Con-Way Inc. Q2 2008 Earnings Call Transcript

Con-Way Inc. (CNW)

Q2 2008 Earnings Call

July 24, 2008 11.00 am ET

Executives

Patrick Fossenier - Vice President of Investor Relations

Doug Stotlar - President and CEO

Kevin Schick - SVP and CFO

John Labrie - Con-Way Freight President

Bob Bianco - Con-Way Logistics President

Herb Schmidt - Con-Way Truckload President

Analysts

Tom Wadewitz - JPMorgan

Justin Yagerman - Wachovia Securities

Ken Hoexter - Merrill Lynch

Jon Langenfeld - Robert W. Baird

Ed Wolfe - Wolfe Research

Thom Albrecht - Stephens, Inc.

David Ross - Stifel Nicolaus

Presentation

Operator

Welcome to the Con-way Inc's second quarter earnings review conference call. Over to Vice President of Investor Relations, Patrick Fossenier. Mr. Fossenier, you may begin your conference.

Patrick Fossenier

Welcome to the Con-way second quarter 2008 conference call for shareholders and the investment community. Firstly to the Con-way President and CEO, Doug Stotlar.

We start with 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 the future results of operation 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 to Doug Stotlar.

Doug Stotlar

. Several l members of our senior leadership team including CFO Kevin Schick, Con-Way Freight President John Labrie and then the Logistics President Bob Bianco and Con-Way Truckload President Herb Schmidt are with us today. Kevin will provide some commentary on financial matter and John, Bob and Herb will be available to participate in the Q&A portion of the call.

I am pleased we were able to turn in the corner that was in line with internal expectations and ahead of analysts' consensus. We managed our business well in the quarter. Operational execution was excellent at each of our primary business units which allowed us to deliver a substantial improvement in margins over our performance in the first quarter.

Turning to our results for the quarter, second consolidated second quarter revenues of $1.34 billion were up 24.8% from last years $1.07 billion, driven by the acquisitions we completed in the second half of last year and complemented by organic growth. Total diluted earnings per share for continuing operations were $0.98 which included a slightly higher than expected tax rate. We also had a gain of $0.04 in the quarter from discontinued operations, so the total diluted EPS was $1.2. This discontinued operations gain came from reversal of accrual related to the successful conclusion of litigation in connection with the shutdown of Emery Worldwide Airlines several years ago.

Now I will review key operating statistics for our business units starting with Con-Way Freight. Quarterly revenue at Con-Way Freight was up 10.6% over last year. Tonnage per day increased 1.9% over the second quarter of 2007. We are working to ensure the market understands that Con-Way Freight provides transit times verified to be superior in the LTL market. This message is being incorporated into our marketing and targeted sales initiative, which is helping to drive our tonnage growth.

Revenue per hundred weight increased 9.6% versus the second quarter of last year, excluding the effect of fuel surcharge our yield growth was 1.2%. When yields are adjusted for a longer length of haul and some shift in the mix of freight, pricing was generally flat year-over-year. Operating ratio of 90.8 in the second quarter included $1.2 million of re-branding expense.

Areview of results at Con-Way Truckload. Truckload has consolidated revenue of $137.4 million after elimination of $44.2 million of revenue related to its intra-company business. Our Truckload unit contributed operating profit of $12.4 million. These results were affected by $672,000 charge related to our pre-acquisition Truckload business. This should be the final charge associated with the merger of our Truckload units.

The operating ratio was 90.6 on revenue excluding fuel surcharge and 93.2 on total revenue. The trend of Truckload industry capacity exiting the market improved the supply-demand relationship during the quarter improving the pricing environment. Con-Way Truckload was successful in improving in asset utilization and reducing its empty miles in the quarter. Our expanded Truckload platform is continuing to present opportunities for synergy with Conway Freight and Menlo Logistics. It’s and advantage unique to our enterprise business model and one that we will continue to leverage to drive better utilization for Con-Way Truckload.

Menlo Logistics revenue net of purchase transportation was $126.6 million, up 19.6% from the second quarter of last year with organic growth complemented by our acquisitions in Asia. Menlo generated operating income of $5 million, a $2 million increase compared to the same quarter of last year. This quarter's operating income was affected by an operating loss in China, the charge related to a current customer and a bad debt write-off.

Generally our China integration is proceeding at a slower pace than planned, so our expectations for profit now has a longer time horizon. Our strategy for Menlo’s expansion in this market remains sound. It’s providing new business opportunities and a strong market position from which we can grow in this important region. We expect operating results to improve as we progress through the remainder of the year. We continue to ramp up the defense transportation coordination initiative, we now have five depots up and running with four or more still later to come online later this year.

Revenue recognition began in the second quarter but it’s still quite limited. This initiative is progressing according to plan and we look forward to increase contributions from this project as rollout continues.

Kevin Schick on some additional financial perspectives.

Kevin Schick

Thanks Doug. Cash and marketable securities totaled $236 million at the end of the second quarter. On June 30, we closed of sale of transaction on two Menlo logistics warehouses in Singapore which added $40 million of cash. The $19 million gain on sale will be amortized over the 10 year term of the lease. Average diluted shares outstanding for the quarter were $48.2 million, slightly above the prior quarter.

Total debt at the end of the quarter was $959 million. Interest expense was $15.7 million and investment income totaled $1.1 million in the quarter. Our tax rate for the quarter was 39.7%. We incurred $1.4 million in re-branding expense for Con-Way Freight and Con-Way Truckload or $0.02 per diluted share for the quarter. This concludes re-branding activity at Con-Way Freight.

We continue to expect 2008 diluted earnings per share from continuing operations to be in the range from $3 to $3.40. This is all in number that includes the $0.7 business transformation expenses we recognized in the first quarter. Total 2008 re-branding expenses was projected to be $5.4 million for 2008. $5.1 million has been spent a year-to-date with $4.9 million that Con-Way Freight. Small amounts of re-branding expenses will continue for a few years at Con-Way Truckload, but the amounts will be too small to warrant future discussion. We will guide you to use a quarterly average of $48.3 million diluted shares outstanding in the second half of 2008.

For the full year 2008, we now anticipate total capital expenditures, net of assets dispositions to be $220 million. Depreciation and amortization is expected to be about $210 million. You should model a tax provision of approximately 39% for the rest of 2008.

Now for some operating guidance, starting with Con-Way Freight, we anticipate the third quarter 2008 tonnage will increase as a low to mid single-digit percentage rate over the 2007 levels. Third quarter revenue for

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hundred weight [Author:l]

is expected to increase by at high single-digit percentage versus the prior year. Excluding fuel surcharge, we expect yield were to decline by low single-digit percentage.

As for manual logistics for the third quarter we expect net revenue to increase by mid teen percentage over the same period last year, while improving operating income over the 2007 level. At Con-Way Truckload we look for third quarter revenue per mile to remain about flat compared to current levels. We expect tractor utilization levels and empty mile ratios to continue improving.

Over to Doug.

Doug Stotlar

To reiterate, we are maintaining our current yearly earnings guidance for 2008. While we hit our internal expectations for the second quarter which typically is our strongest, hourly wage increase during the second half of year will impact our operating costs. The direction of the macro economic environment continues to be the wild card that I don't think anyone can predict. We’ve been gathering economic data from multiple sources and have concluded that there are no indicators that point to any meaningful recovery or improvement in economic activity over the remainder of the year.

With that said, I am pleased with our portfolio of companies and how they are operating, even with the challenges of the economy and freight markets. We will continue to leverage with a significant service differential and competitive advantage that each of our businesses in their respective markets. Our balance sheet is strong, we have a solid cash position and all three of our business units are increasing share and executing well for their customers. Our model captures synergies among our business units and has clearly helped us weather a lackluster market. There are additional opportunities that offer promise both in cost synergy and service differentiation. We are a stronger, more diversified enterprise today than a year ago. We are competing with a unique model that presents exciting opportunities, to extend our role providing highly valued services across our customer supply chain and to generate increasing value for our shareholders.

And with that operator, we’re ready to take some questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your First question comes from Tom Wadewitz with JPMorgan.

Tom Wadewitz - JPMorgan

Yes good morning.

Doug Stotlar

Hi Tom.

Tom Wadewitz - JPMorgan

I wanted to ask you little bit about pricing and outlook for demand as well, I think on the third quarter guidance that you talked about, you mentioned revenue per hundred weight [ex-fuel] looked like it might be down. Is that something that is more a mix of fact, and when price is flat, how are you looking at that? What does the pricing environment look like at the present time?

Dough Stotlar

Tom there is a couple of things going on as far as, obviously we look out through the rest of the year from the pricing environment, why we expect year-over-year yield to be down. Part of it has to do with the fact that each of the months of the second half of last year all the way through November, so from July all the way through November, we actually improved the yield each month, month-over-month, which was defying the gravity last year at this time and we pulled about every rabbit out of the hat we could to improve yield last year. So we really do not have that many opportunities to have that incremental improvement. So, we have real difficult comparisons year-over-year to begin with, but the biggest, it really has to do with the fact that weaker shipment is up significantly and right now our weight per shipment is up almost 5% over the prior year which is going to have a real dampening effect. So, I think when you put it all in the mix and adjust it out on an adjusted basis considering the mix and the weight per shipment, its probably going to be flat year over year but because of the optic of the yield comparison it is going to be down.

Tom Wadewitz - JPMorgan

So if you took out weight per shipment and length of haul changes you would say pure price basis are adjusted, if you expect it to be flattish?

Dough Stotlar

That is correct.

Tom Wadewitz - JPMorgan

Okay. When you gave the guidance in April you changed your guidance for the full year, it seems like you are quite considerable concern about the pricing environment deteriorating, seems like that is stabilized, what is your sense of it now. You are pretty confident it could be stable looking forward? What does competitive behavior look like?

Dough Stotlar

Right now we believe it is stable, it has not gotten any worse than the first than what we experienced in the first quarter, but I can also tell you that it has not got any better. It is a very competitive environment right now.

Tom Wadewitz - JPMorgan

Okay and then that one on the cost side, how do you look at the margin performance in the second half on a year-over-year basis? The impact of the wage increase is coming in at fourth versus not a lot ability to get price, do you think, are there offsets that you can take costs out and help to offset the wage increase a bit and keep then, work towards keeping the margins flat? Or is that unrealistic without more meaningful price and growth?

Dough Stotlar

Our goal would be to keep margins flat year-over-year. Actually I think there is going to be just a little bit of a decline because of the cost increases with the wage levels and also our costs in general has gone up, yet our pricing is flat year over year.

Tom Wadewitz - JPMorgan

Okay, great. All right well thank you for the time.

Operator

Your next question comes from Justin Yagerman with Wachovia Securities.

Justin Yagerman - Wachovia Securities

Hey good morning. How are you all?

Dough Stotlar

Good morning Justin.

Justin Yagerman - Wachovia Securities

I was just curious on the CFI side of things, going at the Con-Way Truckloads giving, how much that business has grown with Menlo in terms of moving up that customer list and optimizing back hauls and like.

Dough Stotlar

Herb you want to address that one?

Herb Schmidt

Well we have grown with Menlo about fivefold, I mean we are on pace to grow about fivefold this year and certainly the environment was right for us to grow with them because the economy was relatively slow. So we focused on maximizing the opportunities we have Menlo and with Freight and it has been a great time to do so.

Justin Yagerman - Wachovia Securities

How much more, will Herb in that relationship, do you see there? I mean how much of you already had used what you think you can in that business mix-up unless your back hauls that you are going to the head hauls now and it is going to look as odd? Is that re-shaping any way you think about the business and do you see more profitability coming out of that relationship?

Herb Schmidt

Justin it has been a good healthy mixture of head haul and back haul from the get go, and I see another good year ahead of us. I just recently met with some of the transportation people with Menlo and we talked about impossible synergies for this next year and I still think there is a lot on the table for us to harvest.

Justin Yagerman - Wachovia Securities

Can you explain that and how about the Con-Way Truckload relationship with Con-Way Freight? I think you have said that you had gone from being 20% pre-acquisition of Con-Way's third party line haul to 45% last quarter, is that stabling off here and how is that relationship progressing?

Herb Schmidt

Right now since the bed I behind us and all of the other sub-contracted carriers are in place, basically where we have our block of business, what we are focused on right now is optimizing that block of business with our non-affiliate customers and with Menlo to drive the empty miles down, the dwell time down and to drive the productivity up as much as we possibly can. So for now it has stabilized but we are serving as a safety net for freight. If they get in trouble in any particular lanes, we are there to provide the service for them.

Justin Yagerman - Wachovia Securities

Got it.

Dough Stotlar

Justin if I can add just little bit of clarification to, a freights total substitute service spend Truckload represents 30% of that.

Justin Yagerman - Wachovia Securities

About 30%. Okay.

Dough Stotlar

Of Truckloads, total revenue mix, freight represents less than 25%.

Justin Yagerman - Wachovia Securities

Less than 25%. That is actually really helpful, thanks. Doug and Herb be interested to hear about the seasonality through the quarter, how tonnage progress the Freight and maybe, Herb a little bit about how you saw the Truckload market progress as we move to June which sounds from most accounts like it was a very strong months in truckload.

Dough Stotlar

Herb why don’t you talk about Truckload first, then will John talk about freight?

Herb Schmidt

As I really saw a little bit of traction begin at the first part of May, the last week of April and just that it is continued to remain. I do believe that in the Truckload of environment it appears at the bottom, as it leaves behind us, really the first six months of next year is when the majority of bids will be left, that is when we will really see what kind of traction we have. We have seen rates or pricing firm up a little bit. We have seen a little bit of traction in the area of improving some fuel surcharges and some detention with respect to our contractual terms. Is promising to say the least, promising. Nothing fast, nothing huge, certainly promising signs for the entire truckload industry and we are experiencing the same.

Doug Stotlar

John you want to comment on freight?

John Labrie

Justin our tonnage on a year-over-year basis also built month by month throughout the quarter. We were up eight tenths of 1% year-over-year in April, 2.4% year-over-year in May, up 2.7% year-over-year in June.

Justin Yagerman - Wachovia Securities

Got it. That is interesting. Herb, with the Mexico business that you traditionally have, are you seeing more near sourcing going on with fuel being where it is? Are customers shifting operations from Asia to manufacturing a little bit more in Mexico? Using that NAFTA relationship as the distribution jumping off point? Or is that something that has not happened yet? Have customers started talking to you about that?

Doug Stotlar

Customers have started talking to us about that a little bit. What we are seeing is a lot of construction activity in Mexico. A lot of old unfinished warehouses and manufacturing plants that now are being completed. There is a lot of anticipation on the part of our Mexican sales force that next year should be a good strong year. We are not seeing a lot of material change already immediately, but certainly it looks like there is change in the wind, there is going to be a lot of opportunity in Mexico.

Justin Yagerman - Wachovia Securities

Doug you had up tonnage and up pricing in the quarter and the OR was still working a little bit against you in freight and overall, what kind of environment do we need to get in, to get an improvement in the operating ratio in the company? Is it the fuel that is overwhelming things right now? I have to imagine that is part the answer, but do we need to get to a declining fuel environment and have up tonnage and up pricing? Can one be negative and one positive? Even if oil comes down, we still get to an improvement in OR. How do you think about that in terms of a turning point in the business in the next 6 months to 12 months?

Doug Stotlar

Justin the overall real big delta there is leveraging our network with increased economic demand and the ability to get our base rates up. Get the pricing power back into our base rates that is really when we will start to see the operating leverage improve. Right now, our base rates are flat, yet our costs across the board have inched up on us year over year. We are going to see some additional cost inflation as we do our hourly wage increases the second half of the year and up on flat revenue.

Justin Yagerman - Wachovia Securities

In your experience, how long does it take LTL to start leveraging the base rate after we start seeing some truckload spot business improving like we did in June?

Doug Stotlar

The only reason I hesitate to give a time line, I will give you a rule of thumb, because we do not see this as a regular cycle, we do not see where the economic catalyst in demand are our truck load is getting stronger because capacity is coming out. Usually that cycle happens when economic activity is propelling truckload. It is not just capacity leaving the market place and subsequently a couple quarters behind we start to see the momentum in LTL but because it is purely a capacity driven event, which does not seem to be supported by increased economic activity, I am very hesitant to say it is two quarters behind. We do not know where that will be at this point.

Justin Yagerman - Wachovia Securities

Once in a typical cycle or every six months is what you are saying.

Doug Stotlar

In a typical cycle we would see two quarters behind, beginning meaningful traction. Once it starts for LTL, it takes well over a year, probably 18 months, to get through a full run rate of all your contracts and all your customers to get back up to what the new run rate looks like.

Justin Yagerman - Wachovia Securities

However, is not it a little bit chicken and the egg with the economy and demand and capacity coming out and that should eventually lead to feeling better from the demand side? Is it just really different in your experience right now?

Doug Stotlar

This whole cycle has been different from anything that I have been through in my career. I am hesitant to determine what the new trend is going to look like. You can make a case based on the fact that it looks like it could get worse because inflation continues to flow through the consumer, you are seeing indications that perhaps things are going to get better in the near term but over the next six months or so some meaningful improvement. I do not know. We are anticipating more of the same we are also anticipating that there will not be a materializing peak season this year just as we have seen the last two years.

Justin Yagerman - Wachovia Securities

Okay. Kevin last question, you are building cash on the balance sheet, again post CFI where are you thinking in terms of using that cash? Is it paying down debt? Is it thinking about acquisitions as we head into potential improvement? Where is your head at on that?

Kevin Schick

Well we do have some debt payments that are a little bit out, but spring of 2010 we have $20 million that is due that we are keeping our eye on because I think our current plans are to extinguish that debt. As we said for `08 it was acquisitions that were done in `07, and was merely going through the integration process with these acquisitions so you know we have said too we are not looking at share repurchase at this given time so it is really debt repayment. Who knows? In `09 maybe if there are some acquisition opportunities, if conditions warrant, we might look at that. It is building cash. It is a strange and rough environment.

Justin Yagerman - Wachovia Securities

Yes well that is fair enough appreciate the time, thanks so much.

Operator

Next question comes from Ken Hoexter of Merrill Lynch.

Ken Hoexter - Merrill Lynch

Hey good morning it is Chris come in for Ken.

Doug Stotlar

Good Morning Ken. Good morning.

Chris

Hey. I want to touch of little bit on the LTL side first, you break out what really is on the volume side what growth was driven by organic market growing as opposed to sharing games, starting to gain traction on the share side. At least you can flow the color on what the breakdown there is?

Doug Stotlar

I will let John take a crack at that.

John Labrie

We saw good solid growth throughout the quarter as I said. We believe the entire market was probably flat at best, may have gotten smaller year-over-year. Definitely our growth is attributed to market share gain.

Chris

Was there any change in that as you went through the quarter obviously you made some significant progress as you move through on a month-by-month basis. Did that stay the same on the market basis?

John Labrie

We Haven’t seen market size data for the quarter. It is our belief that the gains we are seeing are primarily market share gains.

Chris

Would that be what is driving the growth as you move forward, continued market share? Is there an assumption that you might see some firming into the back half of the year?

John Labrie

I think Doug pretty much answered that question already. We know we have a compelling set of capabilities in the market and customers value the fact we are faster everywhere. That is helping us grow the company and we expect that to continue.

Chris

If I could switch gears on to memo, could you give a little color around the specific issues in China. Was it simply higher integration costs? Any issues with customers specific to those acquisitions that you made?

Doug Stotlar

Let me give you a couple high level things. One of the things about China is we are finding it to implement the processes that memo has across the network, throughout their whole system, it is harder to implement those in the China network because they are coming from more of a decentralized process control environment. We are finding to some degree communication is more problematic than we anticipated, as well as our ability to drive this overarching process change through the whole organization. That thing said we have also been impacted by multiple weather related events, whether it is record snows, record floods, earthquakes and now the Olympics effect we are all having a little bit of a detrimental effect on the results there as well. It is just taking us a lot longer than we anticipated it was going too compared to what we were successful in doing in Singapore and how we operate the company around the world. Bob anything else to add?

Bob Bianco

You are right on there. One other big thing that impacted us in the second quarter is that the government arbitrarily increased the cost of fuel, released the Cap and raised the fuel 18%. In China unlike the Menlo Model in the U.S. where fuel is passed through a surcharge methodology and contracts, we do not have that established in our contract with our customers. When that happens, it took effect immediately. We are scrambling with our customer base there to renegotiate and get compensated for the increased cost we are now, seeing. There has been a lot of things a lot of which Doug mentioned that impacted our results. However, our pipeline is bigger than ever in China. Our win rate for new projects is at the highest level we have seen through the Chinese he economy continues to grow. We are very optimistic about our platform that we are establishing there.

Chris

You think, from a customer standpoint, seems like they might be open to rolling in some fuel surcharge program on the contract similar to what you have in other parts of the world?

Bob Bianco

That is the best practice that we are going through. The good news is 85% of the customers that we have, our customer base in China, more multinational companies said they know about fuel surcharges, they are used to having that language. A lot of them, we have that contractual language in other areas of the world with them, we are leveraging that and converting them as quick as we can to that best practice.

Chris

That is great that is very helpful. One final question, to touch on something that Doug you had mentioned on the T.O. side, curious about, is it strictly capacity coming out of the market that is driving the strength that we saw in June? Is there any activity on the economic front? Or maybe his capacity is coming out at a faster pace and demand is slowing. I am trying to understand that better.

Doug Stotlar

Certainly there is a little bit of additional economic activity that happens in Q2 versus Q1, that is historical freight patterns get a little stronger in queue Q two and Q3. Part of it is the incremental demand that curves because of seasonal trade patterns but the majority of what is happening here is it is because it is capacity related that the supply/demand relationship is getting close to equilibrium because of capacity coming out of the marketplace.

Chris

Great thanks very much for the time.

Operator

Your next question comes from Jon Langenfeld with Robert W. Baird.

Jon Langenfeld - Robert W. Baird

Could you talk a little bit about the mix of your LTL freight long versus short haul? How the trends have progressed in terms of demand and pricing in those two distinct groups?

Doug Stotlar

Hi Jon

Bob Bianco

Sure Jon what we did see a slight mix change year-over-year in the various segments that we look at the business from. If you look at our current mix, our next day traffic is 40% of the total. Second day is 41.2 and our third day as 18.8. What we saw on a year-over-year basis is the two, three, plus, growing, slight erosion in the next day, we believe that reflects a capacity situation in that segment of the market meaning the next day's segment as well as our efforts to increase awareness about the overall one network into regional capabilities that we offer.

Jon Langenfeld - Robert W. Baird

Then did that follow from the standpoint of the weaker market? You saw more aggressive pricing?

Bob Bianco

Typically what we have seen is that the regional market has more capacity, there is more competition in the short hall market, and therefore the pricing environment reflects that and we have not seen any change.

Jon Langenfeld - Robert W. Baird

What about in terms of the size of shipments? You are shipments are going up on the run rate, you said you were up 5% in the quarter. How much of that is the 10,000 plus pounds meaning the truckload business coming down versus the consolidation of LTL shipments like one of your other competitors was talking about, and even in the lower weight classes you are seeing higher weight per shipment.

Doug Stotlar

Jon we definitely believe that a portion of this is capacity coming out of a truckload firming up that market, and we are seeing higher weight shipments, those shipments over 5,000 pounds, growing. Our spot traffic, quarter over quarter, has not changed a whole lot. We have to speculate that it is coming from the truckload market. We would have a hard time putting our real finger on how much of this is because LTL shipments are consolidated and going as heavier shipments however because we are seeing our shipment count down slightly, we have to believe some of that is occurring as well.

Jon Langenfeld - Robert W. Baird

Fair enough and then in the truckload side, what was the growth in the quarter, if you looked at the core business we do not have physically the last year Herb and then how would the margin, the way you used to look at it, have compared year-over-year?

Doug Stotlar

Herb?

Herb Schmidt

Well the growth was double-digit growth. Without considering the folding of Con-Ways other truckload division into the former CFI, we are adding trucks this year where most people are not. What was the second part of your questions?

Jon Langenfeld - Robert W. Baird

Is that growth excluding fuel, the second question was the margin, core margin like you used to look at it, how would attract year-over-year?

Herb Schmidt

With respect to fuel, that is including fuel but you could exclude fuel and get double-digit growth. It is real growth. With respect to margin, our margins this year versus last year, if we were running the same type of balance sheet we ran as a private company, it would be slightly improved.

Jon Langenfeld - Robert W. Baird

Good work. Growth this year on the truck growth side? Whether you targeting?

Herb Schmidt

We are targeting a double-digit growth again going forward.

Jon Langenfeld - Robert W. Baird

The last question Doug with regards to guidance, is it fair to look at it in the following way? If things slip or deteriorate, or if we get back to a more aggressive pricing environment, that pretty much brackets the lower end of range, on others and we follow a normal seasonal trend which you can define normal however you like. The normal seasonal trend probably gets to the upper end of the range?

Doug Stotlar

I am not sure it gets to the upper end of range. To some of you I think, a little bit of the waiting is off quarter-to-quarter, that is how the street expectations are. When I look back over our Q3 and Q4 results over the last two years and average those, Q3 is over 10% deterioration Q2 results, and Q4 is over 20% deterioration closer to 25% deterioration, so I think we are, the waiting might be a little off and we do not expect to get any pricing traction. Our anticipation is we do not get pricing traction for the remainder of this year and we do not see a peak season.

Jon Langenfeld - Robert W. Baird

That is what I am saying. If you had the normal seasonal trends, you actually saw a peak season, does not that get you to the upper end of the range?

Doug Stotlar

I have not looked at that because we are not anticipating it. It would incrementally improve it.

Jon Langenfeld - Robert W. Baird

Very good, thank you.

Doug Stotlar

Thanks Jon

Operator

Next question comes from Jason (inaudible).

Unidentified Analyst

Good morning all.

Doug Stotlar

Good morning Jason.

Unidentified Analyst

Want to revisit the operations in China. You mentioned there was a charge due to one of the customers. What was the charge for?

Doug Stotlar

We had a contractual issue with a specific customer and certainly this is not an appropriate forum to discuss that kind of thing.

Unidentified Analyst

This is going to impact the back half of the year just discourage stores in one time and that is taken care of?

Doug Stotlar

One time reconciliation with this customer, it is done, U.S. domestic and had nothing to do with China.

Unidentified Analyst

Perfect. If we could also focus on the truckload a little bit, can we get some color in terms of the business demand in Mexico, and if that differs from internal U.S. traffic?

Doug Stotlar

Herb you want to talk about that?

Herb Schmidt

Business demand out of Mexico has been firm but I have not seen any significant up tick yet Jason. I do anticipate if the building and construction continues in Mexico and if what our sales force believes is occurring down there does indeed occur, I would expect the business demand in Mexico to increase next year.

Unidentified Analyst

Thank you for the time as always.

Operator

Your next question comes from Ed Wolfe of Wolfe Research.

Ed Wolfe - Wolfe Research

Good morning everybody.

Doug Stotlar

Good Morning Ed.

Ed Wolfe - Wolfe Research

Number of questions, some follow-ups starting with Menlo. The contract issues that recited, other than the one you just went over with Jason in the U.S., the only thing in China you were talking about was going in for the fuel surcharges, am I thinking about that right?

Doug Stotlar

That is the current issue. However, Bob you want to talk about other contractual issues in China?

Bob Bianco

Other contractual issues?

Doug Stotlar

Just the fact that we found the contract management in China, lags what our best practices are in the U.S. and so this is going to be an ongoing effort I believe?

Bob Bianco

We are going through one of our top priorities in this integration, is to go through each and every contract and get them up to the minimum standard. So lot of things around risk mitigation, for example when we do have natural disasters or that there is force measure language in the contract and things like that but are absent right now. So we are cleaning up all that going forward.

Ed Wolfe - Wolfe Research

Sounds like nothing specific to one or two customers but generally the contract in China whether few other things need some work.

Dough Stotlar

Yes.

Ed Wolfe - Wolfe Research

What percentage of the roughly billion five of gross in the revenue is China in right now?

Dough Stotlar

In China we will do roughly just under $70 million gross.

Ed Wolfe - Wolfe Research

Is China collectively a negative on earnings right now? It must be, right.

Dough Stotlar

Yes. In the second quarter it was. Yes.

Ed Wolfe - Wolfe Research

Do you expect it to continue to be at drive going forward?

Dough Stotlar

Going forward we expect improvement every month and we are actually forecasting in the third quarter to be break even and then.

Ed Wolfe - Wolfe Research

For the full third quarter or by the end?

Dough Stotlar

For the full third quarter.

Ed Wolfe - Wolfe Research

Okay so why do again Menlo overall, when do you think Menlo overall has reported, forget about just China, starts to show positive EBIT and margins again.

Dough Stotlar

We will show improvement year-over-year, if I answering that question right.

Ed Wolfe - Wolfe Research

So well, let me just take a look at that, so Menlo in third quarter ’07 reported $6.2 million of operating income. You think you will do better than that in the third quarter?

Dough Stotlar

Yes.

Ed Wolfe - Wolfe Research

You are answering that exactly right. Can we shift gears a little bit back to a Con-Way for a second? What is the date in third quarter that the wage increase is going?

Dough Stotlar

Its phased it, part of them came in, part of them phased in and came in June, In July Con-Way Western goes into place and then in the, I believe the September time, and the September Con-Way Southern phases in.

Ed Wolfe - Wolfe Research

So Con-Way Southern was flat, so Con-Way Central is what went in at June?

Dough Stotlar

Which is the big, which is obviously the biggest component half of half of the acquired.

Ed Wolfe - Wolfe Research

Okay. Also back a while ago in regards to Justin's Yagerman’s question, you broke out tonnage by month. Can you give an update of what you have seen in July so far?

Dough Stotlar

So far in July, Ed we are seeing that trend, the trend that we saw in June continue.

Ed Wolfe - Wolfe Research

So up you have 3%.

Dough Stotlar

Yes.

Ed Wolfe - Wolfe Research

I am trying to understand how you can improve margins if you have got inflationary pressures of 3% plus and then yield net of fuel there are flat, all I can come up with is either you are making money on fuel surcharge or productivity that is off the charts, or that the weight per shipment is so much more material than I realized. Can we go through those elements?

Dough Stotlar

One is, I do not think we did it. We improved our margins and we do not anticipate being able to improve them for the remainder of the year. The other piece is we did see productivity gains across the board at freight.

Herb Schmidt

Let me grab that Ed.

Dough Stotlar

Our cross stock, our pickup and delivery was up 2.8% year-over-year, dock productivity was up 2.6%, load factor was up 3.1% year-over-year and we reduced our empty miles as a percentage of loaded miles by 7.4% year-over-year. We had some nice productivity gains and even with that we were still slightly our margin was still 30 basis points worse than last year.

Ed Wolfe - Wolfe Research

Okay. Is it possible that if fuel came down dramatically, that is not obviously it is good longer term for demand, but do you think that could hurt profitability?

Dough Stotlar

As you know, fuel and base rates are so intertwined that this point, that you really can not disconnect the fuel and as fuel has increased to record levels, it has become a larger portion of the overall freight charges on that we serve, that we charge our customers. So it has become a negotiating tactic at every account, so we have had a lot of pressure, on both the fuel surcharge levels as well as the base rates as a result and given the current environment, has been there, the leverage has been with the customers. It is a hard thing for me to call out, because things are so intertwined at this point.

Ed Wolfe - Wolfe Research

Is there some directional rules on that heavier shipment, if your shipments are up 5% size, does that equate to half of that, 2 .5% or rate 20% of that, how do you think of that in terms of the mix impact?

Dough Stotlar

I will ask John, he is been working, doing more work in this area. John

John Labrie

Ed I cannot give you specific numbers. Certainly as weight per shipment improves, it does help us from a profitability standpoint in the sense that most of the of the shipments we handle are on pallets and incremental costs that you incur in handling a heavy shipment is not so much that it is not fully taken care of and more than that by the incremental revenue that you get. So as weight per shipment goes up it is definitely helpful to our profitability.

Ed Wolfe - Wolfe Research

I am assuming it is not as helpful as direct pricing to the bottom line but it is something of that percent of that of that, am I think that all right?

John Labrie

Yes.

Ed Wolfe - Wolfe Research

Why do you think if the economy is not getting better and as the weight per shipments is getting better so much, is it because exports are just heavier than mix of the export?

John Labrie

Well I am not going to talk about it in general, but from an industry standpoint I will give you our perspective from a company point of view, in our case it is simply due to mix change. If you look at our business and your segment it by weight break, the growth that we are seeing in 2,000-pound plus shipment and frankly the growth that we are seeing in 5,000 and 10,000 pound plus shipments, is more significant than the movement that we are seeing at the lighter weight breaks.

So In our case it is due exclusively to mix change and I think may have talked about this earlier but we attribute most of that mix change to tightening capacity in the Truckload environment and then some of that business migrating over onto our trucks.

Ed Wolfe - Wolfe Research

Sure. On the truckload side, you do not tend to think about things in terms of weight, but are you seeing your truck gets fuller on percentage or the weight improving there?

John Labrie

Ed we really do not measure that, so really I have no way of measuring the weight of each shipment. I have not noticed an appreciable change or heard anything from our drivers that would indicate a change.

Ed Wolfe - Wolfe Research

Do you get a sense from any customers that they are holding loads that are larger, so they do not have to come as often for fuel purposes and things like that?

John Labrie

No I have not.

Ed Wolfe - Wolfe Research

Okay, what is your expectation for truckload pricing for ‘09?

John Labrie

I think it will increase. I think the leverage will continue to increase as shippers are aligning themselves with core carriers in anticipation of more capacity falling out. I also believe that, if there is an uptick in the economy we should see some additional pricing traction.

Ed Wolfe - Wolfe Research

Assuming gradual improvement in the economy nothing massive, would you think that pricing for ‘09 is 2 to 3% or is it kind 6%, 7%, 8% like we saw in 04, ‘05?

John Labrie

That would be a tough thing to call. I could, I would have a lot better feel after the first quarter and I see what the bids are coming and at third that would be a shot in the dark for me to predict that at this point in time.

Ed Wolfe - Wolfe Research

Oh that fair. I appreciate. Thanks everybody for all the time. It was very helpful.

Dough Stotlar

Thanks Ed.

Operator

Your next question comes from Thom Albrecht with Stephens, Inc.

Thom Albrecht - Stephens, Inc.

Hey, some of my questions have been answered, but Herb you mentioned a fivefold increase in business with Menlo, what is that approximate level going to be then in ’08?

Herb Schmidt

Do you want me to get that specific?

Dough Stotlar

Thom it will be a little less than $30 million bucks.

Thom Albrecht - Stephens, Inc.

Okay. Then I want to make sure I heard you correctly on the Menlo guidance, you did forecast that operating income would be up year-over-year in Q3 correct? So that has been down a couple of million? I am sorry.

Herb Schmidt

He reiterated that Thom

Thom Albrecht - Stephens, Inc.

Then, there is been this discussion on the call about weight per shipment in the that but, do you know that shipment numbers themselves have remained fairly sloppy. In a perfect world, what makes sure network more profitable, is it those weight per shipment or do not you need some level of shipments as well, and understand how the business is priced but when shipment are down and weight per shipment weight up, that works in the short term but longer term would not you prefer a better balance to enhance your network profitability?

Doug Stotlar

Yes absolutely. We would love the shipment count and the weight to go up in tandem if they are going to go increase.

Thom Albrecht - Stephens, Inc.

Do you read sluggish shipment count as that is really the underlying mirror on the economy more than the tonnage?

Doug Stotlar

Yes because I think it equates to consolidation of LTL shipments only shipped once, with one heavier shipment and couple of smaller shipments and it also equates to the economic activity and the activity of shippers to consolidate. On the heavier weight, I think equates to the fact that truckload capacity is getting tighter.

Thom Albrecht - Stephens, Inc.

Okay. Thanks for that additional color.

Doug Stotlar

Thanks.

Operator

Next question comes from Greg Oliff of BB&T Capital Markets.

Greg Oliff - BB&T Capital Markets

Good morning.

Doug Stotlar

Hi Greg.

Greg Oliff - BB&T Capital Markets

One clarification. Did you give a tax break down earlier I missed it?

Doug Stotlar

Kevin gave our guidance for the year. It is 220, netting out disposition of assets.

Greg Oliff - BB&T Capital Markets

Okay. Excellent. Can you give us, you have already, but can you give us a sense from an environmental standpoint what is embedded in your full year guidance for `08?

Doug Stotlar

From an environmental standpoint, our guidance has more of the same. We expect seasonal tight things you would ordinarily see happen, no peak season a caring occurring on the pricing environment not getting any better for us.

Greg Oliff - BB&T Capital Markets

Okay. A stable idea there.

Doug Stotlar

As steady as she goes at this point.

Greg Oliff - BB&T Capital Markets

Lastly, can you walk me through any fuel saving initiatives you have out there? That is pretty important as fuel seems like it will continue to beat up on everybody for a while.

Doug Stotlar

We were one of the first carriers to actually do anything on adjusting the fleet speed down LTL decreased their speed from 65 to 62, a truckload decrease the speed of their fleet from 70 to 65. We have also had ongoing initiatives associating with anti idling, turning the idle limiters down. We have had network design changes, designed around improving and reducing empty miles and driving those costs out of the system. We also had several years where we have been attacking any weight shaving opportunities off of stacking of equipment, reducing the size of fuel tanks, going to low-profile tires, going to super singles at truckload. Anything we can think of that has an incremental impact we are going after.

Greg Oliff - BB&T Capital Markets

Thanks for your time.

Doug Stotlar

Thank you.

Operator

Next question is from David Ross of Stifel Nicolaus.

David Ross - Stifel Nicolaus

Good morning gentlemen.

Doug Stotlar

Hi Dave.

David Ross - Stifel Nicolaus

Question first on the truckload side, the guidance called for flat rates in the truckload segment of revenue from all bases for the rest of the year. I want to know why that is not going to get any better if capacity continues to come out.

Doug Stotlar

Herb?

Herb Schmidt

David they might get a little better but the primary reason we will not see any appreciable improvement is because the majority of the bids by the shippers take place in the first six months of the year so most of our contractual business will really be, the pricing will be determined first and second quarter of next year as opposed to right now. What we are trying to do right now, is try to polish a few things in the area of fuel surcharge, detention terms, things of that nature, things we can effect and can negotiate with our customers.

David Ross - Stifel Nicolaus

Would you say 95% of your business is contractual on a truckload side?

Herb Schmidt

It is not 95%, but it is the great majority of our business. Approaches 75% to 80%.

David Ross - Stifel Nicolaus

If you could talk on the truckload side, not as much of an issue, with LTL with the 2010 engine strategy is if anything. Do you plan to pre buy in 2009 and what did you do last round?

Herb Schmidt

The last round, we did pre buy what I am hearing from the engine manufacturers is that we will have test engines much sooner than we had prior to the last emissions' change cycle. We are hoping to determine that. If we should pre buy. As of now, we do not anticipate pre buying. If what the engine manufacturers are telling us is true based on our testing, we will not disrupt our trade cycle in 2010.

David Ross - Stifel Nicolaus

Our final question comes from Brian from Merrill Lynch.

Doug Stotlar

Hi Brian.

Brian

Hey. Just wondering if you could comment on capital structure, if you have a target debt ratio, target debt to EBITDA?

Doug Stotlar

I would not say we have a target. We talk about a range we have on adjusted debt to EBITDA. We go through this process discussing our rating agencies and capital structure and liquidity, CapEx being at our debt load. With the acquisition activity we took last year we want to do some de-leveraging, so as I mentioned earlier want to pay off the 2010 debt that is $200 million and build some liquidity. The adjusted debt to equity basis, we are probably talking mid 30s, something on that order debt to equity. We do not have a specific target. We look at leverage but we want to take advantage of opportunities with acquisitions and leverage our balance sheet when we can. As I mentioned earlier, the sale-leaseback we did we build some additional liquidity on the balance sheet and in this environment we always want to err on that side of the ledger.

Brian

Okay great and just a follow up you have any time frame on the de-leveraging as far as your plan or nothing specific?

Doug Stotlar

Well the debt is we are not going to do anything until it comes due in April 2010.

Brian

I thought you were going to do some de-leverageing before that. Pay down some debt before then you said no.

Doug Stotlar

No its in a very. We did some hedging activity that locked in a very low effective interest rate so there is no need to do anything prior to the whole repayment.

Brian

That is great thanks a lot.

Doug Stotlar

Thank you. Operator, thank you very much, could you provide your replay information?

Operator

There will be a replay of this call that will be available at 2 o’clock eastern time today through August 7, at midnight eastern time. The dial-in number for the replay is 1800-642-1687 and internationally at 706-645-9291. The ID number is 510-605-87. Again, the dial-in number for the replay 1800-642-1687 and internationally at 706-645-9291. The ID number is again 510-605-87 thank you again.

Doug Stotlar

Thank you very much.

Operator

Ladies and Gentlemen you may now disconnect.

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