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Con-Way Inc. (NYSE:CNW)

Q4 2011 Earnings Call

February 3, 2012 8:30 am ET

Executives

Douglas Stotlar – President, Chief Executive Officer

Stephen Bruffett – Executive Vice President, Chief Financial Officer

Greg Lehmkuhl – President, Con-Way Freight

Herb Schmidt – President, Con-Way Truckload

Robert Bianco – President, Menlo Logistics

Patrick Fossenier – Vice President, Investor Relations

Analysts

Jason Seidl – Dahlman Rose

Todd Fowler – Keybanc Capital Markets

Bascome Majors – Susquehanna

John Barnes – RBC Capital Markets

Justin Yagerman – Deutsche Bank

Scott Group – Wolfe Trahan

Chris Wetherbee – Citi

John Godyn – Morgan Stanley

Ken Hoexter – Merrill Lynch

Chris Ceraso – Credit Suisse

David Ross – Stifel Nicolaus

Operator

Good morning. My name is Brandy and I will be your conference operator today. At this time I would like to welcome everyone to the Con-Way Inc. Fourth Quarter and Year-End 2011 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. At that time, if you would like to ask a question, press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key.

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, Brandy. Welcome to the Con-Way Fourth Quarter and Year-End 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 would 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 and should not necessarily be relied upon as predictions 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 operation and financial condition. 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 forward-looking 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. Our financial and operating statistics are also available on our website in the Investors section.

I’d also like to note that we have a lot of people on the call today, so we’d appreciate it if you’d limit yourself to a couple questions and then return to the queue.

Now without further ado, I am pleased to turn it over to Doug Stotlar.

Douglas Stotlar

Good morning. On the call today, I’m joined by members of our senior leadership team, including Con-Way’s CFO, Steve Bruffett; Con-Way Freight President, Greg Lehmkuhl; Menlo Logistics President, Bob Bianco; and Con-Way Truckload President, Herb Schmidt. Steve will provide some commentary on our financial picture, and Greg, Bob and Herb will participate in the Q&A portion of the call.

The fourth quarter results capped a year of improvement driven by operating discipline in all of Con-Way’s core businesses. Our employees are executing well against a consistent strategy which is delivering results as we continue to focus on our fundamentals of safety, service, and margin expansion.

Turning to our financial results for the fourth quarter of 2011, Con-Way reported consolidated revenues of 1.32 billion, up 8.7% over last year’s 1.21 billion. On an operating income basis, we earned 49.9 million in the 2011 fourth quarter, which included a 10 million gain from the settlement of a dispute related to Chic Logistics. This compared to the 15.8 million we reported in the fourth quarter of last year.

Diluted earnings per share were $0.41 compared to $0.04 per share in the prior year period. On a non-GAAP basis, earnings per diluted share in the 2011 fourth quarter were $0.26 compared to $0.02 in the prior year. Looking at the full year for 2011, Con-Way reported revenue of 5.29 billion, a 6.8% increase from 2010. Net income for 2011 was $1.58 per diluted share or 88.4 million compared to $0.07 per share or 4 million in 2010. On a non-GAAP basis, 2011’s full-year earnings came in at $1.53 per share compared to $0.47 in 2010.

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 fourth quarter operating income of 19.6 million compared to 1.8 million earned in the fourth quarter a year ago. Operating discipline improved network balance, prudent cost management and steady increases in pricing all contributed to the quarter’s results. Revenue was 796.2 million, an 8.2% increase over last year’s revenue of 736 million. This increase was mostly the result of improved pricing and higher fuel surcharge revenue. Con-Way Freight’s operating ratio this period was 97.5 compared to 99.8 in last year’s fourth quarter.

Tonnage per day, which increased 8/10ths of a percent over last year’s fourth quarter, reflected normal seasonal trends. Revenue per hundredweight or yield increased 8.3% in the quarter compared to the prior year. Excluding fuel surcharge, the increase in yield was 4.3%.

Over the past few quarters, we’ve provided a view into tonnage and yield trends for the first month of the current quarter. For January 2012, we kicked off the new year with an uptick in tonnage as our weight per day rose 3.3% compared to last year. On the yield side, we saw improvement here as well with January’s yield, excluding fuel surcharge, up 4% compared to January 2011.

For 2012, safety and margin expansion remain top of our priority list. Con-Way Freight has a number of projects underway to achieve further gains in safety and performance of our customers, network efficiency, and pricing sophistication. We are focused on results in all of these areas and expect to see progress as we move through the year.

Now I’ll move to our logistics segment. For the 2011 fourth quarter, Menlo Worldwide Logistics, our global logistics and supply chain management operation, recorded operating income of 21.3 million. This included the 10 million gain for the settlement of the dispute over Chic Holdings acquisition. Excluding that gain, operating income was 11.3 million compared to 6.7 million of operating income Menlo had in last year’s fourth quarter.

Revenue for the quarter was 408.9 million, an increase of 11.4% over the prior year revenue of 367 million. The increase can be attributed to growth in revenues for both warehousing and transportation management services. Net revenue, or revenue minus purchase transportation, came in at 157.6 million, a 9.6% increase from 143.8 million in the previous year period. Menlo had a strong finish to 2011 and we expect this business unit to carry that momentum into 2012. Our supply chain management company is positioned for continued growth with international markets a bright spot and the volume of prospects coming through our North American sales pipeline ahead of last year’s pace.

Now I’ll review the results at Con-Way Truckload. For the 2011 fourth quarter, Con-Way Truckload had operating income of 9.5 million, a 31.4% increase over the 7.3 million earned last year. Higher revenue per tractor and gains in pricing underscored the quarter’s improved profit results. Revenue increased 8.8% to 155.6 million over last year’s fourth quarter revenue of 143 million. The revenue growth can be attributed to higher fuel surcharges and improved revenue per loaded mile, which increased 3.4% over the previous year. The operating ratio ex-fuel surcharge improved to 92.1 from 93.8 in the year-ago period. Con-Way Truckload continues to do an excellent job balancing its network, managing empty miles, and recruiting effectively to keep its fleet fully seated, all of which contribute to its market position as a premium service carrier. Con-Way Truckload has initiatives underway to improve fleet utilization. With industry capacity remaining relatively stable, our truckload company is positioned well for further margin expansion in 2012.

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

Stephen Bruffett

Thanks, Doug, and good morning everyone. I’ll begin with a recap of our full-year cash flows. Cash from operating activities was 345 million in 2011 as compared to 185 million in 2010. The $160 million increase was primarily driven by an $84 million increase in net income and a 74 million benefit from the tax effects of 100% bonus depreciation in 2011.

Net capital expenditures were 284 million in 2011, which was in line with our guidance and compares to 162 million in 2010. During 2011, about 240 million of the 284 million was for tractors and trailers as we continued our multi-year fleet replenishment plan.

Financing activities consumed 41 million of cash in 2011 compared to 79 million in 2010. Our 2011 financing activities were split mostly between capital lease repayments and common dividend payments. This cash flow activity resulted in cash and marketable securities of 451 million at December 31, 2011, which compares to 421 million at the prior year-end.

Moving now to the balance sheet, the most notable items were the year-end entries for our defined benefit pension plans. Pension assets and liabilities were valued on December 31 to establish funded status for accounting purposes, and while the plans achieved modest asset returns during 2011, lower discount rates increased the point in time measurement of these liabilities. As a result, an additional 264 million of liability was reflected on our year-end balance sheet in the employee benefits line. Sixty percent of this, or 161 million, also shows up as an increase to accumulated other comprehensive loss, which is a component of total shareholders equity. As a result, total shareholders equity declined year-over-year despite a sizeable increase in retained earnings.

On the income statement, there are just a few items that Doug hasn’t already covered in his operational review. The first of these is healthcare expenses, which were 48.5 million in the fourth quarter of 2011, which was in line with our guidance of 45 to 50 million; and in last year’s fourth quarter, these expenses were 50 million. For the full year 2011, healthcare expenses were 172 million as compared to 170 million in 2010. While there was a lot of variation by quarter between 2011 and 2010, the full-year expense ended up in a similar place for both years.

The second item involves long-term disability benefits. This typically is not a large expense and therefore we normally don’t comment on it; however, given the timing of this expense recognition in 2011, it merits a quick overview. In the fourth quarter of 2011, 5.3 million of expense was recognized as compared to 942,000 in the fourth quarter of 2010. Most of the year-over-year variance was due to an actuarial valuation that increased the healthcare cost projections inherent with this program. The balance sheet liability for this item was increased in line with the valuation, which resulted in above-normal fourth quarter expense recognition, with most of this expense being recognized in the freight segment.

The final comment I’ll make on the fourth quarter income statement is to remind of the 401K benefits that were restored during this quarter. Those retirement benefits reflect approximately 4 million per quarter of expense that is now back in our cost base as we move forward.

As we look ahead into 2012, I’d like to provide some perspective on how we are viewing the year. First, we are experiencing a relatively stable slow-growth economic environment and our forward-looking comments assume that these operating conditions remain throughout the year. Next, having built a solid and sustainable platform during 2011, we entered 2011 with an ability to focus with few distractions on the margin expansion opportunities across the enterprise that Doug has outlined. It’s our belief that these initiatives should outpace the cost increases that we anticipate during the course of the year.

On the topic of cost increases, there are a few items to which I’d like to provide some visibility. The first of these is salaries and wages. We do plan to provide salary and wage increases for the majority of our employee base effective April 1, 2012. These are the first true pay increases since 2008 and we anticipate that these will involve about 11 million of additional quarterly costs, including the impact on payroll taxes and employee benefits. Next, we expect that our defined benefit pension expenses will be approximately 9 million for 2012 as compared to nearly no expense recognized in 2011. The increase in expense resulted mostly from amortization of unrecognized losses, which in turn were driven by lower interest rates. We also anticipate that depreciation expense will increase to about 220 million in 2012, and that’s up from 203 million in 2011 as we continue to move our fleet ages closer to the targeted ranges.

For the tax rate, we are estimating an effective rate of 40% for 2012 and we expect that we will have 56.7 million fully diluted shares on average for 2012.

Moving to 2012 cash flows, we expect net CAPEX to be about 300 million. That’s up slightly from 284 million in 2011, and this amount is consistent with the multi-year capital plan that we established in 2010. We also expect to fund the pension plan with at least 50 million of cash contributions in 2012, and we’ll consider funding up to 100 million in total depending on a variety of factors, including the funded status of the plan.

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

Douglas Stotlar

Thanks, Steve. As I look back on our results for the year, we made a lot of progress and accomplished our key objectives, and that translated into meaningfully better performance in 2011 as reflected in net income per share being more than triple that of last year and operating income that more than doubled. We achieved these results because our engaged employees responded and delivered consistent performance against our goals.

A good example of our ability to execute and drive results is in the area of safety. In 2010, we made a commitment to become world-class in safety, our top core value. In 2011, we achieved double-digit reductions in accidents and injuries and made real progress with safety. That’s one example of a large enterprise initiative that’s getting results. We have several other initiatives well underway as part of our multi-year plan to drive consistent operational improvement. With a clear path forward, focused and engaged employees, and the highest service capability in the industry, our progress will continue.

That concludes our prepared remarks; and Operator, we’re ready to take some questions.

Question and Answer Session

Operator

At this time, if you would like to ask a question, press star then the number one on your telephone keypad.

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

Jason Seidl – Dahlman Rose

Good morning, guys. How’s everyone today?

Douglas Stotlar

Good morning, Jason.

Jason Seidl – Dahlman Rose

I want to concentrate on the freight segment a little bit here, Doug. You guys went over some puts and some takes for 2012, and you mentioned that you have firm-wide a lot of initiatives to sort of increase productivity and save on some costs. I was wondering if you can go through those on the freight side with us, and then sort of remind us where you guys think you’ll be at in terms of being able to get pricing on that segment.

Douglas Stotlar

Sure. So I’m going to have Greg comment on some of the initiatives we had going on this past year, and then Greg, if you want to give some color on pricing in Q4?

Greg Lehmkuhl

Sure. I’ll start with pricing. So Q4 pricing remains steady. When you adjust for weight per shipment and length of haul and you look at sequential quarters 4 to 3, our price increased 1.3% in the fourth quarter, which is consistent with the prior couple quarters.

Jason Seidl – Dahlman Rose

That’s sequentially, right?

Greg Lehmkuhl

Correct.

Jason Seidl – Dahlman Rose

Okay.

Greg Lehmkuhl

Looking into 2012, we expect that the yield increases would be mid-single digits. Supply and demand seems fairly balanced, and we’re confident that we’ll continue to get fair price increases from customers.

On the cost side, we had a lot of initiatives, as Doug talked about, focused on productivity improvement. If you look at our progress this year, despite the fact that we had 5% less tonnage than we had in 2010, which is obviously a productivity headwind, we improved our dock operations productivity by 5%, our P&D by 2.3, and our overall line haul network by over 1%. If you look in January so far, we’re continuing with similar trends in improvement. So we have a lot of productivity projects lined up, many of them in the second quarter, primarily focused on dock productivity and line haul efficiency.

Safety is another area that Doug talked about, but we’re intently focused on safety again this year. If you look—Doug talked about double-digit decreases in accidents and injuries in 2011. It was actually 14% in accidents and 28% in injuries. Going into this year, we’re continuing that progress. In January, we saw our accidents down 20% year-over-year and our injuries down a whole 40%, and this focus and progress in safety led to a workers’ comp reduction of $17 million year-over-year, ’11 over ’10. So we have a lot of great projects lined up and we’re confident that we can continue to make cost progress.

Jason Seidl – Dahlman Rose

And Greg, when you look at the tonnage and how it’s spread out in sort of different segments, I’m sure it’s not just all you’re going to raise pricing 5%-plus. How much do you have to rework in terms of the freight you’re currently hauling, in terms of whether it’s mix is sort of national accounts versus smaller to midsize accounts? How much is left there to move the needle for you guys?

Greg Lehmkuhl

I think we certainly—there certainly remains mix opportunities for us. We’re working hard at improving our pricing sophistication and putting fair pricing in for our customers on a lane basis to incent business in the lanes where we can operate it most efficiently and reduce our overall costs. So I think there is certainly runway for us to improve our mix. We don’t have the same level of pure price opportunities that we had, say back in 2010, because most of our most egregious accounts have been (inaudible); however, there’s always outliers whenever you have the number of accounts that we have.

Jason Seidl – Dahlman Rose

Okay. Gentlemen, thank you for the time, as always.

Douglas Stotlar

Thanks, Jason.

Operator

Your next question comes from the line of Todd Fowler with Keybanc Capital Markets.

Todd Fowler – Keybanc Capital Markets

Great, thanks. Good morning, everybody. Doug, can you talk about what your expectations would be for the freight operating ratio as you get into the first quarter? I know that the comparisons last year are actually a little bit challenging, given the weather and some of the issues. It feels like freight trends (inaudible) are pretty stable here to start the quarter, but what would you expect to see the OR do sequentially into the first quarter?

Douglas Stotlar

Well, we’re not quoting guidance and giving that kind of granular detail; however, as Greg mentioned, we are starting the year on a much better note than last year. Certainly the winter weather is wind in our sails. We are seeing our tonnage increase. Greg indicated our productivity enhancements continue to bear fruit, or I should say the projects we’re focused on; and so we’re actually pretty pleased with how the year has started and actually feel a lot better about how this year is beginning than certainly we felt last year at this time.

Todd Fowler – Keybanc Capital Markets

So let me ask it this way – does it feel like you can get something maybe a little bit better than normal seasonal trends in the first quarter, given some of the things that you’re talking about?

Douglas Stotlar

Well, I want to hedge just a little bit only from the perspective that we truly don’t know what demand trends are really going to look like until we get to March. I mean, every year, January and February are two of our more dicey months. We’re pleased with how January turned out and we’re not far enough into February to have drawn any conclusions. But so far, so good.

Todd Fowler – Keybanc Capital Markets

Yeah, I mean, if we’re going to get six more weeks of winter from the groundhog, I’ll take this winter, so. The other question I have on the freight segment is the purchase transportation did come in a little bit higher than what we were looking for, and as a percent of revenue up a little bit on a sequential basis. Does that have to do with the increase in tonnage that you have to have to deal with, what’s going on with the sister truckload company? Can you talk a little bit about the purchase transportation line in the freight segment?

Greg Lehmkuhl

Yeah, this is Greg speaking. We haven’t changed our philosophy on purchase transportation at all. We’re not making a strategic shift toward doing so; but on a daily basis given the mix of shipments that we are dealt by our customers, we optimize the network and make decisions about what to put on our equipment versus purchase trans. In the fourth quarter, lanes where we do use a higher percentage of purchase trans were slightly higher than on our own equipment. The increase in tonnage on our lanes was a little bit more, so it was really just the mix that impacted it in fourth quarter and doesn’t signify any shift in our thinking around purchase transportation.

Todd Fowler – Keybanc Capital Markets

Okay, that makes sense. And then the last one I have – maybe this one’s for Stephen. On the long-term disability adjustment here in the quarter, is the right run rate for that something like it was in the fourth quarter of last year – that roughly 900,000 or $1 million, or is the actuarial adjustment that was booked here, does that move that up on a year-over-year basis going into 2012?

Stephen Bruffett

I would like to think that the fourth quarter adjustment was a non-recurring type of amount. On average, I would say the consolidated amount is somewhere between 2 and 2.5 million on a normal run rate per quarter.

Todd Fowler – Keybanc Capital Markets

Okay, good, that helps. That makes sense. Thanks for the time.

Stephen Bruffett

You bet.

Operator

Your next question comes from the line of Matt Troy with Susquehanna.

Bascome Majors – Susquehanna

Hey guys. Bascome Majors in for Matt this morning. With Mica’s bill rolled out this week, you saw the triple trailers and truck weight limit increases make it in and then get pulled out; but that battle is far from over. I’m curious what you think a ruling on that front would do for the potential structural margin ceiling of your businesses, both LTL and TL?

Douglas Stotlar

Well that’s a big question, because certainly we don’t know what any of this ultimately looks like. Certainly, larger combination vehicles with the ability to run triples in more corridors throughout the country would be a big productivity enhancement for the LTL industry and Con-Way specifically. I don’t know where that’s going to go, and so I’d hate to speculate; but in the areas where we are able to run triples, our safety record is better than they are with our doubles because we have more experienced people running them, and there are certainly environmental benefits to running this kind of configuration. But there is definitely economic benefit to the industry if that type of equipment configuration is allowed to expand in certain corridors.

Most of the things that we’re—most of the productivity enhancements that we read about aren’t really going to correlate so much for our truckload company. We’re not a company that maxes out on weight on a regular basis in our truckload company, and so any weight enhancements really don’t move the needle for us.

Bascome Majors – Susquehanna

Okay. On the triple side, do you have to structurally reconfigure your network to get that benefit, or is it something that would hit immediately as states begin to potentially adopt those rules?

Douglas Stotlar

If states were able to adopt those rules, we would be able to run triples. I mean, we run a pup (sp?) fleet, and so we have the ability to be able to prop up line haul networks and line haul lanes with that combination of vehicles relatively quickly if the law were to allow it.

Greg Lehmkuhl

I think we’re in as good a position as any carrier to capitalize on potential regulatory changes.

Bascome Majors – Susquehanna

All right, guys. Thanks for the time.

Douglas Stotlar

Thanks.

Operator

Your next question comes from the line of John Barnes with RBC Capital Markets.

John Barnes – RBC Capital Markets

Hey, good morning, guys. As I look at the tonnage numbers in the quarter and then the tonnage number you talked about in January, it’s a little lighter than what we’ve heard out of some of the other carriers; and I know you were going through the purging process on maybe some underpriced freight and that type of thing. Can you just elaborate a little bit, maybe, as to where you might be with that process and at what point—I mean, you’re going to hit some easier comps on the tonnage side as a result of that effort in 2011. When do you think you start to see maybe volume growth back in line with your peers?

Douglas Stotlar

I’ll turn it over to Greg.

Greg Lehmkuhl

So we’re not looking to purge business right now. We’ve been done with those efforts for months and we’re looking at fair, equitable price increases with all of our customers as their contracts expire. We don’t feel certainly like we’re losing share to the competition right now, and our data supports that; so we’re staying with a consistent share - if anything, ticking up a hair as the months progress, and we feel that our pricing approach is fair and in line with what the industry is doing.

Stephen Bruffett

This is Steve. I’d add the perspective that in our view, at least, as we turned the calendar to 2012 and our base year comparison is 2011, that 2011 really provides pretty clean waters for basis of comparison as we move forward. So that’s a good place to be.

John Barnes – RBC Capital Markets

Very good. And then just again, I wanted to go back to some of the things you talked around in terms of the cost increases. On the pay increase and that type of thing, do you feel like pricing is sufficiently strong enough now that you can balance enough volume in the system, enough price in the system to overcome some of those cost increases that you’re going to experience, setting aside the initiatives? I mean, I know you’ve got a couple things there to kind of work on productivity and all, but I’m really just focused on the ability of volume and price to overcome what you’re seeing in terms of the cost headwinds.

Greg Lehmkuhl

So I think given the supply and demand balance, the answer is yes – we expect to be able to offset some pretty real cost headwinds, as Steve detailed, in 2012 with price, and we expect that our productivity initiatives combined with price will help us expand margin in the year.

Stephen Bruffett

To add to that a little bit, John, for no other reason, we enter 2012 with our revenue per hundredweight metric up by $0.75 higher than where we entered 2011, which provides a much stronger platform to enter the year.

Greg Lehmkuhl

I think it’s best evidenced by the results in the fourth quarter. If you look at our fourth quarter, our medical remained high – not quite as high as last year in Q4, but certainly the highest cost of any quarter this year by quite a bit. We reinstated the 401K, which is 4 million in the quarter. Steve talked about the retiree healthcare benefits, which were 4 million in the quarter. Our maintenance expense was up about 3.3 million in the quarter versus last year. Obviously, we gave the wage increase earlier this year which is about a $10 million cost headwind. And despite those pretty real cost impacts, our yield initiative and our productivity improvements help us offset that, and we expect to be able to strike that balance going forward.

John Barnes – RBC Capital Markets

All right. Let me ask it this way, then, because I’m hearing cost-cost-cost, and that’s where I’m a little bit concerned. And Doug, you talked about a couple of quarters ago a roadmap on getting back to prior peak margins, and my question to you is given what you’re experiencing from a cost headwind perspective, does it lengthen the amount of time necessary to get back to more peak type of margins, further margin improvement—you know, back into a low to mid-90s OR on a consistent basis versus what you thought before some of these cost headwinds started to creep in?

Douglas Stotlar

No, because we anticipated some of these costs. Now some—like, we won’t know the pension expense on an annual basis until we do our work at the end of the year, and so that was one that was a little higher than what we originally had anticipated. But no, my perspective is the same. We talked about this being a multi-year process. We have projects lined up for the next three years at Con-Way Freight specifically that we believe are the right things, focusing on the right areas to allow us to improve network utilization as well as improve the effectiveness of our workforce and actually create additional capacity within the existing infrastructure that we’ve basically already paid for. So we’re vey optimistic about our go-forward strategy. I think Freight is executing excellently against the strategy; and the employees, I’ve seen more engagement and excitement by our employees over this last six months than probably any time over the last 15 years. I mean, it’s really neat what’s happening within the Freight organization right now.

So as I mentioned, it’s a multi-year process. I think our prospects are still excellent, and we’re going to keep our nose to the grindstone and keep chipping away at it.

John Barnes – RBC Capital Markets

All right, thanks for your time. I appreciate it.

Operator

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

Justin Yagerman – Deutsche Bank

Hey, thanks guys. I guess the first question I had is a little off-topic, was on the cash side. It sounds like you’re going to use up to $100 million to prefund pension this year, but other than that you guys are building up a decent amount of cash on the balance sheet. How do you think about uses of cash, especially in light of the current share price and progress of the Company?

Stephen Bruffett

This is Steve. I’ll take that one. In terms of priority, of course the replenishment of our fleet has been our predominant focus and use of cash, and that continues in 2012. Once we get through 2012, we’ll be pretty far along the path – have a little bit more to do at Con-Way Freight, but we’ll have achieved a lot of our objectives regarding fleet age during the course of 2012. So that’s been toward the top of our list.

Pension, obviously, and dealing with the volatility and reducing the amount of volatility and improving the funded status has been next on that list. As we get a little further into this, we’ll begin to entertain other ideas or possibilities about what we do with cash, but those remain to be determined.

Justin Yagerman – Deutsche Bank

Okay. Just looking at the model and looking at what you said, unless my math is wrong, it looks like if tonnage growth continues at 3% this quarter, as we saw in January – and maybe you can remind us of the year-over-year comparisons in February and in March – sequential tonnage growth would occur in Q1 versus Q4 that’s kind of not seasonally normal. Is there a change in emphasis between tonnage and yield that you guys are putting into place? I mean, the yield guidance that you guys called out sounded pretty in line with what we were thinking, so I just wanted to check that.

Stephen Bruffett

Simple answer is no – there’s no change. We’re not focused on growing tonnage and reducing yield, or lessening our focus on yield.

Justin Yagerman – Deutsche Bank

So then that would be economy that’s driving that?

Stephen Bruffett

Yeah, and don’t forget the weather impact in January. We’ve had near perfect weather.

Justin Yagerman – Deutsche Bank

No, that’s fair. Steve, you went through a whole bunch of items, and I know that you just went through some of them; but maybe if you could put a price tag on the biggest inflationary cost that you see this year as we move through, and then the comp and benefit piece that was one-time in the quarter kind of snuck up on everybody. So I was curious if there are other items like that as we move through 2012 that you guys are aware of that you’re not calling out yet.

Stephen Bruffett

We tried to provide visibility to those things that we have visibility to in the items that I noted. There’s always things that come up in the course of the year – some good, some bad – that are hard to anticipate as we sit here in early February; but the ones that we have some certainty around and line-of-sight to are the ones that we pointed to. The biggest of those is clearly wage increases beginning in April.

Justin Yagerman – Deutsche Bank

Okay. So I guess putting it all together, the stated view is that you guys will have productivity improvements alongside of tonnage and yield that will offset that, but you’re not willing to quantify to what extent.

Stephen Bruffett

I think that wraps it up fairly neatly. Given that we don’t provide guidance, it gets a little difficult to start applying specific numbers to initiatives; however, we have expressed a good amount of optimism regarding our prospects for margin expansion as we move through 2012.

Justin Yagerman – Deutsche Bank

All right, we’ll be watching for it. Thanks.

Operator

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

Scott Group – Wolfe Trahan

Thanks. Good morning, guys. I know we’ve spent a lot of time on the cost. Just a couple other things – Steve, can you talk about what you’re expecting on the healthcare side? I know that line’s been pretty volatile. And then how should we think about, outside of the main things that you highlighted, just general overall cost inflation on things like purchase trans and maintenance?

Stephen Bruffett

I’ll handle the healthcare and then I’ll toss it to Greg for the other items. On healthcare, most of our volatility, we believe occurred during 2010 in the third and fourth quarters when we were announcing significant plan design changes to our employee base, and so as that settled in in the course of 2011, I would characterize 2011 as a fairly typical year. There is some seasonality to our healthcare costs, and that was evident in our trends in 2011. Now that we’ve made no significant changes to the plan – really, no changes at all to the healthcare plan as we move into 2012, so this will be the second year in this plan. Employees are more used to it, so we would expect a little less volatility in it but we would expect medical inflation to show up in that line. The exact amount is now known, but we would estimate that that’s probably about 5% of medical inflation in that number, perhaps higher.

Does that answer your question on healthcare?

Scott Group – Wolfe Trahan

Yeah, that’s helpful. And then on the purchase trans and maintenance side, just overall kind of non—you know, overall cost inflation on the things you didn’t highlight specifically?

Greg Lehmkuhl

Sure, I’ll talk about maintenance and purchase trans. On the maintenance side, we are making a substantial CAPEX this year, an investment in fleet; and we expect maintenance expense in ’12 to be in line with ’11, so we do not see those costs continuing to escalate as they did this year.

On the purchase trans side, low single digits. I think our line haul team has done a nice job of negotiating multi-year agreements with carriers and becoming a really strategic part of our carriers business, and that’s allowed us to mitigate more significant price increases. It also provides us some shelter from future price increases as the majority of our purchase transportation spend right now is locked down for not only 2012 but 2013 at pretty modest increases.

Stephen Bruffett

And I think most people understand this, but I wanted to reinforce it, that the fuel surcharges we pay to these purchase transportation providers is included in the purchase transportation line, so as fuel moves around and therefore fuel surcharge we pay moves around, it adds some volatility to that line as well.

Scott Group – Wolfe Trahan

That’s great. I want to turn to truckload now a little bit. Herb, the utilization in the quarter came in a little weaker than we thought. Can you talk about that a little bit, and then kind of lay out your expectations for 2012 from a pricing perspective, fleet perspective?

Herb Schmidt

Yes, well, the utilization can be attributed almost totally to a decrease in the number of teams, the percentage of teams in our fleet. Aside from that, as far as solo drivers are concerned, our utilization was virtually flat year-over-year. We’re focused on the same things that Doug pointed out earlier, and that’s basically improving margin and doing so by improving utilization through things like creating some internal dedicated business, lacing in some affiliate and non-affiliate business, improving our cartage operation which supplements our regional operations and helps regional utilization and margins. We’re growing Mexico as a percentage of our business. We’re doing some things with owner-operators, adding owner-operators, and we do not need to add trailers as we tighten up our trailer-to-tractor ratio and adding owner-operators. So there’s a number of things we’re doing, Scott, that I think will help us improve margins and utilization over the course of this year.

Scott Group – Wolfe Trahan

That’s helpful. Herb, what’s your expectant for truckload pricing this year relative to what you got in ’11?

Herb Schmidt

I think it will be similar. Perhaps we don’t have quite the tailwind that we had as an industry. We don’t have quite the tailwind that we had in 2011, but again, I do see continued pricing improvement – nothing drastic but steady, I think is the way I would describe it industry-wide.

Scott Group – Wolfe Trahan

Great. And then just last thing, if I can real quick – Menlo seemed to have a nice quarter on the revenue side. Can you talk about any new contract wins or what you’re seeing in Menlo driving that strength?

Robert Bianco

I can’t talk specifically about customer contracts, but I can say that our pipeline continues to be robust and is filled with quite a few quality projects that span across all our industry groups and all our regions. We’re very optimistic that we’re going to continue the trends that we’ve seen at Menlo as far as growth.

Scott Group – Wolfe Trahan

All right, thanks for the time, guys. Appreciate it.

Operator

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

Chris Wetherbee – Citi

Great, thanks. Good morning, guys. I just wanted to come back to the freight volumes for a second. When you think about the growth rate in January, probably a little bit above what we were thinking about, but obviously you had weather here. When you think about the full year, I feel like your previous comments have been more focused on modest growth on the tonnage side. If we get a better economic environment—or I guess how are you thinking about the outlook for 2012? Is it a little bit more optimistic now, or is it just more of a weather comp issue for the first quarter that maybe moderates it a bit going forward?

Douglas Stotlar

I’m not sure we have enough information for Q1 to draw a real bead on where we’re at. We’re expecting a steady recovery environment of a slow-growth nature, very much in line with kind of what we saw towards the end of last year, and that just continuing throughout 2012. So we’re not expecting tonnage growth to come from a really strong demand environment all of a sudden clipping up. So I don’t know what to make of January’s tonnage increase. We hope it continues and we hope to carry that momentum through the year, but at this point we don’t know. But as Greg indicated earlier, we have not changed our strategy one bit from our core focus on making sure that we’re getting reasonable price increases as our contracts come due, and focusing on the mix of the pricing and trying to incent customers to put the freight into aspects of our network where we need it and can operate it more efficiently, and perhaps using price to discourage some tonnage that we don’t want in certain lanes of our network. So it’s going to be a very strategic approach, but our posture hasn’t changed one bit on how we’re thinking about volume growth versus price.

Chris Wetherbee – Citi

Okay, that’s actually very helpful. When you think about the capacity of the network as it stands right now, there clearly appears to be flex-up capacity out there; but is there any specific areas or regions that you feel a little bit better about how you might have the ability to flex up in the instance of higher growth?

Greg Lehmkuhl

I would say there’s no significant regional differences, so I’d have to say west or east or central, it has more or less capacity.

Chris Wetherbee – Citi

Okay, well I’ll keep it short. Thanks for the time, guys. I appreciate it.

Operator

Your next question comes from the line of John Godyn with Morgan Stanley.

John Godyn – Morgan Stanley

Hey, thanks for taking the question. Greg, I just wanted to follow up on some of your commentary on the yield environment for freight. You mentioned that the supply-demand environment is in balance and that’s going to generate mid-single digit yield growth; but in balance doesn’t really sound commensurate with mid-single digit yield growth, which is quite strong by historical standards. Can you just elaborate on that – what else is going on there?

Greg Lehmkuhl

John, I think the industry is operating under their—they’re not recovering their cost of capital in aggregate, and almost everybody’s price dropped pretty significantly in ’09 and ’10 and carriers know that costs aren’t going down in aggregate and price increases are needed. So it’s always a competitive environment, but it seems like everybody’s pretty focused on gaining back some yield that’s lost. That’s probably why you see yield better than—or yield forecast better than historical levels.

John Godyn – Morgan Stanley

Okay. And when we just think about that commentary sort of versus the 4% that we’re seeing in January, putting it all together, it kind of suggests that supply-demand in balance and tougher comps over the next few quarters, you could see yield ex-fuel accelerate; but even without demand exceeding supply, am I sort of understanding your comments correctly?

Greg Lehmkuhl

Yes, I think you said it well.

John Godyn – Morgan Stanley

Okay, perfect. If I could just follow up on some of the tonnage comments earlier, just really quick, the 3% or so that you’re seeing in January, I mean, with the easier comps over the next few quarters, it seems like that 3% might be a low end to what the growth rate might look like for the next couple quarters. Just using this assumption of slow grind higher in the economy, is that fair or am I missing a moving part?

Greg Lehmkuhl

I’ll just reiterate what Doug said. I don’t think we know. I think it’s early in the year. The economy feels like it has pretty good traction, but it’s still a tenuous environment out there and we’ll not sure what the economy will do. But so far, so good; and I can’t provide any further guidance.

John Godyn – Morgan Stanley

Okay, great. Thanks a lot, guys.

Operator

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

Ken Hoexter – Merrill Lynch

Good morning. If I could just start off with a follow-up on one of the other questions, on the utilization at Truckload, how do you look at it? We saw the load mile per tractor decline but the revenue per tractor kind of for the quarter go up. Just want to understand how you measure utilization and how you set those targets.

Herb Schmidt

Well Ken, it’s just manned tractors. It’s simple math in terms of the number of miles per manned tractor, and when you have teams – equipment versus (inaudible), you get that 1.9 times the productivity, almost double the productivity. The reason that the revenue per tractor went up was primarily the rates. We improved rates year-over-year significantly, about 3.4%.

Ken Hoexter – Merrill Lynch

All right, great. No, I just wanted to get what you were looking at in terms of measurements. So larger picture, I guess Doug, when you think about (audio interference) a lot of questions. Do you (audio interference) structurally changed since FedEx and UPS have come into the market, and when you look at FedEx’s shift to the economy and priority mix, has that had an impact on your customers, how they’re thinking about volumes? And then also on that same subject, have you seen YRC since they re-orged? Have they gotten any more aggressive in the market at coming back and taking back some of the share they had lost, as you think about cleaning out some of the volumes and where you want to start to growing from now on? Thanks.

Douglas Stotlar

So I definitely think over the last half a decade or so, the market has become more competitive in the LTL space, and I don’t necessarily think you can just attribute that to FedEx or UPS. I think all the carriers have gotten better and that’s created a more competitive environment. And then we had this significant downturn that had some real big dynamic impacts on the industry. A lot of capacity came out of the industry during that time – a lot of capacity came out of the industry, and so the whole industry is, I think—as Greg indicated, I think we feel like it’s relatively in equilibrium. The announcement by YRC, I think is good for the industry once again because it takes additional capacity out, so it keeps that supply-demand balance in check. But I think—I’ll just talk specifically about Con-Way, we were a really good fast carrier for a couple decades, and we had a competitive on that front. The competition set got better. We still have an advantage there but it’s not nearly as great, and so we have to—we can’t rely on that as being our exclusive weapon, and so we’re increasing the sophistication of our LTL company dramatically across every aspect of how they do business – in analytics, what we’re doing with business intelligence, how we’re leveraging technology, our ability to get visibility in pricing, the sophistication we’re putting in the line haul network and planning process, how we’re utilizing our workforce and getting them involved in the process through mean methodologies.

We are just increasing and upping our game dramatically at LTL, and so along with that we’ve got a lot of excitement in the company and we believe our prospects are bright, and we’re going to continue to build on the momentum we already have going. That being said, we know we do have some cost headwinds this year but we think we can offset that through all the things we have going on in our business. So we don’t believe that our position in the LTL universe is going to be limited by some of the dynamic changes that have happened here. We just have to become better as a company and that’s our sole focus.

Ken Hoexter – Merrill Lynch

And to the point of the structural margin shift into that equation?

Douglas Stotlar

We don’t believe where we currently sit from a margin standpoint that we’re limited and this is where we’re going to sit in the marketplace for any extended period of time. As long as the environment remains a growing GDP environment, we believe we can continue to expand our margins.

Ken Hoexter – Merrill Lynch

Wonderful. And then lastly, now that Menlo is back on its footing for a while now, do you have kind of a growth target that you set? Is it kind of a double-digit grower going forward, or is there anything general that you’d throw out there?

Robert Bianco

Hi Ken, this is Bob. Thanks for clarifying that we’ve been on this footing for a while. Yeah, we’re a contract-based business, so our focus is on winning contracts and historically we’ve been in that high single to low double-digit range, and that’s where we feel comfortable growing. We feel a big part of growing Menlo is hiring talented people because we’re asset-light, and if we keep in that range we’re able to build our talent to provide the solutions for our customers.

Ken Hoexter – Merrill Lynch

Wonderful. Appreciate the time. Thank you.

Operator

Your next question comes from the line of Chris Ceraso with Credit Suisse.

Chris Ceraso – Credit Suisse

Thank you. Good morning. I wanted to dig in a little bit again on the cost issue and the productivity. If my math is right, it looks like you’re talking about something in the neighborhood of about a $70 million cost increase when you roll up the wages, healthcare inflation, the change in D&A and pension and so forth. That’s a big number. That’s about a third of what you earned in 2011, give or take. So what I wanted to gauge is your view of—you know, given the magnitude of that, is it something you think you can offset? And then maybe to help us quantify productivity, can you tell us how much maybe in dollar terms you were able to generate in terms of cost savings and productivity gains in 2011? I think we can calculate how much you picked up from price, et cetera; but if you could gauge the productivity, that would help us in the context of that 70 million.

Stephen Bruffett

This is Steve. I think that if you rewind the clock prior to the economic downturn, things like wage increases happened every year and they weren’t discussed all that much. They just flowed into the normal course of things, and I think in our view 2012 is a year of really getting back to some normalcy, where in fact you do have wage increases and other costs move around on it, and you get price increases and you move forward. So I think it’s in that context that we’re viewing 2012. We’re providing greater visibility to those items as we have them, given the path that has been traveled by the industry and by Con-Way, and Con-Way Freight in particular over the last couple of years. We don’t see it as abnormal activity and things that can’t be overcome.

To go back to what we’ve emphasized a number of times, we have optimism about our prospects for continued margin expansion as we move through 2012.

Chris Ceraso – Credit Suisse

I guess I’m thinking maybe in terms of the railroads, for example, who also have to deal with pretty hefty annual inflation, whether it’s wages or materials; and they do a pretty good job at quantifying—you know, we can offset 50% of our inflation or it’s $100 million. Can you give us any quantification of what you think you can generate in terms of productivity?

Stephen Bruffett

I mean, our projects, we’re confident under the yield productivity improvements. I don’t think we want to provide guidance on an individual project or operation level at this time. So I mean, if you look back in the rearview mirror for ’11, I stated that we improved dock operations 5%, P&D 2.3, and line haul a little in excess of 1. We would expect those type of improvements to continue going into ’12. It’s the combination of continued—not just raw price improvement, but price sophistication and mix combined with operational efficiencies from the initiatives that have been outlined that we believe more than offset the cost headwinds.

Chris Ceraso – Credit Suisse

Okay, thank you.

Stephen Bruffett

Good evidence of that is on our damage focus. We had the best damage performance last year that we’ve ever had. We had nearly a $20 million reduction in year-over-year claims, and we have real aggressive targets to get even better in ’12, so I think we’re showing that and that it’s working.

Operator

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

David Ross – Stifel Nicolaus

You talk about employee engagement being up and employees being re-spirited with the business, and that’s consistent with what we’ve heard in the marketplace in terms of your services – the service has really improved. We also hear that the rates continue to lag and that Con-Way is not a price aggressor, but certainly not moving up price as fast as others. Was the plan to improve service first and then justify the rate increases with the service? Could you talk a little bit about the disconnect there?

Douglas Stotlar

I don’t know that there is a disconnect; at least, that’s certainly not our observation of what we’re trying to accomplish. Again, we price every contract as it comes due one by one, and we look at the customers’ business mix, we look at our network needs, and we price different aspects of it differently. So if it matches up against someone else and we happen to have an advantage because it’s something we need in our network, and that might look an advantage from that perspective. I could probably cite another 100 examples where we took a significant increase in certain lanes where we discourage the business. So I guess that sounds fairly anecdotal to me, and I don’t know that there’s anything behind it, David, because we are very focused on price increases. We never focused on service over our need for improving our yield, and we’ve operated from a very consistent strategy over the course of this past year. There’s been no change in that strategy at all.

Stephen Bruffett

And I’d just add to that that yield is a compound metric that doesn’t always tell the story. You have to adjust for weight of shipment, length of haul, national-local mix and regional differences, and I feel when you look at us versus the average competitor, we’re right in line year-over-year.

David Ross – Stifel Nicolaus

I understand the intricacies of the yield number, but if most of the worst price accounts have been addressed, why is freight still operating at 97.5? I guess the question is because you’re going to get some price increase to get some cost increase, so you can’t really get back to the low 90s on price alone. So is there a kind of mix-yield improvement or operational productivity improvement at 500 basis points or more that you guys see in the network now, because otherwise it would take more price.

Douglas Stotlar

Well certainly, as I mentioned before, this is a multi-year process so you’re going to get multi-year of price improvement and multi-year of network efficiency gains as we roll out additional leverage tools and we execute against our projects. So it’s going to be a combination of those two things and a lot of hard work.

David Ross – Stifel Nicolaus

And then the next question – because Con-Way Freight as you said, Doug, earlier was in the market as a kind of premium price, premium service player for the first couple decades when it was out there; but then faltered a little bit in ’09, 2010 with the price war that went on. What is your target market position today? I mean, what’s the message that your employees are getting and that your customers are getting as to who Con-Way is, who Con-Way Freight is at least going forward?

Douglas Stotlar

Well, we’re still the premium service company out there, and if you talk—I was at the national sales meeting here a few months ago and talking with our account executives, and our customers are commenting about how not only do we have our service back but they’re seeing higher levels of service from us than they saw even before the downturn. So they can sell a premium for the product. We believe we still command a premium in the marketplace, albeit a smaller premium than we once enjoyed when the differentiation was significantly better. But we do business with just about every 3PL out there that does transportation and management, and the feedback we get from them is there isn’t a substitute for Con-Way’s service when it really has to get done.

David Ross – Stifel Nicolaus

Yes, that’s what we’ve heard as well. Last question just with Steve, real quick – about the 401K benefits being restored last quarter, you’re saying that’s 4 million a quarter that’s coming back. Last couple calls you mentioned it was 5 million a quarter. I just wanted to know what changed.

Stephen Bruffett

Yeah, that’s a good question and I double-checked that myself. We had given guidance of about 5 million a quarter, which was an estimate because we hadn’t done it yet based on an employee snapshot that we had taken, and it was 4.-something million that we’d rounded up to 5. When the actuals came in, they were barely over 4, so it wasn’t a full million dollar difference per quarter but rounding made it be stated that way. So it’s a good question, but our actuals are closer to 4 than 5.

David Ross – Stifel Nicolaus

Excellent. Thank you very much.

Stephen Bruffett

You bet.

Operator

We have reached the allotted time for questions. Are there any closing remarks?

Patrick Fossenier

No, ma’am. Could you give the replay info?

Operator

Thank you for participating in today’s Con-Way Inc. Fourth Quarter and Year-End 2011 review conference call. This call will be available for replay beginning at 11:30 am Eastern Standard Time today through 11:59 pm Eastern Standard Time on Friday, February 17, 2012. The conference ID number for the replay is 44228776. Again, the conference ID number for the replay is 44228776. The number to dial for the replay is 1-800-585-8367, or 1-855-859-2057, or 1-404-537-3406.

This concludes today’s conference. You may now disconnect.

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