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YRC Worldwide (NASDAQ:YRCW)

Q3 2011 Earnings Call

November 04, 2011 9:30 am ET

Executives

Jeffery A. Rogers - President

Phil J. Gaines - Senior Vice President of Finance

James L. Welch - Chief Executive officer and Executive Director

Jamie G. Pierson - Interim Chief Financial Officer

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

Analysts

Scott H. Group - Wolfe Trahan & Co.

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

Jack Waldo - Stephens Inc., Research Division

Thomas S. Albrecht - BB&T Capital Markets, Research Division

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Justin B. Yagerman - Deutsche Bank AG, Research Division

Operator

Good morning. My name is Michelle, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the YRC Worldwide Third Quarter Earnings Conference Call. [Operator Instructions] I will now turn the call over to Paul Liljegren, Senior Vice President, Finance and Controller.

Paul F. Liljegren

Good morning. Thanks for joining us for the YRC Worldwide Third Quarter 2011 Earnings Call. James Welch, Chief Executive Officer of YRC Worldwide; Jamie Pierson, our CFO; and Jeff Rogers, President of YRC will provide comments this morning. James, Jamie, Jeff and Phil Gaines, CFO of YRC and I will be available for questions following their comments.

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 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, 10-Q and today's 8-K.

Additionally, please see today's release for a reconciliation of our GAAP measures to non-GAAP measures, such as our reconciliation of operating loss to adjusted operating loss and adjusted EBITDA, and the reconciliation of adjusted EBITDA to net cash flow from operating activities and adjusted free cash flow. During this call, we may refer to the non-GAAP measure of adjusted EBITDA simply as EBITDA.

Now I'll turn the call over to James Welch.

James L. Welch

Thank you, Paul, and good morning, everyone, and thanks for taking the time to join us this morning. As most of you know, I've just concluded my 100th day back at YRC Worldwide this week after leaving 4.5 years ago. And while I was disappointed and concerned about the condition of the company during the time I was gone, I have to tell you that we have made a lot of progress moving the company forward over these last 100 days, but we still have much to do, no doubt, and I'm not at all satisfied with where we're at and how we're performing,- but we will get better.

Let me start with a few comments on our restructure, which was closed on July 22. While we now have a restructured balance sheet that provides us with runway, we must sharpen our focus on the operations and the delivery of consistently reliable service to all of our customers. I'm very pleased with the service given by Holland, Reddaway and New Penn, but we have to push further improvements at YRC, and we are, in fact, making good progress, but it will take time. And as we improve service at YRC, I believe that we will restore confidence and field operations and sales, which should lead to higher yield and more volume.

If you have read the recent press releases or news articles about YRCW over the last 100 days, you will know that I did not waste any time in making changes on how we will manage the holding company and operating companies moving forward. The holding company was much too involved in the day-to-day business of the operating companies in my opinion. The way the company was previously structured created bottlenecks in strategy, decision making and execution along with creating inefficiencies.

Today, I have eliminated 4 C-level positions at the holding company and have for the most part, put the power and the responsibility back at the operating companies. I can absolutely assure you that each of the operating company presidents have not only fully embraced this change, but they have been asking for it for some time. For example, up until just a few weeks ago, YRC did not have a separate management team actually leading that $3 billion company. There was a very active and oftentimes unnecessary involvement from the holding company, and YRC critical functions were basically blended into the holding company without a separate and distinct leadership team. Another example, the sales organization reported through the shared services organization at the holding company level, yet, YRC operations reported through a field alignment to a different leader, and the 2 groups were not talking and not working together nearly as much as they must moving forward.

Truthfully, and in my opinion, that organization structure made little business sense. So to that end, we recently named Jeff Rogers, President of YRC. Jeff has extensive industry experience, and he has successfully served the company in a number of roles, most recently as President of Holland. And if you remember, when Jeff went to Holland about 3 years ago, Holland was a company that was basically in a mess and losing a lot of money, but he worked hard to create a vision and a roadmap for its operational turnaround and worked to focus the organization on those objectives. Jeff led Holland back to be the next-day carrier in their footprint. He's also led Holland closer to its historical level of operating profitability, and I have great confidence that Jeff will do the same at YRC.

We also named Mike Naatz as President of Holland to replace Jeff. Mike has excellent operating and sales experience with the former USF Companies over the years and most recently was the President of Customer Care at YRCW.

So going forward, each operating company will manage all of the resources needed to support their marketing, sales, operations, processing and human resources efforts. All of our operating companies serve different geographical areas. They all have unique and different operating models and operating philosophies, and most important of all, they all have different cultures that must be worked with and leveraged individually in the marketplace.

There will be no YRCW way of doing business. Each operating company has their own way of doing business. Now that does not mean that we won't pull together as a team of companies when working with our customers who want bundled solutions or services. We will definitely continue to capitalize on those opportunities. But it has been my experience that companies under a corporate umbrella work together better when it is their choice versus having things dictated by a holding company. Our op co-presidents, again, are in enthusiastic support of our new restructure and change in philosophy, and I expect to see improvements on how each one of them operates and in the quality of service that we deliver to our customers.

I'm also very pleased to announce that Jamie Pierson has decided to join us as Executive Vice President and CFO of YRC Worldwide, having served on an interim basis previously. Jamie was most recently Managing Director at Alvarez & Marsal, and as most of you know Jamie has been deeply involved in the YRCW financial restructuring during the last 3 years and that's been a big deal. Jamie has a strong relationship with our lenders and now our new shareholders and noteholders, and he certainly knows the company and understands where we have been and more importantly, where we have to head. So we're excited that Jamie wants to continue participating in the critical role of CFO, as we work toward a successful turnaround of our company. Jamie was my #1 CFO candidate all along from day one. I'm extremely excited accepted that we landed him to help YRCW continue to move forward, and our employees as well are very excited that someone so deeply involved in our financial restructuring, like Jamie, believes strongly enough about our future that he chose to leave a position at another company and join us as a full-time employee.

Finally, as I was contemplating my decision on whether to return to YRCW or not, I was very interested in the composition of the YRC Board of Directors -- YRCW Board of Directors, and I have to tell you that I'm extremely pleased and impressed with the quality of our board. They are experienced business people with a very broad range of skill sets and most importantly, are very engaged with the company as we move forward. Out of our 9 directors, 2 have been selected by the IBT, which combined with a new equity ownership by our union employees, I firmly believe will help our ability to move forward.

Moving on to the operating environment. The general economic recovery continues at a moderate rate at best, which is well below the recovery rates of past recessions. Market volatility and unemployment levels create an additional uncertainty. The dynamics within our industry are encouraging compared to the last several years as price discipline continues, demonstrated by the August general rate increases. Industry capacity appears to be hanging in there, somewhat due to the industry growth rates and probably has much to do with network rationalization and the limited availability of qualified drivers to hire.

Our business performance continues to improve year-over-year especially when you consider the incremental pension expense added to our cost base in June when we agreed to return and ran through multiemployer pension funds, and our union employees began to accrue additional pension service and benefits.

Moving on to third quarter results. YRC's tonnage grew per day at 4.2% year-over-year. Regional tonnage per day was up 5.6% as compared to the prior year. Changes in weight per shipment, length of haul and customer mix have affected metrics for both YRC and the regional carriers in the third quarter. YRC increased its revenue per shipment by 6.2% and its revenue per hundredweight by 7.5%, as its weight per shipment decreased by 1.2% over the prior year with its length of haul increasing 1.8%. The regional carriers’ revenue per shipment grew 10.4% in Q3 versus Q3 of 2010, which included a 2% increase on weight per shipment and a 0.4% increase in length of haul.

Moving on to earnings. YRC reported an adjusted operating loss of $8 million and an adjusted operating ratio of 100.9, which represents an improvement of 70 basis points versus the third quarter of 2010. And remember, the third quarter of this year included incremental union of pension expenses of $17 million, which affects the year-over-year comparison. If not for a much worse-than-expected July at YRC, our third quarter results would have been better. And September was the best month of the third quarter, so I was pleased that we were able to quickly build some momentum starting in August.

For the 9 months of 2011, YRC's adjusted operating results improved by $65 million as compared to 2010. Volume growth, pricing improvement and cost actions all contributed to this positive operating performance trend. Again, we are pleased with the progress, but far from being even remotely satisfied with these results at YRC.

Our Regional carriers reported an adjusted operating ratio of 95.2 for the third quarter of 2011, which is 180 basis point improvement year-over-year. Similar to YRC, this year-over-year earnings growth is net of the resumption of union pension expense, which was about $6 million more than the third quarter -- for the third quarter of 2011.

For the 9 months of 2011, the Regional carriers improved their adjusted operating ratio by 150 basis points to 97.2. While the Regional carriers are making better progress than YRC, we know that they can perform even better as we move forward.

With those comments, I will now turn the call over to Jamie Pierson for more color on our third quarter results.

Jamie G. Pierson

Thanks, James. Good morning, everyone. Let me highlight a few items in the quarter that created some noise in our GAAP numbers. I'm also going to discuss some changes to our capital structure and talk a little bit about guidance.

First, the $79 million fair value change included in our reported net loss was noncash and onetime in nature. It related to the fair value of the conversion rights in the new 2015 note. The accounting rules required us to remeasure the fair value of those conversion right on September 16, 2011, when shareholders approved an increase on a number of authorized common shares sufficient to cover the conversion rights. As a reminder, our common stock closed at $0.07 per share on September 16, and the B notes have an effective conversion rate of approximately $0.042 per share, which is inclusive of the make-whole payment. The make-whole payment represents future interest through March 2015 maturity date of those B notes. As we highlighted in our release, the preferred stock we issued in July converted to common and the Series B note became convertible in September. As a reminder, The Series A notes are convertible after July 22, 2013, about 2 years after the closing of the transaction. With the potential for total outstanding common shares now in excess of 6 billion, we're asking for shareholder approval to reverse split in the range of 1 to 50 to 1 to 300 at our annual shareholder meeting on November 30. The actual ratio and the timing of the reverse split will be a part of the discretion of our board upon shareholder approval. Based upon the favorable determination by NASDAQ cheering panel [ph], we would expect our board to implement the reverse split no later than mid-December.

Now moving on to operations. As James mentioned, we recorded adjusted operating income for the third quarter, which is now the second consecutive quarter with adjusted operating income despite the incremental cost of pension expense of about $23 million for the quarter. In addition, union health and welfare expense increased August 1, which had a cost impact of about $3 million on a quarterly comparison basis.

Turning to cash flows and liquidity. We generated positive free cash flow for the third quarter when you adjust our GAAP numbers for restructuring items. With both operating achievements are important milestones in our recovery, we also clearly recognize our current performance level need to continue to improve. From a liquidity perspective, we ended the third quarter with balance sheet cash and availability of $279 million. It is important to note that our borrowing base under the new $400 million ABL was $371 million at September 30, which means as we continue to grow our revenues year-over-year, we have some dry gun powder go into the full ABL borrowing base and cast into that liquidity to support our working capital needs. Regarding guidance, with the change in leadership, we're discontinuing our practice of providing earnings guidance effective this quarter. While this is a change from our recent process where we provided an expected for by guiding to positive adjusted EBITDA or positive adjusted operating income or year-over-year revenue growth, we believe the typical issue practice of not providing earnings guidance is appropriate for us at this time.

Accordingly, we will not be commenting on future earnings or free cash flow expectations during the Q&A portion of this call. In addition, given the recently closed transaction and resulting shareholder base, we do not plan to conduct quarterly conference calls going forward.

Now, I will turn it over to Jeff Rogers to talk a little bit about YRC.

Jeffery A. Rogers

Thanks, Jamie, and good morning, everyone. Let me start by saying a few words about Holland. I am very proud of my Holland teammates and the remarkable turnaround of the Holland business over the last few years. It took a strong focus on key service and operating initiatives, along with a lot of hard work and discipline, which is now paying off and is apparent in the regional results we report.

Now about YRC. The YRC business is different from Holland and presents its own unique set of challenges and opportunities, but I truly believe the same basic principles that worked at Holland will work at YRC: simplify the business, focus on the right things, and that will enable better execution. James and I have made a number of organizational changes designed to a lean YRC and make it a more nimble entity, which will enable us to act quickly and decisively and make execution more crisp and focused. One of my personal philosophies is to plan shorter, act longer. We need to attack the marketplace and it starts with the customer. We are making a real commitment to service improvement, and we expect to be more efficient as well as we remove waste from the operating process. As an example, we have consolidated the network operations to Kansas City to speed up decision making and eliminate duplication left over from the integration. Focusing on service goes back to my comment on plan shorter, act longer. We know service is key in this business, so we're going to stay committed to delivering solid, consistent service. I am very excited about the way the YRC team, and when I say YRC team, I mean, all YRC employees have responded to the new direction and the traction we are starting to gain on service improvements. I know our customers are excited about it as well. They are looking for a reason to do business with YRC, and we are going to give it to them.

With that, I'll turn it back to James.

James L. Welch

Thanks, Jamie, and, Jeff, as well. Again, we wish to thank the stakeholders who supported our restructuring, and we look forward to returning our focus to the basics of delivering consistently reliable LTL services to our customers with a reenergized and fully engaged workforce that is focused on that objective. And I want to be sure that I say a big thank you to our employees, both union and nonunion for sticking with us and to our new equity ownership, which includes our union employees. They have been through a lot of turmoil over these last 3 years, and I certainly appreciate their efforts even more than they know.

In the recent past, this company, this corporation tended to avoid terminologies like freight and customers, instead, using terms like logistics, transportation, consumers, and that made it very clear to our employees that yes, indeed, we are in the freight business. And we are going to work like hell to give our customers the level of service they deserve.

I like the team we're putting together. I like what we're representing. I like the moves that we are making, and I have to be honest and say that after making numerous customer visits, and my brief time back, I'm convinced that YRCW does have an important role to play in this industry, in the LTL industry. I'm also convinced that customers want to see YRCW do better and regain a more prominent position in the marketplace, and I'm confident our employees will help us get there.

Before taking questions, let me briefly comment on fourth quarter trends. Our daily volumes in October for YRC and the Regional carriers continue to show growth year-over-year. In addition, as Jeff mentioned, we are encouraged by the traction gained by our YRC improvement initiatives, but as I said earlier, it will take some time to accomplish all of our objectives.

With that, we will now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of David Ross with Stifel, Nicolaus.

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

James, can you talk about the big shipper problem in your business, specifically at YRC National, with yields, extra fuel surcharge charging and mix in YRC National being below that of the competition? What are the big customers telling you on rates and opportunities for increases going forward because we think that's just really where you need them?

James L. Welch

I'll let Jeff talk about that.

Jeffery A. Rogers

Well, Dave, I'll be real honest with you. That's one of the big opportunities at YRC is to adjust our mix. We know that. We've got to improve that. I think what the customers are saying is just what I said in my statements. They want to do business. I think if they see a consistent service product, we'll have the ability to pull those levers as we need to, to improve.

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

And have you gone down to a fixed network in National yet? I know there was a lot of changes going on with the integration and continuing terminal consolidation. Can you just talk about where you are from a network standpoint?

Jeffery A. Rogers

Well, I'll be real honest with you. I think I've been here 35 days in this role, so we're looking at that. There's no question I think we're going to make some changes, but I just don't know what they are in full at this point, David.

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

And then the last question, you mentioned in the press release that you're allocating more of the expenses back to the regional companies. So the corporate other expense line item, should we expect that to come down the negative? And how much of that should be transitioned into the regionals?

Paul F. Liljegren

David, this is Paul Liljegren. I'll take that question. We have always allocated the costs to the segment that was benefiting from the service level. What this change is about was the literal redeployment of the people. We are moving people out of shared services, enterprise services back to each regional operating companies. There's no really no change to financials.

Operator

Your next question comes from line of Tom Wadewitz with JPMorgan.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

I wanted to ask you about your approach on kind of volume versus price as you've got the financial restructuring behind you. I think you would aim to have some stability in your operations and approach to the market. And would you think the bigger opportunity is to see volume come back to you and drive better utilization and you try not to be too aggressive on price? Or do you think that the bigger lever for you to pull or push would really be to drive an improvement in price that perhaps would be related to what you might do on service?

James L. Welch

This is James. A couple of comments and I'll let Jeff or others weigh in. Just take a look at Holland as a good example. Jeff went in and really turned the company around by improving their service, and that allowed their volumes to grow and ultimately, now they're starting to deleverage that on a price set. So when you really look at YRC in particular, I think it's safe to say that the integration wasn't all that successful and that there's a lot of work left to do there. So we really think as we improve services, we rationalize the network a little bit more to allow us to give better service and do it more efficiently that, that will help us certainly grow our business. And I don't ever think we want to try to leave with price at all. Certainly, we're going to try to be competitive, but really, we think there's a big opportunity for improvement by just improving our efficiencies, improving our service, gaining the confidence back of our customers, and that's not going to occur overnight. We're going to have to demonstrate that we can give the right kind of service over the next 6 months, but we think over time, that will allow us to energize our sales force, synergize our operations part of the business and ultimately, gain more confidence from the customers so that we can ask for a higher price. I don't know, Jeff, you want to jump in there and comment?

Jeffery A. Rogers

James, you touched on a lot of things. I really think the key is both. I mean you make money in this business by price and volume. So I think by providing a good consistent service, it allows you to make those decisions a lot better. If you don't have the service, then you really don't get to choose what you get, I don't think. So I think as we improve the service, we'll be able to make those choices and one, bring on the right type of volume because that is the key, not just volume, but the right type of volume at the right price. But the consistent service is the key first, and that's what we're going to focus on.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Okay. And as a second question then. What would you -- you say you need make some network changes at the National business at YRC, is that terminal rationalization or what -- I mean just kind of broadly, what type of changes do you think are appropriate? And then what about the equipment situation, rolling stock, is there -- is that a significant, I guess, constrain on your ability to deliver service? Your CapEx has been low for a while, and so I'm just wondering if kind of age of rolling stock is something that is part of the equation on improving service as well.

Jeffery A. Rogers

Right. Well, I think the first thing I'll say is really the thing we're focusing on right now is we're handling too much freight too many times. So I think when we're looking at the network, the first thing we're going to do is how can we move freight better without handling it so much because that will help us in all kinds of areas, improve service, as well as reduce claims, improve the customer satisfaction. So that's really what we're focused on first. So I really won't get into any more -- much more detail about looking at the network other than that. The equipment issue, it is what it is. We, obviously, have not invested the way we would like to, but we are where we are. It is and it does create some problems for us from a higher maintenance cost than we would want. I can say I don't think the equipment issue is creating service problems for me right now. It really is just maintenance issue and the fact that we would love to have more equipment, but we are where we are, and we'll just deal with that as we go forward.

James L. Welch

This is James. As an outsider coming back in, our equipment is not in as bad a shape as I thought it might have been in. I think one of the advantages is that we did get out of the integration between Yellow and Roadway, we were able to pick the best equipment between the 2 fleets and put them into service. So I really think that we're okay. As Jeff said, maintenance is creeping up somewhat, but as we look at our forward opportunities and going forward plan, we have a couple of things that we're going to try to do to address that over time. But for the immediate term, I think we're in pretty good shape.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Can you tell us what tractor age is for the Regional and the National businesses, average age?

Jamie G. Pierson

Yes, Tom, this is Jamie. If we look at it on an average basis at the end of the most recent period, we had about 5.5 years on the line-haul tractors, about 10.5 on the city and that's on the tractor side. Was that your question?

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Yes. But do you have it by Regional and National or you just want to give a consolidated?

Jamie G. Pierson

No, we don't have it broken down. It's on a consolidated basis.

Operator

Your next question comes from the line of Jack Waldo with Stephens Inc.

Jack Waldo - Stephens Inc., Research Division

James, I wanted to ask you if you look out over the next year or the next 2 years, would you expect tonnage growth or pricing -- which one would you expect to grow more? I guess, what I'm getting at is as you think about your network now, do you feel like you're underutilized on the density side? Or is it just a function of getting more profitability out of the current density you have?

James L. Welch

Well, in the corporate world, we'd like to do both. Our network, especially at YRC, can use more density, and we're relatively full at Holland. Reddaway can use a little more business. New Penn is in pretty good shape. But really it's at YRC and we want to improve our service so that we can grow on the density side but as well, improve our position on the pricing side. If you go back and look over the last couple of years, when the company maybe was in its darkest hours, the mix of freight that we took on at that particular time, either by just the situation of the economy and/or the competitive pressure, it's not where we want it, and we're going to have to change that over time, but in order to do that, we've got to first provide the right kind of service that allows us to ask for the right kind of business at the right price.

Jack Waldo - Stephens Inc., Research Division

And James, you have a track record of this focus on service, and I understand what you're saying service has to come before everything else comes. Do you have any -- or maybe, Jamie -- are there any gauges or maybe service levels, on-time service levels or claims ratios, where you are today relative to where you have been or where you are today relative to where you think you should be?

James L. Welch

Yes, our service is not as good as it needs to be but it's improving. Claim ratios are always an issue no matter where we are in our stage of business, so we're constantly working on trying to improve that. But the claim ratio is higher than what I'd like to see, no doubt, and we're working hard to get that back into the proper ratio.

Jack Waldo - Stephens Inc., Research Division

Fair enough. And then I guess my last 2 questions and maybe for you, Jamie, how many terminals do you guys currently have or operate in the National and in the Regional business?

Jamie G. Pierson

It's about 330 on a National basis and about 110 on Regional basis. Well, let me give you the exact numbers.

James L. Welch

317 on the National side and about 126 on the Regional side.

Jamie G. Pierson

There you go.

Jack Waldo - Stephens Inc., Research Division

And then, Jamie, what are your CapEx? What should we have for CapEx for this year and CapEx for next year?

Jamie G. Pierson

Jack, we're not going to comment on the future earnings or CapEx or cash liquidity at all.

Jack Waldo - Stephens Inc., Research Division

Okay. Did you have a maintenance CapEx number?

Jamie G. Pierson

No.

Operator

Your next question comes from the line of Justin Yagerman with Deutsche Bank.

Justin B. Yagerman - Deutsche Bank AG, Research Division

James, when you look at the company having taken inventory over the last 100 days, this has been at different times, a $10 billion company. Now it's arguably somewhere in the $4 billion, $5 billion maybe. I'm talking revenue. How do you think about where you envision the company long term in terms of positioning?

James L. Welch

We're still about a $5 billion company, which is still a large company in this particular space. When I came back, Justin, and really looked at things, I just felt like the regional carriers have their own geographical footprint, each one of them do. They all have their own unique operating model and service offering, and as I said earlier, they all have their own unique culture. So I really felt strongly and still trying to blend them in with a YRCW way of doing business and this whole approach that the corporate company was going down from a global perspective, really try to let these companies be who they are. Let Holland be Holland. Let New Penn be New Penn. Let Reddaway be Reddaway. They all 3 work together very well with what they do and then really trying to look at the national carrier and go, okay, what are we trying to do here? What's our mantra? What hill are we trying to climb? The culture at YRC is not nearly as well defined as the old Yellow or the old Roadway or the regional carriers are today. So really want to try to get the right kind of leadership in place, and I think it is critical that they have their own separate management team, which is the steps that we've taken to put Jeff and he's named his own team in there. So I really think long term, it's letting these regional carriers compete. They give absolutely best-in-class service. They're damn good companies, and then we've got to get YRC moving forward. Do I envision us being a $10 billion company again? No. But I definitely think that we have a role to play in this industry. We're still a large company when you look at the number of carriers and just the sheer shipments that we handle per day with all of these 4 companies. And we're going to continue to try to leverage that where it makes sense together and then try to make sure that these companies are set to compete effectively on their own. But I fully expect the company to be able to compete, and as long we can do that, there's business out there that we can go get.

Justin B. Yagerman - Deutsche Bank AG, Research Division

All right. So are the networks you talked about, the terminals in each of the networks and the fleet, I mean, is the size of the infrastructure where you want it to be? Or are there tweaks that are going to need to be made to get to where you want to be from a positioning standpoint?

James L. Welch

I think the regional carriers are where we want them, and the infrastructure is going to have to be looked at, not necessarily from a reduction standpoint but just how we set up our operation from a network standpoint. I'm really not happy with how the network runs at YRC. Neither is Jeff. Yes, really try to just take the holding company down to the CEO, the CFO and his related organization and the General Counsel and his related organization, a couple of other security and government services person but really stripping down this holding company to just bare bones as much as possible versus what it used to be and really putting the power and the authority in these operating companies but yet, holding them very accountable through monthly business reviews, being involved as possible -- as much as possible with what they're doing and see how they go forward. And I think we've got the right kind of team that can do it.

Justin B. Yagerman - Deutsche Bank AG, Research Division

We've got a critical juncture, I would think, coming up in the first quarter. Even well-operating LTL carriers have issues remaining profitable and a choppy macro environment to boot. So when you talk to your customers right now and you think about the business, how are you guys approaching that? Are you talking to customers and saying, listen you want to do business with us, you're going to need to support us through this period of time. Or is this really just kind of like you grit your teeth and hope things work out as we go over the next couple of months here?

James L. Welch

We're certainly not going to just sit around and hope things work out. We're working hard. I've been out making sales calls. Jeff hasn't had a chance to, but when I'm in front of some of our larger customers, they want us to be in business. Now that could be from a selfish reason so that price stays where it at and capacity doesn't tighten up. But also, I get comments more so on, "We would like you to give you more business. We were looking for reasons to give you more business." And over the last month, the financial condition and all the noise that's been around the company the last couple of years wasn't the topic of good conversation. It was, "Can you guys improve your service at YRC? Can you do other things to help us give you more business." I mean it's clear, especially our larger customers would like to give us more business. So that's a couple of my comments. I'll let Jeff just go and weigh in there or Phil.

Jeffery A. Rogers

Sure. Justin, this is Jeff. I've not had a chance, to James' point, to get out yet and talk to YRC customers. I'm going to spend most of next week doing that. But even when I was the President of Holland, the hundreds and hundreds of customers that I talked to, obviously, still do business with YRC. There's a lot of customers that do business with all the carriers within YRC Worldwide. And they're saying the same things James is saying. We want to give YRC more business, and that's the point that I made in my comments. And what I'm really focused on doing is we are going to give them a reason to do business with YRC, and that's going to be consistent service and obviously, providing a better experience for them. So I guess when we're going to talk to customers, it is going to be couple of tough months. It's a tough couple of months for everybody. But I think we'll have good momentum. We'll be able to tell them exactly what we're doing. We're going to give them a plan of how we're going to approach things going forward, and I think the customers will appreciate that. They're just looking for a reason and we're going to give it to them.

Justin B. Yagerman - Deutsche Bank AG, Research Division

All right. The cash number that we cited when you talk to liquidity is different than what I saw. I think you talked to a number of 279, and on the cash flow statement, it looks like the number that you guys ended the quarter was something in the 163 range. Where's the difference between that cash number? Is there restricted cash that's not included there or [indiscernible] ?

Jamie G. Pierson

No, it's the ABL availability, Justin.

Justin B. Yagerman - Deutsche Bank AG, Research Division

I thought the ABL availability was 371 out of 400?

Jamie G. Pierson

That's the borrowing base.

Justin B. Yagerman - Deutsche Bank AG, Research Division

Okay. Oh, so 279, does that include cash and the ABL?

Jamie G. Pierson

Exactly. The availability under the ABL.

Justin B. Yagerman - Deutsche Bank AG, Research Division

Okay. So let me just make sure I've got this straight. 279 includes the 163 of cash plus the availability under the ABL?

Jamie G. Pierson

Yes, exactly. If you look at Page 2 of the release, you'll see how we've broken it up into the 2 distinct separate buckets. So you can see how much of it is cash and how much of it is availability for the total.

Justin B. Yagerman - Deutsche Bank AG, Research Division

Okay. I'll take a look at that. And last housekeeping item, the reverse stock split in December, do you guys have -- what's the -- and I should probably know this, but what's the most that you guys can do now in terms of how many shares per -- can you convert?

Jamie G. Pierson

We can go up to 1 for 300.

Operator

Your next question comes from the line of Scott Group with Wolfe Trahan.

Scott H. Group - Wolfe Trahan & Co.

So the 279 of liquidity, that's the 163 cash and 116 of availability on the ABL. How much of that can you access today? Is any of that restricted? Or can you use it all for ops and CapEx at this point?

Jamie G. Pierson

We can use it all for ops and CapEx. The restricted cash is on separate accounts on the balance sheet.

Scott H. Group - Wolfe Trahan & Co.

Okay. And the $158 million deposit into escrow that we see in third quarter, can you give a little bit more color on what that's for, Jamie? And is there an opportunity to get that cash back over time or is that gone?

Jamie G. Pierson

Well, it's restricted. It's on the balance sheet. It's under 2 separate accounts. We got some of the short-term account, some of the long-term account. So we don't have access to it today.

Scott H. Group - Wolfe Trahan & Co.

Is there an opportunity to get access to it? What needs to happen for you to get access to that?

Jamie G. Pierson

Yes, we don't have access to it today. We have to go to the individual holders of those of those accounts.

Scott H. Group - Wolfe Trahan & Co.

Got you. Okay. In terms of CapEx, where it -- gross CapEx of $36 million year-to-date, the guidance, I think, entering the year from the old management was $150 million give or take. I think it was $125 million as of last quarter. I understand you don't want to give firm guidance on CapEx, but how much longer can we sustain this kind of really low run rate? Or when do you think we need to think about CapEx ramping up again?

Jamie G. Pierson

Well, I certainly appreciate you not allowing me to comment on future guidance, certainly not on the previous management teams. But in terms of what we got going on in CapEx, it's not only from a maintenance perspective in terms of engine swings. It's currently maintaining the state of the fleet, and as we talked about earlier, capacity can be limited by several different things. This is one of them. We don't have any constraints from a capacity standpoint on our revenue equipment, so I expect it to be about where it is now for a while.

Scott H. Group - Wolfe Trahan & Co.

So you think CapEx stays in this $30 million a quarter range, give or take?

Jamie G. Pierson

No, I wouldn't say that. We're not going to give guidance.

Scott H. Group - Wolfe Trahan & Co.

Okay, but directionally, you feel like it stays at this low level. Is that what you're trying to say, around this low level?

Jamie G. Pierson

Yes, I know, Scott, we're not going to give guidance on that.

Scott H. Group - Wolfe Trahan & Co.

Okay. Okay. I think I heard $23 million of pension expense, cash pension expense in the quarter. Is that the right run rate to think about going forward or does that ramp up?

Paul F. Liljegren

Well, Scott, this is Paul. The union pension expense is based on hours worked, so there's some seasonality to it. $23 million was the incremental for the third quarter, so if you want to put it in a range, it's maybe $20 million, $25 million. It's based on seasonality and hours worked.

Scott H. Group - Wolfe Trahan & Co.

Okay. You have the same numbers for cash interest in the quarter and going forward?

Paul F. Liljegren

Well, we put cash interest in the release, and as Jamie said, we're not giving guidance around forward-looking cash interest.

Scott H. Group - Wolfe Trahan & Co.

And then last question, do you have an ending -- end of the quarter share count, diluted share count and excluding the stock split at the end of -- or reversed in the end of December? How do you think about the share count for fourth quarter?

Paul F. Liljegren

Well, the -- we calculated earnings per share for the third quarter based on weighted average, but at the end of the quarter, we had, on the balance sheet, 1.9 billion common shares outstanding to end the quarter. So you can think about that number as the beginning point for fourth quarter.

Scott H. Group - Wolfe Trahan & Co.

1.9 billion, kind of EBIT diluted number?

Paul F. Liljegren

That is the diluted number. Yes, it's one and the same.

Operator

Your next question comes from the line of Chris Ceraso with Crédit Suisse.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Just one question, really it relates to the pension. It would seem that the reduction to your cash pension obligations was a big part of the restructuring and your ability to hopefully generate sustainable cash flows over time. Is there any risk here that because discount rates have come down, that the size of the liability grows and your potential cash outflows might grow? Or does your agreement with the teamsters transcend the accounting?

Jamie G. Pierson

It's locked in there, Chris. It's part of the contract.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

So no matter what happens to the size of the obligation, you don't have to put more in over the next how many years?

Jamie G. Pierson

On the multiemployer pension piece, that is correct. It's part of the contract due March 2015.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

And is that true for expense that runs through the P&L, as well as cash?

Jamie G. Pierson

Yes.

Operator

Your next question comes from the line of Tom Albrecht with BB&T.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

I had essentially 2 questions. One is when I look at the debt at the end of September 30, short term and long term, it's about $1.34 billion. I'm a little confused whether that includes the equity conversion, the vote that was passed I think on September 16? Or will we see a reduction in debt when we look at the fourth quarter? And then let me come back with part 2 after you answer that. How much would that...

Jamie G. Pierson

Yes, that includes the Series A and B notes, Tom.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

All right. And can you refresh my memory how much where those?

Jamie G. Pierson

$240 million in total.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

All right. So you had -- there's a one -- and so that will go away then? Is that what you're referring to, the $240 million goes away?

Jamie G. Pierson

Well, as they convert, it'll go down. But the series, the life series of these notes aren't convertible until March of 2013. It's only July -- I'm sorry, exactly July of 2013.

Paul F. Liljegren

Tom, you might recall that the interest on those A and B notes are noncash. They're just PIK interest. So it's a 10% coupon, but we just add that to principal and so they're noncash from an interest standpoint.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

From a terminal perspective, I think I heard a couple of things. One, you need increased density and improved mix programs, but it sound like a little bit, maybe you've got still some excess terminals. Do have a sense on the 317 national terminals that, that could be headed to below a 300 figure over the next couple of quarters?

Phil J. Gaines

Tom, this is Phil Gaines. Yes, I think, as Jeff mentioned, we don't know that's specifically nailed down yet, but I would say that as we work to grow this business, our terminal facility count and door count is, I believe, the least of our worries. But if we're going to grow this business, we'll need to make we've got the employees to handle it and the equipment to handle it. I think we've got a fair amount of capacity left in our terminal infrastructure. It's just we got to make sure we get in the right places.

Operator

And your last question comes from the line of Jason Seidl with Dahlman Rose.

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division

I'm going to go back to the operations portion of the business here. When you're looking at the National, you mentioned that there's too many large accounts and there's an opportunity there for you guys. As you think about shifting the business mix back to some of the smaller to midsize customers, how is that going to be accomplished? Do you think you're going to have to give on price? Or do you think that just to improve service levels and through getting in front of the customers and telling them, "Hey, guys, we're back and we're planned on being here to stay." That will be enough?

Jeffery A. Rogers

Yes, Jay, this is Jeff. Yes, I would say, you kind of answered your own question. I think service is really the key to that mix change. While I think all customers appreciate good service, I think the smaller customer mix, noncorporate, I think, appreciates it more and expects it more. So I think as we provide better and better consistent service, we'll be able to make that mix change as needed.

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division

Okay. Great. And James, you made a bunch of changes, obviously, since you've come onboard here. How many more changes should we expect? Or is this sort of the team going forward that's going to be leading YRCW?

James L. Welch

Well, certainly, we stripped down that holding company to just kind of bare bones, and I think we're pretty good there with the structure. Jeff as made an even larger number of changes at YRC, and we were working on that for the last 60 days, really trying to think about what we wanted to do there. I think for the most part, we're in pretty good shape, but that doesn't mean that we won't change the structure depending on what kind of situation that we're in. But we fully know that we need to grow into this capital structure, and we're going to try to be sure that we're putting the right kind of resources and the right kind of emphasis in that area. And another thing that we're going to try to work very hard on is -- especially at YRC, the employees are kind of just out in the field. It's kind of been left out in loop in a lot of ways. And we're going to redouble our efforts to go back and really try to win the hearts and the minds of our people back in the field to, let's strap up our boots one more time and compete. And as an outsider coming back in, it was kind of interesting to hear comments about employee attitudes and the lack of direction perhaps in those darkest hours, and that's understandable. I'm not whooping on past management. It's just I think the company got so darn focused on the restructuring, which they had to in order to survive. I get that. But we kind of lost our focus on freight 101. And it seemed like when Yellow and Roadway went together, they kind of forgot how to operate in some ways, and so Jeff is bringing a strict process, discipline to things that I certainly encourage and support. And so this is not one way that we're going to go at it, whether it's structure or philosophy. We're going to do whatever it takes to succeed, and I think we've got the team, so far, positioned to do that.

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division

James, you touched on something that's interesting to me. You mentioned sort of the employees and obviously, there's been a ton of turmoil, not just over the last year, but over the last couple of years. And you guys have lost some talented people on the operating level. Can you talk a little bit about the employee morale right now? And do you think that's done, that people are done leaving for sort of greener pastures as they think they are?

James L. Welch

This is James. I think employee morale is a lot better than it was 100 days ago. When I've talked very clear and extensively about the fact that we're going to be good at what we do best and that's in the LTL business, compete effectively. And I think the company has been a little distracted about some of the different investments and philosophies that were going on, and we tended to forget that the freight business is a tough business. And we've got to continually be communicating with our people, and I think that new message has been received very fresh. And I'm encouraged and, bullied, by the response that I get. Now are we where we want to be? No. We've got a lot of work to do, a lot of communicating to do. I'm going to be traveling and visiting with terminals a lot. Jeff is too. But I'm encouraged by what I've seen just in the last 100 days about the fact that we still have a lot of good people here. Yes, we've lost some good people, but there are still a lot of good people that want this company to succeed and that are here for the long run. I don't know, Jeff, if you want to make comments or whatever.

Jeffery A. Rogers

Well, yes, I think the comment I'll make is we absolutely have lost good people, but I'll you what, I'm extremely confident in the folks that are here because I know they're battle tested. I know they're resilient, and I'll tell you what, I think they're ready to move forward. The biggest issue from my perspective coming in, in 35 days is just the complete lack of direction and decision making at YRC. And I can tell you, we can fix that. So I think if we give the employees hope and give them a good solid direction, I'm not worried about where we need to go for morale perspective. We'll give them that direction, and that's what they're looking for.

Operator

There are no further questions at this time. Mr. Liljegren, I turn the call back over to you.

Paul F. Liljegren

Thank you, operator, and thank you, everyone, for joining us today. We certainly appreciate it. And operator, I'll turn it back over to you for the closing.

Operator

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

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