Yellow Corp (YELL) 2007 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the YRC Worldwide second-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) I will now turn the call over to Todd Hacker, Vice President, Treasurer, and Investor Relations.

Good morning. Thanks for joining us for the YRC Worldwide second-quarter 2007 earnings call. With us this morning are Bill Zollars, the Chairman, President, and CEO of YRC Worldwide; Don Barger, our CFO; Mike Smid, President of YRC National Transportation; Jim Staley, President of YRC Regional 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 discuss all of these risk factors. For a full discussion, please refer to our 10-K and last night's earnings release.

Unless otherwise noted, our operating income, operating ratios, and earnings per share are presented in this call after adjustments for property gains and losses, reorganizational charges, and net settlement amounts to better compare the results of our core operations among periods. For further details, please refer to our earnings release.

Bill Zollars, Don Barger, and Jim Staley will provide our comments this morning. Mike Smid and Jim Ritchie are available to participate in the question-and-answer session. I will now turn it over to Bill.

Thanks, Todd. Good morning. The second quarter turned out to be a challenging period for the Company and, really, for the entire US domestic transportation industry. The quarter was heavily impacted by the weak US shipping market. In addition, the operating performance of our Regional group was adversely impacted by the integration of the former Bestway Company into Reddaway.

We are satisfied with the relative performance of our National Transportation business and expect that (technical difficulty) continue. They're making progress on identifying and achieving integration efficiencies as we move through 2007.

The Enterprise Solutions Group is fully engaged now and began bringing in incremental revenue for the Company in the second quarter.

Our Logistics group took several actions to reduce costs during the quarter, resulting in a substantial improvement in their operating ratio versus the first quarter. Their China acquisition strategy is moving forward.

Finally, we are aggressively managing our balance sheet and generating good cash flow.

Before I move on to the second-quarter results, let me address the current economic conditions. The general consensus of most economists appears to be further pushing out economic recovery until late in the year. We do not as yet see signs that would signal strengthening domestic shipping demand. The slower economic conditions will continue to impact the Company as we move through the balance of 2007.

Now let me briefly cover the second-quarter consolidated results, since you have the details in the earnings release. Our second-quarter reported EPS was $0.95 a share, and adjusted EPS was $0.91 a share. Consolidated operating revenue was $2.5 billion, down 3.1% from the prior year. Our operating income was $105 million, and our operating ratio was 95.8.

The results were primarily impacted by a reduction in volume; a tougher pricing environment, especially at the Regional companies; and slower progress on the integration of the Regional businesses. Also during the quarter, we recorded a $0.07 per share gain from a newly available propane tax credit, which we will talk a little bit more about.

Now let me move on to our business unit results. The quarterly revenue for YRC National was $1.7 billion, down 3.2% year-over-year. Operating income was $88 million with a 94.9 operating ratio. The slower economy is the primary driver of the lower revenue and operating income at the National companies. But the National Transportation results compared favorably to the overall industry performance.

For the 12 months ending 6/30/07, the return on committee capital for the Nationals was greater than 10%. For the second quarter, YRC National Transportation tonnage declined 4.8%. Despite the slower economy, premium services continued to show very strong growth. On the yield side, we saw improvement year-over-year with 1.4% increase.

The pricing environment has become more competitive as the year has progressed, but the market remains disciplined overall. We continue to balance the trade-off between volume and yield. I think you can see that with the operating ratio declining only 2 points year-over-year, which is a pretty good comparison to our peers.

Moving on to our logistics company, YRC Logistics recorded revenue of $158 million, up 3% year-over-year as a result of organic growth. Operating income for the quarter was $4 million and the operating ratio was 97.4. The softer economy was the primary driver of the slower revenue growth here as well.

We did see improved performance during the second quarter; when compared to the first quarter of the year, the operating ratio improved by 230 basis points.

In addition, YRC Logistics made good progress on our strategic initiatives including an acquisition in China. On June 26, we announced we had entered into a preliminary agreement to buy Shanghai Jiayu Logistics. Jiayu is one of the largest providers of less-than-truckload ground transportation services in China, with coverage throughout the entire country. Economic expansion in China is expected to continue to outpace that of the US, and we believe we have the opportunity to drive substantial growth there.

Now let me move on to our Regional segment. YRC Regional Transportation reported (technical difficulty) revenue of $629 million, operating income of $16 million, and an operating ratio of 97.4. Results include an increased insurance cost of $7 million, which was primarily driven by a couple of severe accidents and had an impact of 1.1 points on our operating ratio. In other words, the operating ratio would have been about 96.3 without those insurance costs.

As for the volume and yield, LTL tonnage per day was down 2%, and LTL yield was down 1.3% year-over-year. While New Penn continued to perform well during the second quarter, as we have discussed previously, the Regional Transportation group continues to be adversely impacted by the integration of Reddaway and Bestway. Progress continues on the integration of the two companies, but it has been slower than expected. Aggressive actions have been taken to accelerate the process, to improve the operating performance before the end of this year.

In addition, the performance of Holland has been impacted by the tough economic conditions in that part of the country, including lower volumes and a more difficult pricing environment. The performance of the Regional business does not meet our expectations nor does it match their historical performance.

I'm going to now turn it over to Jim Staley to provide a little bit more information on the Regional group. Jim?

Thanks, Bill. First off, let me start by say we are pleased with New Penn's performance. They continue to deliver industry-leading service and quality with very good profitability. We are not, however, pleased with the performance of the remainder of the Regional group.

While the timeline for integrating Bestway into Reddaway has been met, the results so far are well below our expectations. We have numerous initiatives underway to address the inefficiencies in the network and cost structure, such as terminal consolidations in California, service enhancements between Texas and California, as well as a renewed service and operational focus within the Texas market.

As mentioned earlier by Bill (technical difficulty) and another competitor released as the pricing environment remains extremely competitive in all segments of the Regional group. Holland, our largest carrier, has seen continued weakness in the upper Midwest, which historically has been their core area. This weakness has led to pricing pressure as well as network inefficiencies created by weak volumes in the core area and growth in the extended areas served by Holland. We are undertaking a significant change to Holland's network which should increase velocity, reduce handling, and improve our service in these longer lengths of haul. This can allow Holland to be more (technical difficulty) and cost-effective as they weather the difficult economic environment in which they operate.

We are confident the steps we are taking can get the Regional companies back to an acceptable level of performance.

Thanks, Jim. I'm now going to turn it over to Don to add some additional comments.

Thank you, Bill. As Bill mentioned, our adjusted earnings per share for the second quarter were $0.91. Including unusual items, our reported earnings per share were $0.95. Consistent with our past practice, we adjusted earnings by excluding certain items because they are not part of our core business, and we believe it is more accurate to evaluate our ongoing operations without these items.

In the second quarter, these items included gains on property disposals; reorganization charges related to YRC Logistics; and settlement of certain pre-acquisition USF obligations. The preacquisition USF obligations included $1.4 million for a settlement of a discontinued Mexican joint venture and a gain of $4.9 million from the settlement of a multi-employer pension plan withdrawal associated with the closure of USF Red Star. The restructuring charge at YRC Logistics relates to the recently announced name change and the closure of a non-strategic business location.

The second quarter also includes a $0.07 benefit from a favorable tax credit we received due to our usage of propane gas. The new available tax credit was the primary driver in the reduction of our second-quarter tax rate to 34.6%. The favorable tax credit will continue through the third quarter of 2008 and is expected to reduce our tax rate to approximately 36.9% for the second half of the year.

Turning now to our balance sheet and free cash flow, and our plans for the free cash flow use. As we have stated over the past several years, our target debt-to-cap ratio is in the mid 30s; and we have achieved that target. We anticipate generating free cash flow in excess of $200 million during 2007.

You will note our year-to-date free cash flow is a negative $44 million. Now, this includes a $131 million cash payment to our defined benefit pension plan, of which $90 million is in excess of the expected full-year pension expense. In addition, a $26 million cash payment was made in July to settle a USF Red Star multi-employment pension obligation that I referred to previously.

Both of these items we consider to be discretionary uses of free cash flow and in essence are payments to reduce high-cost debt obligations. In addition to these two items, uses for free cash flow continue to be acquisitions in China, stock buybacks, and debt reduction.

We continue to prudently manage capital expenditures and still anticipate spending 375 to $400 million. We continue to bring the fleet age down even with this lower level of CapEx. Finally, we expect disposals of approximate $50 million.

I will now turn it back to Bill to wrap up our remarks.

Thanks, Don. In summary, the transportation industry continues to experience soft volumes year-over-year, and most economists are now predicting only a modest pickup in the economic activity in the second half of 2007. The slower economic conditions will continue to have an impact on our earnings.

In addition, the unpredictability of the economy directly impacts the Company's ability to provide an accurate forecast for 2007. Therefore, we will no longer provide annual EPS guidance for the balance of the year.

Although the soft economy continues to impact our financial performance, we have made good progress on our strategic objectives, and the Company is well positioned to perform regardless of the future economic conditions. We will now be happy to take your questions.

(OPERATOR INSTRUCTIONS) Jason Seidl, Credit Suisse.

A couple quick questions. Jim, I think you mentioned about the regional marketplace being extremely competitive on the pricing side. Could you talk a little bit about the recent FedEx announcement and how you see that impacting the pricing on the regional side going forward?

I will let Bill speak to that in a broad sense. I don't think it will have any different impact on us than it will have on the national carriers. But I do think that anything that happens to increase the competitive pressure in the regional markets is not helpful. That is an action that you could say is not helpful. But Bill has got some thoughts on it in a broader sense.

Yes, I think the reality is that the pricing equation now has become fairly complicated. You know, you have got the base rate piece of the pricing equation; you have got the fuel surcharge piece; and then of course the discounts for those numbers. So it is a fairly customer-specific discussion now in all cases. So I am not sure that the impact is going to be significant.

We have no plans to change our approach, because we are in a position with most of our customers now of really talking specifically about each pieces -- each one of those pieces of the pricing equation. So, I would say Jim is right, probably not helpful in terms of the overall tenor; but I don't expect it to have a real significant impact.

Okay. If I can turn to the national side for a second here, Bill. How has the change in operations been going at Roadway? How has that helped you sort of weather the storm, so to speak?

I'm going to let Mike talk about that.

Yes, the change of operations early in the quarter, very effective. It is one more step in multiple phases to reduce the handling in the network, to speed the network up in terms of service and service markets.

As the Roadway team has become a little bit more comfortable with the change of operations process and the planning processes continue to improve, leverage between both companies in terms of resources and planning -- it was very effective and had positive impact on the quarter. We made a change of operations within the Yellow network as well, and it had positive results just as the Roadway change did.

Okay, thanks for the color. Don, real quick, I guess some of the things you said -- just to make sure I got it right. You paid $131 million for the pension but $90 million was only what you were obligated; so you paid about $41 million over so far. Is that correct?

Jason, actually it is just the opposite. The $41 million is what we were obligated; the $90 million is in excess and represents in our minds a use of free cash flow.

But I think importantly, Jason, it lowers our first -- future requirements to about $50 million a year. So it is a prepay to lower future requirements.

Okay. Don, you mentioned, and I apologize for missing this. You mentioned a charge related to a (technical difficulty) withdrawal for the Red Star closure. Could you give me a little more color on that? I didn't quite get all of it.

There actually was a gain related to the settlement of a liability. As you know, USF closed Red Star prior to our acquisition; and therefore, we incurred a withdrawal liability as a result of the acquisition. We in a very disciplined way have been working our way through those. We have been able to negotiate a settlement with one of the funds. We think it is a good deal for them and a good deal for us.

That -- there is about a $0.05 a share gain as a result of that settlement. The cash associated with it is the $26 million that I referred to in the script; and that was paid in July.

Okay, thanks. I will let somebody else have at it. Thanks, gentlemen.

Tom Wadewitz, JPMorgan.

I wanted to see if you could provide some more thoughts on what you are doing in the operational side, how far along those are, and how much you can really take further steps on the cost side to offset some of the obvious pressure that seems to be here in terms of weak demand and competitive pressure on the revenue side. Maybe if you -- okay, thank you.

Sure. Let me kind of tee this up. We have really got three different situations.

On the National side, obviously they are continuing to make progress with integration efficiencies. Those will continue and pick up momentum as we go through the year.

The Logistics business has done a nice job of resizing their infrastructure to be more consistent with the lower volume we are seeing. We would expect that that will continue throughout 2007.

The Regional situation is a little bit different in terms of the integration of Bestway/Reddaway and the operational changes that are going on at Holland. So maybe, Jim, you could give a little more color on that.

I will speak to both Highland and Reddaway. At Holland, we are implementing a highly-engineered centrally-controlled loading plan that is based on current tonnage analysis for each of their 72 terminals. We feel the result of that should produce increased velocity, lower-cost intermediate handling, and more efficient line haul operations.

At Reddaway, more aggressive terminal consolidations. We recently just last week closed three former Bestway facilities in Northern California, consolidated them into existing Reddaway facilities in the same area. We would have done that in February when we consolidated the companies, but we wanted to make sure that the facility capacity was adequate.

We had consolidated four of the Bestway facilities in California with Reddaway facilities in February at the time the consolidation took place. So this has kind of doubled that activity. Each of those consolidations has considerable positive impact for the remainder of the year in terms of reducing cost and improving network performance.

So in terms of the timing with National, did you already see the cost benefit from that in second quarter? Or is that something that you'll see that accelerate?

Then it sounds like Regional, the cost benefit, is that a third-quarter event that we would see it, or a fourth quarter, or what is the timing for that, as well?

On the National side, we saw a little bit in the second quarter, but you will really see that begin to pick up momentum as we go through the balance of the year. The Regionals, we will start to see the impact in the third quarter.

Okay, so when I think about operating ratio performance in the current environment, what you are doing in the cost, does that maybe enable you to deliver similar operating ratio performance in third quarter and fourth quarter to what we saw in second? Or is it really tough, even given those cost actions, to offset some of the market weakness, and the margin performance could get a little worse?

I think, Tom, a lot of this depends on what happens with the economy and the pricing side of the equation. I think we will do an excellent job managing the cost and improving the cost position relative to the volume. But the pricing lever here is important. If things remain the same on the pricing side, we should make some improvements.

Okay. Then just one last one. Any thoughts on the union? Timing for union discussions, whether that might start before UPS wraps up their negotiations and their contract? Or was that something where we really have to wait for them to finish their contract?

Well, I think the UPS discussions with the Teamsters has really taken most of their share of mind. We still are interested in beginning to talk as quickly as we can; and that is what we are communicating to them.

Okay, thank you for the time.

Jon Langenfeld.

On the YRC National side, can you remind us where we are at on the regional rollout? I think you pretty much scaled that back. But what is your thought process on that moving forward?

Can you speak up a little bit? We are having a hard time hearing you.

I apologize. On the National business, just wondering where you are in the regional rollout? I think you scaled that back. But what are your thoughts on that?

We have continued to make changes in the networks that -- actually in both networks that make us more effective. Inside the 500-mile and out type range, we are at a point now where more than half of all of our service from origin to destination is in two days or less.

We have delayed implementation of some of the next-day services that there was some discussion about several quarters about within Yellow. We continue to plan for those as we move forward, but being very cautious in terms of current market and current opportunity and current capability.

We would anticipate at some point moving forward and have actually accelerated our efforts to reduce handling in all of our markets, but have been cautious on the next-day type transportation within Yellow.

You were piloting some of the next-day late last year, early this year. Have you continued doing that? Or did you put that on the shelf for the time being?

Yes, we have next-day operations within Yellow. There are shipments in the new network design within Roadway that do effectively deliver next day. Those operations are up and running and are part of our current service offerings.

So moving forward, it sounds more like gauging the economy before you invest more dollars on that?

Yes, I think that is right. I think we are trying to make sure that we put our effort in a place which is going to give us the best return. Right now, the regional markets are pretty competitive, and we probably have got some better places to put our emphasis.

Okay, all right. Makes sense. Then, on the acquisition front, Bill, how much would you anticipate spending, I guess over the next year or two on an annual basis, with regards to acquisitions?

Well, we have said that we wouldn't exceed $100 million. I think we are still going to be well below that, and probably somewhere about half of that over the next 12 months or so.

Does it still feel like you need another couple acquisitions in China to round out the platform?

You know, I think we are reassessing that right now. We are looking at really Jiayu as having a lot more potential than we originally expected. So we may not be in a position to have to acquire a second company there, but probably can use Jiayu to get the things done over there we need to get done.

Okay. Then finally on the CapEx side, what is your flexibility to pull in this CapEx further if you need to?

Well, we have got pretty good flexibility on the CapEx side, particularly as it relates to replacement equipment. Obviously as the economy softens, we don't need as much replacement equipment. We are also getting better utilization of the existing equipment. So we have got quite a bit of flexibility on CapEx.

Okay, good. Thank you.

Edward Wolfe, Bear Stearns.

Why is interest expense guidance at $90 million for the year when it's been 41 and change for the first half? What debt expense is going up?

Ed, this is Don. One of the main expenses pieces that you have here is the fact that for FIN 48 we have included that change -- not in the tax rate, but on the interest line. That is about 4 to $5 million. Remember, it only started in the second quarter.

The other thing is, you have -- most of our debt is variable-rate, and so -- I'm sorry. Excuse me, we have a fair amount of our debt that is variable-rate; and obviously that impacts it as well.

Okay. I am trying to understand in Meridian IQ or YRC Logistics what the run rate operating ratio -- how we should think about it. You talked about in your release here about $2.5 million of one-time stuff. There was another $1.5 million in the first quarter.

Can you talk about what is the $2.5 million that is specifically in logistics? And how you look at that operation operating ratio, which depending on how you look at it could be anywhere from 97 to 99 or 100?

Yes, before we go -- let me go back to the interest question just for a second. Todd has a little bit of a clarification there.

Yes, Ed, the cash interest expense is not up. I want to make sure you understand that.

The cash piece you are saying is not, but the reported on the income statement is?

Yes.

That is primarily because of the FAS 48 point that I made.

Yes, let me go back to the logistics business. We had really a couple things going on there in the second quarter. One is this need to resize the infrastructure to be consistent with the lower economic activity. The other thing was costs associated with the name change to YRC Logistics. Those are really the two things. Those are behind us. They won't be ongoing.

So the $1.5 million we saw in first quarter, in second, we won't see any of this kind of stuff in the third quarter?

No.

Okay. Bill, tough question, but I have to ask it. Not long ago, you were very publicly saying that even in a recession YRCW would have EPS growth with all the cost synergies. This morning, GDP comes out at 3.4%. Last night you announced that no more guidance because of economic uncertainty.

(technical difficulty) back on that? You think about some of those statements and some of the initial thoughts with the mergers. What synergies didn't develop? Or what is the impact of the two mergers that has been slower to develop, that we still have left to come?

Let me start out by saying what I think I said was even in a flat tonnage environment we have the ability to grow earnings. And we haven't had a flat tonnage environment, as you know. It has been down fairly significantly. So that is where we started.

I think that the reality of the situation here, because of our operating leverage, is that -- the fact that we have had tonnage declines, which have continued now since the fourth quarter of last year and don't seem to be turning around -- has driven our operating performance from an aggregate standpoint.

The National part of our business, I think, is operating about as expected. We are continuing to get good integration efficiencies there. That is why our operating ratio dropped less than our competitors' operating ratio in the second quarter, year-over-year.

On the Regional side, we have had more difficulty there than we expected. One piece of that was the economy in the Midwest has really impacted Holland significantly. The other piece of it has been the integration of Reddaway and Bestway.

Having said that, I think we still feel pretty good about where we are positioned. I think the reality is that if we can work our way effectively through the integration issues on the West Coast, and we can get some impact from the changes that we are making at Holland, that we will be right back on track.

So vis-a-vis the comments that I referred to, your thoughts would be not that you would not have made them or that there was something less exciting about the mergers, but that the economy (technical difficulty) worse than you thought it would have been?

Yes, I think it is significantly worse. When we talked about flat tonnage, it is usually an economy that is growing reasonably well; and we haven't had that.

The other thing I will just say about the guidance is that we are tired of trying to predict the economy. No one else can seem to do it very effectively, and we can't either. So rather than continue to try and predict it, we are just going to go back to work and do the best job we can, and let the economy do what it's going to do.

But right now, we don't see any indication that the economy is recovering. So we're going to continue to plan for the worst, hope for the best. But our ability to predict is not very good.

At this point, five years and two years past the two big mergers, would you say that the mergers are done? And now at this point, if there is an issue at Reddaway and Bestway, that is an issue that is outside of the merger? That was within USF, it is not part of the YRC merger?

Well I think you have to kind of take them in two pieces. The acquisition of Roadway, I think we have gotten well down the road there in terms of integration and are tracking probably a little bit better than we expected against our integration plan there.

In terms of the Regional companies and the acquisition of USF, we have still got work to do there, obviously. We have tripled the size of the Company in the last three years or so. So it is not surprising to continue to have things that we need to do to make the companies as efficient as possible.

But I think the Roadway-Yellow integration is probably far enough down the road that we ought to not even be talking about that anymore. We ought to be just looking at the results there, which I think are reasonably good.

The Regional side of the business, the acquisitions there have gone about as expected, with the exception of the Bestway-Reddaway integration (technical difficulty) the impact of the economy on Holland.

So there is work to do on the Regional side. We do need to get more aggressive there as Jim has mentioned. We have got a plan to do that. On the National side, I would say things are tracking as well as expected, maybe a little bit better.

Would you consider spinning out the Regional business? You have shut down Dugan, you have shut down Bestway, Holland is not feeling great. At some point (technical difficulty) major restructuring, or is that just not (technical difficulty) process at this point?

No, I think the fundamental strategy there was to acquire next-day capability comprehensively across the US. We have that now. Once we get past the integration issues, I think this business is going to go back to performing at historical levels, which will be very, very good return on investment and also give us the strategic coverage that we need from a capability standpoint.

So we have no second thoughts about either acquisition. We got accretion on the Roadway deal within the first 12 months. We got accretion on the Regional deal in the first 15 months, I guess. So these were both good acquisitions from our perspective and strategically place us in a really good position longer-term.

How do you define accretion on the Regional deal?

Well, if you go back and look at the purchase price and look at the return on that investment, I think we passed the accretion point sometime in 2006.

Thanks for the time. I appreciate it.

Justin Yagerman, Wachovia Securities.

Good morning, gentlemen. How are you?

Justin, we can barely hear you. Can you speak up a little bit?

Yes, sorry. It seems to be a recurring theme today. Is that better?

That's much better.

Okay. Can you talk a little bit more about this China acquisition you guys made? It has been something we have been waiting for; and we have not gotten too much info on it. Size, scale, purchase price, anything that you're willing to disclose. I think we would be curious to hear how this gives you a better foothold there.

Yes, probably not going to do satisfy you completely, because we are still in due diligence and negotiation. But this is one of the biggest LTL companies in China. It has got over 200 locations around China, about 2,500 employees.

It really will provide the foundation for us to do two things for our customers. One, organize the ground transportation within China; and secondly, give us the ability to connect the ground transportation in China with our networks in the US so that we can provide this end-to-end solution for our customers. So --.

(multiple speakers) based LTL company in China?

One of the biggest, probably. Probably the second largest.

Would they be considered a regional or a long haul, there? Or does that even have any bearing? I don't know.

It is a different model over there, Justin, so I am not sure those terms really have much impact. But they do have a network that extends throughout China and will be able to provide the kinds of services that our customers that are doing business in China require.

Got it.

Jim, you got any --?

On the Enterprise Solutions piece of the business that you're developing, can you talk about the progress there and kind of -- is that part of your strategy for reinvigorating the Regional group? When you look at trying to feed more tonnage through the different brands and right-size how customers are using your different offerings?

Well, I think one of the big advantages of the Enterprise Solutions Group is that we can bring capabilities to customers that are not usually aware of those capabilities. In some cases we have found that there is a real opportunity there for our National customers to use the Regional capabilities as well as the Logistics capabilities and vice versa. So it really is a potential opportunity for us to provide broader capabilities to the same set of customers and help us with our penetration.

The sales cycle here is a little longer. So we wouldn't expect things to just start to take off like a rocket as a result of this effort. But we're getting very good customer feedback for the 50 or so customers that we are currently talking to. We have already got some incremental revenue, as I said. But I think it will really start to pick up some pace here as we get further down the road and close out some of the deals that we're currently working on.

But it is a great way for us to be able to bring more capabilities to these large customers in a way that is easier for them to access.

Can you talk a little bit about what exactly the integration issues are on the West Coast with Bestway and Reddaway? Are there union issues as you work through trying to fold a union -- a company with union presence into one that doesn't? Or I guess just maybe a little more color on that situation would be helpful.

Sure, Jim, do you want to run that?

Yes, the union issues are not significant. We have got three different labor contracts involving Reddaway and Bestway, none of which of party to the national Master. So that is not the case.

I think the bigger concern, as I expressed, was there in California where we were very hesitant to be as aggressive as we ultimately have been in terms of combining facilities. We started with 24 facilities between the two networks in California, which is just too many facilities in a regional next-day network. We cut that down to 20 immediately and now have gone down to 17. Ultimately we would like to go down to 15, one of -- we can get to 16, maybe not 15. So that has been the issue there.

The other is turning the entire footprint into more of a super-regional operation than the distinct Reddaway and Bestway operations, one of which was primarily up-and-down the coast and into the intermountain states with Reddaway. The other was heavily concentrated intra-Texas, intra-California, not much business in between.

So we think we have a very good business model that the customers will be very receptive to. But a lot of marketing will take place to get that in front of the customers, and along with that is the operational improvements that have to be there to give the customer the service he is looking for. All of which we are working on and -- so started with the terminal consolidations in California are critical to that.

Any other questions on that?

Don, you mentioned that you are satisfied where the debt-to-cap is, I think, in your prepared remarks. Does that imply no more debt paydown for (inaudible) or how are we thinking about that?

Yes, this is Bill, Justin. I think we are very happy with where we are from a balance sheet perspective. We are not very happy with where the stock price is. So we are likely to be out in the market. We have got approval to buy back stock, so we will be probably doing that unless the stock price changes dramatically.

Got it. I guess that is just opportunistic as you see it?

Well, it's a good investment from our perspective.

I guess last two questions. Hours of service, we had a big announcement this week that may reduce drivetime by an hour and get rid of the restart. Do either of those affect you guys operationally in any of your divisions?

Well, it is not clear that that is the end of the discussion. I think there is more discussion to be had there. I think for us it is not as big a deal as it would be for the truckload sector, although it will have some impact on us if it holds. I'm not sure it is going to hold.

Lastly, I guess, thinking about how things went through the quarter and as we move into Q3, can you talk about tonnage growth, national and regional, by month in Q2? Then what kind of comps we are going up against in Q3, and maybe what you're seeing so far in July.

Yes, let me start with the short term. We don't really see much change. The economy continues to just bump along, but is not showing any signs of pickup at this point. I'm always interested to see what the first number is that comes out for GDP, because it gets adjusted downward, usually, at least a couple of times. I think this most recent number is going to get adjusted down a couple of times as well.

But what we are seeing is basically a continuation in July from what we saw in June and in the second quarter. The comps do get easier in the fourth quarter particularly. So it really just kind of depends on whether the economy goes north or south from here or stays about where it is.

We are assuming it is not going to get better. But if the economists are right, it will get better. Our operating leverage, as you have seen on the downside, is very powerful on the upside. So as the economy recovers, that operating leverage will deliver earnings that will be in the incremental range of 15% or so. But we don't see that as yet.

Fair enough. Thanks.

John Barnes, BB&T Capital Markets.

Bill, two questions for you. First of all, the line item where you wore me out on my model was on the salary and comp line. Can you just talk a little bit about -- are there any particular initiatives there? Have you started a furlough process, just given how far tonnage is off? What does headcount look like, both with your union employees and nonunion employees, year-over-year?

Sure. When you say we wore you out, we did better than you expected us to do (multiple speakers).

Absolutely, yes, yes.

I just wanted to make sure I understood that. I think we have done a pretty good job on cost management. As an example, I think at the National companies now we probably have, what, 2,800 or so, Mike?

Yes.

People on layoff. This time of year we normally wouldn't have any. So I think the economic activity that we are seeing has really resulted in the need for far fewer people and we have done a good job of reacting to that, particularly on the National side.

Any efforts on the nonunion side? Are you doing anything in terms of headcount there?

Yes, we basically have had a headcount freeze in place and have let some attrition take hold here. So we feel like our headcount is under very good control.

Okay, all right. Lastly, on the guidance -- and I don't want to beat this death, okay? But I'm trying to -- just as I thought about it last night, and I kind of went through my model, you are coming up on third and fourth quarter which are modestly easier comps than you had in the first half. Especially the fourth quarter starts to get a whole lot easier. I will acknowledge that nobody's crystal call is real good on the economy right now. We are hearing -- I'm hearing 10 different opinions on it.

I guess setting the economy aside, what are the two or three things that got you the most worried about your ability to forecast your business? Is it a muddy line of communication from your customers? Is it this pricing action that has kind of kicked up? What is it that worries you the most about being able to hit any number that you put out there?

I think it all ties back to the economy. I think from our perspective, the ability to focus and forecast the economy is really problematic. So that is one thing, which then drives, obviously, not only demand but the pricing environment.

So I think most of -- and I would also tell you that our customers are as nervous as we are for the most part. So we looked at all of that and said there is just so much uncertainty out there; and we are not seeing anything in our data that would point to a recovery. So rather than try to predict when the recovery is coming, we know the comps in the fourth quarter are easier, but that doesn't really help us with the forecast too much.

So rather than try and get out there and predict something which nobody seems to be able to predict, we just decided that we would go back to work and make as much money as we can.

Okay, all right. Very good. All right, I appreciate your time. Thanks, Bill.

Tom Albrecht, Stephens Inc.

I have got a series of questions. Jim, can you give us a sense as to New Penn's operating ratio? We all know the struggles going on between Holland and Reddaway. But New Penn used to be a company that even a bad environment always kept their OR in the 80s. Is that still the case?

I won't give specific ORs, but New Penn continues to operate as they have historically done. There is obviously some impact from the current economic environment, but no real deterioration in New Penn's core model.

Okay. Then, Don, on the cash flow, you are still forecasting free cash flow of about $200 million. But you have got lower profits now. You still have the same CapEx. Even setting aside the pension issues that you have already described, why would you still feel confident of generating $200 million if CapEx is still up and profits are down?

Actually, you have to look at it -- I am going to give you a rough bridge. The combination -- and let's just go here for the year to date. Okay? If you take and you see the operating cash flow on that sheet, and the operating cash flow through the second half. Excuse me, through the first half is a little bit better this year.

You have the combination of net income and depreciation down about $100 million. You have working capital improvement; and you'll see this when you get the balance sheet and the cash flow statement of better than $100 million improvement.

As we go forward here, you're going to see that it is the balance sheet on the working capital side where we are getting significant benefit. In addition, we continue to be what we call prudently aggressive in our tax planning area. We are expanding our captive, and obviously we get a cash flow benefit from this propane tax credit.

So you put all of those things together and that gives us the comfort that our free cash flow will not be around $200 million but will be in excess of $200 million.

Okay, that's helpful. But I guess I sort of view working capital opportunities usually as a one-year opportunity. It is hard to continually improve that year after year, but I understand what you're saying.

Actually, in our case, we have got a multiple-year goal on working capital. We see a lot of opportunity there. I will tell you that the work to date, particularly on the Nationals and the Regionals, is very encouraging; and there is a lot of upside on the Logistics side.

Again, the proof is in the pudding. But if you take a look at our recent history, we have clearly been able to meet that better than $200 million. The other thing you have to recognize is that we still have significant disposals every year, which help to reduce the net CapEx.

We are very -- believe me, we are very aggressive in managing for cash flow and trying to reduce our asset intensity to improve return as well.

Okay. Speaking of equipment disposals, your release today says $50 million. In April, it had the same CapEx number but no reference to the equipment disposal amount. Is that just because you're halfway through the year you have got visibility? Or --?

No, that disposal is property, not equipment.

Okay, okay.

But the answer to your question is, I think we probably at that point had somewhat less than (technical difficulty) million or so on the disposal side. Again, the picture becomes clearer and I (technical difficulty) my expectation at this point is to do better than that $50 million.

Okay.

Another thing, just a point on that is if you take a look at the change in operations that you have on the National and Regional side, you take a look at the better improvement in utilization and efficiency year-over-year, ongoing disposals will be as part of our life. If you go back several years you'll find that we have taken out a number of terminals over time and we will continue to do so.

Jim, are you looking at two more California terminal reductions? Is that correct?

Just one that we know we can accomplish during the balance of the year. We would like to do two, but I don't think the real estate situation would allow for two.

That is the San Diego situation?

Yes, we have got two facilities in San Diego that we want to combine into one. We will work with Roadway on better utilization of the multiple facilities that we have there.

Okay. Then what about Columbus, Ohio? I believe you are in the process of eliminating a break bulk terminal. I don't know if that has been done, if you have got teamster approval. Can you talk about that, in terms of how many workers might be reduced from that? Will you be selling that terminal? Where will the freight flows go now? Just a whole bunch of things. Because any time an LTL carrier wants to get rid of a break bulk facility, that can have a big impact on freight flows.

I can answer that, Tom. That particular change of operations involves Columbus. I would remind you that over the course of the last two years, we have eliminated five distributions or reduced the number of distribution centers between Yellow and Roadway by five.

You have the Columbus that is most recent within the Yellow network, and actually announced a Milwaukee within the Roadway network over the course of the next couple of months. That is all part of this effort of reducing the number of touches and the number of times we handle freight in the system.

As we begin to refine and consolidate our facilities at the end of the line, we have more opportunity for direct loading. With some of the current technology and optimization tools we use, more opportunity to bypass distribution points altogether.

To the actual impact in Columbia, in some cases, those facilities we have altered the assignment. They may be participating in new types of business, some of our solutions offerings. In other cases, they have been parts of disposals.

The actual change in Columbus affected about 200 employees. The majority of those employees had some opportunity to follow work to other locations or to other positions. In some cases, our changes have resulted in efficiency gains where we actually had fewer employees handling some of the consolidation or deconsolidation. In others they have been reallocated to other types or other parts of businesses.

That facility in Columbus, we still serve a very large metropolitan area there; and in fact, an expanded metropolitan area with that facility. It will remain a big part of the Columbus community, and we still will maintain several hundred employees in the Columbus area for Yellow.

On the other end of town, there is a Roadway distribution center that is involved in a different mission that involves Roadway and totals more than 500 employees in the Columbus area.

Okay, so -- that was helpful. So you're basically saying at the end there that you still have a DC but it's through the old Roadway company?

No. Well, Roadway still has a distribution center in Columbus. The Yellow network no longer performs distribution in Columbus, Ohio. The shipments move beyond or over the top of Columbus without the intermediate handling.

Okay.

The process over the next couple years, as it has been over the last two, will be accelerated change and accelerated modernization of both of these networks.

I think that is the right thing to do. This question probably is a little more pessimistic than I mean it to be; but several years ago when CF was still around, they really -- I think they called it Network 2000 or something like that. They were trying to speed up transit times, which you have always got to try to do.

But why are you confident that you will be able to do that and not end up in a bad situation like they got? Is it because of the technology that we have today? Is it because of the pace that you're undergoing? Whereas I think they really tried to make to happen too fast.

Yes, let me give you a better feel for that. Over the last -- we have been involved with this now, including the work done at Yellow, for more than seven years. It has been done in stages and done piece by piece. It is a complete redesign of the network.

In the CF case, they used the exact same network primarily, reversed a few runs, and just committed to running it faster.

These have been material changes with physical processes and physical handlings removed from it, that allow for the changes. Each time and throughout the last several years they have improved efficiency, they have improved our ability to compete. And they are done step by step by step, as opposed to the -- one day we are going to run faster, which means more -- less efficient.

It is a different blend and a different approach. I do believe that the analysis technology and optimization tools we use are considerably better than what might have been the state of the art several years ago.

Okay. Then I guess overall, I know in the first quarter cargo was not a good experience for you, despite having down tonnage. What was your cargo claims experience like during the second quarter?

Cargo claims experience based on last year's claims was slightly better. We have begun to, in our companies, be able to reduce the reserve slightly. You might recall in the first quarter, I talked about some of the early implementations that we went through as we moved to the National organization. One of those involved a quality, claims, and claims exposure management group.

These are real people and real assets in both operating companies, a shared approach, shared technology, and the ability to allocate people and resources to hot spots, significant opportunities, and improving our overall quality. In both companies, month after month in this quarter, we saw improved acception ratios that are beginning to convert to improved service performance with our customers.

And reduced claims filings. We would hope and certainly part of our plan this year is to see considerable reduction in our claims exposure going forward. They have been very effective programs.

Okay, just a couple of other questions. You have got a lot of goodwill on your books. The Regional companies are not performing the way you would like. This is probably a very forward-looking question, but are you comfortable with the performance of your companies versus your debt covenants, goodwill, and all those things?

This is Don Barger, let me answer that. First of all, from a debt covenants standpoint and even a liquidity standpoint, we are -- we have no issues at all. When it comes to impairment testing, I thank you guys know we do that every year. We don't have any issues with any of our companies. We can tell you for sure we don't have any issues with the Regional companies.

Okay, (technical difficulty) probably just bug you on that periodically.

Absolutely.

That's it from my end; thank you.

I think we have got time for one more.

Art Hatfield, Morgan Keegan.

Bill, just a couple quick questions, I hope. Most of my questions have been answered. But you had commented that you're not seeing anything in your data that would indicate any recovery. Are you seeing anything that would indicate further weakness?

You know, I think what I would say, Art, (technical difficulty) it is more of the same. We don't see it getting much better, we don't see it getting much worse, it has pretty consistently been about the same level now for quite a while.

Then on the Regional unit, I think it was Jim who commented that everything you are doing -- you are trying to get, working to get the Regionals operating at an acceptable OR.

Can you talk about kind of what in your mind should be an acceptable OR for the Regionals? Without -- I (technical difficulty) hold you to this, but are you closer or further away from getting there than you were three, six months ago?

Well, first of all, in terms of what is acceptable, I think you would have to probably define what kind of economic environment we are operating in. I think from a longer-term perspective and a good environment, we have always thought that the Regional companies ought to be in the 90% range from an OR standpoint. In a bad economy, obviously, they are not going to be that good.

So I think our perspective on this is that we are probably better than we were previously this year, but we still have got a long way to go.

Then finally, there has been some noise in Congress about trying to get the Treasury Department or the administration to force the Chinese to reevaluate the yuan. Anything like that concern you with regards to the investments that you're making in China? Can you talk about the changes that may occur there that would [trigger] your willingness to invest in China?

Yes, I think that the yuan situation is probably a little bit of an overblown topic when you look at the differential in cost between the two countries. A 5% change in the level of the yuan doesn't wipe out the 2 or 3X labor differential between (technical difficulty) or two countries, I should say.

(technical difficulty) The other thing that you always have to remember, of course, is that currency valuations are a double-edged sword. So what is bad for imports is good for exports, depending on the country you are in.

Our view of the situation is the Chinese economy is going to continue to grow very quickly, probably faster than the US and the rest of the world; and that we want to be a part of that. We are also very interested in penetrating our US customer base and doing some things for them in China, which would be for the most part all incremental.

So we still think that the business opportunity there is tremendous. We think the Chinese economy will continue to do well, and we are going to participate in that.

Thanks, Bill. As always, thanks for your time.

Okay, well I appreciate everybody's attention and joining us today; and we will see you at the end of the next quarter.

This concludes today's YRC Worldwide second-quarter earnings conference call. You may now disconnect.