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YRC Worldwide Inc. (NASDAQ:YRCW)

Q3 2008 Earnings Call

October 24, 2008 9:00 am ET

Executives

William Zollars – President & CEO

Timothy Wicks – EVP & CFO

Michael Smid – President North American Transportation

James Ritchie – CEO YRC Logistics

Sheila Taylor – VP IR

Analysts

Thom Albrecht – Stephens, Inc.

Tom Wadewitz – JP Morgan

John Barnes - BB&T Capital Markets

Justin Yagerman - Wachovia

Edward Wolfe – Wolfe Research

Analyst - Credit Suisse

Jason Sidel - Stallman Rose

David Ross - Stifel Nicolaus

Justine Fisher – Goldman Sachs

Operator

Good morning. At this time, I would like to welcome everyone to the YRC Worldwide third quarter earnings conference call. (Operator Instructions) I will now turn the call over to Sheila Taylor, Vice President of Investor Relations.

Sheila Taylor

Good morning and thanks for joining us for the YRC Worldwide third quarter 2008 earnings call. With us this morning are William Zollars, the Chairman, President and CEO of YRC Worldwide, Timothy Wicks, our CFO, Michael Smid, President of YRC North American Transportation, and James Ritchie, CEO of YRC Logistics.

The statements made by management during this call that are not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This includes statements regarding the company's expectations and intentions on strategies regarding the future.

It is important to note that the company's future results could differ materially from those projected in such forward-looking statements due to a variety of factors. The format of this call does not allow us to fully disclose all of these risk factors. For a full discussion, please refer to our 10-K, last night's earnings release and today’s 8-K filing.

William Zollars and Timothy Wicks will provide our comments this morning. Michael Smid and James Ritchie are available to participate in the Q&A session.

I will now turn the call over to William.

William Zollars

Thanks Sheila, first let me start by welcoming Timothy to YRC. Timothy joined us less then two weeks ago as our CFO and has jumped right in. We’re excited to have someone with Timothy’s background on our management team who can lead our finance organization during a time of transformation.

Regarding the third quarter, it did not turn out the way we expected when we talked in early September. I’ll give you a little color on why but then I’d like to spend our time talking about the National integration and how it will change our results going forward.

Throughout the third quarter the economic environment progressively weakened resulting in lower then expected volumes and more competitive pricing. But we were not expecting a seasonal peak in September, we would have expected at least a normal end of the quarter spike which didn’t happen in any of our operating companies.

And looking more closely at our segments we’re pleased with the Logistics and Glen Moore our Truckload business. Although Glen Moore reported slight loss for the quarter the results significantly improved over the combined losses of $8 million in the first and second quarters.

In fact, Glen Moore results improved each month throughout the third quarter and we expect that improvement to continue into the fourth quarter.

YRC Logistics reported a profit each month of the quarter and ended up about as planned. As expected Logistics completed the acquisition of Jiayu in August which further expands our global presence and for the first time gives us assets on the ground in China.

Even with the slowdown in the global economy Jiayu remains solidly profitable, free cash flow positive, and continues to grow.

The Regional results were a little lower then we thought they would be as Holland is still feeling the impact of the slowing economy in the upper Midwest and the ripple effect of the auto industry. Holland has made further progress on reducing cost while improving service but the lack of density in the outlying areas of the network continues to challenge profitability.

Reddaway on the other hand has made significant progress since realigning their territory in February and in fact reported their first quarterly profit since the second quarter of 2007. This was mostly the result of improved service levels and stringent cost controls in addition to selectively taking advantage of the [Elcarper] strike.

New Penn remains solidly profitable though their results have also been impacted by the slowing economy and competitive pricing environment in the upper northeast.

The financial performance of the National companies was the most unexpected and disappointing in the quarter. The National’s had an impact related to the recent hurricanes, the accelerated integration and the effect of the increased pension costs under our labor agreement.

But even without these additional costs we’re not pleased with their performance. LTL tonnage per day was down by 9% compared to last year which was slightly better then the year-over-year trend in the second quarter but LTL shipments per day were slightly worse at 10.6% lower.

You might recall that we expected the year-over-year gap in volumes to narrow as the quarter progressed but given the continued decline in the economy and mode shifts in some of our customer logistics models, that did not happen.

Regarding the mode shifts, over the last year some of our larger customers have been moving to a more consolidated models that in many cases allow them to use their internal fleets and reduce volumes with external carriers.

We expect these trends to slow down as we move through 2009 since there is a base level of LTL volumes that is essential to our customer supply chains. Even though our year-over-year volume trends are fairly consistent with previous quarters the sequential change in operating income was more significant given that our base volume levels are now lower and pricing has become more competitive as I mentioned before.

Attempting to adjust for fuel and the impact of mix, LTL revenue per hundredweight was down around 1%. This is about a half a percent worse then we expected when we talked to you in early September and with the National large revenue base translates to about $8 million of lower operating income.

Although we expected pricing to be down in September the level of decline was a little surprising as August was actually much better then July in the pricing area. So far September volume and [inaudible] trends have continued into October.

Now let’s turn to the future, we obviously can’t control or predict the economy but there are several initiatives that we’ve had underway and additional ones that we’re implementing to better position the company to weather these times and come out as a much stronger organization.

Obviously our biggest opportunity to enhance service and improve efficiencies is the integration of Yellow and Roadway. As you know we are in the process of taking the next steps by combining the operational networks and local sales teams of these two brands.

We spent a considerable amount of time over the last few years getting ready for this integration and our customers and our employees are supportive. In fact, many of our larger customers have expressed support for the benefits of the integration including Wal-Mart, General Electric, Wolseley Ferguson, and Hallmark just to name a few.

We’re also pleased with the collaboration of the Teamsters in these efforts. In that regard a joint letter from Teamster leadership and me outlining the substantial benefits of the integration has been prepared for our customers.

Now let me take a few minutes to update you on the integration progress of timing of the benefits. First I think its important to understand that this is a game-changing move for Yellow, Roadway and YRC.

With that said there are not any new processes or technologies that are being implemented. As a matter of fact we have been [sharing] some facilities in Canada for several months and as I said before we’ve been moving in this direction for years.

For example Yellow and Roadway were already sharing more then 60 facilities and a dedicated team has been working on [data] conversion for nearly two years. Our largest customers have been working with our enterprise solutions group since early 2007 and in the last few months our corporate sales teams have been fully integrated to make it easier for customers to do business with us.

When we originally designed our integration plans we allowed the flexibility to accelerate or slow down the process depending on a number of factors including our level of confidence and the volumes moving through the system.

Based on the support from customers and our labor partners in addition to our experience so far we’ve gained a level of confidence necessary to accelerate the process further. Throughout the quarter we have been preparing our employees, facilities, and customers for the integration and every week of consolidations will expand.

Currently we have over 20 consolidations either done or in process and expect to have 80 by year end with no disruptions. As we stated before we’re starting with the smaller facilities and focusing on the pick up and delivery functions. These locations generally only take a couple of weeks to get consolidated and involve fewer moving parts then the larger distribution centers.

Early next year we expect to start consolidation of the some of the distribution centers that are more complex to implement but also represent a larger portion of the expected savings. By the time we consolidate the DCs we expect the risk will be lower given our experience with the other facilities, the enhanced service to our customers that they will already be experiencing. In fact, it will be our seasonally slowest period of the year.

Now with respect to savings, the majority of the early consolidation where facilities already shared by Yellow and Roadway as I mentioned, but we do expect to remove about 30 facilities from our National networks in fourth quarter.

Keep in mind these are the smaller facilities that are not expected to generate significant savings or proceeds from asset sales. By mid next year our consolidated operations will be about 150 with potentially another 60 facilities removed from the networks.

I still feel very comfortable with a run rate of about $200 million of operating income improvement by the end of 2009. To put this number in perspective Yellow and Roadway had about $6.5 [billion] of annual expense of which labor costs for line haul, P&D and dock are about $3 [billion]. If we removed just 5% of that base, we’re talking about $150 million of annual savings.

Other significant opportunities are in purchase transportation, D&A and office and management personnel which combined are around $2.5 [million] dollars a years, again taking out 5% of that base is another $125 million.

So if we believe we’d be able to take out at least $200 million of cost on an annual run rate basis by the time we get to the end of next year.

And we think that’s very realistic in both amount and timing of the expected savings. We’re not funding for anything really notable in the fourth quarter of this year but for 2009 we expect savings to ramp up at an accelerated pace.

In the first quarter of 2009 run rate savings should be around $10 million, in the second quarter about $15 million, in the third quarter $120 million and a full $200 million by the end of the year. These numbers are net of implementation costs and assume and expected level of customer attrition although we’d be very disappointed to see that level of customer attrition. But we think its prudent to put it in.

I want to remind you that when we acquired Roadway others expected that we would lose a significant amount of business which didn’t happen. With that said we do expect that as we consolidate our networks and improve our cost structure some business will not make sense in our National network.

We’ll work with those customers to evaluate options with other YRC companies moving that business to other YRC networks or we’ll reprice the business or if its [inaudible] let it go back to the market.

We are excited about the opportunity we have in front of us to significantly reduce our cost structure while improving network density and enhancing our service to customers. Yellow and Roadway have been around for 80 years and have an unmatched scale and presence in the market.

Our customers expect us to continually improve their supply chains and this integration will do just that.

Before I turn it over to Timothy I wanted to provide a little color on the progress we’ve made on our cost savings initiatives. As you may recall last year we committed to remove $100 million of cost from the business. We said then that about $50 mill would come from the Regional and other $50 million from the rest of the organization, primarily in infrastructure.

We believe a large part of the Regional improvement is apparent in their operating results. Since first quarter of this year when they closed 27 unprofitable service centers, the Regional’s operating income is improved by $23 million. This improvement occurred despite headwinds of nearly $11 million from lower volumes and yield and another $15 million of contractual wage and benefit increases.

If you excluded these two items the Regional operating income would have improved by about $50 million from the first quarter to the third quarter. Regarding the other $50 million we’ve actually done better then that.

Since third quarter of last year we’ve reduced non-union back office positions by over 500 and have aligned our retirement benefits across our companies. These two items alone have created annual savings of more then $70 million and this is exclusive of the one-time curtailment gains of $98 million.

In addition we have eliminated nearly $10 million of monthly sponsorships and other discretionary costs. Keep in mind these savings are not volume related and should continue even when volumes improve. We continue to identify addition opportunities to remove more costs from the business and believe with the $200 million from the integration we will be well positioned when the economy recovers.

I’ll now turn it over to Timothy to provide further details on our financials.

Timothy Wicks

Thanks William and let me say that I’m excited to be here. We have many opportunities in front of us and I’m looking forward to the challenges. Before talking about liquidity let me provide some detail around our third quarter earnings.

Our reported earnings per share were $0.63 which included $0.84 of a curtailment gain related to making our non-union retirement plans consistent across the companies, $0.10 for reorganization charges primarily related to severance, and $0.21 of gains on property disposals.

It is important to note that the actual operating income from curtailment and reorganization charges were very much in line with what we provided in early September. The difference in the EPS associated with these two items resulted in [inaudible] from a reduction in our effective tax rate from 36.1% to 22.3%.

This change in tax rate resulted from lower then expected income, the impact of our propane tax credits on that lower income and the income allocation among our operating companies and their respective rates.

At this time and excluding any potential non-cash impairment charge we expect the fourth quarter tax rate to be around 36.5%. With regard to our leverage ratio for the third quarter we ended up at 3.18x, well within the 3.75 covenant level.

The ratio was comprised of $1.19 billion of debt and trailing 12 month EBITDA of $373 million. We expect our ratio at the end of the fourth quarter to be consistent with this level at around 3.2 well within our 3.5 limit that will be effective at 12/31.

Even with our August acquisition of Jiayu we reduced our balance sheet debt from second quarter by $11 million and we expect to reduce debt by at least an additional $100 million in the fourth quarter. The debt pay down should be the result of additional proceeds from asset sales, including [potential] sale and lease back transactions, cash from working capital, cash investment on our books at the end of the third quarter and other capital transactions the company might enter into on an opportunistic basis.

Regarding potential sale and lease back transactions, we’ve historically entered into these transactions to create flexibilities for future network changes. We are now involved in much larger opportunities that will allow us to monetize our significant real estate assets of more then $1 billion.

Where these potential transactions involve facilities that are core to our future obviously we’ll enter into long-term arrangements with the right of first refusal. These transactions are [inaudible] financing mechanisms and make sense for us given that our experience and focus lies in transportation and not real estate management.

As we finalize additional capital initiatives, we’ll provide you more detail. One example that was completed just yesterday was the draw of $250 million on our credit facilities. We primarily intend to use these funds to opportunistically retire other debt or general working capital needs.

It is important to understand that the company continues to take proactive measures to reduce debt and improve liquidity. As William mentioned while we cannot control the economy and we need to better position ourselves, we will do that from a balance sheet perspective.

As you might recall earlier this month we drew $325 million on a revolver and announced the redemption of the Roadway and [tranche of the USS notes]. We believe this was a prudent move given the unrest in the broader capital markets and the notes were at higher interest rates then our revolver.

We also have satisfied all meaningful debt maturities until April of 2010. We will continue to monitor the financial markets for opportunities to further optimize our capital structure.

Moving to capital expenditures we spent a gross amount of $27 million in the third quarter and generated $68 million of proceeds from disposals generating a cash inflow of $40 million. We continue to [lease the equipment] when appropriate and [inaudible] at CapEx as a planned part of the National integration which gives us the flexibility to remove older equipment from our fleet and sell excess facilities.

For the full year 2008 we now expect gross CapEx to be between $150 million and $175 million, a little lower then our initial guidance of $200 million and the proceeds from disposals of at least $100 million we now expect net CapEx of $50 million to $75 million for the year.

We will provide 2009 CapEx guidance when we talk in January but we would expect it to be significantly lower then the previous annual spend of more then $300 million as the requirements have changed due to the integration.

Before I turn it back to William, let me comment on the impairment test that we are currently doing. Due to the recent decline in our stock price we are required to accelerate our annual impairment review. At this time we do not have the test completed but we expect it to be final before the filing of our 10-Q in early November.

If we do report an impairment charge its important to remember that it is a non-cash charge that does not impact our financial position and will be excluded from our leverage ratio. At this point I will turn it back to William for some closing comments.

William Zollars

Thanks Timothy, given the uncertainty in the economy we won’t be providing specific earnings guidance for the fourth quarter. We do believe the economic environment remains challenging and we are not planning for economic improvement in the near-term.

With that said there are a couple of points I would like to emphasize before taking questions. First we continue to accelerate the National integration and increase our confidence with each step. We also feel comfortable with the financial benefits from the integration.

Second we are aggressively addressing our near-term liquidity and improving our balance sheet. This includes asset sales and debt pay down among other things.

And finally we continue to remove significant costs from the business and identify further opportunities to improve efficiencies and enhance service.

In summary we feel good about the things we can control and our ability to weather the things we cannot. We remain focused on serving our customers and providing long-term shareholder value.

We’ll now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Thom Albrecht – Stephens, Inc.

Thom Albrecht – Stephens, Inc.

Can you give the pre-tax amount of the curtailment gain, you obviously mentioned the earnings per share amount but given the low tax rate I want to make sure I’ve got the right dollar amount.

William Zollars

Pre-tax amount is 63.

Thom Albrecht – Stephens, Inc.

On the property and disposals that’s a net figure 15.46, what was the gross amount on the sale of all that? Are there some equipment gains or losses in that or is that strictly property disposals?

William Zollars

Its almost all property.

Thom Albrecht – Stephens, Inc.

So you borrowed $250 million yesterday I think on your credit agreement, I’m a little confused on what you have available versus what you’ve done, in your 10-Q filing from August you talked about being able to potentially borrow over $600 million but it was really probably closer to $300 million due to some of the constraints with your covenants and so that $300 million what did that relate to? Was that just the credit agreement separate from the revolver?

William Zollars

Yes, Paul Liljegren can walk you through the math there.

Paul Liljegren

As we ended the quarter we actually had $700 million of liquidity available within our facilities. As you recall we used $325 million of that to redeem the Roadway notes and USF notes, that left us roughly $400 million available of which we drew $250 million yesterday.

Thom Albrecht – Stephens, Inc.

Back to the 22% tax rate, the primary reason it was so low was the propane tax credits or, the broadcast was real fuzzy for a little while so it was difficult to hear everything.

Sheila Taylor

It primarily is because of the lower income and in the income allocation among the operating companies and their respective tax rates. But because we didn’t have enough PVT the propane credit starts to impact that rate. The credits are regardless of the PVT.

Thom Albrecht – Stephens, Inc.

If your core profitability is going to continue to be weak at least in the fourth quarter why wouldn’t you have another very low tax rate?

Sheila Taylor

Why don’t you call me afterwards.

William Zollars

We kind of normalized the tax rate really for the year so we don’t have these wild swings and so the accounting rules allow us to smooth that a little bit so we don’t have these wild gyrations on the tax rate and that’s really what we’re trying to do, try to normalize the tax rate.

Thom Albrecht – Stephens, Inc.

Back to the volumes, your experience has been no different then anyone else but I’m curious what the tonnage levels were in September? Other companies have helped us get a sense of what that was. We know what the aggregate number was but I imagine the month of September at National and Regional was worse then what you reported for the whole quarter.

William Zollars

We’re not going to go into specific numbers by month, but let me paint the picture for you. We would normally see absolute volumes build every month in the quarter so they’d start out at a level in July would show an increase in August and then again in September and they actually went the other direction from an absolute volume standpoint. That just shows you what the economic trend was as we went through the quarter.

Thom Albrecht – Stephens, Inc.

So just for the purposes of modeling I’m imagining that its probably like a 12% tonnage decline we should be thinking about for the fourth quarter at National and probably greater then 20% at Regional or would that be too pessimistic?

William Zollars

No that’s a little pessimistic, I also think that the Regional numbers are still tainted by the footprint change. If you backed out about 10% as a placeholder for the footprint change underlying decline in volumes probably around 7%. That’s kind of the base you’re coming off, is the 9% decline in the third quarter at the National and about a 7% decline at the Regional.

Thom Albrecht – Stephens, Inc.

Lastly if things continue to really deteriorate for the economy at large because there’s obviously a lot of speculation about you, but would you be willing to monetize non-core assets such as Logistics and/or New Penn or anything else or just your thoughts on that.

William Zollars

Those are two pretty valuable pieces of the company so we’d have to be in a whole different place to want to do that. We’re really very confident no matter what happens to the economy here over the next six months that we’re going to be in solid financial condition and the ability to monetize some of our real estate which has been a very big asset of ours we just kind of have sitting around, gives us a lot of leverage there and will have a big impact on the balance sheet going forward. We’re pretty comfortable that we’ll be in good shape regardless of the economy over the next six months.

After that of course we start to get significant impact from the integration. So we’re feeling pretty good about where we are right now.

Operator

Your next question comes from the line of Tom Wadewitz – JP Morgan

Tom Wadewitz – JP Morgan

I wanted to just make sure I understand a little bit more on the revolver side and how that covenant works, was the number you gave us the 3.18 debt to trailing EBITDA, that was before drawing down the revolver and how did that, does that put you beyond the covenant when you draw it down or help me understand how that works.

William Zollars

That was before the draw down but what we’re really doing is reducing our debt leverage as we do this because we’re using those cash proceeds to do some other things. We’ve basically said that our target for the end of the year will be about the same ratio as we had at the end of the third quarter even with that revolver draw down. So we will not increase our debt levels and we will end up well within the covenant.

Sheila Taylor

Remember the test is just quarter end so we will take care of other debt prior to the end of the quarter.

Tom Wadewitz – JP Morgan

I understand the notes that you, the Roadway and USF notes when you drew down the $325 million that makes sense, you’re not changing the debt to EBITDA ratio because you’re just drawing down one, paying off another but what else is out there that you can pay off with this additional $250 million?

William Zollars

We’ve still got a lot of other options for the use of that cash and without getting into a lot of specifics, we’re going to look for lower cost debt to swap out if we can that and other opportunities to delever the balance sheet.

Tom Wadewitz – JP Morgan

So there are other pieces of debt or is it the accounts receivable facility or --?

William Zollars

No this is, we still have about $1 billion in debt so there’s other debt that we can swap out.

Tom Wadewitz – JP Morgan

Okay so you do that be end of the quarter and its kind of a push in terms of what you drew down from the revolver versus what you find to pay down?

William Zollars

Exactly, its just lower cost interest on lower debt.

Tom Wadewitz – JP Morgan

And then you’ll still have you think another $150 million left in the revolver you could still access?

William Zollars

Yes.

Tom Wadewitz – JP Morgan

What about the, you’ve given us a pretty specific number on asset sales in 2008 how much of that have you actually signed contracts of that $100 million and do you know what’s the visibility to the cash flowing on that $100 million?

Sheila Taylor

There was $75 million that was done as of the end of the third quarter and the $25 million for fourth quarter is basically all under contract.

Tom Wadewitz – JP Morgan

So you’ve got strong visibility to that.

Sheila Taylor

Yes we do.

Tom Wadewitz – JP Morgan

On the sale lease back of it sounded like maybe terminals, what percentage of your terminals are unencumbered or the magnitude of your terminals that are unencumbered assets that wouldn’t be tied to the revolver or something else where you can freely take those and do a sale lease back, I just don’t have any sense for the order of magnitude of what you’re talking about when you mention sale lease back in terminals.

William Zollars

Really all of the assets are really options because if we even the ones that are collateralized if we pay down the term loan with the proceeds from that, the banks are happy so there really isn’t anything that’s encumbered in that sense.

Tom Wadewitz – JP Morgan

Do you think there’s a decent market for that type of transaction now, is that market available to do transactions?

William Zollars

Yes there is a surprisingly robust market for that right now.

Tom Wadewitz – JP Morgan

What about pricing in the quarter, you talked about how tonnage got materially weaker in September, did pricing also fall off along with tonnage in September or did it, was pricing similar through the quarter?

William Zollars

It actually fell off as well in September. Pricing was a little stronger in August and we were assuming that that would continue into September but it dropped down as I said by about a half a point below where we expected it to be.

Tom Wadewitz – JP Morgan

So it was down maybe 1.5 in September or --?

William Zollars

No it’s a little under, its about 1% below a year ago.

Sheila Taylor

But we only expected it to be down about half a percent.

Tom Wadewitz – JP Morgan

So it was down 1% for the quarter but you’re saying it was worse then that in September so it might have been down two or three in September?

William Zollars

No I think its on the margin. It was under two.

Operator

Your next question comes from the line of John Barnes - BB&T Capital Markets

John Barnes - BB&T Capital Markets

As you go through the impairment tests if you have to take an impairment charge I understand that it is non-cash but would that be in your EBITDA calculation and cause a potential covenant [trip]?

William Zollars

No, its excluded from the calculation on the covenant. It has no impact.

John Barnes - BB&T Capital Markets

Is there anything else out there that could trip you up on the covenant other then just weaker EBITDA, is there anything else out there that we should be aware of that could cause you an issue?

William Zollars

No I think the 3.2 that we’re targeting we feel very good about so there’s really nothing else.

John Barnes - BB&T Capital Markets

I was kind of surprised about your comment to Thom about the tonnage numbers he threw out there for the fourth quarter as being a little too pessimistic, we’ve heard a deceleration story from most everybody else in terms of volumes through the quarter, October has gotten off to a little bit slower start it sounds like for most, I recognize that sooner or later you’re going to overcome the lost business in Regional as a result of redefinition of that footprint but its still going to impact you in the fourth quarter so can you give us some color around why you feel like volumes are at least going to be stable with 3Q levels or even potentially a little bit stronger then 3Q levels.

William Zollars

I’ll start by saying I have no idea because we’ve haven’t been able to forecast volume very well throughout probably the last 12 months. All I’m doing is telling you where we are now and so the numbers Thom threw were probably a little pessimistic based on where we are. Now if the economy takes another turn down, I could be wrong, so just based on current trends.

John Barnes - BB&T Capital Markets

Knowing that there’s no peak season or very little, knowing that November and December are typically seasonally weaker months because of holidays and somebody has made the case that hey, there’s an extra Monday in December but its after Christmas and I’m not sure that week is going to be that busy anyway, I’m curious what steps have you taken proactively to get your cost situation prepared for what’s likely going to be a bit weaker November and December?

William Zollars

Well normally around Thanksgiving we’re pretty aggressive in terms of reducing the infrastructure we’ve got which is primarily labor but also involves equipment and so this year we’re going to be even more aggressive just because we’re very uncertain about where the economy is headed but the primary focus for us is always to make sure that we have the right number of people to handle the business volume and the right equipment.

John Barnes - BB&T Capital Markets

Do you have an idea how much cost you’re planning on taking out in those couple of months?

William Zollars

We’re usually very aggressive once we get to Thanksgiving and all I will say is we’re just going to be a little more aggressive then we would normally be just because we really want to make sure that we’re planning for the worst hoping for the best.

John Barnes - BB&T Capital Markets

In terms of asset sales, I really want to understand, real estate transactions, tight credit markets don’t necessarily go hand in hand, I know some of the carriers that you’re selling property to probably a bit cleaner balance sheet and therefore could write a check for it but I’m curious as to the pace of these sales, do you think its going to stay as robust as it was in the third quarter that you could continue to generate these sales pretty consistently and then, I’m sure you’ve got competitors listening to this call and everybody can read your financials, I’m curious as to do you think you’re being squeezed on what people are willing to pay based on some perception of your viability or not.

Timothy Wicks

With regard to the quantity of real estate sales that we may be able to do and what we’re finding in the market is we actually have been approached by a number of investors who have a significant amount of interest in the core assets of the company and they see those assets as a great opportunity because of the future cash flow capability that will come to them by virtue of our keeping those in our network for the foreseeable future.

So we see a very good market out there. We see a significant amount of interest and we’re in the process of beginning to move forward on those transactions as we speak.

William Zollars

The environment obviously is weak right now and any time you get into a weak environment like this a lot of the supply and demand take over pretty effectively and so that results in pressure on yield but I will tell you that our day to day management of the business really hasn’t changed. We continually make trade offs between volume and price and will continue to do that even though the environment is a little bit weaker I think its weaker for everybody and we still got the ability to serve our customers well and hang onto and grow the business.

The demand weakness is across the board and the macro impact of that is pretty consistent with what’s its been historically and I don’t see much difference there.

Operator

Your next question comes from the line of Justin Yagerman - Wachovia

Justin Yagerman - Wachovia

During the quarter you had found a realized a curtailment gain, given the turbulent financial markets, is there any chance that we could see any reversal on that gain?

William Zollars

No that’s a value that’s determined at a point in time and so its really based on future liabilities and that will not shift. That has nothing to do with the cash portion of it.

Justin Yagerman - Wachovia

During the quarter you had announced you had exchanged $13 million of convertible debt for stock, what are your thoughts on potentially structuring some additional transactions similar to that one and if you could go into that a bit.

Timothy Wicks

As we think through the exchange that we did in early October and we think about where the stock price is today, our expectation is that we will continue to look at opportunities in the market but would be more interested in doing more of those transactions if we saw the stock price move up further so that we could have a larger impact on delevering the company.

Justin Yagerman - Wachovia

On the terminal sales and lease back activity, have you given any clarity in terms of the number that you’d be looking to do a sale and lease back and the number that you’d be looking on doing sales given those terminal disposals that you’re expecting later this year and next year?

Timothy Wicks

We are thinking about it a little bit differently then how you phrased it, its less around the quantity of the terminals as much as it is looking at the options that we have to delever the balance sheet and considering what the size of those transactions are that we’d be interested in doing in order to do that delevering and as I was mentioned earlier, as we think about the transactions that we may do and where we’re having conversations with investors I think its also important for you to have a sense that where a number of earnings calls have focused on transferring assets back and forth among carriers, the conversations that we’re having are quite a different nature with institutional investors who really look at this as a significant asset diversification opportunity for their investors.

Operator

Your next question comes from the line of Edward Wolfe – Wolfe Research

Edward Wolfe – Wolfe Research

Can you talk a bit about the intention for further pension curtailment gains, whether in fourth quarter of 2009?

William Zollars

No there are no plans for anything further.

Edward Wolfe – Wolfe Research

You talked about during the network integration, the timing of taking out some of the small terminals first and then some of the larger ones, how much revenue loss have you factored in into the $200 million in cost savings?

William Zollars

We’ve got an appropriate number in there, we’re not going to get into specifics but it’s a much bigger number then we expect and again it kind of goes back to our history here with the Roadway acquisition when there were a lot of people predicting significant loss and we didn’t get any. Our customers have been supportive of this, I named a few of them. There are hundreds of others that I could have named, but all in all the customers are supportive, our labor partners are supportive and our employees are in the process of executing. We don’t expect any customer loss but we have built in some just to make sure we’re being conservative.

Edward Wolfe – Wolfe Research

Is there enough time to do it and clearly Timothy is laying out our alluding to some ability to bring in capital, if you could give a little more sense of that, are you talking about pools of real estate assets or what is it and how quickly can you bring in that cash? Is that something that can happen within --?

Timothy Wicks

Its hard to predict exactly the time frame in which the size of the transactions could get done but we have a very significant target in front of us that we are working toward for Q4 and then into Q1 and Q2 and as we think about that what we mentioned earlier is if you look at the overall size of the asset pool in terms of real estate its approximately $1 billion as an asset pool.

So what we’re trying to do is look through the opportunity, break off bite size pieces that we’re able to do that will have a meaningful impact on delevering the balance sheet that we can aggressively get down quarter by quarter so we’ve got pretty aggressive targets and we’ve got partners who are very interested in joining us in executing on those targets and I think the combination of those and the difference in their capital where there capital is coming from, and frankly their ability to bring equity to the table and not just be going out to the market to get debt in order to close these transactions is vital to the partners that we’re considering working with.

Edward Wolfe – Wolfe Research

That $1 billion, who put that valuation on it and what percentage of that or what amount of that is secured in some form?

Timothy Wicks

In terms of the security, we mentioned earlier that where we have assets that are collateralized the one underlying obligation we have under our credit agreement is to be able to take those proceeds to repay the term loan and as we do that there’s a draw against that term loan and that’s what gives us the flexibility to be able to put the asset pools together to take to market and release the collateral if there are cases where the assets are collateral.

Edward Wolfe – Wolfe Research

But still where’s that $1 billion coming from, that number that you put out there and what percentage do the banks that are in your revolver pool and your debt pool, what percentage of the total real estate dollars they have some --?

Sheila Taylor

When we amended the credit agreement back in April, we gave the banks about 160-something properties which valued about $1 billion. The value of our real estate is well over $1 billion. We probably estimate it closer to $1.4 billion, $1.5 billion.

William Zollars

That’s been mark-to-market recently so that’s based on our market values, that’s not book value.

Edward Wolfe – Wolfe Research

So now how quickly can you get somebody to bring some cash to the table? Your sense is even with the credit markets and such where they are is that that feels like its impending is that a fair way to term it?

William Zollars

I think the reality is is that people are coming to us with these ideas and as I said earlier it’s a way for us to monetize an asset that we really haven’t been able or haven’t leveraged in the past. So we’ve got partners we’re working with right now. We’ve had other people come to us with additional ideas and concepts so there’s a real market out there and we would expect to be able to execute over the next several months.

Paul Liljegren

Not all of those partners are US based and so they are, the folks that have capital are coming from different parts of the world where they have an interest in these types of assets and so in some cases they are a different structure then what may happen if it were someone who’s just a domestic investor.

Edward Wolfe – Wolfe Research

In terms of tonnage loss you said you’re kind of on a run rate of 9% in long haul or National and 7% net of the restructuring in Regional.

William Zollars

Yes, that’s where we ended the quarter.

Edward Wolfe – Wolfe Research

That kind of what you modeled in as you go forward or have you assumed that changes one way or another?

William Zollars

We’ve kind of modeled in what we’ve seen in September and October as a going forward run rate and then tried to give ourselves a little bit of cushion by assuming that things could get a little bit worse and it still allows us to be in pretty strong financial condition by the end of the year.

Sheila Taylor

Remember our comps do get easier each month as we go along.

Operator

Your next question comes from the line of Analyst - Credit Suisse

Analyst - Credit Suisse

Should we start to see D&A coming down already in the Q4 from the assets that you’ve sold?

William Zollars

No it’ll probably be about the same in the fourth quarter.

Timothy Wicks

Most of the assets we’re selling are assets we’ve suspended depreciation on anyway since we’re not operating in those.

Analyst - Credit Suisse

Regarding the expected level of customer attrition, can you just tell us what you’ve seen so far.

William Zollars

I think we’ve modeled in a loss that we really don’t believe but we’re trying to be conservative here and make sure that we still feel really solid about the cost coming out and the impact on income that that will have. So we’ve modeled in an appropriate level but again as I said, we feel very good about being able to retain the customers we want. We will have some business that does not make sense in the combined network and as I said we’ve got really three options there.

One is to move it to one of our other companies where it makes more sense and fits the network better either the Regional companies or Logistics company. The second option is to reprice the business with the customer and the third option would be to let that business go back to the market.

So we think there’s a lot of leverage here to improve our customer mix in a pretty significant way and we’ve got a very conservative we think outlook that generates and additional $200 million of operating income and we think that could be much better based on the fact that we’re being pretty conservative on the volume side.

Analyst - Credit Suisse

Did you book a gain on the repurchase of the Roadway and USF notes that your purchased?

William Zollars

No.

Analyst - Credit Suisse

On one of the comments about the tax rate, the fact that the tax rate is going to be higher in Q4, that’s not an indication from you that your operating results will be better, is that what you said?

William Zollars

No, its more of a normalization of the tax rate for the year. We didn’t want to be showing wild changes in the tax rate so we tried to normalize for nine months and assume that we’ll have a tax rate in the fourth quarter that will be more of a normalized tax rate.

Analyst - Credit Suisse

Implicit in the 3.2x target for leverage at the end of the year is there an assumption of how much cost savings you’ll realize from integration in Q4 and what is that?

William Zollars

Yes, there won’t be anything meaningful in the fourth quarter. As I said its really the smaller locations that will be combining. There will be some cost savings location by location but its not going to be a significant number. We’ll start to see the significant numbers in the first quarter of 2009.

Operator

Your next question comes from the line of Jason Sidel - Stallman Rose

Jason Sidel - Stallman Rose

Could you give me a breakdown on the average age of the tractor and trailing fleet for both the National and the Regional divisions?

William Zollars

Everything is pretty close to where we would want it. Our road fleet is about four years in both Regional and National and one of the things that we’ll have an opportunity to do as we integrate these networks on the National side is actually get rid of older equipment and improve the age of the fleet but right now its pretty close to where we would like it to be.

Jason Sidel - Stallman Rose

So if need be you could even defer some spending even as we get to 2009.

William Zollars

Yes, I think an important part of the story here is that our appetite for capital on the National side is going to come down dramatically. We mentioned that we had historically spent $300 to $350 just on replacement equipment for the National business and that’s going to come down very significantly as we integrate these two networks and that obviously frees up a lot of cash as well.

Jason Sidel - Stallman Rose

Can you give more color on what you mean by significantly?

William Zollars

Well it won’t be half but it will be significant.

Jason Sidel - Stallman Rose

When you’re out there signing new contracts with customers whether it be on the National or the Regional side, are you trying to lock in longer term contracts at this point or is it business as usual on the length?

William Zollars

It really depends on the customer and it depends on the relationship we have and the profitability of that account so there’s really no one size fits all there. If it makes sense to the customer and it makes sense to us then we’ll try and do that. The vast majority of our contracts are still annual.

Jason Sidel - Stallman Rose

I notice you issued a little bit of stock to pay down some debt that financially you thought made sense, is there anything else coming up for the share count like that we should model in?

William Zollars

No I think as we articulated we would be more apt to do that at a higher stock price and so as the stock price recovers we’ll be looking at that more opportunistically but right now there’s nothing planned.

Operator

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

David Ross - Stifel Nicolaus

Could you talk about YRC Logistics and really what’s going on there, saw significant gain on property and also some reorganization charges.

William Zollars

There are a few things going on there and Paul can give you the detail on that.

Paul Liljegren

On the Logistics segment you’ll notice the gain on property sale, we really had a property that had high appreciation since we’d acquired it that was part of our sale and lease back strategy in the third quarter and the Logistics reorganization charges we closed a facility in Europe in relation to some severance charges but those are the big items in the Logistics restructuring charge.

David Ross - Stifel Nicolaus

You talked about Glen Moore improving as well, is that just a function of better asset utilization of the trucks now that its doing some line haul work for Yellow and Roadway or is there something else going on there?

Michael Smid

There are a couple of things that have gone on with Glen Moore, first of all repositioning of their assets and drivers to slightly different markets, a little bit longer haul as well as addressing some of the regions that they had not. The second is a more diverse customer grouping. At one point as much as 30% of their business was related to a customer several years ago and they’ve been very aggressive in terms of diversifying the customer group.

Third the cost structure or the revenue sharing structure back and forth between the National companies really has had kind of a cost type basis so it does help them with their fixed costs or overhead cost but really doesn’t on a net basis add significantly to their profitability. They’ve done a nice job in repositioning themselves. Their equipment utilization has increased significantly outside the dedicated. On the dedicated side it’s a very, very high utilization; 98% percent and they’ve been able to move to 96% plus on the remainder of the equipment. That’s really kind of the combinations of changes that we’ve made with Glen Moore over the course of the last year.

David Ross - Stifel Nicolaus

Can you talk a bit about the exact express business and how that’s doing in this environment.

William Zollars

Exact express and time critical all of our expedited services are continuing to grow. I think that’s a function of market dynamics as well as a function of further penetration of our customer base. Right now people are very reluctant to put anything in to inventory so it does increase the demand for express type offerings and so that’s a part of our business that’s continuing to grow at all of our companies.

David Ross - Stifel Nicolaus

The pre-tax curtail, the gain of $63 million was the after-tax $49 million?

Sheila Taylor

Just apply the 22.3 to it, that sounds about right.

Operator

Your final question comes from the line of Justine Fisher – Goldman Sachs

Justine Fisher – Goldman Sachs

So $1.183 billion of debt at the end of the quarter, are there any other adjustments as per your credit agreement that we need to make to total debt levels when we’re looking at the leverage ratio?

Timothy Wicks

There’s pretty minor adjustments, for example the bank agreement of debt is at par. We have some premiums and discounts of a pretty immaterial nature on our balance sheet but its substantially the GAAP number.

Sheila Taylor

You do take out the property gains and losses so we won’t get credit this quarter for the $15 million gain. Typically on a 12 month rolling those aren’t that much.

Justine Fisher – Goldman Sachs

Even if they’re minimal do you have any idea of what those adjustments are that we need to be making to our total debt number?

Sheila Taylor

We can talk offline.

Justine Fisher – Goldman Sachs

Working pro forma there was $1.183 billion at the end of the quarter and then pro forma for the revolver draw there’s about $1.43 billion, right? Not assuming any repayments yet.

Sheila Taylor

Yes, on a pro forma basis.

Justine Fisher – Goldman Sachs

Then as repayments from that pro forma level that are already in the bag we’ve got this $13 or so million of converts that you repaid and then I think you said that of asset sales, $75 million were closed at the end of the third quarter, $25 million were already contracted so that’s $100 million in the bag of asset sales already?

Sheila Taylor

Correct.

Justine Fisher – Goldman Sachs

So then there is potential for addition repayment besides the $13 million and the $100 million in the fourth quarter but those are things like sale lease backs, etc. that clearly haven’t been closed yet.

Sheila Taylor

Correct and like the draw we did yesterday, we intend to use that to pay down other debt.

Justine Fisher – Goldman Sachs

So when you were talking about paying down low cost debt, the converts have pretty low coupons so it seems to me that if you were going to pay down other debt you’d either pay down the 8.5% notes because either they have higher interest or there’s a sale lease back covenant in those notes, or you pay down the term loan to free up that collateral, is that right?

Timothy Wicks

And clearly what we are doing is we’re walking through very much that type of analysis to look at opportunistically where we think we’ve got the real bang for the buck as we look at delevering. So we are actively walking through that analysis and looking at where we see those opportunities as the market for our debt adjusts.

Justine Fisher – Goldman Sachs

Are there sale lease back covenants that would restrict your actions on the 8.5% notes that are the only bonds left?

Timothy Wicks

No.

Justine Fisher – Goldman Sachs

Is there a different collateral package for the term loan versus the revolver because I know earlier when you said—

Timothy Wicks

Its identical.

Justine Fisher – Goldman Sachs

So how would you be freeing up collateral if you drew down the revolver to pay down the term loan?

Timothy Wicks

No, the pay down of the term loan is we do real estate sale lease back as we sell the assets that are in the collateral pool, our obligations on the bank revolver is to use those proceeds to first pay down the term loan. And the term loan is from the bank group, from the revolver. It’s the same group of banks.

Justine Fisher – Goldman Sachs

But if you’re drawing on the revolver that’s also secured, if the net amount under that total secured package is the same, how would you be freeing up collateral?

Sheila Taylor

Our intention would be to pay down more debt then just what’s on the term loan.

Justine Fisher – Goldman Sachs

So I guess you’d have to do a sale lease back for some assets that are currently unencumbered in order to net net reduce the level of encumbrance.

Timothy Wicks

I think it may be helpful for us to offline walk you through what our thinking is so you can have a sense of the different pieces because I think the question you’re asking mixes together a couple of the different strategies and I think its important to delineate the differences between them and their respective impacts.

William Zollars

We appreciate you joining us today and we’ll talk to you again at the end of the year.

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Source: YRC Worldwide Inc. Q3 2008 (Qtr End 09/30/08) Earnings Call Transcript
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