LTL Q&A with Con-way Freight President Greg Lehmkuhl

Based on solid fourth quarter results for publicly traded less-than-truckload companies, it is not a huge surprise to hear that the industry appears to be demonstrating a strong recovery from the depths of the recession. This is due, in part, to tighter capacity and steady rate gains.

For Con-way Freight, the LTL subsidiary of Con-way, this was no exception, as the unit had fourth quarter revenue of $796.2 million—was up 8.2 percent, with yield—or revenue per hundredweight—up 8.3 percent year-over-year—4.3 percent excluding fuel surcharge. And tonnage per day increased 0.8 percent, and operating income of $19.6 million was up compared to $1.8 million last year. For the full year revenue for Con-way Freight of $3.2 billion was up about 5 percent.

These positive results came while Greg Lehmkuhl, Con-way Freight President, was relatively new to the job, having started at his new position on September. Management Group News Editor Jeff Berman recently spoke with Lehmkuhl about Con-way Freight’s fourth quarter performance, as well as other components of the LTL market, including rates, capacity, and regulations, among others. A transcript of their conversation is below.

LM: Con-way Freight had a strong fourth quarter and full-year performance. What went well for the unit?
Lehmkuhl: We increased profits at a time when we had some pretty significant cost headwinds. That was done on two fronts—one was improved pricing as we were focused on equitable but consistent increases with our customers as their contracts expired. That said, our revenue management was far more disciplined and focused than it has been in the last few years. On the execution side, we did a very good job for both the full year and the quarter.

LM: In what ways?
Lehmkul: Definitely safety, which is something we value highly at Con-way Freight and across the entire enterprise. Our accidents were down 14 percent year-over-year in 2011 compared to 2010, and our injuries were down 28 percent. We had a really good year from a safety standpoint. That progress continued in January against tougher comps as we were down on both accidents and injuries. We are making an impact here, and it is the right thing to do and it is exciting. And we also saw a year-over-year claims reduction of almost $20 million.

LM: What was the year like from an LTL operational perspective?
Lehmkuhl: Our on-time performance levels were back to historical highs, and based on our transit times we are the fastest carrier in the nation and will be even faster in 2012 through an increasing focus on delivering earlier in the day. While we did not change many lanes…we are very focused on picking up whenever a customer wants us to pick up and then getting their freight to them earlier. 40 percent of our shipments are now being delivered by noon, and customers love that.

LM: Let’s talk about tonnage and pricing at Con-way Freight for the full-year and fourth quarter. Pricing was up 4.3 percent in the fourth quarter, which is very healthy. What led the charge there for Con-way Freight?
Lehmkuhl: The economy continues to show slow growth overall. If you look at the dynamics of the LTL industry things have changed a lot from 24-to-36 months ago. There is a ton of capacity that has come out of the industry, with carriers, including ourselves, closing service centers and reducing capacity and demand has flown back. We are seeing more consistent equilibrium between supply and demand on an aggregate basis, which is one dynamic. Another one is that LTL carriers in aggregate are not recovering their cost of capital. So after a real pricing decline in 2009-2010 carriers are more focused than ever on ensuring they are getting adequate price increases from their customers due to the investments they are making into their business. You are seeing significant yield increases year-over-year now.

LM: Do you think the real or true LTL recovery began in the second half of 2011, with potential for higher pricing and revenue per hundredweight say a year from now should the economy continue to show improvement?
Lehmkuhl: That is fair to say and it is what we are hoping that will happen and are thinking that anyway.

LM: With YRC Freight planning to scale down short-haul and focus on the 500-to-3,500 mile length of haul, what is your take on the planned capacity reduction from both a company and industry perspective in regards to supply and demand balance when looking at capacity?
Lehmkuhl: That news speaks to how carriers in the marketplace were geared towards trading off price for gaining market share. In 2009 and 2010 it did not work. And each time there was some sort of industry consolidation there was a capacity reduction in our industry. YRC did not have that much next-day freight in their national operating network so I don’t think there will be a big surge of freight that will roll over to other carriers. Instead, it speaks more to the fact that the industry is not willing to trade price for volume.

LM: Trading price for volume was a short-fall for many carriers during the downturn, correct?
Lehmkuhl: There is no doubt.

LM: What is on tap for Con-way Freight in 2012 in terms of keeping the positive momentum going?
Lehmkuhl: Revenue-per-hundredweight will continue to march up at a high pace certainly versus historical trends into the mid-to-single digits. We will also continue our intense focus on safety and Lean initiatives and transforming our culture into a Lean culture, where we leverage employees’ skills and abilities to leverage process improvements. We are also seeing employee engagement at the highest level it has been in years, and we plan on using our employees in a way we never have to help us make the company better. There are also some big things going on with our optimization that we are working on now and will deploy in the second quarter that will help us to drive linehaul efficiency this year.

LM: Let’s talk about the regulatory environment. While the December HOS rules are likely to have more of an impact on the truckload side, how do you see things on that front with respect to the final rule?
Lehmkuhl: The way I see it—and this is probably not a popular view—is that anything that strains truckload capacity helps the LTL business. This is because large shipments will shift into our network, which is less expensive. A big issue as a result of HOS is that there will be more demand for drivers on the truckload side, which over time will drive more shipments over to LTL. The rule does not impact us in a meaningful way, and we are probably better positioned than anybody in our space to manage driver shortages.

LM: How so?
Lehmkuhl: From a load management perspective, there is a quality of life advantage for LTL drivers compared to truckload. We have more than 80 driver schools that we have launched in which we are bringing in dockworkers and then elevating their career to become professional drivers.

LM: What about some of the other regulatory issues going on?
Lehmkuhl: Longer combination vehicles (LCV) and the final rule being debated in Washington to increase the size of doubles from 28 feet to 33 feet. If that happens, it will have a significant impact on our productivity and we are well-positioned to take advantage of that regulatory change. Given the way our trailers are constructed, it is relatively cheaper for us to convert them to 33 feet than it is for some other carriers. If that happens, it will be good for our business.

LM: Since you started in your new position, has there been anything that has been unexpected or taken you by surprise when talking about the market or the company?
Lehmkuhl: For more than a year before I came into this role, I worked closely with Con-way President and CEO Doug Stotlar and really learned a lot. That said, the thing that surprised me most was how receptive our employees were to me coming in and taking over, given that I was a relative stranger to the LTL business compared to some of the people we have had in this role in the past. It has been amazing how excited people are about the company and our future even though our earnings have not yet caught up to everything we are doing.

LM: What is your take on the Con-way Freight business year-to-date?
Lehmkuhl: Things are very optimistic. Our January tonnage was up 3.4 percent year-over-year, and we are focusing on efficiency and yield improvement as opposed to large gains in tonnage, which is not our primary focus although we are seeing nice annual gains despite that. Early into February, we are following that trend. We are cautiously optimistic that we will see slow growth in the economic environment, which is all we need to perform very well.

LM: How well-positioned is Con-way Freight to scale up assets should we see significant material improvement in the economy?
Lehmkuhl: We have strong ability to utilize what we already have in our network and capitalize on any surge in demand that we see, as we have trucks parked that can quickly be brought back into service.