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Con-way Inc. (NYSE:CNW)

Q2 2011 Earnings Call

August 5, 2011 10:00 AM ET

Executives

Patrick Fossenier – Vice President, Investor Relations

Doug Stotlar – President and CEO

Steve Bruffett – Chief Financial Officer

Bob Bianco – Menlo Logistics President

Herb Schmidt – Truckload President

Analysts

Chris Ceraso – Credit Suisse

David Ross – Stifel Nicolaus

Scott Malat – Goldman Sachs

Scott Group – Wolfe Trahan

Jason Seidl – Dahlman Rose

Jeff Kaufman – Sterne, Agee

Ken Hoexter – Merrill Lynch

Todd Stover – KeyBanc Capital Markets

Chris Wetherbee – Citi

Ben Hartford – Baird

David Campbell – Thomson Davis & Co.

Rob Salmon – Deutsche Bank

Tom Wadewitz – JPMorgan

Neal Deaton – BB&T Capital Markets

Operator

Good morning. My name is Brandi, and I will be your conference operator today. At this time, I would like to welcome everyone to Con-way Inc.’s Call to review Second Quarter 2011 Results. 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, Brandi. Welcome to the Con-way’s Second Quarter 2011 Conference Call for shareholders and the investment community. In a minute, I’ll turn it over to Con-way President and CEO, Doug Stotlar.

Before we get into the call, I’d 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 predictors of future events. Actual results of operations and financial condition 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 condition 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. I’d also like to note that we have a lot of people on the call today, so we’d appreciate it if you could limit yourself to a couple questions then return to the queue.

Now without further adieu, 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; Menlo Logistics President, Bob Bianco; and Con-way Truckload President, Herb Schmidt. Steve will provide some commentary on our financial picture and Bob and Herb will participate in the Q&A portion of the call.

Our second quarter performance was encouraging. Each of our three primary business units achieved revenue and profit growth and executed well on the quarter. We’re on the steady path of continuous improvement and building on favorable momentum established over the past several quarters.

For the second quarter of 2011, we reported consolidated revenues of $1.35 billion, up 3.2% over last year’s $1.31 billion. Diluted earnings per share doubled to $0.52 versus the $0.26 per share earned in the prior year period. On an operating income basis, we’re in $60.2 million in the 2011 second quarter, a 69.8% increase over the $35.4 million of operating income we reported in the last year’s second quarter.

Moving now to a review of our business segments, I’ll start with Con-way Freight, our LTL Company and largest revenue segment. Con-way Freight posted operating income of $39.2 million in the second quarter, more than double to $17.2 million earned in the second quarter a year ago. Solid operating discipline, improved network balance, prudent cost management and increases in pricing all contributed to higher operating income.

Because of these improved operating trends, we decided to restore basic and transition 401 (k) contributions for employees announced June 30th. You’ll recall these were 401(k) contributions for our longer tenured employees, which were suspended in April of 2009 as part of our cash conservation measures at that time. The steady state of the business today and the sustained progress we’ve achieved in restoring margins has given us confidence we can take the step now and restore this important benefit for our employees.

On the topline we posted revenue of $839.8 million, a 2.8% increase over the last year’s revenue of $817 million. As was the case in this year’s first quarter a combination of improved pricing and higher fuel surcharge revenue contributed to the second quarter revenue increase. Con-way freights operating ratio this period was $95.3, compared to $97.9 in last year’s second quarter and $97.4 in this year’s first quarter.

Tonnage per day in the quarter was down 8.3% over last year’s period but was up 5.9% on a sequential basis compared to this year’s first quarter. It’s important to remember that even though that we are down year-over-year primarily due to efforts we took beginning in the second and third quarters last year to moderate volumes in the network our tonnage today is up 18.5% from where we were two years ago.

Revenue per hundredweight on yield increased to 11.2% in the quarter compared to the prior year. Excluding fuel surcharge, the increase in yield was 6%. Yield improved sequentially over this year’s first quarter as well.

Now, I’ll move to Menlo Worldwide Logistics. For the 2011 second quarter Menlo Worldwide Logistics our global logistics and supply chain management operation, recorded operating income of $12.1 million. This was one of Menlo’s best quarterly operating performances just short of the record $13 million earned in the same period last year.

Revenue for the quarter was $394 million, an increase of 2.1% over the prior year revenue of $385.8 million. Net revenue or revenue minus purchase transportation came in at $147 million, a 2.9% increase from $142.8 million in the previous year period. There were a number of positive developments for Menlo in the quarter. We saw growth in new business wins and an improved sales pipeline in North America where both the quality and quantity of bid opportunities has increased. International markets continue their strong performance with Europe and Asia both outpacing the U.S. in percentage growth. Menlo continues to execute well and is on track for a good year.

Now I will review the results of Con-way truckload. Our full truckload transportation operation delivered increases in revenue, profits and operating efficiencies compared to last year’s second quarter. The quarter benefited from strong operating discipline, as well as improved pricing as industry capacity remained relatively tight.

For the 2011 second quarter, Con-way truckload earned $10.3 million, more than double the 5.1 million earned last year. Revenue increased 6.9% to a $155.5 million over last year’s second quarter revenue of $145.5 million. The revenue growth can be attributed to higher fuel surcharges and increased revenue per loaded mile.

The operating ratio ex-fuel surcharge improved to $91.3 from $95.7 in the year ago period. While the market for truckload drivers remains tight, we continue to focus our recruiting efforts on attracting quality drivers emphasizing the competitive pay package and superior driving experience offered by Con-way truckload. This strategy is proving effective as a result our fleet today is fully exceeded.

Our game plan hasn’t changed for truckload. We continue to bring on new trucks only to refresh the fleet and we are managing market demand and driver turnover effectively. Con-way truckload continues to focus on improving operations and responding consistently to customer needs with value added premium service.

Before I close the truckload discussion, I want to make a comment about our employees in Joplin. As you know, this has been the home of our Truckload company for more than 60 years. In May, this community was hit by a tornado that left unimaginable devastation in its way. And even the hours after the tornado hit in the base of tremendous adversity, our Joplin employees have the company back up and running. As Herb will tell you, we didn’t miss a beat, thanks to a team that pulled together in a remarkable fashion and did an exceptional job for our customers.

As an organization, we’re ready to help our colleagues in Joplin, moving tons of relief supplies from all parts of the U.S. into the community and raising relief funds. In particular, money’s to help the 48 Con-Way Truckload families who lost everything. I’d ask you keep Joplin in your thoughts, especially now as the long rebuilding process is beginning.

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

Steve Bruffett

Thanks, Doug, and good morning, everyone. I’ll begin with a review of our second quarter cash flows. Cash from operations was $125 million, as compared to $82 million in the second quarter of 2010. Key contributors to the favorable variance were at $15 million increase in net income and the continuing benefit of bonus depreciation.

Net capital expenditures were $71 million during the quarter and were comprised mostly of tractor purchases for Con-Way Freight and Con-Way Truckload, as we continue our steady multi-year initiative to improve our Fleet Agency.

Financing activities, which are mostly payments of dividends and capital leases used $7 million of cash during the quarter. Net result of this cash flow activity was at $47 million increase in our cash position during the quarter, cash and cash equivalence were $469 million at June 30th.

Year-to-date, our net CapEx was $123 million and our full year guidance for 2011 remains at $300 million. So approximately $175 million of net CapEx remains for the second half of the year. Also consistent with our guidance on the first quarter call we expect to contribute about $60 million to the defined benefit pension plans during 2011 and a good portion of this funding will occur in the third quarter.

Moving to the consolidated income statement, I’ll begin with healthcare costs, which were $43 million during the second quarter, as compared to $42 million in the second quarter of 2010. So this quarterly amount is more in line with our historically healthcare costs and is consistent with the $40 to $45 million estimate that we provided on our last call.

Looking forward, our current expectations for the third and fourth quarters of 2011 are that healthcare costs will be approximately $45 million or slightly higher and to recall that we experienced significant volatility in our healthcare costs in the third and fourth quarters of 2010, so there will likely be comparability considerations as we move through the last two quarters of this year.

Earlier in the call, Doug mentioned that the restoration of the basic and transition retirement benefits would occur, so as a reminder these benefits reflect about $5 million of quarterly expense and they will prospectively resume on October 1, 2011.

And as for depreciation and amortization expense we continue to expect the full year amount to be just over 200 million for 2011. The last income statement topic is that of the income taxes. The effective tax rate for the second quarter was 35.3% and this included discrete items of $1.1 million.

Excluding discrete items, the rate was 37.7% for the quarter and we continue to guide to a full year effective rate of 38%. The discrete items predominantly reflect the release of an uncertain tax position that reached its statutory limitations during the quarter.

So while I’m discussing taxes, there have been recent developments in the tax dispute with the IRS that we discussed on our first quarter call and subject to final documentation, an agreement has been reached that would settled the matter for an amount similar to the $5.9 million that we booked in the first quarter, as an uncertain tax position. So, upon finalization of this settlement with the IRS only a minor adjustment would be needed in the third quarter of this year.

One final comment is to note that we’ve recently amended and extended our revolving facility, the maturity date was extended about 21 months through August of 2016 and a more favorable pricing going to in place on this $325 million facility, which we predominantly used for letters of credit that backed our self insurance programs.

So, with that, I’ll turn it back over to Doug for some closing comments.

Doug Stotlar

Thanks, Steve. Our second quarter results sustained the progress we have made over the past few quarters. I’m particularly pleased with how our employees have responded to the challenges our businesses have faced and have continued to delivery an excellent service experience for our customers. Our strategy is straightforward. We’ll make some incremental refinements as we go along, but our emphasis on improving business fundamentals and increasing margins will continue to be the game plan that drives our results.

That concludes our prepared remarks, so operator we’re ready to open up the phone line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Chris Ceraso with Credit Suisse.

Chris Ceraso – Credit Suisse

Thank you very much. Good morning. Maybe we will pick up where you left off Doug, with your comment about improving margins, what do you think you have to do or really what can you do to punch through 95 and head back down toward the low 90s and what’s a reasonable timeline you think to get there?

Doug Stotlar

Well, we have to keep executing same game plan which we have in place today, which is to continue to focus on our operational efficiencies, continue to focus on pricing improvements and then not and I don’t want to use the word culling, but continue to work on our network balance and making sure we are putting freight in the right lanes and perhaps taking some freight out of some lanes where we have some balance situations. So it’s really focusing on the key fundamentals of LTL.

As far as the timeframe, I don’t know how to predict that and given the – given where the market currently sits as far as uncertainty, I wouldn’t know how to predict that.

Chris Ceraso – Credit Suisse

Have you made advancements recently or gotten better with the technology so you can see where you’ve got the best density and work on that balance and try to add freight in the right spots to help that margin improve?

Doug Stotlar

Yeah. We continue to make incremental improvements on our use of technology and how we’re leveraging our business intelligence systems and so as the year has progressed we continue to make progress on that front and we continue to expect to make progress over the next year or two.

Chris Ceraso – Credit Suisse

Okay. But it all sounds kind of incremental, there is no big step function changes or any big Ah-ha moments that are going to come through?

Doug Stotlar

I don’t see a big step function change, no.

Chris Ceraso – Credit Suisse

Okay. And then just lastly on the pricing front, you saw sequential improvement in yields from Q1 to 2, do you think we’ll continue to see sequential improvements as we go through the rest of the year?

Doug Stotlar

We continue to expect to see yield continue to be positive year-over-year although the comparisons get more difficult as we go through the year, while tonnage comparisons get easier as we go through the balance of the year.

Herb Schmidt

To specifically answer your question about sequential, at this point of time it would be your expectation that we’re able to continue to push the rock up the hill if you will and achieve sequential pricing improvement through the remainder of the year.

Chris Ceraso – Credit Suisse

Okay. Thank you.

Operator

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

David Ross – Stifel Nicolaus

Yeah. Good morning, gentlemen.

Doug Stotlar

Good morning.

David Ross – Stifel Nicolaus

In Menlo you talked about the quality and quantity of debt opportunities increasing or is that more Menlo specific and that you’re being more aggressive in the marketplace at targeting new business or are you seeing just a continued outsourcing trend or more industries more companies or choosing outsource fairly just as a function?

Doug Stotlar

In the truck we are continuing to see both the large multinational companies continuing to outsource and also more what we would called mid market opportunities, where the smaller type companies are venturing now at the outsourcing market and so we’re benefiting from all of these opportunities.

David Ross – Stifel Nicolaus

And then from Menlo’s prospective, can you talk a little bit about truck capacity right now – what the rate you’ve done in the truckload marketplace and are you able to pass along the rate increases you getting from carriers to the shippers?

Doug Stotlar

Yeah. At Menlo we are – we kind of look at it two ways, we have the book of our business is contract. So we’ve contract with carriers which we have long-term contracts and in that space we see a lesser degree of increases coming our way but we are able to pass those on to the customer as the contracts with the customers come up.

And then on the spot market, that’s where you’re seeing a large increase and that’s more in our margin type business where we’re getting one rate from a customer and trying to beat that with a lower rate from a carrier.

David Ross – Stifel Nicolaus

All right. Thank you very much.

Doug Stotlar

Thanks, Dave.

Operator

Your next question comes from the line of Scott Malat with Goldman Sachs.

Scott Malat – Goldman Sachs

Good morning. Thanks. I was wondering on the pace of the business for the quarter and then as you think about what you have seen more recently especially in LTL?

Steve Bruffett

Okay, Scott. We saw – I will call it a flattening during the course of the quarter. So sequentially April was up over March and then May was down just slightly and then June was down just a little bit more. July started out softer than we would have imagined, yet finished a little bit stronger. But in aggregate if you would have looked at what would we normally expect to be a seasonable trend for July, it was down about a percent more than we would have expected.

Scott Malat – Goldman Sachs

All right. Thanks. And just comments from your customers, is that in line with that as we outlook, are you hearing from them?

Steve Bruffett

I was with the customer group last week and they all were still relatively positive about their expectations for the remainder of the year. So at this point, we were kind of banking on petty issue goes. We are not expecting dramatic economic growth or recovery but just more of a steady state environment.

Scott Malat – Goldman Sachs

Okay. Great. Thanks Steve. The other thing I was interested in is just talking about overtime hours and where overtime hours were last year, this time where we are trending this year and trying to understand the cost savings there?

Steve Bruffett

The last year at this time, we were in the mid teens range 15% to 16% and now we’re down to 9% to 10% in overtime.

Scott Malat – Goldman Sachs

Is that 9% to 10% you can expect that to stay there through the rest of the year, it’s holiday season make it tougher to stay in those ranges how do we think about it?

Steve Bruffett

We’ve been running at a pretty comfortable range consistently and this is the time of year when the majority of our – many of our longer-term employees are on vacation and so as they return to work, we will still have a better trained newer employees will be better trained. So we think we can continue to with as what first grows as regulars come back to vacation keep the overtime within that range dealing with the season of demands.

Scott Malat – Goldman Sachs

Sorry. Just last with that that mid-teen 16% or so last year. Did that continue on to the third quarter and fourth quarter last year? Did it get better or just I’m thinking about the comparisons?

Doug Stotlar

It moderated as once we got past the second quarter is a bit more like 12% by the time we got after the fourth quarter and but we’re running below that trend as we speak now and so we would expect that to probably continue.

Scott Malat – Goldman Sachs

That’s helpful. Thanks so much.

Doug Stotlar

Thanks.

Operator

Your next question comes from the line of Scott Group with Wolfe Trahan.

Scott Group – Wolfe Trahan

Thanks. Good morning guys.

Doug Stotlar

Good morning.

Scott Group – Wolfe Trahan

Curt, can you talk about the trends you’re seeing in truckload by month kind of volume and pricing trends were up for quarter and then what you’re seeing into July?

Doug Stotlar

Well, I’d say that the quarter started out with capacity being relatively tight and it has kind of flattened out a bit right on through July, similar to the trends that we have seen in LTL, although I think that capacity is still a bit tighter. I think in the truck haul market space in general than it is in LTL.

Scott Group – Wolfe Trahan

So when we think about 4ish% yield growth and net of fuel in second quarter, can you maintain that price thing in third quarter or do you think it flows from here?

Doug Stotlar

Well, as far as pricing is concerned, I think pricing at this point in the game with the first and second quarter bid cycle behind us, will remain relatively flat. We’ll still get some residual benefit from a few stragglers, but for the most part from our perspective where our capacity is today, pricing will remain relatively flat and I don’t think we’re losing any ground but I don’t think there is a lot of ground to be gained.

Scott Group – Wolfe Trahan

Well, that’s helpful. And then similarly on the margin side, should we be thinking about kind of normal seasonality of getting a little bit better than the 92 or wire in the back half of the year, or given your comments on capacity, loosening up a bit of that, not reasonable to expect?

Doug Stotlar

I think it’s reasonable to expect that we’re going to maintain about the pace that we have right now and throughout the year. And of course it all depends on any additional economic traction or a dip in the economy, but for the most part I see things, as kind of steady as it goes, the way that Doug described it earlier.

Scott Group – Wolfe Trahan

Okay. And then Doug on the LCL side absolute tonnage increased sequentially over the prior quarter for the first time in a year? Does that mean that we are through that the bulk of the calling process at this point, is kind, of the low hanging fruit on the low margin stock, are we through that now?

Doug Stotlar

Yeah, Scott. We’ve really did the aggressive actions to call some business. We’re really in the second and third quarters of last year. By the time, we got into the fourth quarter and the first quarter of this year, really was maintaining the network as it was. There’re some incremental moves you are always doing in LTL. But we’re not doing any actions that are aggressively trying to take tonnage out of our network.

At this point, we want to stabilize the network issue, we were successful in doing that and now it’s just the incremental, going through the process and Herb likes to use the term weed and feed, but it’s going through, incrementally trying to improve your network balance by incenting the freight in the lanes where you need it and dis-incenting it in lanes where you don’t need it.

Scott Group – Wolfe Trahan

Right. So as we look out to the fourth quarter and then 2012 kind of is comps normalized. Do you think we are at the point where we’ll need to see tonnage growth to see incremental margin improvement from here?

Doug Stotlar

I think, certainly as we go forward into 2012, we’re going to expect to start to see some incremental improvements, but I’m not talking about anything wild or dramatic. We’re talking about just incremental improvements going forward. This is the -- during the second half of this year is when we’ll probably get hitting the -- meeting the levels where we brought it down to last year, so it won’t be negative by the time we get into the fourth quarter.

Scott Group – Wolfe Trahan

That’s helpful.

Doug Stotlar

It’s going to be balance of the yield, the yield dynamics and the volume.

Scott Group – Wolfe Trahan

Thanks for the time guys.

Operator

Your next question comes from the line of Jason Seidl with Dahlman Rose.

Jason Seidl – Dahlman Rose

(Inaudible) everybody.

Doug Stotlar

Hi Jason.

Jason Seidl – Dahlman Rose

Steve you mentioned the phrase, pushing the bottle up the hill here in the third quarter, it was in terms of yield. How much of that pressure is going to come from the GRI 6.9% and the 25-year business and how much do you think you’re going to be able to get out a new contractual on those?

Steve Bruffett

I would say that there would be a bit of the lift from the general rate increase, but it’s more about the contractual negotiations as we go through the time. That’s why it’s always been about and quite it remains to be about effectiveness in getting those right -- getting mix within those lines and contractual business closer to where we need it to be.

Jason Seidl – Dahlman Rose

Okay. Thanks for your color. And eventually you’ve thought process behind reinstating some of these costs last time, I think you spoke that you mentioned that it would take two consecutive quarters below and 95 overall, I don’t think it’s pretty close or just above 95 are here and yet you reinstated the following, kind of, transitional costs in the fourth quarter, I mean did you get a dealing from the ranking file that there were some sort of, discourse that you needed to do something just walk us through that thought process?

Doug Stotlar

Well, certainly when we put the criteria in place we did that during the bottom of the bad news cycle of where we are at in 2008, 2009. So we wanted to make sure that we put some goals out there and goals were designed around operating in an environment that was improving in a steady state environment and that our operating fundamentals were improving.

Well, we felt as we entered into the -- as we went through the second quarter that we were seeing kind of attraction the kind of improvement that we are expecting to achieve and we don’t operate in a vacuum that other competitors who have suspended benefits and done payroll reductions et cetera during the downturn, where we’re starting those benefits and so there is always a tension that you have with your employee group trying to do the right thing.

And trying to make sure your cost remain as high as possible, yet doing the right thing by your employees. And so we felt that we were on a sustainable track to where we could comfortably turn these back on and keep our progress moving forward.

Jason Seidl – Dahlman Rose

Okay. Guys, I’ll let somebody ask. Thanks for the time as always.

Doug Stotlar

Jason, we give our employees certainty.

Operator

Your next question comes from the line of Jeff Kaufman with Sterne, Agee.

Jeff Kaufman – Sterne, Agee

Thank you. Thank you very much. Guys, congratulations, real solid quarter. Back when you guys bought CTI, the feeling was that this was going to be a growth business for Con-way and we were going to put a lot of capital into it and let it grow, obviously the recession turned down and you had the fleet aging issue. It seems like the operating ratio is getting back to a level where you might reconsider the growth prospect, I guess, kind of what’s the thinking about the truckload business today?

Doug Stotlar

Well, Jeff, we still believe that the truckload is a business that we can grow in the future. Obviously, everybody is a little bit gun shy about putting capacity back into the market place and during the downturn, capacity rationalized and so no one is out there or not -- there isn’t much mover right now in any of the truckload carriers part to add capacity back until such times where everyone is comfortable that we’re getting the return on capital and that the operating results are sustainable I mean, the environment looks sustainable.

And so right now I think it’s still a little unclear as to how strong the operating environment is going to be and how long this cycle is going to last, so we will continue to monitor the situation, but at some point in time in the future it certainly is a business segment that we believe we can grow.

Jeff Kaufman – Sterne, Agee

What kind of level of whether you measure it to be operating profit however you chose to look at it, at what level do you say, okay this is the return on capital we need and now it makes sense to rethink the growth trajectory here?

Doug Stotlar

Well, it has -- well the operating fundamentals of the business are very important as well as return on capital metrics we’ll be looking at. As important is where do we believe we are in the cycle and we don’t want to be adding capacity back end of the peak of the cycle and then writing it down the other side again. So monitoring the cycle is as important as the operating metrics.

Jeff Kaufman – Sterne, Agee

Okay. Well, congratulations. Thanks guys.

Doug Stotlar

Thanks.

Operator

Our next question comes from the line of Ken Hoexter with Merrill Lynch.

Ken Hoexter – Merrill Lynch

Hey, good morning, Doug when you talked about, not seeing or I guess expecting maybe some negative growth may be into the fourth quarter should we -- are you still suggesting that we should still see third quarter on the LTL side negative comps despite the fact that you mentioned that most of the calling had been past?

Doug Stotlar

Yeah. Because we are still, thus the comparison still difficult for us which was coming down. So we expect to still be negative comps in Q3.

Ken Hoexter – Merrill Lynch

And in turn positive…

Doug Stotlar

And then crossover flattish year as.

Ken Hoexter – Merrill Lynch

Okay. And then can you -- mentioned on the employees that were working, can you talked about are you starting to now expand your base in terms of on the LTL side in preparation for that growth are you still -- do you still have excess capacity how you think about the investment there?

Doug Stotlar

As we -- we’re not planning on adding any incremental tractors to our fleet next year. We have capacity to run network and as we’ve rationalized the volume in our network and tighten our operations. We are seeing opportunities for additional capacity on our network. The addition of our sales tax trailer leading system is certainly increased the capacity of our trailing fleet and so we have capacity and network to grow in the future.

Ken Hoexter – Merrill Lynch

And then to your discussion before on CapEx, can you talk about -- it sounds like obviously overhauling the truckload fleet bringing down that age. Can you talk about what you are doing at this point on the LTL fleet, are you also doing the same in terms of investment, can you just say kind of what percent has been refreshed at this point?

Steve Bruffett

Hello. This is Steve, we are making incremental improvement with the freight fleet as well, it’s at a slower pace given our investment in the truckload fleet that’s taking place now at a more rapid clip and once we get that where we want it which is targeted for the third quarter of next year then we will -- the plan is to pick up the pace a bit on the freight side.

But at the same time we purchased something like 1300 tractors last year at Con-way freight and we will purchase in excess of 900 this year and our fleet size is roughly 9200 tractors at and average usage of ten years, average life of 10 years, so if you buy 9200 by ‘10 so it’s roughly 900 a year that would need to maintain fleet age and we are running at or ahead of that clip a bit, so that helps to answer your question and then we will pick up that pace a little as we get into 2012.

Ken Hoexter – Merrill Lynch

I see, that’s great stuff. And then lastly if I can just throw one other on the truckload side, you talked about the shift maybe a year and half ago from kind of internal usage to outsourcing to going into the market has that shift being completed, are you now as you enter and what are your thoughts now as you enter the market as that market maybe starts to deteriorate here with some excess capacity. Can you bring some of that back in-house or is there a desire to keep that in the open market?

Doug Stotlar

Well, we haven’t seen a need to bring anything additional in-house we’re at the similar run rate to what we were after we consciously de-levered and went to more non-affiliate business, healthier mix of non-affiliate business and as of now the demand for our equipment has been such that we’ve maintained about the same trajectory we had just post de-levering last year.

And Ken, as you recall the whole premise was that we saw that it looks like external market was going to be becoming more conducive to growth and rate increases. And so when you contract with freight you’re contracting for at least an annual period and sometime multi-year periods.

And so the opportunities for rate increases would be limited with that book of business. So we’re repositioned the fleet a little over a year ago to put ourselves in a position to the market changing and I think Herb’s demonstrated the use very successful in doing that repositioning.

Ken Hoexter – Merrill Lynch

And what percentage is non-affiliate versus affiliate for the freight?

Steve Bruffett

The percentage of Herb’s fleet, in that affiliate business versus non-affiliate.

Doug Stotlar

Ken we’re running about $48 million run rate with freight right now, down from 155 to 157 run rate million.

Ken Hoexter – Merrill Lynch

Great. Appreciate your time.

Operator

Your next question comes from the line of Todd Stover with KeyBanc Capital Markets.

Todd Stover – KeyBanc Capital Markets

Great. Thank you. Good morning.

Doug Stotlar

Hi, Todd.

Todd Stover – KeyBanc Capital Markets

Good morning. Doug going back to the freight yields, sequentially excluding fuel versus the first quarter, I’ve them been up 1%, is that the right way to think about the progression as you replace some of the contractual freight, so is that realistic to expect that going forward, not factoring in the GRI?

Doug Stotlar

It looks Steve looking at the charts, I’m looking at Steve for…

Steve Bruffett

That’s a general range that we were able to accomplish sequentially first quarter to second and that’s our objective is that there is a slow steady progress in improving the portfolio. So target -- say exactly what that number will be in the third quarter and fourth quarter but that’s our objective to keep moving it along the same steady path.

Todd Stover – KeyBanc Capital Markets

Okay. So based on timing of contract renewals and those sort of things that’s probably a good proxy to think about for the base business?

Doug Stotlar

Correct, somewhere in that zip code.

Todd Stover – KeyBanc Capital Markets

Okay. Great. And then looking at incremental margins, obviously there are little bit of out of whack looking at the or considering what the comparisons are but you are looking at the operating ratio on a year-over-year basis in freight, I’ve got it expanding 260 basis points, freight revenue was up about 280 basis points, is there a point where you gain some additional efficiencies where the operating ratio can expand at the greater clip than what -- with revenues increasing or you had a period where really is the driver from pricing coming through and as you get the comparisons on the tonnage side that that’s going to help really lift the operating ratio?

Doug Stotlar

It’s both of those factors, it’s the -- rest of the improvement in the pricing and then balancing that with the tonnage demand on the network and along the way we are also trying to focus on operating efficiencies, so we can continue to take some cost out of the network and incrementally improve the margins from that perspective.

Todd Stover – KeyBanc Capital Markets

So just to make sure that I understand I mean, on the efficiency side are there some levers that you can pull, some things that you see in the next couple of quarters that you think you can get some margin improvement from the efficiencies or I mean, have you realized most of those at this point?

Doug Stotlar

No. I mean we are looking at the network if there is continues improvement opportunities so we are always trying to look for incremental improvements and we think we have a long list of opportunities ahead of us. Many of them requires project management to attack those things and we’re doing several initiatives within the line haul network.

And how we’re handling, managing our capacity in the line-haul network and we have several opportunities within the P&D environment and scheduling. And so we continue to believe that over the next several years, we’ve got plenty of incremental opportunities ahead of us that will continue to show margin improvement as we go through time.

Todd Stover – KeyBanc Capital Markets

Okay. Great. And then two last ones, one on memo, obviously nice performance here in the second quarter. We saw something similar to that in the second quarter of last year, but then sequentially just looking at the level of operating income we’re trailed off. How should we think about memo’s contribution for back half of the year relative to what happens during the second quarter?

Bob Bianco

Hi Todd, this is Bob. We feel our business model is operating very well right now and we expect to maintain in the area that we are at in the second quarter -- or second half I’m sorry.

Todd Stover – KeyBanc Capital Markets

So the $12 million of operating income, Bob, I mean that’s a good place holder to use for the third and fourth quarter?

Bob Bianco

I won’t say that, but we don’t obviously forecast earnings going forward, we look at forward looking guidance, but we feel good about our business model right now Todd.

Todd Stover – KeyBanc Capital Markets

Okay. And I understand that. I just want to -- I think that last year and the second quarter there were some performance indicators that you hit, I’m just trying to get a sense of where there some of those during the second quarter this year that wouldn’t be referring in the back half?

Bob Bianco

Yeah. We don’t see any big negative things on our horizon that would cause the dips that we saw last year in our operating performance going forward.

Todd Stover – KeyBanc Capital Markets

Okay. I think I have got where you guys are going with that. The last one and then I’ll turn over, currently others during the quarter although a little bit of a loss. I’m curious for some color there and your expectations for what that business should do going forward?

Steve Bruffett

This is Steve. I’ll talk tackle that one. The predominant amount in that 1.1 whatever million loss and other was driven by reinsurance pool that we participate and that involves a number of other companies outside of our space that we pool risk together on work is comp predominantly. Our performance in claims experience has improved significantly this year and so ironically that performance was better than the pool, which results in a charge to us if you will. So that’s what you’re seeing there and it there has been advent flow to it as we go through time, our experience versus that of this self the reinsurance pool. And so we wouldn’t expect necessarily that order of magnitude next quarter, but it’s just difficult to predict at this point.

Todd Stover – KeyBanc Capital Markets

And so is there a one-time true up in the quarter or is that going to be?

Doug Stotlar

This is an ongoing measurement every quarter, so we assess where our pool, where our experience is versus that of the pool and look up or down accordingly. It is usually not that large. It’s always in this line. It just usually doesn’t show up very much.

Todd Stover – KeyBanc Capital Markets

Okay. Great. Thank you for the time.

Operator

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

Chris Wetherbee – Citi

Great. Thanks. Good morning, guys.

Doug Stotlar

Good morning.

Chris Wetherbee – Citi

Maybe if you could comment a little bit on your kind of margin progression as you made your way through the second quarter, it seems to kind of coming out of -- coming out of 1Q that you’re maybe running, maybe close to 95 or maybe slightly better based some of the comments on the last call. I’m just kind of curious, did you see any meaningful progression one way or another as you progressed in the second quarter on margins?

Doug Stotlar

We typically don’t give out any type of operating ratio or margin per month, but, you know, if you just follow the historical calendar, June is always one of your strongest -- is going to be your strongest month in the second quarter. And the same thing as we go into the third quarter, July is going to be your softest and September and October are going to be your strongest month. So it’s really follows more of the cyclical calendar of the freight environment.

Chris Wetherbee – Citi

Okay. And just trying to kind of you reconcile that with the -- some of the sequential numbers that you have given us for the quarter with April being up a little bit and then May and June I think tailing off a little bit, would that be -- does that sounds a little atypical from a seasonal freight perspective, I’m just trying to get a sense of, you know would you imply that maybe there would be some potential margin pressures as a result of that, that would be atypical to the normal seasonality?

Doug Stotlar

Well, we don’t, at this point -- we’re certainly hoping for typical seasonality, which would have been a little bit stronger than that. And we didn’t see that. July was a little a bit softer than what we’re expecting from a seasonality standpoint by about 1%. It’s too early to tell or make any indicators in August. And at this point, it will be very difficult, I think for any of us to predict what the seasonal peak will be, if there is a seasonal peak this year.

Chris Wetherbee – Citi

Yeah. And I guess I was kind of, my next question was -- any indication from customers as far as how they feel about business activity obviously with some of the macro data we’re seeing, probably a little bit of a concern about selling out here, but I’m just curious, any thoughts there or is it just too difficult -- don’t have a lot of forward visibility at this point?

Doug Stotlar

No. We really don’t have any forward visibility at this point.

Chris Wetherbee – Citi

Okay. And I guess my last question would be on the yield side, I think you gave some sense on the sequential basis, you know, where we should be thinking about yield as we move into the third quarter, but I guess just for the month for the July from a year-over-year perspective, you know, kind of better than the core 6% you did in 2Q, you know, kind of flat or slightly down, is there something where we should be thinking about that from a modeling standpoint?

Dough Stotlar

I think if you use 6% you are in good shape.

Chris Wetherbee – Citi

Fair enough. Well thank you very much for the time I appreciate it.

Doug Stotlar

Thank you.

Operator

Your next question comes from the line of Jon Langenfeld with Baird.

Ben Hartford – Baird

Good morning guys Ben Hartford in for John. Doug, on the freight network balance that you’ve talked about, I’m looking at that average load factor and it is up modestly kind of comparing to peak levels during the previous cycles up, weight-per-shipments up, so kind of shipments are still down and it appears on a load basis what’s the direction of this load factor? Is that something that we can look at to help gauge what you’re talking about as it relates to network density? Is there the opportunity to optimize that factor, can you provide a little bit of color there?

Doug Stotlar

Certainly the load factor is an important metric in our industry and we’re going to continue to focus on it. We have had some movement though we have seen weight-per-shipment actually starting to come down as we progress through the quarter and we have also seeing our length of haul get a little bit shorter and lot of that -- some of that is very conscious efforts on our part.

We have more opportunities to improve load factor in our next-day pipelines where we have some imbalances, certainly focusing on that. So I wouldn’t be surprised to see our length-of-haul continue to remain at the level or you actually pull back or get just a little bit shorter as we go through the third quarter, but load factor is going to move around a little bit as we go -- as we focus on somebody’s initiatives, but certainly our -- it is a good proxy for one of our key operating metrics and of course it’s an efficiency metric on how we are utilizing our line hold network.

Ben Hartford – Baird

So the shrinking weight per shipment and length of hauls also you are getting -- you are reverting back to characteristics as the middle part of last year. How far are you in terms of, in your view restoring your historical premium to the market as it relates to price and freight profile?

Doug Stotlar

Well. We feel like the profile is moving into a range where are very comfortable with. And as far as premium price that’s really hard for me to say, we know there are some areas where we can command the premium price and there are some areas where we can’t and so it will be very difficult for me to predict or say with any certainty what the premium looks like going forward or how much of a premium there is in our product going forward.

Ben Hartford – Baird

Okay. And then lastly just to tell what we try to get out of this pricing discussion, is it fair to think about, you know, certainly we have the GRI layering on in the 1st of August and I think by mid-August of last year is when you began an earnest -- addressing the contractual rate, so are we getting to the point that when you end the third quarter of this year you’ll have lapped this round of pricing both on the tariff side and on the contractual side and then the fourth quarter and beyond we are starting new on the contractual side, any rate gains will be incremental to the efforts that you have put forth over the past four months?

Doug Stotlar

Yeah that -- I think the way you are thinking about it is accurate and certainly as we have seen the -- when we look at the yield in comparisons year-over-year, we are seeing the year-over-year comparison get a little bit tougher because obviously we did have start to get more traction as we went to the second half of last year just to give you a example of how this quarter trended on a year-over-year basis April yield was up by 7.4%, May yield was up by 5.4% and June was up by 5%. So it is getting tighter as we have the year-over-year lapping.

Ben Hartford – Baird

Got it. Great. Thanks for your time.

Operator

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

David Campbell – Thomson Davis & Co.

Yeah. Good morning. I want to ask you what you felt about road-rail -- there have been times in the past years when you look like road-rail was losing business because their service was not as good as it should have been and because they were losing some decreases their business, is that still a factor and the way you’re looking at the market or can you tell whether they’re losing anything or just what the situation is there?

Doug Stotlar

Dave, we really aren’t focusing on any one competitor. We look at the whole marketplace as our competitive landscape. And so, you know, we know what we need to do to move the ball down the field as far as improving our margins and our fundamentals. And so, I think it would be inappropriate for me to talk about a single on any single competitor in that effort.

David Campbell – Thomson Davis & Co.

And you’re really not trying to increase your market share what you trying to focus on is profitability as basically what you doing is that correct?

Doug Stotlar

Absolutely, I think you’ve certainly see that in our tonnage levels and you are certainly seeing that in our margin improvements.

David Campbell – Thomson Davis & Co.

Okay. Thanks for having a good quarter.

Doug Stotlar

Thanks Dave.

Operator

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

Rob Salmon – Deutsche Bank

Hey, good morning guys. It’s Rod Salmon on for Justin.

Doug Stotlar

Good morning.

Rob Salmon – Deutsche Bank

As we think about yield -- obviously there is a little bit of deceleration in terms of the year-over-year growth, but if I’m looking at kind of the length of haul and the weight per shipment, those factors looks like they were coming down as well. Could you talk about if you’re adjusting for mix as well kind of how you feel the yield progressed throughout the quarter?

Doug Stotlar

I don’t know whether they have a normalized number for how the quarter progress. Sequentially there wasn’t a big difference in normalized versus reported, if you will, those mixed factors of weight per shipment and length of haul almost offset each other. So there wasn’t an overwhelming difference sequentially.

Rob Salmon – Deutsche Bank

I guess that’s helpful and when we’re thinking about the contractual rate increases for the Q2, how did those look like relative to kind of they’re afford to get of the imagine they’re little bit lower because you’ve got some of the benefits from some of the contracts which were kind of non-normal which went below market during the downturn, how should we think about that?

Doug Stotlar

Well we’re just trying to take a steady hand with our contract negotiations and we’re looking at everyone individually and we’re also looking at the components of each contract and there are certain areas of the country where we can get higher increases and there are certain portions of the country where it’s a little bit lower, it’s primarily directional and length specific, but again each contract stands on its own merits, but we’ve been pleased that with the level of increases that we are achieving as we re-negotiate these contracts and they are in the mid single-digit range.

Rob Salmon – Deutsche Bank

That’s really helpful. And I guess kind of final question before I turn it over to someone else. You guys talked a lot about kind of the opportunity to improve net mix as well as drive network efficiencies on the call. It sounds like you got a good pipeline there. If I’m thinking about some of the cost increases that are going to be coming on in Q4, do you guys feel conviction that you’ve got the ability to offset those incremental cost from the help and benefit side, as well as 401K with potential savings off of the productivity initiatives?

Doug Stotlar

Well certainly productive initiatives are a portion of it, but again will be another, by the time we get to the fourth quarter, will be another couple of months into price renegotiations, both contractually and we have had a two months of GRI on our non-contractual business. So, we believe we have the ability to offset that cost.

Rob Salmon – Deutsche Bank

Very helpful. Thanks a lot for your time guys.

Doug Stotlar

Thanks, Rob.

Operator

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

Tom Wadewitz – JPMorgan

Yeah. Good morning. I wanted to ask you Bob, I guess this is probably for Doug and maybe Herb as well. If we do see, an unfortunate move down in the economy and the flow through due to the freight and a downturn in freight which market do you think will prove to be more resilient on pricing in terms of LTL or truck?

Bob Bianco

I guess my take on that would be that truckload is probably a little bit tighter from a capacity standpoint than LTL. I believe LTL is right at equilibrium right now, but truckload is, I mean, it’s very, very sensitive to the demand. So I think truck would probably remain just a little bit tighter than the LTL segment, just my hunch.

Tom Wadewitz – JPMorgan

Okay. How much economy, or how much growth in the freight market, when you look at 2012, do you think you need to for LTL that continue to see constructive pricing and for you a pretty good margin expansion story. If you have a low-growth economy, does that formula keep working you think, 1% growth in the freight, 1% or 2% growth in GDP or do you think you need a little more than that to keep the strong margin momentum that you have in place at the present time?

Bob Bianco

I think if we continue to remain in a low growth environment, we think we can continue to improve our margins. Now, it’s going to be slow, but hopefully steady progress on that front. It won’t be a dramatic improvement unless the environment gets considerably stronger over the next several quarters.

Tom Wadewitz – JPMorgan

All right. Okay. Great. That’s all I’ve got. Thanks for the time.

Bob Bianco

Thanks.

Operator

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

Neal Deaton – BB&T Capital Markets

Hey guys, good morning. Congrats on a good quarter. Just a couple of quick questions, start off with the maintenance question or two. I know you talked, kind of about sequential trends and everything. Did you -- I don’t think you gave a June and July year-over-year tonnage number, did you?

Doug Stotlar

Year-over-year tonnage numbers Neal, let me grab that sheet. It was -- tonnage was down 8.8% year-over-year in April, 7.9% in May and 7% in June.

Neal Deaton – BB&T Capital Markets

Okay. And do you have a July figure, you can share with us? While you’re looking for that let me just ask another question. Did you say Steve to go that your core pricing increases on the contract when you open the second quarter or kind of mid single-digit, is that what you said?

Steve Bruffett

Yeah.

Neal Deaton – BB&T Capital Markets

Okay. And then just one other of odd question you talked about that lot, but with the lot of things going on you are restoring your benefits which obviously they could sign and but if you look from a historical perspective based on our math like from the second quarter to third quarter and history you or just curious about 65 basis points or so but obviously you did an admirable job during the quarter of reducing your expenses as a percentage of revenue and both year-over-year and sequentially. Is it fair to assume that you’ll have some sequential or a lot of improvement in the third quarter?

Doug Stotlar

Maybe. I mean – whereas, you know, concerned about the ongoing -- what the environment looks like as I think everyone on the phone is right now and we don’t have a crystal ball either. If we were continuing to see a really steady-state environment there is no contraction at all. That’s quite possible, but we don’t know.

Neal Deaton – BB&T Capital Markets

Okay. But while we are on the historical topic, just looking back at your model we observed that from kind of a 1997 to 2005 time period, you all usually saw your earnings increased from the second quarter to the third, that’s been really from kind of 5 to 10 which really the offset trend there are any explanation for that at all, I know that’s over encompasses a lot but just wanted to know what might have changed?

Steve Bruffett

This is Steve, from my perspective there has been a change a bit in seasonality in the LTL space, what we all -- those of us have been in the space a long time used think of as normal seasonality. There was this peak shipping period in back-to-school leading me up to Christmas and all of that, that has become more muted in that time periods you referenced 2005, 2010.

Of course there is the economic recess that happened in that time period as well. I think that has as much as to do with it as anything, secondary cause could be somewhat our mix of business and how it has shifted a bit over time and the shipping patterns within our particular book of business.

Neal Deaton – BB&T Capital Markets

Okay. That’s helpful. And just one last and real quick, regarding your 401K, I know that you are bringing it back to benefits, is there anything else related to 401K at all that’s coming back as far as – basically the match is coming back right?

Doug Stotlar

Yeah. These were for our longer tenured employees who were involved in our company when we froze -- when we suspended DB plan back in 2006 and so these were what we call the basic and transition contributions for that group. There is a 401K match that, at this point we have no decision on yet.

Neal Deaton – BB&T Capital Markets

Okay. I felt there was another element too. Okay. That’s very helpful. Thanks for the time guys, thanks.

Doug Stotlar

Thanks Neal.

Patrick Fossenier

Operator, could you give the replay information one more time please?

Operator

Again, this call will be available for replay beginning at 1 o’clock PM Eastern Standard time today through 11:59 p.m. Eastern Standard Time on Friday August 19, 2011. The Conference ID number for the replay is 763-245-74. Again, the conference ID number for the replay is 763-245-74. The number to dial for the replay is 1800-642-1687 or 1706-645-9291 or our new replay numbers are 1855-859-2056 or 1404-537-3406. This concludes today’s conference. You may now disconnect.

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