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YRC Worldwide Inc. (NASDAQ:YRCW)

Q1 2008 Earnings Call

April 25, 2008 9:00 am ET

Executives

Sheila Taylor - Vice President, Investor Relations

William D. Zollars - Chairman of the Board, President, Chief Executive Officer

Stephen L. Bruffett - Chief Financial Officer, Executive Vice President

Michael J. Smid - President, North American Transportation

James D. Ritchie - President, YRC Logistics

Analysts

John Barnes - BB&T Capital Markets

Justin Yagerman - Wachovia Capital Markets, LLC

Thomas Wadewitz - J.P. Morgan

Jon Langenfeld - Robert W. Baird & Co., Inc.

David Ross - Stifel Nicolaus & Company, Inc.

Thomas Albrecht - Stephens Inc.

[Ed Wolf - Wolf Research]

Operator

Welcome everyone to the YRC Worldwide first quarter earnings conference call. (Operator Instructions) I will now turn the call over to Sheila Taylor, Vice President, Investor Relations.

Sheila Taylor

Good morning and thanks for joining us for the YRC Worldwide first quarter 2008 earnings call. With us this morning are Bill Zollars, the Chairman, President and CEO of YRC Worldwide, Steve Bruffett, our CFO, Mike Smid, President of YRC North American Transportation, and Jim Ritchie, President of YRC Logistics.

Statements made by management during this call that are not purely historical are forward-looking statements within the meaning of the Private Litigation Securities Reform Act of 1995. This includes statements regarding the company's expectations and intentions on strategies regarding the future. It is important to note that the company's future results could differ materially from those projected in such forward-looking statements due to a variety of factors. The format of this call does not allow us to fully disclose all of these risk factors. For a full discussion, please refer to our 10Ks, last night's earnings release and today's 8K filing.

Bill Zollars and Steve Bruffett will provide our comments this morning. Mike Smid and Jim Ritchie are available to participate in the Q&A session.

I'll now turn the call over to Bill.

William D. Zollars

The first quarter was obviously challenging for YRC, and there were external and internal factors that affected our results. You already know about the external factors of a weak economy, recurring bad weather and record fuel prices, so I won't belabor those points. However I think it's important for you to focus on the internal actions we were able to take that permit us to report significantly improved results starting in the current quarter.

Looking internally, in the first quarter we booked $0.24 per share from unfavorable actuarial adjustments on our self-insurance claims and reorganization charges from our regionals which we would not expect going forward. The financial performance of the regional companies, with the exception of New Penn was the largest issue in the first quarter. Keep in mind also that Glen Moore, our truckload company, is included in the regional segment, and for the quarter represented nearly $5 million of the regional loss.

Going forward we have a new labor contract in place and with it comes the ability to compete on a more level playing field with a more contemporary network design.

The regional footprint changes are in place and are behind us, so we were able to return our focus to the basics of taking care of our customers.

Also, we have proactively addressed the concerns surrounding our debt covenant and liquidity, and Steve will get into that a little bit later.

As a result of all of that, our situation has stabilized and we are back on solid footing after a couple of very challenging quarters. We're now better positioned to effectively leverage the significant resources across our company.

Let me talk further about what we've done to turn the corner and why we feel confident that the worst is behind us.

First, with the new labor contract I mentioned in effect as of April 1, we are hard at work implementing changes to our networks that will improve their speed and efficiency. In the first phase, our customers should benefit from enhanced service in over 28,000 lanes, so this is a major improvement for us on the service side. The benefits of these changes, primarily at Yellow, Roadway and Holland are sizeable and will ramp up as we move through the year. This is just one example of how we continue to invest in the future of YRC and one of the reasons we expect to be able to grow the company going forward.

Regarding our national companies, they were challenged to reduce costs fast enough to offset the volume declines that we experienced. Under the new contract we believe they will be able to respond better in a tough environment and with their operating leverage they're well positioned to deliver significant earnings growth when the economy improves. Also note the nationals recorded nearly a $6 million charge of actual adjustments, so without these charges they would have been a little better than breakeven for the quarter.

Second, the changes that we made to the geographic footprints of Holland and Reddaway have been effective. The larger change was made at Reddaway, obviously, and as a result service is back to their typical high standards and their margins have improved significantly. We expect Reddaway to make money in the second quarter since they are now back to their natural market. The footprint changes at Holland only involve six smaller locations in the South, so the network change impact was less. However, other actions have been taken to improve the efficiency of the Holland network. Substantial headway has been made at Holland, and we expect them to turn profitable some time during this quarter. This is significant given the fact that they represented the majority of the first quarter loss at the regional segment.

It's also important to reinforce the fact that we have completed the footprint changes at the regional companies. Over the course of time we'll fine-tune these networks, but we now have the most profitable footprints in place for our regional companies.

As I mentioned earlier, Glen Moore had a very challenging quarter dealing with many of the same issues as other truckload companies. With that said, they are having success right now at adding drivers and their trends are improving significantly. In addition, Glen Moore is participating in the purchase transportation flexibilities allowed under the new labor agreement by handling loads for Yellow and Roadway, primarily to and from the West Coast. This provides our customers better service than rail and is more cost competitive. We see these opportunities expanding throughout the year and contributing toward profitable growth at Glen Moore.

To summarize my comments on the regional companies, we've made the changes we're going to make, the situation is stabilized and margins are improving. Given all that, we expect the regional segment to make money in the second quarter.

Another item that contributes to us turning the corner quickly is that of overhead costs. We have taken out about $40 million of overhead costs in the past six months, and we have identified several other sizeable opportunities to further reduce overhead costs in the next couple of quarters. We're constantly striving to be as efficient an organization as possible. Just to give you an example of some of the other things that we're looking at, we're evaluating the final steps in what has been a transition to a common employee benefits platform across all of our companies.

These changes will likely result in a combination of near-term gains and ongoing cost reductions, both of which serve to provide additional cushion as we manage our way through this downturn. The specific amounts related to these actions will be determined once the detailed plans are established, but that's an example of the additional infrastructure approaches we're taking.

So given these action plans and in spite of the continuing challenges we are facing due to the weak economic environment, we decided to provide investors with greater clarity to our expected performance over the near term and as a result we are confident in our ability to deliver between $0.30 and $0.40 per share in the second quarter. This is an improvement of about $1.15 per share from the first quarter, so it's very significant. Changes in the economic environment will probably determine which end of the range we end up at but will somewhere between $0.30 and $0.40 we believe.

Before turning it over to Steve, let me remind you that we continue to expand our global presence. Logistics is working toward closing the acquisition of Shanghai Jiayu Logistics, one of the largest LTL providers in China, for an estimated $40 million. We believe this acquisition provides the right platform for our growth in China to more effectively service our increasingly global customer base and that $40 million is also baked into our forecast going forward.

Steve will now comment on our financial position.

Stephen L. Bruffett

I'm going to focus my comments on our debt covenant and liquidity, as there's been lots of attention on those topics lately.

As you know, we proactively amended our credit agreement last week, and that increased our leverage ratio from the previous 3 times to now 3.7 times. That goes through September 30, 2008 and then it'll be 3.5 times thereafter for the remainder of the term of the credit facility. We did this to provide the financial flexibility that we need to remain solid throughout this economic downturn. We also successfully renewed our ABS facility concurrently with the credit facility. And given the status of the credit markets, we view our ability to retain this capital structure and keep our current lending group, and this is a significant positive.

The combined size of the two credit facilities is $1.7 billion, and if you subtract from that our borrowings, our letters of credit and other uses of the facility, there's about $762 million available at the end of March. Of course, that availability's governed by the leverage ratio itself, so if you apply the new covenant level of 3.75 times to our trailing 12-month EBITDA, we had nearly $400 million of liquidity available for our use at the end of the quarter.

So while we don't expect to need it, we do have a significant liquidity cushion in place, and it's also important to note that we did not exceed our 3 times leverage ratio in the first quarter. It was a proactive amendment. The ratio at the end of the quarter was just under 2.8 times at March 31. That was primarily the result of our ability to reduce debt by nearly $60 million from year end, and that's mostly through continued DSO improvement, capital expenditures management and tight controls on cash.

We'll continue to aggressively manage costs and cash and therefore expect debt to remain at or near current levels for the next couple of quarters. But we also remain confident that even in this environment we should be able to generate meaningful free cash flow in the fourth quarter and further reduce debt by the year end.

The seasonality of our business is such that working capital is a strong source of free cash in the seasonally quarter fourth quarter as we collect from the relatively stronger third quarter. So we're very focused on reducing debt, and we'll continue assess a variety of alternatives that help us achieve that objective over the next several quarters. And these alternatives range from additional leasing to disposition of excess assets to numerous other ideas that we have on the table. The key point here is that we're not easing up simply because we have amended and renewed our credit facilities. We will continue to take proactive and prudent actions that both increase earnings and/or reduce our debt.

Moving briefly to our capital expenditures, we spent about a net amount of $33 million in the first quarter. That's down significantly from last year. This is a combination of increased leasing - we had about $38 million of leasing that was incurred during the quarter - its improved asset utilization, and there's some marginal reductions in the fleet as well. With the lever of volumes across our asset base, companies were able to redeploy equipment where needed and remove older units as appropriate.

So for the full year we now expect our gross capital expenditures to be around $200 million. That's slightly lower than our initial guidance for the year. Our net CapEx should be about the same range of $200 million since the proceeds from property sales are expected to offset the Jiayu acquisition.

I'll now turn it over to Bill for some closing comments.

William D. Zollars

Let me wrap up by saying we're well on our way to realizing the run rate of $100 million of performance improvement that I mentioned before the end of the year. About half of that will be coming from our regional companies as they continue to rebound, and the other half will be spread across the remainder of the organization.

Also, our corporate sales groups have made significant progress in their integration in creating a single point of contact for our larger customers. And we're actively working toward getting Yellow and Roadway on a single technology platform which provides a lot more flexibility going forward in terms of managing the resources comprehensively. We're also very excited about the opportunity to reap the benefits of the new labor contract, which we'll be beginning here in a couple of weeks.

With all these items in motion and our confidence in our second quarter turnaround, we're excited about the future of YRC and what we can do for our customers, employees and our investors.

With that, we'll take some questions.

Questions-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of John Barnes with BB&T Capital.

John Barnes - BB&T Capital Markets

I listened to your call, I hear what you're doing in terms of the cost reductions and things like that, but I guess I have two questions. Number one, to swing from the kind of operating loss you had in the first quarter to the kind of profits you're forecasting in the second quarter without a material uptick in volumes, I'm not sure I get that. You can take out a lot of costs but all of these models still require pumping additional volumes through a fixed-cost system to realize - and I recognize there's a tremendous amount of leverage to the model; I don't dispute that - just explain to me why such a wide variance from first quarter into second quarter.

William D. Zollars

The primary driver for that is the elimination of the losses at the regional company. The new footprints we have in place as well as the changes we've got from a network standpoint, particularly at Holland, are driving really good improvement at the regional companies. And having them go from a very significant loss in the first quarter to a gain in the second quarter is a big driver for the turnaround.

The other thing is that national companies will return to a more historical performance in this kind of an economy. If you go back and look at how they performed during 2001 and 2002, I think you'll see that they performed better than they have in the first quarter and we'd expect that performance to rebound in the second quarter and we will not have the $7 million worth of insurance adjustment.

And then finally, although this probably won't impact the second quarter very much, we've got the new labor contract which will be implemented during the second quarter.

So that's kind of on the operating side, and then you layer on top of that, John, the continued infrastructure cost reductions that we've got and, given about the same volume level that we had in the first quarter in terms of year-over-year comparisons and given about the same pricing we had, which was about plus 1 across all of our companies if you exclude fuel, we expect that we'll be solidly within the $0.30 to $0.40 range.

We could end up doing a little bit more toward the upper end if we get any kind of economic wind at our back and we could probably end up a little more toward the lower end if we don't, but those are really the things that are driving the turnaround in performance.

John Barnes - BB&T Capital Markets

And then in terms of the regional business, any time other companies have gone through similar struggles in trying to right size the footprint and that type of thing, to me it looks like some of the volume lost - while there's a direct relation to you guys rightsizing and moving out of certain markets, that's fine - but some of it also looks like a little bit of market share loss to me as well, especially given some of the volume results out of the other regional players. How confident are you that you can eventually stem that bleeding and keep the regionals from - my fear is that a little bit more market share loss and all of a sudden you're kind of right back in, the losses continue because there's just all that - there's another stair step function down in the volumes in the regional business. How confident are you that you can eventually - you're going to stem that loss.

William D. Zollars

First of all, they're going to back to where they were, so it's not like we've had to create a whole new network, and they performed extremely well in those previous footprints.

Secondly, you're right, we did lose a little bit more business than we expected through the halo effect. I think customers are very concerned that maybe there was another step coming and that we had another set of terminals we were going to close, and so I think we did suffer a little bit more loss there than we expected to have and we said that. That's stabilized. We continue to repeat, as we have this morning, that the network changes are complete and that we're very happy with the footprint.

So I think that's behind us, the situation has stabilized and now it's a matter of kind of getting back to work on the footprint that we've had historically at those two companies.

Operator

Your next question comes from the line of Justin Yagerman with Wachovia Securities.

Justin Yagerman - Wachovia Capital Markets, LLC

Walk me through what your cash outlays aside from CapEx are this year. You mentioned Jiayu but how much in the way of union and non-union pension contributions are you guys going to have this year?

Stephen L. Bruffett

As far as the non-union pension contributions, we have targeted a $55 million contribution in September. We have up until that time to make the final decision on that, but to date we've assumed that we're going to make that contribution. We do have significant flexibility with the timing and amount of that contribution.

As far as the union pension contributions, they are just a normal part of our cost structure. They're paid kind of by the drink, by the hour, by the mile as those benefits are accrued so they flow through salaries, wages and benefits, and we would expect those total amounts to be in a similar range to where they've been historically on an annual basis.

Justin Yagerman - Wachovia Capital Markets, LLC

I guess you spoke a bit about the debt covenants and how things have changed. How does your bank view Q1 in terms of - if we were to take it into the total trailing EBITDA, how should we be thinking about that in terms of the number that they're looking at? Do they exclude any of the extraordinary items or is it the full loss for the quarter?

Stephen L. Bruffett

There's not a lot of difference between the kinds of GAAP calculation of EBITDA versus the bank. The only notable exception is there's a $20 million annual carve-out for restructuring charges. So with that exception, it's pretty similar.

Justin Yagerman - Wachovia Capital Markets, LLC

When do you lose that $20 million benefit?

Stephen L. Bruffett

We never lose it. It's just you look at your trailing four quarters for actual results and if there's up to $20 million of restructuring charges, you can subtract those out of the math.

William D. Zollars

Just to be clear, obviously the bank group knew where the quarter was going to be during our discussions on the credit agreement adjustment.

Justin Yagerman - Wachovia Capital Markets, LLC

I would imagine. As you go through the year, obviously your goal is to stay around where you are or improve on the debt covenants but it [inaudible] that if you guys jump to 3.5 or above, you begin to have bigger collateralization events. At that point, do you consider more drastic cost steps and could you walk us through what those would be offset getting in breach of those covenants over the course of the year?

Stephen L. Bruffett

Well, we clearly aren't - like I tried to indicate in my comments, just because we have this in place doesn't mean we're going to sit back and just wait and see what happens. We're still very aggressively and proactively looking at a number of alternatives to ensure that we retain significant cushion under that leverage ratio and never get into that dialogue.

So we will be executing a number of things over the next couple of quarters. There's no one big silver bullet in there, but we'll do a variety of things to help ourselves out, get through the tough patch here.

Justin Yagerman - Wachovia Capital Markets, LLC

You mentioned that you're using Glen Moore for truckload freight on the substitution line haul. Can you tell us how much of a percent of your line haul you used Glen Moore for and how much you're expecting to use it for this year? Are you maxing out what you can under the contract? And then I guess I'm curious if you guys are using other truckload carriers as well.

William D. Zollars

We're just really getting that up and running because obviously the ability to do that didn't start until April 1, so we're just in the early stages. But Mike can give you more details on that.

Michael J. Smid

As the year progresses - at this point right now, just in the first couple weeks of the contract, we've got about 20 teams up and running - as we progress through the remainder of this year we would hope to ramp to 4 percentage points of our overall transportation or inner city transportation, primarily right now, between the middle of the country and to the West Coast, and in particular to the Pacific Northwest.

William D. Zollars

And we're not using anybody other than Glen.

Michael J. Smid

No, at this point right now we've not used anybody other than Glen Moore.

Justin Yagerman - Wachovia Capital Markets, LLC

And I guess when you look at the impact on Glen Moore, how is that - their utilization, has it helped them move toward - were they profitable in the quarter, or do you expect them - I guess how do you expect that to change the operating results at Glen Moore?

Michael J. Smid

Well, they were not positive for the quarter. Still kind of trailing from the issues that they had last year. But two things have begun to happen. One is that particular type of business is very attractive in the truckload market in that it's predictable. It has helped their recruiting efforts significantly. And in their particular case, recruiting, retaining and drivers in position are critical.

Secondly, they have had some nice results in the market, some business that they have attracted will be coming online over the course of the next couple weeks and months that we feel begins to push them back over to a point that their fixed costs and overhead portions of the companies are well covered and positions them to have a broader range and reach as a truckload carrier as well.

Justin Yagerman - Wachovia Capital Markets, LLC

Bill, I don't know what kind of light you can shed on this but I'm a little perplexed because diesel going up the way that it is and we have seen carriers that have had much stronger performance over the last year or two revise their annual guidance. I mean, why give guidance with the kind of operating leverage you have within your company? I mean, if diesel goes to $4.50, it's going to be very hard for you to make these numbers.

William D. Zollars

I think in our particular case we had suspended guidance because our view of the economy was not very good and we had internal issues to fix. I think we felt that it was really important for investors to understand that we've turned the corner, and I think if we hadn't made some sort of comment around that and quantified it that it would have been difficult for people to really understand that.

So it was really more our intention to provide more clarity to the investment community that we have turned the corner here.

Stephen L. Bruffett

It's more of an internal comment than trying to make any call on the external environment.

William D. Zollars

That doesn't mean we're going to do it again next quarter, but we just thought it was very important in the near term to provide as much transparency as possible.

Operator

Your next question comes from the line of Tom Wadewitz of J.P. Morgan.

Thomas Wadewitz - J.P. Morgan

I wanted first to follow on to the last question that Justin posed to you. Can you give us a sense of how much of your business does have fuel caps on it? I think some of the others that have reported have implied that the number is probably between 5% to 10% of their total book that has these fuel caps that have really begun to hurt them as fuel has continued to run up, and I'm trying to get a sense if that's representative for you or if you've really avoided some of the fuel risk from those caps.

William D. Zollars

Tom, first of all, we need to be careful about our terminology. We have very few customers that have actual caps on the fuel surcharge. We do have some that we would call substandard in the sense that they're not paying the full fuel surcharge above a certain level, although they're still paying a fuel surcharge. And so with fuel where it is now, it was probably not in anybody's head to spend too much time worrying about that level.

So we've got customers that are not paying the full fuel surcharge and we're attacking that gap as best we can. We are having an impact there, probably pretty consistent with the rest of the peers in the group, but very few have actual caps.

Thomas Wadewitz - J.P. Morgan

So if we look at your sensitivity to fuel, I know historically there was a period of time where LTL companies might make a little money when fuel moved up and that dynamic had changed, but are you now actually in a position where, as fuel moves up, you're not fully recovering and you're losing a little money?

William D. Zollars

Well, in aggregate I think fuel prices where they are now are probably not good for anybody, including us. So we're probably not recovering at the same rate we were when fuel was at a lower level.

Thomas Wadewitz - J.P. Morgan

So you think you're recovering less surcharge revenue than the increased expense or closer to neutral on it?

William D. Zollars

Yes, it really depends on the specific situation and our ability to follow the fuel prices up. You know, lately they've been going up so fast and they're so high it's tough to catch them. But it has had an impact on our profitability.

Thomas Wadewitz - J.P. Morgan

Okay. Yes, fair enough. Your comments and your guidance on the regionals, I wanted to see if you could talk a little bit about what you saw in March after you had put in place some of those terminal changes in February. I know the seasonality probably makes it a little difficult, but if you look at the year-over-year operating ratio performance in regional through the quarter, did you see significant improvement in the March OR performance in the regionals because you're implying obviously in second quarter that you're going to see a lot of that improvement. I'm wondering if you already have seen early evidence of that in March or not.

William D. Zollars

Yes, I think we'd be very careful about giving guidance unless we had seen some pretty significant movement there. And let's kind of break it up into two pieces, and then I'll let Mike kind of provide additional color.

The changes that we made at Reddaway had an almost immediate impact. There's a little bit of trailing cost associated with closures, but we did see a very quick turnaround there in terms of moving back toward profitability pretty quickly. And that's understandable given the size of the closures that we did at Reddaway. So we do get weekly information on profitability from the regional companies so we can track that on almost a real-time basis and at Reddaway, it snapped back pretty quickly.

At Holland, as we mentioned, there weren't as many terminal closures, so the impact from the terminal closures was not nearly as significant. But we've been doing a lot of other things at Holland on both the network side as well as the customer side that have given us good traction there. And we've got several weeks of improvement that's very significant going on in Holland.

So we've got pretty good momentum in both companies, and that's really what led us to the comments that we made. But I'll let Mike give you a little more detail on that.

Michael J. Smid

I think with Reddaway, because of the territories and areas that were closed you had extreme imbalances and an extreme excess of miles versus tonnage. As soon as we got those closed there was an opportunity to refocus on their network, get their processes in line and their efficiencies back and very, very saw the types of performance, both from an efficiency and service standpoint, that they had experienced historically.

From a Holland standpoint, while the actual facility closures and tightening of the network was not nearly as significant, to the side of that we've also made a significant number of changes in how their line haul system, their connecting system, works on a daily basis. And as we move toward a change of operations to leverage the contract, we've made significant adjustments in equipment and resources in that company to where their performance has improved significantly.

As we go through this quarter and we actually, through a change of operations, kind of hard code those changes going forward, you see the next levels of results.

The actual closures occurred with a little bit of a week or several-week opportunity for customers to make adjustments at the very end of August. And as we moved through the second weeks of March and got into better position, the results began to change dramatically.

William D. Zollars

End of February.

Michael J. Smid

I'm sorry; end of February was the closure. As we got into March, we started to see the types of results we expected.

Thomas Wadewitz - J.P. Morgan

So just to put some numbers and a little more clarity behind that, are you willing to talk about what the operating ratio in Reddaway was, for example, in February and then what it was in March? And then also that type of a number for Holland just to get a sense of that improvement?

William D. Zollars

No, we're probably not going to be willing to share a lot more detail than we already have. Suffice it to say that we expect both of those companies to be in the black during the second quarter and then, depending on how effective some of these actions continue to be, we'll determine how far into the black they go. But they're definitely headed in the right direction now, and by the end of the second quarter I think you'll have a pretty good feel for the level of profitability going forward.

Thomas Wadewitz - J.P. Morgan

On the national side, you haven't talked as much about that. Can you see a substantial improvement in operating ratio, let's say the next two quarters, if tonnage remains down 9% year-over-year or do you really need to see some tonnage deterioration slow down in order to get that operating ratio significantly in the right way?

William D. Zollars

Well, in the second quarter we have a more historical performance from the national companies baked into our guidance. The changes of operations to implement the new contract really won't have any impact on the second quarter but should start to have an impact in the third quarter. So we're going to get a little bit of a bounce in the third quarter as a result of that.

But we're not assuming any improvement in the economy in the numbers that we're providing.

Operator

Your next question comes from the line of Jon Langenfeld of Robert W. Baird.

Jon Langenfeld - Robert W. Baird & Co., Inc.

A question for you on the leverage side. It looks like if you hit the low end of your guided range you end up at about a 3.3 on the debt covenant. And I know 3.5 is kind of the place you want to avoid. You don't want to pledge those assets. But if things deteriorate, how much flexibility, how quickly can you affect the denominator of the debt side of the equation - or I should say the numerator.

William D. Zollars

I understand the question, and if you just literally take the guidance and assume the same gap level, you do end up with those types of leverage ratio-type numbers.

I would tell you, referencing back to my earlier comments, there are a variety of things that we're working on to help ourselves out in addition to the earnings, increased earnings, in the second quarter.

Our target internally is to keep that leverage ratio below 3, and so there are a variety of other things that we're working on to manage that situation as we go forward.

Jon Langenfeld - Robert W. Baird & Co., Inc.

And I'm assuming, based on the fact we know kind of what the denominator is based on your guidance so that would imply potentially paying down some debt, yet I think you said in your prepared remarks that you probably aren't going to pay down much debt. So I'm trying to rationalize the two statements.

William D. Zollars

Well, we want to - part of it just depends on the specific timing and the specific actions that we end up taking, so there is a little margin of error in there. But circle back to the fact that we are trying to keep the ratio below 3. Is there a possibility it could temporarily pop a little above 3? Sure, that's a possibility. But we certainly see maintaining plenty of adequate cushion under that leverage ratio.

Jon Langenfeld - Robert W. Baird & Co., Inc.

And is there anything on the external fundraising, the market, you would look to to raise cash?

William D. Zollars

We're pretty opportunistic in looking at any ideas that make sense for the corporation. We viewed the renewal of the credit facilities as a first step if not a final step, and like I've indicated, there's pretty much a laundry list and we're pretty receptive to ideas and have been for the last couple of quarters. And so we have plenty on our plate to look at and a lot of feasible things to execute as we move forward here.

Jon Langenfeld - Robert W. Baird & Co., Inc.

And then on the need or the potential need to pledge the remaining facility in rolling stock to the bank if you violate the 3.5 times, can you just walk - and I know that's not in your planning horizon - but can you walk us through, what is the logistics behind that, what does that do to your financial flexibility if that were to occur?

William D. Zollars

The logistics behind it are basically just a lot of administrative work and some cost associated with retitling tractors and trailers, principally, and the remaining real estate. So that's that. The financial flexibility does become a bit more limited in that scenario.

I would point out that if you just roll the clock back a couple of years post the Roadway transaction, we were fully a secured credit and worked our way out of that environment quite successfully and anticipate doing so again.

Jon Langenfeld - Robert W. Baird & Co., Inc.

Bill, can you talk about the pricing environment just as you've seen it progress, both in the national and the regional. We've heard from most of the regional players - I think all of them, basically - saying look, it got worse in the last two months. How would you characterize that?

William D. Zollars

I think there are a couple of comments to make there.

First of all, as you can see from our relative yield number and our relative volume number, we've been a little bit more disciplined maybe than some of our competitors. And on top of that we had the impact of the volume that hit us because of the changes in the footprints at the regional companies. So we've had some unusual things going on there.

I would say that the pricing environment hasn't changed a lot. It's still very competitive. It's still positive for us. One of the things that may not be apparent in the regional yield number is that they had as a result of the footprint changes a significant change in length of haul which, if you adjust for that, gives them yield a little bit closer to what the nationals had.

So our yield is pretty consistently positive. In the last couple quarters, in the kind of plus 1% range and we see that as trend that will continue through the second quarter.

Operator

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

David Ross - Stifel Nicolaus & Company, Inc.

Can you talk a little bit about the recent turnover you've seen at the executive level at both Yellow and at Holland, what's going on there?

William D. Zollars

The situation at the regionals has obviously been challenging, and the one that we wanted to make sure that we could turn, so we made a couple of changes there. Keith Lovetro is basically day-to-day full time in charge of Holland, and we're making really good progress there now.

We've had some changes also on the national side which have been consistent with our ability to try and make sure that we implement all the change effectively, and by that I mean we had a retirement - Maynard Skarka decided to retire. We thought about how to implement a change there and decided that Mike being in that job temporarily would be very effective in terms of making sure that we get all the changes in the contract made effectively and stayed really close to that and not end up with a learning curve in a new person in that job.

So those are the two primary one. Mike, I don't know if you want to add to that.

Michael J. Smid

Bill, I think the most important aspect of this is over the course of the next couple of months and as we go into the second part of this year, the number of changes and the speed of those changes, I just felt that the current assignments - Keith's role and the role that I've taken on with Yellow - offered the most seamless opportunity to move forward.

Having been involved in the network designs, selling organization efforts that we are putting in place as we move through this year as well as having been involved in negotiation of the contract, it just made a more fluid, more reasonable change.

David Ross - Stifel Nicolaus & Company, Inc.

And you also talked about I think a $40 million overhead reduction year-to-date. Can you give a little more color on where that's been?

William D. Zollars

Yes, it's a whole long list of stuff that we've attacked. It includes trying to make sure that we've got the right span of control and that we have the right infrastructure to support the volume of business that we currently have. There's no one really big thing in there. It's more a list of a couple million here and a couple million there.

David Ross - Stifel Nicolaus & Company, Inc.

And do you currently still have a Yellow Transportation sales force and a Roadway Express sales force?

William D. Zollars

There's been no changes to the local sales force in any of the companies. We are in the process of integrating our corporate sales forces into one sales force to give the larger customers a single point of contact, which is something they've been asking for for some time and has been in our plan since we made the acquisitions.

But the local sales forces remain exactly as they were.

David Ross - Stifel Nicolaus & Company, Inc.

Do you think it makes any sense down the road as you're combining operating systems that operate under a national transportation platform to maybe consolidate the Yellow and Roadway sales forces?

William D. Zollars

Well, you never say never. I think for now we're convinced that the best approach is to have those separate sales forces represent each one of the brands that have equity and market presence in their own right. But I would never say never. But for right now, I think we're convinced that's the best approach.

David Ross - Stifel Nicolaus & Company, Inc.

And if we could just move to the tonnage losses we saw year-over-year at the national level, how much of that would you say is maybe due to a couple larger accounts. Is it broad based? Where are you seeing the tonnage losses the most?

William D. Zollars

Did you say on the national side, David?

David Ross - Stifel Nicolaus & Company, Inc.

Yes, on the national side.

William D. Zollars

First of all, we have our normal - if you can call it that - leakage that we experience as we go through the contract renewal kind of timeframe, so that was part of the impact in the first quarter. The weather obviously did not help us.

And then we did have a couple of customer-specific things where have a couple of our larger retail customers that are implementing changes to their logistics system and going more to a consolidation model which eliminates LTL.

So those were two kind of unusual situations. The rest of it really fell into the other two categories.

David Ross - Stifel Nicolaus & Company, Inc.

Last question. On the regional level, the tonnage losses there, how much would you attribute to the pullback from the Holland and Reddaway territories and how much would you consider just normal year-over-year same-store sales tonnage loss?

William D. Zollars

Well, I think if you looked at the 10% that you have in there, we were saying yesterday to ourselves about 7% of it is probably related to the footprint changes. And on a go forward basis, that'll probably be around the right number.

David Ross - Stifel Nicolaus & Company, Inc.

Your next question comes from the line of Neal Deaton of Stephens.

Thomas Albrecht - Stephens Inc.

It's Tom Albrecht here on Neal's line. I'm certainly glad to hear that things are moving in the right direction for the first time in awhile. If we step back and just talk strategically, within the Yellow regional offerings, Holland and Reddaway now are in 32 states, look like they're going to regain some level of profitability. But as you think about whom you're competing against, most of those stronger regional competitors have maybe 38 to 48 state coverage and you've obviously pulled back. Where do you feel you need to be over the next three to four years in terms of states offerings for the regional company? And obviously I'm excluding New Penn.

William D. Zollars

I think it's been surprising to me to see the amount of business that's been able to be transferred to Yellow and Roadway as we removed ourselves from some of the territory that Reddaway served.

We think that the core markets that Reddaway and Holland are now serving are really the right core markets. I would never again say never about going back into the territories that we've left, but at least for now we're very happy with the coverage we have.

Thomas Albrecht - Stephens Inc.

And then as you look at your guidance for the second quarter, does that mean that you expect all of your main operating companies - regional, national and logistics - to each post a profit, or will one perhaps still have a loss and be carried by the others?

William D. Zollars

We expect them all to post a profit.

Thomas Albrecht - Stephens Inc.

And you mentioned, Bill, as well in the national company that you expect it to perform more consistent with, at this point in the cycle - I forget exactly what you referenced - at this point in the cycle the old Yellow and Roadways usually were kind of a 98, 99 OR company. Is that kind of what you're alluding to?

William D. Zollars

Yes. The way I would describe it is we expect the national companies to be somewhere between a 95 and a 99 and hopefully closer to a 95. If you go back and look at the 2001, 2002 performance, that's kind of where they were. So given no further deterioration in the economy, you know, that kind of 95 to 99 range is where they should end up.

Thomas Albrecht - Stephens Inc.

And there's so much to digest today and I don't know if you addressed this head on, but obviously there's been a lot of discussion about the competitive pricing landscape deteriorating the last five, six, seven weeks. Can you talk about that, particularly as separate comments for national and then for regional?

William D. Zollars

I think there has been a lot of noise lately, but as someone once said, facts are stubborn things. And if you look at the numbers, the yield that we're getting is fairly consistent with what we have been getting. So at an aggregate level, there hasn't been a lot of change.

There obviously is always stuff going on at the account level that may or may not be a lot more aggressive than it has been, but in aggregate on either the regional side or the national side, it really doesn’t look to us like there's been much of a shift.

Thomas Albrecht - Stephens Inc.

And a moment ago obviously you offered a range on the national OR. Do you want to take stab at that for the regional?

William D. Zollars

I'll that they'll be profitable, as I said. I'm not going to try and predict any further than that because we've got a lot of things in motion there. Most of them are very encouraging, but I don't want to get too far out in front of our skis there.

Thomas Albrecht - Stephens Inc.

Sure. So to make sure I understood you right, so probably ex the pull back at regional, the tonnage levels at Holland and Reddaway would have probably been down 3% to 4%?

William D. Zollars

That's about right, yes.

Thomas Albrecht - Stephens Inc.

And then in terms of guidance and that, did the banks have a hand in perhaps prompting you to offer guidance or was that your own decision?

William D. Zollars

I have to take full responsibility for that. That was our idea. And, you know, just to clarify that a little bit, we really did feel like the investors deserved to know that we've turned the corner. We didn't want to go through another quarter of uncertainty in the minds of the investors, and so we thought it was important to provide more clarity around that and try and quantify it so that we could give them a sense for the kind of change that's taking place here.

Thomas Albrecht - Stephens Inc.

And then, last question, I assume that we should continue to forecast losses at Glen Moore? I think you mentioned a $5 million first quarter loss. No reason to believe that one would be profitable in the environment the truckload carriers are facing?

William D. Zollars

Yes, I think that one is going to be close to profitable as well by the end of the quarter. So that loss will continue to lessen as we continue to implement the contract opportunity there and rebuild the driver force there. So the worst is over there as well, we think.

Thomas Albrecht - Stephens Inc.

All right. I keep saying last one, but were any of your key entities - regional or national - profitable during the month of March?

William D. Zollars

Yes, sure.

Thomas Albrecht - Stephens Inc.

Oh, March?

William D. Zollars

Yes.

Thomas Albrecht - Stephens Inc.

Both or primarily national?

William D. Zollars

Well, we had, you know, during the month of March we had, well, obviously New Penn continues to be profitable 

Thomas Albrecht - Stephens Inc.

Sure.

William D. Zollars

-- So you kind of take them out of the equation because they're doing a terrific job. The national companies were profitable in March, and we had moments of profitability at the other two companies as well.

Operator

Your next question comes from the line of [Ed Wolf of Wolf Research].

Ed Wolf - Wolf Research

Let's start, if we could, just with some cash flow questions. In the quarter it looks like, Stephen, there was $93 million of operating cash flow despite the $46 million net loss. Can you just kind of get us from the 46 net loss to the 93 positive operating cash?

Stephen L. Bruffett

Yes. Like I mentioned earlier in my comments, the DSO performance was strong so receivables or working capital were in fact a source of cash in the quarter.

Ed Wolf - Wolf Research

Do you have an amount for that?

Stephen L. Bruffett

It was around $20 million, going from the top of my head, and so that was important. And a number of other things that took place in the quarter. There was a tax refund received during the quarter of about $20 million, a federal income tax receipt, and a variety of other things just with prudent cash management make up the difference there.

Ed Wolf - Wolf Research

Can you talk what the trailing 12-month EBITDA is including the first quarter since that seems to be a big bogey that you're talking about and everything? What is the trailing EBITDA?

Stephen L. Bruffett

It's just under $400 million.

Ed Wolf - Wolf Research

And similarly, when you look at the debt for purposes of that 3.75 debt-to-EBITDA, what's included in there in terms of off balance sheet leases or is there any potential pension liability or anything else that we need to include in there?

Stephen L. Bruffett

No, it's straight off the balance sheet, which our ABS facility is on balance sheet, so it is the 1.175 number that's listed in the release.

Ed Wolf - Wolf Research

Is there going to be a number in the quarter for what the withdrawal liability has gone to given the weak stock market or is that not every quarter or just in the Ks - when do we see those numbers?

Stephen L. Bruffett

It's an annual, and it's an estimate at that point in time. So there's no new information coming there.

Ed Wolf - Wolf Research

And interest expense, as we try to model going forward, how should we look at it? There's some puts and takes here with the new agreement and everything. Is there a pretty good number that we could use going forward?

Stephen L. Bruffett

Yes, you could kind of take the interest expense from the first quarter and add a couple of million per quarter to that. There's about an $8 million or so increased interest expense on an annual basis that's been added as a result of these amendments.

Ed Wolf - Wolf Research

So take the $18.6, add it back to - so about $20 to $21 million, that kind of range?

Stephen L. Bruffett

In that range, yes.

Ed Wolf - Wolf Research

You talked about CapEx coming down to $200 million this year. You only spent 30 something in the quarter. How do we think longer term, Bill, in terms of when the economy comes back and thing start humming again, what's a more normalized CapEx number and what's a strong CapEx when you're growing number?

William D. Zollars

Yes, it's kind of tough to zero in on that at this point, but it will be less than what we historically have had in there for the same amount of volume because the contract will allow better asset utilization as well as better labor utilization. But we had a number of about $300 to $350 historically, and it will probably be in that range.

Ed Wolf - Wolf Research

That's a more normalized number or is that kind of when things are really humming number?

William D. Zollars

That's kind of a more normalized number. But, you know, on fleet, our fleet is in really good shape. We still have an average age of about four years so we haven't got any real catch-up to do there. It would be more supporting higher volumes.

Ed Wolf - Wolf Research

That's the tractor fleet for both national and regional, kind of a combined fleet?

William D. Zollars

Yes, that's about right.

Ed Wolf - Wolf Research

And how about on the trailer side?

William D. Zollars

About 10. I'm getting 10 from a couple people, so that must be about right.

Ed Wolf - Wolf Research

One last one, the Teamster contract, you talked a couple of times and it's in your release, about improved flexibility, you talked about it with the truckload side. There are also some increase costs on the pension side particularly. That went into effect when, on April 1 or it should have a lag versus some of the other costs of the contract?

William D. Zollars

Yes, that kicks in, I believe, in August, doesn't it Mike?

Michael J. Smid

August 1. The hourly and per-mile increases kick in April 1, and then the benefits increases kick in August 1.

Ed Wolf - Wolf Research

And what are those two increases, what's the April 1 increase and then what's the August 1 increase?

Michael J. Smid

In terms of percent?

Ed Wolf - Wolf Research

Yes, percent would be helpful.

Michael J. Smid

I believe it's about 1.9% that kicked in April 1, and the total was about 3.8, 3.9 and so it was about, let's see, about 2% on the same basis as the 1.9% that was stated.

Ed Wolf - Wolf Research

Okay, so it's a higher number but on a smaller number because pension's not as much as wages. But when you do it as points, it all adds up to about 3.8?

Michael J. Smid

It's a higher percentage increase on the benefits, but against a lower number. Given the same terms, that's about -

William D. Zollars

And just to remind everybody, there is a cap on the benefits side of this which is important in the sense that there's no additional liability regardless of what happens to the pension funds over the next five years.

William D. Zollars

I think that was our last call, so again, thanks for listening and we'll talk to you at the end of the second quarter.

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