Executives
Patrick Fossenier - VP of IR
Doug Stotlar - President and CEO
Kevin Schick - CFO
John Labrie - Con-way Freight President
Bob Bianco - Menlo Logistics President
Herb Schmitt - Con-way Truckload President
Analysts
David Campbell - Thompson, Davis, & Company
Ken Hoexter - Merrill Lynch
David Ross - Stifel Nicolaus
Tom Albrecht - Stephens Inc
Justin Yagerman - Wachovia Securities
Jon Langenfeld - Robert W. Baird
John Barnes - BB&T Capital Markets
Tom Wadewitz - JP Morgan
Jason Seidl - Credit Suisse
Ed Wolfe - Bear Stearns
Art Hatfield - Morgan, Keegan
Con-way, Inc. (CNW) Q4 2007 Earnings Call January 29, 2008 12:00 PM ET
Operator
Good afternoon. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to Con-way Inc's fourth quarter and year end Earnings Call. (Operator Instructions).
Thank you. I would now like to turn the call over to Vice President of Investor Relations Patrick Fossenier. Mr. Fossenier, you may begin your conference.
Patrick Fossenier
Thank you, Stephanie. Welcome to the Con-way fourth quarter and year end 2007 conference call for shareholders and the investment community. In a couple of minutes, I'll turn it over to the Con-way President and CEO, Doug Stotlar.
Before we get into the call, I would like to read the following Safe Harbor Announcement. Certain statements in this conference, including statements regarding anticipated results of operation and financial conditions constitute forward-looking statements and are subject to a number of risks and uncertainties and should not necessarily be relied upon as predictions of future events. Actual results of operations and financial conditions might differ materially from those projected in such forward-looking statements and no assurance can be given as to future results of operations and financial conditions. Additional information concerning factors that could cause actual results of operations and financial conditions to differ from those in the forward-looking statements is contained in our Forms 10-Q and 10-K, and other filings with the SEC.
Now without further adieu, I'm pleased to turn it over to Doug Stotlar.
Doug Stotlar
Thanks Pat. Good morning everyone. On the call today, I'm again joined by several members of our senior leadership team, including CFO, Kevin Schick, Con-way Freight President, John Labrie, Menlo Logistics Bob Bianco, and Con-way Truckload President Herb Schmitt. A bit later, Kevin will provide some commentary on financial matters and John, Bob, and Herb will be available to participate in the Q&A portion of the call.
I am pleased to report that Con-way provided good earnings results in a challenging freight environment. Looking at the fourth quarter, consolidated fourth quarter revenues of $1.2 billion were up 20% from last year's $1 billion, complimented by CFI's contribution.
Total diluted earnings per share, from continuing operations were $0.78 including $0.10 of charges for the Con-way Freight reorganization. Excluding this item, we earned $0.88 per share at the top-end of the quarterly range implied in our annual guidance.
Now, let's review key operating statistics for our business units. Starting with Con-way Freight, revenue per day at Con-way Freight was up 9.7% over last year. Tonnage per day increased 6.1%, consistent with the growth we anticipated going into the quarter and guidance provided on the last conference call.
Revenue per hundred weight increased 3.4% versus the fourth quarter of last year. If you excluded the effect of fuel surcharges, the decline was 4/10's of 1%. Which was inline with our guidance and an improvement from the year-to-year comparisons, we saw in the second and third quarters.
Excluding the reorganization cost, Con-way Freight's operating ratio was 91.6% in the fourth quarter, reflecting good cost discipline in a difficult environment. We made a concerted effort to conclude the Con-way Freight reorganization activity in the fourth quarter. Some related expense that would have otherwise been incurred in first quarter was pulled forward, for the most part this activity was completed during the fourth quarter.
Now, I will turn Menlo Logistics revenue net of purchase transportation was $126.1 million up 24% from the fourth quarter of last year, which included the Asian acquisitions of Cougar and Chic. As we've noted in previous quarters, we focused on net revenue rather than gross revenue, which includes a significant amount of sub-contracted pass-through purchase transportation.
Menlo generated operating income of $59 million, a $2 million decrease compared to a very strong fourth quarter of last year. Increased operating income from Menlo's higher net revenue was more than offset by an increase in self insurance cost and higher employee benefits cost.
Integration work for Cougar and Chic will be ongoing and has already led to new contract wins. Furthermore, the protest that was filed on Menlo's Department of Defense USTRANSCOM contract award was dismissed during the quarter and implementation is now underway.
Now, I'll review the results of our Truckload segment, all Truckload operations have been integrated into CFI's Joplin, Missouri Operation Center and we recently announced that we are re-branding the company as Con-way Truckload.
Truckload had consolidated revenue of $118.4 million after elimination of $30.8 million of revenue related to inter-company business and contributed operating profit of $8.8 million, which included $2.3 million of residual cost related to former Memphis operations of Con-way Truckload.
The operating ratio was 94.1 on total revenue or 90.8, excluding fuel surcharge and the pre-acquisition operating loss. The pricing environment is challenging and our Truckload operation side decrease in revenue per mile as 2007 progressed. But that seems to have stabilized in the fourth quarter. Utilization has improved in recent months and was assisted by the integration of the operations.
Con-way Truckload Management continues to refine the operations of the combined entity and execute on our plans to capture the synergy opportunities created by this platform.
Now I will turn the call over to Kevin Schick for some additional financial perspective.
Kevin Schick
Thanks, Doug. Cash and marketable securities totaled $206 million at the end of 2007. Obviously that balance was reduced significantly from the end of 2006 due to significant share repurchases in the first half of the year and the acquisitions of CFI, Cougar and Chic.
Average diluted shares outstanding for the fourth quarter were $48 million, flat with the prior quarter level. Total debt at year-end is $983 million. Quarterly interest expense was $14.9 million, and investment income totaled $2.6 million, reflecting a full quarter from the borrowing related to the CFI acquisition in August.
In December we replaced the one-year $425 million bridge loan utilized in the acquisition of CFI, with a $425 million 7.25% fixed rate 10 year public note. The quarterly tax rate was 35.3% and full year 2007 ended up at 36.6%. Our re-branding expense totaled $3 million in the quarter, a $0.04 per share impact. Re-branding totaled $14.3 million and $0.19 per share in 2007.
Lastly on the income statement there was a $2.5 million net loss from discontinued operations. Gross 2007 capital expenditures came in at $152 million. Net of property and equipment sales CapEx was $124 million. 2007 depreciation and amortization totaled $162 million and the proceeds from the sale of Vector were $52 million. Putting those together with our earnings, I'm pleased with the cash flow generation.
Now as for guidance. We expect 2008 diluted earnings per share from continuing operations to be in the range from $3.40 to $3.80. This includes a few cents in the first quarter for the completion of the Con-way Freight reorganization. Also included in the earnings guidance is our expected total of approximately $10 million for 2008 re-branding expense. $8 million of that is expected to occur at Con-way Freight and $2 million of it is expected to occur at Con-way Truckload.
We hope to complete the Con-way Freight re-branding in the first half of the year, while the smaller amount of truckload re-branding will be more linear, and should continue to mid 2009. Interest expense is expected to increase to approximately $65 million this year and 2008 investment income is forecasted to be about $11 million. We would guide you to use an average of $48 million diluted shares outstanding in 2008.
For the full year 2008, we anticipate total capital expenditures net of the equipment sales will rise to $250 million, as some planned spending for land and buildings projects will carry over from 2007, and we add the needs of Truckload to our budget. Depreciation and amortization is expected to be about $212 million. This should model a 38% tax provision for 2008, slightly higher than 2007.
Now for some operating guidance, starting with Con-way Freight. We anticipate that first quarter 2008 tonnage will increase at a low to mid single-digit percentage rate over 2007. Revenue per hundredweight is expected to increase by a mid single-digit percentage versus the prior-year level, and by a low single-digit percentage if you exclude the effect of fuel surcharge.
At Menlo Logistics for the first quarter, we continue to expect an increase in net revenue by low double-digit percentage. For your modeling I'd had note that we don't expect to book any revenue or profit from Menlo's new DTCI contract until the second quarter. We expect to book their net revenues on this business. So the contribution won't be significant for a while.
At Con-way Truckload, we look for first quarter revenue per mile to remain about flat from current levels, and as we gain momentum in capturing synergies, we expect tractor utilization levels and empty mile ratios to improve overtime.
Now I will turn it back to Doug.
Doug Stotlar
Thanks Kevin. I will close with a few comments on our outlook. In our last call three months ago, I was asked would I'd be disappointed if Con-way's earnings didn't reach $4 a share in 2008. It was the question that went to our enthusiasm for the business.
We'd just come up a strong performance in that quarter and we were confident as we are today in our prospects. So I answered: “yes”. It was one of those questions where the emotions of the moment found its way into the answer.
Today we outlined earning estimates for 2008 that are more conservative. But, they reflect absolutely no less enthusiasm than I shared three months ago about this company; the opportunities ahead and the confidence in our people to deliver on them.
We now have the benefit of three additional months of trending data and experience relative to the direction of the economy, which I think can be described as uncertain at best. We are taking a conservative, prudent approach. One is entirely appropriate, considering the current economic environment.
Our strategies in 2007 consisted of targeted acquisition coupled with Con-way Freight's reorganization to engineer a specific outcome, to provide the foundation for new and sustainable leverage and synergy opportunities across the platform.
Each of our company is finding opportunities to create competitive advantage from working collaborative whether its operational efficiencies or new customer offerings. We are much stronger for these strategic initiatives and well there are still challenges, I am pleased to see tangible results.
We completed integration at our Con-way Truckload operations, these are now fully centered in Joplin. At Con-way Freight we have essentially completed the major activities in this company's structural transformation. At Menlo we have completed initial integration plans for our expanded Asian platform. And we are capturing new business from opportunities enabled by these acquisitions.
I am also pleased with the rollout for the Defense Transportation Coordination Initiative, which is preceding well.
In closing, we entered 2008 energized by the opportunities to show what this expanded diversified portfolio of transportation and logistic businesses can offer in the marketplace. It's a unique mix, that I believe will help us navigate the ups and downs of individual markets in times of economic uncertainty. Most exciting are the prospects for value creation for both Con-way's customers and our shareholders.
Before I turn it over to questions, I would like to remind everyone that I please ask you that you direct your questions to Kevin Schick or myself and since John, Bob, and Herb are all in different offices and I will direct questions them as appropriate.
So, with that operator we are ready to take some questions.
Question-and-Answer Session
Operator
(Operator Instructions).
Your first question comes from the line of David Campbell with Thompson, Davis, & Company.
David Campbell - Thompson, Davis, & Company
Good morning, how are you?
Doug Stotlar
Good morning David.
Kevin Schick
Good morning David.
David Campbell - Thompson, Davis, & Company
Just wanted to ask a question about the comment you made when you renamed the Truckload operating unit to Con-way Truckloads. You reminded us that there would be about $500 million of revenues there. But it's really only $400 million, you take up the inter-company business and you just reported $118 million for the fourth quarter. I am trying to figure out what's going to happen, that you will be down to only $400 million of Truckload business next year.
Doug Stotlar
Dave, I think we are going to do better than $400 million of revenues after you backup inter-company business. The actually run rate is a little better than $500 million all in. So, I think you'll see our results come in stronger than $400 million on the net revenue.
David Campbell - Thompson, Davis, & Company
Okay, Thanks and can I have one more question. It has to do with the FedEx expansion of their Less-Than-Truckload service announced January 16th, new long-haul shippers have improved, service reliability etcetera. Are you seeing any competitive impact from that since January, or is it that not a significant change in the competition situation?
Doug Stotlar
David I can't specifically sight that we have seen any change in the competitive landscape at this point, certainly LTL is pretty fragmented, well the concentration of players are relatively small pool. We may freight around on a regular basis. We would have virtually no way of knowing whether we'd lost long-haul business or gained long-haul business, as a result of these changes in other competitors operations.
David Campbell - Thompson, Davis, & Company
Okay. Thank you very much, I'll let some one else to ask the questions.
Doug Stotlar
Thank you.
Operator
(Operator Instructions).
Your next question comes from the line of Ken Hoexter with Merrill Lynch.
Ken Hoexter - Merrill Lynch
I was wondering if, just to get one point of clarity, first, on the first quarter outlook, I think you said low to mix-single digits on tonnages, is that correct, just to make sure that I understand what you had mentioned there?
Kevin Schick
I believe that's correct.
Doug Stotlar
Yeah, on tonnage?
Ken Hoexter - Merrill Lynch
On tonnage, yeah.
Doug Stotlar
Yes.
Ken Hoexter - Merrill Lynch
And then would it -- mid single digit all in for pricing with positive fuel pricing is that what you mentioned as well?
Kevin Schick
Well, we were bifurcating the yield. All in yield was going to be what would we say here?
Doug Stotlar
Mid single digit.
Kevin Schick
Mid single digits.
Doug Stotlar
And then excluding fuel surcharge to be up and low single digits.
Ken Hoexter - Merrill Lynch
Okay. Thanks I appreciate that. I guessed, if we could also get just an update on the market right now, how you see things, and other companies have mentioned that they feel like we might be at the bottom of the market. Is that an opinion that you guys agree with, or where do you think we are?
Doug Stotlar
Oh, Ken that’s a really difficult question, because there are still mixed signals out there. We are still too early into January, and January by its nature is always a relatively spotty month. You will see a couple of strong days and you will see a couple of week days. And so, I don't think we are prepared to really call the bottom on this thing. And I don't think we are really prepared to know about any true directional trends yet for the first quarter.
Ken Hoexter - Merrill Lynch
Hey, it's kind of actually -- if I can just step in as well, so can you talk a little bit maybe about what kind of trends you did see during the quarter? Obviously you had shifting comps, and talked to us about how the comps were a year ago, just kind of trying to judge how you are seeing that flow as the quarter progressed?
Doug Stotlar
Sure I am assuming we are currently talking about LTL here.
Ken Hoexter - Merrill Lynch
Yes.
Doug Stotlar
So, John would you like to talk about the quarter. We just finished.
John Labrie
Sure. Ken, this is John. I think we saw a pretty steady state, relative to the sorts of trends we had talked about in the third quarter on our call. And there were a few moving targets, obviously fuel surcharges continued to tick up during the quarter. Our length of haul continues to grow just a little bit. And we continued to see the declining weight-per-shipment trend that we have pointed out on our third quarter call. And those were sort of the big highlights. Shipment volume during the month or during the quarter was pretty consistently positive. And so, really those three other key things that were moving targets during the course of the quarter.
Ken Hoexter - Merrill Lynch
So, just during the course of the quarter you didn't notice it, whether because of your comps, did that incremental increase start to slow or have you been building, and I am just trying to get a feel of how you are seeing things as we progress through the quarter.
John Labrie
Well we have been seeing positive momentums in those areas as I mentioned in the last call, through the final two months of the third quarter, and we continued to see that in those areas through the fourth quarter. So, the metrics were improving and they were improving relative to our comps from the prior year.
Ken Hoexter - Merrill Lynch
Alright, great thanks Doug, Kevin and John.
Doug Stotlar
Thanks Ken.
Kevin Schick
Thanks
Operator
Your next question comes from the line of David Ross with Stifel Nicolaus.
Doug Stotlar
Good morning, David.
David Ross - Stifel Nicolaus
Initiative couple years back
Doug Stotlar
Dave, can you start over we didn't hear the beginning of your question? David?
Operator
One moment please. Mr. Ross, you may begin.
Doug Stotlar
David.
Patrick Fossenier
I think we might have to come back to Dave. Operator?
Operator
Mr. Ross your line is open. Your next question comes from the line of Tom Albrecht with Stephens Inc.
Doug Stotlar
Good morning Tom.
Tom Albrecht - Stephens Inc
Can you hear me?
Doug Stotlar
Yes.
Tom Albrecht - Stephens Inc
Okay. There was a ring for a second. Nice quarter. Couple of questions, your length of haul, I don't like to normally make too much noise about 12 miles increase in the average length of haul at the LTL carrier. But for years you had been stuck between 690 and about 700, and all of a sudden you jump to 712, anything going on particularly there or I mean specifically did you do a little bit more third day and later deliveries.
Doug Stotlar
Actually Tom when we look at our profile of shipments, and by one day, two day and three plus days, our one day was actually down 1.1% year-over-year, our two day was up 1.1% and our three day plus was flat year-over-year.
Tom Albrecht - Stephens Inc
Alright.
John Labrie
As a percentage of the total.
Doug Stotlar
Right as the percentage of the total shipment that we move, so primarily it came in the second day environment.
Tom Albrecht - Stephens Inc
Yeah, okay. That makes some sense. Is that the primary reason too that the load factor almost hit 21,000 pounds or is that some new efficiency efforts that you have undertaken?
Doug Stotlar
John, you want to address that.
John Labrie
Sure Doug, Tom we put some real emphasis on that part of our operation in the quarter and that was really improving just simply as a result of focus on execution in that area of the business.
Tom Albrecht - Stephens Inc
Okay. And then can you talk about, I actually little bit surprised that your yields excluding fuel surcharges were fairly down on a year-over-year basis, and why you don't give the absolute numbers. I suspect they were up slightly versus the September quarter. I would have expected a little bit more of a competitive set of numbers i.e. a decline. Can you just talk about the pricing environment a little bit here, and what your expectations are for '08. Would it be more or less competitive in pricing than '07?
Doug Stotlar
John you want to take that.
John Labrie
Sure Doug. It's hard to talk about yield as you know, when so many of the drivers of yield are moving. Obviously we saw fuel surcharge levels rise throughout the course of the quarter. So If you look at yield Q4 versus Q3, it was up $0.51 in total and about 70% of that improvement in yield was due to the movement in fuel surcharge. At the same time, our length of haul was growing, our weight per shipment was coming down, and all of those factors contributed to the movement that you saw in yield. I think overall there wasn't much change to the pricing environment in the quarter. So that if you look at, it's simply, what did the pricing environment look like? It looked pretty much like it did in Q3.
Tom Albrecht - Stephens Inc
Okay. Usual, plenty of stuff to think about. Kevin can you review real quickly, you mentioned the '07 and Q4 rebranding cost, I got your '08 guidance, but I think I heard $14 million and I didn't hear the fourth quarter.
Kevin Schick
Yeah let me flip back here. Rebranding for the full year was $14.3 million, $0.19 a share for the full year. Q4 was $3 million even.
Tom Albrecht - Stephens Inc
Okay.
Kevin Schick
Of [course] an impact.
Tom Albrecht - Stephens Inc
Okay. And then I had one more question. I think that's it for now guys. Thanks very much.
Kevin Schick
Thanks.
Doug Stotlar
Thanks Tom
Operator
Your next question from the line of David Ross with Stifel Nicolaus.
Patrick Fossenier
Dave are you there?
David Ross - Stifel Nicolaus
I am here. Can you hear me?
Patrick Fossenier
Yeah, finally.
David Ross - Stifel Nicolaus
I hope not to ask a question that was just asked, but with the increase in shipment of tonnage seen in the quarter, a lot of that was due to easy comps in terms of the growth rate. Do you have any sense for how much of that business is returned business, business you might have pushed away when you raised price during the initial downturn in '06 versus your new business or growth in the market?
Doug Stotlar
That's really hard number to drill in. As you know, when you had tonnage declines in 2006, we've picked some remedial action during the third quarter and fourth quarters to reinforce our base to win back some of the business that we had. Although, I believe there is a definitely a combination of wining back some of the business that we lost, and certainly some market share gains. John and his team have done a pretty admirable job this year, and very targeted sales approaches to try to win some new business and very targeted lands. John, do you have any additional comments on that?
John Labrie
I think the only thing I would add David, is that to Doug's point, we do business with good portion, call it 70% of the LTL market in some way, shape or form. So we are consistently seeing our share of wallet with those customers, move up and down slightly and obviously we focus from a sales force standpoint. I am trying to get to move in the right direction, but it's very much of moving target to Doug's point and we are constantly gaining and losing little bits of business with our entire basic customers.
David Ross - Stifel Nicolaus
Yeah, that's helpful. And then also with the reorganization cost at the freight division, are you guys almost through that, take the bulk of its hind year you said, and the biggest being the centralized pricing, I think, getting all the companies under the senior management system? Can you talk a little bit more about the reorganization, what the biggest pieces were and then what might be left to go?
David McClimon
Why don't you take that John.
John Labrie
Sure David. Well the two biggest pieces were the integration of all the back office functions that were previously done in Ann Arbor, Michigan; Buena Park, California; and Fort Worth, Texas. We are doing all of those functions that support the business in Ann Arbor now.
That entire integration effort was completed in December, and that was the bulk of the reorganization. I mentioned in the last call that effective in October; we had really begun to operate under the new management structure of the company. So, we had that in place right at the start of the quarter, and really the work is pretty much entirely done.
We are still working on more things to a single set of policies and procedures for the company, and that's going to take sometime. But the heavy lifting is really behind us at this point.
David Ross - Stifel Nicolaus
Okay. And then I think you have hit in to it a little bit just moving over to the truckload pieces for a second - revenue per loaded mile and revenue per tractor per week utilization.
Can we get some year-over-year color there and how the fourth quarter may have looked versus a year ago?
Doug Stotlar
Sure, since we obviously didn't acquire CFI until mid-year, I'll let Herb talk about the prior year. But Herb do you want to give a little color there?
Herb Schmitt
Pricing is down just a little bit David, but they stabilized in the fourth quarters, as Doug alluded to earlier. And basically, even though pricing was flat, we saw utilization actually hold strong and improve just a little bit, and I think that's primarily because of the integration. We have the opportunity to harvest rates, that in the past we didn't have the opportunity to harvest. So these synergies are starting to kick in and empty miles have dropped just a click and utilization was up slightly.
So that's pretty much where we stand today. It's a little early to tell what the pricing environments going to be at this next year, we believe that it will be relatively flat, but we are really too early in the bid cycle to predict that.
David Ross - Stifel Nicolaus
Okay, thank you very much.
Doug Stotlar
Thanks Dave.
Operator
Your next question comes from the line of Justin Yagerman with Wachovia Securities.
Patrick Fossenier
Good morning Justin.
Doug Stotlar
Good morning Justin.
Justin Yagerman - Wachovia Securities
Good morning. Wanted to dig-in in to Menlo a little bit, and get a sense of what's going on there. It looks like you saw some net margin contraction in the quarter. You mentioned a few things around insurance claims, and I think one other item in the press release. But wanted to get a little more color there, and get a sense of what do you think margins are going to do throughout the year, and whether or not Cougar and Chic and potentially the DTCI could be a factor in expanding margins of that business?
Doug Stotlar
Okay, Justin. First of all I want to correct something. When I was reading the prepared script I miss-spoke and I indicated that Menlo's fourth quarter up income was $59 million it's actually 5.9, I am sure. But I wanted to prefect the record here.
Justin Yagerman - Wachovia Securities
That sounded pretty good, 59.
Doug Stotlar
We would have wished. We'd really liked those margins.
Justin Yagerman - Wachovia Securities
Yeah
Doug Stotlar
That being said, the biggest preponderance of the year-over-year cost differential, really was two buckets in reserves. One was in claims, for claims reserve and the other was for a vehicular incident that we had to reserve for. And those two items totaled about $2 million. So there is the big delta in the year-over-year comparisons. Bob you want to talk about your margins overall and what you are anticipating.
Bob Bianco
Hey Justin, it's Bob.
Justin Yagerman - Wachovia Securities
Hi Bob.
Bob Bianco
When you look at the margins and compare them to prior periods, the other key factor is Cougar and Chic, and they did enhance our net revenues obviously in the quarter and we are well into the integration activities with each of them. So, you are seeing that effect in our margins in the fourth quarter. Going forward we expect that barring any radical change in the economy, that we expect to have margins in line with what we have in the past.
Justin Yagerman - Wachovia Securities
Got it. And just a point of clarification. Doug you mentioned that it was a vehicular issue, but you guys are on non-asset based carrier, can you just give a little bit more clarity on that.
Doug Stotlar
Menlo does operate a handful of vehicles, so any one type of incident is a pretty big disruption to them. But Bob how many total vehicles are you operating today.
Bob Bianco
In North America, it's fewer than 50.
Justin Yagerman - Wachovia Securities
Got it. All right, that helps. I appreciate your clarity there. On CFI I was just curious. Given how this company operates, this is a standalone company, having spoken for a while. I was under the impression that they were typically in the mid to high 80s in terms of an [OR]. I know that stuff from a consolidated basis, that pushes them over that in terms of their operating margins, but wanted to get a sense of where you guys see run rate settling out for CFI as you look out for the next 12 months or so?
Kevin Schick
Justin, just to clarify our frame for you, you are correct, there are number of accounting conventions and adjustments that we've made once we acquired CFI. Even just conforming how we treat fuel surcharge, it was as you know, we recognized fuel surcharge revenue up in our top line. CFI in the past had netted fuel surcharge revenues against their fuel expenses. So, just confirming that accounting convention is almost three operating points. It doesn't change anything, it just the bucketing involved. Also, there are aspects of intangibles that need to be amortized, these are systems, customer relationships, and accounting rules that mandate that you write some of these off. So, when you take those, we had to adjust the rolling stock to fair market value, so that effects depreciation and gains on sale, etcetera. You are looking at about five operating points, just through all these accumulated accounting adjustments. So, I just wanted to give you some background on that.
Doug Stotlar
Another thing Jason, is it's hard to predict right now what we anticipate the future run rate to be given the fact that the environment still remains relatively uncertain. But it's definitely a low 90's operating type company. And certainly our goal is to do better than that. But I think that's what we are going to see given the current environment.
Justin Yagerman - Wachovia Securities
No, with the clarity on the operating, kind of points towards the consolidated unit, it is helpful.
Doug Stotlar
I think the really important thing that Herb touched on is that we are seeing additional efficiencies. We are seeing utilization improved as a result of the combined entities and we are seeing our empty miles actually decreased.
Justin Yagerman - Wachovia Securities
Got it, just a curiosity. I am wondering if CFI has been approached, or is considering any business related to the new flexibility that has been announced at Yellow and Roadway for doing line haul at their business, given their expertise having handled your business for so long?
Doug Stotlar
Well Herb I'll let you address that, I am not aware of any activity on that front.
Herb Schmitt
No there is no activity at this time. We are really focused on the fundamentals of settling in and getting as much traction from our internal synergies as possible this year. Of course we are going through a bid cycle as all truckload carriers are, to try to harvest more business, from new and existing customers so, that's really what we are focused on at this time, Justin.
Justin Yagerman - Wachovia Securities
I appreciate that. I guess one more question and I'll turn it over to someone else. Just curious, because every time valuations get lower on LTL stocks, rumors always pop up as to somebody being out there illuming to buy somebody. Deutsche Post is usually the one that's mentioned given that they haven't made a foray into LTL in North America. Is there anybody out there that approaches you guys on a regular basis? You don’t have to comment on whom. But from a financial or strategic position is that an interested buyer in the LTL market right now?
Doug Stotlar
No, we have not been approached by any strategic buyers, Justin. And there were certainly some private equity interest when the rage was on, but subsequent to the melt down of subprime and all the other lending issues. Those calls don't come any more either. So, at this point I am not aware of anybody.
Justin Yagerman - Wachovia Securities
Okay. That's helpful, thanks so much.
Operator
Your next question comes from the line of Jon Langenfeld with Robert W. Baird
Doug Stotlar
Good morning Jon.
Jon Langenfeld - Robert W. Baird
Nice quarter.
Doug Stotlar
Thank you.
Jon Langenfeld - Robert W. Baird
Doug, what is your guidance assumed in terms of kind of the economic backdrop or maybe even more specifically, do you anticipate the external freight environment getting better or staying the same or potentially getting little bit worse?
Doug Stotlar
When we put our plan together we are basically assuming it's going to continue to bounce around where it is right now and not materially improve as the year progresses.
Jon Langenfeld - Robert W. Baird
Okay.
Doug Stotlar
So, we didn't model in any inflection point for upside for this year, because we just don't see it at this point.
Jon Langenfeld - Robert W. Baird
So, I think that's the appropriate way to go, I definitely thought that, but if we think about how earnings progress over the year, you are saying that there is not a backend loading to the earnings, we should think about them pro-rata over the year as you would in any typical year after such a thing.
Doug Stotlar
Yeah, given the typical seasonality, well that being said, we haven’t see much of a Q4 event in quite a while either. But Q1 is always our worse, our most difficult quarter, you never know what you are going to get from a -- what kind of weather impact we might have as the quarter progresses. And it's always spotty as far as volumes, certainly Q2 and Q3 are our strongest quarters then Q4 is usually our third best so --.
Jon Langenfeld - Robert W. Baird
Okay. And then on the logistics side, do you know what the organic net revenue growth would have been in the quarter?
Doug Stotlar
Bob do you know that rate offhand.
Bob Bianco
Well, not offhand but our organic track was in the low double digits, so within that range in the 12% to 13% range.
Jon Langenfeld - Robert W. Baird
And then how big of a drag will be integration expenses would be, I know you didn’t expect this to be meaningfully accretive at all in the first year, but is there an outright drag from integration expenses of the acquisitions in Menlo.
Bob Bianco
Going forward, we should see that become less and less as each quarter goes, all throughout the year.
Jon Langenfeld - Robert W. Baird
Okay. So, there is some drag now.
Bob Bianco
Yes,
Jon Langenfeld - Robert W. Baird
Okay. But you have to anticipate -- what by the time you leave '08 you are a basically on a clean run rate.
Bob Bianco
Yes
Jon Langenfeld - Robert W. Baird
Okay, good. And then on the CFI side, on the Truckload piece, have you had any successes leveraging the LTL customer base to get the Truckload offering in there or vice versa, you've told us about some success stories on Menlo on the international side, but how about in trucking?
Doug Stotlar
Herb you want to take it.
Herb Schmidt
Sure. Jon, we are early in the integration process, but we certainly have looked at all of the LTL national accounts and we've identified a significant number of accounts that we intend to, and we are putting together a plan to call on throughout this next year, that have truckload business, but we don't currently do business with. So, we are excited about that as an opportunity we've never had in the past. And we will just see what that potential brings over the course of this next year. But I can tell you, we're excited about it, we're going forward making those calls.
Jon Langenfeld - Robert W. Baird
Okay. Good and then lastly on just the volumes of bids, Herb. I mean is it more than what you'd typically see, I'm assuming it less than last year, but just how that pipeline is starting to shape up here in the first half of the year.
Herb Schmidt
It's just about what we expected, not more and not less. And I can tell you of the few bids that we've had visibility too and there have been very few, at this point time. Pricing has remained flat.
Jon Langenfeld - Robert W. Baird
Great thanks for the color.
Doug Stotlar
Thanks Jon.
Operator
Your next question comes from the line of John Barnes with BB&T Capital Markets.
Doug Stotlar
Hi, John.
John Barnes - BB&T Capital Markets
Couple of things. Number one, following up on that conversation about the last question on the bid activity, this time a year ago as a lot of truckload carriers were going through bids, and we heard instances where bid activity was going to maybe the fourth round of bids, before something we got to see -- they kind of finalized. Can you talk to that a little bit or are you still seeing multiple rounds of bids to get these things settled, or is it kind of coming to flourish in a little bit quicker, is it right?
Doug Stotlar
Herb?
Herb Schmitt
Nothing out of the ordinary John. I am not seeing the bids going to any additional rounds any more than I have seen in the past. I see no change in that.
John Barnes - BB&T Capital Markets
Okay. The second thing is, as we progress through the earnings season especially with the truckload carriers, a lot of majors have been shrinking the fleet and going through some material fleet reduction efforts to protect profitability. Can you talk about the Con-way's fleet count, and, do you really have to focus on your fleet count, given that you got the back staff of some of the LTL freight to fill you up and until the truckload volumes reemerge? Can you talk to that just quick here a little bit?
Doug Stotlar
I will take that one. CFI's fleet count, when they came in and joined up forces with our Truckload carrier, we had some access tractors that we hadn't been cede to former Con-way Truckload. Herb and his team have been successful at ceding all those tractors during the remainder of the year. And right now we are pretty well for the next recruiting class. Herb is going to be scrambling to make sure he has enough trucks to cover everybody. So, we've got our seat pleated at this point in time. We are looking at a few adds this year, and only because we are adding some additional teams for some of the transcontinental line haul service. But we are going to be very conservative with our approach this year.
John Barnes - BB&T Capital Markets
Okay, very good. And then on Menlo, can you just talk to kind of the bid pipeline right now and what I am interested in is with the DoD contract kind of coming, beginning to - the start up of that effort. Are you limited at all in terms of the kind of things you want to pursue right now within Menlo, just given the complexity of that and what resources it may consume?
Doug Stotlar
Hey John. No we are not limited at all. We have a team that's dedicated to the DTCI project. That's fully engaged, that's going to ramp up here over the next two years. It's a two years' phase roll out, with about half of the project rolling out in this first calendar year of '08.
Our pipeline is as strong as ever. We had a record year of project wins in '07 and in January where that momentum was continuing. So we are pretty optimistic in the short-term here that we are going to bring on at least as many projects as we did in 2007.
John Barnes - BB&T Capital Markets
Hi Doug, have you seen your close percentage of on bids within Menlo accelerate, or is it about historical level?
Doug Stotlar
Well '07 was a record year for us, and right now our pipeline is relatively the same level as it was last year.
John Barnes - BB&T Capital Markets
Alright, very good. Nice quarter guys. Thanks for your time.
Patrick Fossenier
Thanks John.
Operator
Your next question comes from the line of Tom Wadewitz with JP Morgan
Doug Stotlar
Good morning, Tom.
Tom Wadewitz - JP Morgan
Yes, good morning. Let's see, I wanted to ask you about your assumptions on LTL within the guidance, if you are assuming kind of flattish OR at LTL in '08? And what kind of cost levers do you have to push on if the tonnage trend - if you will say our markets stay kind of weak, and so you can't do a lot with pricing and tonnage is kind of low single-digit?
Doug Stotlar
John you want to take that.
John Labrie
Sure, Tom. Tom as you know, we run a very heavy, fixed and call it semi-fixed cost. So as tonnage declines, obviously it creates a tougher operating environment for us, and the biggest lever that you have to pull is how you manage your staffing in order to keep your productivity up, given the impact that labor cost has on our total business. So, if we get into declining environment, that's the single biggest lever. There are some other ones that obviously you can put some focus on as well. CapEx is an example where there are some things that we can do with planned equipment purchases, but the by far the biggest opportunity is to really manage our workforce in a very disciplined manner.
Tom Wadewitz - JP Morgan
If you look at - looks like less rebranding cost, and I think you will have some overhead, headcount reduction benefits from the consolidation of the three regional. What kind of an impact does that have if you think of it in OR terms. Is that worth 50 basis points on the OR. How big is the impact on that?
Doug Stotlar
Well, to some degree it depends on what pricing environment does, because anything we could gain on from those cost savings if we see any softening in the pricing environment would be overwhelmed by that. So in a static environment your are going to be looking at a little bit of OR improvement perhaps three quarters of a point, I mean a third of a point to a quarter of a point.
Tom Wadewitz - JP Morgan
Okay. And then I guess on the sales force team that you have made in LTL, have you seen some early traction on that? I think the initial sense was, if you manage it as one unit or manage it a little differently it would attract traction on the business, it's inter-regional just because you have the more integrated sale and most complexity in the way you present that to the customer. Have you seen traction on that at this point?
Doug Stotlar
John?
John Labrie
I think the reorganization has already, and will in the future, enable higher levels of execution across the business, and that includes our sales force execution. We are definitely focusing the entire team in one single direction, and it I think had some benefit already and I think it will continue to benefit in the future.
Tom Wadewitz - JP Morgan
Okay, great. Thank you for your time.
Operator
Your next question comes from the line of Jason Seidl with Credit Suisse.
Jason Seidl - Credit Suisse
Hi guys.
Patrick Fossenier
Good morning Jason.
Jason Seidl - Credit Suisse
Good morning. Dough a quick question for you, and you alluded to the fact that one of your competitors is up there. Yes they almost come in the bottom of the economy. It sounds like you are a little bit more cautious right now. Can you talk to some of things that you are looking at internally that would cause you to forecast your just bumping along the bottom line?
Doug Stotlar
Well I guess the biggest concern I have is, I don't think we truly know what happens in a global recession, and there are signs that there is concern about that and what that potentially does to export activities to others. So I am just concerned that we continue to focus I think as an industry on North America specifically, the world's a much more integrated place now. And I am just concerned that any type of disruption globally could potentially put us in a situation where we are not going to able to keep our pricing levels firm and that could have a pretty detrimental impact on us.
Jason Seidl - Credit Suisse
So, right now you are looking at things as were still in a freight recession, but not going sort of any lower at the moment?
Doug Stotlar
That's correct.
Jason Seidl - Credit Suisse
Okay. That's good.
Doug Stotlar
Basically we just modeled our year, there's more of the same. We don't see any at this point inflection point that would change that.
Jason Seidl - Credit Suisse
Okay, fair enough. Now I know you commented a little bit on sort of new pricing for the Truckload, could you talk little about contractual wins at the LTL market, and what sort of rates increases you are getting now. Sounds like the revenue per loaded mile -- revenue per hundredweight, actually is going to be up in 1Q, and so I just want to know what kind of little contracts are right now?
Doug Stotlar
John?
John Labrie
Sure Jason. As I said earlier, we didn’t notice any real change in the pricing environment in the fourth quarter. We see a pretty even distribution of contractual explorations throughout of the course of the year. So, if you look at our contractual explorations by quarter, they are the highest in the first quarter and lowest in the fourth quarter with every quarter being between call it 18% and 30% of our contracts expiring. So, it's pretty normal distribution. And we haven't noticed any real changes. It hasn't been a great pricing environment for some time, but it's also been worst. And there is no indication that, that's changing.
Jason Seidl - Credit Suisse
Okay John. I know you guys have been putting out for a couple of months, the ads really trying to get a larger percentage of long-haul business and it doesn't sound like in terms of the percentage of overall business the needle has moved that much. In '08 can we expect the long-haul portion to creep up a little bit?
John Labrie
We are going to continue to focus on the fact that we have a single network, where we offer customers a fantastic product in both regional, interregional and long-haul business, and we think we have some real advantages to customers in that regard.
We think, we have under communicated the capabilities that we have in the longer length haul segments of the business in the past, and therefore we focused some of our sales and marketing effort most recently around that. But the real message is that, through a single network, we can provide our customers with a full suite of a very best LTL service available, and we are going continue to really focus our conversations and our marketing efforts around that point.
Jason Seidl - Credit Suisse
Okay gentleman thanks for the time as always.
Patrick Fossenier
Thank you.
Operator
Your next question comes from the line of Ed Wolfe with Bear Stearns.
Ed Wolfe - Bear Stearns
Hey Doug, last time I asked you the question of when can we expect to start to see clean quarters with no more charges and puts and takes, and I think you said probably by about second quarter of '08, at least that's how I recall it. Do you feel like you are on track for that still?
Doug Stotlar
I do, and we intentionally try to conclude as much of the freight reorg activity in Q4, as we could. We got a little bit of residual from that, a few cents. There are certainly going to be some additional rebranding, we are going to try to accelerate the freight rebranding and get the majority of that done in the first half of next year, and I think after that we should be looking at some smooth water.
Ed Wolfe - Bear Stearns
Hey Kevin, can you talk about the interest expense guidance of $65 million for '08. You are on a run rate of $50 million or $60 million coming out of fourth quarter. Is that just the repricing of the bonds for CFI or what's going on?
Kevin Schick
It's basically the permanent financing that we secured just before Christmas. December ended, the quarter that we got done, and just reflecting that reality going forward in '08.
Ed Wolfe - Bear Stearns
Okay. Switching gears on the LTL side, the sense that I get is your are assuming we bump along at the bottom in terms of freight demand, doesn't get better, doesn't get worse kind of a thing. And that you guys continue to take some share like you have been doing in the market, that's how you are looking at demand. Is that a good summary of that?
Doug Stotlar
I think that's a summary Ed.
Ed Wolfe - Bear Stearns
Okay. On the yield side, should we assume that you assume pricing gets a little bit less worse that we go from minus 0.4 net of fuel to positive low single digits or is there something to mix there?
Doug Stotlar
Right now we are assuming that we are going to get back to a low single digit yield improvement ex-fuel.
Ed Wolfe - Bear Stearns
So, we would see an acceleration from fourth quarter, is the assumption that -- gradually through the year kind of a thing.
Doug Stotlar
Well you probably have seen more towards the first half of the year, simply because the GRI comes in the beginning part of the year and that will have an impact and then as in typical years you see it kind of moderates as the year goes on as the pricing environment starts to eat away at it.
Ed Wolfe - Bear Stearns
Okay. Can we get an update maybe from Herb, just a little more color on the transition of CFI on what physically has occurred to this state in terms of terminals and in terms of changing in routing or changing in sales force or combination and what's left to be done over the next several quarters?
Doug Stotlar
So Herb.
Herb Schmidt
First of all Ed I think the most critical thing is that our primary team, the team that brought the bride to the wedding in the first place, is in place, and they are fully engaged at this point in time. Relationships are developing between the Con-way, Truckload, CFI people, and the other divisions and so as they understand each others needs more and these relationships develop. It seems like the integration process is beginning to gain more momentum as we go forward.
So, I have got this team primarily focused on the integration, getting the most we can from the synergies that are very evident with respect to our customer basis, the internal harvesting of LTL Freight and Minelo Freight, as well as the calling on the national accounts that we don't do business with today and vice versa, us handing accounts off to them, or introducing them to accounts that they don't do business within the LTL logistics environment. So, really we are focused on gaining as much traction as possible, as much momentum as possible in our integration efforts this next year.
Ed Wolfe - Bear Stearns
But in terms of structures, I know that there was in the report somewhere consolidation in Memphis or somewhere of a terminal, how much of that is there that you have done and what's left to do on the physical side of things?
Herb Schmidt
Okay .The physical side of things, it's done. The drivers are settled in, the Memphis facility the old Con-way Truckload has been closed down and the drivers are settled in and integrated into our operation, as are the trucks. And in to our existing terminal network, so that part is done. Throughout that process we were able to keep driver turnover flat, which we thought was a great success and that's behind us.
Ed Wolfe - Bear Stearns
Okay. And so, in terms of terminals, in terms of equipment you are in shape, the only drag at this point then would be on the branding the 2 million.
Herb Schmidt
On the branding and that's primarily signage and equipment branding and things of that nature.
Ed Wolfe - Bear Stearns
On the Freight side, is there any truckload that get's reported, when I look at yields and tonnage now for the LTL side, the Freight side. Is there any truckload tonnage that's blended in LTL or is that a pure LTL revenue per hundred weight and tonnage or is all that truckload been striped and brought over to CFI?
Herb Schmidt
I am not quite sure I understand what you’re trying to get to at?
Ed Wolfe - Bear Stearns
Well, all LTL carriers do some truckload, and when I look at data whether it's reported from Arkansas Best or Old Dominion or you guys, we have to be careful whether we are talking about just LTL or combined LTL and truckload to understand the mixes of things.
Herb Schmidt
Okay. Well, first of all, any truckload freight that they give to substitute service carriers it's just consolidation of LTL shipments. So, anything that we report LTL does have some truckload movements, that's included in their revenue. We start breaking out the difference between truckload and LTL quite a while back. It was pretty much mixed together. But there is no specific truckload that, if there is truckload movement that are moving on a set up hubs within the LTL network, it's included in the LTL revenue.
Ed Wolfe, - Bear Stearns
Okay. That's what I was just trying to understand. Thank you. This is great. I appreciate the time.
Herb Schmidt
Thanks Ed. Take care.
Doug Stotlar
Thanks Ed.
Operator
At this time we have time for one last question. Your last question is come from Art Hatfield with Morgan, Keegan.
Art Hatfield - Morgan, Keegan
Good morning everybody.
Doug Stotlar
Good morning Art.
Art Hatfield - Morgan, Keegan
Actually I do just have one quick question. This is related to both LTL and TL. Are you seeing any shippers come to you who want to, for lack of better works, divert freight to you from other carriers for fear of certain carriers going out of business?
Doug Stotlar
Art, we certainly don't believe that's happening and it hasn't been how it's been described to us by any customer. So, we are not aware of any diversion.
Art Hatfield - Morgan, Keegan
Okay. That's in either case, truckload or LTL?
Doug Stotlar
Right.
Art Hatfield - Morgan, Keegan
Okay. Thank you. That's all I have.
Doug Stotlar
Thanks Art.
Patrick Fossenier
Operator, why don't you give them the replay information and if or anybody who has further questions feel free to give me a call. Thank you very much.
Operator
Thank you. This concludes today conference call. Today's replay will be available at 1800-642-1687. Again the number is 1800-642-1687. You may access this conference by pressing 28965863. Again that was 28965863 as the conference ID number. Thank you this concludes today's conference call.
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