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YRC Worldwide Inc. (NASDAQ:YRCW)

Q2 2008 Earnings Call

July 25, 2008, 9:30 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

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

David Ross - Stifel Nicolaus & Company, Inc.

John Barnes - BB&T Capital Markets

Brian Geiger - Merrill Lynch

Jason Sidel - Stallman Rose

Neil Shear - Shear Capital

Raffi Savitts - Credit Suisse

Justin Yagerman - Wachovia Capital Markets, LLC

Operator

Good morning. My name is Michael and I will be your conference facilitator today. At this time, I would like to welcome everyone to the YRC Worldwide Second Quarter Earnings Conference Call. (Operator Instructions) I will now turn the call over to Stephen Bruffett, Executive Vice President and CFO.

Stephen L. Bruffett

Thanks Michael. Good morning everyone and thanks for joining us for the YRC Worldwide second quarter 2008 earnings call. With us this morning are Bill Zollars, the Chairman, President and CEO of YRC Worldwide, Mike Smid, President of YRC North American Transportation, and Jim Ritchie, President of YRC Logistics.

The 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 10K, last night's earnings release, and Bill Zollars and I will provide our comments this morning. Mike Smid and Jim Ritchie are available to participate in the Q&A session.

I will now turn the call over to Bill.

William D. Zollars

Thanks Steve and welcome everybody. Second quarter GAAP earnings came in at $0.62 per share and if you back out losses on property disposals and reorganization costs as normally do, the number was $0.69. Our guidance was $0.55 to 0.65 for the quarter, so the $0.62 was near the high-end of that range. Excluding other one-time impacts that we previously disclosed, we are at $0.38 as compared to our guidance for core operations of $0.30 to 0.40 per share, so again, near the upper end of that range.

We executed as we planned during the quarter and are gaining momentum across the organization. We have several key initiatives across YRC that are helping to drive this momentum. I will provide an update on them so that you have a clear understanding of what we are working on.

First, and very importantly, the regional segment returned to profitability in the second quarter earning about $3 million, a very solid recovery from the loss of 30 million in the first quarter. While seasonality helped a bit in the second quarter, a majority of the improvement was due to the efforts of our regional team. The return to profitability would not have been possible this quickly without the footprint changes that were made at the end of February at both Holland and Reddaway. Those changes, along with numerous other actions to improve network efficiency and our book of business, have resulted in a stabilization of the volume trends at these companies. This gives us greater conviction that we are on the right path and there remains plenty of up-side at the regional companies. We are not where we should be there, but we are on our way.

The next key objective during the second quarter involved the national companies. The goal was to complete all the planning necessary for successful execution of the changes of operations at Yellow and Roadway. That preparation work was completed on a timely basis, which enabled the changes of operations to take place as scheduled in early July. These changes are the first of three phases planned for this year, the second coming later this summer and the third is scheduled for this fall. The resulting new velocity networks improved speed, reliability, and efficiency all at the same time. As mentioned previously, we wheeled at accelerated service and about 40,000 lanes while reducing over 20 million circuitous miles. That is worth about $40 million.

Also at the national companies, the work continues as we work toward Yellow and Roadway being on the same operating technology. While this effort is obviously large and likely will last through 2009, it is not inventing new technology. Rather, it is utilizing existing technologies in a more effective manner. This is an important project, as we see significant opportunities for being able to view the freight flows of these two large networks through one lens.

Another objective for the quarter was to make meaningful progress toward the consolidation of our corporate sales forces. This compliance sales team will bring all the capability of YRC to our largest customers through one point of contact. You may recall that we started this process 18 months ago by establishing enterprise solutions to address our most complex and largest customers. We are on schedule with this initiative in the corporate town area and should have the transition completed during August. So far, customer response to these changes has been overwhelmingly positive.

A related topic, which also begins to tie together the collective capabilities across our corporation, is the establishment of YRC Worldwide as a customer facing master brand. The family of brands in our operating companies will remain in place as we tie them together under the YRC master brand.

By the way, those of you who watched the British Open last weekend might have noticed that Jim Furyk was sporting a YRC logo. That is a part of this brand building effort.

Another objective involves our truckload unit Glen Moore. Our objective for Glen Moore is to return them to profitability by year-end if not sooner. We made progress during the second quarter and we expect that to continue into the third quarter as we are actively hiring drivers in the locations where we need them.

Beginning in the second quarter, Glen Moore has been broken out as a separate truckload segment from our financial reporting perspective. In the past, it made sense for Glen Moore to be included in the regional segment because a significant portion of their revenue was related to moving shipments between their regional sister companies. Now, the focus has shifted to providing more comprehensive truckload capabilities directly to shippers, as well as providing services from Glen Moore to all of the YRC operating companies. And that has been enabled by our new labor agreement.

With this shift in focus, it made sense to make them a stand-alone reporting segment. The shift in focus should also drive revenue and earnings growth for Glen Moore going forward.

A final initiative is at YRC logistics and involves the Jiayu acquisition. While we did not close the deal during the second quarter, we have made significant progress and anticipate an August closing. Customer response to this transaction and the capabilities it will bring has been favorable and we look forward to welcoming Jiayu into the YRC family.

So you can see that we have a lot of positive efforts underway across the company. Hopefully that provides you with some insight into our priorities and where we are going. Steve will now provide a financial overview.

Stephen L. Bruffett

Thanks Bill, I will start with an overview of our segment performance for the quarter. YRC national business volume has generally improved on a year-over-year basis as the second quarter progressed. April was relatively soft, while May and June showed some improvement. That year-over-year improvement has continued into July and we expect that trend to carry through to the third quarter. Pricing was up 8.2% but while most of the increase was due to fuel, this increase is reflective of our pragmatic approach to pricing, especially in the given competitive environment.

At the regional segment, tonnage was down about 17%. Keep in mind that we made footprint changes in late February, so the second quarter was the first full quarter with our new footprints. And those tonnage trends have been consistent and stable at the regional companies since March.

At the truckload segment, Glen Moore made incremental progress during the quarter and we expect them to continue that improvement and get close to break-even during the third quarter. Looking at the bigger picture, we are optimistic about the future growth in revenue and profits at Glen Moore. As we are now better positioned to offer our full portfolio of services to our customer base.

At YRC Logistics, the underlying profitability trends are improving. This improvement was somewhat mastering the second quarter by additional reserves for bad debt, but despite this accrual, they improved their year-over-year earnings. And that is a solid accomplishment in a difficult environment.

Moving now to the consolidated level, I will provide an update on our leverage ratio. We were right at three times at June 30 against a covenant level of 3.75 times. Net ratio was comprised of total debt at 1.19 billion and trailing three-month EBITDA at 396 million. Debt did move up about 20 million from the March 31 balance, primarily due to the seasonality of working capital, but it is still 39 million below our year-end level.

So we continue to manage cash effectively across the organization and we are continuing with our internal goal of keeping the leverage ratio at or below three times. We anticipate the debt level will increase during the third quarter by approximately 60 million due to the Jiayu acquisition and further seasonality of working capital. But we also expect a proportionate increase in our trailing 12-month EBITDA, so the leverage ratio of September 30 should remain right around three times. And then by year-end we expect to decrease the ratio a fair amount as we deliver from free cash flow generation in the fourth quarter. So we anticipate that a comfortable cushion will be maintained under the leverage ratio as we move through the remainder of the year.

Capital expenditures were a net 33.1 million for the quarter and that was slightly below where planned, plus that variance versus planned was related to timing and we will catch that up over the second half of the year. So we still anticipate gross CapEx to be around 200 million for the full year as we previously guided.

Moving to the income statement, interest expense was about 18 million for the quarter. It is a bit lower than our April guidance, primarily due to the Jiayu acquisition and underlying interest rates, mainly LIBOR, being lower than we projected. So we anticipate interest expense in the third quarter to be about 19 million.

The tax rate for the second quarter was 34.1% and now we expect the full-year tax rate to be about 36.1 and that increase is mostly due to the impact of the curtailment gains on our effective rate map.

And I will turn it back over to Bill for some guidance on our third quarter.

William D. Zollars

Our earnings guidance for the third quarter is $1.05 to $1.15 per share. This range includes additional curtailment gains of about $0.70. These curtailment gains are due to the second and the final wave of changes to retirement plans as we move all of our nine contractual employees to one common and competitive retirement plan.

Also, beginning on August 1, we will incur the health and pension increases at a part of our new labor agreement. These increases are larger than those from the previous contract and in the near term represent a higher cost base for us, about $0.15 in the third quarter, $0.15 a share.

By year-end, though, we expect the network benefits to outweigh the increased health and pension cost significantly. To say it another way, we are trying to give you some transparency into the earnings growth quarter-to-quarter. And if you looked at the second quarter, we believed the number is about $0.38 from an ongoing operation standpoint.

The number on an apples-to-apples basis in the third quarter will be somewhere between $0.50 and $0.60. Keep in mind also that the higher health and pension cost that I just mentioned come with the benefits of providing a cap on our pension contributions to multi-employer plans. So we are protected from any increase in benefits requirements for the next five years.

So to summarize, we are not where we want to be. But we do feel good about the direction we are heading and the progress we have made over the past several months. And with that, we will stop and take some questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tom Wadewitz with J.P. Morgan

Tom Wadewitz - J.P. Morgan

Yes, good morning.

Stephen L. Bruffet

Morning Tom.

Tom Wadewitz - J.P. Morgan

I wanted to see first if you could give us a little more detail on the cost items in the second quarter on the regional side. And you have broken out truckload now, so if you look at regional in first quarter without truckload and regional in second quarter how much was the sequential improvement just to make sure I understand it because you hadn’t broken out truckload before that?

William D. Zollars

Yes, I think the operative numbers there, Tom, are we lost 30 million in the first quarter and we made 3 million in the second quarter. Regional is on a stand-alone basis.

And the activities that have been going on there are both on the operating side as well as on the book of business side and we have made significant progress on both. The footprint change was obviously much more dramatic at Reddaway. That had a tremendous impact on Reddaway. And, frankly, once we made that change at the end of February, snapped them back into a profitable position almost immediately.

Holland, we made minor changes to the footprint but did some pretty significant things with the network engineering was well as the book of business there. So, that one is taking a little bit longer to recover, but both Reddaway and Holland were profitable by the time we got to the end of the quarter.

Tom Wadewitz - J.P. Morgan

So how much of an impact from the changes did you see in the second quarter, I guess at Holland in particular? And at how much more would you expect to see that in the third quarter?

William D. Zollars

Well, they were a significant part of the turn around from -30 to +3. We would expect that trend to continue as we move through the third quarter.

Tom Wadewitz - J.P. Morgan

Okay, and then can you give us some more detail just in terms of understanding how the rollout of the utility workers, I guess you’re doing it in three different ways at national, how specifically that drives cost savings and it sounds like that’s what you’re counting on to offset the $0.15 from the increased benefits.

William D. Zollars

Yes, that is a big part of it but I will have Mike take you through that Tom.

Michael J. Smid

Tom, the rollout of the utility employee really involves several different phases or different activities. First of all, it promotes a redesign of our network, a series of smaller, faster, more time-predictable distribution points where shipments now move through, or had historically moved through a traditional hub-and-spoke with a consolidation and a deconsolidation on either end. And sometimes movement to the East in order to get to the West as terminals were aligned with single consolidation points. That is eliminated.

We begin to move in one direction. Facilities are aligned with multiple distribution points or consolidation points creating much more direct routes. So the first part of the efficiency is fewer miles in order to provide the same transportation.

Second part of the efficiency is few transfers. The way the utility employee is utilized in this network is it allows the employs to move end-to-end with the shipments. So they can participate in the initial loading or specific type of pick-up or delivery. They can provide the line-haul service to the consolidation or deconsolidation points.

And they also get involved in the transfer or movement of shipments. It takes a lot of the hand-to-hand or the hand-offs that we have typically had in our network. It allows individuals to work through them, fewer miles, and much more effective service profile. It takes time out of the transportation and probably a real important aspect of this is the velocity of the shipments moved through the network improve our asset utilization quite a bit as well.

Tom Wadewitz - J.P. Morgan

I am sorry, go ahead.

Michael J. Smid

I was just saying does that help?

Tom Wadewitz - J.P. Morgan

Yes, yes it definitely helps. It sounds like the first step of that was in early July so I know you’ve only got a couple weeks for visibility on that, but how has, the first step, how has that gone? And how much visibility do you have to the actual cost savings that come through? It sounds like it would be a pretty good degree of visibility.

Michael J. Smid

We have solid visibility in terms of the number miles we operate, the labor that we apply to it, and, most importantly, the attractiveness of it from a market perspective. We have seen on a, localized basis, some nice improvements. And shipment counts in those particular lanes and while any major change like this in these networks takes just a few weeks in order to ramp up. We would say that we are very pleased with the first couple of weeks in Yellow, the first week and a half in Roadway, and Holland is a little bit further along. It has been very well accepted from a market perspective and is providing the types of performance we expected.

Tom Wadewitz - J.P. Morgan

Okay, great, one last question and I will pass it along. On the tonnage performance, at some point you presumably need to see tonnage decline that are less or get back to flat tonnage. What kind of visibility do you have to that? When do you expect that to take place or do you think as long as it is a tough market you might see tonnage declines that are this significant?

William D. Zollars

No, I think, Tom, as Steve mentioned, it got better every month in the second quarter so we have closed the gap year-over-year and continue to close the gap in July. We would think that some time in the fourth quarter we should be back to a positive year-over-year relationship.

Tom Wadewitz - J.P. Morgan

And it is true for both national and regionally or were you talking more specifically on regional?

William D. Zollars

Well, the regional is a little different. We will have to wait until we lap the footprint changes, so that will probably take until next March. So all of that obviously in the context of the economy does not get worse

Tom Wadewitz - J.P. Morgan

Do you think with stable economy you could see actually kind of flattish or slightly positive tonnage in fourth quarter?

William D. Zollars

Yes.

Tom Wadewitz - J.P. Morgan

Okay, great. Well, thanks for the time and the responses.

William D. Zollars

You bet.

Operator

Your next question comes from Jon Langenfeld with Robert W. Baird.

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

Good morning.

William D. Zollars

Morning.

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

The curtailment gain side, could you just run through which divisions, how much fell in each division?

William D. Zollars

Sure, that was primarily in the national segments. It really came from changing our approach for our non-contractual employees there from a defined benefit plan to a defined contribution plan in the third quarter guidance. In the second quarter, it was primarily in the national segment as well and involved changes to the retiree medical program we offered there.

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

And anything on the regional side?

William D. Zollars

Very little, it was scraps here and there in the other segments, but they are immaterial. It is predominately in the national segment for both second and third quarter.

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

Got it. And then what are your expectations for the company pension plan payments this year?

William D. Zollars

As far as funding the non-union pension plan?

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

Yes, correct.

William D. Zollars

We are still evaluating that. We have until September 15 to ultimately make that call. And so we are evaluating that dynamically. It is likely that we will make some sort of contribution this year. The amount is to be determined.

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

And the minimum you can make is what, five million?

William D. Zollars

Yes, five million.

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

For the year anyway? Okay.

William D. Zollars

Correct.

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

Okay, and on the Jiayu acquisition, is that 60 million did you say?

William D. Zollars

It is 40 to 45, in that range, depending on how the currency translation works out in the exact math at the closing, but we do anticipate a mid-August closing on that.

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

Okay, the 60 million was just the amount of debt you would take on given working capital and data.

William D. Zollars

Yes. Considering both factors, Jiayu and working capital.

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

Okay. And then on the CapEx side, how much operating lease capital, equivalent capital expenditures did you have in the quarter?

William D. Zollars

In the quarter, we had about 20 million and do year-to-date we are around 60 and anticipate a full-year number on leasing to be in the 90 to 95 million range.

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

Okay, and is the network at this level of operating lease, operating leases in capital expenditures, is the network sufficient enough that you could sustain this type of capital plan for the next couple of years if the environment stands?

William D. Zollars

Yes, we are largely feeding our equipment needs in a lower volume environment, we are keeping our fleet age maintained. We are not creating any future issues for ourselves at these levels

We have curtailed it a little bit but for the most part, this is largely a manageable run-rate.

Michael J. Smid

The other thing, Jon that is going to happen as we implement these velocity networks is that we will free up more real estate and we will continue to sell out the excess. We have got the opportunity here to do more co-habing between Yellow and Roadway in the same facility even though we are still in different operating systems. So there will be some additional disposals that will continue to happen as we go through the end of the year.

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

Okay, good. And then the last question I had was just on the regional side, given things jumping around a little bit here and the progress you have made, does the business stay profitable through the seasonally weaker fourth and fifth quarter?

William D. Zollars

Yes, it does.

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

Obviously assuming no deterioration of the environment but your plan would be to be profitable there.

William D. Zollars

Right, we would expect every quarter to be better at the regional companies going forward.

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

Better in terms of the actual profit dollars? Or?

Stephen L. Bruffett

Yes, we would expect the margins to continue to improve at the regional companies through the end of the year at least.

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

Alright. Good, thanks for the time.

William D. Zollars

You bet.

Operator

Your next question comes from David Ross - Stifel Nicolaus.

David Ross - Stifel Nicolaus & Company, Inc.

Good morning, gentlemen.

William D. Zollars

Morning.

David Ross - Stifel Nicolaus & Company, Inc.

First question is just on the yield, especially the national LTL piece. Was pricing actually a little bit better than reported due to moving into shorter length of haul business? I know that you have had kind of a regional effort focused internally there with the national companies.

Stephen L. Bruffett

Yes, we have had a little bit of increase in weight per shipment and a little impact from length of haul.

William D. Zollars

So yes, mix adjusted, it would have been a percent or two better than the reported number.

David Ross - Stifel Nicolaus & Company, Inc.

Right. Okay, some of the other competitors that reported today reported real significant increases in weight per shipment. I guess taking advantage of the truckload spot market. Is that something that you are not seeing? Is that business you are not going after? Is there a reason you are not seeing the same weight per shipment increases as others?

William D. Zollars

Yes, well we may kind of add up the numbers a little differently than others. Our truckload business is up pretty significantly. But in addition to that, the weight per shipment within the LTL segment of our business is also up.

David Ross - Stifel Nicolaus & Company, Inc.

Right, and then you talk about the IT systems of Yellow and Roadway and I know that those are still in the process of being integrated because you have got to get on the same IT platform and you have got to get the processes down. Is there anything going on like that at the regional companies?

Michael J. Smid

No, not at this point, no. The focus here is getting Yellow and Roadway on the same technology platform.

David Ross - Stifel Nicolaus & Company, Inc.

Okay, and then Mike talked about the network improvements that are going on especially in the national side. You know, fewer miles being run, fewer handles, is that eliminating facilities or are you better utilizing the facilities you have?

William D. Zollars

No, it will result in eliminating some facilities and downsizing others and allowing us to co-hab still others. So there is a lot of impact there.

David Ross - Stifel Nicolaus & Company, Inc.

Okay and the last question I have is just kind of along the same lines. Do you have metrics on percent of loads that bypass freight logs today or direct loads versus where they were a year ago? And then maybe where you think they should be next year.

William D. Zollars

Yes, Mike can give you those numbers.

Michael J. Smid

We keep the information on what is called a transfer ratio. That is the number of times a shipment gets touched in the network at an intermediate point. It does not include any positioning for pick-up and delivery but just a pure transfer. And the transfer ratios in this new network begin to move to a point where from something to or above at one time historically because of the pure design of a hub-and-spoke network to one that begins to decline. So now it would be in the area of 106, 107, meaning just a little bit over one time. And that number will continue to decline as we make the additional changes in the network throughout this year. We do expect that number to drop below one eventually.

David Ross - Stifel Nicolaus & Company, Inc.

Thank you very much.

William D. Zollars

You bet.

Operator

Your next question comes from John Barnes with BB&T Capital.

John Barnes - BB&T Capital Markets

Hi, good morning guys.

William D. Zollars

Hi, John

John Barnes - BB&T Capital Markets

Bill, can you talk a little bit about, we spoke about this before, just kind of your anticipation for when volumes for both national and regional go positive? Can you just kind of take us through your idea from a monthly progression. You know, July we have heard has gotten off to a little bit softer--are you anticipating a normal peak season in there for volume in the fall? And then you know, maybe kind of continue that way? And then maybe get weaker again in December? Or is there something? I am just kind of trying to get a feel for how you see it progressing for the balance of the year?

William D. Zollars

Sure I do not think we see any major kind of change. We see a gradual improvement every month. The comps get easier as we go through the balance of the year. What we have seen since April, is the gap has continued to narrow. And as I said, some time in the fourth quarter we will probably cross over into positive territory on the national side of the business.

The regionals, as I said, until we get back to an apples-to-apples comparison, which is probably March of next year, we probably will not see a positive increase in tonnage there.

John Barnes - BB&T Capital Markets

Okay, in looking at the decline in the regional tonnage, you know, going back and listening to your commentary about the redefinition of the footprint and pulling out a certain market, you anticipated being able to handle some of that former regional business through the Yellow and the Roadway networks. Have you been surprised that the volume, that the tonnage, at the regional side has fallen off to this magnitude? Did you expect you would be able to hold on to more of it through Yellow and Roadway?

William D. Zollars

It has not been too different than what we expected. You know, part of what we did there, in addition to changing the footprint was to go back and look at our book of business. And we actually had customers that were unprofitable that we eliminated. So some of the decline was self inflicted.

We did pick up a significant amount of business at Yellow and Roadway as we exited those markets, though. Probably about what we expect and maybe a little bit better.

John Barnes - BB&T Capital Markets

Very good. And then, lastly, on the cost side I understand your commentary about the labor agreement, the impact to earnings from that. But your commentary about improved productivity being able to offset some of that. Could you just walk us through what is left?

My understanding was some of this productivity gain was part of the original 100 million in costs saved. And I am just trying to get a feel, is that an incremental amount of productivity? Or was the 100 million cost save and some of the productivity that went along with that always there with the idea that it was going to offset this $0.15 impact in the quarter from the contract?

William D. Zollars

No, we kind of separated them here John. The 100 million dollars really did not include any impact from the velocity network. So it was made up of 50 million of recovery at the regionals. And they are obviously well on their way toward that goal. And the other 50 million was reduction and infrastructure to support the business from a corporate standpoint. And we will exceed that.

So that was the 100 million. Now the benefit that we will get from the velocity network is in addition to that. And frankly, we are not going to get much of that. In the third quarter, as Mike said, it takes a little while to start to realize the efficiencies there but we certainly should start to see them in the fourth quarter. So those are all in addition to the 100 million.

John Barnes - BB&T Capital Markets

Okay and then lastly, I would imagine that when you are having to furlough some employees and things like that, that you are operating right now with probably your most expensive employees? Correct? Your most senior, most expensive employees.

William D. Zollars

Correct.

John Barnes - BB&T Capital Markets

So to see the real savings, do you have to be back in a little bit better environment? Just because, you know, when you begin to layer it on, obviously more volume helps. But then you begin to layer in your less expensive labor. And that is where you really get the benefit on the labor line?

William D. Zollars

Well that would certainly help. However, the utility employee in combination with this four hour casual that we got under the new contract really allows us to reduce costs, even using our most expensive employees. So, yes, it would help to have more volume. But the combination of that utility employee and the four casual is a powerful thing. And Mike, you might want to talk a little about that.

Mike Smid

Yes, the design with this new network really allows for a very quick throughput. Instead of the traditional, kind of pipeline approach to distribution where there was just around the clock volume. These processes are started and completed in four to six hour windows. So the application of labor--it is important to know that first of all the utility employee is heavily involved in the intermediate function as opposed to some of the significant standing dock operations that we had. And then secondly the opportunity to supplement on a real short order basis helps as well.

To Bill’s point, certainly with a little bit more volume there is that opportunity. And we have, as I mentioned earlier, have noted already in these locations some positive market facing opportunity and some positive growth. We anticipate growth in these models and that should help support some of the efficiency as well.

John Barnes - BB&T Capital Markets

Okay and then could you give us an idea of the percentage of man-hours, dock hours or whatever, that are now being worked by either the utility employee or the four hour casual?

William D. Zollars

We are in the early days, obviously. It is not a very big percentage yet. By the time we get through all three phases it will be a significant, maybe 30% or so of our drivers I think is the number that we were talking about.

John Barnes - BB&T Capital Markets

Where do you expect it by year end?

William D. Zollars

That is the number. Somewhere in the 30s.

John Barnes - BB&T Capital Markets

About 30% by year end? Alright, very good. Thanks for your time guys.

Operator

Our next question comes from Brian Geiger (ph 00:36:25) with Merrill Lynch.

Brian Geiger - Merrill Lynch

How are you doing guys? I noticed you spoke a little bit about a leveraged debt to EBITDA ratio. Is that on an adjusted basis or unadjusted?

William D. Zollars

It is under the bank definition of the calculation. So it is largely the GAAP number. There is just some slight nuances to it.

Brian Geiger - Merrill Lynch

Okay do you have also a target adjusting? And also reporting for this quarter, adjusting for operating leases and pension obligations?

William D. Zollars

I am sorry, say that again?

Brian Geiger - Merrill Lynch

Do you have an adjusted debt to EBITDA ratio, adjusting for operating leases and for pension obligations?

William D. Zollars

No we do not.

Brian Geiger - Merrill Lynch

You do not have that. And obviously you do not have a target for that either, then?

William D. Zollars

No

Brian Geiger - Merrill Lynch

Okay. Thank you.

Operator

Your next question comes from Jason Sidel with Stallman Rose (ph 00:37:15).

Jason

Hey guys.

William D. Zollars

Hi Jason.

Jason Sidel - Stallman Rose

A couple quick questions just for clarification. Bill, the $0.15 that you are attributing to the contract increases on August 1st, is that due to a one-time payment? Or is that just going to mean that things are going to be higher from there ongoing forward?

William D. Zollars

Yes, the reason that we have included that Jason is that we are trying to give people some clarity around the earnings acceleration from the second to the third quarter. That $0.15 will be ongoing. But we expect to more than offset that $0.15 by the time we get to the fourth quarter as a result of these efficiencies we are building into the network.

Jason Sidel - Stallman Rose

That is helpful. Also, when I look at the regionals in the quarter, obviously, I think New Penn lost one of its inner line carriers. Who have they used to replace them? Have they used Holland?

William D. Zollars

We actually use our own operating companies almost exclusively.

Jason Sidel - Stallman Rose

Okay so the one carrier that went under that was using New Penn was replaced with Holland then?

William D. Zollars

Right.

Jason Sidel - Stallman Rose

Okay. That is helpful. Thank you for the time guys.

William D. Zollars

You bet.

Operator

Your next question comes from Neil Shear (ph 00:38:36) with Shear Capital.

Neil Shear - Shear Capital

Hi Bill, Steve, good quarter. Thanks for the improvement.

William D. Zollars

You bet.

Neil Shear - Shear Capital

The question I have is really about diesel fuel. What kind of impact will it have on profits on the short time or anything? Or really, will it have no impact because of the pass through?

William D. Zollars

Well I think at the levels we have been at down is good. The company really was not made for $150 a barrel oil, nor was the country probably. So I think if we get the oil down to a more manageable level--I cannot believe I am saying this but $100 a barrel would be nice at this point. I think it will have an impact not only on the company but also on the overall economy.

The levels right now are manageable. I think our fuel surcharge is working well. Obviously, it is a tremendous burden on our customers. Which we get very concerned about. But, right now we are kind of just treading water. Anything lower would probably help everybody.

Neil Shear - Shear Capital

Okay. I guess the confusion is that when you look at the reduction in tonnage, I assume you are saying that May and June has improved that the most reduction in tonnage is just due to your footprint reduction?

William D. Zollars

Sorry due to our what?

Neil Shear - Shear Capital

Footprint reduction.

William D. Zollars

Well, kind of two separate stories, there, Neil. One, on the national side, it has been more driven by the economy and the marketplace. On the regional side, a significant portion of the year-over-year shortfall from last year is driven by the footprint change.

Neil Shear - Shear Capital

Well, again, thanks for the quarter. Some of us are happy.

William D. Zollars

Great, thank you.

Neil Shear -Shear Capital

Thank you.

Operator

Your next question comes from Raffi Savitts (ph 00:40:34) with Credit Suisse.

Raffi Savitts - Credit Suisse

Hi, good morning.

William D. Zollars

Morning.

Raffi Savitts - Credit Suisse

You had touched upon the leverage ratio and the trailing EBITDA number for your credit agreement. Can you just walk through what your liquidity situation is right now and just kind of using your guidance for next quarter, what that will look like, both on the bank facility and on the AR curve?

William D. Zollars

Yeah, we have north of $700 million of liquidity available under those combined facilities today. If you put the constraint of the leverage ratio on that capacity, it still leaves north of 300 million f liquidity available to us, which is a more than comfortable cushion. And like I said, we anticipate maintaining that through the third quarter. And then by year-end, have even a greater liquidity available to us as we de-lever from our seasonal free cash flow. So, I think that all that is very manageable and we are executing against the targets that we set out for ourselves.

Raffi Savitts - Credit Suisse

So, the add-back numbers are included in EBITDA for the bank companies, right?

William D. Zollars

They are largely driven by GAAP numbers, correct.

Raffi Savitts - Credit Suisse

Okay, fair enough and just one last question. In terms of your bond maturity, I guess there is a Roadway bond coming due in December?

William D. Zollars

Correct.

Raffi Savitts - Credit Suisse

How do you hope to address that?

William D. Zollars

Well, we are being opportunistic. We are keeping our finger on the pulse of the markets and looking at various and sundry alternatives and so, it will probably a combination of factors that get us there. We are obviously interested in extended debt maturities at some point in the future, but will be opportunistic about that and we are accelerating the sale of some of our real estate facilities and taking actions that free up more of those to help ourselves. Our free cash flow helps. The capacity under the credit facilities help. So, it is a lot of things put together that I think will get a comfortable resolution to those Roadway notes.

Raffi Savitts - Credit Suisse

And what about an equity offering, is that a possibility?

William D. Zollars

We do not say never to anything. It is not on the front burner at this point in time, but we consider all alternatives.

Raffi Savitts - Credit Suisse

Thank you very much.

William D. Zollars

You bet.

Operator

Your next question comes from Justin Yagerman with Wachovia Securities

Justin Yagerman - Wachovia Securities

Hey, good morning, gentlemen. How are you?

William D. Zollars

Good.

Justin Yagerman - Wachovia Securities

Given that you called out $0.09 activity due to insurance and claims in the quarter, I was just curious if you could give us some color around your self-insured retention so that we could get some confidence that this is not something that is a recurring, just part of business, that this is extraordinary.

William D. Zollars

Yeah, well let me kind of start here and Steve may want to add some comments, but just to refresh everybody’s memory. When we gave the guidance of $0.30 to $0.40, we excluded that impact. And the reason we did was because it was so extraordinary and so outside the normal course that we thought that we probably ought to call it out. So it was not in the guidance and it was not in the kind of net $0.38. Therefore, that we reported is really reflective of operating earnings.

The fact that it was so unusual and so extraordinary, obviously, we do not expect it occur in the distant future even. We are self-insured. We have multiple layers beyond the self-insurance protection, but beyond that, I do not think we are going to get into much detail.

Justin Yagerman - Wachovia Securities

Okay and then, I guess just piggybacking on Jason’s question earlier. With the $0.15 being part of normal increase in wages and benefits, should we be thinking about a continuing number on this guidance is $0.35 to $0.45 as opposed to 50 to 60 that you guys had mentioned earlier, I mean?

William D. Zollars

Yeah, what I was trying to do with that, Justin, was to give people some transparency into what is going on in the operations. So if you looked at it on an apples-to-apples basis, we are taking about 50 to 60, but because of that $0.15 impact, we are going to be talking to, really, about 35 to 45 is the guidance that we will measure ourselves against.

Justin Yagerman - Wachovia Securities

Okay, alright and then when thinking about these curtailment gains here, that took place in the second quarter and we have got again in the third quarter, obviously there is a period of time that the non-union employees are not getting retirement benefits. Is there going to be any kind of catch-up for that as we get into 2009 and you guys re-establish? Should we see any charges on the other end of that as we go through in terms of making these employees whole on their retirement benefits?

William D. Zollars

No, we will be announcing the new plan to the employees probably sometime in the fall and you should not expect any incremental cost to come out of the new plan.

Justin Yagerman - Wachovia Securities

Okay, alright, good and then, I guess, Bill, you spoke earlier and Mike touched on also, increased co-habs that you think is going to take place over the next couple of quarters and that is encouraging, obviously. Take some of the cost out of your network and you also have these networks and systems integrations between Yellow and Roadway. I guess I am curious how long you think the runway continues to be before Yellow and Roadway are on the same system and then, effectively, the barriers to consolidating those two companies outside of your labor issues become much lower I would think and, I guess, is that really what we are moving towards here?

And even if you keep the two brands, the networks are really kind of one and the same. How are you thinking about that in terms of the evolution of these companies as we, hopefully, move into a better economic situation?

William D. Zollars

I think the job one here is the common platform and as I mentioned earlier, there is nothing heroic about that. There is no new technology that needs to be developed. We are really moving everybody onto existing technology, but what that does in the short term is it gives us the ability to look across those two networks and mange them much more comprehensively than we have been. And it also allows us visibility at the customer level that we really have not had across those companies, so that is the first part of this plan that is going to take us until the end of next year, probably, to get that done.

Justin Yagerman - Wachovia Securities

Until the end of next year?

William D. Zollars

Probably, yeah.

Justin Yagerman - Wachovia Securities

Okay and then, Mike, I guess it would be interesting to hear, as you look at the asset-based networks, you obviously have seen some tonnage decline that has been pretty material. When you think about, obviously, letting some of that go as you call your freight base and some of that being market share loss, how do you separate the two and what percentage would you put into that calling base silo? And what percentage would you put into the we maybe lost some market share here that could be tough to get back?

Michael J. Smid

I do not know that (inaudible 00:48:21) can specifically point one to the other. We certainly know that as we went into our contract-type negotiations last year and into a tough market at the same time that there were some issues with market share. As I mentioned earlier, we are seeing very quickly with these network changes and a new approach to the market from corporate account standpoint that there are opportunities to regain portions of that share and move toward growth. But to try to specifically pin-point one versus the other, we have spent a lot more time looking at the growth side and what it is going to take to do it than that type of analysis.

William D. Zollars

Yes, the other thing I would add to that is that I think that if you look at our yields over the first half of this year, it has been near the top of our competitive set. So we have continued to try and be fairly disciplined on the yield side and as a result of that, have traded off some volume.

Justin Yagerman - Wachovia Securities

Yes, that is definitely evident and you guys have done a good job on keeping those yields high. Bill, I have asked this question on a couple of calls and it would be interesting to hear you answer because you have been pretty vocal about the economy not being good for the last six months or so. If you were a pilot in a storm and you were just looking at your instrument panel right now and what that is saying about the economy without kind of trying to filter out what you are seeing in front you, what does that read right now? What are you thinking about when you look at just the numbers that are coming out of your company and the other companies that you guys compete with?

William D. Zollars

Well, I feel a little better this week than I did even a week ago because of what has happened to the price of oil. Now, I do not know what is going on today, but I was getting concerned given the fact that the price of oil continued to rise. And I was concerned that was going to have a ripple effect across all of our customer base and, as a result of that, maybe risk going down another notch in terms of economic activity.

Right now, our data would say that things have stabilized and if we do not get another shock, I think we are going to be there for a while, maybe until the end of the year. But, it is not getting worse, which is good and the fact that the oil prices abated a little bit, I think, is also good news.

Justin Yagerman - Wachovia Securities

Fair enough. Thanks so much.

William D. Zollars

You bet. That wraps up our Q and A session for today and I will turn it back over to Michael to conclude the call for us.

Operator

Ladies and gentlemen, thank you so much for dialing in for today’s conference call, you may now disconnect.

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Source: YRC Worldwide Inc., Q2 2008 Earnings Call Transcript
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