhat volatile over the next few years, depending on what happens with asset returns and discount rates.

However, we’re in a good position to get through this pension bubble over the course of time. And as for pension funding, we expect to make a minimum cash contribution of $34 million for 2009 and may elect to contribute more, but we’ll make that determination later in the year.

Moving to our tax rate, we expect our 2009 tax rate to depend on a number of factors but we’d guide you to use 39% for 2009. And for diluted shares we suggest an average of $49 million for the year 2009. As I mentioned earlier we’re very focused on cash flow generation, so we’ve limited our capital plans to the minimum potentials for 2009. For the full year, we anticipate total CapEx net of asset dispositions to be approximately $70 million.

So as a result of the reduced capital plans in 2009 we expect depreciation and amortization expense to be about $190 million, down from about $200 million in 2008. So to be clear even in the challenging environment and the increase in pension expense and funding, we expect to generate a reasonable amount of free cash flow this year. And that positive cash flow will help us build on our cash position during 2009.

So with that I’ll turn it back over to Doug.

Douglas W. Stotlar

Thanks Steve. We all know that we’re operating in an extraordinarily challenging environment. The recessionary economy coupled with over capacity, weak demand and competitive pricing all point to further declines in tonnage and yields. We see no indicators of any meaningful improvement in the economic activity in the near future, and we have positioned our company to weather the storm and remain a strong, stable and trusted service provider for our customers.

From a financial perspective, we have a good cash position to support working capital needs, and plans in place to insure continued positive cash flow. Our focus is on the end game. I mentioned earlier maintaining a superior, differentiated service for our customers while we [grossly] controlling expenses. In times like these, not every competitor has the financial wherewithal to be a service leader. We’ll cling to our strength and focusing on this fundamental value that the customer can depend on from Con-way today and tomorrow. And with that, we’re ready to turn it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jason Seidl - Dahlman Rose & Co.

Jason Seidl - Dahlman Rose & Co.

Steve, a question regarding your pension expense. That $55 million that you gave us that was your income sheet impact, correct?

Stephen L Bruffett

What was the last part of your question?

Jason Seidl - Dahlman Rose & Co.

That was the income statement impact, the $55 million, correct?

Stephen L Bruffett

That’s correct.

Jason Seidl - Dahlman Rose & Co.

Because you gave the shareholder equity impact before but that was different, right?

Stephen L Bruffett

Yes. The $363 million is purely a balance sheet entry to recognize the pension liabilities on the balance sheet and then the offset goes to shareholders equity. And then separate from that is the income statement, which we expect $55 million of expense in 2009 whereas we had a

$23 million credit in 2008. So there’s a year-over-year delta of $78 million.

Jason Seidl - Dahlman Rose & Co.

Now how should we look – I mean, when are you going to expect to make this impact? Is it going to be spread out throughout the year? Or is it going to be lumpy? For modeling purposes.

Stephen L Bruffett

That expense is recognized reasonably smoothly throughout the year.

Jason Seidl - Dahlman Rose & Co.

On your capital spending, you gave the net number of $70 million, Steve. Could you give us the gross? I know you guys have a lot of terminals for sale still what the combination impacts.

Stephen L Bruffett

There’s not a lot of terminals for sale. That’s the thing – the difference between gross and net for us is really the disposition of a couple of hundred tractors at Truckload. So there’s not a large difference. I think it’s along the order and magnitude of about $20 million difference.

Jason Seidl - Dahlman Rose & Co.

I guess the next question is for John. John, can you talk to us a little bit about current times? Obviously it got worse throughout the quarter. I’m assuming it hasn’t really gotten that much better here in January in the LTL side. But if I’m not mistaken you guys had a little bit easier comparisons the first quarter of 2008 than you did throughout the year. Am I correct on that?

John G. Labrie

Yes. Our comparisons in the first quarter of ’08 were a little easier than they were the remaining quarters of last year, Jason. That’s correct. And to your point about what we saw or what we’ve seen throughout the course of January, we’ve seen pretty much an environment that looked pretty similar to December. It stepped down just a little bit from December levels as it relates to shipments, ton and January revenue.

Jason Seidl - Dahlman Rose & Co.

Have you seen pricing deteriorate along the same lines? Or is pricing holding in there a little bit better?

John G. Labrie

No, pricing has probably gotten worse. And we were I think very direct throughout the course of the last year, talking about the fact that from our point of view the pricing environment continued to worsen as the year went on. And we have seen that not only be the case in the fourth quarter but in January it has intensified as well, both as it relates to specific deal volume flow that we’ve seen in our pricing department, both with existing and new customers as well as the kind of prices that shippers are able to get from carriers.

Jason Seidl - Dahlman Rose & Co.

John, are there an inordinate amount of contracts being renegotiated in the first and second quarter here? Or is spread evenly throughout the year for you guys in ’09?

John G. Labrie

There’s not a tremendous difference between first quarter and second quarter typical contract renewal, but a little bit higher in first than second. Although I would say that the volume of pricing opportunities that we’re seeing right now is at least from my point of view unprecedented.

Jason Seidl - Dahlman Rose & Co.

In other words more people are putting stuff out for bid than you’ve ever seen before in the first quarter? Is that fair?

John G. Labrie

Correct.

Jason Seidl - Dahlman Rose & Co.

And you think that’s probably something to do with shippers trying to take advantage of a weak marketplace?

John G. Labrie

Correct.

Jason Seidl - Dahlman Rose & Co.

On the Truckload side, can you guys give a sense for how much there was a benefit in terms of fuel coming down for the quarter? Because I know some of the other truckload carriers talked about it in terms of the differential between what they pay and what is recognized, and also the slight lag that was impacting you guys.

Herb Schmidt

Jason, it benefited us just like it benefited the other carriers and it certainly hurt us on the way up. I don’t have a specific number to share with you, but we did benefit from that headwind there.

Jason Seidl - Dahlman Rose & Co.

I know it was a definite tailwind for you guys the first half of last year. That wind, that tailwind you received in the fourth quarter, that’s pretty much gone after January, correct?

Herb Schmidt

Well, yes, as long as it stays –

Jason Seidl - Dahlman Rose & Co.

As long as it stays where it’s at?

Herb Schmidt

Right. Right. It’s just business as usual. You really don’t get any incremental benefit from it, any additional benefit from it in the first quarter with fuel being flat.

Operator

Your next question comes from Christopher Ceraso - Credit Suisse.

Christopher Ceraso - Credit Suisse

I’m sorry. I missed the last comment. Did you quantify the benefit from the fuel surcharges lag in the Truckload business?

Douglas W. Stotlar

We did not.

Christopher Ceraso - Credit Suisse

Can you give us the fuel expense in Q4 ’08 and Q4 ’07 for the Truckload business?

Douglas W. Stotlar

No, we don’t break that out, Chris.

Christopher Ceraso - Credit Suisse

You gave a helpful walk on volumes as you worked through the fourth quarter over November and December. Do you have a similar walk for the revenue per hundredweight in the LTL business on a year-to-year percentage basis?

John G. Labrie

Yes, Chris, in October revenue per hundredweight was $17.93. It dropped to $17.24 in November and $16.66 in December.

Christopher Ceraso - Credit Suisse

And you say that has weakened a bit since?

John G. Labrie

January so far is similar to December.

Douglas W. Stotlar

Obviously that’s impacted by fuel surcharge levels.

Christopher Ceraso - Credit Suisse

If I’m doing the math right, it looks like on a ex items basis you had a very high tax rate in the quarter. Is that because of any valuation allowances or what explains that?

Stephen L Bruffett

When you look at the tax rate and you back out the special items for the quarter, you end up with a pretty small pretax income and so the permanent items show up a lot more prominently in the tax rate than they otherwise would. There’s some non-deductible items just normal course of business that are relatively small in a normal year compared to our pretax income. But in this fourth quarter, those stand out more.

Christopher Ceraso - Credit Suisse

On the CapEx budget of $70 million, what does that imply for replacement of trucks? Are you going to see the age of the trucks go up? Is this – would you consider that below sort of a maintenance level? Or how long could you go with $70 million?

Douglas W. Stotlar

It’s definitely below a maintenance level. Typically we would do a regular refreshing of the fleet. At the Freight company we’ve historically maintained a relatively young fleet for an LTL company, and so a one year hiatus on replacements really won’t do any long-term damage to the company. So we’re just going to basically maintain the fleet as it is. From the Truckload standpoint, it’s certainly not a full replacement. We’re just going to age the fleet a little bit this year. But we can’t do this for a long period of time, but for a one year period to get through pretty unusual circumstances, it won’t do any long-term damage to our franchise.

Operator

Your next question comes from Jon Langenfeld - Robert W. Baird & Co., Inc.

Jon Langenfeld - Robert W. Baird & Co., Inc.

Doug, can you just talk a little bit about the strategy on capacity? I mean, I guess the way we’re looking at the industry it probably has 25, 30% too much capacity out there. There’s really only a couple carriers actively reducing capacity. What discussions have you had about even further taking capacity down in the form of shedding additional terminals beyond what you already have done and actually reducing the rolling stock?

Douglas W. Stotlar

John, certainly the steps we took early in the year to you take a look at our network and optimize our network based on the one company configuration. So we, from my perspective we’ve already done the hard work of the modeling and made the necessary step to put our capacity in the proper perspective. You know, as you know being an LTL company with the broad service coverage that we provide and the direct nature of the service product that we provide, you have to have a certain geographic physical footprint to cover the miles that we do and the geographic territory that we do on a daily basis.

So there may be incremental things we do over time as tonnage volumes move and shift, but for the most part, our network is where it needs to be to provide the coverage we do in North America. We have tractors parked right now and we don’t know where the industry’s going from a capacity standpoint this year. We certainly recognize that there’s over capacity in the LTL environment, and ultimately the market will determine how that shakes out. And so we don’t want to be premature in getting rid of a lot of tractors at this point, but certainly as we get a chance to see where the environment’s going, we’ll make that determination later.

Jon Langenfeld - Robert W. Baird & Co., Inc.

And if, you know, if we’re in a scenario here, if this is the new reality, the new run rate of volumes and you know we’re going to grow off of this base, and again with the industry there’s way too much capacity, at what point do you take a look at it and say, “maybe we do need to reduce capacity.” Because it’s going to be hard to operate this network and receive a fair return if we’re going to be in a multi-year environment of just low single-digit freight growth even from the current base.

And if you don’t have a major bankruptcy out there occur, at some point do you need to readdress the business model for the new paradigm?

Douglas W. Stotlar

Absolutely. I mean we will certainly if this turns into a multi-year scenario or even if we weather this whole year and it’s at the same place, we’ll have to completely re-think how we look at our LTL infrastructure going forward. But I think it would be premature to do anything hasty at this point in time.

Jon Langenfeld - Robert W. Baird & Co., Inc.

Again, I would agree with you because there’s a lot of variables on the table, but I mean I guess the question is is it something you as a management team are at least thinking about and leaving open the possibility to do?

Douglas W. Stotlar

We continue to work through a whole laundry list of scenarios and have outlined some not detailed plans, but outlined plans associated with each scenario so we know how to move.

Jon Langenfeld - Robert W. Baird & Co., Inc.

And then the 40 facilities that you have taken out of the network, first question are they done? Are you done with those facilities? And then the second question is, what exactly is happening to those facilities? Are they in process? Have some of them been sold? And can you just walk us through that piece?

John G. Labrie

Sure, Jon, we announced those network changes on November 3 and we have fully integrated those changes on November 17, two weeks later. So we have been operating with the revised network of 40 fewer service centers than we had on November 3 since November 17. The integration went flawlessly. Our people did a phenomenal job communicating both with our employees as well as our customers, and just as we expected we improved our [exception] free on time and fast performance with customers.

As far as the 40 facilities that were closed, 10 of those were owned facilities and 30 were leased. And we are in the process of trying to sub-lease the leased facilities and in the case of the owned facilities we are in the process of selling those facilities.

Jon Langenfeld - Robert W. Baird & Co., Inc.

Your best guess on the 10 that you’re selling, is that a 2009 event or will that be early 2009, late, or even beyond that?

John G. Labrie

It really varies market by market, Jon. And I’ll just add to that that the total value of those 10 facilities is not a big number, so that’s not a material piece of our cash flow thought process.

Jon Langenfeld - Robert W. Baird & Co., Inc.

And then last question, and just with regards to the pension, so and I think you answered this, I just want to make sure I understand it, you said there’s essentially $1 in earnings per share differential between the $23 million of income last year and the $55 million in expense this year. So from our modeling perspective, the way we should think about that is basically evenly spread throughout each quarter of the year?

John G. Labrie

That’s correct.

Jon Langenfeld - Robert W. Baird & Co., Inc.

And with the majority of it, or I guess nearly all of it would fall within the Freight division?

John G. Labrie

Yes, probably 85 to 90% of it is in Freight.

Operator

Your next question comes from Thomas Albrecht - Stephens Inc.

Thomas Albrecht - Stephens Inc.

I wanted to talk a little bit first on the Truckload sector. Steve, did you give a number inter-company revenues were $88 million versus $92? Or did I mishear something else?

Stephen L Bruffett

I don’t think I provided a number.

Thomas Albrecht - Stephens Inc.

Can I just use the numbers basically that’s back in the back of the stat book?

Stephen L Bruffett

Yes, exactly.

Thomas Albrecht - Stephens Inc.

Really my question is where do you go from here? You had a very successful 2008 where CFI got in and hauled a lot of LTL freight and a lot of Menlo. A, can you give us where those numbers finished ’08 and how much more opportunities you see, particularly if you can put a number on it for ’09?

Douglas W. Stotlar

We, you know we don’t have a necessary bogey on that number. We really use the internal business and marry it up against external opportunities with the customer base. And so while certainly we had some success in growing that number and utilizing the fleet as it was in place we tried to use it strategically to make sure we have the highest asset utilization and profitability of the Truckload fleet when marrying that up against that external business.

And so certainly we’ve – you know, in this difficult environment it’s been a real lifeline for Truckload as far as keeping our assets busy and keeping our trucks full and our drivers getting plenty of miles, so our reduces our turnover and so it’s really benefited us in a number of ways. I know that many of Truckload’s competitors would love to have that same kind of opportunity.

But and I think you’ll see some growth in that number this year, simply because there’s going to be fewer external opportunities as the base of our existing customers and the volume that they ship has declined. But certainly our preference is to make sure we handle the most profitable external business and then we marry it up with internal opportunities to maximize our yields and to maximize our utilization.

Thomas Albrecht - Stephens Inc.

Do you have numbers where you ended up ’08 just so we can sort of at least think of where your baseline business is and then whatever strategic decisions you make, you know, that’s fine but Menlo I was thinking TL hauled about 30 million maybe up from 5 in ’07 and LTL I’m not sure, 100 million maybe up from 30 million or something?

Herb Schmidt

Tom, it’s approximately and it’s varied throughout the year, we’re still about 70%. We were about 70% non-affiliate and 30% affiliate business.

Thomas Albrecht - Stephens Inc.

But do you have breakdowns between those two affiliates if you will?

Douglas W. Stotlar

I’ll tell you what, we’ll have Pat provide those for you, the breakout here.

Thomas Albrecht - Stephens Inc.

Steve, on the pension even though you’ve now moved into a defined contribution world the last few years, can you give us a sense how big is that pension plan and how many employees still participate in that old defined benefit plan?

Stephen L Bruffett

In terms of size, I guess it depends at what point in time you measure it.

Thomas Albrecht - Stephens Inc.

Well, maybe just year-end ’08. We all know everybody went backwards last year.

Stephen L Bruffett

Yes. It started ’08 with about $1 billion in assets and ended up with a little over $700 million in assets as far as order of magnitude. And the number of participants I honestly don’t know off the top of my head.

Operator

Your next question comes from Edward Wolfe - Wolfe Research LLC.

Edward Wolfe - Wolfe Research LLC

Hey Steve the $363 million equity impact from the pension shortfall, how many years are you going to amortize that over?

Stephen L Bruffett

There’s a 10-year amortization period and of course that gets re-measured at every year-end, so as that number moves then that rolls into the smoothing part of that if you will.

Edward Wolfe - Wolfe Research LLC

And a 10-year period doesn’t change because you froze it a couple of years ago? It’s not eight years? It’s 10, it would have been 12, is that how I should think about it?

Stephen L Bruffett

No, it keeps being 10 unless you move forward. Just because we froze the plan, I mean there’s ongoing benefits to the existing participants so it’s not just frozen in time. It keeps moving forward.

Edward Wolfe - Wolfe Research LLC

The Freight OR if I think about at 98 and fourth quarter, I would think that normally seasonally that would imply a loss in the first quarter. There’s a lot of puts and takes with the restructuring and what’s going in, but is that kind of a fair way to think about things with everything getting worse in January and just sequentially from a 98?

Douglas W. Stotlar

I think directionally you’re on the right track, Ed. Obviously we’re not giving guidance but I think directionally you’re on the right track.

Edward Wolfe - Wolfe Research LLC

Can you take us through the tonnage and pricing trends first for LTL and then Truckload through the quarter? I know you gave the hundredweight but you didn’t give what those were relative to a year ago. Maybe give us what those were a year ago in October, November, December, January.

Douglas W. Stotlar

John, do you want to touch base on the LTL side?

John G. Labrie

I don’t have those numbers right in front of me, Ed. You know, we were down as we said in the opening comments 2.3% versus Q4 ’07 in aggregate, but I don’t have – I have the numbers here but I have them including fuel surcharge.

Edward Wolfe - Wolfe Research LLC

And the ones that you gave, the $17.93 going down to $16.66, those were gross?

John G. Labrie

Those include fuel.

Edward Wolfe - Wolfe Research LLC

If look at the negative two, three or the negative one, four net of fuel, what is that like in December and January?

Douglas W. Stotlar

Sorry, Ed, I’m not sure I understand the question.

Edward Wolfe - Wolfe Research LLC

Well, for the quarter the comments I’ve made were trends were worsening throughout the quarter and in January they’ve worsened still. If yields were negative 23 on average gross and negative 14 roughly now is it twice as bad as that? How do we think about the magnitude of where we’re at in the current world?

Douglas W. Stotlar

Yes, it’s down on a year-over-year basis. It’s [inaudible] more than it was in December.

Stephen L Bruffett

Yes, it’s incrementally worse in January, Ed, but it’s not a – we haven’t had a major step-down.

Edward Wolfe - Wolfe Research LLC

What was December like then? Is it minus three? Is it minus seven?

John G. Labrie

Without fuel – I mean with fuel in there, it was down seven but that’s largely driven by fuel. It was just – it didn’t move a lot during the quarter, Ed, and it was about 1.4 to about 1.6 or 7% down by the time you got to the end of the quarter.

Edward Wolfe - Wolfe Research LLC

And January’s slightly off that one-seven?

John G. Labrie

Correct.

Edward Wolfe - Wolfe Research LLC

Tonnage, can you give us kind of the percentage of tonnage throughout the quarter?

John G. Labrie

Yes. Tonnage per day was down 3.8% October, 9.1% November and 10.6% in December, down 7.7 in aggregate for the quarter, year-over-year.

Edward Wolfe - Wolfe Research LLC

And how about January?

Stephen L Bruffett

It’s down a little bit more in January, but again slightly worse than December.

Edward Wolfe - Wolfe Research LLC

And then Herb for Truckload, can we kind of go through the sequential on pricing net of fuel and I guess miles, without more volume, how you look at that?

Herb Schmidt

Well, Ed, what we saw is in January we saw basically the same volume levels that we saw in December, and we shored that up with a little more affiliate business beginning in January. And we’re going to sit tight here and see what the [VIT] cycle does. We’re seeing an unprecedented number of bids, but we really won’t know the result or how much that we’ve won until mid-February. So we did shore up our utilization by taking on some additional affiliate business in January, second week of the month.

Edward Wolfe - Wolfe Research LLC

So utilization I think for the quarter was down five. Is that right?

Stephen L Bruffett

I don’t have that in front of me. Just a minute. We’re looking for that. And pricing Ed is relatively flat from what we saw in fourth quarter bids. Now again I won’t know about pricing for the first quarter until the mid-February to mid-April timeframe. That’s when our bids from the first quarter will be awarded. So I really don’t have a feel for first quarter pricing, but I can tell you in fourth quarter stuff we were awarded for first quarter was flat.

Edward Wolfe - Wolfe Research LLC

And in fourth – you’re saying flat in first quarter over fourth, but where does fourth end? Where was December year-over-year when you look at revenue per mile, loaded mile net of fuel?

Douglas W. Stotlar

He’s looking for that number right now.

Edward Wolfe - Wolfe Research LLC

While he’s doing that maybe we can just move on. John can you talk about is there any difference in LTL pricing between the real regional stuff versus the longer haul right now?

John G. Labrie

Not noticeable, Ed. The environment’s very aggressive for all segments of business and really for all geographic segments as well.

Edward Wolfe - Wolfe Research LLC

You know, if the hypothetical that a large public competitor shut down their capacity all at once, where are the pinch spots? When you think about you know day one we’ve got to get drivers, we’ve got to get trucks, and then you think about maybe three or six months down the road how much capacity do you have for something like that? How can you put it in place?

John G. Labrie

Sure. We have plenty of rolling stock and plenty of brick-and-mortar capacity. The people would be the pinch point and we would put plans in place to ramp up the people we would need very quickly.

Edward Wolfe - Wolfe Research LLC

So if you think about excess capacity now in the network, normally we’d talk about doors or terminals, is that number 25, 30%? Is that a fair kind of excess capacity number? Or is it bigger than that right now?

John G. Labrie

It may be even a little bigger.

Edward Wolfe - Wolfe Research LLC

In terms of people that’s where you can’t quite take that 30% right away, you’ve got to ramp up the people. Is that what you’re saying?

John G. Labrie

That’s correct.

Douglas W. Stotlar

Yes, through our rationalization and our headcount reduction associated with making sure we have our costs in line with our tonnage levels, Ed, we’ve taken some pretty aggressive measures to reduce headcount so we would have to ramp that up incrementally.

Edward Wolfe - Wolfe Research LLC

Well that’s all I’ve got other than if you’ve got that revenue per mile and then the fuel in December that would be helpful for Truckload.

Stephen L Bruffett

I have it by quarter but not by month, so –

Douglas W. Stotlar

We’ll follow up with you, Ed, on that.

Operator

Your next question comes from David Ross - Stifel Nicolaus & Company, Inc.

David Ross - Stifel Nicolaus & Company, Inc.

I guess Bob at Menlo, I wanted to talk a little bit about chief holdings, Menlo’s presence over in China, do you still make [inaudible] over in China? Then if you could talk a little bit about where Menlo is focused right now, where they’re growing and what segments of the business are not doing as well.

Robert L. Bianco, Jr.

Well, as far as China, you know, if we look back at ’08 that was a year of investment which we put a lot of investment in integration and strengthening our platform. As we go into 2009, we feel we have built up a great platform for growth in China. We have a new leadership team there. We have a solid sales pipeline and business opportunities that we are actively converting into contracts for new business. So we’re, you know, strategically we feel we’re positioned strong there.

We have full coverage across China and a good book of business there. As far as your second question was about overall Menlo, if you look at our industry sectors, I would say that auto obviously is down, high tech is flat and we’re seeing a little bit of growth from new contract wins, primarily not the existing business side in our consumer industrial group.

David Ross - Stifel Nicolaus & Company, Inc.

And I guess in terms of product lines at Menlo, whether it’s I guess value out of warehousing, transportation management, how do you break down those segments and what’s performing well and what’s not?

Robert L. Bianco, Jr.

Well, we’re – our mix of business right now, we’re seeing more transportation management business come in through the sales pipelines than in warehousing. And you can see that by our gross revenue is growing faster than our net revenue. But as far as performing well, we feel that both of them are doing quite well right now.

David Ross - Stifel Nicolaus & Company, Inc.

And then, Steve, with the I guess reduction in equity due to the under-funded pension, is there any covenants that have a minimum tangible net worth associated with them that we should be concerned about?

Stephen L Bruffett

That’s a good question. We have no net worth debts in any of our facilities or indentures.

David Ross - Stifel Nicolaus & Company, Inc.

And what would the main debts be? Would this be debt EBITDA or debt EBIDAR?

Stephen L Bruffett

We have two covenants and that applies to our revolver and there is a leverage ratio at 3.5 times and a fixed charge coverage ratio at a floor of 1.875, and we have quite a bit of cushion under both.

Operator

Your next question comes from Justin Yagerman - Wachovia Capital Markets, LLC.

Justin Yagerman - Wachovia Capital Markets, LLC

I wanted to get a sense on the length of haul in Freight. I’ve been seeing that creep up throughout the year and I wanted to get a sense of what that’s attributable to or are you taking in whatever freight is out there and if that’s desirable. Are you going after long haul freight in particular or is that kind of market share grab as some of your longer haul competitors are struggling out there in the marketplace?

Douglas W. Stotlar

Yes, so it increased 20 miles or 2.7% at year-over-year, Justin. And we saw that growth in length of haul across really all regions of the country. And you know it’s hard to know exactly why that’s happening. I think certainly the fact that we have a uniform brand of Con-way Freight throughout North America and have now for the last year-and-a-half has really increasing shipper awareness about the fact that we have tremendous capabilities, both regionally, inter-regionally in our long haul product.

So I think just overall awareness about the broad capabilities we offer customers is the thing that is driving length of haul up. Specifically to your question we are not doing anything from a targeted standpoint with our sales force. We’re very focused on trying to understand shipper needs and offering our capabilities which are very broad.

Justin Yagerman - Wachovia Capital Markets, LLC

Are you seeing shippers that hadn’t used you in the past for your long haul capabilities? I mean, you know you guys talk about yourselves as inter-regional carriers. Sometimes when we speak to shippers individually they still think of you guys as a regional player in a much bigger way. So are you getting more traction with your long haul product right now? I mean, is that really what you would say it’s most attributable to?

Douglas W. Stotlar

I think there is a growing awareness within the LTL customer base throughout North America that we have a full range of capabilities and that we are really the only carrier in the industry that can do it all through a single network.

Justin Yagerman - Wachovia Capital Markets, LLC

And that should be positive to yields, which I would imagine is being just overwhelmed by the overall environment right now?

Douglas W. Stotlar

Certainly as length of haul goes up, yield moves directionally in the same way.

Justin Yagerman - Wachovia Capital Markets, LLC

And then just thinking about the current environment in both LTL and Truckload, when I’m trying to get my head around sequential rate of change and in this case the deterioration in this environment, it sounds like the sequential rate of change in tonnage at LTL has slowed but the pricing is continuing to deteriorate at potentially a faster pace. Is that a fair characterization of what’s going on?

Douglas W. Stotlar

Well, we shared what happened with tonnage on a year-over-year basis throughout the quarter, and as we said it’s slightly worse in January month-to-date than it was in December. So you know directionally how things have moved there. And from a pricing standpoint, as we said earlier in the call the pricing intensity continues to be very strong, both as it relates to shipper behavior and carrier behavior.

Justin Yagerman - Wachovia Capital Markets, LLC

But when you talk to your customers out there and you think about the bids that are outstanding and what you could or couldn’t win, do you have a sense of whether or not you expect tonnage to get incrementally sequentially worse as we move through the first quarter? Or do you think that maybe we’ve seen that sequential movement start to slow as we go month-to-month here?

Douglas W. Stotlar

Justin, we just don’t know. We’ve seen it trend here in the past couple of days that suggests that we may have hit bottom, but it’s a relatively few number of days of data and too early to tell.

Justin Yagerman - Wachovia Capital Markets, LLC

Do your customers give you any sense in terms of inventory and where they are on that?

Douglas W. Stotlar

No, not at all. I mean certainly I think it’s fair to say that the marketplace in general, regardless of the company you’re talking to or the industry that they’re in is concerned about the economy going forward, but nobody really is able to shed any light on what we should expect.

Justin Yagerman - Wachovia Capital Markets, LLC

Herb, on the Truckload side, when you think about taking on more affiliate business and having the Con-way sister companies become a bigger part of your business, obviously it’s preferable to have utilization go down in this type of an environment. But when you think about it relative to your profile freight that you look for in your business and have looked for over the past several years, how do you think about that relative to what kind of freight is out there? Is it an attractive opportunity? Is it something that you kind of see as a stopgap measure in this type of environment?

And I guess now that you’ve gotten a little bit of time to assess that freight versus maybe some historical freight profile, how does that stack up as freight that you really want in your network in a better environment?

Herb Schmidt

Well, some of it is attractive. Some of it is stopgap. It’s both. Certainly where it will be really helpful to us in this environment is we’re seeing an unprecedented number of bids, and I think what you’re going to see is as this freight changes hands the network for many carriers in the truckload business is going to change. When it does, when those bids are awarded, the key is going to be rebalancing your lanes and reducing your empty miles.

And certainly with our affiliate network we’ve got an advantage over our competitors in doing that because we can harvest internal business to synch up with our non-affiliate business and keep our empty miles at a minimum. So that’s really where our advantage lies is in that efficiency that exists because of the affiliate business.

Justin Yagerman - Wachovia Capital Markets, LLC

So it’s pretty fluid when you think about what you can or where you take or don’t take? You have that ability to pick and choose to the extent that you can realign that with how your bids shake out?

Herb Schmidt

It’s very fluid. And I think the important thing to remember, Justin, is it’s at market rates.

Justin Yagerman - Wachovia Capital Markets, LLC

And Herb I guess you made a couple of comments around the overall Truckload environment, and it sounds like while demand is still kind of wavering and you’re not exactly sure where pricing is going to fall out because of these bids that that pricing is probably a bit more stable than your sister company’s seeing in the LTL market. Is that fair to say? Do you think that’s a fair characterization?

Herb Schmidt

I think it’s fair to say that through the fourth quarter that was the case. I think it’d be premature for me to predict that in the first quarter until I see the results of these bids.

Operator

Your next question comes from Thomas Wadewitz - J.P. Morgan.

Thomas Wadewitz - J.P. Morgan

I wanted to I guess Steve you made a couple of comments that were helpful on the pension side, I guess I had a few specific ones to start with to follow-up on that. Can you tell us what discount rate you’re using and also what the actual return was in 2008 for the pension?

Stephen L Bruffett

From a FAS 158 accounting perspective it was a 6.1% discount rate and that did trail off sharply in the fourth quarter from what it was say at the end of the third quarter. And that increased the pension liabilities on there. And I’m sorry, what was the other part of your question?

Thomas Wadewitz - J.P. Morgan

What was the actual return on the pension assets in 2008?

Stephen L Bruffett

It was about 35% loss.

Thomas Wadewitz - J.P. Morgan

It was down about 35%.

Stephen L Bruffett

Correct.

Thomas Wadewitz - J.P. Morgan

When we look at this under the pension accounting, it’s pretty confusing to start with and then you’ve got cash and balance sheet and income statements that are all different, but it seems like you’re charged especially on a pretax basis, $563 million was a very large number, even after tax is a big number. And presumably that’s going to drive if you’re smoothing that out in terms of the cash contributions, but it seems to imply that you have a cash contribution that would be meaningful looking out a couple of years.

Is that a fair way to look at it? And is – based on what you see today, would that $34 million minimum contribution to be higher in 2010 and 2011? Did you – it just seems like that $34 is kind of small relative to the write-down on the balance sheet.

Stephen L Bruffett

And it is a minimum contribution, and if all else remained equal for years and years, then that cash contribution would need to go up in the out years. But that’s impossible to project. I don’t think anyone could have projected that you enter 2008 with an over-funded plan and you exit 2008 with the shape that it’s in as of this point in time. So I think that at some point asset returns will come back. And it may take a while to fill that hole, but that will be a fluid situation over a number of years, and it’s basically impossible to predict.

Thomas Wadewitz - J.P. Morgan

So in terms of the earnings in ’09, you’re not giving guidance and to get a response which is helpful in terms of maybe you ought to look at first quarter, but if you try to put the pieces of the puzzle together here, you know, you’ve got a lot of bids outstanding so presumably pricing may get a little bit worse. You’ve got a pretty significant pension headwind and it seems like it you know maybe it’s not overstating things to think that you might have a loss for more than just first quarter.

So I mean is there something I’m missing that’s going to kick in in second quarter or third quarter that from a cost perspective that would really help you out? Or is it possible that it’s not just a first quarter loss but given the pension headwind and pricing that you might have a loss for a couple of quarters?

Douglas W. Stotlar

I would say that we’re not giving guidance. We just literally don’t have visibility into that timeframe. We’re not trying to be evasive in any way. We just don’t know what the second quarter’s going to look like. We would expect some normal seasonality to kick in in the second and third quarters, even from the depressed level that we’re operating from today. But I think that’s as far as we’d go with our comments at this point.

Thomas Wadewitz - J.P. Morgan

Is there something else that kicks in on the cost side or are you pretty much – I mean you had some nice cost actions at the end of 2008. I guess terminal network rationalization and so forth, but is there more cost side that might kick in later in the year in ’09?

Douglas W. Stotlar

Well, Tom, certainly we’re going to be very cautious and prudent about how we look at expense and expense controls during this environment. And as needed we’re going to take action necessary to keep our company in as good of a competitive position as we can.

Operator

Your next question comes from Ken Hoexter - Merrill Lynch.

Ken Hoexter - Merrill Lynch

You mentioned earlier that just the past few days suggest you might have hit the bottom. I’m just wondering since some of the rails had mentioned that there were some chemical and oil plants that they were expecting to reopen over the next two weeks. Is there anything specific that you could point to or that you may be kind of feel of the bottom kind of comment?

Douglas W. Stotlar

Ken, I don’t think we have anything specific, certainly not any sector or geographic area. It’s just over the last couple and again this is only a few days, so this is a relatively new phenomenon here, but we’ve seen a little bit of an improvement. I mean this is not – by orders of magnitude, this is pretty insignificant. But there’s hope that we’ve at least bounced once off the bottom.

Ken Hoexter - Merrill Lynch

If we look at the some of the charges, you had taken a $21 million reorganization charge. It was only a couple of weeks ago during your pre-announcement I believe you had said you were taking an $8 million charge for the reduction. I just want to understand. What was the difference between the $8 million and the $21 million charge?

Douglas W. Stotlar

Well, the big difference was the network rationalization. That was everything associated with employee severance costs, facility closures, all the changes we made in linehaul network, that was all in network reductions. So everything that was contained in that action that we engineered was in the first charge.

The second charge was related to the actions we took much broader employee count reductions across our – either through our general offices, our administrative offices here in San Mateo, our administrative offices in Portland, and it’s primarily employee severance cost related.

Ken Hoexter - Merrill Lynch

So, I just want to understand because we obviously don’t get much detail on that. I don’t know if you put more in the Q, but just what of that really is one time versus just operational costs? Are those truly all one time?

Douglas W. Stotlar

Well, those are one time compacted. We took some very aggressive actions and made as cuts as deep as we felt was prudent to go at that time. And I will tell you that subsequent to that, we have made some driver layoffs at Freight as volumes continue to decline, and so we’re trying to keep those variable costs in line with what tonnage levels actually reflect. And the layoffs reflect the fact that because we believe just regular seasonality we’ll probably need those employees within the next 90 days.

And so we made those adjustments. These weren’t economic terminations, these were layoffs because we’re probably required to bring those employees back to work at the end of the first quarter. At least that’s what we’re hoping.

Ken Hoexter - Merrill Lynch

And then in your pre-announcement you came out with a down $0.06, up $0.09 for the quarter and on a normalized basis you came in at up $0.10. I’m just wondering what was different versus your kind of original expectations? Or what shifted if you went from the mid-point let’s say to where you ultimately ended up?

Stephen L Bruffett

Like I said when we gave guidance or updated guidance for the fourth quarter, we said for the full year $2.20 to $2.35 and that was with a few weeks left in the year. So it was hard to project. That’s why we had a relatively wide range and we came in at the upper end of that range. But I can’t point to any single factor that moved us toward the high end from the mid-point.

Ken Hoexter - Merrill Lynch

Well, Steve, what I’m saying is if when you set that guidance you obviously had put forecast for the rest of the year into your results and came up with that, you know, $0.02 being the mid-point and you ended up at $0.10. So I’m just wondering what was better? Was pricing not as competitive or volumes looking at December better than what you would have plugged in at that point, based on what you were seeing in November? I’m just trying to understand what from that mid-point was so different relative to what you ended up hitting.

Stephen L Bruffett

It wasn’t volumes. Yield may have been modestly better than what we had forecasted. I’m not saying it was good. But we didn’t know where to try to peg that for year-end. And it’s a laundry list of small items that ultimately get you there. It’s not one single thing to point to.

Ken Hoexter - Merrill Lynch

Also in the press release, you had said the write-down, the non-cash write-down at Chic was going to be between $30 and $35 million. It now ends up at $38 million. What is – has it deteriorated that much more at the end of the year? I guess you’ve now written down, what about $40 of the $60 million of the purchase price? What would happen to I guess to expand that write-down?

Stephen L Bruffett

We were just trying to provide a directional range when we determined that in fact there appeared to be an impairment. The fact that we ended up a little higher than that is a function of a ton of variables, including discount rates. That was probably the most significant change from the time we gave our initial range.

Ken Hoexter - Merrill Lynch

Steve, you weren’t there when the Chic acquisition occurred, right? So I guess maybe when you look back at the acquisition, what was there something that shifted, I guess, from the diligence process to what ended up happening? Or did business just deteriorate I guess that much faster than it [stayed]? I’m just trying to go back to when you acquired Chic and it was going to be the blending of Menlo. And I think you did Cougar relatively at the same time and as that one had much better prognosis since the acquisition, I guess what went wrong with the acquisition start to finish here?

Stephen L Bruffett

I think there’s probably three primary factors here. One is just buying assets at that time in China 2007 it was a fairly [Broadview] market so the price eventually was probably a bit high. We paid a premium to get into that environment at that time. Number two is there are some significant cultural differences in doing business in China than virtually any other part of the world where we do business today. And we had a platform in China, prior to the Chic acquisition.

However it had all been organically grown and so we had from the very beginning our people and our processing systems, and I think there was a bit of a naiveté on our part concerning how much different an entrepreneurial Chinese company was from the type of company that we ran. And so we’ve had a whole laundry list of issues associated with trying to move a very entrepreneurial Chinese business to a process driven, network driven organization.

And that was the other major contributing factor. We haven’t seen big customer defections. We haven’t seen necessarily volume declines there. Certainly as the environment softened we’ve seen some volume decline, but it’s not indicated. We have a nice platform there now. We have a rebuilt management team and management structure. We put in a lot of internal controls in processes over the course of this year. And our pipeline is really full. So we have some great opportunity there, but we certainly had some – had an education process over the past year.

Douglas W. Stotlar

Thanks operator.

Operator

Thank you for participating in today’s Con-way, Inc. fourth quarter earnings review. This call will be available for replay beginning at 12:00 PM Eastern Time today through 11:59 PM Eastern Time on February 10, 2009. The conference ID number for the replay is 79978707. Again the conference ID number for the replay is 79978707. 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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