Con-way Inc. Q4 2009 Earnings Call Transcript

Feb. 5.10 | About: Con-Way Inc. (CNW)

Con-way Inc. (NYSE:CNW)

Q4 2009 Earnings Call

February 05, 2010; 08:30 am ET

Executives

Doug Stotlar - President & Chief Executive Officer

Steve Bruffett - Chief Financial Officer

John Labrie - President, Con-way Freight

Bob Bianco - President, Logistics

Herb Schmidt - President, Truckload

Patrick Fossenier - Vice President of Investor Relations

Analysts

Tom Wadewitz - JP Morgan

Ed Wolfe - Wolfe Research

Scott Flower - Macquarie Securities

Jason Seidl - Dahlman Rose

David Ross - Stifel Nicolaus

Justin Yagerman - Deutsche Bank

Jon Langenfeld - Robert W. Baird

Todd Fowler - Keybanc Capital Markets

Ken Hoexter - Banc of America

Tom Albrecht - BB&T Capital Markets

Operator

Good morning. My name is Brandy and I will be your conference operator today. At this time I would like to welcome everyone to the Con-way Inc. fourth 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 please go ahead sir.

Patrick Fossenier

Thank you, Brandy. Welcome to the Con-way fourth quarter and year end 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 adieu I am pleased to turn it over to Doug Stotlar.

Doug Stotlar

Thanks Pat. Good morning, everyone. 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 participate in the Q-and-A portion of the call.

While our fourth quarter results reflected the continuing challenges of the competitive marketplace, we have begun to see early indications of some positive trends. We’ll put some additional color around this as we go through the call.

First, I’ll share some of the highlights from our fourth quarter. At Con-way Freight, last year we were coping with the economic reset, which left us with available capacity at that time. We made a strategic decision to attract more volume with the goal being to utilize some of the excess fleet capacity we had in our network.

Our execution was successful and as a result, we saw significant month-to-month volume increases through the second and third quarters, which stabilized in the fourth quarter with weight per day running slightly above third quarter levels. The increased volume helped to improve fleet utilization and operating density, but the competitive dynamics of the pricing environment put a damper on profits.

Our supply chain company, Menlo Logistics, was able to grow fourth quarter net revenue, despite the challenging operating environment. The growth was primarily due to the on boarding of new accounts in the Warehouse Management segment of their business. Menlo is well positioned as we begin 2010.

Con-way Truckload responded well to challenges of a difficult environment and despite lower fuel surcharge recovery, turned in a commendable profit performance. Cost vigilance, improved asset utilization and momentum in our regional operations were contributors. We’re also seeing some early signs of demand firming, that’s an encouraging sign which we hope is a precursor to a sustained recovery in this market segment.

For the Con-way enterprise, top line revenue was $1.12 billion in the fourth quarter, down eight-tenths of 1% from last year’s $1.13 billion. At the net income level we posted a loss per share of $0.04. Results in the period included incremental charges totaling $0.04 related to the planned outsourcing of certain administrative functions.

Now I’ll review key results and operating statistics for our business units, starting with Con-way Freight. Fourth quarter tonnage per day increased 20.6% compared to the same period last year. Sequentially, tonnage levels were on par with the third quarter, at $77.8 million pounds per day. The more stable tonnage trends are certainly a welcome change from the market conditions in last year’s fourth quarter, which saw a precipitous drop if volumes and a lot of uncertainty about where the bottom would be.

Quarterly revenue at Con-way Freight of $683.9 million was up 6.8% compared to the fourth quarter of last year. Despite the double-digit year-over-year increase in volume, we saw this quarter, lower yields constrained revenue growth. Gross revenue per hundred weight decreased 14.4% compared to the fourth quarter of last year.

Excluding the effect of fuel surcharge, yield in the quarter was down 11.7%. We did see pricing stabilize as the quarter progressed, albeit at a lower level. Going forward, our focus is on driving efficiencies into the network, maintaining stable volumes and working to improve yields.

Fourth quarter operating profit for Con-way Freight was $2.8 million, resulting in an operating ratio of $99.6. As we noted before, the cost reductions initiated in April 2009 continued to provide benefits during the quarter. However, with pricing levels down significantly from last year, we didn’t see the growth in the shipments and tonnage carry through to the bottom line.

Despite the challenges of the current LTL environment we remain focused on making share we remained a strong financially sound company heading into 2010 and beyond. We’re investing strategically in technology and other areas to generate productivity and efficiency gains and we’ll be replacing aging rolling stock to maintain a healthy fleet age. As we work toward lowering our cost per unit going forward through efficiency gains, with incremental strength on the pricing side, we should start to see the inherent operating leverage in our LTL business.

Turning now to Menlo Logistics, revenue net of purchase transportation was $133.1 million, which is an increase of 2.9% over net revenue of $129.3 million in the fourth quarter of last year. Menlo’s operating income of $5.9 million compared to $4.2 million last year, absent last year’s impairment and acquisition related charges. The increases in net revenue and operating income are due primarily to the warehouse management segment.

Turning now to Con-way Truckload, truckload reported revenue of $93.6 million, after elimination of $46.1 million of inter-company revenue. Revenue was down 15.6%, primarily due to lower fuel surcharge recovery. Asset utilization was a positive story, with revenue per tractor up 5.3% versus last year. Total miles were very close to last year’s levels, despite 6.7% fewer tractors in service.

Con-way Truckload contributed operating profit of $8.2 million, despite the lower fuel surcharge recovery, producing an operating ratio of 93.2 on revenue including inter-company business and excluding fuel surcharge revenue. We continue to be encouraged by truckload’s expansion into the regional markets, this move alliance well with evolving trends toward sourcing of product closer to the end user, which has the effect of compressing supply chains.

The demand environment in the Truckload segment also appears to be strengthening. We saw an unusually strong amount of activity in December and the January bid cycle showed firming in pricing with some early bids coming back with low single digit increases. A number of signals would seem to indicate that a recovery is beginning to take hold in the truckload market. After what we’ve been through in the last year, that’s very encouraging.

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

Steve Bruffett

Thank you, Doug and good morning everyone. Given the uncertainty of the environment in 2009, it was important for us to focus on cash flows and as a result of that focus throughout the year. We were able to increase our cash position by $198 million to $477 million at December 31, 2009. This increase was the result of effective working capital management, cost controls and CapEx containment.

The $198 million increase was derived from $277 million of cash from operations, less $41 million in net CapEx and $38 million of dividends, debt repayments and other uses. The $41 million of net CapEx was inline with the $40 million to $45 million guidance that we provided on our last call and as a reminder, part of our overall capital program we also entered into $50 million of leases for tractors during the fourth quarter of 2009. So, $91 million of capital was deployed during the calendar year 2009.

Our total debt balance at year end was $982 million. This balance includes the $50 million of fourth quarter leases as well as the $200 million note that will be retired, when it matures in May in 2010. Our year end balance sheet also reflects the annual re-measurement of our defined benefit pension plans.

As a result of the 12/31/09, snapshot of our plan assets and liabilities, we’ve increased our pension liabilities by $100 million. The offsetting entries were a $39 million increase to deferred tax assets, and $61 million decrease to shareholders equity. Keep in mind that these adjustments compared to the April 30, 2009 re-measurement that we performed as a result of the hard freeze at the pension plans.

If we compare our funded status to that of 12/31/08, were in a significantly better position. At 12/31/09, our GAAP based funded status was 77% as compared to 62% the prior year. Improvement in funded status was the result of asset performance during 2009, the reduction of pension liabilities resulting from the hard freeze of the plan, and to a lesser extent our cash funding of $17 million.

Doug has already covered most of the highlights from the income statement, but I’ll touch on a few additional items. The first is our tax rate for the fourth quarter. We had the unusual situation of our tax expense exceeding our taxable income.

Our fourth quarter pretax income of $1.1 million would imply a tax expense of about $400,000, while our actual tax expense was $3.1 million. So $2.7 million difference consists of several relatively small adjustments to our full year effective tax rate that individually are not noteworthy, but collectively they result in our tax expense exceeding taxable income for the quarter.

The second item is a $3.4 million charge for an outsourcing initiative. We’re in the process of outsourcing certain administrative functions, namely our IT infrastructure and accounts payable functions. The fourth quarter charges relate to severance costs, and during the first and second quarters of 2010, we expect to recognize additional expenses for severance, state pay and transition costs as we sunset the in-house operations and complete the transition of functions to the outsourcing provider.

The next item is depreciation and amortization expense, which was $46 million in the quarter and $192 million for the year. The final income statement item is interest expense, which was $16 million in the fourth quarter and $64 million for the full year.

Now for some forward-looking comments about 2010, and those items to which we have visibility, as discussed on previous calls, we have some cost returning in 2010. First, there’s the partial restoration of wages, half of the 5% wage reductions that’s taken in 2009 were restored at the beginning of January 2010. This represents about $7 million per quarter of incremental costs and on a year-over-year basis, the wage restorations represent about $13 million of incremental cost, given the timing of the reductions and the restorations.

Second, the accruals for paid time off at Con-way Freight, which were suspended for a 12 month period due to a policy change will resume on April 1, 2010. This represents about $15 million per quarter of incremental cost and since 2009 we’ll have three quarters of this expense, while 2009 had one quarter of the expense. There’s about a $30 million year-over-year increase due to that item.

As for pension expense, we expect 2010 expense to be $5 million, as compared to $24 million in 2009. The decline is due to the improved funded status of the plans, and another benefit of the improved funded status is that our cash funding during the calendar year of 2010 is discretionary. We’ll monitor our cash flows as we move through the year and may choose to make collective contributions during 2010.

At this point, we would guide you to use 43% as the effective tax rate for 2010. The 2010 tax rate is expected to increase, primarily because of the expiration of propane credits that had been in place for the past several years. There’s a possibility that regulatory action will extend these credits, but for planning purposes we’re assuming that they expire. As always, our actual tax rate will be a function of a number of factors, namely our taxable income and permanent and discrete items.

Our diluted share count for 2010 should be about $49 million in the first quarter, and $50 million for the full year. As for capital expenditures, we previously indicated to you that, we were still working on our 2010 plan, but that our CapEx would likely resemble a normal maintenance CapEx, which for us is about $225 million. Since that time we compete our planning process and made several adjustments.

As a result, we now expect 2010 net CapEx to be approximately $125 million, and we also anticipate we will enter into an additional $35 million of capitalized leases for tractors. So you can think of it as a $160 million capital investment plan. In 2010, we’ll continue to emphasize cash flows and we believe that this capital plan provides prudent reinvestment in the areas that provide the most benefit to our operating companies and produce the greatest returns.

As a result of this capital plan, we expect that our 2010 depreciation expense will be approximately $180 million, as compared to $192 million in 2009, so while the operating environment remains challenging, we’re generating our own momentum for 2010, and we’re doing so with a healthy balance sheet.

With that, I’ll turn it back over to Doug for closing comments.

Doug Stotlar

Thanks, Steve. We weathered a host of difficult challenges in 2009, but as I look at our markets today, we’re in a different and better place than this time last year. The overall market seems to have stabilized. Volumes have leveled and a more normal business cycle appears to have returned. It will be some time before profits and margins return to what we would consider to be historical levels as excess capacity remains a problem and will be a headwind in the LTL and to a lesser extent the truckload sectors for the foreseeable future.

Con-way Freight continues to invest in opportunities to improve efficiency and productivity, while lowering operating expense. Menlo Logistics is building on a strong track record of effective, strategic solutions in the supply chain services market and in particular, is being recognized for its expertise in the emerging market for 4PL services.

Con-way Truckload is well positioned in the full truckload sector and is poised for solid top and bottom line growth as this market continues to strengthen. The worst appears to be over for the economy, but there is no clear consensus on the strength of the recovery; and while we can’t control what happens with the economy, we can certainly manage our response to it, as we have demonstrated throughout the year.

We have a solid balance sheet and strong cash flow, which underscores our financial stability and flexibility and we continue to bring to market three industry leading operating companies, each of which deliver a portfolio of services recognized by more and more customers for the reliability, competitive advantage and superior value.

In closing, I want to recognize the hard work, sacrifices and dedication of the 30,000 employees who are the foundation of Con-way’s value, and the differentiation we provide in the market. Even through all the turmoil and turbulence of the last year, this team kept its focus on our customers and delivering consistent quality transportation and logistics services that our customers have come to expect.

That concludes the prepared remarks portion of this morning’s call and we’d like to turn it over now to the operator to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tom Wadewitz - JP Morgan.

Tom Wadewitz - JP Morgan

Wanted to ask you a couple of questions on the LTL pricing side, it seems like there’s potential for you perhaps for FedEx as well to transition to an attempt to take up pricing, but there also seems to be a lot of excess capacity in the market. So I was wondering if you could give a sense of how much optimism you have that you’ll be able to get rates up. How long that may take to work through some of the business that was priced down a lot in 2009?

Doug Stotlar

I’ll turn that over to John, Tom, for discussion.

John Labrie

I guess the way I would characterize it is cautious optimism. We’re working hard to try to maintain our volumes in network and increase overall price. Obviously, that’s going to be a situation that’s somewhat difficult to achieve, given the excess supply in the marketplace, but we’re working through it account by account, and expect to have some success. We also took a 5.9% GRI on January 4, and so far that is holding pretty well.

Tom Wadewitz - JP Morgan

So do you have any early feedback in terms of have you gone to some of the major accounts at this point and said, we need to take rates up and do you have any examples where you’ve been able to do that or is that something that you really will start to do over the next several months?

John Labrie

We’ve been working on that, Tom, and the results are different by account, based on the situation that exists with that customer, what their needs are from a service standpoint, what their options are, what the pricing exists with that account today, and so we’re working through account by account and as I said, we’re cautiously optimistic about the ability to maintain volume and increase price in this environment.

Tom Wadewitz - JP Morgan

If you look at your book and say, well, this is kind of the portion of the book that we maintained at acceptable rates and then this is a portion of the book that maybe we got too aggressive with pricing or the market just forced us to defend and then it’s not at an acceptable market level. How do you think the mix between those two buckets would look like? How large is the portion of freight you’re handling that’s really at unacceptable pricing?

John Labrie

I mean, certainly our growth throughout the course of 2009, was weighted towards large, national accounts. In general, those accounts have lower contribution margins than small and mid sized customers. Obviously, throughout the course of 2009, LTL pricing across the industry continued to down and our customer base and the book of business that we handle reflects what’s been happening in the environment. So it’s really all over the map and that’s why we looked at it customer by customer.

Operator

Your next question comes from Ed Wolfe - Wolfe Research.

Ed Wolfe - Wolfe Research

Is it possible in an environment where you’re getting some GRI and you’re saying rates have stabilized and tonnage has stabilized a bit, that first quarter, even though it’s seasonally weaker typically, could have a better OR than fourth quarter? Is that in the realm?

Doug Stotlar

Ed, while we’re not providing forward guidance, I’d say that would be difficult.

Ed Wolfe - Wolfe Research

Are you seeing mostly, when you look at the 21% tonnage growth? Are you seeing mostly in longer haul type of tonnage coming in, yellow just reported their national tonnage was down 43%, I’m guessing you’re seeing some of that and is that part of what’s going on with might be mix issues?

Doug Stotlar

Yes, I’ll ask John to give a perspective on how our mix has changed just a little bit.

John Labrie

Ed, we grew as you know in the quarter, lengths of haul 4.7% year-over-year. The mix of the total book of business did change slightly on a year-over-year basis. Currently, we’re running 37.4% of our shipments that are moving in next day lanes, 41.9% are moving two day lanes, and 20.7% are moving in three plus day lanes.

Length of haul did increase slightly throughout the course of the quarter and interestingly enough, that was a function of two things happening simultaneously. Next day business did grow as a percentage of totals during the course of the quarter, month-by-month, but also, long haul business, three day plus business grew throughout the course of the quarter. So, definitely we’re growing through market share and a decent amount of that market share is in longer haul lanes.

Ed Wolfe - Wolfe Research

Do you have those numbers, those splits for next day, second and three plus a year ago what they look like?

John Labrie

I do not have them in front of me.

Ed Wolfe - Wolfe Research

Can you guys talk to, or John, you mentioned the GRI sticking, what does that mean, sticking? What percentages of your business can that stick to and sticking, does that mean the full amount is sticking and we’ll start to see that in the next quarter’s report, or talk to me, what that means?

John Labrie

30% of our revenue currently, Ed, and so far as we’ve implemented that, we’ve seen volume maintain 2009 levels from that segment and we have not been negotiating price with that segment of customers.

Ed Wolfe - Wolfe Research

So all things being equal, if I take 30% times 5.9%, I should see yields up one, seven or eight relative to where they were in first quarter over fourth quarter. Am I missing something from that equation other than changes in mix or fuel or anything?

John Labrie

I think you’re pretty close. I think, the only you have to be careful about is normalizing for length of haul shipping class, but you’re pretty close.

Ed Wolfe - Wolfe Research

What are you seeing from, it sounds like you guys are saying “We need to get rates up.” We certainly have some of your public competitors, who have reported some frustrations that they had higher yields, but lost some freight. They didn’t grow like you guys have. The competitors tend to point particularly to you and to FedEx. What are you seeing from FedEx as a big competitor out there, who has been more aggressive than most. Any change in their behavior over the last couple weeks or months?

Doug Stotlar

No, we don’t comment on individual competitors, Ed, but certainly as I’ve said, the market seems to be moving in a slightly positive direction.

Ed Wolfe - Wolfe Research

Can we switch gears to the truckload side for a second?

Doug Stotlar

Sure.

Ed Wolfe - Wolfe Research

Again, for truckload relative to our expectations, the revenue was solid, but the margin came in a bit. Is there something that’s driving the margin pressure here and how should we think about that as the OR of 90.8 for the full year in ‘09? How should we think about that going into 2010 directionally?

Herb Schmidt

This is Herb. The main headwind was fuel surcharge recovery, and there were some other things we had farmed out, work comp to third party, we’ve since taken that back in-house. So there were some other small headwinds. We recognize the ground that we need to take back in fuel surcharge. We identified the target accounts, where we’re going to go after it in 2010 and that was really the primary headwind we dealt with and that was the reason for the deterioration in the margin.

Ed Wolfe - Wolfe Research

So if you look out this year, and just assume a gradual improvement in the economy, would your best guess directionally be margin for the year should be similar, better, or worse? How should we think about it?

Herb Schmidt

I would think equal or better.

Operator

Your next question comes from Scott Flower - Macquarie Securities.

Scott Flower - Macquarie Securities

Couple of questions, I wonder if you could give us some flavor, how the business in LTL and then truckload trended from a volume perspective over the months in the fourth quarter and into January? Is there any sense of relative improvement throughout the months in the fourth quarter and into January or was it on a volume change basis about the same throughout those four months?

Doug Stotlar

Sure, I’ll have John walk through each of the months during the quarter and January.

John Labrie

Scott, October was up 14.8% year-over-year. November was up 21.9%. December, up 27.0% and we’re up about 30% in January year-over-year.

Doug Stotlar

I think it’s important to remember, Scott, that obviously last year the comparisons just got easier each month because the market was falling away from us as we went through the fourth quarter and into the first of last year.

Scott Flower - Macquarie Securities

Any sense if you strip away the comparisons and you just looked at tonnage sequentially between the months was the relationship more traditional or was it actually a little better than traditional?

John Labrie

It was slightly better than what we’ve seen historically each of the months as we progressed through the quarter, Scott and that includes January as well.

Scott Flower - Macquarie Securities

Then could I get any kind of a sense on truckload, obviously different metrics, but sort of a volumetric perspective through the quarter?

Herb Schmidt

We were operating fewer trucks, but still had volume that was inline with last year. So I mean, sequentially better, but certainly January versus last year, I think is on a better track.

Scott Flower - Macquarie Securities

I mean sequentially were the trends better than they traditionally are month-on-month or about the same?

Herb Schmidt

I would say better than the previous year.

Scott Flower - Macquarie Securities

Then one other question, I guess I’m just curious about, maybe it’s a function of mix, but your weight per shipment was up nicely over a comp in fourth quarter of last year in the LTL that was up as well and obviously you had nice volume growth against easy comps, but yet the load factor was slightly off from your peak earlier this year and I’m trying to understand from operational perspective how those square.

Steve Bruffett

Load factor was actually up slightly year-over-year, Scott. Load factor bounces around quarter-to-quarter a little bit, but in general, throughout the course of ‘09 and including the fourth quarter, our load factor was right at historical high.

Operator

Your next question comes from Jason Seidl - Dahlman Rose.

Jason Seidl - Dahlman Rose

Couple quick questions here, on the LTL side, John, clearly you guys have the tonnage you need, but it’s not at compensatory rates. I know you guys are going to sort of attack some of that, but it seems like at least in the current marketplace with some stuff firming that you would be able to at least go after some of that business.

If your GRI is still sticking a month later here, that’s a positive sign. How quickly can you attract some of that business that you would say would be unsatisfactory pricing right now? Could you talk a little bit about last year, how quickly the GRI actually evaporated that you instituted in January?

John Labrie

We began the process of trying to attack the segment of our business that we’re not comfortable with from a pricing standpoint late last year, Jason. We are ratcheting through the book of business, account-by-account, trying to be careful to both accomplish an increase in overall price, which we obviously want, while maintaining volume, because we want to accomplish that as well.

Last year from a GRI standpoint, we did see obvious deterioration in the GRI as the year progressed and I would say by the fourth or fifth month of the year last year, it had evaporated and we’ll see what happens this year. So far, so good, relative to the GRI we implemented in January, but with this much excess supply in the market, we don’t know exactly what’s going to happen.

Jason Seidl - Dahlman Rose

Herb, on the truckload side, could you talk a little bit about what you’re seeing in the small segment, the spot market? Also, it seems like the bid process is going favorably. How quickly you think rates can recover on that side and talk a little bit about some of the recent bankruptcies that we’ve been seeing, mainly in some of the Mexican carriers and see if you can, how much benefit that’s going to provide CGI going forward?

Herb Schmidt

With respect to the spot market doesn’t appear at this point in time. In the first quarter, we’re going to be nearly as reliant on it as we were last year same time. So I’m speaking specifically to the broker business. It doesn’t appear there’s going to be near the need. On the bid side of things, it’s really, really early in the bid cycle, Jason.

Most of the bids begin to be let about January 15 and they’ve not been awarded yet, but early indications are a slight strengthening over last year with respect to pricing, which is encouraging and the bankruptcy that you’re referring to along the border that’s one player among many, but unquestionably anytime you eliminate a player, you certainly gain some traction with respect to pricing.

Operator

Your next question comes from David Ross - Stifel Nicolaus.

David Ross - Stifel Nicolaus

Doug, can you talk a little bit about the training cost associated with handling the increase in volumes over 2009? I know that kind of you went from the low point early in the year to all of a sudden really ramping up volume a little quickly, you guys expected and said that there was some training cost of bringing on that many people that quickly and that was a headwind on margins in 2009. Can you give an approximation of what the margin impact might have been in 2009 that’s not going to be there in 2010 from that ramp?

Doug Stotlar

I really don’t have a real good solid number to give you. It was more of a phenomenon in Q3 and late Q2 as we didn’t realize how ripe the market was for opportunity and so as it poured on to our trucks, we were behind to curve and we weren’t very efficient. As we went into Q4, we’ve started to digest that rate and we started to become more efficient got back to our levels of productivity that we would normally expect, but I don’t know have a dollar number to give you.

Steve Bruffett

David, as we added about 2,700 in that jobs during the course of the year to support the growth in the business that took place throughout the course of 2009 and in general, it takes about six months to get up to average levels of efficiency with new employees.

David Ross - Stifel Nicolaus

Yield grow is the biggest question out there in the whole. You helped your market, how fast it’s going to comeback? How much is picking? Outside of yield improvement, is there any other way you guys see, because you already have a lot of volume and if not you’re going to see those 20% volume growth in 2010.

How are you guys looking to heading operating ratio back to where’s it been before anywhere in last recession? How do believe it’s operating in the low 90s? We’re still wave the way for that, I think yield provide you so much what other message you have getting out there?

Doug Stotlar

Well, obviously it’s a multiple front attack and so we’re going to look at some of our business that’s non-compensatory and trim some of that business out of the portfolio. We’re certainly going to look at the yield side, and then we’re making some investments in the company, primarily as it relates to technology to help us additional efficiency.

John, you want to talk about your rollout this year.

John Labrie

Dave, I think it’s important to note that the biggest issue we face is definitely price. As I said earlier in the call, we’re running in mid year all time highs and various efficiency measures really across the Board. That said we do have several initiatives in place both from our process improvement standpoint and in investment standpoint.

Doug just mentioned, in-house. We know that we’re going to be able to through the automation of management process improve our efficiency in every area of the operation through that investment and in addition to that, we continue to work on additional network efficiency opportunities.

We made an adjustment to the network in January, we’re rallying the way that improve some of the freight that flows up and down seaboard and through continuous improvement efforts like that to bring efficiency out of the network as well as investments I can helped to improve efficiency. At the local level, we expect to see some improvement.

Operator

Your next question comes from Justin Yagerman - Deutsche Bank.

Justin Yagerman - Deutsche Bank

Just following up quickly on Ed’s question earlier, it sounded like you were saying that all things remaining equal from what you saw in January with GRI that you would expect yield and that fueled to be up year-over-year in Q1? Isn’t that a correct read?

Doug Stotlar

Yes.

Justin Yagerman - Deutsche Bank

Looking at the balance sheet, obviously, impressive to add that much cash in such a difficult environment, but I can’t imagine that the capital investment levels that you are at right now are sustainable, and I think Steve, you had mentioned that, you guys had brought down from original plant maintenance CapEx to lower capital plan for year.

So is 2011, when we should be thinking a much to getting back to a normal CapEx run rate and how should we be thinking about that? Is it going to be a maintenance year or you’re going to have to do some catch up spend, when we get back to a better part in our economy cycle?

Steve Bruffett

We’re just allocating the capital through leasing and through acquisition in the areas that keep us healthy, which is our, Hoovers fleet making sure that we’re keeping up with the curve on tractors, so that we don’t create those types of the effects grow sales down the road.

So I don’t think we have worming big catch up years if you will. At these levels of capital, we will continue to monitor our situation as we go forward, but we think that we’re putting the right amount of the capital for the situation into the company and balancing a healthy balance sheet with the environment.

Justin Yagerman - Deutsche Bank

So around those lines then, what’s your comfortable cash balance for you guys to be carrying, or how do you think about where you want your balance to be? Obviously, we’re in a difficult environment still. So I understand erring on side of conservatism, but I can’t image that you guys need $0.5 million in cash on the balance sheet to run your business.

So what’s the use of cash, once we get to more comfortable economic environment you guys are seeing some of these initiatives that you putting to place take hold? You’re getting pricing volumes starting to comeback, things going a little bit better?

Steve Bruffett

Obviously, one the debt maturity in May of 2010, we wanted to overshoot that mark a bit and have successfully done that. So as far as how we want to manage our balance sheet once you’re delivering it, which we will do in May. As far as the amount of cash we’d like to carry long term that can fluctuate a little bit overtime depending on revolver capacity and so on that in general we kind of target about 250 or greater of cash that we think it’s a good conservative position to carry.

Doug Stotlar

Justin, just one more comment on the CapEx too. One of the things we don’t talk about very often is the fact that we have a small trailer manufacturing company in Circe, Arkansas. We’re able to do an off level to trailing fleet on a free refurbishment standpoint and run these asset a lot longer than a lot of our peers in the industry, because we sent them back through to bring half light, which helps us really kind of run out our capital a lot longer than some other fleets might have to from a replenishment standpoint.

We’re going to be doing a pretty extensive amount of that in truckload fleet this year, refurbishing a couple thousand trailers and so it’s just something that it’s the tool that we have that a lot of other people don’t.

Justin Yagerman - Deutsche Bank

You guys spoke a little bit about the truckload bid season coming in better than expected so far. Can you talk a little bit about the volume, just general of the bid season, bolt-on the TL and the LTL side; are shippers hiding out and not wanting to discuss pricing or are they kind of coming at you for last licks and you’re able to fend them off a bit better in the truckload market and can you put some comments around the LTL bid season?

Doug Stotlar

On the truckload side, we’re seeing a bid cycle that I think is really close to last year’s cycle in terms of bid volume, perhaps not quite as aggressive, but the expectation is certainly different than it was last year. I say that, just from the general mood that I get in talking with shippers, but also the early indications from the pricing are just that in the truckload space, there’s a little bit of leverage that we didn’t had last year.

Steve Bruffett

Justin, in LTL, the deal flow that we see throughout the course of the year is more evenly balanced than it is in truckload. The only comment I would make that, we’re seeing so far is that the very aggressive moves by shippers that we saw throughout the course of last year, to take advantage of the buyers’ market, seems to have softened a little bit and we’re seeing what I would call much more normal deal flow from our customer base.

Justin Yagerman - Deutsche Bank

Lastly, before I turn it over to someone else, you guys spoke about a bunch of upcoming projects and initiatives and what have you that you’re going to be looking to implement to get back to more normalized margins and obviously a lot of it’s going to be macro related as well, but over the last year or two, you’ve had a decent amount of charges from a restructuring standpoint.

Should we expect these kinds of charges to continue as the business evolves here or is it going to be from here on out more of a just organic within the operating segments, where these charges are taken and if they’re more just normal course of business type things?

Doug Stotlar

Justin, I can’t tell you there won’t be any charges going forward, but what I can tell you is the bigger charges that we’ve had I think are behind us. The overall restructuring of the whole LTL customer and we’re moving as one platform. The big network adjustment we made in November of 2008. We tried to take a pretty big swipe at that one. So we didn’t have to go back and do this incrementally.

So the really big things we’ve done, we went through what functions we thought would be appropriate to be outsourced and that’s the process we’re finishing now and going forward, it’s really investment and trying to just increase greater efficiency and lower our cost per unit.

Justin Yagerman - Deutsche Bank

So maybe like this quarter, a few charges here and there as they arise, but nothing on the horizon that’s some big sweeping change that would cause a large charge in a quarter?

Doug Stotlar

That’s correct.

Operator

Your next question comes from Jon Langenfeld - Robert W. Baird.

Jon Langenfeld - Robert W. Baird

Doug, when do you think about shrinking the amount of rate in your network or how do you think about, I mean clearly there’s freight in there, that’s not profitable, you’re at record volumes and utilization is pretty strong. So the only way we get that OR up is better price freight. So can you take the stance this year, if things don’t get better from the volume side that maybe we see volumes down and yet profitability could be up under that scenario?

Doug Stotlar

We think that the possibility, our goal right now is to try to just maintain volume and incrementally improve yield and obviously we’re looking at every account and there already has been some business that we have call from our overall book of business and probably be more as we go through the year and we may or may not be successful at finding business that places it at levels that we feel our compensatory. So it’s a possibility that we downsize. It’s not our strategic approach right now, but that’s the possibility at the end result might look like that.

Jon Langenfeld - Robert W. Baird

Doesn’t in fact that your network is fully utilized and the profitability isn’t there and then I guess the other backdrop is that, it doesn’t work like there’s a big consolidation event in the near term? Doesn’t that backdrop give you the ability to be more aggressive with customers and takeout the customers that are not making an acceptable return?

Steve Bruffett

Jon, like I said, we are working at customer-by-customer and when clearly it’s not our best interest to handle with this business. We are walking away from that business, but we’re balancing that against the fact that volumes is equally important as it relates fixed cost burden that each shipment carries in the network as well as the variable cost that we have in network, because density in a large part drivers our variable cost structure. So trying to balance all of those things out and we really prudent about how we manage this in this environment.

Jon Langenfeld - Robert W. Baird

Then what would your expectation be, maybe get your thought, Doug, and Herb, maybe you as well. I mean less-than-truckload versus truckload. Would you expect the LTL trends to lag the truckload trends here by several quarters it has in the past upturns?

Doug Stotlar

I think that’s a pretty fair comment Jon. Truckload fundamentals look like they’re getting better faster than the LTL fundamentals. I think more capacity has come out of truckload over the course of the past year, then certainly it has in the LTL side and so it still a bit unclear from my perspective, how the excess capacity or how it comes out of the LTL or how long it takes to work off the excess capacity in LTL.

For truckload, I think just a little bit more economic demand will evaporate the excess capacity pretty quickly. So I think you might be looking as you know LTL lagging truckload by several quarters.

Operator

Your next question comes from Todd Fowler - Keybanc Capital Markets.

Todd Fowler - Keybanc Capital Markets

Doug or maybe John, I guess just a few more here on LTL pricing. Can you talk a little bit about the perception of service in the LTL market? We always thought of you guys is offering a nice service and then compensative plus service that you are offering. Is that service premium eroded based on the pricing competition that we’ve seen and then the service that carriers have been able to offer, just because volumes are down overall the industry?

John Labrie

Todd, we certainly have transit time advantage versus every carrier in the marketplace, and customers realized that. What matters to customers from a service performance standpoint varies customer-by-customer and certainly there are some mix in service attributes that are important to every customer as is price.

We tried working with customers to make it very clear, what we can do for them from a supply chain standpoint and make sure that we get the price of that as a fair and reasonable price based on the capabilities that we offer to customer.

Todd Fowler - Keybanc Capital Markets

So John, it sounds like to me that there’s still is some premium with the service that you’re offering and you’re able to get some compensation for that. Is there opportunity as things improve to take that up as people view things as the economic covers, as less of a commodity on the transportation side?

Steve Bruffett

We’re definitely talking about some of the initiatives that we have in place to improve efficiency and virtually everyone of those initiatives that I talk about, also has an exact on our performance for customers. So if you think about the network change that we made in January, we’ve significantly reduced the amount of handling that place as we move shipments in north and south along with Eastern Seaboard and we also accelerate a transfer time between 460 market players.

So as part of our strategic improvements are focused on efficiency, but a large portion of our efforts are focused on continuing to be the best performance carrier in marketplace and to continue to always get better for customers.

Todd Fowler - Keybanc Capital Markets

So as you captured a little bit margins on the efficiency side as well as if you’re not getting fully on the price side?

Steve Bruffett

That’s certainly our intent.

Todd Fowler - Keybanc Capital Markets

Kind of a hypothetical question and theoretical question, in a status quo scenario, where we don’t see a big supply side of events, if we continue to see basically supply where it is now; what’s your expectation, what’s your realistic expectation for LTL pricing to improve, if we continue to see this gradual improvement in demand. Is it 1% to 2% type scenario or you actually something more than that with supply where is that right now?

Steve Bruffett

I don’t know, Tom to be honest and I don’t think anybody knows. We’re certainly hopeful and we’re doing that things are hopefully going to impact our overall pricing, but as long as supply continue see demand to the extent it does in LTL, it’s going to be challenging.

Todd Fowler - Keybanc Capital Markets

Just a couple last ones maybe perceived I know you talked about the pension impact from an earnings standpoint. Are there going to be any cash contributions with the pension plan in 2010?

Steve Bruffett

Like I mentioned they’re discretionary, there may very well end up being, but they’re not required and so, we’ll monitor that as we go through the year. I think its reasonable likelihood that we will put cash into the plan just a question of how much and exactly when.

Todd Fowler - Keybanc Capital Markets

From a ballpark standpoint, what would you think about?

Steve Bruffett

As I said, year-to-date somewhere around $25 million, give or take.

Todd Fowler - Keybanc Capital Markets

Steve, did you give any specific guidance on where interest expense should be in 2010 going to have the retirement of some debt here probably some interest expense would go down. Did you specifically quantify that prepared remarks?

Steve Bruffett

I think it will around $58 million to $60 million somewhere in that range depending on where underlying rates are and so on. So we’ll be down a little. It’s May before that note is retired, so there’s seven months of reduced interest expense from that on full year basis, but we’ll be down a bit $64 million, it was in 2009.

Operator

Your next question comes from Ken Hoexter - Banc of America.

Ken Hoexter - Banc of America

Can you talk about the timeframe of the some of the contracts that were brought on short term? Was there some that are going to expire fairly rapidly that you can address? I know you talk about going to customers and talking to them, but are there some that put on special programs that we could accelerate and what percent of base would that now represent?

John Labrie

The deal flow I said earlier in the call looks pretty normal right now, so we deals that come in every single day to our pricing department in the range of $50 to $100 depending on the day and we’re working through those one-by-one. There have been a very few number of situations, where we have gone out of contract for customers to get some rate relief because of our analysis and the pricing situation that we’re in with those customers. For the most part, we’re working through the contract process and then normal cycle flow of our business.

Ken Hoexter - Banc of America

So John, when you look back at a bunch of the volumes that you brought towards the end of year, you’re saying none of it was on for order, was any of it on any kind of promotion that was at a certain price for an accelerated pace that you can revisit it at a faster pace than just your normal one year contracts, even the business that you’re gaining at rapid rate at the end of the brought at those one year contract levels?

John Labrie

The business that we brought at the end of the year, Ken, looked like the business that we brought on throughout the course of the year with the exception of the track that the marketplace price had declined consistently throughout the course of the year. So we didn’t do anything extraordinary, we didn’t run any pricing specials or deals like that, but obviously, it’s the overall market price declines throughout the course of the year the business that came on reflected that market environment.

Ken Hoexter - Banc of America

I was just trying to get to there, so there’s no way to address this any quicker. Its going take just as a cycling through maybe you can all the way through the third quarter when the volume started coming on.

John Labrie

Yes, I think that’s the best to look at.

Ken Hoexter - Banc of America

John, if you step back and look at this with onsite, where do you think this process went wrong, because you talked before in one of the questions about utilization on the network now being fairly full, if you could go back and do this again, having the position you’re in now, what would you do differently, because if you’re running over a 100 OR, or near with all of the volumes?

I mean clearly that’s not how you were design to do this, even knowing what you know about the pricing market. So where can you adjust things and I know you’ve been asked about the cost side, I mean I’m just wondering what you can do now. You brought on all these employees, what do you do to bring the cost down? Where is it out of lack, with what you’ve got right now?

Doug Stotlar

As we said, we have a number of initiatives to try with that cost and improve performance for customers and we’re in a simultaneously try to keep volume where it is in the network, while improving price. We’re not looking back about, how we reacted through very challenging market in 2009. What we’re going to try to make the situation from a profitability standpoint better in 2010 by focusing on those areas of the business.

Ken Hoexter - Banc of America

I know you don’t want to look back, but I’m asking you just for a quick, second just to understand where you could improve it, when these opportunities present again?

Doug Stotlar

I think that we were certainly in an unprecedented market situation, because customers during the course of last year took advantage of an unprecedented buyer’s market and the flow of business that came in our network in the second and third quarter exceeded even our wildest expectations and have we had crystal ball during that timeframe, we probably would have begun to increase price slightly earlier in the year than we did.

Operator

Your final question comes from Tom Albrecht - BB&T Capital Markets.

Tom Albrecht - BB&T Capital Markets

Couple of things, first of all, your on-time performance in cargo claims, I’ve got assume that with the tremendous tonnage growth with both of those deteriorated, do you have those figures?

John Labrie

I don’t have in front me Tom. What we did see a little bit of slippage in the second and third quarter and we are back to historical normal levels at this point.

Tom Albrecht - BB&T Capital Markets

So what would that be like 0.6% on cargo and 99% on on-time?

John Labrie

I don’t have in front me…

Tom Albrecht - BB&T Capital Markets

Then I just want to make sure, I understand some of the different comments, even though you don’t offer guidance and it’s probably correct to assume yields are up sequentially. You lost a boatload of money Q1 ‘09, I think it was $0.42 of share? Everything considered even if you loss money, shouldn’t be loss less money in this year’s first quarter?

Steve Bruffett

I think that’s a fair assessment, yes.

Tom Albrecht - BB&T Capital Markets

So I guess you tell us confidently that you loss money January?

Steve Bruffett

We haven’t closed the books on January yet.

Tom Albrecht - BB&T Capital Markets

I guess there’s a bigger question here with pricing and then since the fourth quarter of 2005, every six to nine months you’ve had fairly aggressive changes in your pricing in response to a marketplace, where you’re either really focusing on getting yields out or focusing on maybe being aggressive with rates to fill the network?

I’m just wondering if you concerned that customers are now expecting that whatever you’re telling them on rates, it’s just a matter of time before you’re going to change your position and in that sense wouldn’t that lead to greater customer turnover and create some other network problems?

Doug Stotlar

Tom, we’ve been cautious with our comments about what we’re attempting to do in this environment, because it’s an environment of significant excess supply and what we’re trying to do is tricky.

Tom Albrecht - BB&T Capital Markets

So is your network essentially a 100% right now?

Doug Stotlar

I would characterize it little differently. We’re utilizing our rolling stock. Our network is not full. We have excess breaking more than capacity. So we have capacity in the hard assets, but the rolling stock, which is more of your variable cost, is being utilized.

Operator

We have reached the allotted time for questions. Thank you for participating in Con-way Inc., fourth quarter video conference call. This call will be available for replay February 19, 2010. The conference ID number for the replay is 48324685. Again the conference ID number for the replay is 48324685. The number to dial for the replay is 1-800-642-1687 or 1-706-645-9291. You may now disconnect.

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