YRC Worldwide Inc.Q1 2009 Earnings Call Transcript

Apr.24.09 | About: YRC Worldwide, (YRCW)

YRC Worldwide Inc. (NASDAQ:YRCW)

Q1 2009 Earnings Call

April 24, 2009; 9:30 am ET

Executives

Bill Zollars - Chairman, President and Chief Executive Officer

Tim Wicks - Chief Financial Officer

Sheila Taylor - Vice President of Investor Relations

Analysts

Tom Wadewitz - JP Morgan

Justin Yagerman - Wachovia

Edward Wolfe - Wolfe Research

Jon Langenfeld - Baird

David Ross - Stifel Nicolaus

Thom Albrecht - Stephens Inc.

Greg Olif - BB&T Capital

Operator

Good morning. My name is Leslie, and I will your conference facilitator today. At this time I would like to welcome everyone to the YRC Worldwide first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer period. (Operator Instructions)

I would now turn the call over to Sheila Taylor, Vice President, Investor Relations.

Sheila Taylor

Thanks, Leslie. Good morning and thanks for joining us for the YRC Worldwide first quarter 2009 earnings call. Bill Zollars, the Chairman, President, and CEO of YRC Worldwide; and Tim Wicks, our CFO, will provide our comments this morning. Our operating company President Mike Smid, Keith Lovetro and Jim Ritchie are available for questions. I would also like to welcome [Jeff Schiebel], our new Director of Investor Relations to the call. Jeff has been with YRC for a few years in our forecasting area and I’m pleased to have him on the team.

Now for our disclaimers; statements made by management during this call that are not purely historical are forward-looking statements. 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 discuss all these risk factors. For a full discussion, please refer to last night’s earnings release, and our SEC filings including our 10-K and today’s 8-K filings.

I will now turn the call over to Bill.

Bill Zollars

Thanks Sheila good morning. The first quarter was historic, not only for YRC, but for the LTL industry as we successfully integrated Yellow and Roadway into the most comprehensive single network in the market. This did require a lot of hard work and effort by our employees, and a lot of patients have support from our customers. The process wasn’t perfect, and we had some hurdles in the first couple of weeks, but given the size of the integration and the history of our industry, we feel very good about what we accomplished in a relatively short period of time.

In a minute I’ll give you some more color about where and when we expect to see the benefits of the integration, but first, let me touch on the first quarter results and the operating environment. As we commented recently, the economy progressively weakened throughout the first quarter. This went to more volume decline than we initially expected at all of our operating companies.

We’ve effectively removed a significant amount of costs from the business or with an unprecedented economic environment coupled with separate national networks that was challenging for us to get ahead of the declining volumes. This was the clear driver behind our operating loss after taking out the non-recurring charges from our internal initiatives and significant accrual adjustments. We provided a detail of these charges at our recent analyst meeting, but Tim can give you an update in a minute.

In addition to the economy, we believe we are still experiencing some customer diversion due to concerns surrounding the integration. It’s difficult to quantify this volume, but we believe it’s about a third of our year-over-year decline at national or about 10%. We believe much of that volume will return, and in fact some of it already has, but we can’t predict how quickly or at what levels the rest will come back.

With respect to yield, our national company continues to see trends better than the current market given the customer mix improvements that we initiated prior to the integration and our ability to obtain contractual increases. If you exclude fuel, the nationals LTL revenue per hundredweight was up more than 1% in the first quarter compared to year ago. This is also bought a 2% improvement from the fourth quarter trends.

We continue to feel good about the ability of our national company to secure price increases even in the current competitive environment. As for pricing at the regional companies, it remains competitive given the over capacity in the regional markets and the economic recession that is significantly impacting Holland’s core territory.

For the quarter, yields at the regionals was down a couple of percent after excluding fuel. We are encouraged by some initiatives in the early stages at the regional companies to expand and diversify their customer base and approve their contractual increases.

Given that, all the regional brand services are now consistently in the high 90s, which obviously is a great leading indicator for future business. Before getting back to our national integration, let me quickly say that YRC Logistics and Glen Moore, our truckload company, continue to make adjustments for the economic environment.

Logistics reported declines in revenues as the global economy worsened, but in response removed a significant amount of cost from the business. Keep in mind that we continue to record our investments in Jiayu and JHJ through the equity method which means their results are not reflected in the logistics results. We remain pleased with our opportunities that these investments in China provide our U.S. based customers.

Glen Moore reported revenue somewhere to last year and were still able to reduce its operating loss by nearly $3 million for the quarter. Also, that improvement was due to lower fuel cost and the driver teams that now support the national transcontinental business.

Now I’d like to take a few minutes and give a current update on the national integration. We showed a lot of details at the Analyst Meeting, so I don’t want to be repetitive, but I would like to remind you of a few key points. First, the integration caused some large charges in the first quarter, primarily related to employee severance relocation cost and facility closures. We may continue to have smaller charges of this nature as we right size the business in relation to the economies, but charges related to the integration are now behind us.

We also recognize significant declines of productivity in the short-term as about half of the workforce was using unfamiliar technology, driving different routes and working in a new environment. We expected these declines and are encouraged by how quickly the trends have recovered and to have continued throughout April. In total, we estimate the integration cost of at least $65 million in the first quarter, but we don’t expect that to reoccur. As far as the financial benefits of the integration, earlier this month, we increased our run rate savings from $200 million annually to $250 million annually.

This additional savings was always built into our expectations, but we wanted to be conservative in our external commitments until we were confident the integration was complete, and that we were on the right path. We now have that confidence. The substantial upfront investments are behind us and we can focus entirely on running the new network servicing our customers and improving the operating results.

We feel pretty good about the national integration and the fact that it approves our position as the market leader and will significantly enhance the service we provide to our customers which hopefully they are already seeing. Our daily trend shows that we are improving everyday and the productivity, load average and service are approaching all time highs.

I’ll now turn it over to Jim to provide some more details on the first quarter results and our financial condition.

Jim Ritchie

Great, thank you Bill. While it has clearly been a busy quarter from an operational standpoint, we have also taken some significant steps to manage our financial position. As everyone knows, we finalized our bank amendment in mid-February that provide a substantial relief from a leverage ratio standpoint and permitted us flexibility in terms of generating and using liquidity.

Since we already hosted a separate call on the amendment, I won’t spend our time going through it this morning. I would however like to talk about the amendment we just finalized last week, which allows us to more effectively use our real estate to manage cash. As we announced recently, we are in negotiations with the Union Pension Plans to temporarily differ our monthly pension payments of around $40 million per month and in exchange, we’ll provide real estate as collateral.

It’s important to understand that this does not change any of the benefits earned or paid to our employees. It does however give us more flexibility to manage cash during the seasonally slow cash period and provide the pensions with security that could appreciate in value.

As of now, we’ve worked with our lending group to amend the credit facility and release the federal properties to provided collateral to the pension funds. We accomplished this in a matter of days which demonstrates the continued support of our lending group. We are in the midst of negotiations with the pensions and expect to provide you more details in the near future.

Its important for you to think about the pension deferral is incremental to the sales leaseback transactions we are completing. It allows us to effectively accomplish the same goal with a little more predictability on cash flow. With regard to the sale leasebacks, we closed 157 million during the quarter, including $111 million with NAT and $24 million with Estes and we completed 19 million of other property sales for a total of $176 million during the quarter.

As NAT was completing some final surveys and inspections on the remaining properties, they informed us that their underwriting will take longer than originally planned for their remaining properties valued at over $40 million under the agreement and would not have it completed prior to exploration. I want to point out that we appreciate and value the partnership we have with NAT and we expect to complete further deals with them in the future. But it was on our best interest not to extend the entire amount remaining under the contract, since we were able to secure agreements with other investors.

In fact, this week we just signed an additional $32 million with Estes, and just yesterday signed additional agreements with other investors for $70 million in sale leaseback. We did however mutually agreed to extend the contract with NAT, as it relates to the $16 million of properties that remain under the original contract and we expect them to close during the second quarter.

So when you think about all of this, it is important to understand that the new transactions we are entering are very attractive to us as the cap rates are better, the real estate values are higher, and the investors already have financing secured. We continue to evaluate additional opportunities in this area, and will execute more if the market conditions remain favorable.

Before moving on, I’d like to point out one other notable item in this most recent amendment. There was some question in the market regarding how we would satisfy the 2010, 8.5 notes and the 5% converts, given certain limits under the credit agreement.

We felt confident, we would work-out additional options with our lending group prior to those maturities, and in fact this latest amendment now provides the flexibility to complete debt for equity exchanges, in addition to issuing equity in the open market, as options to satisfy that debt prior to their maturity. We will continue to monitor the financial markets and evaluate these opportunities as the year progresses.

Now, I’d like to spend a few minutes on the financials we released last night and the steps we have taken and continue to take to improve them going forward. We realized the numbers at face value maybe a little overwhelming, but I would urge you to remember the significant investments we made this quarter and changing our networks and enhancing our position in the market.

First, though I already talked about the national integration that had an up front cost of more than $65 million, but should generate run rate benefits of at least 250 million by early in the fourth quarter. So we are expecting nearly 4 to 1 ROI on that investment in under a year. At least 20 million of benefit should be recognized in the second quarter; that’s a sequential operating income improvement of more than 85 million compared to the first quarter.

Second, we also address the overlap between Holland and New Penn in the upper Northeast. This resulted in charges of $6 million during the first quarter, but is expected to save the regional companies 25 to $30 million annually. Again, another ROI of over 4:1 in less than 12 months.

These one time charges were lower than our initial 8 to $10 million estimate as the WARN Act liability was less than anticipated. We continue to implement additional cost and business mix improvements to Holland that we believe will improve their results as we progress through the year.

Another item to note is the union employee stock awards of which we recorded a one-time non-cash charge of $30 million in the quarter. This investment provides each of our union employees another way to benefit when the company performs well.

The associated 10% wage reduction should reduce costs around $240 million annually or nearly $1 billion over the life of the contract. Salary and benefit reductions for non-union employees should add another $75 million in annual savings. In the first quarter these actions saved the company about $90 million in actual operating expense reductions.

Finally, in response to declining volumes and the need to further streamline the organization, we continue to reduce headcount by a meaningful number. It gets a little blurry when determining whether a position was eliminated due to integration of volumes. So let me break it down for you.

We eliminated over 800 non-union positions due to integration, which resulted in about $13 million of severance during the first quarter. This cost and the associated benefits were a subset of the integration numbers I just shared. What is not included in those numbers is the additional 900 non-union positions eliminated due to lower volumes. This resulted in another $19 million of severance, but should provide cost savings of over $70 million annually.

While we are discussing headcount, I would also mention that we are down over 4,000 union positions due to integration and the lower volumes compared to the fourth quarter, and nearly 9,000 compared to the first quarter of last year.

As you know, our contract allows us to flex labor in relation to volumes. We believe with our consolidated national networks, we could now add a significant amount of volume without additional labor, which means a very healthy incremental margin as the economy improves. So when you think about all of this, we invested over $120 million in the first quarter to generate future benefits of over $600 million a year, an ROI of five to one, which is fairly decent return in our mind.

Everyday as we move forward, we will continue to adjust our operating capacity and structure to match market demand. This is a critical component of our short term tactical operating plan while we simultaneously invest for long term success when the economy recovers.

Before turning it back to Bill, let me remind you that our focus remains on liquidity as we manage through this economic recession. At the end of March, we had $266 million of cash and we anticipate completing nearly 200 million more of sales leasebacks during the second quarter.

We expect to negotiate differing multiple months of pension payments to our multi-employer funds and plan to finalize these arrangements soon. We also expect our growth CapEx to be more than offset by excess property sales during the second quarter, which means, there really is not a cash impact from CapEx.

Our non-union pension payments in 2009 will be about $10 million, mostly paid in third and fourth quarters. We do not expect any large unusual cash outflows this year, so you can basically model cash using your operating assumptions.

I will now turn it back to Bill for additional remarks.

Bill Zollars

Thanks Tim, I think it’s important for all of our stakeholders to understand that we consciously made some pretty tough decisions that we feel will put us in a really different position going forward and provide tremendous benefits. It’s easy to get caught up in the numbers and forget what we really accomplished here, but I would urge you to think beyond that and realize that this company is an industry leading organization with hundreds of thousands of very loyal customers and dedicated employees.

We’ve gone through a significant transformation over the last year, and yet our quarter business remains solid. With the national network that’s unmatched in the industry, strong regional brands, a global reach and significant employee ownership, you can expect us to go on in the offense now in the marketplace. We’ve taken a significant amount of cost out of this business, including over 150 facilities and more than 11,000 people since the first quarter of last year.

Our new integrated network and significantly reduced infrastructure have lowered our breakeven point which gives us the ability to significantly reduce our cost per shipment. When you combine that with the improvements in our service, the result is an even stronger position in the market, which we are beginning to leverage in the marketplace. Because of the continuing economic uncertainty, it’s too early in the second quarter to provide guidance, but we will update you as we move through the next few months.

We’ll now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Tom Wadewitz - JP Morgan.

Tom Wadewitz – JP Morgan

Let’s see. So, the increase you presented is helpful in obviously a lot of moving parts. I wonder if you can give us a sense of how things look in April, and in terms of profitability and whatever kind of metrics you can give us to get a sense of what the profitability trend looks like in second quarter based on the first couple of weeks of April?

Bill Zollars

Sure. Well, let me start with kind of the macro environment. We don’t see much change there. So the volumes being driven for business activity are about the same. If you move into a more company specific kinds of focus, the integration of the national companies has gone better than expected, from probably the three or four most important perspectives.

First of all, our service as I mentioned is approaching all time highs that’s obviously critical, our productivities are better than expected thus far including loan average which as you know is a key component of that. So from a cost standpoint and a service standpoint, integration is going very well.

We are starting to see business that had been diverted temporarily return, we expect that to pick up momentum here as we move through the rest of the month of April. So that’s kind of the situation on national. I’ll turn over to Mike here in a second he can talk about it in a little bit more detail.

On the regional side of the business obviously Holland is still struggling with really kind of nuclear impact of the economy in the Midwest and the ripple effect from what’s going on in the auto industry.

Having said that we have a lot plans in place at Holland as well as the other regional companies to make sure that we have a solid recovery plan in place. So I expect that you’ll see much improved performance in the regional companies in the second quarter as well. Logistics is struggling with a worldwide global downturn, but doing a good job of adjusting their infrastructure to be consistent with the business lines.

So that’s kind of a snapshot. Let me go back to the integration and let Mike talk for a coupe of minutes about that.

Michael Smid

Yes Tom there are really two areas, first of all from an operating standpoint it has been exciting to move from the pure phases of integration in to progresses, as we begin to build the service performance as well as the momentum from an operating standpoint.

From a revenue standpoint in the course of the last coupe of weeks we have begun to initiate some significant programs with our customers based on recovery and development of new business like the most encouraging part of that is that as we release new and different programs from a customer perspective and we’ve not only seen some recovery, but have had some wins from the standpoint of new and different business.

I think that’s probably the best example of making our way through a really complex integration and then onto the beginning of leveraging the integration from a market standpoint.

Tom Wadewitz – JP Morgan

So if we think in all our terms at national and regional, is there any rough sense you can give us of what the OR might look like in the first couple of weeks of April, its just that there is so many moving parts in first quarter, its kind of hard to work through all that and have really an idea what the trend might look like in second quarter?

Bill Zollars

Yes, I think that’s right Tom. Its just too early and we’ve got a couple of things that we are assuming will continue in the right direction, productivities and the return of business that was temporarily diverted and then of course you got the wildcard of the economy, we’ve been sort of given a couple of [head] fakes in the past where we thought the economy stabilized and then it took another step down, so still lot of moving parts here and too early to make any kind of a call on the second quarter.

Tom Wadewitz – JP Morgan

Have you seen the operating ratio improve in the first couple of weeks of April versus the reported levels in March, can you comment that way directionally?

Bill Zollars

While the cost per shipment is obviously coming down as we continue to improve productivities, but I think the most exciting thing to see right now is the level of service we’re providing, because that as I said earlier is a great leading indicator for everything and all of our companies are providing terrific service, which going forward will be the most important thing.

Tom Wadewitz – JP Morgan

Okay. I guess, one more on the bank you seem to like you work through pretty quickly there with the banks regarding what you want to do with the teams during the pension contribution and the deferral there and so is that an indication that if you need to go back to the banks in terms of the minimum EBITDA requirement, which might appear to be challenging given how bad the economy has gotten, I mean is that something where you also think you get flexibility on those covenants?

Tim Wicks

Tom, its Tim. I appreciate the question. I think it’s fair to say that very broadly we have a very productive and positive working relationship with Blender Group, and as we identify opportunities that relate to just about anything related to liquidity improvement opportunities, operating improvement opportunities, we have a very open dialogue with the lending group and counter them to talk about ideas and approaches.

As you saw last week in our ability to work together to amend the agreement in and really frankly just about 24 hours to free up that property for the pension funds. That really is a good characterization of the relationship that we have and I would say it covers many dimensions.

Operator

Our next question comes from the line of Justin Yagerman - Wachovia.

Justin Yagerman - Wachovia

I wanted to get a sense of, I guess it would be helpful to hear the tonnage per Month transit national and get a sense from that, I guess how much volume has come back if you are seeing any kind of diversion coming back to you in April?

Bill Zollars

Yes, I think we saw the tonnage weaken as we went through the quarter I think we said that a couple of times and a part of that I think was economic softness getting worse and part of it was people having a little bit of concern around the integration time table.

That’s behind us; at least the integration piece of it is and we have seen business start to return. The question is, how fast and how much as we said, we think about 10% of our volume decline in the first quarter was related to business that have been diverted temporarily. So, as that business comes back, that 10% should return. It’s just kind of tough to tell the pace of that business returning.

Justin Yagerman - Wachovia

The trends in April, and Bill what are your seeing there, is it sequentially up from March in national?

Bill Zollars

It’s a little bit too early to tell. I would say there has been no meaningful change at this point, but we expect that to change as we go forward through the second quarter.

Justin Yagerman - Wachovia

Okay. One of the things you guys talked it about in your analyst meeting was an insurance captive that could free up about $160 million in liquidity. I was wondering where you guys are with that. I didn’t hear you mention it, and was curious what the timing looks like on that liquidity chunk?

Timothy Wicks

Sure. Justin, its Tim. We actually did the wind down of that captive coincident with the signing the amendment back on February 12th. So, when we closed that amendment, we wound down the captive from liquidity purposes, right in time with the amendments. So, that liquidity was received at that point in time.

Justin Yagerman - Wachovia

So that’s a lever that’s already pulled in other words.

Timothy Wicks

That is correct.

Justin Yagerman - Wachovia

Okay. When you guys are talking with the pension plans, you already got the approval from the collateral, is it for the uncollateralization of the assets from your bank group. What would prevent the pension plans from allowing you guys to put up these assets as collateral for your payment obligations to them? Is there anything holding up to those negotiations or is that just a matter of time, and then, if so, what do you think timing is when we get resolution on that?

Tim Wicks

Justin, it is we believe a matter of time and it’s just a part of the process of negotiating and making sure that everybody’s interest are well represented as we work through that. We’re negotiation with several funds simultaneously, and it’s important as we do that to make sure that everybody is well represented and that everybody’s needs are met to the best of our abilities as we work through it. That just takes time to get done, and we are actively engaged in those discussions on a daily basis.

Justin Yagerman - Wachovia

I understood. And I guess the implication there is that the bank group feels there is excess collateral relative to the loan value that’s outstanding on the credit facility. Do you guys have a sense of where you would peg that excess collateral number? Where are you above and beyond the value of the loan obligation you have to the credit group?

Tim Wicks

Justin, I don’t know that there is a good way to peg that value precisely. I think the way I would characterize our relationship with the banks is, we each come into those discussions knowing what we are trying to accomplish, and each has a sense of the room each has around the various parameters that we’re negotiating on.

Clearly, we’re working together to ensure that we have the liquidity that we need to get through this tough spot in the economy, because we all believe that when you look at the historical performance of the company, that we are going to be in a position to perform well moving forward. Frankly, a lot of that is driven by the actions that the management team has taken to take significant operating expense out of the business.

As you see, the tonnage declines that we have shared with you, we have invested an enormous amount of both resources and energy in right sizing the capacity of the business to match the demand. When we continue to enter those discussions with the bank group and demonstrate those areas where we have taken out expenses in order to ensure that we have the right operating structure in this economy. There continues to be support to help us through the liquidity time. Particularly as we are in a period of the year that’s seasonally slower related to cash flow.

Justin Yagerman - Wachovia

Okay. Bill, you alluded to the economy in the Midwest, and obviously, [haul] on to struggle with some of the issues there. Can you talk a little bit in light of the plans expended shutdowns and the potential bankruptcies at GM and Chrysler, what your guys auto exposure looks like to date?

Bill Zollars

Let me start, and Keith is here, and he can give you more color around that. You know, our corporate exposure to the auto companies is not significant, but there is more exposure in Holland, not only directly, but probably more importantly indirectly in terms of the impact that the auto industry has on that part of the country.

We’ve try to build in some analysis that would take into consideration some of the things that are going on within the auto industry as we look at our forecast going forward and have also got some plans in place to continue to diversify the customer base there. But I’ll let Keith add to that.

Keith Lovetro

Excuse me; in fact, that’s exactly how we are attempting to mitigate some of that business cycle risk, which is through the diversification that we actually talked about at the Analyst Day. So by penetrating or targeting other industry segments as a way to mitigate that risk and to diversify Holland’s customer base, that’s a key way for us to offset whatever might occur in the auto industry. So, that’s a key step for us.

Justin Yagerman - Wachovia

Okay. Lastly, I will turn it over to someone else, Tim, can you just talk about working cap trends and what you expect for the year that this quarter looks like, accounts receivable is pretty healthy to you guys. How do you see that playing out as we normalize that throughout the year for cash puts and takes?

Timothy Wicks

Sure. Again, I would come back to how I finished my comments, Justin, and that we don’t expect any large swings one way or another as it relates to significant cash obligations. We will continue to work the working capital side of the business to be able to continue to produce liquidity there just as we did in the first quarter.

I think in terms of probably the most straightforward way to think about it is as we get into a part of the year when revenue intends to grow more significantly based on the overall just seasonality of the business. As account receivable goes back up, we also find that under the ABS facility the borrowing base expands as well, so we have an ability to finance ourselves during that time when accounts receivable is increasing.

Having said that, we have a significant amount of energy placed around our working capital and managing the working capital and really focused on producing cash from working capital just like you saw on the first quarter and will continue to drive hard in that direction through the remainder of the year.

Operator

Our next question comes from the line of Edward Wolfe - Wolfe Research.

Edward Wolfe - Wolfe Research

Tim, can you talk to when you look at the internal plan, you got to get the 45 million in EBITDA. How much in your plan comes from April? How much comes from May, how much June and you know we’re 24 days into this. Are you on that plan? How does that plan feel?

Timothy Wicks

I think Ed, it’s obviously a great question, but very much like Bill mentioned earlier to Tom’s question. It’s pretty early into the quarter to be able to address that as we think through achieving that plan for the quarter.

Edward Wolfe - Wolfe Research

All right but instead of in terms of what’s happened so far and I know its only 24 days and Easter’s Day and all that, is the plan back ended, is there more cost savings in June than April? Is the seasonality better in April than May? How do we think about where you are looking at the strength to come from?

Bill Zollars

Yes, I think that we are assuming normal seasonality Ed, and obviously the more we get into fine tuning the network of the national side of the business, the better we expect the productivity is to be and the more business, that have been diverted we expect to return, so things should get better as we move through the quarter pretty much on all fronts.

Edward Wolfe - Wolfe Research

You talked a little bit about the availability on the revolver as of March 31 and now?

Tim Wicks

So the key area at is, is less around the revolver and more around the ABS. What happens when we sell assets, real estate, excess equipment, we are under obligations through the credit agreement around the portions that we prepay. So good example of that is, as you look at the balance sheet for Q1, and you see there are approximately $245 million of cash on hand, you see the incremental 17 million of restricted cash. That restricted cash is the portion that we put into an escrow account that then gets freed up on July 15, so as we move forward and we continue with assets sales.

We will be under the appropriate split outs that are detailed in the credit agreement around when sell assets that we do a 50-50 split on those assets for the first 300 million above and beyond, what we call the scheduled transaction which is the $150 million under NAT and that will then be available under the revolver and its available under the Escrow account and then that Escrow account gets released on July 15.

Edward Wolfe - Wolfe Research

Does that Escrow keep moving six months?

Tim Wicks

I’m sorry Ed?

Edward Wolfe - Wolfe Research

If you put new money in the Escrow, how long is it supposed to stay in the Escrow? For six months?

Tim Wicks

No. The total period, the Escrow period ends on July 15.

Edward Wolfe - Wolfe Research

So, if you sold some real estate and closed on it today, that would go into Escrow 50% of it theoretically and that would be released July 15 too?

Tim Wicks

Yes. Yes.

Edward Wolfe - Wolfe Research

Okay. So, there’s 500 million, is that the new ABS facility. What’s available on that if you wanted to draw down today?

Tim Wicks

So you’re correct, the ABS facility has a size of 500 million in terms of capacity. The borrowing base is approximately 300 million based on where AR is and we are not fully drawn on that.

Edward Wolfe - Wolfe Research

Can you tell us how much room there is there?

Tim Wicks

It’s approximately 20 million.

Edward Wolfe - Wolfe Research

So you got the 20 million plus you’ve got the 245 million in cash minus the 17 which will come back to you in July.

Tim Wicks

No. You’re almost there it’s the 245 plus the Escrow amount 17, so take that as 266 million of cash.

Edward Wolfe - Wolfe Research

Right.

Tim Wicks

And then if you want to do the math of backing out the Escrow you back that out from there.

Edward Wolfe - Wolfe Research

Okay. When you talked about some of the sales that you’ve entered in to yesterday and so forth do those include the New Penn we’re hearing they’re selling some terminals as well or is that just related to Yellow Roadway?

Tim Wicks

They’re really across the board in terms of the operation and we probably won’t get in to the specifics of those facilities as to where they are until the transactions are completed but they really are all across the board, across the various operating companies at.

Edward Wolfe - Wolfe Research

Okay can you give us more details about what happened with national terminals it felt like this was closing in February than just a couple of weeks ago its closing but within 60 days and now its not closing.

Tim Wicks

Yes and that’s probably not exactly how we had characterized it. We did enter in to extensions with them Ed as we continue to move through the period that you reference the February and March periods and essentially what was happening was it was really reflective of their underwriting process and many different facets of what’s going on in the credit markets.

We continue to work together and we frankly continue today to work together around a number of properties that they still have options on but in each of those extensions we have the option of the conclusion of those extension periods to pull properties from that list, and as we got to this latest extension, what we did was, we pulled a number of those properties where we knew we had negotiating opportunities with other potential sale leaseback investors.

So we did that at the end of this last extension and we were able to sign the additional agreement that we did with Estes, as well as other investors for this incremental 70 million. NAT will continue to close on approximately $16 million out of that 40 million that remained. So they are still a very important partner to us, and we continue to look at future opportunities as well, because we have a lot of confidence in that relationship.

Edward Wolfe - Wolfe Research

And what’s the sense of timing of both the 16 from NAT and the 70 from Estes and others?

Tim Wicks

We’re really working together to close them during the second quarter.

Edward Wolfe - Wolfe Research

Both of those separate ones?

Tim Wicks

Yes.

Edward Wolfe - Wolfe Research

Okay. Just one last one. Can you talk a little bit in terms of, you know, you look out and you say we’ve got the ABS to redo next February. Are you in still constant dialogs with the banks or they’ve gone onto somebody else and you’re not having those conversations all the time. When do you start those negotiations?

Tim Wicks

I would say, just like what we did last week in terms of amending the credit facility. It’s very hard to go back to the banks and make a request like we did around the release of the real estate if you’re not in continual dialogue with them. We continue to be in dialogue with them, which we believe is very important as we continue to move forward, and will continue to be in dialogue about each dimension of the credit agreement.

Edward Wolfe - Wolfe Research

Okay. Tim, is there a way to think of extra cash flow coming into the quarter, because you are not making payments into the teamsters because of this new agreement that you’re reaching, and what would that look like if we thought about it?

Tim Wicks

If I understand your question, Ed, I would focus on referencing the approximate $40 million that I mentioned earlier in my comments and three months of that deferral. Do I understand your question correctly?

Edward Wolfe - Wolfe Research

You do, I think. So in other words, if you didn’t have this agreement, 40 million would be due over second quarter that you are not going to have to pay in second quarter. Is that a way to think about it?

Tim Wicks

No, 40 million each month during the quarter. So, approximately $120 million.

Edward Wolfe - Wolfe Research

And that’s during second quarter?

Tim Wicks

Yes.

Operator

Our next question comes from the line of Jon Langenfeld - Baird.

Jon Langenfeld - Baird

Good morning. Could you just follow-up on that last point. As far as the deferral versus the using of asset to pay the pension. Are there two different things going on there? One, they are allowing you or potentially allowing you to defer the payment, the other is part of the payment is being settled through essentially pledging of an asset?

Tim Wicks

I think that’s essentially the way to think about it, Jon, is that, that we are really deferring the payment and offering the collateral, so that the pension fund has coverage of that amount of payment being deferred.

Jon Langenfeld - Baird

But the amount that you can pledge, so you think of a 120 million roughly that you talked about. Are you going to pledge to assets worth a 120 million?

Tim Wicks

We’re working through that as we talk.

Jon Langenfeld - Baird

Okay. Because the revised credit agreement only allowed for 50, did it not?

Tim Wicks

That’s not how I would interpret it at all.

Jon Langenfeld - Baird

Okay. So, I thought in the revised debt agreement last week or week before last, it was basically a $50 million limit, am I misunderstanding that?

Tim Wicks

Now the $50 million limit really relates to the way we looked at, essentially describing the scheduled transaction and pulling $50 million off of what we are able to sell during the year. So under the credit agreement, we had the ability this year to sell $400 million of assets, and essentially what we negotiated is that in doing this real estate transfer of collateral in lieu of payments, we pulled $50 million off of that total $400 million. One should not construe that as related to the value of the real estate at all.

Jon Langenfeld - Baird

I got you. So, in effect, the bank has freed up more liquidity for you. You’re net down 50 on that, but potentially up as much as 120, the positive on the facilities.

Tim Wicks

Yes. That’s exactly how I would think about it, Jon.

Jon Langenfeld - Baird

Okay. Good clarification. And then, what was the tonnage trend year-over-year in March for national and regional?

Tim Wicks

Say that again, Jon, I’m sorry.

Jon Langenfeld - Baird

The year-over-year tonnage growth, daily tonnage growth in the month of March for national and regional.

Bill Zollars

Now, we really haven’t broken it out by month, March was the worst month because of the integration in addition of the weakening economy.

Jon Langenfeld - Baird

I mean, the order of the magnitude, is that 10 percentage points worse, 5 percentage points worse than that.

Bill Zollars

On the national side it was probably 10 worse, and on the regional side it got a little bit better.

Jon Langenfeld - Baird

It did. Okay. Thoughts behind it, so when you say 10%, I was thinking relative to what was reported. Is that how you were interpretation the question?

Bill Zollars

I was talking about from February to March on the national side, and again that reflected in large part the temporary diversion of business as a result of concern around the integration.

Jon Langenfeld - Baird

Got you. And your previous comments was, April. Haven’t actually seen it come back, but have indications that it will start to come back with that.

Bill Zollars

I would describe it, Jon, as a slight uptick. So we expect more than slight.

Sheila Taylor

And Jon, this is Sheila. That the overlap from the regionals from the prior year, for the [prime] changes, that happened in late February. So we are starting to see the comps get a little bit easier for the regional companies.

Jon Langenfeld - Baird

I got you, right, so that’s the reason for it getting little bit better. Okay and then you bought a minimum $100 million required cash balance does the restricted cash count towards that 100 million?

Tim Wicks

Yes it does it’s a part of total liquidity.

Jon Langenfeld - Baird

Yes okay. And then what else is part of total liquidity that’s not cash as it relates to that 100 million?

Tim Wicks

Its total availability under the facilities the revolver of the ABS, the Escrow and then the cash on the other side.

Jon Langenfeld - Baird

Okay and then that restricted cash presumably the availability comes after the debt covenant date, or in conjunction with the debt covenant date?

Bill Zollars

I’m not sure what you mean by that.

Jon Langenfeld - Baird

Well I guess I’m wondering, you talked about that being available in mid-July, but doesn’t that also require or I guess it assumes that the debt covenant is for March or for July excuse me?

Tim Wicks

I think if I understand your question essentially what it means is we’re in compliance with the credit agreement to that point, yes.

Jon Langenfeld - Baird

Okay and then what would be a good interest expense number to be using for the second quarter?

Sheila Taylor

You know John that’s going to vary depending on if we complete the sale leaseback we obviously pay down part of the revolver so I am going to have to give you kind of a wide range but I’d say between 35 and 40 million.

Jon Langenfeld - Baird

35 and 40 okay. And then of the 176 million in proceeds that you’ve already obtained here in the most recent quarter, how many facilities would that represent roughly?

Tim Wicks

So it’s in the first quarter it is 27 facilities in total that we did sale leasebacks on during the quarter.

Jon Langenfeld - Baird

Okay great and then the last question I had was just thinking about a bridge I know you’re not giving guidance too early but if I’m looking at the national operating income line you had about 300 million of operating losses. I think if I net out the charges would a good starting base be kind of 175 million of operating losses?

Tim Wicks

Yes, that’s close John.

Jon Langenfeld - Baird

Okay and then to build on that we have the cost savings, the 90 million run rate cost savings. We have seasonality and then we have whether or not the business comes back and how fast it comes back?

Tim Wicks

That’s right that’s pretty close to the total number of things.

Operator

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

David Ross - Stifel Nicolaus

Good morning gentlemen and Sheila. Quick question I guess on the charges. Most of them, the network integration in Holland are easier to allocate but can you give a sense of split of the severance reserve accruals and the union placed backwards between the regional and national group so we get kind of a better award comp.

Sheila Taylor

Yes Dave, on the national I would split the total significant charges like a 125 million would go to national, 29 million would go to the regional and then 11 million goes to corp. And far as breaking out the pieces you and I can go over that after, we get off the phone if you want but its basically about 20 million of the stock comp goes to national and then most of the rest goes to the regional companies.

David Ross - Stifel Nicolaus

Okay and then what would the, I guess EBITDA on the first quarter have been that would be consistent with the bank covenant. That’s kind of a base to start from to build for a second quarter EBITDA number?

Tim Wicks

We don’t even calculate that anymore since we’re not under that covenant calculation rate. We didn’t calculate that at the end of first quarter David.

David Ross - Stifel Nicolaus

So you have to come up with that the calculation for the second quarter?

Tim Wicks

I’m sorry.

Sheila Taylor

Yes, we would calculate it starting in second quarter and as we talked about when we did the amendment that the bank EBITDA number is pretty clean now from a cash standpoint. So they are looking for cash earnings. So there is not much excluded for bank purposes versus GAAP.

Tim Wicks

Right, it’s a very clean definition under the credit agreement.

David Ross - Stifel Nicolaus

Okay, so we can kind of go with the EBITDA number on the income statement and the release?

Tim Wicks

I think you get very close by doing that.

Sheila Taylor

Are you talking about first quarter?

David Ross - Stifel Nicolaus

Yes.

Sheila Taylor

Yes, I mean, you will definitely add the union stock comp back though. That’s purely non-cash.

David Ross - Stifel Nicolaus

Okay, and then can you talk about a little bit of the availability left in the revolver, I think you said 20 million left on the ABS facility but how about the revolver?

Tim Wicks

The revolver is essentially drawn with the exception of the restricted cash.

David Ross - Stifel Nicolaus

Okay, then I think just talked about earlier, the real estate needed to pledge, I mean if you are looking to forgo 360 million of pension payments this year, would that apply 360 million of real estate, that would need to be pledged to the pension fund?

Tim Wicks

First let me come back and address your assumption. What we are seeking is three months of deferrals of those pension payments that are approximately $40 million per month so it’s a $120 million and then what we walked through a few moments ago with John; it really is to free the amount of real estate that allows us to collateralize those payments.

David Ross - Stifel Nicolaus

Okay and if I could really ask about the capital, its re-negotiated or drawn down in February. Does that mean your insurance renewals next comes up in February or do you have an earlier insurance renewal for your self matured retention and everything else.

Tim Wicks

The insurance renewal is really focused around what happens in any individual state at any point in time and the captive was really a structure that enabled us to take the benefit that was really a timing mechanism to take the benefits for the claims, when the claims are to take the benefit, when the premiums were paid versus when the claims were actually paid. So, the [unwind] of the captive just changes that timing around.

David Ross - Stifel Nicolaus

Okay. So your broader insurance policy for the company wasn’t affected by that. So when does that expire or did you renegotiate?

Tim Wicks

Again, as I mentioned earlier, they come up in each particular state with regard to the plans that we have in each individual’s state.

David Ross - Stifel Nicolaus

Okay. Also we heard that there was I guess issues around either health and welfare plan or one of the pension plans with spending employee benefit temporarily that lot of employees got notices in their mail that their insurance is going to expire, but then that got resolved kind of at the last minute. Can you talk a little bit about what happened there I guess in the first quarter?

Tim Wicks

This is really just a part of the overall negotiation that we are working through right now, and just making sure that everybody had the same communication at the same time frame, and that really is all that is happening there.

Operator

Our next question comes from the line of Thom Albrecht - Stephens Inc.

Thom Albrecht - Stephens Inc.

I just wanted to make sure I heard you correctly. So, the pension deferral, you’re really only looking at it as a 90 day solution, not a nine month of even a year solution?

Tim Wicks

That’s exactly what we are working through right now. The pension funds is a 90 day approach.

Thom Albrecht - Stephens Inc.

And when would you catch up on that payment. Would it be like the second half of ‘10? I mean if you’re going to defer it, you wouldn’t really probably want to turn around and have to make that payment just six months later necessarily.

Tim Wicks

Right. What we are working on are those terms as we speak. So, we are working through every last aspect of that potential arrangement right now, and it includes both the amount of payments that we can defer as well as the timeframe in which we would repay them. So, it probably be premature to go through it in any greater detail than that.

Thom Albrecht - Stephens Inc.

Okay. And then, on the pension expense for non-union folks, you gave that figure early on, but I was writing so quickly. How much was that per quarter?

Sheila Taylor

Well, we gave the cash funding Thom, which was 10 million and it’s going to be split between third and fourth quarter. So $4 million to $5 million a quarter in those two quarters.

Tim Wicks

And Thom, I’m glad to know we had you writing so quickly.

Thom Albrecht - Stephens Inc.

Yes. But my brain works slower than my writing.

Tim Wicks

I definitely wasn’t going there.

Thom Albrecht - Stephens Inc.

I just want to make sure kind of piggy backing on David’s question, you are current on your health and welfare payments at this time?

Tim Wicks

We are.

Thom Albrecht - Stephens Inc.

Okay. And there was no issue or you don’t want to quite go there?

Tim Wicks

I don’t think there was an issue, so I’m not sure what you’re referring. There has not been any issue.

Operator

Our next question comes from the line of [Greg Olif] - BB&T Capital Markets.

Greg Olif – BB&T Capital

Most of my questions have been answered. I just have two things. I’m just curious, in terms of volumes you talked about deferral there, but I heard a diversion there, but I just wanted to see what you thought you needed to have come back in Q2 in order to get a little bit closer to be in accordance with the covenants and how many customers you need to return?

Bill Zollars

Well, it’s more than just returning diverted business that has an impact on the EBITDA for the second quarter. As I said, the other thesis to that are the economy and whether we continue to see the expected improvement in our productivities, how the regionals do. So, I think, there are a lot of moving parts there, and so there isn’t any one specific answer to that question, it’s a combination of all those things.

Greg Olif – BB&T Capital

So the 10% you mentioned earlier I mean you guys are seeing that, are you’re suggesting that come back rather slowly but you anticipate vast majority of that coming back, correct?

Bill Zollars

Yes, that’s correct.

Greg Olif – BB&T Capital

Okay, and last thing, were there any fees associated with the property deferral agreement with your banking group in the quarter?

Tim Wicks

No there were not.

Operator

Thank you and this concludes our Q-and-A session for today. I’ll turn it back to Ms. Taylor for any additional or closing remark.

Bill Zollars

This is Bill, we appreciate you joining us and we’ll see you at the end of the next quarter, thanks.

Operator

Thank you this concludes today’s conference call. You may now disconnect.

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