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Con-way Inc. (NYSE:CNW)

Q1 2014 Results Earnings Conference Call

May 1, 2014; 08:30 a.m. ET

Executives

Doug Stotlar - President & Chief Executives Officer

Steve Bruffett - Chief Financial Officer

Greg Lehmkuhl - Con-way Freight President

Bob Bianco - Menlo Logistics President

Joe Dagnese - Con-way Truckload President

Patrick Fossenier - Vice President of Investor Relations

Analysts

Bill Greene - Morgan Stanley

Thomas Kim - Goldman Sachs

Chris Wetherbee - Citi

Scott Group - Wolfe Research

Ryan Cieslak - KeyBanc Capital Markets

Ben Hartford - Robert W. Baird

David Ross - Stifel Nicolaus

Ken Hoexter - Merrill Lynch

Jason Seidl - Cowen & Co.

Allison Landry - Credit Suisse

Rob Salmon - Deutsche Bank

Tom Albrecht - BB&T

David Campbell - Thompson Davis & Company

Operator

Good morning. My name is Stephanie, and I will be your conference operator today. At this time I would like to welcome everyone to the Con-way Inc. first 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) Thank you.

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, Stephanie. Welcome to the Con-way, first quarter 2014 conference call for shareholders and the investment community. In a minute I'll turn it over to Con-way’s President and CEO, Doug Stotlar.

Before we get into the call, I'd like to offer a few reminders. First, 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.

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. Additional information concerning factors that could cause actual results and other matters to differ materially from those in the forward-looking statements and the inherent limitations of such statements is contained in our forms 10-K and 10-Q and other filings with the SEC.

Second, today's prepared remarks contain non-GAAP financial measures. Reconciliations of GAAP to non-GAAP financial measures are found within the financial tables of our earnings release, which is available on our website at con-way.com. Also, certain financial and operating statistics of the company can be found in the Investors section of our website. Also we have a lot of people on this call, so we’d appreciate it if you limit yourself to a question or two, then return to the queue.

With that, I’m pleased to turn it over to Doug Stotlar.

Doug Stotlar

Good morning. On the call today I'm joined by members of our senior leadership team, including Con-way’s CFO, Steve Bruffett; Con-way Freight President, Greg Lehmkuhl and Menlo Logistics President, Bob Bianco. I’d also like to welcome Joe Dagnese to his first earnings review call. As you may recall Joe was named President of the Con-way Truckload earlier this year. Steve will provide some commentary on our financial picture, and Greg, Bob and Joe will participate in the Q&A portion of the call.

The harsh weather clearly impacted our first quarter’s results, adversely affecting expense, productivity and business volumes. It was a difficult environment for our employees. We are proud of how our employees responded to the challenges of operating under such sever conditions.

Collectively we estimate the weather had an impact of approximately $20 million on the quarter’s results. However, we exited the quarter in a strong demand environment with improving operating fundamentals.

Turning to our financial results for the first quarter of 2014, Con-way reported consolidated revenues of $1.37 billion, up from $1.34 billion in last years first quarter. On an operating income basis, we earned $33.1 million in this year’s first quarter. That compares to $31.6 million earned in the first quarter a year ago. Diluted earnings per share were $0.22 compared to $0.25 per share in the prior year period.

On a non-GAAP basis, earnings per diluted share in the 2014 first quarter were $0.20 compared to $0.18 in the prior year. The only adjustments in both periods were for discreet tax items.

Moving now to a review of our business segments, I’ll start with our LTL Company, Con-way Freight. Con-way Freight posted first quarter operating income of $18.6 million, a 15.9% increase over the $16 million earned in the year-ago period.

Weather negatively affected operating income by an estimated $18 million due to lower tonnage growth and increased costs. The higher costs were primarily from lower productivity, increased snow removal, propane price hikes and excess diesel fuel consumption.

Revenue was $848 million, a 2.5% increase over last year's revenue of $827.5 million. The increase in revenue was primarily attributed to improved yield. Con-way Freight's operating ratio this period was 97.8 compared to 98.1 in last year's first quarter.

Revenue per hundredweight or yield increased 1% in the quarter compared to the prior year. Excluding fuel surcharge, the yield also increased 1%. When adjusted for length of haul and weight per shipment, the improvement was 3.3%.

Comparing tonnage for the three months in the 2014 first quarter, year-over-year January tonnage per day was down 2.8%, February was up to 0.7%, while March was up 3%. For the full quarter, tonnage was up 0.3% compared to the same period last year.

The sequential tonnage increase continued in April. On a year-over-year basis April 2014 tonnage per day was up approximately 3.3%. As a result of the strong demand environment, we pulled forward our general rate increase, which took effect on March 31 and applies to about 25% of our business. We also expanded lane-based pricing to all our contractual accounts. We expect the results of these two actions to drive continued yield improvement.

With respect to our line haul optimization initiatives, these showed year-over-year progress in the first quarters as purchase transportation declined and load factor increased. Our focus at Con-way Freight continues to be on execution, disciplined cost control and leveraging the benefits of our pricing and line haul initiatives to drive improved financial results.

Now I’ll move to our Logistics segment. For the 2014 first quarter, Menlo, our global logistics and supply-chain management company recorded an operating income of $6.2 million, a slight decline from last year’s $6.5 million. Revenue for the quarter was $406.4 million, a 3.6% increase from prior year first quarter revenue of $392.4 million. Net revenue or revenue minus purchased transportation came in at $182.5 million, a 16.1% increase over the $157.2 million in last year’s first quarter.

The higher net revenue was primarily the result of growth in warehouse management project. Menlo was winning new business and expanding with current customers. Our Logistics Company continues to implement actions to increase efficiencies using its lean processes. We expect Menlo to show incremental profit improvement as the year progresses.

Now we’ll review results at our Truckload segment. For the 2014 first quarter, Con-way Truckload had operating income of $6.4 million, compared to $10 million earned in the first quarter last year. The severe weather during the period negatively impacted Truckload’s operating income by an estimated $2 million.

Revenue of $156 million came in just shy of last year’s first quarter revenue of $157 million. First quarter revenue included the effects of a 1.1% decline in loaded miles, partially offset by a 0.4% increase in revenue per loaded miles, excluding fuel surcharge.

Empty miles were 10% compared to 9.7% in the previous year period. The operating ratio ex-fuel surcharge was 94.7 compared to 91.8 last year. The difficult operating environment impacted efficiency, maintenance, fuel cost and asset utilization of Con-way Truckload, however as the quarter concluded, operations begin to normalize, demand accelerated and the pricing environment strengthened.

Our biggest challenge at Con-way Truckload going forward will be one of asset utilization. Driver retention and recruiting have become increasingly difficult. In response we are increasing our recruiting activity and considering enhancements to our drive compensation package.

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

Stephen Bruffett

Thanks Doug and good morning everyone. I'll being with first quarter cash flows and as we anticipated, we were net users of cash in the quarter. Our operating cash flow was a negative $5 million compared to the positive operating cash flow of $27 million in the first quarter of last year; on a year-over-year basis the main items that drove this difference for the timing of working capital and pension contributions.

Regarding pension funding, we expect to contribute about $60 million on a pretax basis for the calendar year of 2014, which is slightly above the $55 million we contributed during 2013. A portion of our 2014 funding was made in the first quarter, more closely aligned with the cash outflows of the plan and to facilitate the termination of a small plan. As a result, the first quarter funding of roughly $30 million was about $21 million higher this year than last.

Net capital expenditures were $67 million in the quarter as compared to $46 million in the first quarter of 2013, and while the first quarter CapEx was higher in 2014 than in 2013, this timing difference was planed and we still expect full year CapEx for 2014 to be around $285 million, which is similar to last year’s level.

Financing activities consumed $7 million in the quarter, which was the net effect of capital lease repayments, common dividend payments and stock option activity. In total this cash activity resulted in a balance of cash totaling $406 million at March 31, which compares to $485 million at year-end. For the full year of 2014 we continue to project that we will be relatively cash flow neutral.

Looking ahead, we want to provide some context on our near term expectations for business unit performance. At Con-way Freight, we expect year-over-year improvement of 15% or more over the strong second quarter of 2013 in which we earned $55 million. This expected improvement was driven by a number of factors, including the favorable demand in pricing environments, as well as our margin improvement initiatives.

At Menlo, we expect second quarter operating income to be similar to the $6 million earned in the same period of 2013 and at Con-way Truckload, we also expect second quarter operating income to be roughly equal to last year’s level, which was $10 million. Truckload is working to leverage strong demand environment, while facing the ongoing challenge of driver availability.

In addition, here are further items for your modeling purposes. First, we continue to expect depreciation and amortization expense to be approximately $250 million. Also we continue to anticipate that our 2014 effective tax rate, excluding discreet items will be approximately 40%, and finally regarding our share account, we expect our fully diluted shares for 2014 to be $57.8 million.

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

Doug Stotlar

Thanks Steve. I want to reiterate how proud we are of our employees and how they responded to the challenges of the quarter. Looking ahead, we are encouraged by the strong demand environment and their improving operating fundamentals. Our focus is on continuing to executive against those targeted initiatives that move the needle. We’re making progress and we are confident that we can sustain and build in that progress in the future.

Operator, that concludes our prepared remarks and we are now ready to open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Bill Greene with Morgan Stanley.

Bill Greene - Morgan Stanley

Good morning. Steve, thank you for those comments on the operating segments. I’m wondering if you can drill down at all into some of the assumptions, because when I sort of look at the impact of weather on the first quarter and to think about the historical sequential change, I would have said that Con-way Freight would have done a little bit better. But maybe there are some impacts in April we’re not aware of or there are some costs that aren’t lining up in the way we expected. Can you provide any sort of color about how to think about that?

Doug Stotlar

Yes, we can. I think Greg can be helpful in providing some context. There’s obviously some favorable items in the quarter and there is also some cost items that we continue to address and Greg, why don’t you provide some more context.

Greg Lehmkuhl

Yes, I would just say regarding the 15% or more projected increase in op-income, there’s a lot of moving parts and a large LTL network and the 15% reflects the impact of our initiatives, the favorable demand in pricing environment, as well as the normalization of claims expense in the quarter. So I think you recall that the second quarter last year was pretty good, but we said we can beat that this year.

Bill Greene - Morgan Stanley

Yes. When you look at the GRI, presumably it erodes a bit over time. Should we think about the GRI as kind of on the percent of business that it affects kind of getting to year-over-year or has last year's more or less eroded to a point where we should think about this as really just a single GRI?

Greg Lehmkuhl

It does erode over time slowly. I didn’t really understand the last part of the question.

Bill Greene - Morgan Stanley

Well, so last year’s went in, in July and this year’s is going in earlier. So effectively for a period here there will be two GRI’s if you will.

Greg Lehmkuhl

I mean, the demand environment feels robust, feels pretty good. So I think that’s possible this year.

Bill Greene - Morgan Stanley

Okay. All right, thanks for the time.

Doug Stotlar

Sure.

Operator

Your next question comes from the line of Thomas Kim with Goldman Sachs.

Thomas Kim - Goldman Sachs

Hi, thanks very much. In our last call I had asked about how we should be able to see the impact of all the lane-based pricing and line haul optimization. Based on what’s reported, it’s really hard for us to really see the impact thus far. I’m wondering to what extent can you maybe put out some more color as to how your initiatives are impacting the yields and particularly on the freight side? Thanks.

Greg Lehmkuhl

Sure. I’ll talk about tonnage and yield. So, we ended Q1 with essentially flat tonnage as Doug talked about, but it did improve sequentially through the quarter. April tonnage as just Doug mentioned was up 3.3% year-over-year. In April the yield looks really good with the GRI.

As you recall, we’ve been focusing a lot on improving the mix of business. So for example, in April, our national account tonnage was essentially flat, while our local tonnage grew over 11% year-over-year.

I think it’s also important to note that we’re seeing a lot of demand for truckload-size shipments or shipments over 20,000 pounds, so we’re using the line-haul and pricing capabilities that we’ve been talking about for the last several years to ensure that we’re really surgical about which of these shipments we’re allowing in the network.

So by focusing on each shipment’s profitability for these shipments, we’re restricting about 2 million pounds a day out of the network of core OR Freight. And so I think when you look at the advancements in engineering the 20,000-pound initiatives and our business mix plus the GRI, you’ll see our yield perform pretty well going forward.

Thomas Kim - Goldman Sachs

Okay, and I guess another question I had with just regard to the cost associated with associated with the line-haul optimization and obviously with some of this mix effect going on here.

One of the items I had asked also about previously was purchase transport. Clearly we’re seeing some of declines in the last fourth quarters and particular within freights in the past two weeks, which we think is encouraging. To what extent does that reflect some of the change that you are making?

And then also can you comment on the purchase labor, because its still an area that’s elevated and back in the third quarter I had asked about this and the rent and you did mention that it had to do with startup costs and I suspect that was more with regard to Menlo than the Freight side, but I’d like to focus more on Freight. And you also said that these costs should fade over the next one or two quarters. So I’m wondering, like from Q3, should we begin to see the purchase labor side also start to stabilize or at least decline year-on-year?

Greg Lehmkuhl

Sure, good questions; I’ll start with line-haul. And so even with the severe conditions in Q1, we did see our line-haul efficiency rise and it was the best quarter in our history from the first quarter basis.

We are especially pleased with that result, given with the Q1 disruptions some of our line-haul initiatives were slowed, because one of our key models used as a four-week history to optimize and there simply wasn’t a normal four weeks in the first quarter. And so now with the weather behind us, we’re rolling out the next phase of the line-haul. It remained very encouraging of their impact.

But before the weather really hit in November of last year is when we ran one of our models for the first time and that did and it cause the reduction in purchased transportation in Q1, of about 5% year-over-year, and so we could expect we’ll be running those models again just this month. Now that the weather has cleared and we have four weeks in history and we’re encouraged about how that could impact that line going forward.

On the dock-mix strategy that I talked about last time, that’s really what’s driving purchase labor. So we continue to change our dock-mix by performing more of our dock work with dock workers versus what we’ve traditionally done, which is rely almost fully on drivers. And with hiring the dock-workers we often start them as temporary workers or the purchase labor to ensure that they are a good fit in our culture before hiring them on full time.

And so this enables us to utilize our CDL carrying professional drivers where we need them most, and that’s in front of our customers. And we think as the year progresses we’ll see more of those purchased labor individuals come over to be full time and you’ll see that cost come done. But those hours will just roll into our normal wages line.

Thomas Kim - Goldman Sachs

Okay. Thanks a lot for all that detail.

Greg Lehmkuhl

Sure.

Operator

Your next question comes from Chris Wetherbee with Citi.

Chris Wetherbee - Citi

Great, thanks. Good morning guys. Maybe I just want to understand a little bit of sort of the pace of the volume acceleration. Maybe how we should think about it for the second quarter. How much I guess do you feel like is some pent-up demand that maybe we’re seeing right now? Can you sort of parse that from the underlying pace of demand? I guess I’m just curious with how we might see tonnage progress into May and June?

Greg Lehmkuhl

It’s hard for us to determine that, but we’re out in front of a lot of customers every week and just in general the demand environment seems good. Obviously, with the rail disruptions and the tight truckload market, that’s pushing a lot of freight into the LTL market. It doesn’t seem to be rebound from the weather anymore. It’s more just the tight capacity in the overall transportation space.

Doug Stotlar

I think I concur with Greg’s comments there. I think what we perhaps saw at the end of March and then into early April might have been some rebound and catch up from weather, but the further this continues, as we continue to see strong tonnage demand all the way through the month, I’m continuing to be reinforced that this seems to be a broader economic pickup and all the data points that we’ve seen recently seem to support that thesis.

Chris Wetherbee - Citi

Okay, that’s helpful. And then you mentioned earlier the mix of the local versus national account tonnage growth, I think in the month of April. Just kind of curious how that looked for the first quarter generally speaking and maybe sort of where you are? I think you’ve given us maybe sort of your directional numbers on where that mix of local versus national business within the freight pie kind of stands today versus targets. I guess I just want to understand sort of the progress you continue to make towards more balance in that network.

Greg Lehmkuhl

Sure. So for ending with the first quarter, for three quarters now we’ve had double-digit growth in local account tonnage. So the mix goals are out there to our sales-force and we’ll be doing an excellent job executing against them. As far as an overall mix we’re, call it 65/35 now, national to local.

Chris Wetherbee - Citi

Okay and in the first quarter, using sort of a 10% or 11% growth rate on the local side versus kind of negative national is the right way to think about it.

Greg Lehmkuhl

Yes. Can’t call it flat national, yes negative national a little bit.

Chris Wetherbee - Citi

Okay, that’s helpful. Thanks very much, I appreciate it.

Greg Lehmkuhl

Sure.

Operator

Your next question comes from Scott Group with Wolfe Research.

Scott Group - Wolfe Research

Hey, thanks. Good morning guys.

Doug Stotlar

Good morning Scott.

Greg Lehmkuhl

Good morning.

Scott Group - Wolfe Research

So a couple of questions. First, is there any way to think about – just following-up on Bill’s question from earlier, is there any way to think about how much of the operating income growth in the second quarter is just coming from kind of this GRI that you didn’t have a year ago?

Greg Lehmkuhl

I’ll just repeat what I said. The 15% or more reflects all pieces of the pie, including the GRI, driven by better pricing and demand, as well as we have good guys at other places and we have other areas where we see opportunities. So it’s kind of an all in number.

Scott Group - Wolfe Research

Okay. And Steve, I think you had mentioned in the past that from the back of this year is where you’d probably revisit the idea of share repurchase. We’re getting to close to that. You have any updates or thoughts for us there?

Doug Stotlar

I think the message is pretty consistent with the response I provided on prior calls. As we mentioned repeatedly, our primary focus remains on enhancing operating margins, which is key to everything. This recent economic strengthening is in fact encouraging and if this environment continues, it should complement our internal initiatives and contribute to that margin expansion, which in turn is a key factor that supports our credit rating, which is an important part of our dialog when it comes to the balance sheet strength.

These improved margins, they are also a critical driver that enable our company to consistently generate free cash flow. That’s another metric that we are monitoring closely and as I indicated earlier on the call, we anticipate being about cash flow neutral this year and we want to get above that water line on a consistent basis.

So we’ve made considerable progress in a lot of areas, including the pension plan and its funded status, which is another area that we look at when we think about this topic and we’ve made considerable progress like I said, but there is still some ground to cover there. All in all we’re making progress. I don’t have a declarative statement to make about it, but it’s moving in the right direction.

Scott Group - Wolfe Research

Okay, great. Just last one if I can, is there any way to help us kind of parse out the tonnage growth? How much of this is spillover from Truckload, how much of it is maybe just your traditional LTL customer, and are you seeing kind of a ramp in kind of maybe new customers related to e-commerce and things like that?

Greg Lehmkuhl

So I would say no on the last point. We’re already there and we have a pretty good presence with some major e-commerce customers. We are seeing the large shipments certainly flow into the network, but like I mentioned earlier, with our ability to understand where we want those on a dynamic basis, we are limiting about 2 million pounds a day.

So if you restate that we couldn’t do that, in April our tonnage would have been up year-over-year, up 6% and so certainly large shipments in the overall economy are flowing from Truckload’s LTL and we’re trying to only select those that will contribute to operating income. You know that said, throughout the weight per shipment band or throughout the shipment we’re seeing pretty good growth throughout. So it’s just not in big shipments.

Scott Group - Wolfe Research

Got you. It makes sense. All right, thank a lot for the time guys.

Greg Lehmkuhl

Sure.

Operator

Your next question comes from Todd Fowler with KeyBanc Capital Markets.

Ryan Cieslak - KeyBanc Capital Markets

Hi, thanks. This is actually Ryan in for Todd. Good morning.

Doug Stotlar

Good morning.

Ryan Cieslak - KeyBanc Capital Markets

I guess the first question I had is on the purchased transportation side. In the line-haul initiatives some nice improvement as you guys mentioned this quarter despite the weather. When I think about it on the freight side, going into the second quarter and maybe even to the back half of the year, as weather now normalizes and it sounds like there’s maybe some additional traction you could get from some of the model enhancements.

How should we be thinking about how that line item should trend, maybe as a percentage of revenue, which I think was closer to 16% level this quarter. Is that a good level or should we continue to see improvement there on a sequential basis?

Doug Stotlar

We run the model iteratively and we make the changes iteratively and so we don't have a goal for what we want purchased transportation to be. As we learn more about our network and surgically layer freight in, the need for purchased transportation can shift, but overall I would say that we would continue to see that number come down over time.

Ryan Cieslak - KeyBanc Capital Markets

Okay, and my follow-up question Dough. I know last year around this time there was some headwinds on the tonnage side with regards to maybe some of the agricultural business that you guys had. Can you give us an update on maybe what you’re seeing this year as it relates to that type of business, particularly all in a difficult year last year?

Doug Stotlar

Yes, I think because it’s been a dryer spring here, certainly its cold, but it’s been a dryer spring. We’re seeing a more normal distribution than what we could in our agricultural shipments. So we’re not seeing – in the last year we’re sitting here, April was off to a very slow start and it really accelerated in May and June and even at the beginning of July. I don’t think it’s over by the end of June. So it just feels like a more normal distribution this year.

Ryan Cieslak - KeyBanc Capital Markets

Okay, thanks.

Operator

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

Ben Hartford - Robert W. Baird

Hi guys. Greg, maybe you could just provide us some high-level views about where you feel like the freight division is from an initiative perspective. I know in the past you've talked about guideposts in terms of what you think that the ultimate success can be from a margin standpoint in this segment and obviously it's clear that economic trends are improving here to begin the year based on what you guys are saying.

So it feels as though this year sets up for a year in which the pace of freight margin gains accelerate and EBIT growth accelerates. You have easy comps in the back half of the year and I don't expect you to provide specific guidance, but I'm just looking for some degree of clarity of how we should expect the cadence of margin improvement in ‘14 and even into ‘15, and maybe what you think over the longer term to be. I think it's been a couple of quarters since we've done that.

Greg Lehmkuhl

Yes. So, it's a good question and you know we won't give guidance, but certainly after 2013 we expect our margin improvement to accelerate this year and you're absolutely right, the demand environment remains certainly the best it's been since I've been in this job and our initiatives are coming along really well.

I mean on the pricing front we're using lane-based pricing now on all of our contractual accounts. The process has been very successful and we're really excited about how that will continue to impact our bottom line. When we think about lane-based pricing, the early GRI, the potential for another one maybe later this year, we'll see how the demand environment looks. Our surgical restriction of core-paying truckload-sized shipments bodes well per yield in the second quarter and going forward.

On the line-haul side, we still have a lot of work to do. I mean we've rolled out a couple of models in the last quarter and a half and we haven't gotten the full benefit yet. We're excited about what we can do with line haul. We talked last quarter about installing two-way cameras and EOBRs. Those are now installed on the entire fleet, giving us a new capability to reduce both accident severity and accident frequency, as well as better manage fuel economy. I mean it was great to see it in Q1 despite brutal weather, that our MPGs increased 2.4% versus last year, even with all the extra items.

So going forward, with that technology we think we can get 4% for the balance of the year. Our dock mix project that I talked about is impactful to our cost per hour and at freight, we're about this year extracting the value from the initiatives that we've been talking about.

There are several others that we don't talk about, like installing side skirts on the entire trailer fleet this year. There's a number of other things that we're not very public about. But this year we're about extracting the value from those initiatives, while continuing to focus on critical investments for the future and we feel really good about our profit-improvement plan. We think we'll show that this year and we’re excited about ‘15.

Ben Hartford - Robert W. Baird

Good, that’s helpful. Just if I could ask a follow-up. Have you quantified what your business in freight was relative to third party providers, brokers in the first quarter? Maybe compare that to a year ago and how do you see that trending as well. Is there an opportunity to be able to expand the amount of business that you do with them?

Greg Lehmkuhl

There is for sure. So I would say year-over-year in Q1 we’re flat. It’s pretty early in this process. So our new sales team’s just been in place about three months, but we had quite a few meetings with key third party partners in Q1 and we’re encouraged about the opportunity to surgically grow with them in the future.

So you know there’s still certain lanes with certain accounts that don’t operate very well and we see the 3PL’s as an opportunity to continue to lead and feed the network and improve the performance of each lane and so the 3PL’s are a key part of our formula going forward and I think we’ll have more to say about that as the year progresses.

Ben Hartford - Robert W. Baird

Thanks for the time.

Doug Stotlar

Sure.

Operator

Your next question comes from David Ross of Stifel Nicolaus.

David Ross - Stifel Nicolaus

Hi gentlemen.

Doug Stotlar

Hi Dave.

Steve Bruffett

Good morning.

David Ross - Stifel Nicolaus

Yes Doug, maybe you can comment on this and Greg as well, although I don't know if Greg was there back then. But today if you look at the Con-way freight network operating more or less as one unit versus the three regionals that you had operate for a number of years up until ‘08, ‘09 or so, what's better today about the existing network and what did you lose in going to the national network that might have been better when you were operating the three regionals?

Doug Stotlar

Well, I don’t think we lost anything now that we’ve had time to optimize and work together as a single unit. I think the single biggest thing that changes that time is the environment. We operated three separate companies in a different time and a different place with regard to pricing and with regard to demand and this is the environment we’re just starting to experience now over the last, I’ll call it 60 days.

It is the first time from my perspective, almost a decade where we had this kind of demand increase this quickly and so I think that if you look at the low factor statistics and you look at some of the other efficiency statistics, we actually operate the network more efficiently today than we did several years ago.

I think the reality is though, that it’s a much more complex network and so through our initiatives we certainly seem to believe there’s an awful lot more opportunity to get better at how we manage this network and with the new visibility tools that we have now, the ability to put freight into this network in a much more surgical fashion as Greg alluded to at multiple times already this morning in his comments. I think there’s great, great upside to how we leverage this network, but these tools are really important to managing a network as complex as ours, with the velocity that it has.

David Ross - Stifel Nicolaus

That's helpful, and then one quick question for Bob, just on the warehousing versus transportation management shift at Menlo. Can you comment a little bit on why warehousing is growing so much faster? Is that more of a focus area now for the company? Are you just being more opportunistic because there's more deals out there in the warehousing side or does Menlo have a distinct competitive advantage in warehousing versus TM that's being excluded.

Bob Bianco

Yes, this is Bob. Really its what comes into our pipeline and it kind of ebbs and flows and so over the last year or so the majority of the opportunities were warehousing type solutions that we were responding to. If you look at our pipeline today, I think its more weighted towards transportation management solutions, we have a lot of great opportunities there, so. I don’t know if there’s any science or logic to it and we’re kind of in a reactive mode to what the market gives us.

David Ross - Stifel Nicolaus

Excellent. Thanks.

Operator

Your next question comes from Ken Hoexter with Merrill Lynch.

Ken Hoexter - Merrill Lynch

Great, good morning. On the Truckload side, you mentioned the driver-pay increases coming in to keep the trucks seated. Can you talk if you're incorporating driver-pay raises into your outlook? You mentioned I think maybe $10 million of operating income going forward. Are you looking at incorporating that already in your targets?

Steve Bruffett

This is Steve and we do anticipate even in our original plan for the year that we put together late last year, we did contemplate driver pay increases, the exact mount and timing just being worked out, but the expectation is that there would be some form of driver pay increase in this calendar year.

Ken Hoexter - Merrill Lynch

Thanks Steve. And then on the Menlo side, can you talk about I guess the start-up costs? You had a really nice ramp on the revenue side, but you're still looking for another similar $6 million for income there. Can you talk or maybe delve into a little bit of the start-up impacts and the pace of the new contracts it seems like that you've been at this for a while, so just wondering when do we see that benefit flow through on the Menlo side?

Steve Bruffett

Yes, so we made a great deal of progress stabilizing all of the projects that we took on in the third and fourth quarter. There are primarily two very large warehousing projects that took longer than we thought as far as to getting to stabilization.

One of them in March we did reach profitability on, the other one we’re still making great strides. We’re working with both customers on additional revenue opportunities and as well as increasing our productivities at all the operations. So we’re happy with the progress we’ve made and I think that’s reflected in the financial performance of Menlo between the fourth quarter of last year and the first quarter of this year, and going forward we expect to see that progress continue.

We do have some headwinds. As far as in the past we’ve talked about this year we’re investing a lot in IT and voice and data infrastructure projects. Those costs will primarily be hitting us in the outlining quarters of this year and when you look from a cost standpoint, year-over-year we did not achieve any bonuses in 2013, but we are accruing bonuses in 2014. So it’s not really an apples-to-apples comparison year-over-year.

Ken Hoexter - Merrill Lynch

So as you look forward, do you expect to get back to the low 90s you were at before or is the mix shift going to warehousing projects or other, just a different business that changes the margin outlook?

Steve Bruffett

Yes, the mix shift absolutely changes that. If we bring on a bunch of transportation management projects, yes, then I think low 90’s is where we used to be. It’s an achievable target, but mix plays a very big role in it.

Ken Hoexter - Merrill Lynch

All right, great. And then just I guess a technical question Doug on the progress at freight. Is there something that you can provide? Like I know you mentioned you don't want to give a quarterly update, but are there statistics or anything that we can see or is it just operating ratio in terms of the progress of some of the lane-based pricing or is it dock, you maybe changing your dock hours or dock workers that can show that progress on your three-year plan?

Doug Stotlar

I think operating income is going to be the single best metric you can look at, but obviously as we continue to go through time, you continue to compare statistics of different categories and see how low factors are going to be one that I would keep an eye on, yields another one that I would keep an eye on and then I’ll be growing the company again. And so I don’t see operating income is going to be the single best metric for you.

Ken Hoexter - Merrill Lynch

I appreciate the time. Thank you.

Operator

Your next question comes from the line of Jason Seidl with Cowen & Co.

Jason Seidl - Cowen & Co.

Good morning guys.

Doug Stotlar

Good morning.

Steve Bruffett

Good morning.

Jason Seidl - Cowen & Co.

I just wanted to touch on Freight a little bit. Obviously you said 15% or more for 2Q. What's embedded in that flat 15% number, not the 15% or more part. Your mix of business is improving obviously between local and national via the line-haul optimization and your lane-based pricing. So what are you getting out of that versus just a general improvement and it looks like your tonnage trends, your general rate increase which will help you out and also contractual renewals?

Doug Stotlar

So, we kind of hit it before, but the majority of improvement is coming from our revenue management initiatives and on the operations side we have some metrics that are going very well and some that are still recovering from the first quarter. So we have plenty of opportunity on the op side to improve beyond the 15%, but the majority of the year-over-year benefit is coming from the lane-based pricing initiatives that we've been talking about.

Jason Seidl - Cowen & Co.

Okay. I guess you won't put a number behind on that $55 million of your tied lane from lane based.

Doug Stotlar

No, but you know its not that we don’t want to share the information. Its just so moving parts that we’ll be sharing a pretty detailed income and expense report to be able to do that. There’s puts and calls out in there.

Jason Seidl - Cowen & Co.

Okay, fair enough. And Steve I guess getting back to sort of driver pay you said you've already sort of modeled that in to your forecast for Truckload and obviously the driver environment is pretty tight out there. What sort of rate increases going forward do you think Truckload and also the industry might need to support any sort of significant driver hikes?

Joe Dagnese

Hey Jason, this is Joe. We’re looking at a couple of different options and opportunities on how to best seat our trucks. There are certain things we’re considering in regard to incentivizing driver to do things that are important for our asset utilization as well as keeping him or her in the seat.

We’re trying to lock in on that as we look forward down the road. It’s a very good dynamic marketplace right now and as you know some of our competitors have already gone out with certain type of productivity based incentives to drivers. So we’re contemplating those, as well as other things to not only keep drivers in the seats, but to get new drivers to come to our company as well.

Jason Seidl - Cowen & Co.

Okay, so this has been more of an incentive based increase as opposed to just a general diver pay?

Joe Dagnese

We’re contemplating on a number of different avenues and that’s sort is of one of the ones right now that has some good traction underneath it.

Jason Seidl - Cowen & Co.

Okay. Thank you for your time as always guys.

Doug Stotlar

Yes, sure.

Operator

Your next question comes from the line of Allison Landry with Credit Suisse.

Allison Landry - Credit Suisse

Good morning and thanks for taking my question. I apologize if this has been asked already, because I came to the call late, but I was wondering if you could comment on what you're seeing in terms of the bid season on the Truckload side and if there's been any sort of changes in shipper behavior, resulting from the volatility that we saw in the last quarter?

Joe Dagnese

Allison, this is Joe. We’re seeing an up-tick in a number of bids that have come in and we’re working through those with our team, our sales team, but we are also working with our customers on a proactive basis to talk about the market and what we need in regard to driving our overall rate and productivity gains for the balance of the year. So I would say in general the bid levels are up.

Allison Landry - Credit Suisse

Okay, and is there any quantification you can give on sort of what you guys are anticipating in terms of the year-over-year change in contractual pricing?

Joe Dagnese

We began the year in the two to three range and as the quarter gained traction through the balance of the year Allison, we’re looking more in the four to five range now. What you need to know in our business and I think you do, is that each and every contract and each and every shipper is a different discussion and so we’ll optimize those conversations as best we can.

Allison Landry - Credit Suisse

Fantastic. Thank you so much.

Joe Dagnese

Welcome.

Operator

Your next question comes from the line of Rob Salmon with Deutsche Bank.

Rob Salmon - Deutsche Bank

Hey, good morning guys. This is a follow-up to Allison's question. Could you talk a little bit about the contractual rate increases that you're seeing in freight thus far in April, and how that compared to the trends you guys experienced in Q1?

Greg Lehmkuhl

I would say at freight we've had fairly aggressive targets for about a year now, especially on national accounts and we're able to get those increases. I think where we see the impact more is just on the tonnage side, because we have very specific account or targets by lane for each customer and so we're able to achieve those and we're shedding less national tonnage than we were a year ago using that same approach.

Rob Salmon - Deutsche Bank

Okay, that’s helpful. And then Steve, a quick clarification in terms of the corporate and eliminations EBIT line. That increased significantly on a year-over-year basis. Could you describe the drivers of that in the first quarter and how we should be modeling this line item for the remainder of the year?

Steve Bruffett

Sure. There’s two primary things in that line, one of which is our defined benefit pension expense for our frozen plans that go through there and the other key thing is some reinsurance activity for a portion of our work-comp claims.

On the pension side there is a year-over-year benefit of roughly $1.25 million that you should see consistently throughout the year. The reinsurance activity is much harder to forecast, because its our claims experience relative to the remainder of the reinsurance pool experience, and that can be a positive or a negative in a given quarter and if its positive in the first quarter, then we’d assume it to be somewhat more neutral as we go through the remainder of the year.

Rob Salmon - Deutsche Bank

Okay, that's helpful. So roughly kind of $1 million or so positive from that line looking out for the rest of the year then.

Steve Bruffett

Something in that range, but again there’s some variability on the reinsurance side that can vary that by quarter.

Rob Salmon - Deutsche Bank

Makes sense. I appreciate the time.

Steve Bruffett

You bet.

Operator

Your next question comes from the line of Tom Albrecht with BB&T.

Tom Albrecht - BB&T

Hey guys, I'm traveling, so hopefully you can hear me okay.

Doug Stotlar

That’s fine.

Tom Albrecht - BB&T

I just wanted to explore the PT line a little bit. I do see the progress and that's been certainly something I've been cautious about, but I wonder if there was a little bit of a different dynamic in the first quarter. As I recall, almost all of your PT spend is on truck as opposed to rail. We've seen some other carriers where PT went up, because the poor weather caused them to reposition on the railroads. I'm wondering if yours went down because you couldn't get the trucks, and you don't historically use rail for PT. Could you talk about the influence of that in the quarter?

Greg Lehmkuhl

Sure, there was none. I mean we used a low single-digit percent of our line haul in rail and that had no change in Q1, so that's not what was going on. I'd say if anything, the severe weather made us use more PT to reposition freight in mid one-way lanes to try to get the network to flow back.

Doug Stotlar

And just to add a little more color to that, most of the schedules in the freights network are fixed and so they show up everyday with pull in the specific lane where we have freight imbalances and so our capacity, it moves down as we manage out the, I’ll call it one ways that we do more on the spot market and so that’s the part that we’ve really been managing down, the models are helping us with.

Tom Albrecht - BB&T

So, you're saying – yes, I knew you didn't do any rail and so I guess really what I was saying is, I wonder if PT didn't come down because of the absence of truck capacity available, but you're saying that that number maybe could have been even lower?

Doug Stotlar

Correct.

Tom Albrecht - BB&T

Okay. Do you have a sense of how much lower, $3 million to $5 million or…

Greg Lehmkuhl

I'm not going to put a range out. We’ll probably expect to show more progress as the year progresses, but I'm not going to put a (inaudible)…

Tom Albrecht - BB&T

Okay. All right, well thank you for the color.

Doug Stotlar

Anytime.

Operator

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

David Campbell - Thompson Davis & Company

Yes, thanks very much. Doug, I think it was you that mentioned the driver shortage and we've talked about it already, but it all seems to be in the Truckload business. There's no driver shortage problem in the Con-way Freight division?

Doug Stotlar

Well, I can’t say that they are not hard to hire markets in the Con-way Freight division, although part of our strategy this year with our dock-mix is hiring additional dock workers to reduce the amount of dock work we use with our drivers, making them available to work in the P&D environment or the line haul environment and so its really less than any type of burden we’ve had, even its hard to hire markets in the freight market. So it really is, at least in our case, its much more of a truckload specific phenomenon.

David Campbell - Thompson Davis & Company

That’s great. Okay, thank you.

Doug Stotlar

Thank you.

Patrick Fossenier

Thank you very much operator. Could you provide the replay information, if you have that handy.

Operator

Ladies and gentlemen, you may access today’s replay by dialing 1-855-859-3056. Again, that is 1-855-859-2056 or you may dial 404-537-3406. Again, that number is 404-537-3406. The access code is 24785305. Again, the access code is 24785305.

Patrick Fossenier

Thank you.

Operator

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

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