YRC Worldwide Q4 2007 Earnings Call Transcript

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 |  About: YRC Worldwide, Inc. (YRCW)
by: SA Transcripts

YRC Worldwide Inc. (NASDAQ:YRCW)

Q4 2007 Earnings Call

January 28, 2008 2:00 pm ET

Executives

Stephen L. Bruffett - Chief Financial Officer, Executive Vice President

William D. Zollars - Chairman of the Board, President, Chief Executive Officer

Michael J. Smid - President - North American Transportation

Sheila Taylor - Vice President, Investor Relations

Analysts

Tom Watawich - J.P. Morgan

Dave Ross - Stifel Nicolaus

Justin Yagerman - Wachovia Securities

Ken Hoexter - Merrill Lynch

Tim Zoyer - Bear Stearns

Tannis Prietto - Aurelius Capital

Jason Seidl - Credit Suisse

Thom Albrecht - Stephens

Andrew Rast - Collins Stewart

Aaron Wilson - Resolution Partners

Paul Carpenter

Matthew Sheppard - Business Strategies

Mark Schrieder - J.P. Morgan

Stephen L. Bruffett

Good afternoon, everyone. I’m Steve Bruffett and on behalf of YRC Worldwide, we’d like to welcome everyone to our analyst meeting and fourth quarter earnings discussion this afternoon. We appreciate all of you joining us here in person and we welcome those who have joined us via the Internet or by phone.

Just some quick administrative stuff this morning. The slides that we’ll cover here today are available on our website, yrcw.com, so those can be accessed up there on the site. In addition, we’ll be making some forward-looking comments that are contained in the slides as well, so we would encourage you to look at our earnings release from this morning, as well as our recent SEC filings, our K and our Q, as well as the disclosures that are contained in the presentation itself.

Representing the company today are Bill Zollars, our Chairman, CEO, and President; Mike Smid, who’s the President of our North American Transportation unit -- that’s basically all of our asset-based companies in North America, a predominant part of YRC Worldwide; myself and Sheila Taylor, who is our Vice President of Investor Relations.

We realize it’s earnings season. Everybody is busy and has a lot going on so we’ll try to move through our comments crisply this morning and let you get on your way. We plan an hour or less of prepared comments and then we’ll open it up for Q&A and plan to be done in 90 minutes or less.

So with that, I’ll introduce Bill Zollars and he’ll take you through an overview of our 2007 results.

William D. Zollars

Thanks, Steve and again, welcome. We appreciate you being here. I know this is a little bit unusual from a timing standpoint. I wanted to just take a couple of minutes at the beginning to talk about why we felt it was appropriate to do this today.

Frankly, we thought we might run out of time during our normal analyst call to cover some of the things we think are really important for the understanding of the company and so we thought a forum like this would be a more appropriate way to make sure that we covered those high points.

So today we’re really going to talk about, in addition to the earnings and the fourth quarter and for the year 2007, our labor contract, which is in the process of being ratified with the teamsters, talk to you a little bit about some of the high points of that; talk to you a little bit about the recovery plan that we have in place for the regionals, and I’ll tell you right up front that we’re not going to give you everything you’d like to have on that because we are still a couple of weeks from being able to share the details of that regional recovery plan. And then talk to you a little bit about the financial position of the company, just in general terms.

We’ll also get into further discussion of the integration process for the companies. You might think of our strategy over the last few years in three stages. The first was an acquisition strategy where we tried to build the scale of the company and build the capabilities of the company so that we could do more things for our pretty sizable customer base.

The second phase was really the synergy phase where we started to pick up opportunities that were either duplications in processes or uses of best practice in one company that we could transfer to the others.

And then the third phase of the strategy, integration, which is the phase we are currently in. And just as kind of a reminder, integration is a process, a continuum, and not simply an on and off switch.

So we are going to talk to you today about where we are in that process or that continuum of integration as we bring together different pieces of our companies in a more effective way, but realize that that process is likely to go on for several years. And we’ll get into as much detail there as we can as well.

So let me just kind of quickly review the results for the quarter and the year. As you all know, I think operating conditions this year have been particularly tough and as really contrast to the last downturn in the economy, this one kind of gradually took place over all of 2007 and in fact began at the end of 2006. And rather than the kind of steep drop-off we had in the 2001/2002 timeframe, this time it was more month after month of consistent erosion.

We also had very poor performance from our regional companies and that was really exacerbated by the performance of the regionals over the last two quarters of the year. We’re going to talk to you, as I said, a little bit later about our plans for recovery there.

Really the story there is we had one company that’s pretty much bulletproof in New Penn. They continue to perform extremely well throughout the downturn and we have two companies that are not doing well, Holland and Reddaway, and we’ll talk to you about the plans to fix those.

The national part of our business, the Yellow and Roadway companies, performed reasonably well in the fourth quarter, probably not as well as we expected them to perform. There’s a little bit of nuance in the way the reporting came out. We do have about $10 million of a technology write-off that was applied directly against the nationals for accounting rule reasons, but if you took that out as a one-time kind of write-off for technology, they would have operated at about a 98. Not up to our standards but a little better than the reported results would have indicated, and we’ll come back to that a little bit later as well.

And then the non-story here is the logistics part of our company continued to perform well. We’ve made some progress in China and I’ll come back to that as well.

We’ve done a lot in the last few months to position ourselves for the future. Moving the regional companies under Mike Smid’s team into the national -- sorry, the North American transportation organization was another step in the process of making sure that we start to manage our businesses more comprehensively and take down some of the artificial barriers that we have.

The fourth quarter in particular had some relatively big numbers in it. Probably the most obvious and the one that I think most of you are very familiar with is the impairment charge that we took before the end of the year. That was something that resulted from a pretty precipitous price fall in our stock and the fact that we have to go through an annual review of all of our assets. So that was a big number. It was a non-cash charge, really doesn’t have any impact on our ongoing operations other than the one-time charge.

We have had some reorganization charges as well in the fourth quarter. These really revolved around the consolidation of the regional group and the North American group and we also had, as I mentioned earlier, a write-off of our technology systems. The thing that drove that really was the desire to get Yellow and Roadway on a common operating platform from a technology standpoint. We’re going to talk more about that but that was really the driving reason behind that $10 million write-off. It really made a lot of the systems obsolete as we start to transition to a common platform there. And then we had our normal gains on property, which is a quarterly event.

We also reduced debt quite a bit during the fourth quarter. I think that probably came as a surprise to some people who were having questions around our cash generation. We actually paid down a significant amount of debt in the fourth quarter. Steve will take you through the numbers here in a minute.

So for the full year, it’s really what I just covered -- we had the impairment charge, we had about $22 million worth of severance as we begin to streamline the company for a go-forward basis, and then the technology write-down of about $10 million that I mentioned.

I think this chart is interesting in that it kind of shows you the progress that we’ve made since the last downturn. This shows you the margins that we’ve had during all the parts of the business cycle and as you can see, both in the good times and in the bad times, we’ve been able to expand our margin from where it has been historically.

If we had had the kind of performance out of the regionals we expected for this year, our margin would have been around 3% instead of that 2.3%, just to put that into perspective. But I think you can see from that that the margins have expanded both at the peak and hopefully this is the trough. We’ve been through this before. We know how this movie comes out and now it’s a matter of just making sure we manage our way effectively through this downturn.

I’ll get to some of the tonnage numbers here and give you a feel where you I think we are in that cycle as we stand here today. From a national segment standpoint -- again, this is Yellow and Roadway -- you can see how the year unfolded, where every quarter got a little bit weaker than the previous quarter from our perspective, with about an 8% tonnage decline in the fourth quarter of this year.

The good news here is that the yield has held up pretty well. The 5.7% yield you see in the fourth quarter is a little bit distorted because up until the fourth quarter, year over year fuel prices were about equal. In the fourth quarter of 2006, fuel came down dramatically. Obviously that did not happen this year, so if you wanted to put this on an apples-to-apples basis, you could assume that the yield for the national companies was about where it was in the second or third quarter. Somewhere between 1% and 1.5% if you kind of normalize the fuel.

On the regional side of the business, you see the tonnage declines here as well. Not quite as significantly down as on the national side and again, on the yield side, not quite as strong as the national. Again, normalizing for fuel, you’d get about the same kind of result as you saw in the third quarter on the regional side of the business.

So tonnage has been a struggle this year, as everyone knows, driven by the underlying economy. Yield has held up reasonably well in that kind of a sizable softness. We really feel like right now we are about at the bottom of the cycle. It’s difficult to know how long that bottom is going to last. That’s really the big question in front of us but it doesn’t feel like things are getting any worse. If we had to guess, I think we’d say that we’ve got about another quarter ahead of us that will be rough sledding and then we should see things start to improve a little bit.

Steve is going to take you through the financial position here in a second and then we’ll get into a little bit more around the labor contract and we’ll finish up with the actions we’re taking for 2008. Steve.

Stephen L. Bruffett

There’s been quite a few questions and confusion and even rumors around the company, so I’d like to address some of those as I weave in discussion around our fourth quarter as well, beginning with the bank covenant. There seemed to be a lot of questions about are we going to violate a debt covenant or not, and as you can see from the slide on number 15 here, we were able to delever significantly in the fourth quarter from our position at 9/30/07. We had $150 million of cash on the balance sheet and we used that to extinguish $150 million of floating rate notes that were to mature in May of ’08, so that’s been taken care of by year-end, and as well as our seasonally strong fourth quarter, we generated $128 million of cash flow, all of which was used to reduce debt. So we ended the year at about $1.2 billion of debt and as such our covenant, which can exceed three times trailing 12 months EBITDA, is at 2.5 times, so well with inside the covenant and we feel that through prudent management of cash flows and CapEx and so on that we’ll be able to manage this issue successfully.

You can see here that on our current debt levels, this $1.2 billion, that we would need about $160 million of operating income or EBIT to support that level of debt, as we have at least $240 million of depreciation and amortization expense.

One thing I’d like to point out is if you look just on the face of our income statement for the fourth quarter, it shows $74 million of depreciation and amortization expense. Don’t take that number and multiply by four and assume that’s going to be our ’08 number. It’s not. It has these technology charges that Bill referred to earlier contained within that line of our income statement, so I’m providing you here 240 to 250 range for depreciation and amortization for 2008. It’s a better number.

Next slide -- like I mentioned, we do anticipate that we’ll be able to manage our debt levels at or below the current levels of $1.2 billion and we’ll do so through the management of the amount of CapEx, as well as the timing of CapEx to make sure that that’s well aligned with our cash in-flows and free cash flow generation.

Debt reduction is the predominant use of free cash flow, outside of a couple of items I’ll mention on the next slide. We have no intended uses of cash other than debt reduction for the foreseeable future.

For those of you that followed the company, you’ve heard us talk for several years about our target debt position being 35% or so of debt to capital as being our target leverage and we’d like to revise that today. Going forward, our target is just a simple we want debt to be below $1 billion. There’s some math behind arriving at that number but it’s a good clean target for us to aim for as we move forward.

Slide 17 here, you can see capital expenditures, our view of this as we go into 2008, a range of $200 million, $250 million, and there is a considerable amount of discretion contained within these numbers and we’ll prudently manage this as we move throughout the year. We’re in pretty good shape with most of our fleet and so on and have some flexibility in how we manage our way through the remaining portion of this economic downturn.

Other uses of cash that I mentioned previously, the Jaiyu acquisition in China that we previously announced. We have a definitive agreement and anticipate that the transaction will close sometime in the second quarter, plus or minus a little bit. That’s about $40 million that we anticipate of a cash outflow at that point.

There’s also a non-union pension funding. This would be a third quarter event. If we indeed choose to do this, we have discretion on $55 million out of the $59 million of funding that’s currently anticipated that we have, and for those of you that are doing modeling, we anticipate this non-union pension expense to be about $35 million expense during 2008, so you can see the gap between expense and cash funding that we anticipate there.

Slide 18, more questions about our liquidity and how stable is that and I would characterize it as being very adequate, very stable. So you can see from the slides here, we’ve been able to increase our liquidity throughout the economic downturn, both through debt reductions and through in August of 2007, we’re successfully able to renew our credit facility, and upside in a challenging credit environment, so we feel very comfortable with $689 million of liquidity at year end and like I said, we’ll work to preserve and enhance that number as we move forward.

Another question has been about our upcoming refinancing activity and so here you see what we have within the next 24 months. We don’t have anything until December of this year, $225 million of Roadway notes. And then in May of ’09, the USF notes of $100 million, which are -- we don’t have a specific plan to tell you about today because there’s not a need for a plan at this point. It’s still well off in the future and like I said, we intend on delevering further as we go through the year and creating more additional liquidity, so we always have a fallback plan if we need it of just using our existing credit facilities to absorb especially the Roadway notes and even the USF notes if need be. However, we have plenty of time to work through that. We’ll be actively assessing the credit markets and what makes sense for us to do but we’re not -- this does not present a concern for us at this point in time.

Another area where there’s been a lot of confusion is pension plans. Now this won’t be a deep dive into pension accounting and all of that but it will compare and contrast briefly that we have more than one pension plan and people constantly confuse the two, so I’m trying to lay out for you here what they area and what they look like and what they represent.

The first is our multi-employer pension plans, which is a group of retirement plans referred to as MEPPA, that cover our collective bargaining employees, about 50,000 across the corporation. You can see here the annual expense numbers associated through that. Importantly, these numbers are inherent in our cost structure, they run through the salaries, wages, and benefits line. They always have and they will going forward. They are not new, incremental costs, like there’s been some confusion about.

The cash outlay is very similar to the expense. There would only be minor timing differences involved here, so that is already inherent in our numbers and will be going forward as well.

In addition, we don’t anticipate any funding requirements above and beyond what are contractually agreed to in our existing or tentative new labor agreement as we go forward. They are contingent liabilities. These plans are not our plans. They are managed by trustees of these pension plans, therefore they are not on our balance sheet but they do represent contingent liabilities and we don’t see anything that would make them be other than a contingent liability in the foreseeable future.

Slide 21 here is our other pension plans, which is our non-union pension plans. You can see the population of non-union employees that it applies to. These again flow through salaries, wages, and benefits line of the income statement. You can see the declining expense numbers associated with this and $62 million in ’06, $44 million in ’07, and the $35 million or so that I referred to for ’08 on a previous slide. The decrease in that expense is due to the improved funding levels and to at year-end, the discount factor used to estimate the present value of those liabilities.

You can see the cash funding that’s gone into the plans -- part of why the funded status has improved significantly but you can also compare the expense to the cash funding with that.

Slide 22 shows the funded status of our non-union pension plans here. At 12/31/06, unfunded amount was about $300 million, but then you can see the considerable improvement, both through asset performance and through the funding we provided during the year, we’re now at $137 million at year end, so we see a pretty clearer path to meeting our obligations under PPA to be fully funded by the pension plan year of 2011.

We do have discretion around the specific timing of that funding but at this point, we anticipate that it’s approximately $50 million a year for the next several years.

With that, I will turn it over to Mike Smid who is going to take us through an overview of the tentative labor agreement.

Michael J. Smid

Thanks, Steve. The labor agreement that we’ll talk about today is the national master freight agreement. Attached to the national master freight agreement are a series of supplements that involve different geographies throughout the United States. The national agreement is by and large the core of our overall contract and really applies to all of our labor at Holland, New Penn, Yellow, and Roadway.

As far as general comments on the outset, it is a good contract. It is a very different contract than what we have had historically. It does address some of those critical issues in terms of our employees and most notably, the pension and benefit structures that are out there. But probably more important, it really allows us to address and broaden our approach to the business. It is a contract that can allow us to move to more contemporary designs with our network, a different approach to labor, a different approach to some of the jurisdictional aspects and different approaches to our national transportation network.

It’s a tailored agreement. Historically, we had to come to terms on a multi-employer concept to where we sat with a number of different companies -- the interests were different, the competitive aspects of that room made it very, very difficult to become aligned and really push or attempt to redesign a contract that applied to our business. The industry has changed and as the concepts of networks and freight transportation has changed, this time we were able to approach it from a YRC standpoint.

It allowed for a more productive approach but most importantly allowed us to work on this cycle and on this structure much earlier. Coming to conclusion in early or mid December put us in a position that over the course of the next couple of weeks will move toward ratification.

Historically, there’s been some impact as we approach our contract. There’s also the unsettled aspect of the market. Being done with this and moving forward, in the beginnings of redesigning our business to utilize the contract, we’re well ahead of where we’ve been historically.

The contract is for five years. It will be effective April 1, 2008. It expires on March 31, 2013. The ratification process is ongoing right now. The national master freight agreement vote is in process. The ballots are out. We’d expect them to be turned in and counted between February 6th and February 8th. During that timeframe, or ongoing right now, are some lesser or more localized negotiations that go on in some smaller segments -- a few offices, shops in the Chicago metropolitan area, all of which are moving along as planned and by and large, the national master freight agreement sets the standards for those contracts.

On slide 25, it talks about a utility employee and the important aspect of this designation is that it begins to move beyond some of the limiting jurisdictional aspects of either geographical movement of an employee or crosses back and forth between segments of the workforce, a driver versus a dockman versus somebody that may perform some supporting function.

The utility employee is capable of moving across those jurisdictions. It adds a lot of speed. It has a tendency to be more efficient, reduces the hand-offs that becomes, makes our national network much more effective in terms of regional transportation, or shorter distances, eliminates some of the time or overlap where one driver may be waiting for another individual to perform a function. It allows us to enter and be more aggressive in new market opportunities, some of the distribution work, some of the more regionalized work that has been very, very difficult historically to do in our large companies.

It also offers some significant opportunity for the redesign and in a more effective network at Holland. In particular, their regional operations should see some significant advantage.

There’s a dollar premium per hour. That dollar though, when compared to the blended wages of functions that this employee will be doing really is pretty much an offset. A road driver versus a local driver versus a local dockman, that entire blend of wages comes pretty close to this same incremental payment.

Some of the key benefits -- more competitive, more efficient freight movement. The hand-offs, the number of people that have to touch or be involved in a shipment from end to end in order to perform a deliver, our proposition or value proposition in the shorter length -- it all changes dramatically as to what we can do, or what we can do within a region with these types of employees and it really facilitates us moving to a more contemporary network design with all of our companies.

Another important aspect of the contract has to do with the application of labor. In this contract, there is a four-hour casual. A casual employee is someone that can be brought in on an intermittent basis. The purpose of this employee is to deal more aggressively with fluctuations in business volume. It does recognize the non-driving wage and will remain at $14 throughout this contract. There is a different benefit level or different benefit structure that’s associated with this as well.

As we look at these faster, more compressed, quicker timeframe networks that respond up and down to varying degrees of volume, this is going to allow us to be more responsive, more aggressive in terms of matching labor with actual work.

The short interval planning, high-speed network design we can compensate for with the variable start times of these employees and the commitment of a four-hour type of work day as opposed to an eight with a standing start time.

An aspect of this that you’ll hear more and more about over the course of the next year is our ability to purchase transportation. Historically within our contract, we’ve been able to take 26% of our miles and move them via the rails. Most of you have recognized over the course of the last year, year-and-a-half that the dynamics of that service have change considerably. Not just the railroad service and predictability but also the availability of equipment or repositioning of equipment. For years our company has operated on a series of real trailers. As that disappeared over the course of the last year, it’s had some impact but more importantly the overall services the rails provide and the rate increases that we’ve seen are going to make this new form of transportation very, very viable.

As it progresses and as it develops, there will be opportunities for us to expand our offerings in the marketplace and potentially become much more aggressive in terms of how we promote and sell truck loads and perhaps even blended services in terms of distribution and utilization of the utility employee.

The [inaudible] side of this is very similar to our last contract. The actual compounded, on page 28, the actual compounded annual increase is in the area of 1.9%. The pennies or cents per hour are very similar to what we had in our last contract.

When we go to page 29, we begin to talk about the overall benefit structure. There’s a $1 per hour per year increase in terms of our benefits.

The most important aspect of this is that with our multi-employer pension funds, we have our current benefit rate, the cost of that on an hourly basis. This particular $1 is defined in design, so that it receives first priority should there be a surcharge associated with the fund or an additional fee associated with the position of that fund, it comes first in terms of utilization of this dollar before any other dollar or any other cents are applied to the benefits within the structure.

There are also some changes within the benefit structures related to the triggers, the number of hours or number of days that an employee needs to work in order to qualify. So it was very important to us in terms of our total cost per hour, our utilization of employees, and our blended labor cost over a period of time.

On page 30, give you a feel for the total compounded cost of the contract. The actual compounded cost is 3.8% over the life of the contract. That’s the weighted average of the wages, pension, healthcare increases. When we actually look at the net impact and we look at the impact after some of those aspects of the contract, it provides some advantage or provides some opportunity for us as we go forward. It’s in the area of 3 to 3.5. Just as a point of reference, in our last contract that annual impact on a year-over-year basis was about 3.2.

To give you a feel for the size and scale of some of this, we do have approximately 50,000 employees that are involved in this contract. From a rail standpoint and from an intermodal standpoint, one percentage point of intermodal is about 14 million miles, so the advantages from a cost standpoint and a flexibility standpoint within our transportation models offer us means of approaching our business very differently.

On page 31, a little bit of a summary; the contract addresses the opportunities for growth. It deals with new services that are an opportunity for us to expand our current service offerings. It allows us to move to a more contemporary network design, a design that has fewer changes, fewer hand-offs, better efficiency in terms of either long or short distances as they move to our network. There are benefits for our customers. Our ability to change transit times, to provide some of the expedited, premium services or solutions part of our services that we offer currently, expand it tremendously.

When we look at the contract from a timing standpoint, having this done and leaving us in a position to move forward with some of our network plans, to move forward with some of the work that we need to do in terms of each of our operating companies, and remain focused in terms of our market, customer, and development of new service is very, very important. Historically this process has still gone on and on and on well into March and sometimes into April.

It more effectively aligns all of our resources and particularly our employee resources with both growth opportunities and the actual work on a day-to-day, hour-by-hour, week-by-week basis. It allows us to more effectively deal with changes in business volumes and unique or immediate business opportunities. It allows for us to match both employee benefits and the hours worked more correctly with our business volumes and changes in business volume.

It’s a good contract. Very different than what we’ve seen in the past. It is very much tailored to our company and very, very important for us in terms of the positioning and changes that we need to make with our business as we go forward through the remainder of 2008.

With that, Bill.

William D. Zollars

Just to tie up a couple of other loose ends on the contract, Mike’s team did a great job negotiating a contract which I think is going to make us extremely competitive for the next five years and allow us to do some new things in the marketplace. The other big deal is that the MEPPA liability here is capped basically at $1 a year, so there is no further liability there. And some of you may be wondering the impact of UPS writing a check to get out of these multi-employer pension plans, the impact that that has had and basically, they wrote a pretty big check and that’s going to take the central states unfunded liability from about 60% to about 70% -- sorry, I should say the funding status, so it’s taken it up about 10%, which means our unfunded liability risk has gone down.

Another question that we’ve had is what percentage of the liability do you have as a company now that UPS is not there, and it’s about 33% of that liability that would accrue to us. But again, we’re protected for the next five years with a contract that Mike’s team has negotiated.

We got the contract done early, which is a good thing, minimized leakage from a customer standpoint and created the kind of flexibility that’s going to allow us to be very competitive in the marketplace.

I think we’d all like to forget 2007, so I’d like to move on and talk a little bit about 2008 and what we are doing to make sure that we have as good a year as possible this year.

Basically four overall objectives, as you can see -- first is to manage through this economic downturn. As I said, it feels to us like we are at about the bottom of that and again, as I said, not sure how long the bottom is going to last but at least it doesn’t look like we are going to continue to deteriorate further. Based on our historical reference, it looks like another several months of softness but it doesn’t look like much further deterioration.

China is going well for us. I’m not going to take a lot of time today to go into that. We are going to complete our acquisition of Jaiyu, as you’ll see here in a second but we continue to do well there and that’s a great opportunity for us, not only within Asia but also in connecting the Asian networks to the U.S. networks.

The effectiveness of our asset based companies is going to be greatly enhanced in a number of ways, which we’ll talk about in a second, and that gives us lots of opportunity as we go into 2008.

And then we’re going to put the national companies on one technology platform, which again is an enabler and we’ll talk about the impact of that here in a second.

Just a little more detail on how we are doing against that goal that we set for ourselves of $100 million worth of improvement in 2008, those of you that have been following us know that at the end of the last quarter, we said we were going to go after $50 million of overhead cost and about $50 million of improvement in the regional performance. Of the $50 million target on the overhead side, we’ve got about 30. We expect to get the other 20 here in the next several months. The remaining 20 will be not anymore difficult to get, just a little bit longer in terms of timing as we do some further consolidation.

As Steve said during his part of the presentation, we’re going to keep a real close eye on cash management this year. It’s really important to us and we’ve got a lot of levers to use to make sure that we stay in really strong shape there.

As I said, the Jaiyu acquisition, which will give us the first ground transportation presence in China for a company in our industry, we think that’s extremely important, both for growth within China as well as, as I said, connection to the U.S. networks. And then our logistics and porting joint ventures are going extremely well in China and those will continue to provide great growth opportunities as we go forward.

I want to spend a couple of minutes on the asset-based company effectiveness and I’d like Mike to comment on these as well. Moving the regional companies into this North American transportation structure has really streamlined our ability to look at these companies in a more comprehensive way. The $50 million improvement plan that we’ve got going on at the regional companies will focus on really right-sizing those companies and making sure we have the correct geographic footprint for those companies.

It’s really a back-to-basics kind of strategy. We have one company, as I mentioned, New Penn, that continues to operate extremely well in a very disciplined network and that’s really the model that we are going to use for Holland and Reddaway.

In 2007, frankly, we had a poor plan that was poorly executed. That’s not a good combination and that’s something that we’re still recovering from. But we know the way to fix that and we are well on our way to putting a plan in place to get that done. We’ll have more details for you there within a couple of weeks.

And then finally on this chart, you can see that we’re going to have the ability now to manage all of these resources more comprehensively across all the companies. That’s really important because a 1% change in our asset utilization there is worth about 50 basis points from an operating ratio standpoint, so you can see the leverage we get there by starting to look at these assets and resources across all of these networks as opposed to dividing them up into smaller pieces.

That network management gives us the opportunity to not only look at taking out costs and making those networks operate more effectively but also gives us the opportunity to be more competitive in terms of our service product and the way we go to market with customers. That improved service and quality we think is going to give us a real leg up in terms of our competitive position in 2008.

So maybe I’ll stop there for a second and Mike, maybe you want to talk a little bit about both the regional plan and also the national organization structure.

Michael J. Smid

The regional companies in and of themselves, if you take a look at their history and you take a look at their capabilities, each of them -- in particular, Holland and Reddaway -- had unique footprints and had unique approaches to business. They were really over time and historically a premium carrier within a specific part of the market. They provided world-class service and in many, many cases, commanded a premium for what they provided.

The development of the North American organization and over the course of the last six to eight weeks, we’ve had an opportunity to take a look a little bit more carefully at some of the changes that have been made in those companies over the last couple of years and bring to bear some of the tools, optimization tools and teams that have been involved in execution of much, much larger projects over the last few years.

It’s clear that these companies still are very capable. They still offer a significant value within the marketplace. There is some work that needs to be done.

Obviously within each of the networks, some work in terms of how they operate and how efficiently. I mentioned earlier taking advantage of the new contract, certainly within the connecting piece, the line haul operations within Holland and certainly within Reddaway to really understand the most capable offering and their real -- most efficient economic footprint. All of those processes are in place right now and as Bill mentioned, I would hope to be able to talk a lot more about that over the course of the next couple of weeks.

Within the national transportation group, or the Yellow and Roadway brands, more familiar, there are a couple of big changes that have occurred very recently. This past week we took steps to begin consolidating across the North American brand our corporate accounts, or our relationships with our corporate accounts. The purpose of that is to begin offering broader solution, bring more to bear, more resources and assets to bear with each and every one of our sales calls.

There’s groups within the North American transportation group and specifically we originated them as Roadway solutions group, where they begin to define very specific, very tailored solutions for our customers.

Over the course of the last month or so, we have been able to secure and begin to make offerings that go across the brand. We’ve had a number of projects that involve thousands of shipments, that certain shipments move within each of the carriers, the opportunity to offer a much broader portfolio offering and a much more aggressive approach to our corporate account selling organization.

Our local accounts and local relationships and relationships with local portions of corporate accounts are still very important. Those local relationships will continue.

The real net of this is our regional companies are going to require some work in terms of improving the efficiency of their operation. The plans are well underway. The actual networks themselves are going to require some work and further required change.

As we take a look at what we bring to bear with that, a very different model in terms of execution, a different approach as we go forward in terms of using all of the North American resources to make sure that these plans and efforts are executed properly, and an opportunity to much more aggressively approach our entire organization in terms of how we offer ourselves in the marketplace and how we approach and particularly those larger accounts that span across the United States.

William D. Zollars

Thanks, Mike. Just to kind of wrap up this piece, one of the other things that we’ve done from a strategic standpoint was to take a look at the technology platforms that we had. These were separate between Yellow and Roadway and really kind of precluded us from moving any further down this integration path until we really addressed that. So we made a decision in the fourth quarter to go ahead and move Yellow and Roadway under the same operating platform from a technology standpoint. That was what triggered the $10 million write-off, which made some of the systems obsolete that we had been developing, or had used.

So we are going to be moving to a common technology platform here which will allow us really enhanced visibility and the ability to manage across all of our networks much more effectively than we have in the past.

We’ll also obviously have lower maintenance costs but the real opportunity here is to begin to manage all of these assets more comprehensively and obviously then that gives us more strategic flexibility as we go forward. So that will be an ongoing process as we go through 2008, building that common platform so that we can really increase our opportunities here for better asset utilization and visibility as we move forward.

So that’s kind of what we’ve got planned for 2008. Just to remind you of a couple of things, one is our market position here. We are the largest LTL provider in this space. The operating leverage is not pleasant on the way down but it’s a lot of fun on the way back up and that operating leverage will begin to kick in as the economy recovers.

We are very anxious to get back on track here. We had four years in a row of record revenue and operating earnings. We didn’t like 2007 at all and we would expect to get back on that track sooner rather than later as we implement some of the changes we talked about today.

With that, I will stop and we’ll be happy to take your questions. If you could maybe state your name and what company you are with and then ask a question, so people on the phone and on the Internet can hear you.

Question-and-Answer Session

Tom Watawich - J.P. Morgan

Sure. It’s Tom [Watawich] from J.P. Morgan. I wanted to get your thoughts on the integration of the sales force, how they will sell, whether they will sell two different brands, and -- or if that’s the next step down the road in terms of selling two different brands, and then I had one follow-up.

William D. Zollars

Well, really the thing that gave us the confidence to combine the corporate sales forces together is our experience over the last year with enterprise solutions. You may recall that at the beginning of last year, we put together a group that we named enterprise solutions and it was really their responsibility to provide a single point of contract to our largest customers, our more complex customers.

We’ve had about a year of experience with that now. It worked extremely well. That single point of contact represented all the brands and all the capabilities that YRC has to offer. And that really on a smaller scale is what we are doing here with the corporate account groups. We are putting them together so that we can create a single point of contact for those customers and give them access to all the capabilities, so the answer to your question is yes, they will be selling all the brands and they will be selling all the capabilities the company has.

Tom Watawich - J.P. Morgan

Okay, and then on the cost side in fourth quarter, in national in particular, you ran into some issues on managing down the costs. With the new contract, how much more aggressively can you bring in costs and how quickly can you deploy these utility workers and casuals so that you’d really be able to get at the cost and right-size the cost structure with respect to the lower volume levels? Thank you.

William D. Zollars

Let me start that and I am sure Mike will want to add. The fourth quarter for us was challenging because the volumes were so low that we really ended up with a much smaller group of employees but they were the highest priced employees, if you will, so our cost per shipment handled went up just because we weren’t able to use the same labor mix that we had used in the past.

The contract itself, which will go into effect in April, gives us a lot of opportunity there. It won’t go in all at once everywhere overnight but it does give us a much greater opportunity to be more effective there with our labor force. Mike.

Michael J. Smid

There’s a couple of areas that are important in the contract as it relates to the cycle. The first one would be I mentioned the triggers, what triggers the payment of the health and welfare payment, or potentially a pension payment but typically the health and welfare. When you look at the new contract, the hours are more specifically aligned with the payment. As it stands historically, we have had to almost artificially reduce the number of employees that we have in order to manage that benefit cycle. So with that more accurately lined up, we don’t have one day of work triggering an entire benefit but more closely align the hours, we are actually going to have the opportunity to use a few more people from a service cycle and actually have a much more balanced cost.

The second piece to that is the short interval employee -- those employees that whether it be during a really particularly tight cycle or some of the irregularities in a tighter cycle, the [inaudible] casual and our ability to fluctuate our work force a little bit more aggressively in a shorter timeframe I think will be a distinct advantage going into the cycle next time around.

I think the other part is really taking a look as we go forward, some of the items that we’re beginning to enable with the technology, with the network management, where we currently manage our networks and equipment across all companies as opposed to optimizing within individuals -- all those I think [we’re going to see] better opportunity.

Tom Watawich - J.P. Morgan

So just a follow-up and then I’ll hand it off to someone else -- shouldn’t it take a while to get new employees where you can use casuals and affect the mix? Or can you apply these new things to existing employees and immediately --

Michael J. Smid

Right, the casuals will be applied April 1st. We will also have network changes in both Yellow, or all of Yellow Roadway and Holland, whereby we implement the initial phases of this utility employee very quickly. You’ll see significant changes to these networks aggressively over the course of 2008 to utilize the contract, so it’s fairly quick.

Tom Watawich - J.P. Morgan

Thank you.

Dave Ross - Stifel Nicolaus

Just a question on the use of the utility employees again with starting up a regional service within the national group. Is that part of the regional recovery plan? And how do you see the regional business growing within the national group going forward?

William D. Zollars

I think that we’ve concluded that the next-day offering for YRC will come to our regional companies, so we’ll have New Penn and Holland and Reddaway as really the primary providers of that next-day premium service.

Having said that, I think the ability that this gives us with the new contract is to do a much better job on second day, third day, and beyond kinds of services, with more flexibility and more effectiveness, because it allows us now to be able to manage those pieces much more effectively than we did in the past where we had to hand things off from person to person.

Mike, do you want to add to that?

Michael J. Smid

I think the changes in terms of the utility employee within the national companies, it allows us to do some things that are very difficult right now. As an example, when you talk about something within a region, what’s actually a next day and second day is kind of a blurry situation when you get to some of your premium services.

Things that are only 70 miles away historically in our labor contracts could involve three unions or three locals in order to get that done. As we look at this type of environment, we can make that transition with a single employee across those lines, make a type of delivery.

So the first part is it takes down some of the barriers. The second part of it is because of the fact that you can use this type of employee a little bit differently, it allows us to move to a network with considerably fewer touches. Maybe more locations but fewer touches as freight moves through our network.

From a regional standpoint, when you look at Reddaway, when you look at Holland, when you look at New Penn, they are designed to do some very, very special things in a very special or specific geographic area and their services will always be complementary to what we are capable of doing at a [inaudible].

Dave Ross - Stifel Nicolaus

And then just one follow-up, Bill; with the regional and national products being different, customers like using one company for both of them. Is there any talk of consolidating the pick-up functions on either the national or regional level so that they can have one truck just pick up both from one customer at one time?

William D. Zollars

We’re actually getting better than we used to be in doing that, even with all the obstacles in our way but certainly a common technology platform makes that kind of an opportunity easier to implement for sure.

Justin Yagerman - Wachovia Securities

I guess with what you just said on the regional side, if you are going to be focusing more on just next day and the regionals, does that -- what kind of magnitude of downsizing would that leave you the option of doing within that regional group? Does that include the opportunity to divest assets that aren’t performing well? Or are there alternatives for cash flow generation?

William D. Zollars

I think the real core of the regional companies is going to be next day/second day. That’s really been kind of their sweet spot and will continue to be. I think what we are looking at is what’s the most effective geography to serve customers in that next day/second day and still have it make sense to us. So that’s what we are working our way through right now. That’s the detail we’ll be able to provide you in the next couple of weeks.

Justin Yagerman - Wachovia Securities

How much of the cash flow there is generated from New Penn? Can you break that out?

William D. Zollars

You know, we really haven’t broken that out and I don’t think we want to set a precedent but what I can reiterate is that New Penn has done extremely well. In fact, their fourth quarter operating ratio this year was better than their fourth quarter operating ratio in 2006. That’s the kind of model that we are transferring now to Reddaway and Holland.

Justin Yagerman - Wachovia Securities

And switching focus, I guess third party truckload or just truckload opportunity for some of the line haul that you guys do is an exciting freight opportunity in the marketplace as well as for you guys. What are you thinking? I guess it’s early now but in terms of how much you’d be willing to do yourselves, how much you want to farm out? I guess just to give us a flavor for that, what’s the average length of haul that you have thought about using truckload at or above?

William D. Zollars

Let me start and then Mike can give you some insight here but first of all, I’d like to compliment the teamsters on how they worked with us on this real tremendous area of opportunity for both of us. I think it’s a great opportunity for us to grow teamster jobs in a place where there haven’t been many teamster jobs in the past.

Having said that, there are a couple of pieces of this. One is on our own internal piece today, where we’re moving things over the rail which we could probably move more effectively and really even cost effectively over the road with this new contract. So that’s really the first area to attack, is how can we get more effective use of our line haul operations, either to replace rail where it makes sense or instead of rail where we’ll get a competitive advantage.

And then secondly, to look at the market opportunities beyond that, so I really think it kind of goes in two steps there. The second opportunity could be a very big opportunity for us but the first opportunity creates a lot of value as well.

Mike.

Michael J. Smid

The chart on page 27 really probably is the best illustration of it, and as you take a look at the -- historically, we’ve had the ability to roll up to 26% of our miles. This new contract you can see in 2008 and 2009, would allow us to use purchase transportation for the upper 4%, or 4% of the miles.

As the contract progresses, it would give you a feel for how we might be able to utilize this and keep in mind that each percentage point is about 14.5 million miles. Obviously within the existing rail costs and structure, there is some benefit to do it this way and we feel a better opportunity to provide a different type of service and a more predictable service throughout our distribution centers [inaudible].

Justin Yagerman - Wachovia Securities

Lastly, on Jaiyu, I’m just curious how that’s going to figure into your overall kind of reporting. It’s an asset-based solution so it doesn’t feel like it would be at home in logistics. Is it going to be a separate thing that’s broken out and we’ll get to see it or is it going to be somewhere in the asset-based companies?

William D. Zollars

I think in the short-term, the answer is -- and we’ve had some discussions with our friendly accounting partners on this, because there’s kind of always been different opinions on this but I think the way we are going to come out is that we will be able to consolidate the Jaiyu results into our overall results.

Eventually, we will consolidate everything into an Asian business category. Steve, do you have any other insight into that?

Stephen L. Bruffett

I think to answer this particular question, we’d anticipate it being in the logistics segment for now.

Justin Yagerman - Wachovia Securities

Will it be accretive this year?

Stephen L. Bruffett

I would anticipate that but not immediately this year.

Justin Yagerman - Wachovia Securities

Thank you, guys.

Ken Hoexter - Merrill Lynch

Bill, just a question -- I guess the purpose of this meeting originally seemed like set up for the restructuring or your plans for the regional group. Can you just describe, was there a snag that came up that is causing this few week delay when you think about what your goals were for that process?

William D. Zollars

No, Ken. I don’t know if you were with us at the outset but really, when we set this thing up, the reason it was set up was that we didn’t think we had enough time during the normal analyst call to cover the labor contract, some of the regional restructuring, and the next steps on our integration process. So we thought we would do this in person so we’d have enough time to tell you some of this stuff and answer your face-to-face questions.

The restructuring plan is pretty much on schedule. It’s just not quite ready to roll out at this point.

Ken Hoexter - Merrill Lynch

And that’s just for the regional side -- is there still anything on the national side? I know you were talking about the technology now finally getting blended well with Roadway and Yellow. Is there a desire or any possibility of consolidating real estate? I know at the beginning when you made the acquisition years ago, you said not yet but we can think about things down the --

William D. Zollars

Yeah, I think as we’ve moved down this integration road, there’s going to be a lot of opportunity for overall effectiveness to improve and we may end up with some excess real estate and there are other opportunities to become more effective as we start to manage across all these networks, and as we start to implement this new labor contract we’re going to create opportunities as well. So I think you’ll see as we move through the year both of those things happen.

Ken Hoexter - Merrill Lynch

At the time of the merger, there was historically -- each one was viewed for their own specialty. Do you still view that in the marketplace, that each one still has that same legacy feel with the customers or can you get to a point where you just combine the national operation into one consolidated carrier?

William D. Zollars

I think that there are specific reasons why customers use one brand versus another. I think what our experience with the enterprise solutions group has told us is that the customer would like a conversation with us about how we feel all of our capabilities fit best with their particular challenges, and so where we’ve gone into a situation where a customer might be predominantly one brand, we’ve had the ability to be able to bring other brands to bear with that particular customer as we talk to them about what their needs are.

So even though there is still a lot of equity on these brands, the crossover, the ability to use different brands within our portfolio with that single point of contract has been very real.

Ken Hoexter - Merrill Lynch

As far as China, is there anything that could get you to say you know what, maybe that’s a stretch while we’re working on this whole regional plan. We need to stay focused domestically, or is that a given we’re moving forward with China no matter what?

William D. Zollars

I think it’s a critical part of our strategy, Ken and frankly, it’s a different set of resources and the investment from a cash standpoint is not all that dramatic, so I think we are going to continue to push ahead as quickly as we can on China, for the ultimate opportunity then to connect the networks and really provide our customers that end-to-end service that’s pretty unique in the marketplace.

We’re actually building something called World View which is a technology solution that allows visibility across that global supply chain, so we can pick something up in Shanghai, barcode scan it, follow it all the way through the supply chain to its final delivery in the U.S. and that’s something that kind of goes along with this overall strategy of developing China. So I think we’re going to continue to move ahead on that as fast as we can.

Unidentified Analyst

[inaudible] I want to follow up with a question that Ken asked. If I recall last year in February at the BDC conference, I thought you mentioned that you may be looking at combining the line haul and [inaudible] of Yellow and Roadway because they do not come in contact with the customer and yet [inaudible]. Is that part of what this better asset utilization is going to involve?

William D. Zollars

It certainly gives us more options when we have the common technology. Today, as Mike said, we are sorting of running these networks independently. We look for opportunities where we can. For example, I think we are about 100 different terminal operations where we’ve got combined operations there, so we’ve eliminated the need for one terminal.

But really, the way to get the best asset utilization is to have visibility across all the networks, have this common platform and then be able to kind of mix and match where it makes sense.

Unidentified Analyst

So what you are saying is that the trucks that you find on the highways, that may be a Yellow trailer or a Roadway trailer, may have shipments of the other company on it?

William D. Zollars

Longer term, that’s a possibility. That’s certainly not the plan to flip that switch in the next six months even, but as I said earlier, this integration is a continuum, so it does open up possibilities for other kinds of moves once we have the ability to look across these things more comprehensively.

Unidentified Analyst

And then on the regionals, you mentioned how New Penn did so well in ’07, better than ’06, and historically Mike mentioned how Holland and Reddaway [inaudible] came in. Can you shed some light as to who it happened that those two carriers have ended up being so much down compared to where they were and New Penn this quarter better in spite of economic conditions and how you plan to prevent that from continuing on?

William D. Zollars

I’ll try, and again, we’ve got a lot more that we can tell you probably in a couple of weeks than we are capable of telling you today. The problem with both Holland and Reddaway is that we expanded beyond the business density, and those of you that follow transportation as your day job, know that density is the god of all transportation, regardless of what mode you are talking about.

So once you start to develop a plan that drives your coverage beyond your density level, you start to get in trouble. We did that at both companies. And then we started to try and fill up with density in those areas as we expanded, and that got us into a bit of an aggressive pricing posture and then we start the death spiral.

So it’s all about making sure that you serve the customers effectively with the proper amount of density. It’s kind of a back-to-basics strategy. That’s been New Penn’s business operating approach forever. That’s the kind of operating approach that we need to put back into Reddaway and Holland.

And it isn’t that they didn’t have that approach. I think we got a little bit distracted by chasing shiny objects at the other two companies and really didn’t focus enough on what we already knew about why New Penn was such an effective company and why Reddaway and Holland had been very effective in their past.

Unidentified Analyst

Last one with respect to the labor contract, you call it the master freight. It’s basically the YRC contract -- is that correct, basically? [inaudible] are involved in that?

William D. Zollars

Right. At this point, the contract that is up for ratification is for Yellow Roadway, Holland, and New Penn.

Unidentified Analyst

So now, this will be the first time that you have [inaudible] and ABF, whose contracts could be different, so does that change the competitive dynamics [if the labor contracts may be different at these companies?]

William D. Zollars

I’m sure it’s changed things. I think from our perspective, it gave us a much easier way to make sure that we were negotiating on our agenda. We were trying to get the things that were important to us as a company and I think we got those things. So the other negotiations I think probably will come up with different kinds of conclusions and different contracts but we are happy with ours.

Michael J. Smid

One thing -- you may not realize it but a good percentage of the equipment, there’s optimization of the people and the networks, but there is also equipment and just line haul capacity. We do move equipment, both laden and empty, between the companies.

Secondly, you may notice some going down the highway but a good percentage of the trailers that have been purchased in the last couple of years carry multiple brands. There is still a lot of opportunity to pursue those [types].

Now, beginning in April, keep in mind that we would begin to redesign the transportation networks for Yellow and Roadway to take advantage of the new contract and move toward a much more contemporary network design.

Tim Zoyer - Bear Stearns

Tim [Zoyer], Bear Stearns. I just wanted to -- if you could say how much of the real estate network is owned versus leased?

William D. Zollars

I think it depends on how you count them. I think in value terms, we’re probably three quarters owned and a quarter leased. In terms of the number of locations, it may be more like 50-50 but basically we own all the big ones and lease many of the small ones.

Tim Zoyer - Bear Stearns

And do you think a sale lease-back would be a viable transaction to --

William D. Zollars

We look at that from time to time. Steve, you might want to comment on that.

Stephen L. Bruffett

It’s always a possibility. We have significant assets on our balance sheet that we do own, both in terms of equipment and real estate, so it’s -- I suppose there is a backdrop that at this point in time, there is not a need to look at the secured financing path.

Tim Zoyer - Bear Stearns

Do you expect any of the utility employees to be doing a shorter length of [inaudible] service for Yellow and Roadway, or did you say that was going to be primarily regional?

William D. Zollars

That’s going to be all company.

Tim Zoyer - Bear Stearns

And then just one more thing -- have you not set a general rate increase at Yellow and Roadway?

William D. Zollars

We have for the regionals. It will be February 4th I believe is the day. We have not as yet for the national.

Tim Zoyer - Bear Stearns

What was the level?

William D. Zollars

Five percent -- I think five percent.

Tim Zoyer - Bear Stearns

Thank you.

William D. Zollars

Five-and-a-half percent for the regionals -- don’t want to lose a half-a-percent.

Tannis Prietto - Aurelius Capital

[Tannis Prietto] from Aurelius Capital. I wanted to ask you a question about the liquidity. I understand that you my not have concrete plans with regard to the Roadway [notes], but have you given thought to how you deal with that maturity in the event that the economy doesn’t improve?

William D. Zollars

Like I indicated, if need be, we always have the back-stop of about $700 million of liquidity available under our existing credit facility and if we need to wait for a better window, either through the credit markets or our own performance, we have that ability to do so. So that is there.

And we will continue to evaluate any other viable alternative between now and that maturity date but there is not a need to state an outcome agenda.

Tannis Prietto - Aurelius Capital

And in that, if you were to take those out under your revolver, you have the ’09 and you have significant maturities in the relative near-term. So have you had discussions with the bank in terms of where that would leave you if you were to use the revolver to take those notes out?

William D. Zollars

They are all aware of that. We have not had extensive conversations because there is no need to yet. We don’t see that that becomes an issue. I think that we’ll be able to successfully manage our way through any liquidity or refinancing concerns if they come up as we have for the last many decades.

Stephen L. Bruffett

And the majority of our free cash flow is generated in the second half of the year and we’re talking about a year-end kind of event, so we really don’t think that that’s going to be a problem.

Tannis Prietto - Aurelius Capital

And in terms of your costs, it seems like a large reason for the results this quarter was just an increase in costs, year over year. So recognizing that you’ve been in this weaker environment since 2006, how should we think about our -- I mean, how could we best get comfortable with the ability to reduce cost, given the economic environment that we were in and we saw the cost increase in the fourth quarter, so going forward, how do we think of that?

William D. Zollars

Well, we kind of had a double whammy in the fourth quarter. We had not only a really soft economy which drove our volume down significantly but then we had this labor mix issue in the fourth quarter. Now, we’re going to have a tough first quarter as well because we are right now at the trough from a seasonality standpoint.

Starting in March, even if the economy doesn’t improve, the seasonality will begin to improve volume. So I think our biggest challenge, frankly, is managing through the next couple of months and I think our ability manage the labor mix gets much better. And then when we get to April, of course we’ve got the new contract would kick in, so it’s really about the next 60 days we’ve really got to focus on in terms of managing the costs pretty aggressively.

Tannis Prietto - Aurelius Capital

Got it, and one more question -- I’ve read or heard that you guys have a retail component, either the shipper or the receiver is maybe 50% of your --

William D. Zollars

Yeah, that’s about right.

Tannis Prietto - Aurelius Capital

-- of your sales. So how do we think about retail, given that we are just beginning to see consumer spending decline?

William D. Zollars

I think that’s where the numbers are just kind of catching up with reality. I think we’ve seen weakness in the retail sector for months. I think it’s now starting to dribble out in the numbers you are seeing and it’s certainly starting to become obvious to the Fed, finally. But you know, we’ve been looking at numbers that have been pretty weak on the retail side for quite a while. We did not see the kind of inventory build at Christmas that we would normally see. I think retailers were a little bit encouraged by the early sales on the Christmas season but then things very quickly deteriorated for them.

So I’m not sure we’re really going to see a lot of change there, even in the economy stays soft because we’ve really been in the middle of what’s been a pretty soft retail environment for several months.

Jason Seidl - Credit Suisse

I want to touch on the regional guidance. I mean, it seems like there is more going on there [in the economy]. I remember at Holland they were Premier Plus, which is more long haul, getting away from the next day. Then Red Star shut down, they went into the Northeast. They stopped that. And then you shut down [inaudible] and gave them sort of an extra region to cover.

Other than that and maybe some softness in the automotive sector hitting in that region, what else went wrong at Holland?

William D. Zollars

Well, I think that you start with maybe the economic impact being greater on Holland because it is -- you know their core market is in that rust belt. And we’ve described this in the past, but just kind of going back, Holland really got the middle part of their market hollowed out by the economic impact of auto and the ripple effect of auto and then the overall intensity of the economic softness.

So they began to see growth in what you might think of as the outer ring of their market. And obviously it takes a lot more cost to serve the outer ring. That’s okay if you get price to offset that cost, but we didn’t. So I think we had a situation there where we started to really focus on growing an outer ring, which was already questionable from a profitability standpoint. I think the back to basics kind of approach that Mike and I have talked about basically says let’s go back and really refocus on that premium next day/second day service in the core market and quit really trying to make a profitable business where there isn’t one.

Jason Seidl - Credit Suisse

If I can look at pricing for a moment, has there been any fundamental difference in contract pricing between national carriers and regional carriers? And what are you currently getting right now when you renew contracts?

William D. Zollars

Mike may want to comment on this. I think maybe the regional has been slightly more competitive but it’s on the margin. I’m not sure that there’s a lot of difference. Mike.

Michael J. Smid

To a degree, a little bit more aggressive with some pieces of the business. Going forward, we mentioned some of the [approach] to corporate accounts and how to manage those types of situations. There’s significant opportunity in that area as well to provide a customer, a consumer with a better price, but also perhaps a better blending of services balancing that I think is a big opportunity for us going forward.

To answer your question, probably a little more aggressive with some specific accounts, and in particular with potentially some larger accounts.

Jason Seidl - Credit Suisse

Last question for Mr. Bruffett here -- Steve, how long can you guys have CapEx at or below depreciation levels? Should we expect no matter what the economy does, if it recovers or not, a spike up in 2009 for CapEx?

Stephen L. Bruffett

That’s a good question. I think that we have ample liquidity within a 12 to 18 -- or ample flexibility, I should say, within a 12- to 18-month cycle. Beyond that, we probably need to ramp up the CapEx back to a normal level.

William D. Zollars

And you can also assume that our appetite for capital will shrink a little as we get better at asset utilization, as some of these other programs kick in. So hopefully we won’t need the same level of capital as --

Stephen L. Bruffett

And I’m specifically referring to the portion of our CapEx that’s related to our tractors and trailers. In the technology arena and the properties arena, we have additional flexibility there.

Thom Albrecht - Stephens

A number of questions -- first off, on the ability to use more truck load, do you envision that primarily being the old Glenmore our outside truck load carriers?

William D. Zollars

Mike, take that one.

Michael J. Smid

Within the contract, there is an opportunity to agree to approved carriers and there is an opportunity perhaps to leverage Glenmore in terms of going forward, as well as other truck load providers but yes, there is an opportunity there.

Thom Albrecht - Stephens

On page 27, where you show the rail purchase, or the miles, is that a projected schedule or that is what is the actual contract and you show the out years?

Michael J. Smid

That’s the actual contract, so that, as an example, if we used only 15% rail, we could still use the full 4% of our total miles for the contract carrier.

Thom Albrecht - Stephens

Okay, and then what happened to logistics in the quarter? You had a 99.7 OR. It’s been making $5 million to $7 million a quarter and all of a sudden you make $489,000.

William D. Zollars

I think part of the answer is a little softness in the economy impact on them and then we had some accruals this year that we didn’t have last year, so the year over year comparisons were a little distorted as a result of that but we are pretty happy with the logistics progress. The quarter that you saw this past quarter was really a combination of those accounting accruals and softness in the overall economy. I think you’ll see them bounce back during [inaudible].

Thom Albrecht - Stephens

On page 29 where you show the dollar per year pension and healthcare increases, what’s the approximate split between pension and healthcare? I’m assuming that pension is getting more of that dollar per year.

Michael J. Smid

Roughly 70-30, 65-30, it depends on the fund. The important part of this dollar though in relation to the [past] is that the pension obligation, including anything that might be prescribed because of the status of that fund has to be covered before any additional pennies to go the health and welfare side of the equation.

Thom Albrecht - Stephens

And then you mentioned, Mike, a better matching for the utility worker, the benefits. I forgot what the old contract was -- was it two days, was that a full week?

Michael J. Smid

Actually, it’s different in different parts. Actually, that applies to everybody that’s a teamster for us, not just the utility employee but there were all different triggers. In one part of the country, there might be -- you work one hour or one click of the clock and you qualify for that week.

In another part, it might be you are paid for day. The general, the largest, the central state. So basically if you worked two days, you had benefits for the week and this increases that substantially.

Thom Albrecht - Stephens

So is it, if you want five days of benefits, you’ve got to work five days? Or is it just another step --

Michael J. Smid

It’s a little [inaudible] than that, but it does require you to work.

Thom Albrecht - Stephens

Okay. And then, as it relates to your salaries, wages and benefits, you’ve had kind of a split contract in recent years with an April 1st wage and an August 1st benefit. Will we continue to see that sort of a split or is it all going to be loaded into April?

William D. Zollars

As the slides says, it’s the wage increases in April and then the pension and healthcare is in August.

Thom Albrecht - Stephens

Okay, and then I think lastly, I don’t want to put words in your mouth but it sounded like as you examined the whole regional network, some changes are coming, you’re not ready to announce them yet. You refer to the fact that Holland had to expand into Dugan and Reddaway had to expand into Best Way. It sounds like you may be thinking about pulling back a little bit, given the absence of density. A, is that what you are thinking? And B, are you concerned about the negative domino impact where the shipper out west or Michigan, if you pull out of the Southwest market, for example, that they might not find you as valuable, even though it might help your P&L in the short-term?

William D. Zollars

I think the way I would say this is that we are looking at what the best combination of satisfying the customer and our profitability is for each one of the companies. And it’s clearly not where we have them today.

So no matter what you do to change a company like Holland or Reddaway, you run the risk of disenfranchising some customers. But we’re trying to look at that balance and figure out what the best balance is between serving those customers and at the same time making it profitable. And we’ll get into a lot more detail, Tom and I, in a couple of weeks.

Stephen L. Bruffett

There’s a very positive aspect to it in that some of those changes over time have had some negative impact on the actual core services and the premium aspect of those services. Being able to focus resources and people correctly within their power stroke can have some significant advantage as well.

Andrew Rast - Collins Stewart

Andrew [Rast], Collins Stewart. In your opening remarks, you said that the economic environment had bottomed. I was wondering if you could tell us some of the specific data points you’ve seen that led to that conclusion.

William D. Zollars

Sure. There are a couple of things we look at. We look at previous downturns and kind of compare the metrics between what was going on then and what’s going on now. And there are really two key ones. One is the weight per shipment metric and the other is the number of shipments, and usually the weight per shipment leads in both directions, so you start to see the weight per shipment decline as the economy weakens, then the number of shipments start to fall off.

On an economic recovery, you see the inverse. You start to see weight per shipment pick up and then you see the number of shipments follow. In a couple of our companies now, we’ve begun to see that weight per shipment shift from a negative to a positive, so that’s one of the things we look at.

And then the overall underlying shipment volume looks to us like it’s pretty much bottomed and we should start to see that come back at some point.

As I said, that does not mean tomorrow we are going to see this thing take off like a rocket because we are not sure how long this bottom is going to last. But at least it doesn’t look like things are deteriorating further.

Sheila, by the way, you are doing an excellent job.

Aaron Wilson - Resolution Partners

A quick question on the cash outflow for the non-union pension -- can you give a little insight into the decrease from the $134 million cash outflow in ’07 to the $59 million guidance for ’08?

Stephen L. Bruffett

Sure. The amount required in 2007 was substantially less than what we actually put in. It was -- there was about $90 million of discretionary funding that went in, just to improve the overall funded status of the plan and put us on a clear path to meeting the what we knew were coming as the pension protection act requirements to be fully funded.

So this is just more -- ’07 was the unusual item. ’08 is a reversion to a normal funding pattern.

Aaron Wilson - Resolution Partners

I guess in last year’s K you had projected around $125 million, $130 million for both ’07 and ’08. It seems like last year you thought it would be this similar high level. Was that just --

Stephen L. Bruffett

With the asset performance and the actual amount that we ended up putting in, we’re in a position where we can talk about a lesser number now.

Aaron Wilson - Resolution Partners

Thank you.

Paul Carpenter

Thanks. Paul Carpenter with [inaudible]. I had a similar question to one of the previous questioners about the economic outlook. Bill, how do you reconcile those two statistical trends you are seeing with your comments that you still expect to have a difficult first quarter? When should we expect those two trends to counteract each other and then things to start getting more positive? And then after that, I have a couple of financial questions.

William D. Zollars

It’s just our line of sight doesn’t go out very far, so we can look at real time data but we can’t see too much farther than that. So when we see one or two of our companies begin to show signs of a reversal in weight per shipment, we’ve got to make sure that that isn’t something that’s company specific that’s going on there, as opposed to something that’s really being driven by the aggregate economy.

And then secondly, we’ve got to see it over a fairly sustained period of time before we are ready to feel comfortable that the economy has turned. So I think where we are right now, we would expect January/February to continue to be very rough and then March is kind of an open question because March begins the seasonal recovery period on a typical year. So we will get seasonal pick-up there. The question is do we get any economic impetus behind that.

Paul Carpenter

So when weight per shipment starts ticking up, that’s because the amount of equipment has been rationalized down in a tough period, and then the customer demand is picking up? Are those --

William D. Zollars

No, it’s more of a customer specific thing, so if a customer says I’m feeling a little bit better about this, I’m going to put a couple of more boxes on this pallet, so the weight goes up. And then eventually he’s shipping two pallets instead of one pallet. So it’s more that kind of a phenomenon that we pick up in our data.

Paul Carpenter

And then if I could, just a financial question; I had a question about the liquidity but a little different from one of the previous questioners. The liquidity as I see it has two different components to it. The amount you could borrow if you needed to refinance those upcoming maturities but also just an amount you could borrow in actual cash to do with whatever you would, other than refinancing debt, which I assume is going to be limited by that three times debt covenant. So by measuring just the amount of cash you could take down through the bank line, I assume it would be substantially less than $600 million to $700 million if you limited by the three times debt to EBITDA covenant.

William D. Zollars

Obviously we’ll have to manage those dynamics in conjunction and keep in mind we fully anticipate generating additional free cash flow during the course of 2008, which provides even more headroom under the existing facilities. And again, if there is other opportunity as we move through the market, you know how quickly markets can turn on and off and be hot and cold. We will look to be opportunistic if there is that window opening there. If not, we’ll use time to our advantage and wait until it is a better time.

Paul Carpenter

Can you just walk through in a bit more detail the sources and uses of cash for ’08? And also maybe comment as to whether the fourth quarter, some of that debt pay down was through non-operating items like working capital, non-income statement items like working capital reduction?

The way I see it in the outline, it looked like you were saying you need about $400 million of EBITDA so you could meet the bank [test] and you were looking for maybe 225 of CapEx, which was reduced $100 million out of interest expense, and then these other items, like the pension contribution. And if you are expecting a tough first quarter by which I take it that means it’s going to be worse than last year, it could be looking a bit tight. So along those lines, what would you really expect in terms of cash generation in ’08? And are there some non-income statement items like working capital reduction or real estate sales that we should be mindful of that are going to be sources of cash this year?

William D. Zollars

Our fourth quarter is our seasonally strongest cash flow quarter because we are collecting off of the third quarter revenues in the fourth quarter, and likewise our first quarter is generally our weakest. Typically we’re collecting off of December and January and February revenues, and typically have higher than we’ll have this year outflows for CapEx.

So we’re managing the timing of those gaps to help with that seasonal dynamic. You are correct in that if you look at our trailing 12 months EBITDA math, that you trade out the first and second quarter of ’07 for potentially softer first and second quarter of ’08, it does compress the debt-to-EBITDA calculation. However, we think that we can manage our way through that through just prudent use of capital and timing and the seasonality. Once we get into the second quarter, we start to see an upswing in free cash flow again.

From what we can see today, we’re comfortable that we can manage through that but we do kind of see that as the spot we’re managing towards.

Paul Carpenter

And just one more question, which might make you chuckle or other people, but in looking at the funded status of the plans, and [inaudible] to contribute or shortfalls, how up to date is that information? I mean, we’re a month into the year and there’s already been a pretty big draw-down in the equity markets. I don’t know what percentage of the plans are invested in equities, but as you look out to how much you are going to have to contribute to these plans -- and they are a very meaningful component of your cash uses, how much -- how up to date is the data? Are the comments you are making today based on data from the end of the third quarter or end of the fourth quarter, or is it something you monitor on a more timely --

William D. Zollars

These are 12/31 figures that we are providing for the non-union pension plans and an estimate based on public information around the multi-employer plan.

And on the multi-employer side, really the reality is we don’t have to worry about that for the next five years. We’ll take one more question and then we’ll let you get back to work. Two more questions. Sheila said two more questions.

Matthew Sheppard - Business Strategies

How do we distinguish the weakness that you are seeing, financial weakness, from a macro perspective and management effectiveness in a kind of a steady environment going forward? What metrics can we look at from today to 12 months from today to understand whether or not this management team has been effective? Thank you.

William D. Zollars

I think there’s a -- the biggest macro measurement is operating ratio. So we’ve always said take a look at how much our operating ratio changes relative to our competitors. That’s really the single biggest I think measurement.

Now this year, we’ve got a very bad performance by the regional companies and frankly that’s resulted in us not doing as good a job as we would have liked to have done vis-à-vis the competition, but I think that OR number is probably the best measurement.

Look for the change in the OR number, both directions.

Matthew Sheppard - Business Strategies

[inaudible]

William D. Zollars

I’m not sure I understand - how does the board make an assessment or how do you assess -- I’m not sure I understand the question.

Matthew Sheppard - Business Strategies

Well, I’m trying to understand how we assess management’s effectiveness or management’s ineffectiveness --

William D. Zollars

The OR comparison with competitors.

Matthew Sheppard - Business Strategies

And is that just -- that’s primarily a function of operating rate and revenue.

William D. Zollars

It’s a function of operating performance more than just revenue. Okay, one more, maybe.

Mark Schrieder - J.P. Morgan

Mark [Schrieder], J.P. Morgan. Just under the wire here for Steve -- you mentioned the absolute target debt-to-cap of a little bit below $1 billion. As the company grows or expands or shrinks, it seems strange to have an absolute target and not a relative target, especially compared to your debt-to-capital ratio of mid-30s that you were targeting previously. So can you talk a little bit about maybe a debt-to-EBITDA target or a debt-to-cap target that you want to have going forward in addition to the $1 billion?

Stephen L. Bruffett

Sure. I think we came up with the $1 billion as some simple barometer for us and also because our capital base has changed fairly significantly. We thought that might be more meaningful at this point in time.

But I think back to the leverage ratio we talked about in the past, I think we would feel a little better in an environment like this if our leverage was a little lower, so probably more like a 30% debt-to-cap kind of ratio than a 35%, to give you an example.

I don’t think our view of the world in terms of leverage has changed all that much.

Mark Schrieder - J.P. Morgan

And given the rating agency downgrades, how do you think about credit ratings right now and what your targets are for those?

Stephen L. Bruffett

Well, I think it will be interesting to see when we recover how quickly the rating agencies respond to that. Obviously they are I think a little slower to react on the way up. We would expect that as we get back into the recovery cycle, that our cash flow generation will be very strong and then we’ll be right back to the rating agencies asking for an upgrade.

I don’t want to keep you any longer but again, we appreciate you being here. Thanks for your interest in the company and we’ll talk to you soon. Thank you.

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