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YRC Worldwide (NASDAQ:YRCW)

Q2 2010 Earnings Call

August 03, 2010 9:30 am ET

Executives

William Zollars - Chairman, Chief Executive Officer and President

Paul Liljegren - Chief Accounting Officer, Vice President of Investor Relations and Controller

Sheila Taylor - Chief Financial Officer and Executive Vice President

Analysts

Justin Yagerman - Deutsche Bank AG

Allison Landry

Thomas Wadewitz - JP Morgan Chase & Co

Jon Langenfeld - Robert W. Baird & Co. Incorporated

Edward Wolfe - Bear Stearns

Jason Seidl - Dahlman Rose & Company, LLC

Operator

Good morning. My name is Amanda, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the YRC Worldwide Second Quarter Earnings Conference Call. [Operator Instructions] I’ll now turn the call over to Paul Liljegren, Vice President, Investor Relations and Treasurer.

Paul Liljegren

Good morning, and thank you for joining us for the YRC Worldwide Second Quarter 2010 Earnings Call. Bill Zollars, Chairman, President and CEO of YRC Worldwide; and Sheila Taylor, our CFO, will provide comments this morning.

Now for our disclaimers. Statements made by management during this call that are not purely historical facts are forward-looking statements. This includes statements regarding the company's expectations and intentions on strategy 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 of these risk factors. For a full discussion, please refer to this morning's earnings release and our SEC filings, including our 10-K and today's 8-K filings.

In addition, please see today's release for a reconciliation of our GAAP measures to non-GAAP measures, such as operating loss to adjusted EBITDA as defined in our credit agreement. During this call, we’ll refer to the non-GAAP measure of adjusted EBITDA, simply as EBITDA. I'll now turn the call over to Bill.

William Zollars

Thanks, Paul. Let me start by saying we're pleased with the significant traction we've gained with our key initiatives of disciplined pricing, customer mix management and cost improvement. In addition, we appreciate the continued confidence demonstrated by our customers who have either returned their business to us or have increased their shipments with us, and they've significantly helped create operating momentum, which we achieved throughout the quarter.

To put that in perspective, our EBITDA went from $3 million in April to $22 million in June. We still have a lot of work to do, but we're encouraged by our trends. The general economic outlook reflects modest growth prospects for the second half of 2010, and the LTL industry dynamics appear to be improving. We've seen volume increases absorb excess capacity in the industry, and pricing actions appear to be more disciplined as compared to last year's trend.

Moving on to our joint committee discussions with the Teamsters and the multi-employer pension funds. As you may recall, these discussions relate to the reentry of our operating companies into the multi-employer pension funds and also market competitiveness. We'll keep you updated as the discussions with these two key stakeholders move forward on these two important issues.

Turning to the business performance, we feel that the organizational changes we talked to you about last quarter are a key part of our improved operating performance, which you can now clearly see in our results. Pricing in the industry remains competitive, but we're seeing it tighten. Our traditional annual contractual increases have continued to improve, and the results of our focused efforts on our profit improvement accounts are generating positive impact.

Our quarter-to-quarter volume changes were up 11% at National and almost 16% at Regional. The quarter-over-quarter revenue per shipment for National improved by about 1% and Regional revenue per shipment grew by about 0.5%, as increasing weight per shipment impacted the sequential change in our yields. On a year-over-year basis, our revenue per shipment improved almost 4% at National and almost 5% at Regional.

Moving on to our cost initiatives. Last quarter, we talked about our $300 million cost reduction targets, which as you may remember, was incremental to the third quarter of last year. This cost reduction initiative is focused on SG&A, safety and operational process improvements. To date, we've exceeded our $250 million run rate, but we still expect to achieve our run rate of $300 million by the end of this year.

As you look at our operating results in the second quarter, you'll see the third quarter of year-over-year improvement and the fifth quarter of sequential improvement. Our consolidated results included positive EBITDA for the first time since the third quarter of 2008.

Moving to our segments and starting with National. EBITDA for National was positive, also for the first time since the third quarter of 2008 and it improved by more than $210 million from last year despite the year-over-year reduction in our revenue base. This improvement includes the benefit of the union pension cessation of about $60 million for the quarter.

Sequential improvement from first quarter was more than $65 million, which represents an incremental margin of 85%. Given that our historical incremental margins from volume growth are about 20% to 25%, it's very clear that our cost-reduction initiatives were major drivers of earnings improvement, along with disciplined pricing actions. We expect pricing to be a large factor as we move through the second half.

Our Regional business improved its EBITDA by over $50 million from the same quarter a year ago. We've benefited from year-over-year volume growth of almost 5% and have significantly reduced our operating costs, including the benefit of the union pension cessation of about $25 million for the quarter.

Holland's volume growth has constrained its driver capacity in many locations and has allowed them to be more selective on customer mix and the shipments moving through the network, while New Penn and Reddaway continue to make solid progress. Glen Moore, our truckload business, reported break-even EBITDA and the modestly favorable revenue comparisons for second quarter.

As a reminder, we expect to close during early August on the sale of YRC Logistics to Austin Ventures. This is a good move for our customers and the company. Through our Continued Commercial Services Agreement, YRCW will continue to offer our customers across the globe supply chain solutions, while additional liquidity from the transaction will help YRC Worldwide focus on our core strengths.

As a result of this transaction, our YRC Logistics segment is being reported as a discontinued operation for all periods. Its net loss of $11 million this quarter is largely due to the operating loss and shutdown charges related to the flow-through and pool distribution service, which we have discontinued as of June 30.

Importantly, we have retained our two strategic operations in China, which enhance our global capabilities. The first is JHJ, a 50%-owned freight forwarding operation and Jiayu, a 65%-owned ground transportation operation. Our share of JHJ is reported below the line as a non-operating item.

Beginning this quarter, we have included the revenue and operating income results of the Jiayu business in our consolidated results, since YRCW assumed management control of this entity during the quarter. Sheila will now provide more color on our financial results and recent actions taken with the lender group.

Sheila Taylor

Thank you, Bill, and let me apologize in advance, I’m fighting a head cold. As Bill mentioned earlier, our operating results improved significantly throughout the quarter, which put increased pressure on our liquidity to fund our growth. We continue to proactively address this pressure through a combination of more effective working capital management and additional actions with our lenders. Let me take a moment to go into each of these in a little bit more detail.

Some of you may recall after the integration of Yellow and Reddaway in 2009, our ABS Lenders amended the agreement to carve out the negative impact of the integration on our receivables. At the time, this kept us from making a fairly large repayment on the ABS, but also created a hurdle for us to overcome before we could borrow additional funds. With the significant growth we experienced this spring and projected in June, we worked with our ABS Lenders to temporarily remove this block, so that we could further borrow against our receivables and fund our volume growth.

This amendment provided an incremental liquidity of about $22 million that will fluctuate with seasonality of our AR. During this process, we also started conversations with our credit lenders to amend their agreement that should provide further incremental liquidity and flexibility around certain transactions. This amendment was completed last week and announced in an 8-K this morning, so let me give you some of the specifics.

First, the lenders consented to the sale of YRC Logistics, which was required given their collateral position. Under a previous credit amendment, we had negotiated the ability to retain 50% of the proceeds from this sale. We have now agreed with our lenders that the company will retain 100% of the proceeds from this transaction after receiving consent from the pension funds.

With the closing of the Logistics sale, this would result in the company increasing its unblocked availability by an initial $30 million and a corresponding reduction of 50% of the proceeds, or approximately $15 million against the facility size of $950 million.

In addition, we have agreed to switch the waterfall on the next $20 million of sale leaseback, which means the company will retain 75% of the proceeds in exchange for the lenders receiving a permanent reduction of $15 million on the facility. This additional liquidity incentive comes to the company if we successfully address the 2011 operating cost netbacks prior to late October of this year and, again, after receiving consent from the pensions.

Combined, these two transactions would reduce the block on the facilities that is subject to a 2/3 lender vote by around $30 million. We have also agreed to freeze the growth of the 2/3 voting block and allow the lender's portion of future asset sales to become additional reductions to the facility. You might recall that this was the initial intention prior to last October's amendment when the blocks were established.

The lenders were very supportive and flexible as the company worked through its restructuring last year and allowed us to rebuild liquidity with their portion of asset sales. We appreciate that support and believe it is only reasonable that they start to get some reduction to the facility, especially given the company’s size now versus when this facility was established.

Other notable items in the amendment are the conversion of $150 million of the revolver to term loam and a reduction of the LC supplement to $550 million. These do not change the economics of the facility from our standpoint, but enhance some of the administration for the lenders and create a reasonable balance when resetting the facility composition. We appreciate the overwhelming support given by our lenders through these most recent amendments.

I mentioned a few times that some of these provisions require approval of the pension funds under our CDA or 26 separate funds. We are in the process of receiving approval from the funds and feel good about their support. We have received approvals from about half of the funds and expect to receive the remainder shortly.

In terms of the 5% contingent convertibles that are puttable to us next Monday, we expect to fund those later this week. Proceeds from the issuance of the second tranche of 6% notes that were funded back in February of this year, are expected to be released from escrow today, and will be used for this purpose as they were originally designated. We know that the funding for these notes has been a concern of many of you and our customers, and we are pleased that this noise can be put behind us.

As we have provided economic benefits through equity participation to other stakeholders, we have temporarily modified the conversion rate for a portion of the 6% convertible notes to allow up to 59 million shares to be issued upon conversion of 590,000 at par value of notes.

It is also important to remember that the total shares available for the 6% convert remain subject to the original cap under the indenture, which was 19.9% of the outstanding common stock as of February 23, 2010, or approximately 202 million shares.

We believe the 6% noteholders have been an important stakeholder in our restructuring, and we look forward to continuing to work with them and our other stakeholders as we move forward.

In regards to the reverse stock split, our board of directors continues to evaluate the timing and, at this time, has not finalized a day. We have every intention of working with NASDAQ to stay in compliance with listing requirements.

As for additional liquidity that we generated during the second quarter, we received $15 million of net proceeds from our aftermarket equity issuance program which we get to retain 100%, and we sold $24 million of surplus and completed sale-leasebacks of $22 million, which allowed us to reduce pension debt by approximately $10 million and retain 25% of the remainder under our credit agreement, or about $9 million.

In terms of working capital, our operating companies hit targets that we have not seen in many years from both a productivity standpoint and DSO. We handled the sequential volume improvement at YRC of 11% with 3% fewer people than last quarter and around 4% more people at the Regionals compared to their 16% volume increase.

In terms of DSO, our consolidated performance improved by four days, with DSO at YRC eight days less than last year and the best it has been in over four and a half years. And at the Regionals, DSO improved by one day. As a rule of thumb, a one-day improvement in our consolidated DSO equals around $10 million of liquidity. We are very pleased with these results and the continued commitment of our employees across the organization to remain focused and deliver improved performance.

Our second quarter working capital cash outflow of $48 million includes increased AR of $26 million from revenue growth and $22 million of operating expense disbursements. The operating expense items are primarily settlements of liability claims and the front end-loaded timing of quarterly unemployment tax payments. We would expect the third quarter working capital requirement to be driven primarily by increased AR from sequential revenue growth.

Now moving to the income statement for a few quick comments. We did reverse $83 million of the first quarter non-cash charge related to the union SARS issued in March, since our shareholders approved the conversion to stock options. The accounting cost of these options is now fixed, as they are fully vested and, therefore, fully exercisable at a strike price of $0.48 per share.

We also booked a $12 million non-cash impairment charge as a non-operating expense related to Jiayu that basically removed the remaining goodwill for this investment. We no longer have any goodwill on our books. As Bill mentioned, given our assumption of management control at Jiayu, we will now consolidate the 65% investment, and the results will be reported in our Corp and Other segments. Over the next few quarters, we expect Jiayu to be about breakeven, so I wouldn't expect it to be meaningful for modeling purposes.

One last item to note on the income statement is a gain on foreign currency of $5.5 million reported in other non-operating income. This gain relates to the dissolution of a Canadian entity that was comprised entirely of an intercompany note with Reimer. Given the changes in tax rules, the entity was dissolved this quarter, and the accumulated foreign currency that had been building in equity was reversed to the income statement. We would not expect any future impact from this dissolution.

We provided some guidance in this morning's release, so I won't go into that here. And instead, I'll turn it back to Bill for closing.

William Zollars

Thanks, Sheila. With the significant operating momentum we achieved throughout the second quarter and have experienced in July, we're positioned to generate positive EBITDA earnings in the third quarter in excess of the second quarter.

We've been working toward enhancing our liquidity in advance of our peak shipping season, so our customers and the marketplace can remain focused on our service offerings. We believe the steps we have taken demonstrate the continued support of all of our stakeholders, including the lenders, our noteholders, the IBT and our customers. We look forward to the opportunities in front of us and reporting further success. We'll now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Justin Yagerman of Deutsche Bank.

Justin Yagerman - Deutsche Bank AG

I wanted to just dig into a few things here. First, Sheila, at the end there, you talked about, was it 5.9 or 5.5, a benefit from the Canadian entity there?

Sheila Taylor

5.5.

Justin Yagerman - Deutsche Bank AG

Okay, 5.5. Is that number included in the penny loss that you guys reported? Or where do we find that in terms of showing up?

Sheila Taylor

Yes.

Justin Yagerman - Deutsche Bank AG

So that was beneficial to what you guys were calling out as adjusted EBITDA in the quarter.

Sheila Taylor

Well, yes. It is, it's in the penny loss. It's in the adjusted EBITDA number. It’s in the non-operating income line.

Justin Yagerman - Deutsche Bank AG

Okay, but it's included in that. All right. And then I guess, I was just a little confused. The statement in the press release where you guys talked about increased business volumes putting pressure on your liquidity. I guess, when I think about your liquidity position, I think about you guys being able to access more accounts receivables even if DSOs are expanding and I guess, DSOs came in, in the quarter, so it seemed a bit of a contradictory statement. So maybe you guys could go into a little bit more depth on why that would be having such a negative impact on you?

Sheila Taylor

I think, Justin, what we’re trying to say there is it’s the timing. So if our customers aren't paying us for 38, or 40 days and, as the business is growing, we have to, obviously, pay our employees and our vendors. Our employees within a week or two, and our vendors in most cases within 20 days, so it's the timing gap there as the business starts to grow and we’re bringing on those volumes, we’re paying our employees now. And we're not collecting those receivables from the customers ’til 38 or 40 days later.

Justin Yagerman - Deutsche Bank AG

With your stock lifted from the AR facility, are you guys now I mean able to match those a bit better?

Sheila Taylor

Well, I think some of the challenges -- it's not a great advance rate on the ABS. It’s in the low 40s so I'd much rather collect the receivable and get 100% of that dollar than borrow on the receivables where I’m only borrowing $0.42-ish, $0.44 on the dollar.

William Zollars

And, Justin, this is Bill. Just to add to that, historically, in our business, the first half of the year we use cash, the second half of the year, we generate cash. It's just part of the seasonality of the business. And obviously, this is a situation where we're recovering customers, as well as experiencing the normal seasonal growth. So that's putting pressure on our working capital.

Justin Yagerman - Deutsche Bank AG

So just in the back half, you'd expect that the operating leverage would hopefully kick in and your labor levels and vendor levels wouldn’t be going up as fast as hopefully your EBITDA’s improving.

William Zollars

Yes, that's right, and particularly in the fourth quarter. That's our biggest cash generation quarter.

Justin Yagerman - Deutsche Bank AG

Okay. And then, Bill, you mentioned the Teamster and pension issues that you guys are negotiating right now, but really didn't go into too much detail. I'm sure there's not a huge amount you can say, but is there anything more than just that there are discussions ongoing, or is that about it right now?

William Zollars

Not right now, Justin. I think as things develop there, we'll be happy to share them with you, but for right now, that's all we can say.

Justin Yagerman - Deutsche Bank AG

Okay. I wanted to just ask shares going forward. You've got now these convert shares they’re going to be issuing. What kind of share count should we be using for the next quarter or two?

Paul Liljegren

Justin, this is Paul. Probably somewhere in the 1.2 billion range. We were a little bit less than 1.1 billion for the second quarter weighted average so 1.2 going forward.

Operator

Your next question comes from Tom Wadewitz at JP Morgan.

Thomas Wadewitz - JP Morgan Chase & Co

So I've got one question just here on the split, and before I get into some other things here, the $83 million equity add-back, what's the split on that between the Regional and National?

Sheila Taylor

Let us get you the exact number.

William Zollars

Do you want to go on to another question, Tom?

Thomas Wadewitz - JP Morgan Chase & Co

Sure, of course. In terms of the pension, I think you had mentioned, Sheila, something about the bank agreement that something was contingent on, I think an agreement regarding the pension, the costs that are coming back in 2011, that you needed that by October. Did I hear that correctly? And can you maybe just give us a sense of what are some of the reasonable time frames for when you need to have an agreement so that you have time to ratify and that type of thing?

Sheila Taylor

Yes, there's a couple of different things, Tom. A couple of the items under the bank amendment are contingent upon pension fund approval because of the deferrals that we did with the pension funds last year. If we do certain things under our credit agreement, the pension funds also have to approve. So keeping the Logistics sale and reducing the facility size under the credit agreement, that requires the pension funds to approve that. And the other thing was the sale lease-backs. And really, what that is, is that’s an opportunity for us to have some incremental liquidity and a little bit of an incentive from the lenders that if we do address the snap-backs that are supposed to come in next year from an operating cost standpoint and the labor cost, if we address those early, we basically get some incremental liquidity from that.

Thomas Wadewitz - JP Morgan Chase & Co

So when you say addressing them early, what's the definition of early you've got?

Sheila Taylor

Late October.

Thomas Wadewitz - JP Morgan Chase & Co

And when you say addressing also, is that just mean a tentative agreement, or does that mean something that’s actually voted on by the Teamsters and ratified?

Sheila Taylor

It's really more of an agreement.

Thomas Wadewitz - JP Morgan Chase & Co

Okay. So, Bill, what do you think is the necessary time frame for you to reach a tentative agreement with the Teamster leadership in order to not scare the customers too much, and in order to give time for the Teamsters to get it ratified?

William Zollars

Well, Tom, we’re working pretty hard on dealing with the 2011 snap-back issue. I wouldn’t want to put any specific timing out there at this point. I think it's just something that we need to address, and we need to address it, obviously, sooner rather than later. But I wouldn't want to put a specific time out there right now.

Thomas Wadewitz - JP Morgan Chase & Co

Okay. Do you think there’s pretty good recognition of the Teamsters’ leadership of what your parameters are which you need to achieve in order to continue making progress in your broader business? Do you think there’s a good openness and recognition from leadership and the Teamsters of what you need?

William Zollars

Yes, I think the best example of that, Tom, is these two committees that have been set up, one focusing on competitiveness and the other on the pension. So I think that's a good example of the recognition of where the issues are.

Thomas Wadewitz - JP Morgan Chase & Co

Okay. You made some good progress in Regional OR on an adjusted basis. The National, I guess, progress is pretty good as well, but you're at a better point in terms of sub 100 OR and Regional than you are in National, I think it just did 105. What are you doing to drive to profitability on National? Is it further cost reduction? Is it kind of waiting for the pricing to improve? Or is it kind of anticipating this cycle improving further in the volume side? What are the keys to make that National OR get below 100?

William Zollars

Yes, I think the trend is really encouraging, Tom. I think, obviously, we're going to continue to be very disciplined on the pricing side as we wring out the excess capacity. We're making real good progress on the cost side of the equation there. The seasonality of the business will help us there, as well as customers continuing to return. So it's really all of the above there, but we like the trajectory that we're seeing on the YRC side.

Thomas Wadewitz - JP Morgan Chase & Co

Is there much more to go on cost, or is it pretty much -- I would think you’d be pretty close to right size at this point given all the work you've done on cost?

William Zollars

Yes, there's always more to do on cost. We have done a tremendous amount of work. Mike Smid’s team has really responded well. I think we've now got a pretty good balance between the capacity that we've got in the big network and the volumes that we're seeing. But obviously, as you've heard from our incremental margin conversation earlier, the more profitable business that we put into the network at this point the more it falls to the bottom-line. So we're going to continue to work on customer mix management. We've been very kind of aggressive in terms of making sure that we remove all the non-profitable business from the network, so we're going to continue to do that. We're going to continue to encourage customers to bring their business back, and we're also going to continue to work on cost. All of that’s moving forward, and as I said, we're feeling good about the trajectory there.

Thomas Wadewitz - JP Morgan Chase & Co

Sheila, did you get the split on the $83 million or should I just follow up after the call?

Paul Liljegren

This is Paul. I can follow up on that. In the release today, we put a bridge in by segment for both National and Regional to get to their adjusted EBITDA. And in those bridges, the add-back for National was $64 million during the quarter and for Regional, is $18 million.

Operator

Your next question comes from Ed Wolfe at Wolfe Trend.

Edward Wolfe - Bear Stearns

Sheila, can you take us through how you get from EBITDA to adjusted EBITDA? Because I'm getting about $16 million of EBITDA on the quarter and it's $40 million of adjusted the way the banks look at it. Can you kind of give us the add-backs to get there?

Sheila Taylor

Yes, I think it's in the press release.

Paul Liljegren

It’s on the supplemental following the segment information. On that page, Ed, for the quarter, we had operating income as reported, it’s on the supplemental page following the segment information. We reported, on a consolidated basis -- first of all, we provided the monthly data for April, May and June and the second quarter total. But if you look at the second quarter total, reported operating income of $48 million and the add-backs consist of the equity comp that we talked about in total and the normal add-backs, the depreciation, amortization, along with the add-backs per the credit agreement of letter credit expense and professional restructuring fees. And then the all other net gets us to the $40 million of adjusted EBITDA as compared to the operating income of $48 million.

Edward Wolfe - Bear Stearns

And what's in that other net, that $7.6 million?

Paul Liljegren

That includes the foreign exchange gain that we talked about earlier, that we booked at National in the month of May. That's the biggest component of that.

Edward Wolfe - Bear Stearns

And that FX gain, you said was related to the Canadian dollar strength relative to the U.S. dollar?

Paul Liljegren

Yes, for one of our subsidiaries that we dissolved during May.

Edward Wolfe - Bear Stearns

So that won't be ongoing regardless of what happens with the currency is what you're saying?

Paul Liljegren

Correct. That was a one-time event. It was economic, but it was over a period of time so from an accounting standpoint, we recognized it in May, but it’s a one-time event not expected to recur.

Edward Wolfe - Bear Stearns

Was it a cash, or non-cash?

Paul Liljegren

It was non-cash.

Edward Wolfe - Bear Stearns

And the guidance of better adjusted EBITDA than the $40 million in third quarter, obviously, says on an operating basis, we're going to overcome that $5 million one-timer. So it's really almost saying better than $45 million, is that the right way to read it?

Paul Liljegren

Yes.

Edward Wolfe - Bear Stearns

Can you go through some of how the tonnage looks in July so far and the sequentials through the quarter?

William Zollars

Sure. We have seen kind of since March, is tonnage trends that have exceeded what we would consider to be normal seasonality. So in July, for example, which is usually a weaker month than June, kind of across the board for all of our operating companies, National was down about 0.3%. Normally we would expect it to be down about 2.5%, so a couple of percent better there. On the Regional side, we were down about 2%. The seasonal norm is down about 3.2%, so on both cases, a little bit better than seasonality, sequentially.

Edward Wolfe - Bear Stearns

So that's July over June?

William Zollars

Correct.

Edward Wolfe - Bear Stearns

Can you go year-over-year for each of those months, April through July, for the two?

William Zollars

Sure. Let’s do July versus June because that's the only thing I've got in front of me here, and we can get to the other numbers. But year-over-year, down 14.3% at National and up 5.5% at Regional.

Edward Wolfe - Bear Stearns

And then just, what's your sense of pricing out there? We've heard from some people that some of your competitors are firming up on pricing, and capacity is tightening a bit, and then sometimes you hear stories where that's not the case. What are you seeing out there? And what's your expectation for pricing going forward?

William Zollars

Well, we think it's going to continue to improve. We've heard some public statements from our competitors. We're actually seeing that play out in the marketplace in many cases. So we would expect over the balance of the year to see pricing continue to get better.

Edward Wolfe - Bear Stearns

At some point, does it make sense for you to price a little volume in if that's helpful? Or what's your view on taking rates, being the rate leader, or being a little more aggressive, maybe getting some density back?

William Zollars

Well, we've historically, I think, been kind of on the disciplined side of the pricing equation even through the recession. I think our situation right now is that our networks are in much better shape in terms of capacity than they have been in the past, which allows us to be more aggressive about the customer mix. So I think you will see us continue to be very disciplined as we go through the third quarter, very focused on the best mix of profitable customers we can get across all of our businesses. We will probably lean, I guess, out in the direction of price versus volume at this point.

Edward Wolfe - Bear Stearns

Tom had asked about the timing of the pension. Where are we with the timing of the cash interest? And can you explain, there's an option of whether that comes back in, in ’11 or ’12, where we are and what -- I'm assuming if the bank's option unless you hit certain numbers. Can you just remind us about that?

Sheila Taylor

Yes, I mean, it's just a matter of us coming back to the table with the banks towards the end of the year and talking about it and it requires a 2/3 vote to extend that through 2011. We're obviously always talking to our lenders. We haven't officially put in a request for that or broached that topic at this point in time, but would expect to here in the near-term.

Edward Wolfe - Bear Stearns

So without that 2/3 vote, then the $25 million or $30 million of cash interest would come back January. But based on the way things are going with the lenders, you would assume that, that would get pushed out to 2012. Is that a fair assessment?

Sheila Taylor

I wouldn't assume anything. I would talk to them. But the way it's set up, we would start paying cash interest in January, but the amount that we deferred in 2010 still would not be due until December of 2011.

Edward Wolfe - Bear Stearns

So even if you got the 2/3 majority of the bankers, the $25 million or $30 million comes in, but the interest from 2010 doesn't?

Sheila Taylor

Correct. That is a December 2011 balloon. So the only thing that would come in, in January would be the normal interest. We would start paying that.

Edward Wolfe - Bear Stearns

So do you expect at this point to start paying that normal interest in January of 2011?

Sheila Taylor

I think it will be something that as we finalize our forecast for next year, that we'll have the discussion with lenders as to what makes the most sense.

Edward Wolfe - Bear Stearns

So what does the 2/3 vote get you? It just gets you the deferral of 2010's interest? Or does it also get you the further not paying of the interest in 2011?

Sheila Taylor

No. When we set it up at the beginning of this year, or late last year, it took a 100% vote from the lenders to defer interest and fees. And when we set up that agreement, we agreed that if the economy still wasn't coming back and the company wasn’t in the position to pay interest in 2011, then with a 2/3 vote from the lenders, we could continue to defer into 2011, but it requires us to come back to the table with them at the end of this year and make that determination.

Edward Wolfe - Bear Stearns

So if you make that determination, 2/3 vote, then your cash interest remains at $10 million to $12 million a quarter throughout 2011, right?

Sheila Taylor

Correct.

Operator

Your next question comes from Jason Seidl at Dahlman Rose.

Jason Seidl - Dahlman Rose & Company, LLC

Bill, you mentioned you’re in discussion with Teamster leadership. Recently your main competitor, Arkansas Best, reached an agreement with the leadership of the Teamsters, but couldn’t with the rank-and-file members. Talk to me how you’re going to look at that and how you want to address that going forward. Because really you need to reach the agreement with the rank-and-file.

William Zollars

Sure. Well, we're in a position that's very different from ABF. And I really couldn't comment on what happened there, but I can tell you that our employees have been extremely supportive of the steps necessary to the company position to be successful long-term. And we're continuing to talk to Teamster leadership about that. But I wouldn't want to compare the situation with the one at ABF.

Jason Seidl - Dahlman Rose & Company, LLC

Is there a time frame we should think about, sort of like a, I don’t want to call it a drop-dead date, but like sort of when you sort of need to get an agreement in place at least with the leadership to go out to a vote to the rank-and-file?

William Zollars

Well, it's obvious that it's got to be done this year. I think we would love to get it done early enough so that our customers don't get nervous. But beyond that, I wouldn't want to be more specific.

Jason Seidl - Dahlman Rose & Company, LLC

You mentioned you're seeing sort of some of your competitors put their money where their mouth is finally on pricing. Are you seeing any difference between the Regional and the National networks in terms of pricing?

William Zollars

Not really. I think it's been pretty consistent across all the operating companies, Jason.

Operator

Your next question comes from Tom Albright at BBT [ph 49:58].

Unidentified Analyst

I wanted to just clarify, on the equity-based compensation, the reason that won't be a factor going forward is because shareholders approve the conversion to stock options, is that what you said?

Sheila Taylor

Correct.

Unidentified Analyst

And what’s the Q3 EBITDA target that the banks have now? I know you've laid that in the past in 8-Ks, but I don't have that right in front of me.

Sheila Taylor

It's accumulative $50 million for second and third quarter combined.

Unidentified Analyst

And then what was the description you gave, Sheila, I believe $60 million that favorably impacted the EBIT at National?

Sheila Taylor

For…

Unidentified Analyst

For the quarter?

Paul Liljegren

That was the benefit of the pension cessation at National. It was roughly $25 million for Regional, for a total of $85 million.

Sheila Taylor

On a year-over-year comparison.

Paul Liljegren

For the quarter.

Unidentified Analyst

Okay. How many terminals do you have at National right now?

Sheila Taylor

We're about 330.

Unidentified Analyst

And as you see things now, there's not going to be additional shrinkage?

William Zollars

Well, I think we’ll continue to trim the network. Obviously, that helps us with density which improves the service product we're delivering and it also reduces our costs. So we'll continue to kind of streamline the network by trimming the network on a go-forward basis. So again, something you're probably never done with.

Unidentified Analyst

I want to make off of Ed’s point with the banks and the 2/3 approval. At the end you said that if they do approve the interest expense would be $10 million to $12 million a quarter, kind of about where we are, but earlier, it did sound a little confusing like maybe you would start paying the deferred '10 interest, but if the banks approved, you would defer the '11, and I want to make sure that literally, if they approve it, it's just the lower amount, the $10 million to $12 million. You wouldn’t be adding back '10, but getting a deferral on '11 interest, is that correct?

Sheila Taylor

That does sound confusing, doesn't it, Tom? No, you're correct. The $10 million to $12 million is basically our sale-leaseback which is treated as interest so that's why we have cash interest now. But you are correct in that the way the lender agreement works is with a 2/3 vote, they can continue to allow us to defer interest in 2011, but the 2010 interest that is building now is not paid back until December of 2011 as a balloon.

Unidentified Analyst

And from an accounting perspective though, we would want to model the additional, call it, $25 million of '10 interest in our '11 quarters?

Sheila Taylor

Yes, I mean, well, the expense has been going through 2010. We've been booking interest expense all along. It's just the cash payment has been deferred. So it's been building up on the balance sheet as a liability. So you'll continue for your modeling purposes on the income statement, you'll continue to book that expense, and we'll continue to recognize it on the income statement, but on the cash flow, you'll see it as a benefit until we pay that back later next year. And I think to clarify one of your questions earlier, when you said the benefit to National of $60-something million, were you talking about what ran through the current income statement?

Unidentified Analyst

I may have to listen to the replay. I was just writing so quickly. I wasn't sure what I was hearing the comment in reference to. I thought it was a benefit on the EBIT line.

Sheila Taylor

Yes, well, we talked about the benefit we got from the equity-based compensation expense.

Unidentified Analyst

Yes, that was $64 million.

Sheila Taylor

$64 million, correct. So I want to make sure that we clarify the difference between that and obviously what we’re not paying from a pension scheme point this year versus last year. Those numbers are very similar.

Unidentified Analyst

And these talks that you're having with the Teamsters, they’re going to cover both the pension and the wage, or only pension at this point?

William Zollars

Well, all I can say, Tom, is we've set up these two committees, and the two committees are working, and they’re working on the two areas that I mentioned earlier. One is competitiveness and the other one is the pension issue.

Operator

Your next question comes from Chris Ceraso of Crédit Suisse.

Allison Landry

This is Allison Landry in for Chris this morning. I know a lot of people have asked about the pension snap-backs, but if we assume that there is another agreement with the Teamsters, or a change in the orphan pension legislation, what is the expected amount of expense and cash contribution that should resume in 2011?

Sheila Taylor

If there’s not a deal worked out? I would expect it to be a little North of $300 million annually.

Allison Landry

And then on the 15% wage concession, could you remind us if there was a specific profitability level or a date was attached with its restoration?

William Zollars

Yes, the date was, it ran through the end of the contract which is 2013. No other specific parameters there.

Allison Landry

And then if we could maybe focus a little bit on peak season. Do you guys think that you're seeing any pull-forward in demand in June or July due to the tight truckload or container capacity?

William Zollars

No, not really. I think in our situation, it's pretty difficult to peel that onion back because we've got customers returning to the company, and then we have the normal impact of seasonality, and then the third factor is, obviously, the recovery from the recession. So it's pretty difficult to unscramble that egg. But in the kind of final analysis, we are seeing volumes that are trending higher than what we would normally expect from a seasonal standpoint. But it's difficult to tell how much each of those factors is playing in that overall result.

Operator

Your next question comes from Jon Langenfeld at Baird.

Jon Langenfeld - Robert W. Baird & Co. Incorporated

Bill, does your wage rate – do you have a scheduled wage increase that goes into effect here?

William Zollars

Yes, we do. We've got healthcare that kicks in August 1.

Jon Langenfeld - Robert W. Baird & Co. Incorporated

And then next April, it's wage?

William Zollars

Yes, it's $0.40 then and next April, it's another $0.40 on the wage side. We'll get back to you with that one, Jon. I think it's in April, but I think it's $0.40.

Jon Langenfeld - Robert W. Baird & Co. Incorporated

And then how much of the pension expense that you accrued back a year or so ago before you got the deferral, how much of that’s outstanding that's not paid?

William Zollars

The pension accrual?

Jon Langenfeld - Robert W. Baird & Co. Incorporated

Yes.

William Zollars

We're looking that up.

Jon Langenfeld - Robert W. Baird & Co. Incorporated

And then sale-leasebacks, you have the $40 million to $50 million in the year, what did you do in the first half?

Paul Liljegren

We'll get that to you.

Jon Langenfeld - Robert W. Baird & Co. Incorporated

And then of the stock, how much stock are you left authorized to issue, I guess where we're at today, how much more stock do you have left authorized to issue?

Sheila Taylor

We probably have around 300 million shares.

Jon Langenfeld - Robert W. Baird & Co. Incorporated

And then we’ll net off of that, assuming there's some conversion, this $59 million?

Sheila Taylor

Well, that's exclusive of that. The 202 million shares that, again, didn't change as part of the 6% convert is exclusive of the 300 million we have available.

Jon Langenfeld - Robert W. Baird & Co. Incorporated

Okay. So what would be your intention on those 300 million?

Sheila Taylor

I mean we still have an aftermarket program that's in place. We haven't been active on that, but it's always available to us if opportunity makes sense.

Jon Langenfeld - Robert W. Baird & Co. Incorporated

Got it. Okay. And then what does the capacity so -- if we fast forward to the end of the third quarter and assuming these things go through, where does the $950 million on the revolver loan and the $400 million on the ABS facility, what does that look like?

Sheila Taylor

Well, the ABS is at $350 million. That changed in June when we did the last amendment. The capacity on the revolver will change as these steps go in place from this last amendment so I would expect it to go down to about $920 million, once we sell Logistics and once we do the sale-leaseback and receive a larger portion of that. And then I would take about $150 million off of that, which we'll convert to a term loan. So you're probably looking around $770 million and then as we sell future assets, the lender’s portion of 75% will continue to bring that down. So you're probably looking somewhere in the mid-700 range by the end of the year .

Jon Langenfeld - Robert W. Baird & Co. Incorporated

Are you to the point, or would you get to the point, where you’d look at streamlining the network and removing coverage from unprofitable geographies?

William Zollars

Well, that's what we're doing now, Jon. We've been doing that for a while in terms of utilizing the operating companies to address part of that. The other part of that equation obviously is unprofitable customers. But that's part of the kind of the customer mix management approach that we’ve been taking for some time now.

Jon Langenfeld - Robert W. Baird & Co. Incorporated

Sure, but I don't think you’ve eliminated coverage in any area.

William Zollars

I think one of our real competitive advantages is the fact that our networks go everywhere every day, and that's a big advantage for our customers. So we'd want to be really careful about walking away from any coverage area until…

Jon Langenfeld - Robert W. Baird & Co. Incorporated

Understood. And now if I can follow up offline on those other questions...

William Zollars

We got a little cleanup for you here. So it is $0.40, 04.01.11 is the wage increase.

Paul Liljegren

Jon, this is Paul. On the sale-leaseback, as Sheila mentioned, we did $22 million of sale-leasebacks in the second quarter. We did another 4 million in the first quarter. So year-to-date number that you asked for is roughly $26 million.

Operator

There are no further questions at this time. I turn the call back over to the presenters.

William Zollars

Thanks for joining us. We'll join you again at the end of the next quarter.

Operator

This concludes today's conference call. You may now disconnect.

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