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Con-way (NYSE:CNW)

Q1 2013 Earnings Call

May 02, 2013 8:30 am ET

Executives

Patrick J. Fossenier - Vice President of Investor Relations

Douglas W. Stotlar - Chief Executive Officer, President and Director

Stephen L. Bruffett - Chief Financial Officer and Executive Vice President

Robert L. Bianco - Executive Vice President and President of Menlo Worldwide LLC

Walter Gregory Lehmkuhl - Executive Vice President and President of Con-Way Freight Inc

Saul Gonzalez - President and Executive Vice President of Con-Way Inc

Analysts

Carol A. Krakowski - Wolfe Research, LLC

Thomas S. Albrecht - BB&T Capital Markets, Research Division

Justin B. Yagerman - Deutsche Bank AG, Research Division

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

Christian Wetherbee - Citigroup Inc, Research Division

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

A. Brad Delco - Stephens Inc., Research Division

Ken Hoexter - BofA Merrill Lynch, Research Division

Robert H. Salmon - Deutsche Bank AG, Research Division

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Operator

Good morning, and welcome to the Con-way Inc.'s First Quarter Earnings Review Conference Call. [Operator Instructions] I would now like to turn over to Patrick Fossenier, Vice President of Investor Relations. Please go ahead.

Patrick J. Fossenier

Thank you, Rachel. Welcome to the Con-way first quarter 2013 conference call for shareholders and the investment community. In a minute, I'll turn it over to Con-way President and CEO, Doug Stotlar.

Before we get into the call, I would like to offer a few reminders. First, 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. Actual results of operation and financial condition might differ materially from those projected in such forward-looking statements, and no assurance can be given as to future results. Additional information concerning factors that could cause actual results and other matters to differ materially from those in the forward-looking statements and the inherent limitations of such statements is contained in our Form 10-K, 10-Q and other filings with the SEC.

Second, today's prepared remarks contain non-GAAP financial measures. Reconciliations of GAAP to non-GAAP financial measures are found within the financial tables of our earnings release, which is available on our website at con-way.com.

Also, certain financial and operating statistics of the company can be found in the Investors section of our website. [Operator Instructions] 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 members of our senior leadership team, including Con-way's CFO, Steve Bruffett; Con-way Freight President, Greg Lehmkuhl; Menlo Logistics President, Bob Bianco; and Con-way Truckload President, Saul Gonzalez. Steve will provide some commentary on our financial picture; and Greg, Bob and Saul will participate in the Q&A portion of the call.

Let me begin by stating upfront that we are disappointed with our consolidated first quarter results, which even taken into consideration the short-term were infrequent cost factors, were below our expectations.

However, there were several positive takeaways from the quarter, which I'll provide more detail on in our segment discussions. First, I'll provide an overview of our consolidated financial results. In the first quarter of 2013, Con-way reported consolidated revenues of $1.34 billion, a 2.2% decline from last year's first quarter revenues of $1.37 billion. On an operating income basis, we earned $31.6 million in this quarter compared to $55.7 million last year.

Diluted earnings per share were $0.25 compared to $0.46 per share in the prior-year period. On a non-GAAP basis, earnings per diluted share were $0.19 compared to $0.45 in the prior year.

Moving to our business segments, I'll start with the review of Con-way Freight, our LTL company. Con-way Freight's first quarter revenue of $827.6 million was slightly below last year's revenue of $831 million. Increased yield largely offset the effects of 1.5 fewer workdays and a slight -- and slightly lower tonnage per day.

Operating income was $16 million compared to the $34.5 million earned in the first quarter a year ago. Earnings were affected by the items we noted in our March 19 update, which included a reserve for a large vehicular claim, a charge related to a transition to new technology, costs associated with adverse weather and field training expenses pertaining to our line-haul initiatives. Collectively, these items reduced operating income by approximately $14 million.

As a result, Con-way Freight's operating ratio this period was 98.1 compared to 95.8 in last year's first quarter. Revenue per hundredweight or yield increased 3.7% in the quarter compared to the prior year. Excluding fuel surcharge, the increase in yield was 3.4%.

With respect to tonnage year-over-year, January was down 1%, February declined 0.9% and March was down 1.8%. For April, the year-over-year tonnage decline was 4.8%. A significant portion of this decline can be attributed to the timing of shipping activity by our agricultural customers. Last year, we benefited in March and April from higher volumes of agricultural products, as mild winter weather allowed for early planting. In fact, April last year was our highest tonnage per day month of the year.

This year, the longer winter and heavy spring rains delayed the normal uptick in agricultural shipping we would typically experience. Volume for our top 10 agricultural shippers was down 2 million pounds per day in April compared to last year.

As we move into May and June, we expect to see a compressed agricultural shipping season, which will help both near-term volumes and productivity.

With respect to our 2 major improvement initiatives, lane-based pricing and line-haul efficiency, we are encouraged with the progress made in both of these key focus areas. On the pricing front, using our lane-based pricing process, we have completed negotiations with 111 of our 360 largest accounts through the end of April. Our analysis of accounts renegotiated in January and February based on actual, not forecasted, profitability validated the results we projected. We are working collaboratively with our customers to grow profitable business in those lanes where it best fits our network and in those lanes that have high operating ratios we have been successful in either improving profitability by raising price or reducing our exposure to unprofitable freight.

With respect to our line-haul efficiency initiative, the initial phases are in place, and for the first quarter, line-haul efficiency was up 2.2% over a strong first quarter of last year. These gains were amassed in the first quarter by increased training and implementation costs, as well as staff adjustments to accommodate the new freight flows in the network based on the changes. But our key metrics are trending in the right direction.

As we implement subsequent phases over the balance of the year, we expect the efficiency of our line-haul network to continue to improve. The takeaway is that our key initiatives are on track, and we remain confident that the benefits from these initiatives will build as the year progresses, particularly in the second half.

Now I'll move to our Logistics segment. In the first quarter, Menlo Worldwide Logistics, our global logistics and supply chain management operation, posted lower gross revenue, slightly higher net revenues but saw operating income decline. Revenue was $392.4 million, 6.4% below the prior year revenue of $419.1 million. Net revenue, or revenue minus purchased transportation, came in at $157.2 million, a slight increase over $155.7 million in the previous-year period.

Menlo's operating income this period was $6.5 million, which was below last year's $12.3 million. There were 3 primary factors that influenced Menlo's quarter. First, were revenues from new business. Menlo is predominantly a project-based company. The cycle from contract award through start-up to full implementation can take anywhere from 6 months to a year or more. As such, Menlo's revenues can experience some volatility, influenced by the magnitude of new contracts and their timing. We experienced some of that volatility in the first quarter, and that was the reason the revenues were down and net revenues were flat.

Second, 2 project-specific items affected the quarter as well. Menlo absorbed some start-up costs related to a large project being implemented for a major global customer and exited some international transportation management business that did not fit our risk profile.

Lastly, Menlo IT expense in the quarter included costs related to transitioning customers to new technologies and a onetime charge for transition of IT services to a new provider. Collectively, these items represented the majority of the operating income shortfall compared to last year.

On a positive note, while Menlo's pipeline has remained robust, we have seen our win rate, as well as the size of projects, improve considerably. This positions Menlo well for revenue growth as the contracts are implemented.

To give you some context in this year's first quarter, Menlo secured 5x the amount of new business measured in net revenue than it did in the first quarter of 2012, and they are on a record pace for new business wins this year.

We expect Menlo to have significant start-up activity through the remainder of this year as we onboard new projects, setting our logistics and supply chain management company up for a good 2014 as these projects begin to generate revenue and income.

Now I'll review results at our Truckload segment. In the first quarter, Con-way Truckload posted revenue of $157 million, which was essentially flat with last year's first quarter revenue of $157.3 million. Business levels were affected by adverse weather, and we also had one less workday in the quarter.

Truckload had operating income of $10 million compared to $10.6 million last year. Weather and related productivity impacts constrained first quarter profits as did higher maintenance expense. Revenue per loaded mile, excluding fuel surcharge, increased 3.3% over the previous year. We're about midway through the annual bid cycle, and we've been successful in securing rate increases in the 2% to 2.5% range. The operating ratio x fuel surcharge was 91.8 compared to 91.3 in the year-ago period.

Con-way Truckload continues to benefit from one of the industry's lowest driver turnover ratios. Operating discipline and consistently superior service are the cornerstones that will help Con-way Truckload build on a solid first quarter performance.

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

Stephen L. Bruffett

Thank you, Doug, and good morning, everyone. I'll begin with our first quarter cash flows. Cash generated from operations totaled $27 million, which compares to $53 million in the first quarter of last year.

On a year-over-year basis, the main items that contributed to operating cash flows were working capital and higher depreciation. The primary items that reduced cash compared to last year included lower net income, less benefit from deferred income taxes and higher pension funding.

Regarding pension funding, we still expect to contribute about $55 million for the calendar year of 2013 and that's similar to the $51 million that was contributed during 2012. However, in 2013, we're adjusting the timing of cash funding to more closely align with the cash outflows of the plans. And as a result, the first quarter funding was about $5 million higher this year than last.

On net capital expenditures, they were $49 million in the quarter as compared to the $78 million in the first quarter of 2012. Although the first quarter CapEx was considerably lower than to -- in 2013 than in 2012, this timing difference was planned and we still expect full year CapEx for 2013 to be around $300 million, slightly above the 2012 amount of $281 million.

Financing activities consumed $7 million in the quarter, similar to that in the first quarter of 2012. And this amount was the net effect of capital lease payments, common dividend payments and stock option activity. In total, these changes in cash resulted in a balance of cash and equivalents totaling $405 million at March 31, which compares to $433 million at year end.

Also, on the income statement, there's an additional item of note, which is our tax rate for the first quarter. The effective tax rate in the first quarter was 16.5%, which was unusually low due to the recognition of a discrete item that we discussed on our prior earnings call.

Our first quarter 2013 tax rate reflects the propane tax credit for the full year of 2012. This item represents $3.3 million of the $3.4 million in discrete tax items that we referred to in our earnings release.

Looking ahead, we want to provide some context on our near-term expectations for our business unit performance. At Con-way Freight, we expect meaningful sequential improvement in operating income from the first quarter to the second quarter of 2013. There are 3 primary factors driving this expectation: the first is seasonality from a tonnage standpoint, second quarter tends to be our highest; the second involves certain cost items. The first quarter of 2013 contained numerous cost items that we've already discussed, and at this point, we're not aware of any similar items in the second quarter; the third factor is time. We look to gain further traction from the key initiatives that Doug described as we move through the second quarter. So as a result of these factors, we expect Con-way Freight's operating income to be significantly better sequentially but less than the $49 million the was earned in the second quarter 2012. That $49 million I just referenced excludes the property gains that were reported in the second quarter of 2012.

We also expect to gain traction as we move through the second quarter of 2013, and therefore, be well positioned for year-over-year margin expansion as we enter the second half of the year.

At Menlo, we expect several of the same factors that influenced the first quarter. We'll have a similar impact on the second quarter. Then as we onboard the new business wins that Doug outlined, we expect to see costs from start-up activity, as well as net revenue growth as we move through the second half of the year. That should set Menlo up for a strong start to 2014.

At Con-way Truckload, we expect continued steady performance in the second quarter, in a range that's similar to the second quarter of 2012. So hopefully, this business unit overview provides useful color for the paths we expect to travel over the next few months.

In addition, here are further items for your modeling purposes. First, the majority of our employees received an increase in compensation effective April 1. The average increase was just over 2%, and this translates into approximately $8 million to $8.5 million per quarter on a consolidated basis. The impacts of these pay adjustments are reflected in the comments I just made regarding near-term expectations for our business units.

Next, we expect depreciation and amortization expense to be approximately $233 million, that's up from $216 million in 2012. Also, we anticipate that our 2013 effective tax rate, excluding discrete items, will be approximately 37%. And moving to our share count, we expect fully diluted shares for 2013 to be 56.9 million.

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

Douglas W. Stotlar

Thanks, Steve. In closing, while the first quarter presented some challenges, we maintained our focus on executing against our key strategic initiatives. And while we're in the early implementation stages, the results we've seen so far reinforce our expectations. We have made strategic investments at Con-way Freight and have fundamentally transformed the underlying systems with which we make decisions in pricing and plan line-haul operations. We fully expect to see the benefit of these new capabilities build as we progress through the next several quarters.

We remain encouraged about the prospect for all 3 of our business units. We will continue to manage them with a focus on expanding margins, creating service value every day for our customers and driving lean, continuous improvement into everything we do.

That concludes our prepared remarks. Operator, we're ready to take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from the line of Scott Group, Wolfe Research.

Carol A. Krakowski - Wolfe Research, LLC

It's Carol on for Scott. I just wanted to follow up a little bit on the issues going on at Menlo. You guys have talked for a couple of quarters now about the pipeline remaining strong. And just kind of how are you thinking about converting that pipeline into the same contracts? I know you said business is up, but how long should that take until we see it hit the bottom line? And kind of as a follow-up on that, what's your view on timing for revenue and margins to turn positive?

Robert L. Bianco

Carol, this is Bob Bianco. So last year, we are -- our pipeline -- we -- I think we characterized it as robust, and we expected to see a lot of that pipeline convert into contract awards and especially some large projects. And they just got pushed out into 2013 and now we're seeing those projects come on board. And that we're working with our customers right now on the start-up timelines. Some of them are -- we've already commenced, and some of them are slated through the summer and into the third quarter. So they're going to be spread out throughout the rest of this year.

Carol A. Krakowski - Wolfe Research, LLC

Okay. And I guess, when you see kind of these soft patches at this business, does it ever change your view about the business as a whole and how it fits in with the overall Con-way story? Would you ever consider monetizing it?

Douglas W. Stotlar

On an annual basis, we look at all strategic options and we compare those -- share those with the board. So we compare what we believe our goals are for the company and our strategic plan, and we compare all -- a whole range of options for the board. So we do look at that annually. But we like this business. It's countercyclical typically to the asset base businesses, and it's a business that we can grow without having to add a lot of capital. So while we've had a near-term -- some near-term headwinds, we're pretty excited about how Menlo's new business wins look and what this looks like for 2014 and beyond.

Carol A. Krakowski - Wolfe Research, LLC

Okay. And if I could get one more follow-up then. Can you tell us what percentage of your business you guys think you worked through on the lane-based pricing initiative? And with that, how is customer retention going? And kind of on a per customer basis, how is retention versus the amount of margin improvement on that customer trended?

Walter Gregory Lehmkuhl

So this is Greg. Good question. So as Doug stated in his prepared remarks, we've made it through 111 of our top 360 national accounts. And so far, the customer feedback has been very good. We do surveys with each national account after the negotiation and we've scored very high marks on collaboration, on the time we've given them to work through the negotiation and get to a fair deal for both sides, and ultimately, on Net Promoter Score. So the feedback has been very good. We have seen the tonnage -- we have seen the downward pressure on tonnage post negotiation. But on our actual account profitability statements, we've seen the profit improve despite a slightly lower tonnage. So we're seeing very clearly that the process is working for the bottom line.

Operator

Your next question is from the line of Tom Albrecht, BB&T.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

Doug, as you move forward into the second half of the year in Freight, I guess a couple of things. First, I want to make sure -- I think Steve said that you would expect margin improvement in LTL during the second half of the year?

Douglas W. Stotlar

Yes.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

Okay. And what's the timing to complete the negotiations on the other 249 accounts? Will that be by the end of the second quarter?

Douglas W. Stotlar

Oh, no. I mean, these come...

Thomas S. Albrecht - BB&T Capital Markets, Research Division

All throughout the year?

Douglas W. Stotlar

Ratably out throughout the course of the year. Greg, you want to provide some more color on that?

Walter Gregory Lehmkuhl

Sure. So yes, they're pretty much even throughout the quarter. So we're at 111 and you would naturally expect us to be at about 120 after 1/3 of the year goes out. So they're very closely to it, even calendarization. And so if you look at the impact on profitability for the company, we have a very specific profit impact target for the lane-based pricing initiative for each month and for each quarter this year. And because we negotiated more contracts each day in the first quarter using our new methods, the planned profit escalates significantly as the year progresses. So in Q1, we met our profit impact target, but because there weren't that many in effect especially until late in the quarter, the impact wasn't huge. And so to illustrate the impact of that calendarization, if you will, we expected and experienced only 5% of the expected 2013 profit increase in Q1 for the initiative, which was obviously overshadowed by some Q1 nonrecurring costs. But that means we have 95% of the benefit for the initiative yet to realize over the balance of the year.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

Okay. And then what metric should we be paying attention to the most? You know that you're making progress. Obviously, you give average load factor and that is one, but are there going to be particular expenses like purchased transportation or other metrics? I mean, give us some help because, I mean, it all sounds good but data ultimately tells the story.

Walter Gregory Lehmkuhl

No doubt, we feel the same way and one of the most encouraging things that we'll share on today's call, and frankly the thing that gives us the most confidence in the transparency we're providing into the rest of the year's profitability, is the data that we're seeing on our account statements. So we looked at the profitability statement by account in February and March for all the contracts that we negotiated in January and February. And despite slightly lower tonnage, we saw that the profitability was significantly improved and improved really, really close to our original target. And so as the year goes on, we're seeing that escalate, where we will see that escalate and specifically in the second half of the year. As far as what you can track, I think you'll see it in profit and I think you'll likely see it in yield just because we are pushing price up in aggregate, although we certainly don't have any yield target. It's a lane-by-lane, customer-by-customer profitability target.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

All right. So last, could you give us a sense of magnitude? And I wouldn't view this as guidance, but when you talk about you are seeing dramatically improved profitability, are you talking about the OR improving 200 basis points or 800 basis points on these accounts? I mean, what -- and I know it's all over the ballpark, but if you had to give an average from that first bucket.

Walter Gregory Lehmkuhl

So it is all over the ballpark by account. We have different targets based on where we start with that customer and how that customer's rate profile fits into our network. So I think the guidance, if you will, that we'll provide is what Steve said and that's that we expect second quarter margins to substantially improve from Q1, but we do have a tough comparison from last year as the full impact of the lane-based pricing and the line-haul won't be realized yet in Q2. As you recall last year, we had a very strong second quarter. The weather was nearly perfect in April, and this year, we haven't quite had that. For the second half of the year and for the full year, we expect profitability in Freight to increase versus '12. So we're -- I think you can kind of -- we're giving you goal post there in order to expand the profitability for the full year after a very tough first quarter. We obviously are expecting a pretty good second half and that's mainly driven by the lane-based pricing initiatives that we've been talking about.

Operator

Your next question is from the line of Justin Yagerman, Deutsche Bank.

Justin B. Yagerman - Deutsche Bank AG, Research Division

I was hoping that you guys could detail some of these items at Menlo. Now you have the start-up costs, you have, I think, some disputed revenues with a customer, you got rid of an account. You were talking about some IT rollout. Can you break out what's onetime in nature in the quarter and what should carry through? And then I didn't quite get a sense from you. You said that second quarter is similar, but can we see EBIT improve sequentially? Or is that going to be tough here?

Robert L. Bianco

Justin, it's Bob. So yes, those -- the 3 items that Doug outlined, the combined impact to OI was approximately $5 million. And of that, about half of it was a onetime event in that quarter. So going forward, we are going to have, because we are bringing on some very large projects into Menlo right now, we're going to have some start-up activity and with that, associated cost. So like Steve said, we expect that several of the same factors that influenced the first quarter are going to impact the second quarter. But as time goes on, throughout this year, as we get these projects up and running and the revenue streams go into profit transmission, we should be in a good position.

Justin B. Yagerman - Deutsche Bank AG, Research Division

So on a run rate basis, I could take this $6.5 million and add $2.5 million of onetime things to get myself to $9 million, but some of that's going to be matched, what you're saying, by additional start-up costs again in the second quarter. Is that the right way to think about it?

Robert L. Bianco

Yes, that's how I would think about it, Justin.

Justin B. Yagerman - Deutsche Bank AG, Research Division

Okay, all right. And I'm just trying to get some comfort around the margin improvement and how it's tied into how you guys are doing things. You guys have alluded to in the past that you have a 3-year plan going on. And Greg, I think you just talked about the fact that you do have internal targets around margin goals for the lane-based pricing. So I guess, I'm trying to get a sense of maybe how management compensation hurdles are tied to your 3-year profit improvement plan. And is there an embedded OR target in those hurdles? And if you can give us any kind of order of magnitude for how much improvement you're looking for over 3 years, I think it'd be really helpful.

Douglas W. Stotlar

We are -- just to go back, our management targets as far as compensation are tied to operating income improvements. So we set a plan for this year based on how we expect the year to progress, given what we understand about our lane-based pricing initiatives and the efficiencies we expect to gain through our line-haul initiatives. So it's to drive operating income. So that's what we're focused on, that's what we're driving towards. Obviously, we don't disclose our internal targets externally. And also, our -- and for the 3-year plan, Justin, we haven't given any guidance as to what that -- what those numbers are that we're expecting. Obviously, we still have the macro environment we have to negotiate -- navigate along the way. We've certainly been clear with our board, as well as internally, about our expectations. And we measure ourselves against those expectations, but we haven't signaled those externally.

Justin B. Yagerman - Deutsche Bank AG, Research Division

Okay. Steve, $400 million on the balance sheet, still a lot of cash. How are you guys thinking about trying to make better use of that on a go-forward basis?

Stephen L. Bruffett

Yes, and I think the phrase you said, go-forward basis, has probably been the key phrase as we've discussed several times in the past. There are number of considerations that went into building our current capital structure, which admittedly isn't the most efficient capital structure, but it serves a very purpose for us where we are at this point in time. Part of the reason the capital structure exists at it does today include things like pension funding, volatility and the need to replenish our fleet over a period of years and the economic uncertainty and margin profile of the company at the time. As we move forward in time, several of those factors have been mitigated or diminished, which puts us in a better position as we look forward to consider potential uses of cash. But where we sit today, we feel like we need a bit more time. We'd like to get through year 2 of our 3-year plan and see where that leaves us. We do have our credit rating that's a consideration for us to keep in mind. And so further progress along that 3-year plan is important to us.

Justin B. Yagerman - Deutsche Bank AG, Research Division

So basically, it's going to take better EBIT coverage on the interest, basically, to allow some of that cash to drop down to shareholders, I mean, just to keep the profile stable?

Stephen L. Bruffett

That was exactly -- yes. That's one of the considerations in the overall view of things. At the same time, we don't believe that we need to continue to accumulate cash as we move forward in time. So that's not our intent either. It's just something that we continue to monitor but probably need a bit more time with the current capital structure.

Justin B. Yagerman - Deutsche Bank AG, Research Division

Okay. Last question and I'll turn it over to someone else. In terms of the ag outlook, Doug, you sounded pretty confident that you're going to get some of that catch-up in mid-June. Do you have a line of sight to that? Are your customers communicating to you that as we move here now into May? Or is that just kind of hoping that normal trends hold and you'll get to catch up on that?

Douglas W. Stotlar

No, I'll turn this over to Greg, but we actually surveyed our customers because we wanted to understand how they were thinking about the agricultural shipping season given the fact that we simply weren't seeing the traffic. So Greg, do you want to some more color to this?

Walter Gregory Lehmkuhl

So yes, as you heard, April volumes were down 4.8% from a year ago, and there's a number of things in play there. First, obviously, the weather led to the ag season being very late and farmers were unable to get in the field. And Doug talked about our top 10 customers in April that was over $2 million -- or 2 million pounds a day decline up from last April. And so we also saw some impact of the lane-based pricing negotiations but not nearly to the magnitude of the ag impact. The ag impact was at least half of the April volume decline. And so we are seeing the impact, and as Doug said, we survey customers and they said there'll be an accelerated and compressed ag season this year.

Douglas W. Stotlar

Justin, just to give you a little more color on what some of our customers told us but last year at this time, Illinois and Iowa were about 65% planted in their crops, and this year, it's less than 5% so far. And we just got another whole dose of rain again this week and snow. So we'll see where that leaves us.

Operator

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

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

Bob, on Menlo, I just wanted to dig into this new business wins you guys have been getting. You talked about the win rate being up and project size increasing. I guess more color on why there is this new business available. Are these companies that are new to outsourcing? Or are they looking to ship to providers?

Robert L. Bianco

Well, it's hard to predict when we're going to -- when these contract awards will actualize. We work with our customers on design solutions and then we get into contract negotiations. And it's a -- some of these larger projects take a long time to move along. With a couple of the projects, I'll give you some color on. We are beefing up some industry space that we traditionally haven't operated in before. We have set the -- so one of them is oil and gas, another is e-commerce order fulfillment. And these are pretty substantial projects that we'll be bringing on. And it's new space, it's growing space. So it's pretty exciting for Menlo.

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

And in the bid, what accounted for Menlo's better win rate? Was -- is Menlo doing something better than the competition right now? Is it pricing below competitors as other 3PLs are focused on margin expansion? Why was Menlo getting more than their fair share, I guess?

Robert L. Bianco

Yes, I don't know if we're getting more than our fair share or not. The feedback that we're getting from our customers as to why we're winning the projects we have won is because they like our Lean methodologies and our approach to continuous improvement and creating value in our supply chain design. So that's really been a big help in helping us get these contract awards.

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

The contract -- last question on Menlo, more on the transportation management side of things or more on what I would call the warehousing distribution side?

Robert L. Bianco

Both. They're -- we're seeing wins in both areas, warehousing distribution and transportation management.

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

You prefer one over the other?

Robert L. Bianco

I -- personally, I like both because our model is once we get in the door with the customer, then we can grow with them through continuous improvement, through scope expansion. So they both serve as a way for Menlo to add value to our customers.

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

And just a quick question on Truckload side of things. You talked about a higher maintenance expense in the quarter. With the fleets half-year younger, I would think that maintenance expense will be better year-over-year.

Douglas W. Stotlar

It's a good question, Dave. And there were -- it's really 2 areas that we had some elevated costs, so one was just higher expense in Q1 compared to the prior year. But a different item was the fact that the newer trucks with the more complex emission systems, we're seeing more downtime as a result of these emission systems failing during the cold winter months specifically. And Saul will might want to provide a little more color, but all these units have more sensors on them. They have these particulate traps that need to be regenerated. And this is not just a EGR or -- it's an EGR and an SCR problem, it's not just one brand. It covers the whole spectrum. So Saul, anything to add there?

Saul Gonzalez

No, it's just not unique to Truckload, it's also -- it's an industry problem that we're seeing. So that's why we have the unusual high expense of the new equipment.

Douglas W. Stotlar

Dave, we looked at the maintenance expense for these emission systems and compared them to the pre-2010 trucks and our emissions-related maintenance expenses are 3x over what they used to be.

Operator

Your next question is from the line of Chris Wetherbee with Citi.

Christian Wetherbee - Citigroup Inc, Research Division

Just maybe a question on the split between regional freight and, I guess, some of the national businesses. You're going through the lane-based pricing and I know you have about 1/3 of it kind of underway. Have you seen the split or the weightings of that start to shift a little bit more favorably in your direction, the direction of regional? It sounds like you're making the progress that you expected, but just wanted to get a sense of how that's playing out.

Walter Gregory Lehmkuhl

So I would say no significant shift and every account's different and every lane's different. So some customers will trim some regional business and grow long-haul and we'll see vice versa on others, but no aggregate trend.

Christian Wetherbee - Citigroup Inc, Research Division

Okay. When you started the year and you think about the -- going into this process, would you have expected to see some of that already? I guess I was kind of under the impression that maybe you'd start to see that as one of the tenants of improving the profitability of the overall book of business.

Walter Gregory Lehmkuhl

No, we don't really think about it that way. I mean, we really honestly look shipment by shipment, lane by lane, customer by customer so we didn't go in and say, "Let's reduce our length of haul 20 miles or let's increase or reduce our weight per shipment." That's not the way we think about it. We think about it lane by lane and how that fits into our network.

Christian Wetherbee - Citigroup Inc, Research Division

Okay. That's helpful. And then I know you mentioned that ag was about roughly half the decline in April tonnage. Can you give us a rough sense? Is it a small piece what the decline in April tonnage was related to maybe some of that national business going away as you're trying to price that pretty aggressively?

Walter Gregory Lehmkuhl

So I would say possibly a couple percent was based on that. But the good news is while we're trimming our worst operating national account lanes, we also have a very intense focus on growing local business. And we saw our local tonnage go up 4% year-over-year in the first quarter and that continued throughout April. So as we trim the national, we're growing the local to offset some of those declines. And it's very good for the mix change, obviously.

Christian Wetherbee - Citigroup Inc, Research Division

Okay. Because that sounds like you are seeing some of that shift going on between the different pieces of your business as you're making these lane-based changes?

Walter Gregory Lehmkuhl

Yes, I'm sorry, I thought you meant when you said regional, I thought you meant long-haul versus short-haul so...

Christian Wetherbee - Citigroup Inc, Research Division

Yes, I apologize. I was thinking more local versus national.

Walter Gregory Lehmkuhl

Yes. So we are seeing a mix change there in a favorable direction.

Christian Wetherbee - Citigroup Inc, Research Division

Okay, okay, that's helpful. And then one final question. Just when you think about the guidance that you've given out around profitability in the LTL business, what's the underlying kind of volume assumption when you think about that? As you start to improve in the second quarter versus the first and then see growth on a year-over-year basis in the back half, how do you think about this kind of tonnage environment?

Walter Gregory Lehmkuhl

So in our models, we're showing a year-over-year decline for each of the next 3 quarters of tonnage. But again, the evidence that we're seeing in our INEs or account profitably statement shows that what we forecasted and modeled is true, that we can trim the worst lanes and improve profitability.

Christian Wetherbee - Citigroup Inc, Research Division

Okay. So tonnage down the next 3 quarters is what you said?

Walter Gregory Lehmkuhl

Yes.

Douglas W. Stotlar

Right.

Operator

Your next question is from the line of Ben Hartford with Baird.

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

Greg, I guess, can I -- can we talk a little bit conceptually about -- we've talked a lot about margins. You guys gave the outlook for the next 2 quarters. But in terms of your conviction, you guys have talked about in the past returning Freight to either peak profit or peak margins and I want to get your sense on when you will have -- assuming that we have kind of low-single-digit volume declines over the next 3 quarters as planned, when are you going to be sitting in a situation where you believe that the success from lane-based pricing and the line optimization initiatives are trending as planned and therefore, this visibility to either peak profit or peak margins is credible and, I don't want to say imminent, but maybe on a run rate type basis?

Walter Gregory Lehmkuhl

Yes, I mean, we're not going to throw out a date to get back to peak margins. But the lane-based pricing is something that is a game changer for us and you're going to see significant evidence of that this year. And more exciting to us internally than expanding margins year-over-year in 2013 is the trajectory we will have going into 2014. And so the line-haul initiatives, the lane-based pricing are the ones we've been talking about. But right behind those, we've been working for over a year on numerous other significant strategic initiatives that we have planned to roll out in the second half of this year and first half of next year. And so our lean continuous improvement process doesn't rely on just these 2, we have a whole series of projects lined up each quarter over the next multiple years. So I think you'll see that trajectory improve significantly this year. We'll go into next year with a really good run rate. And then we'll continue to line them up and knock them down and improve margin next year as well.

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

So returning to peak margin, that -- it is credible. You feel like that is the target. And once we get into year 3 of this 3-year plan, you ought to have some conviction of being able to get back to those levels, is that right?

Walter Gregory Lehmkuhl

Yes.

Operator

Your next question is from the line of Anthony Gallo with Wells Fargo.

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

How would the board score you right now with respect to the progress of the turnaround within this 3-year plan? And if you strip it -- and how does the board and how does your comp plan work if you either include or strip out the variety of onetime items along the way here?

Douglas W. Stotlar

Well, the onetime items certainly impact our comp's plans because we're based on operating income, particularly on our short-term incentive plan. So they're in and obviously, the hill got steeper for us after Q1 as far as achieving our incentive plan for this year. Certainly, the board was disappointed with Q1, just as management was disappointed with Q1. But they understand the underlying strategy that we're executing against. We continue to give them a deep dive into the tools that we've developed to provide visibility into the business and allow us to make very strategic, very focused pricing decisions, and they certainly understand the benefits that will be gathered over time with lean. So from a strategy standpoint, the board is very supportive with the direction that we're going as an organization.

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

But within that 3-year plan right now, would they score you behind, in line or ahead?

Douglas W. Stotlar

I'd say after Q1, they'd score us behind.

Operator

Your next question is from the line of Brad Delco with Stephens.

A. Brad Delco - Stephens Inc., Research Division

Greg, first question for you. It kind of goes back to one of the earlier questions on kind of what metrics we needed to focus on. And really, what I'm trying to get is, when you think about improving the margins in LTL, is it more of a pricing or yield issue? Or is it more of a cost or expense issue? And if you were to put a weight on either one of those, what do you think the opportunity is on the yield versus the cost in the network?

Walter Gregory Lehmkuhl

70-30 and I wouldn't use the word yield. I would use the word revenue optimization. I mean, we're really a revenue management. It's not about pushing up yield. As you know, yields impacted by weight per shipment like the haul density, all those things. So you can optimize your revenue or manage it properly and yield can go either direction while profitability improves. And so certainly, we have a lot of cost savings lined up for this year and we're certainly in our line-haul initiative ahead of plan year-to-date, and we expect to see further improvement as the year progresses. But the majority of the 3-year planned profit improvement is on the revenue management side.

A. Brad Delco - Stephens Inc., Research Division

Got you. So in terms of kind of trying to set a barometer for gauging the progress, we should be looking more at your revenue per hundredweight kind of outpacing industry peers, you think, 70-30 versus seeing kind of expenses ratchet down. Is that the right way to think about it?

Stephen L. Bruffett

This is Steve, Brad. I think what Greg is trying to say is the metric of revenue per hundredweight is a compound metric and therefore, can be a bit confusing. So I wouldn't necessarily look for our metric of revenue per hundredweight to significantly outpace that of the space. What I do think will change is the quality of that metric, the composition of revenue per hundredweight, and how those shipments fit within our network, our portfolio and how efficiently we're able to handle them is what will change underneath it all.

A. Brad Delco - Stephens Inc., Research Division

Okay. And then maybe one quick follow-up, and I guess what I'm trying to get here is with the line-haul optimization, Greg, I think you just said it's tracking ahead of progress. But how do I kind of understand your purchased transportation costs up 5.5% year-over-year, and when you look at kind of absolute tonnage for the quarter, it's down 3.6%. So I guess, where are we seeing the benefits of the line-haul optimization?

Walter Gregory Lehmkuhl

Sure. So I'll talk about it kind of conceptually from a metric standpoint and maybe Steve can provide a little more color from an income statement standpoint. So our PT did go up over Q1 '12 as you noted. But that's just one element of our total line-haul network efficiency. So load factor, which is the metric we use for line-haul efficiency, is 2.2% better than first quarter last year, the highest first quarter in our history despite lower tonnage. Another metric that we've started to track internally is the total line-haul cost per million pound miles. And so this is a unit cost measure that includes things like our wage increases internally, the rate increases that we award to our purchased transportation partners, the increased appreciation on tractors as they cost more than they did last year. All those things roll up into a total line-haul cost per million pound miles, and if you compare us to that -- to the first quarter last year, we've held those costs flat despite all of the underlying escalators. And so you don't see visibility to that but we -- those 2 metrics combined give us a lot of confidence that the line-haul initiatives are working and we're either keeping costs at bay while our revenue is going up or reducing costs. In addition, some of the -- we've talked about that we rolled out the first phases of our line-haul initiative so far this year. Subsequent phases later in the year will give us an improved ability to understand our purchased transportation stand and how that layers into our network.

A. Brad Delco - Stephens Inc., Research Division

Got you. And Steve, anything to add to that in terms of the P&L or...

Stephen L. Bruffett

Yes, I guess, not on a metric basis but just from the income statements that you can see in our 10-Qs and so on. The purchased transportation line obviously stands out but if you look at fuel and fuel taxes, for example, in the first quarter of '13 compared to that of first quarter of '12, you'll note that, that is down as well and a good portion of that decline is -- contributes to the metric that Greg was referring to about line-haul costs being a total package, not just the purchased transportation line. There's also salaries, wages and benefits are down year-over-year at Freight and good portion of that decline is due to lower mileage wages, which is line-haul function. So when you factor in things like fuel and mileage wages and put them together with purchased transportation, you start to get a more fulsome view of what's actually going on.

Walter Gregory Lehmkuhl

I think it might make sense for me to provide a little more color on Q1 as well for everybody on the call. The vast majority of the additional costs in the first quarter were either nonrecurring, things like the biggest vehicular accident we've had in a number of years or associated with some network rebalancing we did based on our line-haul adjustments. So for example, because we changed the way we move freight in the network, we needed to reposition about 400 jobs in Q1, mostly in February and March, and mostly in our resort operations. So for example, just in one facility here in the Midwest, we had to add 20 part-time positions to a single shift to support the new freight flow. So this impacted the first quarter in a few areas, including training, dock productivity. Overtime was a little up. Claims were a little up as we brought these new employees up to speed. But going into May, all these positions are filled, the new team members are training up to speed and these adjustments are behind us.

Operator

Our next question is from the line of Ken Hoexter with Bank of America Merrill Lynch.

Ken Hoexter - BofA Merrill Lynch, Research Division

Doug or -- maybe if you think about the local business being up 4% and ag was down 2.5%, lane-based pricing pushed it down another half or, I guess, maybe 2%, so are you not -- I guess just looking at the underlying economy when you talk about that 4.8% figure for April, what are you seeing in the economy? And then if we're not seeing much growth when you start to think about the progress that you expect in the second quarter, if that works against you, is there any way to break out so we can see that visibility of the improvement from the lane-based pricing maybe on an operating ratio for the half -- by then the half of the business that would've been converted or any other options in terms of kind of breaking it out to really highlight the ones that have been converted versus none?

Douglas W. Stotlar

I heard 2 different things there but as far as the economy, I mean, when I look at that, I look at the pulse of all 3 business units. And we're definitely seeing it to be a bit spotty. Truckload, we have -- we'll have a few weeks in a row where we're feeling really pretty good about things and then we'll have a couple of weeks in a row where it feels pretty soft. If I look across our Logistics customers, it's flat and we're just not seeing the kind of volume or growth in volume that we expect from our existing customer base for this time of year. And at Freight, I would say that the LTL environment is relatively flat and other external touch points that we have to look at the economy are kind of indicating the same thing. And so certainly, as we go forward, we're going to try to think of ways in which we could provide visibility to demonstrate to you and be able to show you the progress that we're making with the -- with our lane-based approach to pricing, as well as our efficiency gains from how we manage the network differently. Right off hand, I don't know exactly what those will look like if we're dealing with it for fighting a decline in tonnage environment, but we'll certainly try to be able to provide some color for that for you.

Walter Gregory Lehmkuhl

I think the good news from a freight standpoint is that we're not counting on tonnage increases and we actually planning on tonnage declines in our margin expansion and that the pricing environment is always a competitive industry but the pricing environment in the LTL hasn't softened and people are still focused on margin expansion as the industry, as a whole, isn't putting back the cost of capital.

Robert H. Salmon - Deutsche Bank AG, Research Division

So just to clarify that last point, Greg, you're saying that even if you get -- obviously, you're expecting the decreases but even if the economy softens a bit, that would not interrupt your ability to show the improvement on the lane-based pricing as we move into second quarter?

Walter Gregory Lehmkuhl

Of course, it's not going to help if the economy gets worse but that's certainly not what we're counting on. As long as the pricing environment continues to be stable, we should be okay.

Douglas W. Stotlar

And we will continue with lane-based pricing even on a weaken environment because it's absolutely the right thing to do, that we make sure we get our network balance around the kind of freight that fits best in our network and we can operate the most effectively. And so the game plan won't change even if the environment slows up a little bit.

Ken Hoexter - BofA Merrill Lynch, Research Division

Got it. Sounds great. Love to see that as we move forward. The -- maybe Greg or Doug, I guess to further on that, you mentioned on the -- and actually I think Steve mentioned the wage rate increases. How do you think now your wage and benefit rates compare to whether it's ODFL or your other peers out there overall now that -- post the increases and relative to where you stand?

Stephen L. Bruffett

So we did a wage study dating to last year, and this year, we took a very targeted approach to our wage increases. So we did -- not everybody around the network got the same increase. Some people got a onetime increase that we're paying quarterly in lieu of a base wage increase. So over time, in markets where we pay more than the average competitor, we're going to give, if we're substantially over that market target, we're going to give onetime increases instead of base wage increases. In areas where we were under market, where we were struggling to retain drivers, we did the opposite, gave them a little bit more than the base wage increase. The aggregate that averaged out of Freight to about 2.2% of wages. But we think over time, that will make us structurally more competitive in every market in which we compete.

Ken Hoexter - BofA Merrill Lynch, Research Division

But after that 2.2%, do you think you're now more in line with where -- I just wonder if there's any other thing that you could do aside from the lane-based pricing in order to get that efficiency metric back to -- or the operating ratio back to where it is? Is it something as simple as adjusting wages or is that -- you feel that that's more in line?

Douglas W. Stotlar

No, I mean, when we look at -- we look at total rewards for our employees, so it's all in. It's wages, it's benefits, it's retirement benefits, et cetera. And we continue to look at this and we brought that down over time as a result of several initiatives. And when we look at comparing ourselves to our union-free peers around the industry, we stack up very favorably. I mean, we're right in the middle of the pack as far as what our total rewards are to our employees. So I don't see that as being a big structural problem. Our biggest issue is the fact that we need to rebalance our network and we need to make sure that the freight that we're moving in our network is priced adequately and for profitability. And that's something what we're doing to our lane-based pricing initiative. And as we do that and we're able to adjust our line-haul operations dynamically because of the new tools that we have, we'll continue to reduce our cost structure. The biggest leverage points we have are in pricing and our ability to leverage our network differently than we do today.

Ken Hoexter - BofA Merrill Lynch, Research Division

Just a quick one on line-haul optimization. Can you kind of just throw out, what is that doing to you Truckload business? Just trying to understand the synergies between businesses. Is there any impact that you're feeling on the Truckload side?

Douglas W. Stotlar

No, I mean, Truckload had been on specific lanes that they have won and they continue to maintain, and those are regular lanes that move on a daily basis. So that business hasn't moved around. I mean, a big portion of our purchased transportation spend are regular movements that are predominantly one way in direction. So we fill in the purchased transportation with -- in balances that we currently have. And obviously, as we change the freight as it moves in our network through lane-based pricing, we'll continue to adjust that aspect of the network.

Ken Hoexter - BofA Merrill Lynch, Research Division

But it's not as simple as going from 25% to 10% in terms of what you're giving another Truckload or...

Douglas W. Stotlar

No, it's not that simple.

Operator

We have time for one more question. Your last question is from the line of Tom Wadewitz, JPMorgan.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Wanted to ask a little bit about the kind of -- I guess, like training and IT, I think, were some costs you mentioned in Freight in the quarter. And there was also some mention of the kind of some of the adjustments in workforce that I think your lane-based pricing initiatives caused. So I guess, would you think that those things are fully onetime? Or given that you're only about, I don't know, 25%, 30% through the rollout of lane-based pricing to the account base, is it possible that some of those network adjustment costs keep recurring for the next couple of quarters?

Stephen L. Bruffett

So we're going to -- so most of the rebalancing that was driven by the line-haul initiatives versus the lane-based pricing, one of the great things about our process in lane-based pricing is the operations team is on the calls prior to the negotiation, 90 to 120 days. So they have visibility to how their operations can be impacted months in advance. And so they have plenty of time to adjust, if their tonnage changes, at their individual service centers. The network rebalancing that happened in the first quarter was a result of the optimization model changes that we rolled out throughout the first quarter. And I would say the vast majority of those are behind us. The people are up and trained, and the subsequent optimization improvements that we have for the balance of the year will not have the type of network impact that -- as we had in the first quarter. The other big expense was training for our queue-based loading and planning process. So we had 3 to 4 hours of training for every single hourly employee in the first quarter. In our original plan, we have that training spread out between the first and second quarter, and what we found is our operations management team really like the training, saw that it was improving their load factor, which improved their personal score, and they accelerated the training and had it pretty much complete by the end of the first quarter. And so we saw an accelerated training expense that has tapered down in April and is, at this point, complete.

Douglas W. Stotlar

And just to get one more clarification point. The IT expense, the charge that we cited in the announcement in March, that was a termination charge. So that's not recurring event. We're moving to a different technology platform with a different provider, and we had a termination fee with the existing provider.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Okay. So you -- would you say you have a high degree of conviction that we won't look at second quarter or third quarter and be talking about kind of one-off items in Freight?

Douglas W. Stotlar

As Steve mentioned earlier, we don't see any right now that are on the horizon.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Okay. I know that -- so I wanted -- I guess, trying to get around metrics and what would show up an improvement revenue per hundredweight. I know it's not a perfect metric, but one we would consider looking at. So I was wondering if you could give the by-month trend in the quarter? And then, what revenue per hundredweight x fuel look like in April as well?

Stephen L. Bruffett

That's a level of granularity that we haven't gotten into, and we do provide the quarterly trends in that -- in our prepared comments. But the month by month, we haven't.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

I guess, as you look forward, given what you saw in the quarter and what you see in April and so forth, would you think that, that would accelerate somewhat as we look at second or third quarter? Or do you think it's fair to look at it and say that's pretty representative of what we saw in first quarter in terms of revenue per hundredweight and what we had to look for going forward?

Stephen L. Bruffett

I would say you'd see a slight uptick in revenue per hundredweight as the year progresses, especially -- second half especially as we -- as more accounts have went through the process.

Douglas W. Stotlar

I think we're done now, Rachel. Thank you very much.

Operator

Thank you for participating in Con-way Inc. First Quarter Earnings Review Conference Call. This call will be available for replay beginning at 11:30 a.m. Eastern Standard Time today through 11:59 p.m. Eastern Standard Time on Thursday, May 16, 2013. The conference ID number for the replay is 19136637. The number to dial for the replay is (855) 859-2056 or you made dial (404) 537-3406. Thank you. You may now disconnect.

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