Con-way Inc. Q3 2009 Earnings Conference Call

Nov. 4.09 | About: Con-Way Inc. (CNW)

Con-way Inc. (NYSE:CNW)

Q3 2009 Earnings Call

November 4, 2009 08:30 a.m. ET

Executives

Patrick Fossenier - VP of IR

Doug Stotlar - President and CEO

Steve Bruffett - CFO

John Labrie - President, Con-way Freight

Bob Bianco - President, Menlo Logistics

Analysts

Jason Seidl - Dahlman Rose

Justin Yagerman - Deutsche Bank

Ken Hoexter - Bank of America Merrill Lynch

Edward Wolfe - Wolfe Research

David Campbell - Thompson Davis & Company

Jack Waldo - Stephens Incorporated

Young Kwon - Barclays Capital

Tom Wadewitz - JPMorgan

David Ross - Stifel Nicolaus

Neal Deaton - BB&T Capital Markets

Presentation

Operator

Good morning. My name is Taylor and I will be your conference operator today. At this time I would like to welcome everyone to the Con-way Inc. third quarter earnings review conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. (Operator Instructions). I would now like to turn the call over to Patrick Fossenier, Vice President of Investor Relations with Con-way Inc. Please go ahead sir.

Patrick Fossenier

Welcome to the Con-way third quarter 2009 conference call for shareholders and the investment community. In a minute I will turn it over to Con-way’s President and CEO Doug Stotlar.

Before we get in to the call I would like to read the following safe harbor announcement. Certain statements in this conference including statements regarding anticipated results of operations and financial 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 condition.

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 am pleased to turn it over to Doug Stotlar.

Doug Stotlar

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

While, our third quarter results reflected near term challenges all three of our operating companies have adjusted to the resetting economy and we saw some positive trends. I will start by sharing some initial highlights and provide additional color around this quarter’s results. As we reported Con-way Freight continued its growth momentum, hosting another sequential quarter-to-quarter tonnage gain as well as improvement over last year’s third quarter. This was a significant accomplishment given the challenging conditions and competitive environment in the LTL market. Over the past two quarters we chose to invest in growth in order to better utilize available capacity in our LTL network.

The strategy worked, volumes are up and we are moving more freight through the system but not without some growing [pains]. Tonnage growth accelerated as the quarter progressed requiring us to ramp up the workforce rapidly to accommodate this growth, increasing our variable cost beyond anticipated levels. A portion of this growth came at pricing levels, which were more aggressive than we would normally take. We believe this investment in volume puts us in a stronger competitive position for the long term. We will continue to take actions and focus on stability and improvement across all improvement metrics of our business.

Menlo logistic, had a very solid quarter, our supply chain company is doing a superb job managing its cost. Menlo achieved an all time record for quarterly profits in the third quarter, which is a testament to the value they are delivering to their customers helping them reengineer their supply chains. Con-way Truckload also managed their business well through a tough quarter and despite lower revenues turned in a commendable profit performance. Costs remained well controlled, asset utilization is improving and the recent expansion of regional truckload operations is gaining momentum.

Turning to our consolidated results, third quarter revenue of $1.13 billion was down 17.3% from last year’s $1.37 billion. Competitive pricing and reduced bill surcharge revenue drove the revenue decline. On a GAAP basis, our diluted earnings per share for the third quarter was $0.27. This included the ongoing benefit of the cost reduction actions taken earlier in the year. Quarterly net income included charges of $0.07 a share for an accounting estimate change of Con-way freight and $0.05 of share for discrete capital items. Excluding these items, we achieved net income to shareholders of $0.39 per diluted share in the quarter.

Later in the call, Steve will add some additional background relative to the freight accounting estimate change. Now we will review key operating results and statistics for our business units starting with Con-way freight. Quarterly revenue at Con-way Freight up $692.8 million was down 14.3% compared to the third quarter of last year. The revenue shortfall was due primarily to pricing that was well below third quarter 2008 and reduced fuel surcharge levels combined these offset benefits of increased volume. Tonnage per day increased 5.1% compared to the same quarter of the prior year and on a sequential basis third quarter tonnage per day improved 11.9% over the second quarter. This continued a positive trend we’ve seen since mid first quarter of this year. Gross revenue per hundredweight decreased 19.4% compared to the third quarter of last year.

Excluding the effect of fuel surcharge, yield in the quarter was down 10.5%. Sequentially, pricing trend stabilized somewhat during the third quarter after declining significantly for 2009’s first and second quarters. Excluding the change in accounting estimate third quarter operating profits for Con-way Freight was $28.2 million. As we have noted, our LTL Company continue to benefit from the expense reductions implemented at the beginning of the second quarter.

Operating income, however, was down due to lower pricing levels compared to last year and higher variable cost that came with the increased volumes moving through the network. Looking at the operating ratio including the charge for the accounting estimate change, the OR for the third quarter was 96.8. It was certainly an interesting if not somewhat unique quarter for Con-way Freight. I'd like to make a couple of points to put this into perspective.

First, as I noted before we made a conscious decision to grow the business to increase our network utilization. Customers responded adopting our service at a pace even greater than we could have expected. So, this decision accomplishes its goal tonnage is up and we absorb some of the excess capacity in the network.

Second, this is a fluent process and we manage it daily customer-by-customer. With the continuum that’s evolving with the market and the competitive environment, we'll adapt our philosophies and the actions we take in order to best position our LTL Company for a long-term success.

Lastly, the growth we experience in the quarter was unlike any in our history. Sequentially, 11.9% growth we saw in the third quarter over Q2 levels was the largest Q2 to Q3 increase ever. Nearly double the previous record. Our daily tonnage in September of this year was 38% higher than the low watermark we set this past January, that’s almost five times the average growth rate that has been the historical norm between these two months. We are now instituting specific measures but will improve efficiencies.

Now I will turn to Menlo Logistics. Revenue net of purchase transportation was $129.3 million, which is an increase of 1.1% over net revenue of $127.9 million in the third quarter of last year. The results reflect new contracts implemented this year and higher gain share revenues. Menlo’s operating income of $9.5 million established a new record for quarterly earnings. This was a substantial increase over the $3.7 million earned in the same period of last year. Once again good cost control coupled with ongoing improvements in operating efficiency drove better profits. Menlo’s income also benefited from gain share agreements with a number of customers who have these pay-for-performance contracts in place. Menlo’s multi client warehouse operations also contributed to record earnings as the service offering expanded its client base.

Now I will review results for Con-way Truckload. Truckload reported revenue of $95.7 million after elimination of $50.6 million of inter company revenue. In the third quarter, Con-way Truckload recognized the charge of $2.4 million representing a loss on the disposition of tractors. These units will be retired from the fleet as replacement units are delivered in the fourth quarter. Excluding the loss on asset disposition Con-way truckload contributed operating profit of $13 million and operating ratio of $90.1 on revenue including inter company business and excluding fuel surcharge revenue. On the same basis, but including the loss, Truckload generated a profit of $10.6 million and had an operating ratio of 91.7.

During the quarter, we formally announced Con-way truckload’s entry into regional truckload market. We’ve actually been rolling out this service successfully through the past year and have been pleased with the operating results. Truckload is benefiting from our enterprise model with its regional truckload expansion taking advantage of Con-way Freight facilities strategic staging locations for drivers and equipment.

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

Steve Bruffett

Thanks, Doug and good morning everyone. I will begin with an overview of the balance sheet starting with our cash position. We generate a $46 million of cash from operations in the quarter, $5 million of that cash went to fund net CapEx and $5 million more went to pay common dividends. Remaining $36 million went primarily to build our cash and short-term marketable securities to $438 million at quarter end. We have increased our cash position by $160 million so far this year.

As for total debt, we got $923 million as of September 30. $200 million of which comes due in May 2010. Given our cash balance we will be retiring these notes that have maturity.

Moving now to the income statement, I will provide some additional color around the change in accounting estimate that Doug referred to you earlier. Each month we estimate how many corrections and adjustments will be made in the future to [curb] on invoices. Our historical approach for balancing this estimate was based on periodic standpoint of a small number of invoices. And our new approach, made possible by new reports developed by our IT team, is based on the entire population invoices rather than a small sample. This new report yields us a comprehensive view of the timing and nature of these adjustments and as a result we are now are able to more accurately accrue for future revenue adjustments. With this $5.4 million increase in our allowance for revenue adjustments, our ongoing expenses related to these adjustments should revert to levels more consistent with our recent history.

Other income statement items of note include depreciation and amortization expense of $47 million for the third quarter. Interest expense was $16 million and our effective tax rate for the quarter was 46%, that’s higher than normal due to discrete tax items during the quarter. The largest of these items was the $2.4 million valuation allowance related to [sheet] logistics. There were also a couple of smaller items that mostly offset each other. Diluted shares for the EPS calculation were $49.5 million.

Now for some forward-looking comments we’ve guided used 37% tax rate fourth quarter of 2009. We also recommend that you use an average of 50 million diluted shares for the fourth quarter. As for capital expenditures, we now expect 2009 levels net of asset dispositions to be $40 to $45 million. We also expect full-year depreciation and amortization expense to be around $195 million or slightly less. We have not finalized our 2010 capital expenditure plan but for now you can assume that it will be similar to last year’s levels of $225 million.

I would also like to note that we expect to enter into equivalent leasing agreements prior to year end. Our plans are to lease up to $50 million of tractors and that would be comprised of about 390 units of freight and 115 units of truckload and all of these will be replacement units. These transactions enable us to capture some very attractive lease rates available during the fourth quarter as well as preserve some cash during 2010.We anticipate these leases will be capitalized so the tractors will be assets on the balance sheet and the lease obligations will be recorded in the manner similar to debt. On the income statement depreciation expense and interest expense will be recognized rather than lease substance.

Next I will provide an update on the status of the wage and the reductions we implemented in March and April of this year. If you recall we expected these actions to generate between $33 million and $43 million in cost savings per quarter. And we remained in the middle of that range for the third quarter. These cost reductions are comprised of three categories that are roughly equal in size, they are wages, retirement benefit and paid time off.

Beginning with wages, we are planning to restore half of the wage reductions effective January 1, 2010. The partial restoration is the balanced approach between recognizing our employees for rising to the challenges of the last year and acknowledging that the operating environment remains difficult. In isolation the wage increases will add about $25 million annually to our current cost base and about half of that amount on a year-over-year basis.

At the same time, we are working on other areas of cost reduction, operational efficiencies and cost avoidance that help offset these increases. As for retirement benefits, we have established financial criteria that if met for two consecutive quarters would result in the restoration of these benefits. But for now, these benefits remained suspended. And as we have noted in the past, the accruals for paid time off will resume in April of 2010.

Doug will now provide some closing comments.

Doug Stotlar

Thanks, Steve. We are now through three quarters of a year that has presented us with extraordinary challenges. Our primary trucking markets continue to have too much capacity with too little demand for services. These realities will keep pricing under pressure and will continue to make it a challenging and competitive environment. Given the uncertainty of the operating environment we need to remain vigilant in protecting our customer base, controlling our costs and maintaining a strong balance sheet. We continue to operate three great franchises, each provides a service recognized by customers for excellent value and competitive advantage. These strengths are reflective of Con-way employees who have stepped up time and again over the past year to keep our company in a strong competitive position.

While we can’t control the economy, but while others in the markets may do, we certainly can control our response. If the landscape changes we will be ready to adapt. In the meantime, we will run our businesses through strategies and goals focused on serving our customers and positioning the company to be successful for our customers today and for the long term. That will conclude our prepared remarks for today’s call and at this point I would like to turn it over to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Edward Wolfe of Wolfe Research.

Doug Stotlar

Ed?

Operator

Ed please go ahead your line is open.

Doug Stotlar

Operator I think may be we need to come back to Ed.

Operator

Yes, thank you. Your next question comes from the line of Jason Seidl of Dahlman Rose

Jason Seidl - Dahlman Rose

Couple of quick questions, this is for Doug or John, when you look at the actions you've had to take on pricing and all the freight that you’ve got, the business starts coming back a lot of this stuff probably can’t be adjusted. So to get back to where you think you need some more traditional Con-way like pricing, do you think that’s more of a 2011 on that?

Doug Stotlar

Jason, I think the reality is it has to do with the capacity in the industry and as long as we are in a situation whether its excess capacity in the LTL marketplace, pricing is going to be difficult to come by.

Jason Seidl - Dahlman Rose

You mentioned that pricing has actually stabilized a little bit during the quarter. Did this happen in the beginning of the quarter or towards the end of the quarter?

Doug Stotlar

We saw a fair lease and that it declined during Q2. And we actually saw it's hard to stabilize at the beginning of Q3 and kind of bounce along within a pretty narrow [van] throughout the course of Q3.

Jason Seidl - Dahlman Rose

Okay. Doug for some reason we are sitting here in April talking to each other and YRCW is still hanging around. Do you think some of the others who have been very aggressive on pricing will start to ease up as we enter into more buoyant freight months?

Doug Stotlar

Jason, I really don’t know the answer to that question. Certainly we don’t have any control over competitive forces in LTL and decisions that our competitors might make regarding their own strategies. So, I truly don’t have a good response for that.

Jason Seidl - Dahlman Rose

One last one for Steve before I turn it over to somebody else. Steve the CapEx number that you guys gave for 2010, the 225 is that a net number or gross number?

Steve Bruffett

Those are net number, Jason.

Jason Seidl - Dahlman Rose

That’s a net number. Gentlemen I appreciate the time, I'll get back in queue and listen to this call.

Operator

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

Justin Yagerman - Deutsche Bank

Just following up on Jason’s questions on pricing and what’s going on in your mix? Thinking about that may be I should wait and Jason did, what point do we have to get you where you guys say well, we got all this great tonnage but it came at a pretty crappy price and we are not going to be able to reprize it because the market isn’t allowing us to yet because the competitor has stayed in or because the economy stayed weak. Is there a cut off point where you guys start to say okay this is its capacity that’s disrupting our network and we walk away from it or you know when do you make that decision to potentially call upon that out of your network.

John Labrie

This is John. We look at every deal, case-by-case and we will continuously look at the network in our situation and the customers that make up our mix and make those decisions account-by-account.

Justin Yagerman - Deutsche Bank

How quickly can you do that? Is it, the contracts that you've signed or agreement that 60-day walkway clauses or I mean can you just tell a shipper that unless they start paying more compensatory rates that you just won't move their freights, how does that work, that process.

John Labrie

Virtually every contract we have in place with customers has a 30-day clause on either side. And the book of business if you look at how our pricing agreements take place over the course of time, our book of business, we are negotiating with customers pretty evenly throughout the year and it takes about a year to work through the entire book of business but everything we have has an (Inaudible) clause.

Justin Yagerman - Deutsche Bank

Got it. That’s helpful. On the truckload side you guys booked a loss on some of the equipment that you are trading out. I would assume that some of that is due to mark-to-market from when you bought Con-way Truckload and the differential between what the market is now and what it was then. How many more quarters do we have of that equipment training out until how long should we be expecting a drag there? And is it going to be as big as it was this right now is due something really in this quarter is that going to continue?

Doug Stotlar

Well, Justin certainly that’s going to be an overhang we're going to have for some time. Herb and I are working through various strategies to help mitigate that as we go forward. We haven’t made any final decisions yet, but we are going to try to work towards making that as small a number as possible.

Justin Yagerman - Deutsche Bank

Is that a multi-quarter thing so we should continue to expect that those results to be impacted by that for at least a couple of quarters here?

Doug Stotlar

Well, overtime, yes. As we replaced equipment we are going to be faced with this issue and so again we are going to try to do we can to mitigate this cost but it is something that’s going to be an ongoing issue for us sometime.

Justin Yagerman - Deutsche Bank

Okay. That’s helpful. And thinking about Menlo Logistics just you guys had possibly the best quarter you put up in a very, very long time. Largely logistics had a one bright spot in their report, which was otherwise very dismal. What's driving that improvement? Is there a cash per [conquer zone] that is a one quarter deal and we probably see things revert back or I mean can you guys may be give a little bit of guidance as to what run rate is on a quarterly basis going forward.

Doug Stotlar

I turn it over to Bob in just a second but I think you should note that Menlo has been pretty strong this whole year. They have continued to gain momentum as the years' progress. So, this certainly wasn’t a one-quarter phenomenon here. But Bob you want to talk about what you are seeing.

Bob Bianco

Yes. Hi, Justin. This is Bob. First of all the cash per [conquers], it has no effect on Menlo. Our level of automotive business is pretty small. But what really drove our results was our continued effort driving operational efficiencies our good cost controls that we have in place. We saw a very high utilization of multi-client warehouse network. And one of the trends we are seeing is a larger degree of gain share contracts that show good results for us. So a combination of all those things led to our results in the third quarter.

Justin Yagerman - Deutsche Bank

That’s great to hear actually and I guess Bob is there any read through there on the economy when it comes to volumes that are throughput at those warehouses, I know you guys do a lot of high tech and that’s high value air freight shipments in a lot of cases I would imagine are you seeing the pick of that as you know from Asian exports that people have been talking about over the last month or so.

Bob Bianco

Not necessarily in October we have a gross impact.

Justin Yagerman - Deutsche Bank

In Q3?

Bob Bianco

In Q3, we saw results across all regions and all of our industry groups improved.

Justin Yagerman - Deutsche Bank

Have things taken a step down then in October?

Bob Bianco

No, no, I would say October was of the same level as we saw in the third quarter, it just was greater.

Justin Yagerman - Deutsche Bank

Got it. Okay and then the last question and I will turn over to someone else, Steve you mentioned that you are going to get some wages coming back in 2010. The 401(k) stuff we had talked about last quarter is I think you had hit thresholds and if you had hit in the thresholds for another quarter you were going to potentially have to bring back the 401(k) match I am assuming that because its not coming back you didn’t get that this quarter and I am just trying to figure out where that threshold is so that we can understand when and if that would comeback as I look out quarterly in 2010?

Bob Bianco

Yes. Good question, Justin. And let me clarify on the retirement process kind of two pieces within there. One of which is the one that we talked about last quarter is kind of its not directly a 401(k) match that’s a separate piece that the one we were referring to is kind of a transition benefit for those longer tenured employees who participate in the defined benefit plans and then as we transition them to a defined contribution plan there were some additional contributions for them. And it’s that piece that we were talking about potentially turning on as soon as the fourth quarter of 2009.

We did not have those two consecutive quarters’ criteria so those cost them and if not or those benefits have not been resumed at this point. The threshold for that tranche if you will was two consecutive quarters of 95% operating ratio were better than freight.

Justin Yagerman - Deutsche Bank

Okay that’s perfect. Thanks I appreciate the time if I have any more questions I get to back then.

Operator

So our next question comes from the line of Ken Hoexter of Bank of America Merrill Lynch

Ken Hoexter - Bank of America Merrill Lynch

Just on the volume side a little bit. Can you talk about what you have done lately to save off some of the volumes obviously you are looking out taking some prices. I just want to understand it looks you gained volumes a little bit faster than you anticipated just want to see how that’s trended lately as you moved into the beginning of this quarter.

John Labrie

Ken this is John. We worked really hard throughout the course of the entire year, especially in the quarter both from a sales and marketing standpoint as well as from a price standpoint, take advantage of the capacity in the network. That was really a combination of those three factors that was marketing and pricing and aggressively going after business. And if you look at the business that came on it was driven in large part by new business from very large shippers.

Ken Hoexter - Bank of America Merrill Lynch

No, no I got that you aggressively went after the business what I am wondering is now that you loaded up the network and went back and hired additional staff what moves have you taken to slow that pace of volume while you kind of work internally.

John Labrie

Well, you said in your initial question that certainly volume did come on quicker than we anticipated during the course of the quarter. We were overwhelmed by the positive response from shippers who are going to do business with us and we have begun to adjust our pricing to reflect the cash in the variable portion of our network, the rolling stock portion of our network today which looks different than it did say six months ago.

Ken Hoexter - Bank of America Merrill Lynch

So the business is coming out now you have readjusted or are you seeing that pace of volume continue as you have now adjusted that. I just want to understand as we enter the fourth quarter if those volumes are still coming even though you have taken a step back instead of you were taking, readjusting some of those aggressive pricing strategies, are you still seeing the volume slowing on to the network? In other words, are they still running away from by their carriers that are struggling.

John Labrie

It’s definitely starting to slow if you look in October as an example, Ken. October volumes looked slightly better than it would on a sequential month-over-month basis versus our historical pattern but not by much. Its definitely starting to slow as we adopt our situation to reflect not only what's going on in the market which is very fluid but also the amount capacity that exists in both of our fixed network and our variable rolling stock.

Ken Hoexter - Bank of America Merrill Lynch

Wonderful. I appreciate the time John.

Doug Stotlar

Thanks, Ken.

Operator

Your next question comes from the line of Edward Wolfe of Wolfe Research

Edward Wolfe - Wolfe Research

Just one question. Doug when you think about the strategy as it evolve the last couple of quarters of really going for volume and showing backup utilization that's clearly has worked. And I think when nobody could have foreseen as how competitive the market got, not because of that but as part of in a fluid situation with YRCW and [Saia Inc.] and everybody else. And how weak the market is in terms of tonnage? What do you do going forward? At some point you give up some volume and take pricing up leverage. And if so when can do that? You have wait for March seasonally or you have to wait for YRCW or the things that you can do to kind of play those leverage and how do you think about that going forward?

Doug Stotlar

No certainly we are going to. Our whole strategy was to put some additional volume to the network, mission accomplished there. Now we are moving on to how we manage our network, keep volume in our network and continue to improve our cost position and over time certainly we would like to see the yield improve but we are going to have to do that at a very measured pace in conjunction with the market realities we face. And it is a very competitive environment right there, right now and we will continue to monitor the pulse of the environment and make decisions accordingly.

Edward Wolfe - Wolfe Research

So from where you stand if you were to stay at this pace and you have double digit tonnage growth and pricing doesn’t get worse from here, but kind of stays here, can the operating ratio improve from where you are right now or is it difficult to do without getting that pricing to its support?

Doug Stotlar

Certainly pricing is going to have to be a part of meaningfully improving the operating margins going forward. There is only so many things we can do from an efficiency standpoint and we are continuing to look at opportunities to reduce our costs of doing business. But at some point in time, pricing has to be a more meaningful part of improving our operating ratio.

Edward Wolfe - Wolfe Research

So at some point does it make sense to say if we are in track for mid-double digit tonnage growth to go to some customers and hire them and have mid-single digit growth with better yields because you got rid of the 10% of you restraining customers or something that does not affect you, is that something that you can get even on the mindset at this point.

Doug Stotlar

I can tell you that’s not a part of our strategy right now but I can’t tell you that that might not be a part of our strategy if this long-term situation unfolds differently.

Operator

Your next question comes from the line of David Campbell of Thompson Davis & Company.

David Campbell - Thompson Davis & Company

Hi, good morning everybody. It’s just seasonally that the focus should on expenses. Your expenses sequentially went up at least as much as on the Con-way Freight you know the lease is not just the revenues last sequentially. I understand that there is pricing pressure but given the fact that you were, the additional tonnage and revenues were included into the selling capacity and selling what has been less for containers and tucking units why isn’t there a more focus on getting those expenses down, then there is prices?

John Labrie

David, this is John. We have been very aggressive about taking cost out of company all through the actions we took in the fourth quarter of last year with the network change. As long as with the employee-based cost reductions, that we made in the second quarter, there is no doubt that given the flow of volume in the third quarter which, as I said earlier, exceeded our expectation. We are not volume attrition today with the amount of business in the network if we expect to be in the future. And I would expect over the next couple of quarters we will see some improvements and efficiency particularly in (Inaudible) as we get new employees fully off to average levels of efficiency in the company. That’s the biggest issue that we face though from a profit standpoint ad operating ratios standpoint as we talked about this morning, it’s clearly the pricing trends.

And Doug just added now we are iterating, we definitely need price to improve and that probably won’t happen in any significant way until the supply, demand situation comes into better balance.

David Campbell - Thompson Davis & Company

Is there still capacity in the system that through this surge in business in the third quarter?

John Labrie

Well, there’s certainly excess capacity in the plant network. There is a not a lot of excess capacity in our rolling stock. And that as we said earlier by the time that was a part of our strategy to build volume during the course of this year to take advantage of the fact that we had either rolling stocks and we are up.

David Campbell - Thompson Davis & Company

Okay and I guess one last question, that is, you mentioned the non-recurring events there and items in the Con-way unit but the truckload loss on the sale, we should continue to put that in the operating income of the unit?

Doug Stotlar

Certainly we are going to be faced with those types unless the new stock market corrects the stock meaningfully over the short term. We are certainly going to have some additional write downs on the disposition of assets as we replace tractors gong forward.

Operator

Your next question comes from the line of Jack Waldo of Stephens Incorporated.

Jack Waldo - Stephens Incorporated

I wanted to first hit the tonnage issue, I mean if I look sequentially between the third and fourth quarter almost the average has been overtime it looks like you are going to have high teen growth on a year-over-year basis in the fourth quarter, is there anything that would be abnormal but would cause that how to change and do you have any comments on how tonnage has looked so far I guess in the month of October?

Doug Stotlar

For the month of October, we are up about 14.7% year-over-year. But I will tell you on a sequential basis its down about 2.6% from where we were running in September, which is a little bit better than what we ordinarily see from a seasonality standpoint. So, I don’t think you are too far often assuming a mid-teen type growth year-over-year keep in mind October was the first month of last year where we had a really meaningful downturn in volumes and then it continued to drop like an elevator through the remainder of the fourth quarter. So, the comp certainly gets easier from a year-over-year perspective.

Jack Waldo - Stephens Incorporated

Okay. On the cost, I think last quarter you had a $0.15 benefit from the vacation accruals, is that correct?

Doug Stotlar

We didn’t put it in terms of cents Jack, but we did talk about that in millions. It was over $10 million that we talk about on the 10-Q, and this quarter we are put it in the range but it's going to be a similar amount.

Jack Waldo - Stephens Incorporated

Okay. So, you are advertising that essentially equally through the first quarter of 2010?

Doug Stotlar

Yes.

Jack Waldo - Stephens Incorporated

So, I am correct, assuming that next year that will be I guess you could call a headwind is that right?

Doug Stotlar

Yes.

Jack Waldo - Stephens Incorporated

Okay. And it will start in the second quarter of next year right?

Doug Stotlar

Correct.

Jack Waldo - Stephens Incorporated

Okay and then I am sorry I didn’t understand it completely. Could you explain again Steve how the restoration of the wage decreased?

Steve Bruffett

In April first of 2009, we took it across board and freight incorporate 5% wage reduction across our employee base. And so it’s half of that 5% that were under restoring January 1, 2010. And that 5% reduction benefited us about $12.5 million a quarter or roughly $50 million annualized and we will bring half of that back. And so about $25 million incremental step ups from our current cost base if you are comparing full-year 2010 to full-year 2009 about half of that amount would be the year-over-year increment.

Doug Stotlar

And if I can add something there Jack, while we are on that subject, healthcare has been one of our cost buckets of our fastest rising costs and we are going to be unfortunately having to pass on some of those cost increases to our employees this next year. And given the amount of effort and how great a job our employees did this year managing through this difficult environment and helping us out. As a company we are always trying to manage the goodwill we have with our work force. It's our labor that makes us a different company than a lot of others in our industry. And so we are very cognizant of that. And this is our way of helping, recognize that hard work by our employees and also helping them with some costs that are going to be coming their way.

Jack Waldo - Stephens Incorporated

Thanks. Just so I understand it right you are going to have about $25 million headwind next year at about $0.30 per share and then you are going to have the three quarters worth of the headwind on the vacation accruals, right? And that’s like $0.40 per share, is that right?

Steve Bruffett

Correct.

Jack Waldo - Stephens Incorporated

Okay. On your employee base, how many employees did you add over the last 90 days and where do you stand now relative to where you did a year ago?

John Labrie

Jack this is John. We hired in freight about 3000 employees from June through September. And today our employee count is right at about 21000 even which is all about 3% roughly over the last year at this time.

Jack Waldo - Stephens Incorporated

Okay, I am sorry would you repeat that last piece.

John Labrie

We are up about 3% year-over-year total employee count at present is about 21000.

Jack Waldo - Stephens Incorporated

Got you, and then on the potential pension legislation that’s out there, have you guys look at that at all. Have you looked what impact that can have on your shareholders equity I know you took a big freight down last year right? Because of your pension plan?

Steve Bruffett

This is Steve. We are monitoring that situation very closely and the proposed pension legislation would allow longer amortization period for losses occurred in 2008. And if that were to happen it predominantly deals with the funding side of pension more so than the accounting side of pension. So, we would anticipate that our accounting would remain largely as same it would be driven by our 1231, 2009 measurement date quarter. Liabilities and our assets were quite compared to each other at that point in time that should drive our 2010 pension expense and then your balance sheet increase that would result from that.

From a funding standpoint, we continue to monitor that situation and are supportive of the proposals that are on the table with Congress at this point in time.

Jack Waldo - Stephens Incorporated

Understood and then question. And this is more of a figure picture question. You guys obviously had a change in your operating strategy and I am just wondering are you pleased with how things turned out, what surprised you if there is anything? Would you have done anything different relative to how the tonnage versus price equation came out?

Doug Stotlar

Well we were certainly surprised by how rapidly we got adoption from customers and how customers are able to get Con-way service at a better price than we historically would have offered to them. We were surprised to how quickly they adopted that. And took advantage of that opportunity which kind of overwhelmed us and this isn’t a, you know there’s not a real fine valve you can adjust this up or down with, once you got this thing started, it kind of got some momentum and took on a life of its own.

So at this point I am not going to second guess what we did. We accomplished our goal which has put more volume in the network and now we will manage going forward.

Jack Waldo - Stephens Incorporated

Got you. Okay, thank you guys for your time.

Operator

Your next question comes from the line of Matt Vittorioso of Barclays Capital.

Young Kwon - Barclays Capital

Good morning this is actually Young Kwon in for Matt. Thanks for taking my question. Another one on price. I know we’ve continued to see some deterioration sequentially although you did mention seeing some stabilization in the third quarter. Is it fair to assume that we’ve finally reached the bottom here on price or are you seeing your competitors continue to be aggressive in the marketplace how should we think about that going forward?

John Labrie

Young this is John. I mean we are certainly still seeing an aggressive environment out there. As we’ve said that the things did in our company started to stabilize a little bit at the end of the third quarter. But, I think as it relates to what the future holds from a price environment standpoint nobody really knows. As long as there continues to be excess capacity in the LTL business, it going to be a challenging pricing environment and that probably won’t change until either there is a supply side correction or a significant uptick in demand.

Young Kwon - Barclays Capital

Okay, understood. And then, quickly on volumes. Assuming the continued focus on higher utilization just if we could get may be some higher level of guidance here. Do you think that going forward, the past two quarters are more indicative of what should be our run rate for you guys going forward or?

Doug Stotlar

Keep in mind our goal was to help fill up the network, the excess capacity primarily in rolling stock, we’ve done that. So we are at a level now that we want to sustain, we are not really interested in trying to grow the fleet beyond with the current size and we are just trying to leverage what we already have.

Young Kwon - Barclays Capital

Okay and then just one last one quickly on your covenants. Could you just remind us where you guys are at in terms of your fixed charged in leverage covenants?

Steve Bruffett

Sure, this is Steve. Those are the only two covenants, financial covenants we have the leverage test, which is based off, of net debt so we get credit forward cash positions in excess of a $100 million. So, we are multiple terms inside of that covenant, no issues whatsoever on that, same on the fixed charge test. We have considerable attrition within that measurement.

Young Kwon - Barclays Capital

Great. Thank you for your time.

Operator

Your next question comes from the line of Tom Wadewitz of JPMorgan.

Tom Wadewitz - JPMorgan

I apologize if I misread that there was an overlapping conference call. But on productivity can you give us a sense of, if you want to look at pickup in delivery your line hold productivity and utilization. What does that look like as the freight has come on and how do you think that might look like going forward? You know, I guess it’s a mix if you think utilization will improve with the freight but I know you brought a lot of people on. So, can you give us any sense on the productivity and I think that might move in the couple of quarters?

John Labrie

Tom, this is John. We continue to be not far off of all time highs in all of our productivity areas. Non productivity is the one that suffered the most sequentially during the quarter because of all the new employees that we brought on in terms of learning curve associated with them getting up to full levels of efficiency. I would suspect that we will continue to see improving productivity in all areas through the next couple of quarters as the new people that we hired during the course of the year get up to full levels of competency.

Tom Wadewitz - JPMorgan

What about as the freight came on did you see some improvement in pickup and delivery did you see some leverage in the network in terms of pickup and delivery productivity or line hold utilization?

John Labrie

Our P&D productivity was up quarter-over-quarter. So versus the second quarter by 1%. So we definitely saw, the benefit of improving density from the volume that we brought on. We saw a pretty flat load factor which is, that’s at it right at all time historical highs and I would expect that we will see some benefit from the volume relative, related to the density improvement that it creates in the network over the next couple of quarters.

Tom Wadewitz - JPMorgan

So I mean if you are, help me understand a little bit further I mean you are at kind of the right of stable run rate is my understanding in terms of your volume, you don’t necessarily want to grow that more. But you are not necessarily I mean you are not taking people out of here, right you are kind of keeping the same work force level. So how do you generate productivity if those few factors don’t change a lot?

John Labrie

It's really a reflection of where we are in the learning curve with the 3000 people, that we hired in June through September. It probably takes on an average about six months, for a new driver or a new dockworker, to get up to average levels of productivity.

And so we’ve been going through the learning curve with those employees and as they get more experience under their belt we would expect them to become more efficient and that will certainly help our overall efficiency numbers.

Tom Wadewitz - JPMorgan

Okay and then I guess the last question or two in terms of how will you think about the outlook, I think Doug in a press release he provided some comments about diminishing prospects for earnings growth.

I take that as a sequential comment in fourth quarter versus third that its hard to see that improve and seasonally typically I guess fourth is down but any rough sense, I mean are you below $0.30 a share you think in fourth quarter, is there any kind of parameter you can give us for product thinking about the fourth quarter?

Doug Stotlar

Well, Tom. We are obviously not giving guidance, when we suspended that practice beginning this past year but its going to be a challenging environment given the nature of the pricing in the competitive nature that we currently find ourselves in. And so I would caution everyone to look at how the years have progressed in the waiting of each quarter. Over the past few years to try to get a little better insight as to how you might want to weigh Q4.

Tom Wadewitz - JPMorgan

So, you would think out of a normal seasonality might imply fourth quarter versus third?

Doug Stotlar

It’s hard to say but I would use that your guideline.

Tom Wadewitz - JPMorgan

Okay. And the last one when one of the earlier questions, a couple of questions were on some of the cost head wins you face next year, I guess your first quarter comparison is pretty easy but if you look to kind of second quarter, third quarter next year. What needs to happen to see the margin kind of flat year-over-year next year? Or I guess if potentially margins would improve is it really all about the pricing or is there something else we should be considering in terms of margin outlook into next year?

Doug Stotlar

I mean it really has to do. It has to do with pricing and has to do with either supply and demand balance in the industry. Either demand has to come up dramatically in economic recovery or we need to see supply come out of the industry but it really does get down to pricing.

Operator

Your next question comes from the line of (Inaudible).

Unidentified Analyst

Good morning. (Inaudible). I have a, or just one clarification if I could on the $5.4 million revenue adjustment. Are we to understand that is a one time hit that you are going to be taking or is that something that could be ongoing.

Steve Bruffett

We would fully expect that to be a one-time step up in that reserve adjustment.

Unidentified Analyst

Okay and then just going on to I think you said earlier that you will lease up to about $50 million worth of rolling stock for the end of the year. What should we expect the income statement impact of that for the full year 2010.

Steve Bruffett

As part of the?

Unidentified Analyst

In terms of incremental costs.

Steve Bruffett

Right the expense should be very similar to what depreciation would have been if it were an owned asset but I would expect that about $2.5 million a quarter of expense for those particular leases or about $10 million annually.

Unidentified Analyst

Okay and then just back on the pricing side if I could just follow up I know its been discussed exhaustively at this point did you give a sense, I think you said earlier that in terms of the year-over-year declines of about 19% but that was pretty steady throughout the quarter or is there did it accelerate throughout the quarter?

Doug Stotlar

No we said the pricing has been declining in really from the first quarter. So it declined from the first quarter all the way through Q2 and we actually saw it starting to stabilize in Q3.

Unidentified Analyst

Alright so in terms of what July, August, September it was pretty much 19% across the board or is there a little difference there?

John Labrie

The year over year percent has vary a bit but the absolute level of the pricing on our revenue per hundred weight statistic is what we are referring to as stable.

Unidentified Analyst

Okay and then in terms of in October, you talked a little bit about your what tonnage is like on the pricing side? Is there any improvement from the 19% year-over-year decline or is that pretty stable there or any color you can give that will be appreciated?

Doug Stotlar

I would say that this point we’re pretty stable.

Unidentified Analyst

Pretty stable. Okay and then just one other thing fuel decline and fuel surcharge was a I think it was about nine percentage points out of that, yield decline on year-over-year basis. What was the year-over-year decline in your fuel expense for the freight segment?

Steve Bruffett

We typically don’t provide that level of granularity on that metric.

Unidentified Analyst

Okay, well I guess bigger picture I am just trying to get a sense for whether fuel was a head win year-over-year or whether it was just neutral or whether it was a little bit of tailwind or any color you can give on that would be appreciated?

Steve Bruffett

I was trying to recall what oil prices were and diesel prices were in third quarter of last year. I don’t think that there was a significant year-over-year impact related to fuel itself. We and of course on the fuel surcharge part of that dynamic, we view that as part of the overall pricing equation.

Unidentified Analyst

Okay and then just one other question it’s really just a clarification of something I heard earlier. You talked about the wage rates decrease of 5% taking effect on April 1, of 2009 and about half of that will be reversed and on January 1, is that right?

Steve Bruffett

Correct.

Unidentified Analyst

So the I think you said the full year impact of that is about $50 million annualized, is it $50 million the half of the 5% or the full 5%?

Steve Bruffett

$50 million is the full 5%. So that’s not what’s coming back on, half of that is coming back on.

Unidentified Analyst

So half of that is coming back on and so I guess you will only see the year-over-year head win for three quarters of 2010 given that it took effect April 1, of this year right?

Steve Bruffett

Exactly that’s why I was saying that the year-over-year impact is actually about half of the $25 million that I referenced because 2009 has three quarters of benefit from a 5% reduction whereas 2010 would have four quarters of partial restoration of half of the 5%.

Unidentified Analyst

Got it. Okay and then I think that’s pretty much it. Thank you very much.

Operator

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

David Ross - Stifel Nicolaus

Just a follow up very quickly on one of the LTL productivity questions I noticed load factor declined sequentially while tonnage was up significantly from the second quarter to third quarter is that because the longer haul business, use to be run for service as you increase length to haul and you can’t get the load factor up as you increase the tonnage through longer haul move.

John Labrie

This is John and if anything I think our ability to get higher load factor is even better on the long haul business than it is on the short haul business. It’s really a reflection of all of these new people that we brought into the company and as I said earlier in the call I would expect to see some improvement in load factor as we move forward based on the current tonnage levels in the network.

David Ross - Stifel Nicolaus

Okay and then where do you stand on the technology roll out in the LTL segment as law noted and put off for a little while due to the economy and conserving cash but how far long are you moving in that process?

Doug Stotlar

We certainly have plans for 2010 to continue to make our investment in technology and continue to move our company forward on that front.

David Ross - Stifel Nicolaus

Okay and then question on Menlo with the gain sharing increase. What was the reason I guess for the gain sharing, was that you were able to buy gas stations cheaper because the over capacity in the trucking market, was there something else going on as to why now you are I guess getting in your adverse positive impact from gain sharing?

Bob Bianco

David, this is Bob. It’s a trend that we have been seeing more and more customers are coming to us with projects that are asking us to design and deploy, optimize networks and the contracts are really business case driven on total lend to cost and the more value we had, the more ability we have to get gain share and these projects take a lot of time and effort there is a lot of engineering systems resources that need to be deployed into them and takes time to get the gain share and so over the last year or so we have been seeing a number of these projects come up and we have been able to realize these gain shares particularly in this quarter.

David Ross - Stifel Nicolaus

And are there any industries that are disproportionately benefiting from the gain sharing that may have less efficient supply chain would be retail versus industrial versus high tech?

Bob Bianco

No, we are seeing it pretty much across the board.

David Ross - Stifel Nicolaus

Okay and then last question I have some of the truckloads side real quick. As you guys grow into the regional truckload market should there be any head win on the margins there should we see any temporary margin compression as you roll that out or should it kind of fit into the normal operation without ultimate impact.

Herb Schmidt

David this is Herb. I think it will fit in without much of an impact certainly, it’s solemnly profitable today and we know what we have to do to make it more profitable while working on those things. So I would expect it to be kind of a non-event, its just kind of blends in as if we were growing in the long haul space.

Operator

Thank you. We have time for one final question. Your last question comes from the line of Neal Deaton of BB&T Capital Markets.

Neal Deaton - BB&T Capital Markets

All of my questions have been covered but I just want to ask one or two, just you wouldn’t mind repeating, for the structuring planning some lease beginning in the fourth quarter what was the, what were the counts again.

Herb Schmidt

390 units' freight and 150 truckloads. Replacement units' not additional units.

Neal Deaton - BB&T Capital Markets

And you asked earlier about capacity and if I heard you correctly I believe you said you were close to full capacity in the freight network but you have a fair amount of excess capacity with your fleet, is that correct.

Herb Schmidt

No I think it's backwards, we have.

Neal Deaton - BB&T Capital Markets

It’s the other way round.

Herb Schmidt

We have more capacity on our brick and motor infrastructure but our fleet is pretty well utilized at this point.

Neal Deaton - BB&T Capital Markets

Okay can you give a rough percentage of where you think the brick and motor capacity is.

Herb Schmidt

It’s a really hard question to answer because you have somewhat depending on shift and time of day and there’s a lot of factors that go into that but we have ample capacity for taking on increased businesses if necessary.

Neal Deaton - BB&T Capital Markets

Okay, that’s helpful I appreciate it. And referring to newer employees that you had in the last three or six months, how many of them would estimate your brand new employees to Con-way where they were let's say in structure or some other field where their learning curve is much deeper than former Con-way employees that’s coming back?

John Labrie

This is John. Certainly the majority of that overwhelming majority are new to Con-way now how many have some sort of LTL experience I don’t know to be precise. But a good number would be good to the LTL industry I would guess more than half are new to the LTL industry.

Neal Deaton - BB&T Capital Markets

Okay. And how many of those factors overtime in your higher labor expenses, is that pretty substantial right now? Why you are trying to get those up to speed?

John Labrie

We certainly use overtime, since the manage peak volume levels in the business as we move throughout the 252 day in calendar. In general going heavier on overtime is the more cost effective manner for us to manage our total labor expense than bringing on fixed cost employees. So, that kind of philosophy we follow and we use overtime to really give us increased capacity during peak periods of demand.

Neal Deaton - BB&T Capital Markets

Okay. That’s all I have got. I appreciate your time.

Doug Stotlar

Operator, I think that’s it. I know we didn’t get quite through all the queue. So please give me a call if you have further questions that need to be answered. Thank you very much.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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