Yellow Corp (YELL) 2007 Q3 法說會逐字稿

Good morning. My name is Carmen and I will be your conference facilitator today. At this time, I would like to welcome everyone to the YRC Worldwide third-quarter earnings conference call. 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 Investor Relations and Treasurer. Please go ahead, sir.

Thank you and good morning. Thanks for joining us for the YRC Worldwide third-quarter 2007 earnings call. With us this morning are Bill Zollars, the Chairman, President and CEO of YRC Worldwide; Steve Bruffett, our CFO; Mike Smid, President of YRC North American Transportation; 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 on a reported basis, which differs from previous earnings release calls. For further details, please refer to our earnings release.

Bill Zollars, Steve Bruffett, 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 the call over to Bill.

Thanks, Todd. Good morning. As we have discussed throughout the year, the weak economy has heavily impacted our Company as well as the entire domestic transportation industry. We haven't seen shipping volumes like these since 2001, and this is the first time since 2001 that I have seen a sequential reduction in volumes from the second to the third quarter.

While we are experiencing a difficult transportation environment, we've been successful on several fronts. Our National Transportation and Logistics businesses performed well in the face of tough economic conditions. Good progress continues on our strategic initiatives. National Transportation realized integration and efficiency gains during the quarter. The new Enterprise Solutions Group has been successful and is bringing an incremental revenue to the Company. Our Logistics group improved its operating ratio for the third straight quarter, while continuing progress in China. Finally, we have aggressively managed our balance sheet and are generating good cash flow.

Although we have been successful in moving forward on several fronts, the Regional business significantly impacted our overall performance for the order. Our Regional businesses have been more heavily impacted by current economic conditions, a tougher pricing environment, as well as integration challenges of the former Bestway Company into Reddaway. Our Holland business has not controlled costs effectively and has had an unfavorable shift in its business mix which Jim Staley will discuss in a minute. Further actions have been taken to address this underperformance. At the same time, New Penn delivered solid performance despite these difficult economic conditions.

Before I move into our financial performance I would like to discuss a few management changes. Mike Smid has been promoted to President of North American Transportation. In this newly-created role, he will be responsible for all the asset-based operating companies of YRC Worldwide, which will include Yellow Transportation, Roadway, USF Holland, USF Reddaway, New Penn, and USF Glen Moore.

As you know, Mike most recently served as President of YRC National Transportation and previously led the Roadway organization prior to that. Mike will continue to report directly to me.

We're taking the next step here in managing the assets of the Company comprehensively in order to give us further integration efficiencies and improve our operating performance. We will also then be able to provide access to some of the national tools that we haven't used previously at the Regionals, and also to additional talent to help turn that situation around.

Jim Staley, President of YRC Regional Transportation, has announced his retirement effective at the end of the year. I want to take this opportunity to publicly thank Jim for all of his significant contributions to us over the past five years or so; and before that, of course, his great contributions to Roadway. In total, 37 years in the business. So Jim, thanks very much for all you have done.

Keith Lovetro has been named President of YRC Regional Transportation effective immediately. Keith recently joined the Company and brings extensive experience in regional transportation to the organization. Keith will report to Mike Smid as part of the asset-based transportation group. We want to welcome Keith to the team.

Jim Ritchie, President of YRC Logistics, and the other senior leaders from a functional standpoint will continue to report to me. These changes will streamline our management structure and enable significant opportunities to enhance profitability across the Company.

We are targeting about $100 million in performance improvement over the next six months. About half of that will come from infrastructure costs that we will remove across the Company, and about $50 million will come from improved regional operating performance. This is a very doable number and a number that we have already launched a number of plans against. So we are fairly confident we can get that done over the next couple of quarters.

Now, let me briefly cover the third-quarter consolidated results, since you have the details in the earnings release. Our third-quarter EPS was $0.70. While the National and Logistics companies delivered as expected, the Regionals fell about $25 million short of what we expected them to provide. Consolidated operating revenue was $2.5 billion, down 4.4% from the prior year, while operating income was $88 million and our operating ratio was 96.4.

Now let me move on to our business unit results. At YRC National Transportation, they performed well when compared to overall industry performance. The quarterly revenue for YRC National was $1.7 billion, down 4.8% year-over-year. Operating income was $90 million with a 94.7 operating ratio. The operating results were a positive given the current environment, and I think positive compared to the last time we went through an economic downturn. So the National group did a nice job. The operating ratio decline at 1.8 points was also lower than almost any of our competitors.

For the 12 months ending September 30, return on committed capital was above 9% for the National group.

For the third quarter, YRC National Transportation LTL tonnage declined 6.7% and shipments declined 4.8%. We haven't seen much of a change in that trend in October. Despite the slower economy, premium services continue to show year-over-year growth at the National companies; and yield for the quarter was up almost 1% despite a pricing environment that has become more competitive as the year has progressed. We expect yield to be positive throughout the business cycle, as we balance volume and yield at the Nationals.

Moving on to YRC Logistics, despite the softer economy our Logistics business performed well. This is the third quarter in a row of sequential operating ratio improvement, primarily as a result of growth in profitable business and cost containment. YRC Logistics recorded revenue of $153 million which is about the same as last year. Operating income for the quarter was $4 million, and the operating ratio was 97.3.

Progress also continues on YRC Logistics' expansion into China. Our negotiations are on track to finalize a definitive agreement based on our preliminary agreement that we announced last quarter to purchase Shanghai's Jiayu Logistics. Just to remind you, Jiayu is one of the largest providers of ground transportation services in China, with coverage throughout the entire country. We believe Jiayu provides the right platform for growth in China and therefore will not be seeking another acquisition. Total cost is expected to be less than $50 million, paid in 2008, assuming the final agreement is reached.

Now let me move on to YRC Regional Transportation. YRC Regional Transportation reported third-quarter revenue of $600 million and an operating ratio of 100 or basically breakeven. LTL tonnage per day was down 2.5%, and LTL yield was up modestly 0.3% year-over-year.

We're very disappointed in the performance of the group and pace of the recovery. We view about half of the year-over-year decline as a result of the operating environment; and the remainder is really on us, but fixable. I'm now going to turn it over to Jim Staley and let him provide some further insights. Jim?

As Bill has stated, the primary issues affecting the Regional group performance are the difficult economic conditions we face in the Midwest and the integration of Bestway into Reddaway. A very competitive pricing environment now exists, which is resulting -- resulted in an approximate 2% yield deterioration at Holland when adjusted for current mix. They have not been able to offset this deterioration through productivity improvements.

We do you have the appropriate focus on improving our efficiency as we continue to examine our account pricing for yield improvement opportunities.

Reddaway is now a much larger company. The many issues of integrating Bestway operations and successfully concluding our labor contract negotiations in California are now behind us. Considerable employee training remains to be done, but our primary focus is on marketing and attracting new customers to a significantly different Reddaway footprint.

There are yield issues at Reddaway as well, and we are addressing a significant number of poorly-priced accounts in addition to aggressively addressing excess cost in the combined networks. Bill?

Thanks, Jim. Just to remind you, this is a group of companies that made about $150 million last year. We believe with the addition of more expertise from Keith Lovetro and some of the aggressive actions we are taking, which we can get into in more detail on the Q&A, we are confident that we can get these companies back on track over the next six months.

As most of you already know, Don Barger announced his retirement during the quarter, and Steve Bruffett was promoted to Chief Financial Officer. I would like to thank Don for his numerous contributions to the Company over the last six years. He has done a great job in leading the finance organization.

Steve Bruffett, our new CFO, is very qualified for his new position. He gained operating company experience and corporate finance experience in his nine years with YRC. I'm now going to turn it over to Steve to add some additional comments. Steve?

Thank you, Bill. If you look at our release this quarter, you will notice that we have taken some steps to streamline our financial reporting, primarily by eliminating the references to adjusted earnings per share and adjusted operating income.

We will continue to provide the same level of detail for you on a consolidated basis and at the segment level, just in a simpler format as we go forward. I would also point out that we are not a static organization. We will continue to evolve as a corporation, so we will incur gains and charges that we believe are relevant to our performance. Therefore, we will continue to point these items out and provide additional color on them. These changes are just to reporting format only and apply to just our supplemental information and the text of our earnings releases, so they don't impact the presentation of the income statement itself.

Let me now turn to our balance sheet and cash flow. During the quarter, our net debt-to-cap ratio increased slightly to 36.3%, primarily due to the seasonal nature of our business and the timing of our capital expenditures.

You'll also notice that there is additional cash and debt on the balance sheet for the quarter. The increase in cash is due to a recent term loan as part of our refinancing, whose proceeds are earmarked to repay a $150 million floating-rate note that matures in May 2008.

Our year-to-date free cash flow is about $67 million or about the same as this point last year when you factor in our discretionary pension fundings. But we now expect our full-year free cash flow to be in the 150 to $175 million range. During the quarter, we invested about $35 million of that free cash flow to repurchase stock.

Going forward, our anticipated uses for free cash flow continue to be acquisitions in China; debt reduction, including the prudent management of our pension obligations; and stock buybacks. Our gross CapEx for 2007 is expected to be 375 to $400 million, with property disposals offsetting about $50 million of that amount.

As we previously announced, we successfully increased our liquidity by $300 million through the increase in our bank credit lines and asset-backed facility. We were able to reduce our pricing in the process; and all this was achieved in a challenging credit market, which we view as a positive reflection on our Company.

With that, I will turn it back over to Bill to wrap up our comments.

Thanks, Steve. As all of you are aware, we have started contract discussions with the International Brotherhood of Teamsters. We started a lot earlier than we have previously, and we are focused on an early renewal of our contract, which would be in the best interest of our employees, our customers, and our shareholders; and are a little bit ahead of where we expected to be at this point in time.

As you also know, UPS recently announced an early agreement with the Teamsters that included a withdrawal from the Central States pension plan. We view this early agreement as very positive for the Central States pension plan as the funded status will improve substantially as a result. This increased funded status, coupled with prudent actions that the plan trustees have previously taken and the implementation of the Pension Protection Act of 2006, reduces our overall risk associate with the contingent pension obligations significantly.

To wrap up my comments, the transportation industry has been experiencing a significant slowdown since the fourth quarter of last year. The weak economic conditions of the transportation industry will have a significant impact on our financial performance until the economy begins to improve.

In spite of the weak economy, the National Transportation and Logistics businesses performed well and we are taking more aggressive actions to correct the performance of the Regional business. We continue to make progress on our strategic objectives, and we believe the Company is well positioned for the economic recovery which is still to come.

I might also just add that the $100 million target that we set out is independent of an economic recovery. That $100 million we think is doable in the current economic environment. With that, we will start to take your questions.

Jason Seidl of Credit Suisse.

Bill, getting to the Regionals, when you talk about some of the issues they were under -- forget the economy for a moment, because that is going to do what it's going to do. When you look at your book of business and you look at how you're going to have to go through and change that, isn't that very difficult to due in an environment like this? How long do you think that is going to take to correct?

Well, it is always difficult to go through and fire customers and get price increases where you've got unprofitable customers. But we started on this a few weeks ago and are making progress as we go through the book of business at both Holland and Reddaway.

So I think, yes, it is difficult, but it is doable. We have done it before, and we are in the process of doing it now. I don't know, we have got both Jim and Keith here, if you want to make any comments to add to that.

Well, the issue of getting rid of the very poorly-priced business is pretty easy to accomplish. What is more important is attracting replacement business. I think we have service levels at all the Regional companies that are very capable of attracting that replacement business.

Bill, I know we spoke about this in the past, some of your competitors have gone through a rebranding. The Freightways companies are very different now than they were before; and obviously you have had New Penn from the Roadway transaction. But have you given any thought of rebranding them as sort of just the YRC Regional group, to make them easier to manage, since they have gone through sort of so much consolidation and reorganization?

Yes, we constantly review our brand strategy, Jason. I think our feeling has been that the brands we have in the marketplace -- New Penn, Holland, and Reddaway -- are all very strong brands. So before we moved away from that, we would have to have a pretty well-thought-out brand strategy. But is obviously something we discuss on a regular basis.

Okay. Bill, can you talk about the economy a little bit? I know you frequently get out there and talk to shippers a lot. Because it sort of feels like it's going to get worse before it gets better; would you agree with that statement?

Well, yes, it is hard to tell, Jason, as you know. But one of the things that is troubling to us is we don't feel like we has felt the bottom of this. We haven't seen any indication that we are closing the gap with as last year, even though the comps are getting easier. So we are still pretty concerned about the overall economic health and haven't seen the kind of recovery we would have expected to see by this time.

Okay. Steve, question for you related to Bill's comments about you think Central States is going to be much stronger once the UPS infuses them with some money. Do you have any estimates of your estimated liability that are different now from what you filed in your K?

Well, as far as the withdrawal liability, I think those numbers wouldn't be impacted directly by that contribution. So those numbers would likely be about the same.

Okay, those numbers wouldn't change? Okay, I will let somebody else have at it. Thank you, gentlemen.

Tom Wadewitz of JPMorgan.

Yes, good morning. Bill, can you give us a bit more detail on the timing of the $100 million that you mentioned? Is that something that is an '08 target? And just a little more perspective on what is behind that $100 million that you are aiming for.

Sure, Tom. I think, you know, we have got some things that we can get done fairly quickly and probably would have a little impact on the fourth quarter. But it will be primarily a 2008 kind of impact.

As I said earlier, the two big buckets are taking a look at the things we can do to improve operating performance at the Regional companies. A lot of those actions are already in place. There will probably be some more that come out of our ability to access tools and talent from the National group now that we've got all the asset companies under one umbrella. So there is $50 million we are expecting there over the next couple of quarters.

Then, we are also taking a look at the infrastructure across the entire Company. Given the economic environment we are in, we want to make sure we have got infrastructure that is appropriate for the level of business. That is really where the other $50 million should come from.

We have started a lot of activities on the Regional side, as you might expect. We have not really started to look at the infrastructure question until just recently.

Okay, so from a Regional perspective, if we look at our '07 forecast for operating income, you might think of adding $50 million to that for '08 is kind of how you are looking at this program?

Right, I think that is fair.

Okay, what about the cost issues at Holland? How much room do you have to address those? Are they structural? I don't know, work rule related type of things or union type of things that you can't really address very easily? Or what do you really do to take out the cost at Holland in particular?

Let me start and then Jim I'm sure will want to add to this. But the business mix at Holland has shifted in terms of where the growth has come. That has really been a function of the fact that the economy has really hammered that upper Midwest pretty significantly. So the business growth that we have gotten at Holland has been around more the outer edges of the geography, and the middle part of what has been Holland's market has been really decimated by the economy.

That has required us to go back and take a look at how we have the system running and said up. It has caused us to go back and make sure that we have the right lanes running on the right schedule. It's also caused us to go back and look at some of the productivities that we have from a pickup and delivery standpoint.

So all of that work is being done as we speak. Some of it has already been implemented. But that is really the biggest piece of the cost picture there. Jim, do you want to add to that?

Yes, just to amplify that, their market has definitely shifted as their footprint has expanded. The business has contracted in the upper Midwest due to the economic conditions there.

The expansion that they have had over the past couple of years into the East Coast and Gulf Coast, Western edge of their footprint, has definitely changed the shape of their business. That has not been a profitable area of business for us. So it has been problematic in terms of where they're contracting and where they are growing.

They have gone through a significant network change of operations at the end of July that we are monitoring closely. When Bill spoke to some of the network modeling tools from the National carrier group that will be available to us, we will be spending a lot of time looking at -- is that network really the proper network to handle the changed shape of the Holland footprint?

So do you feel like the network changes from July are not working? Or is just more time required, or how do we think about that?

Definitely improving some; not at the pace that we hoped to. But definite improvement there. And we will continue working with that and implementing other network modeling tools.

Okay. Then I guess just one on the demand side. You seem to imply that maybe the year-over-year tonnage decline was similar in October. Is that right? Or is it sequential? Because I know October is a meaningfully easier comparison.

Yes, unfortunately, the comparisons are pretty similar with last year. So even with easier comps, it is not getting a lot better.

Right, okay. Thank you for the time.

Justin Yagerman with Wachovia.

I guess just a couple of questions. Last year was it October when tonnage turned negative? Then I guess when you look at the current environment, do you see --? It sounds like the answer is no, but I mean any kind of positive action off of that?

Then I guess, how do the comps proceed as we go out through the year? Do you see any potential inflection point from where you stand in the economy right now?

Yes, it was October of last year, Justin, when the economy started to soften. So October, November, December were reasonably weak. January and February were all weak. You will recall maybe that we have a bit of a blip in March which gave us some hope this year, but then things deteriorated pretty consistently from March of 2007.

So we are in the part of the year where we should have easier comps. But as I said, we just haven't seen anything that indicates we're closing the gap with last year from a tonnage standpoint.

I guess when you are looking at things to offset some of that on the cost side, you mentioned infrastructure is where you expect about $50 million of these synergies to come from.

Right.

You guys have talked about different things within your network over the years, like putting a chain down a Yellow Roadway, a Yellow terminal, and calling it a Yellow Roadway terminal; or combining different areas where you see less of a need for, I guess, redundant infrastructure.

What kind of opportunities exist now that you haven't exploited already? Is it more of the same and just taking another hard look at things? Or is it new solutions on that kind of front?

Let me give you a sentence, and then Mike Smid can elaborate, Justin. But I think one of the reasons that the Nationals have performed as well as they have is there has been a lot of really good further integration. We used to call it synergy. That has allowed us to take cost out and operate more efficiently even as the economy deteriorated. But Mike can give you some specifics around that.

Yes, Justin, I think it falls into several areas when you really take a look at it, down over the top of it. First of all, some of the issues that go on with just the optimization of assets. Things like trailers and tractors, when you begin to look at them as a larger pool, and how you utilize them or how you reposition them. Or what kind of money you spend, for instance, to reposition empties, to take one simple example. You get a much bigger picture and a much better approach to it.

As an example of that, within the National carriers over the course of the last year, we have taken out almost 500 pieces of power with some efforts earlier in the year, efforts later in the year, and continue to work on that.

Between the networks now, we have trailers that are dual branded, that you can change the brand in a particular facility. So if you need extra 20 or 50 or 100 trailers in a location and they happen to be available in another part of town in another operation, we have been able to make those transitions.

The big pieces, as you begin to look down at the transportation networks and you look at better ways to move freight, utilizing different opportunities whether it be intermodal or some of the purchased transportation, for instance, that occurs within the networks, you get a much different view and much more distinct opportunities to optimize it.

When you look at the resources and capabilities that you could have within a company, when you start to look at it as a -- truly look at it as a $7 billion or an $8 billion company, that becomes much broader. The skill levels and talent levels and capability levels that you can retain in the business and optimize what they do across the businesses gets much more powerful.

Finally, just the ability to look at the market and manage your efforts and your assets and your resources in terms of price and in terms of better penetrating particular groups of customers. It has been very effective.

Mike, how many distribution centers (multiple speakers)?

At this point right now, if you take a look at the National networks over the course of the last year or so, we have reduced or eliminated four distribution centers between Roadway and Yellow. We have now close to 50 facilities that are currently combined from a physical standpoint where literally we do share a facility.

There are a few facilities now that we have three companies in. At least one down in Chattanooga and a couple others that we are currently in the process of moving. The movement of those assets back and forth, depending who is growing, who is not, business opportunities, has been an effective means of better utilizing the physical assets, physical properties that we have in our business, and actually, with better service and market performance as well.

So I think, Justin, one of the reasons why we are moving the asset companies all under the same team is to further go down that road of integration. We think there is a lot of potential there.

Okay, so it sounds like you have been doing some of these things and seeing some success on the National side. But then if you are taking it to the Regional side, how does that differ from the other cost initiatives you're going to be doing that make up the other $50 million on the Regional side?

Well, you know, we're just going to be managing all of our assets more comprehensively. So you can take something as simple as the fleet; and now we've got an opportunity to really focus on the most efficient utilization of the fleet across all of the companies, not just across Yellow and Roadway.

The same could be said of facilities. The same could be said of tools and talent. So we've got a lot of opportunity here by looking at this as a more comprehensive set of companies.

Okay. When you talk to customers out there, are you getting any indication from people that there is any freight diversion going on ahead of your Teamster negotiations? Are there any worries that you are hearing from any of your customers at this point?

No, we really haven't seen any of that at this point. It historically wouldn't happen until much later.

Then I guess, Steve, I know Jason kind of asked the question; but getting at it a different way, not looking at the withdrawal liability necessarily, but have you guys done any kind of preliminary thought process on the cash flow impact on pension funding on an annual basis that will occur? Now that we are -- if you assume the $6 billion payment from UPS.

Well, that will be part of the labor negotiations that are underway. So, pending the outcome of those negotiations, that will determine what our per-hour contribution will be to those plans. To somewhat refine my answer, the UPS withdrawal itself does not have that big of an impact on our withdrawal liability. However, the revisiting of the actuarial assumptions by the Central States could incrementally increase that number for us if we were to think about withdrawing, which we are not.

Yes, and then to just kind of complete the picture there, given the numbers that have been published in terms of the contribution by UPS to withdrawing from Central States, we think that will have a material impact on the funded status in the short term of the Central States Fund. The numbers that have been already published would increase that by about 20%, given the number that has been reported for UPS contribution there.

So the overall funded status of Central States will go up significantly. As I have mentioned previously, that kind of lowers our risk from a short-term perspective.

Okay. Then, I think you said it but I may have missed it, and I will turn it over to someone else after this. But what was your free cash flow for this year? Then I guess how much of kind of pension funding, requisite or not, is in that number?

The numbers I said earlier, kind of touched on year-to-date and full-year. Year-to-date I said $67 million was a free cash number. That is considering the $170 million or so that we have contributed either to the non-union or multi-employer pension plans, that is factored out of that as discretionary funding.

The full-year number we have been talking about up to this point had been $200 million of free cash flow generated. We have now modified that number to the 150 to $175 million range. Again, those numbers adjust for the pension funding that took place earlier this year.

Okay, thanks. Appreciate it, guys.

David Ross with Stifel Nicolaus.

Good morning, gentlemen. The regional side saw its total tonnage decline more significantly than its LTL tonnage. I know Glen Moore is excluded from those comps. I thought that last year I guess you (technical difficulty) a lot of the truckload overflow freight. So can you talk a little bit about the discrepancy there and what is going on?

Yes, we're having a little trouble hearing you, David. I think the question was about why total tonnage declined more than LTL?

Yes, at the Regional level specifically.

Got you. Jim, you want to take that?

Glen Moore is included in those numbers, and Glen Moore had the loss of one significant customer which has resulted in a pretty significant decline in tonnage at Glen Moore; plus the lower number of truckload opportunities that we have both there and at the other Regional companies.

Okay. Then, as far as the Teamster talks are concerned, Bill, what are the main issues this time around that you guys are approaching with them? Assuming that you're not trying to get out of any multi-employer plans like UPS did; and you're not trying to necessarily get work rule changes because of the Regional companies, that I guess maybe you don't need a Regional presence in the National anymore. Is there anything else I am missing there?

Well, really, the focus with the discussions with the Teamsters has been on competitive workforce and being able to be competitive against our non-union colleagues. So that is really where the focus of the conversation has been. Mike, you might want to give a little more detail on that.

Yes, the contract negotiations this time around are quite a bit different than we have been involved with historically, in that the negotiations we are involved with currently involve companies that are part of our Company group. Therefore, really trying to take a much more specific approach to making sure that from our employee standpoint we are able to be competitive in the marketplace. And that we arrive at a contract that takes into account all the factors of both the marketplace and the changing fact of the marketplace. New services, new approaches to the business, as well as the best we can from a timing and economic standpoint.

So the most positive part of this entire effort is you might recall we had some early notices and an early start to the process, and a significant level of conversation that has gone on in trying to deal with those issues.

Obviously, being in the middle of it and it being an ongoing process, not in a position to talk real specifically. But it's a good process. We'd classify it is on target or ahead in terms of scheduling; and still work to do as we go into this fall.

Okay. Then another question on the Regional group. You said you are going back to the book of business at Holland and Reddaway now, a lot of the business is poorly priced. I guess my question is, after owning the company two and a half years now, did this poorly-priced business just creep up on you? I mean, how did the business get poorly priced? Was attention focused elsewhere? On integration rather than yield management? I guess what changed from when you bought it to now in terms of pricing?

Sure. Well, I think the biggest impact has been the significantly weaker economy in that part of the world. That has resulted in a lot more competitive pricing situation. So that is kind of the underlying fundamental there. I think the leadership changes we have had at Holland probably have exacerbated that.

So, basically a very competitive environment, where we didn't probably focus as much on yield management as we should have, with the shifting customer mix that we had and the change in the market from being very centered in that upper Midwest area to really growing around the edges. But Jim, you want to add to that?

Yield improvement opportunities have been there since the time of the acquisition, and we have been working hard at that. I would say that in the current economic environment it has been one step forward and two steps back, as we have attempted to protect market share in the upper Midwest. But also just trying to preserve our book of business and probably have not paid as much attention to some of the pricing decisions as we should have.

Thank you very much.

Edward Wolfe of Bear Stearns.

Good morning, guys. Just in terms of the Regional business, last quarter on the call you talked about expecting to see improvement this quarter. Obviously, it went the wrong way. Why do you have so much confidence, in a weakening environment, going into seasonally slower parts of the year, that this is going to -- that you're going to show improvement here?

I think a couple things. First of all, the actions that we took following the second quarter are starting to have some traction. It has taken us longer than we expected. We now have a couple of major things behind us at Reddaway. We have got the labor contract that we were negotiating through the third quarter completed. We also have consolidated the dual terminal structure in Northern California.

We have also now got the ability to bring some new talent and some new tools to bear on the Regional performance. That gives us some additional momentum. So it's a combination of the things we have already done starting to take hold and some other things that we will be doing that gives us the confidence.

I mean, Bill, at this point, the economy has become tougher. A couple years ago we were talking about operating income growth even in a downturn. Now the longhaul guys are down 30% and we're calling that relatively good on operating income side.

So knowing that the economy is feeling worse to you, and we're going into the seasonally first quarter, do you think Regional group could put up positive operating income in the first quarter if things don't get better?

If the economy stays where it is, we still feel pretty confident that we can get a lot done against that target of $100 million. Half of it is improved operating performance from the Regionals; the other half is infrastructure. So we have been pretty careful not to assume an economic recovery in that $100 million target.

The economy doesn't appear to be getting a lot worse. It just hasn't gotten any better. So I think as long as the economy doesn't continue to deteriorate, we feel pretty good about making progress over the next couple quarters.

That would include some positive operating income for the Regional groups in first quarter?

That is certainly our target, absolutely.

Okay. Then just the second thing on the Teamsters and the withdrawal liability amount. I think you have talked about in your past Q 3 to $3.5 billion as the withdrawal amount. Arkansas Best today noted that the former amount they talked about last year of 600 to 650 has gone up to 800 to 850 as a result of last week's filing of the new Form 5500.

Have you looked at that new Form 5500? Should we assume -- again this is before UPS withdraws -- but that the number of 3 to $3.5 billion it's probably up somewhere like 30%, like Arkansas Best, at this point?

You know, I don't think that we feel comfortable talking about any other number than the one we have already talked about. There are a lot of moving parts here. So it is really tough to nail that number down. I think the number that has been published is probably a good placeholder for now.

I would remind everyone, though, of two things. One, that is a contingent liability that we don't think -- because of the actions taken both legislatively and by the IRS as well as the additional funding from UPS -- that that is ever likely to be anything other than a contingent liability. Secondly, in the short term, our risk has gone down substantially because of those things.

Okay. So we will see that number again though I guess in your K when it eventually comes out (multiple speakers).

Right, exactly.

Thanks, guys for the time.

Jon Langenfeld with Robert W. Baird.

Morning. Can you just give some estimate for what pricing is actually doing? Your yields -- reported yields (technical difficulty) your reported yields held up a lot better than your competitors. But if you kind of looked at pricing on the Regional and National side, what would it be?

Well, you know, the numbers are what they are. They are slightly positive, which is better than some of our competitors from a yield standpoint. I think as I said earlier, there is a lot of work to do on the Regional side to continue to cull the customer book of business at both Reddaway and Holland.

But I think the demand-supply laws will continue to work pretty well, and I wouldn't expect that the yield profile is going to change substantially based on that.

Is your mix impacting that yield much at all in the third quarter?

Not a lot, very small impact.

Very little impact to the international or regional from mix year-over-year.

Okay, okay. Good performance there then. Then, if I look at the National side, do you feel like there is more pressure on your market share from some of the regional or superregional players that are moving more in the longhaul lanes?

Well, is pretty competitive out there across the board, so I am not sure there has been a significant shift. But it is certainly very competitive.

I guess I look at some of that freight that maybe was more captive to yourselves, Arkansas Best, and Watkins. I am wondering if you are seeing more of the Conways or UPS Freight going after that longer-haul business that they didn't compete in a couple years ago.

Well, you know, Watkins was a very good competitor of ours prior to their acquisition by FedEx. They continue to be a very good competitor. Arkansas Best of course has been there right along. So there have not been new entrants there in terms of brand-new capacity. But what we have seen is continued increase in the competition as the economy has continued to weaken.

But you're basically seeing the same players, though, on that longhaul market. You are not --?

Same players, different flags, but pretty much the same players.

Okay. Then just a kind of give us more clarity into what is happening on the Regional side. Your revenue sequentially was down $10 million, your profit was down $18 million. Are there added costs you are incurring here in the short term to get this turned around?

No, I don't think there will be any meaningful incremental cost to get some of the fixes in place. We did have, as I said, some focus on eliminating the duplicate networks in Northern California. Obviously, working our way through the labor contract in the West has been an added burden.

But most of what we have got going revolves around using the tools we have got and sort of re-engineering the network. So I wouldn't look for a lot of incremental cost.

But even in the third quarter, did incremental cost exist? I'm just kind of reflecting on the fact that your revenue, your profit was down on a dollar basis twice as much as your revenue. More than what you think incremental negative leverage would bring you. So I'm trying to understand why that is the case and how much --?

Well, yes, there is a piece of the integration of Bestway Reddaway there, where -- while we were running duplicate networks we had incremental costs from a line haul standpoint and some other incremental costs. But Jim, you might want to talk more about that.

I would also jump in here that part of what you are seeing there sequentially is the relative fixed nature of the cost structure at Holland and the direct point model. That is part of what we are alluding to as part of our action plan to make that be a little bit more of a variable cost network. So we would expect to see improvement in that as we move forward over the next couple of quarters.

Good color. Thank you.

John Barnes with BB&T Capital Markets.

Hey. Good morning, fellows. Bill, the $100 million you talked about of kind of focused area of cost, is that $100 million something that has kind of been teed up for a while and you have been working through the other issues? Whether it be the synergies between Yellow and Roadway, or the integration of Reddaway and Bestway. And it is now more of a focus because of the issues with economic backdrop and all.

Or is this an incremental $100 million that you looked at and said, okay, in order to maintain some level of profitability if volumes are going to deteriorate further, we have got to get more aggressive about this?

Well, I do think that the economic environment has kind of made us more aggressive in this area. The stuff that has been going on at the Regional companies for the last three months is obviously a big part of the $50 million improvement of operating performance there.

But the infrastructure adjustment that we're going to be going through I think is a recognition of the fact that we can't really predict the economic recovery. We are going to get ourselves as lean and mean as possible here as we enter 2008, so that we have a minimum amount of infrastructure cost to support the business levels.

All right. Can you give us an idea, in the two or three buckets of infrastructure that you are talking about, what kind of reductions are we looking at? Whether it is line haul equipment or actual terminal facilities and so forth.

Well, I think there is a big category that is doing things only one time in one location as opposed to doing things in multiple places. We have got a lot of that, that is still going on. The plan has always been to eliminate that redundancy. But I think the economic environment has pushed us along that road faster. So there is, we think, a lot of costs there.

Then there is another piece of cost, which is really leveraging now what is being done across all of our asset base companies. Those will be two of the bigger buckets that we have got.

Okay. Then lastly, as you go through the infrastructure rightsizing, can you comment on labor force? Where do you feel you need to take the labor force, given the current freight environment?

Yes, it will be away from the frontline. We have done a pretty good job at the Nationals of managing our cost. I think this will be more overhead, G&A kinds of costs that we are looking to take out from a people standpoint.

Very good. Thanks for your time, Bill.

Okay, thanks a lot for joining us, and we will talk to you at the end of the year.

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