Yellow Corp (YELL) 2008 Q2 法說會逐字稿

Good morning. My name is Michael and I will be your conference facilitator today. At this time I would like to welcome everyone to the YRC Worldwide second-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS)

I will now turn the call over to Stephen Bruffett, Executive Vice President and CFO.

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

The statements made by management during this call that are not purely historical are forward-looking statements within the meaning of the Private Litigation and Securities Reform Act of 1995. This includes statements regarding the Company's expectations and intentions on strategies regarding the future. It's 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 doesn't allow us to fully discuss all risk factors. For a full discussion, please refer to our 10-K, last night's earnings release. Bill Zollars and I will provide our comments this morning. Mike Smid and Jim Ritchie are available to participate in the Q&A session.

We will now turn the call over to Bill.

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

We executed as we planned during the quarter and are gaining momentum across the organization. We have several key initiatives across YRC that are helping to drive this momentum. I will provide an update on them, so that you have a clear understanding of what we are working on. First, and very importantly, the regional segment returned to profitability in the second quarter earning about $3 million, a very solid recovery from the loss of $30 million in the first quarter.

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

The next key objective during the second quarter involved the national companies. The goal was to complete all the planning necessary for successful execution of the changes of operations at Yellow and Roadway. That preparation work was completed on a timely basis, which enabled the changes of operations to take place as scheduled in early July. These changes are the first of three phases planned for this year, the second coming later this summer and the third is scheduled for this fall.

The resulting new velocity networks improved speed, reliability, and efficiency all at the same time. As mentioned previously, we will have accelerated service in about 40,000 lanes, while reducing over 20 million circuitous miles. That is worth about $40 million.

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

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

A related topic, which also begins to tie together the collective capabilities across our corporation, is the establishment of YRC Worldwide as a customer-facing master brand. The family of brands and our operating companies will remain in place as we tie them together under the YRC master brand. By the way, those of you who watched the British open last weekend might have noticed that Jim Furyk was sporting the YRC logo. That is a part of this brand building effort.

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

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

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

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

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

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

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

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

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

Moving now to the consolidated level, I will provide an update on our leverage ratio. We were right at 3 times at June 30 against a covenant level of a 3.75 times. That ratio was comprised of total debt at $1.19 billion and trailing 12-month EBITDA of $396 million. Debt did move up about $20 million from the March 31 balance, primarily due to the seasonality of working capital, but it's still $39 million below our year-end level.

So we continue to manage cash effectively across the organization and we are continuing with our internal goal of keeping the leverage ratio at or below three times. We anticipate the debt level will increase during the third quarter by approximately $60 million, due to the Jiayu acquisition and further seasonality of working capital. But we also expect a proportionate increase in our trailing 12-month EBITDA, so the leverage ratio at September 30 should remain right around three times.

Then by year-end we expect to decrease the ratio of fair amount as we delever from free cash flow generation in the fourth quarter. So we anticipate that a comfortable cushion will be maintained under the leverage ratio as we move through the remainder of the year.

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

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

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

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

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

Also beginning on August 1, we will incur the health and pension increases as a part of our new labor agreement. These increases are larger than those from the previous contract and in the near term represent a higher cost base for us, about $0.15 in the third quarter, $.15 a share. By year-end though we expect the network benefits to outweigh the increased health and pension costs significantly.

To say it another way, we are trying to give you some transparency into the earnings growth quarter-to-quarter. If you looked at the second quarter, we believe the number is about $0.38 from an ongoing operations standpoint. The number on an apples-to-apples basis in the third quarter will be somewhere between $0.50 and $0.60.

Keep in mind also that the higher health and pension costs that I have just mentioned come with the benefits of providing a cap on our pension contributions to multi-employer plans. We are protected from any increase in benefits requirements for the next five years.

So to summarize, we aren't where we want to be much, but we do feel good about the direction we are heading and the progress we have made over the past several months. With that we will stop and take some questions.

(OPERATOR INSTRUCTIONS) Tom Wadewitz, JPMorgan.

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

Yes, I think the operative numbers there, Tom, are we lost $30 million in the first quarter and we made $3 million in the second quarter. Regional is on a stand-alone basis. The activities that have been going on there are both on the operating side as well as on the book of business side, and we have made significant progress on both. The footprint change was obviously much more dramatic at Reddaway, so that had a tremendous impact on Reddaway. Frankly, once we made that change at the end of February, snapped them back into a profitable position almost immediately.

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

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

Well, they were a significant part of the turnaround from minus 30 to plus 3. We would expect that trend to continue as we move through the third quarter.

Okay. Then can you give us some more detail just in terms of understanding how the rollout of the utility workers, I guess you are doing it in three different waves at National. How specifically that drives cost savings? It sounds like that is what you are counting on to offset the $0.15 from the increased benefits.

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

Okay.

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

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

Second part of the efficiency is fewer transfers. The way the utility employee is utilized in this network is it allows the employees to move end-to-end with the shipments. So they can participate in the initial loading or specific type of pickup or delivery. They can provide the line haul service to the consolidation or deconsolidation point. They also then get involved in the transfer movement of it shipments.

It takes a lot of the hand-to-hand or the hand offs that we have typically had in our network and allows individuals to work through them. Fewer miles and much more effective service profile. It takes time out of the transportation and probably a real important aspect of this is the velocity that shipments move through the network. Improve our asset utilization quite a bit as well.

Does that help?

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

We have solid visibility in terms of the number of miles we operate, the labor that we apply to it, and, most importantly, the attractiveness of it from a market perspective. We have seen on a localized basis some nice improvements in shipment counts in those particular lanes. While any major change like this in these networks takes just a few weeks in order for it to ramp up, we would say that we are very pleased with the first couple of weeks in Yellow, first week and a half in Roadway.

Holland is a little bit further along. It's been very well accepted from a market perspective and it's providing the types of performance we expected.

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

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

That's true for both national and regional or were you talking specifically on regional?

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

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

Yes.

Okay, great. Thanks for the time and the responses.

You bet.

Jon Langenfeld, Robert W. Baird.

Good morning. Curtailment gain side, can you just run through which divisions -- how much fell in each division?

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

Anything on the regional side?

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

Got it. Then what are your expectations for pension, the company pension plan payment this year?

As far as funding the non-union pension plan?

Yes, correct.

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

The minimum you can make is what, $5 million?

Yes. $5 million is right.

This year anyways?

Correct.

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

It's $40 million to $45 million, in that range depending on how the currency translation works out and the exact math at the closing. But we do anticipate a mid-August closing on that.

Okay, the $60 million was just the amount of debt you would take on given working capital in that?

Yes, it's considering both factors -- Jiayu and working capital.

Then on the CapEx side, how much operating lease capital, equivalent capital expenditures did you have in the quarter?

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

Okay. Is the network, at this level of operating lease -- operating leases and capital expenditures, is the network sufficient enough that you could sustain this type of capital plans the next couple of years if the environment is bad?

Yes, we are largely feeding our equipment needs. In a lower volume environment we are keeping our fleet age maintained. We are not creating any future issues for ourselves at these levels. We have curtailed it a little bit, but for the most part this is largely a manageable run rate.

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

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

Yes, it does.

Obviously, assuming no deterioration in the environment but your plan would be to be profitable there --?

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

Better in terms of the actual profit dollars or --?

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

Okay. Good, thanks for the time.

You bet.

David Ross, Stifel Nicolaus.

Good morning, gentlemen. First question was just on the yields, especially at the national level with the LPs. Was pricing actually a little bit better than reported due to moving into shorter length of haul business? I know that you have had a regional effort focused internally there with the national companies.

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

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

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

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

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

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

Okay, and then Mike talked about the network improvements that are going on, especially on the national side -- fewer miles being run, fewer handlers. Is that eliminating facilities or are you just better utilizing the facilities you have?

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

Okay. The last question I have is just kind of along the same line. You have metrics on percent of loads that bypass brake bulk today or direct loads versus where they were a year ago and then maybe where you think they should be next year?

Yes, Mike can give you those numbers.

We keep the information on what is called a transfer ratio, that is the number of times a shipment gets touched in the network at an intermediate point. It doesn't include any positioning for pickup and delivery, but just a pure transfer. The transfer ratios in this new network begin to move to a point where -- from something two or above at one time historically, because of the pure design of the hub and spoke network to one that begins to decline.

So now it would be in the area of 1.06, 1.07 meaning just a little bit over one time. That number will continue to decline as we make the additional changes in the network throughout this year. We do expect that number to drop below one eventually.

Thank you very much.

You bet.

John Barnes, BB&T capital.

Good morning, guys. Bill, can you talk a little bit about, we spoke about this before, just your anticipation for when volumes for both national and regional go positive? You had indicated you thought by the end of this year we would see positive volume comps. Can you just take us through your idea from a monthly progression?

July we have heard has gotten off to a little bit softer -- are you anticipating a normal peak season and therefore volumes (technical difficulty) in the fall and then continue that way and then maybe get weaker again in December. Or is there something -- I'm just trying to get a feel for how you see things progressing for the balance of the year.

Sure, I don't think we see any major change. We see a gradual improvement every month. The comps get easier as we go through the balance of the year. What we have seen since April is the gap is continued to narrow and, as I said, sometime in the fourth quarter we will probably crossover into positive territory on the national side of the business.

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

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

It hasn't been too different than what we expected. Part of what we did there in addition to changing the footprint was to go back and look at our book of business. We actually had customers that were unprofitable that we eliminated, so some of the decline was self-inflicted. We did pick up a significant amount of business at Yellow and Roadway as we exited those markets though. Probably about what we expect and maybe a little bit better.

Okay, all right, very good. Lastly on the cost side, I understand your commentary about the labor agreement, the impact to earnings from that. But your commentary about improve productivity being able to offset some of that, could you just walk us through what is left? My understanding was some of this productivity gain was part of the original $100 million in costs saved.

I'm just trying to get a feel is this an incremental amount of productivity or was the $100 million cost save and some of the productivity that went a long with that always there with the idea that it was going to offset this $0.15 impact in the quarter from the contract?

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

Now the benefit we will get from the velocity networks is an addition to that. Frankly, we aren't going to get much of that in the third quarter. As Mike said, it takes a little while to start to realize the efficiencies there, but we certainly should start to see them in the fourth quarter. So those are all in the addition to the $100 million.

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

Correct.

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

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

The design with this new network really allows for a very quick throughput. Instead of the traditional pipeline approach to distribution where there was just round-the-clock volume, these processes are started and completed in four to six hour windows.

So the application of labor, it's important to know that, first of all, the utility employee is heavily involved in the intermediate function as opposed to some of the significant standing dock operations that we had. Then secondly, the opportunity to supplement on a real short order basis helps as well.

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

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

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

Where do you expect it by year-end?

That is the number, somewhere in the 30s.

About 30% by year-end. All right, very good. Thanks for your time, guys.

[Brian Geiger], Merrill Lynch.

I noticed you spoke a little bit about a leverage debt to EBITDA ratio. Is that on an adjusted basis or unadjusted?

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

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

I'm sorry, state that again.

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

No, we do not.

You don't have that. And you obviously don't have a target for that either then?

No.

Okay, thank you.

Jason Seidl, Dahlman Rose.

Hey, guys. A couple quick questions just for clarification. Bill, the $0.15 that you're attributing to the contract increases on August 1st, is that due to like a one-time payment or is that just going to mean that things are going to be higher from thereon going forward?

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

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

Yes, we actually use our own operating companies almost exclusively.

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

Right.

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

You bet.

[Neal Shear], [Shear Capital].

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

You bet.

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

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

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

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

Sorry, due to our what?

Footprint reduction.

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

Again, thanks for the quarter. Some of us are happy.

Great, thank you.

Thank you.

[Raffi Savitz], Credit Suisse.

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

Yes, we have north of $700 million of liquidity available under those combined facilities today. If you put the constraint of the leverage ratio on those -- on that capacity, it still leaves north of $300 million of liquidity available to us, which is a more than comfortable cushion. Like I said, we anticipate maintaining that through the next, through the third quarter and then by year end have even greater liquidity available to us as we delever from our seasonal free cash flow.

I think all of that is very manageable and we are executing against the targets that we set out for ourselves.

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

They are largely driven by GAAP numbers, correct.

Okay, fair enough. Just one last question in terms of your bond maturity, I guess there is a Roadway bond coming due in December/

Correct.

How do you hope to address that?

Well, we are being opportunistic. We are keeping our finger on the pulse of the markets and looking at various and sundry alternatives. So it will probably be a combination of factors that get us there. We are obviously interested in extending debt maturities at some point in the future, but we will be opportunistic about that.

We will -- we are accelerating the sale of some of our real estate facilities and taking actions that free up more of those to help ourselves. Our free cash flow helps. The capacity under the credit facilities help. So it's a lot of things put together that I think will get a comfortable resolution to those Roadway notes.

What about an equity offering? Is that a possibility?

We don't say never to anything. It's not on the front burner at this point in time, but we consider all alternatives.

Thank you very much.

You bet.

Justin Yagerman, Wachovia Securities.

Good morning, gentlemen. How are you?

Good.

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

Let me start here, and Steve may want to add some comments. But just to refresh everybody's memory, when we gave the guidance of $0.30 to $0.40 we excluded that impact. The reason we did was because it was so extraordinary and so outside the normal course that we thought we probably ought to call it out. It was not in the guidance and was not in the net $0.38, therefore that we reported as really reflective of operating earnings.

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

Okay. Then I guess just piggybacking on Jason's question earlier. With the $0.15 being part of formal increase in wages and benefits, should we be thinking about a continuing number on this guidance as $0.35 to $0.45 as opposed to $0.50 to $0.60 that you guys had mentioned earlier?

What I was trying to do with that, Justin, was to give people some transparency into what is going on in the operations. If you looked at it on an apples-to-apples basis we are talking about $0.50 to $0.60. But because of that $0.15 impact, we are going to be talking to really about $0.35 to $0.45 is the guidance that we will measure ourselves against.

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

We will be announcing the new plan to the employees probably sometime in the fall. You should not expect any incremental cost to come out of the new plan.

Okay, all right, good. I guess, Bill, you spoke earlier and Mike touched on also, increased cohab that you think is going to take place over the next couple of quarters. That is encouraging, obviously, to take some of the cost out of your network. You also have these networks and systems integrations between Yellow and Roadway.

I guess I'm curious how long do you think the runway continues to be before Yellow and Roadway are on the same system? And then, effectively, the barriers to consolidating those two companies outside of your labor issues become much lower I would think. I guess is that really what we are moving towards here? Even if you keep the two brands, that the networks are really kind of one and the same. How are you thinking about that in terms of the evolution of these companies over the next two years as we hopefully move into a better economic situation?

I think the job one here is the common platform. As I have mentioned earlier, there is nothing heroic about that. There is no new technology that needs to be developed, we are really moving everybody onto existing technology.

But what that does in the short-term is it gives us the ability to look across those two networks and manage them much more comprehensively than we have been. It also allows us visibility at the customer level that we really haven't had across those companies. That is the first part of this plan that is going to take us until the end of next year probably to get that done.

Till the end of next year?

Probably, yes.

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

I don't know this and that can specifically point one to the other. We certainly know that as we went into our contract type negotiations last year and into a tough market at the same time that there were some issues with market share. As I mentioned earlier, we are seeing very quickly with these network changes and a new approach to the market from a corporate account standpoint that there are opportunities to regain portions of that share and move toward growth.

But to try to specifically pinpoint one versus the other, we have spent a lot more time looking at the growth side and what it's going to take to do it than that type of analysis.

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

That is definitely evident and you guys have done a good job on keeping those yields high. Bill, I have asked this question on a couple of calls and it would be interesting to hear your answer, because you have been pretty vocal about the economy not being good for the last six months or so.

If you were a pilot in this storm and you were just looking at your instrument panel right now and thinking about what that is saying about the economy without trying to filter out what you are seeing in front of you, what does that read right now? What are you thinking about when you look at just the numbers that are coming out of your company and the other companies that you guys compete with?

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

Right now, our data would say that things have stabilized. If we don't get another shock, I think we are going to be there for a while, maybe till the end of the year. But it's not getting worse, which is good, and the fact that the oil price has abated a little bit I think is also good news.

Fair enough. Thanks so much.

That wraps up our Q&A session for today. We will turn it back over to Michael to conclude the call for us.

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