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YRC Worldwide (NASDAQ:YRCW)

3Q 2010 Earnings Conference Call

November 5, 2010 08:30 am ET

Executives

William D. Zollars - Chairman, President and Chief Executive Officer

Sheila K. Taylor - Executive Vice President, Chief Financial Officer

Michael J. Smid - President, YRC Inc., Chief Operations Officer

Paul F. Liljegren – Controller, VP Investor Relations

Analysts

Chris Ceraso – Credit Suisse

Tom Albrecht - BBT

Alex Johnson – JP Morgan

Jason Seidl – Dahlman Rose

Scott Group – Wolfe Trahan

Presentation

Operator

Good morning, my name is Louisa and I will be your conference facilitator today. At this time I would like to welcome everyone to the third quarter YRC earnings conference call. All lines have been placed on listen only mute to prevent background noise. After the speakers remarks there will be a question and answer period. If you would like to ask question please press star then the number one on your telephone keypad. If you would like to withdraw your question press the pound key. I will now turn the call over to Paul Liljegren, Corporate Controller and Vice President Investor Relations.

Paul F. Liljegren – Controller, VP Investor Relations

Good morning and thank you for joining us for the YRC Worldwide third quarter 2010 earnings call. Bill Zollars, Chairman, President and CEO of YRC Worldwide, Mike Smid, President YRC and Chief Operations Officer at 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 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 this morning’s earnings release and our SEC filings including our 10-K and today’s 8-K filing. In addition please see today’s release for reconciliation of our GAAP measures to non-GAAP measures such as our operating loss to adjusted EBITDA as defined in our credit agreement and our adjusted EBITDA to cash flow from operations.

During this call we will refer to the non-GAAP measure of adjusted EBITDA simply as EBITDA. Now I’ll turn the call over to Bill.

William D. Zollars

Thanks, Paul, good morning. Let me start by saying that we are gratified by the significant momentum in the third quarter operating performance, driven by our key initiatives of disciplined pricing, customer mix management, and cost improvements, which I’ll talk more about but first let me remind you that we are making significant progress on our comprehensive recovery plan. The ratification of our new labor contract is obviously a major step in the renewal of our ABS facility is another key accomplishment. We’ll cover both of those items in more detail in a few minutes but first I want to talk about the operating environment.

The general economic outlook reflects modest growth prospects for the balance of this year and into 2011. While the LTL industry dynamics continue to improve. We have seen industry volumes increase and increases in absorbing the excess capacity in the industry and pricing actions continue to be more disciplined as compared to last year’s trend. Pricing in the industry remains competitive but we are seeing it tighten. Our contractual increases now stand about 3.5% ahead of last year and the results of our focused efforts on customer mix management have generated positive results. Finally our action to take a September general rate increase for our non-contractual customers lead the industry and this action has now been followed by most of our competitors which further strengthens the pricing environment.

To date our retention of the GRI has been better than it has been in recent years. Our quarter over quarter shipment volumes were up 1.6% at national and up 1.8% at regional. The year over year revenue per shipment for national improvement by about 2% and regional revenue per shipment grew by almost 4%. Moving on to our cost initiative, last quarter we told you that we had achieved more than $250 million of our $300 million cost reduction target, 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 improvement and we still expect to exceed our rent rate of $300 million a year. As you look at our operating results in the third quarter you see the fourth consecutive quarter of year over year improvement and the sixth consecutive quarter of sequential improvement all following the integration of Yellow and Roadway in March of 2009.

Our consolidated results include positive EBITDA for the second straight quarter and importantly positive operating cash flow for the third quarter. Moving to our segments and starting with national; EBITDA for national was positive for the second quarter in a row and it improved by more than $100 million from last year, despite the year over year reduction in our revenue base. Our regional business reported a year over year revenue increase of nearly 5% in an OR of 97.6. This second consecutive profitable quarter. This performance was lead by Holland and New Penn, while Reddaway experienced a year over year revenue decline in the softer operating performance than either Holland or New Penn as it works through a volume reduction related to a change in the logistics of that work for one of its larger customers.

We do expect Reddaway to benefit from its new labor contract which as you may recall is separate from the multiple labor contracts that govern YRC, Holland and New Penn. Those operations are under different contracts but we do expect that Reddaway contract will be ratified during the fourth quarter. Glenn Moore our truckload business reported break even EBITDA as it works to improve its mix of customers and pricing. Shelia will now provide more color on our financial results and recent updates with the lenders.

Sheila K. Taylor

Thanks, Bill. As you read in our lease last month we renewed our ABS facility for another year. We know there was speculation in the market about our ability to renew this facility but I assure you the lenders remain supportive as we work through our recovery plan. That was also demonstrated by the amendment that we recently completed with the credit lenders to retain 100% of the logistics proceeds. It is premature for us to provide any specifics for our current discussion with the lenders but as we work through the next phases we do intend to seek a replacement facility for the ABS with an enhanced long-term structure designed to significantly increase our advance rate.

For example, at September 30th our ABS borrowing base was fully drawn at $195 million against applicable receivables of around $480 million for an effective advance rate of about 40%. The relatively low advance rate is due to the high credit quality designed into this commercial paper conduit. Replacing this facility with the longer-term facility which better fits our capital structure should provide us incremental liquidity to fund working capital both seasonally and as we grow our revenue. Until then our ABS lenders have provided the flexibility we need to support our current business levels with attractive refinancing incentives as we progress through 2011. As for our operating cash, during the third quarter we produced $5 million of positive cash flow from operations. As our level of adjusted EBITDA exceeded our working capital requirements, cash interests and restructuring professional fees for the quarter.

This was a sequential improvement of $38 million from the second quarter and if you exclude our tax refund it is a $68 million improvement from first quarter. In terms of DSO our consolidated performance improved by three days with DSO at wire fees five days less than last year and the regional’s DSO improved by three days. As a rule of thumb a one day improvement in our consolidated DSO equals around $10 million of liquidity. As you know we closed on the sale of YRC Logistics and reported net proceeds of $23 million in our cash flow statement. It is important to note that this GAAP number is showing net of the foreign cash we sold and transaction costs and excludes the amounts deposited into escrow for indemnification hold backs. We expect to receive at least $10 million in additional cash proceeds during the fourth quarter related to the working capital adjustment associated with this transaction. In addition we sold $36 million of surplus property and completed sale lease-backs of $3 million during the quarter.

In October we completed another $18 million of sale lease-backs of which we retained 75% and effectively use the remainder of our special $20 million basket; agreed to under the July amendment to our credit agreement. At this time we do not have additional sale lease-backs scheduled. Another reminder is that we implemented the share holder approved reduced stock split on October 1st and as expected have regained compliance with the NASDAQ listing requirements related to minimum bid price. Our share counts and APS for all periods presented in this release reflect the reverse split. Sorry, moving to our income statement I wanted to provide some additional color around our third quarter results. We incurred EBITDA charges of about $10 million, primarily for the settlement for a couple of large accident cases and additional amortization of debt issuance costs to non-office expense associated with the reduction in our revolver capacity this quarter.

We also recorded favorable revenue adjustments for bad debt and re-rate experienced during the quarter which basically offset the unfavorable adjustments I just mentioned. As our self-insured accident expense tends to be variable, we don’t expect large charges as a normal quarterly item. However, the favorable revenue adjustments are indicative of operational process improvements which we expect to benefit us going forward. The collaboration across our pricing, billing, collections and sales functions has been dramatically enhanced allowing us to provide more accurate invoices and collect our receivables sooner. We are extremely pleased with how these teams have stepped up and shown improvement despite our challenges. Before turning it over let me comment on guidance. We will continue to refrain from providing specific earnings guidance but I would say with our operating momentum we expect to again generate positive adjusted EBITDA and be well within our lender covenants for the fourth quarter of this year.

As a reminder when we reset our covenants for 2010, we agreed with the lenders to review the 2011 covenants as that year approached. We still fully expect to do that. We have provided some full year expectations in our earnings release, so let me just make a quick comment on our CapEx. As a reminder the reduction in our fleet over the last two years due to the integration and economy has allowed us to maintain a reasonable age as we have primarily disposed of the older units. As we move into 2011 and work through our comprehensive recovery plan, we do expect to resume our CapEx program more consistent with our new fleet size. We will plan to give 2011 CapEx guidance on next quarter’s call.

At this time, I’ll now turn the call over to Mike Schmidt to provide comments on the new labor agreement.

Michael J. Smid

Thanks, Sheila. The percentage of our employees voting yes is evidence of their strong support of our plan. The plan is designed to protect jobs and provide for long-term growth. The new labor contract is important in many ways. First, it improves our competitive cost position in the marketplace and allows us to be more efficient and better serve the needs of our customers. Second, it’s extension through March 2015 positions us for long-term growth; third, it provides re-entry into the multi-employer pension funds at a more affordable contribution level. This labor contract provides for resuming monthly pension contributions in the range of 6 to $8 million starting in June of next year.

The expected savings from the work rule changes in this contract which are being implemented now are designed to offset the cost of resuming those pension contributions. A large portion of the work rule savings comes from a change in vacation rules which impacts the accrual for 2011 vacation. In addition, the work rule changes allow us to better match our work force in each network and respond to the dynamic demand of our customers supply chains. For example, we can better meet peak demand times which occur during each work day through the use of 4 hour shifts and additional staggered start times.

And use with multiple start days for our employees allows us to manage the normal variability of customer demand during the week. Finally, we’ll be able to keep the freight moving faster, fewer hand-offs with these new efficiencies in our network operations. All of this means we can provide better response to our customer’s needs, while improving the cost productivities at the same time.

Moving on, as you probably know by now, ABS has filed a suit in U.S. District Court of Arkansas attempting to nullify our contract with our Teamster Employees. Their claim is in direct contradiction to the laws governing labor contracts and in direct contradiction to their specific statements regarding their intention to not be bound by any agreements with TMI and the IBT. They are not a party to our labor contract. Let me give you some historical background.

For the five year labor contract which began on April 1st, 2008, ABS decided not to bargain with YRC and Holland. In an August 2007, letter, Bob Davidson, former CEO of ABS stated, “ABS will not consider itself bound to any such agreement, reached between TMI and the IBT.” In another August 2007 letter to the Teamsters, Mr. Davidson stated, “ABS hereby gives notice that it will conduct future negotiations directly with the IBT in order to enter into a new collective bargaining agreement applicable only to ABS.” ABS then dropped out of our negotiations of the 2008 contract and never became a party to our contract; later ABS was unable to negotiate a deal of their own and decided to enter into a contract with their employees that we’ve been told was on the same terms as the agreement that YRC and Holland has negotiated. We’re not a party to their labor contract with their employees.

Early this year ABS again tried to desperately negotiate; this time it was for an amendment to their 2008 labor contract. ABS proposed amendment was presented to its employees for ratification and was voted down. This very amendment stated that ABS was not part of our contract or our multi-employer bargaining unit. With the recent actions, ABS is now interfering with our contract with our employees. We’ve sacrificed so much and approved three amendments. We will vigorously defend the decisions that our employees have made. Due to the pending litigation, we won’t comment further on this call but we will update you as we file our court response. Now I’ll turn it back over to Bill for closing.

William D. Zollars

Thanks, Mike. Before wrapping up as you know I’ve informed the board of my intention to retire and the board has formed a search committee with the focus primarily on external candidates. I’m happy with the quality of leadership shown throughout the organization and believe it is a key contributor to our improved operating performance. I look forward to being involved in the process to find my replacement that will lead the company through its next chapter. Let me close by reiterating what Sheila said in that we are in an ongoing discussions with our stake holders in order to complete the final steps in our comprehensive recovery plan. We believe the steps we have already taken demonstrates the continued support of all of our stakeholders including our employees, the IBT, our lenders, the pension funds and of course our customers. Because of where we are in the process, we’re not going to be taking any specific questions on this topic today. We’ll now take your questions related to the business and we would ask that you limit yourself to just one question with one follow up.

Question-and-Answer session

Operator

(Operator instructions). You’re first question comes from the line of Edward Wolfe with Wolfe Trahan. You’re line is now open.

Scott Group – Wolfe Trahan

Morning, guys. It’s Scott Group in for Ed. First can you just give an updated liquidity balance through October?

Sheila K. Taylor

No, we’re not going to provide that, Scott, but I’d say it’s fairly consistent. We had positive EBITDA in October and continue to show that trend.

Scott Group – Wolfe Trahan

Okay, okay, so that’s helpful. And then I understand that you don’t want to talk much about some of the next steps with the banks but just directionally can you talk about have you figured out how much of the debt needs to go away and if not what’s the timing to figure out that number and then just -- so let’s start there in terms of what’s coming out?

William D. Zollars

As I said we’re not going to talk about where we are in those discussions but they are ongoing with the lender group and we’re obviously working on the solution to many of those issues.

Scott Group – Wolfe Trahan

Okay, so okay, can’t talk about that. Okay, so then next question just when I look at the yields both at national and regional they were pretty flattish sequentially over second quarter. We’ve seen some nice yield improvements from some of the other LTLs, what’s going on where we’re not seeing the yield improvement? Is it that there’s some business that’s coming back to you that’s having some mix issues or is it tough to get the real rates out?

William D. Zollars

Well, because we had a bit of shift in weight per shipment during the quarter, probably the more relevant numbers to look at are revenue per shipment rather than revenue per hundred weight and the revenue per shipment was up about 2% at the national company versus a year ago and up about 4% at the regional company so pretty good growth in revenue per shipment year over year. And again if you looked at the shift from quarter to quarter were reasonably flat on the national side and up a little bit on the regional side. So we’re fairly consistently providing I think disciplined pricing. It’s nice to see some of the other competitor’s that haven’t been in the past starting to get religion. We think that can only help the industry dynamics but we continue to be pretty disciplined in our pricing approach.

Scott Group – Wolfe Trahan

And what kind of impact do you think we should see in fourth quarter from the GRI’s and other rate initiatives?

William D. Zollars

As we mentioned the GRI is holding well, better than it has in recent years and we’re continuing to see good momentum on the contractual side of our business. So I would expect those trends to continue in the fourth quarter.

Scott Group – Wolfe Trahan

Okay thanks for (inaudible).

William D. Zollars

Okay.

Operator

You’re next question comes from the line of Jason Seidl with Dahlman Rose, your line is now open.

Jason Seidl – Dahlman Rose

Hi, guys. Hey Sheila, well first I just want to just congratulate you guys on being the first carrier to go out there and take and being out cycle GRI and showing leadership in the LTL industry. I think it was much needed for the group. Now, Sheila, as we look out to 2011 I know you mentioned you wouldn’t give specific CapEx guidance but I’m assuming we’re going to have to be materially higher than $20 to $30 million. Can you talk to us about sort the average age of some of your equipment in both your tractors and your trailing fleet to give us an idea of what might need to be spent?

Sheila K. Taylor

Yes, I think I mentioned Jason, our – the age of our fleet has been fairly consistent given the integration and what we’ve been able to do there. Line haul tractors on average right now are about four and a half years and city tractors are about 10 and remember there are – we run them in the city for about 7 and then move them into the – I’m sorry run them off line haul for about 7 then move them into the city and then on the trailer side they’re about nine years on average.

Jason Seidl – Dahlman Rose

Okay, that’s helpful and Bill you talked a little bit about the contractual rate increases that you were being sued, can you talk to what progression of your contract rate increases this year and how they’ve been improving sort of 3Q over 2Q over 1Q?

William D. Zollars

Yeah, I think it’s fair to say that they’ve improved sequentially every quarter as we entered 2010. So there’s good momentum here in the right direction.

Jason Seidl – Dahlman Rose

Okay, can I get one more in? On Reddaway, Bill, did – just so I get this right, Bill, is a customer adjusting something, did you loose some business at Reddaway, what was going on there?

William D. Zollars

Oh, the situation at Reddaway is that one of our larger customers there has changed their supply chain and has moved away from LTL in terms of the percentage of their freight mix and that is having a knock down effect to Reddaway.

Jason Seidl – Dahlman Rose

Okay so it wasn’t you lost an LTL carrier it’s just that they’ve changed their distribution patterns?

William D. Zollars

Exactly.

Jason Seidl – Dahlman Rose

All right, I appreciate the time as always everyone. Thank you.

William D. Zollars

Okay, Jason.

Sheila K. Taylor

Thanks, Jason.

Operator

You’re next line from – you’re next question comes from the line of Tom (inaudible) with JP Morgan. You’re line is now open.

Alex Johnson – JP Morgan

Good morning, it’s actually Alex Johnson in for Tom.

Sheila K. Taylor

Hi, Alex.

Alex Johnson – JP Morgan

Good morning, so the first question that – wanted to ask is in terms of the lawsuit that Arkansas Best filed, you gave some good detail there, in terms of you defense of that, are there any expenses that would be associated with defending yourselves on that that we should be aware of?

William D. Zollars

Well it’s really hard to predict that. I think obviously anytime you file a lawsuit there’s expense but you know we would expect to win the day in both defending ourselves against a suit that’s been already been filed and then would expect to win any lawsuit that we counter file.

Alex Johnson – JP Morgan

Is it the type of thing where you think that that could be resolved pretty quickly, is that the guidance that you’re getting from your legal counsel?

William D. Zollars

I have no idea.

Alex Johnson – JP Morgan

No idea. Okay, and then my follow up question, is in terms of just looking at some of items the working capital items within the quarter looks like payables were a use of cash in the quarter is that consistent with normal seasonality, was there anything that you know reduced the payables and found that to be a use of cash in the quarter and what does that mean for the fourth quarter?

Sheila K. Taylor

No it’s – I mean it’s pretty consistent with what we would normally see from a seasonality standpoint. So I don’t expect anything significantly different on the receivables or oh the payables side. Obviously we continue to work with out vendors to negotiate more favorable payable terms and try and better match our DPO and our DSO. I think we’re doing a pretty effective job at that.

Alex Johnson – JP Morgan

Okay, and what’s – just one more, what’s within – what’s contained within the other liabilities that was roughly $50 million benefit to cash in the quarter?

William D. Zollars

Alex, that’s where the interests that were booking on the income statement, the interest accrual, is being deferred by the lenders. That’s showing up in accrued liabilities.

Alex Johnson – JP Morgan

Okay. Great, thank you very much.

William D. Zollars

Sure.

Operator

You’re next question comes from the line of Tom Albrecht with BBT. Your line is now open.

Tom Albrecht - BBT

Hey, good morning everyone, I just wanted to get the latest number of service centers at both national and the regional company’s.

Sheila K. Taylor

Give us one moment Tom.

Tom Albrecht - BBT

Okay.

William D. Zollars

It’s 350 at national and 128 or so at the regional.

Tom Albrecht - BBT

And are you essentially done, I mean I know a network, whether its you or others, there’s a little bit of a dynamic nature to it but I mean in terms of wholesale, plan, shrinkage, are you essentially done at this moment?

Michael J. Smid

This is Mike Smid, actually no, we will continue to work particularly on the YRC network, to refine the pick and delivery areas and there will be some further consolidation of facilities as we progress through this year and into next.

Tom Albrecht - BBT

Do you have stated goal on desired or amount of properties you hope to sell, I know you gave us a – what you did in the quarter on that?

Sheila K. Taylor

No, I mean we still have some access that we’re selling from the integration, that are still on the market that we’ll be selling and I would expect over the next couple years you’ll continue to see proceeds from those but they’ll definitely come down from where they’ve been over the last two years.

Tom Albrecht - BBT

Mike, is it fair to think about your network as probably not going below 300 service centers?

Michael J. Smid

I think – we’ll continue to work at least toward that number. I would suspect that ultimately it would be slightly less than that.

Tom Albrecht - BBT

Okay, thank you.

Sheila K. Taylor

Thanks, Tom.

Operator

Your next question comes from the line of Chris Ceraso with Credit Suisse, your line is now open.

Chris Ceraso – Credit Suisse

Thanks, good morning. I was hoping you could just help me understand something about this suit. I know you can’t say too much but it – wouldn’t a win by ABS threaten Yellow solvency and if that’s true doesn’t that leave ABS holding the bag on the Central States Pension?

William D. Zollars

Well, we – as we said previously we think this suit is completely without merit and we’re approaching it on that basis as we defend ourselves here but we don’t see that as a possibility.

Chris Ceraso – Credit Suisse

Okay and then another pension related question, what’s your view on the change in Congress? Does that put at risk the likelihood of getting the Orphan Pension Relief? Is that still relevant for you?

William D. Zollars

I think it is relevant. We don’t see that as having much impact on chances per success but we’ve got good support on both sides of the isle.

Chris Ceraso – Credit Suisse

Any update on where that stands?

William D. Zollars

Not really, they’re just coming back to work here and we’re going to continue to work with Congress on the fixes that are required there.

Chris Ceraso – Credit Suisse

Okay thank you.

Operator

That’s all the time we have for questions now. Now let’s turn the conference back over to our presenters.

William D. Zollars

Thanks very much for joining us and we’ll speak to you at the end of the next quarter.

Operator

This now concludes today’s conference call you may now disconnect.

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