Yellow Corp (YELL) 2008 Q3 法說會逐字稿

Good morning, my name is Erin 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 Sheila Taylor.

Good morning and thanks for joining us for the YRC Worldwide third quarter 2008 earnings call. With us is this morning are Bill Zollars, the Chairman, President and Chief Executive Officer of YRC Worldwide; Tim Wicks, our CFO; Mike Smid, President of YRC North American Transportation; and Jim Ritchie, CEO of YRC Logistics.

Statements made by management during this call that are not purely historical are forward-looking statements within 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 on 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, last night's earnings release and today's 8-K filing. Bill Zollars and Tim Wicks will provide our comments this morning. Mike Smid and Jim Ritchie are available to participate in the Q&A session. I'll now turn the call over to Bill.

Thanks, Sheila. First, let me start by welcoming Tim to YRC. Tim joined us less than two weeks ago as our CFO and has jumped right in. We're excited to have someone with Tim's background on our management team who can lead our finance organization during a time of transformation.

Regarding the third quarter, it did not turn out the way we expected when we talked in early September. I will give you a little color on why but then I'd like to spend our time talking about the National integration and how it will change our results going forwards. Throughout the third quarter, the economic environment progressively weakened resulting in lower than expected volumes and more competitive pricing. Though we were not expecting a seasonal peak in September, we would have expected at least a normal end of the quarter spike, which didn't happen in any of our operating companies.

Looking more closely at our segments we are pleased with the progress at Logistics and Glen Moore, our truckload business. Although Glen Moore reported a slight loss for the quarter, their results significantly improved over the combined losses of $8 million in the first and second quarters. In fact, Glen Moore results improved each month throughout the third quarter and we expect that improvement to continue into the fourth quarter.

YRC Logistics reported a profit each month of the quarter and ended up about as planned. As expected, Logistics completed the acquisition of Jiayu in August which further expands our global presence and for the first time gives us assets on the ground in China. Even with the slowdown in the global economy, Jiayu remains solidly profitable, free cash flow positive and continues to grow.

The Regional results were a little lower than we thought they would be, as Holland is still feeling the impact of the slowing in the Upper Midwest and the ripple effect of the auto industry. Holland has made further progress on reducing costs while improving service but the lack of density in the outlying areas of the network continues to challenge profitability.

Reddaway, on the other hand, has made significant progress since realigning their territory in February and, in fact, reported their first quarterly profit since the second quarter of 2007. This was mostly the result of improved service levels and stringent cost controls in addition to selectively taking advantage of the [orcarver] strike.

New Penn remains solidly profitable though their results have also been impacted by the slowing economy and competitive pricing environment in the Upper Northeast. The financial performance of the National companies was the most unexpected and disappointing in the quarter. The Nationals had an impact related to the recent hurricanes, the accelerated integration and the effect of the increased pension costs under our labor agreement.

Even without these additional costs we are not pleased with their performance. The LTL tonnage per day was down by 9% compared to last year which was slightly better than the year-over-year trend in the second quarter. But LTL shipments per day were slightly worse at 10.6% lower. You might recall that we expected the year-over-year gap in volumes to narrow as the quarter progressed.

But given the continued decline in the economy and mote shifts in some of our customers' logistics models that did not happen. Regarding the mote shifts, over the last year some of our larger customers have been moving toward more consolidated models than in many cases allow them to use their internal fleets and reduce volumes with external carriers.

We expect these trends to slow down as we move through 2009 since there is a base level of LTL volumes that is essential to our customers supply chains. Even though our year-over-year volume trends are fairly consistent with previous quarters the sequential change in operating income was more significant given that our base volume levels are now lower and pricing has become more competitive, as I mentioned before.

Attempting to adjust for fuel and the impact of mix, LTL revenue per hundred weight was down around 1%. This is about 0.5% worse than we expected when we talked to you in early September. And with the national large revenue base translates to about $8 million of lower operating income. Although we expected pricing to be down in September, the level of decline was a little surprising as August was actually much better than July in the pricing area. So far, September volume and (inaudible) trends have continued into October.

Now, let's turn to the future. We obviously can't control or predict the economy, but there are several initiatives we have had underway and additional ones that we are implementing to better position the Company to weather these times and come out as a much stronger organization. Obviously, our biggest opportunity to enhance service and improve efficiencies is the integration the Yellow and Roadway.

As you know, we are in the process of taking the next steps by combining the operational networks and local sales teams of these two brands. We spent a considerable amount of time over the last few years getting ready for this integration and our customers and our employees are supportive. In fact, many of our larger customers have expressed support for the benefits of the integration including Walmart, General Electric, [Willesley Ferguson] and Hallmark just to name a few. We're also pleased with the collaboration of the teamsters in these efforts. In that regard a joint letter from teamster leadership and me outlining the substantial benefits of the integration has been prepared for our customers.

Now, let me take a few minutes to update you on the integration progress and the timing of the benefits. First, I think it is important to understand that this is a game changing move for Yellow, Roadway and YRC. But that said, there are not any new processes or technologies that are being implemented. As a matter of fact, we have been piloting some facilities in Canada for several months and as I've said before we've been moving in this direction for years.

For example, Yellow and Roadway were already sharing more than 60 facilities and a dedicated team has been working on data conversion for nearly two years. Our largest customers have been working with our enterprise solutions group since early 2007, and in the last few months our corporate sales teams have been fully integrated to make it easier for customers to do business with us.

When we originally designed our integration plans we allowed the flexibility to accelerate or slow down the process depending on a number of factors including our level of confidence and the volumes moving through the system. Based on the support from customers and our labor partners in addition to our experience so far we've gained a level of confidence necessary to accelerate the process further.

Throughout the quarter, we have been preparing our employees, facilities and customers for the integration and every week the list of consolidations will expand. Currently we have over 20 consolidations either done or in process and expect to have 80 by the year end with no disruptions. As we stated before, we are starting with the smaller facilities and focusing on the pick up and delivery functions.

These locations generally only take a couple of weeks to get consolidated and involve fewer moving parts than the larger distribution centers. Early next year we expect to start consolidation of some of the distribution centers that are more complex to implement but also represent a larger portion of the expected savings. By the time we consolidate the DCs we expect the risk will be lower given our experience with the other facilities, the enhanced service to our customers that they will already be experiencing and the fact that it will be our seasonally slowest period of the year.

Now, with respect to savings, the majority of the early consolidation were facilities already shared by Yellow and Roadway as I mentioned. But we do expect to remove about 30 facilities from our National networks in the fourth quarter. Keep in mind, these are the smaller facilities that are not expected to generate significant savings or proceeds from asset sales.

But mid-next year our consolidated operations will be about 150 with potentially another 60 facilities removed from the networks. We still feel very comfortable with a run rate of $200 million of operating income improvement by the end of 2009. To put this number in perspective, Yellow and Roadway had about $6.5 billion of annual expense,of which labor costs for Linehaul, P&D and [Doc] are about $3 billion. If we remove just 5% of that base, we are talking about $150 million of annual savings.

Other significant opportunities are purchase transportation, DNA and office and management personnel which combined are around $2.5 billion a year. Again, taking out 5% of that base is another $125 million. So we believe we will be able to take out at least $200 million of cost on an annual run rate basis by the time we get to the end of next year. We think that's very realistic in both amount and timing of the expected savings.

We are not planning for anything really notable in the fourth quarter of this year but for 2009 we expect savings to ramp up at an accelerated pace. In the first quarter of 2009, run rate saving should be around $10 million, in the second quarter about [$50] million, in the third quarter $120 million and a full $200 million by the end of the year.

These numbers are net of implementation costs and assume an expected level of customer attrition, although we would be very disappointed to see that level of customer attrition. But we think it is prudent to put it in. I would remind you that when we acquired Roadway others expected that we would lose a significant amount of business which didn't happen.

With that said, we do expect that as we consolidate our networks and improve our cost structure, some business will not make sense in our National network. We'll work with those customers to evaluate options with other YRC companies moving that business to other YRC networks or we'll reprice the business or if needed let it go back into the market.

We are excited about the opportunity we have in front of us to significantly reduce our cost structure while improving network density and enhancing our service to customers. Yellow and Roadway have been around for 80 years and have an unmatched scale and presence in the market. Our customers expect us to continually improve their supply chains and this integration will do just that.

Before I turn it over to Tim, I wanted to provide a little color on the progress we've made on our cost savings initiatives. As you may recall, last year we committed to remove $100 million of cost from the business. We said then that about $50 million would come from the Regionals and the $50 million from the rest of the organization, primarily in infrastructure.

We believe a large part of the Regional improvement is apparent in their operating results. Since first quarter of this year and they closed 27 unprofitable service centers the Regionals operating income has improved by $23 million. This improvement occurred despite headwinds of nearly $11 million from lower volumes in yield and another $15 million of contractual wage and benefit increases.

If you excluded these two items, the Regional operating income would have improved by about $50 million from the first quarter to the third quarter. Regarding the other $50 million, we have actually done better than that. Since third quarter of last year we've reduced nonunion back office positions by over 500 and have aligned our retirement benefits across our companies.

These two items alone have created annual savings of more than [$7] million and this is exclusive of the one-time curtailment gains of $98 million. In addition, we have eliminated nearly $10 million of marketing sponsorships and other discretionary costs. Keep in mind, these savings are not volume related and should continue even when volumes improve.

We continue to identify additional opportunities to remove more costs from the business and believe with the $200 million from the integration we will be well positioned when the economy recovers. I will now turn it over to Tim to provide further details on our financials.

Thanks, Bill, and let me say that I am excited to be here. We have many opportunities in fronts of us and I am looking forward to the challenges. Before I talk about liquidity, let me provide some detail around our third quarter earnings.

Our (inaudible) earnings per share were $0.63 which included $0.84 of a curtailment gain related to making our nonunion retirement plans consistent across the companies, $0.10 for organization charges primarily related to severance, and $0.21 in gains on property disposals. It is important to note that the actual operating income from curtailment and reorganization charges were very much in line with what we provided in early September.

The difference in EPS associated with these two items resulted entirely from a reduction in our effective tax rate from 36.1% to 22.3%. This change in tax rate resulted from lower than expected income, the impact of our propane the tax credits on that lower income and the income allocation among our operating companies and their respective rates. At this time and excluding any potential non-cash impairment charge we expect the fourth quarter tax rate to be around 36.5%.

With regard to our leverage ratio, for the third quarter we ended up at 3.18 times, well within the 3.75 covenant level. The ratio was comprised of $1.19 billion of debt and trailing 12-month EBITDA of $373 million. We expect our ratio at the end of the fourth quarter to be consistent with this level at around 3.2, well within our 3.5 limit that will be effective at 12/31.

Even with our August acquisition of Jiayu, we reduced our balance sheet debt from second quarter by $11 million. We expect to reduce debt by at least an additional $100 million in the fourth quarter. The debt paydown should be the result of additional proceeds from asset sales including potential sales and lease back transactions, cash from working capital, cash investment on our books at the end of the third quarter and other capital transactions the Company might enter into on an opportunistic basis.

Regarding potential sale and lease back transactions, we've historically entered into these transactions to create flexibilities for future network changes. We are now involved in much larger opportunities that will allows us to monetize our significant real estate assets of more than $1 billion. Where these potential transactions were involved, facilities that are core to our future, obviously we'll enter into long-term arrangements with the right of first refusal.

These transactions are (inaudible) financing mechanisms and make sense given that our experience and focus lies in transportation and not real estate management. As we finalize additional capital initiatives we will provide you more detail. One example that was completed just yesterday was a draw of $250 million on our credit facilities. We primarily intend to use these funds to opportunistically retire other debt for general working capital needs.

It is important to understand that the Company continues to take proactive measures to reduce debt and improve liquidity. As Bill mentioned, while we cannot control the economy and we need to better position ourselves, we will do that from a balance sheet perspective.

As you might recall, earlier this month we drew $325 million on a revolver and announced the redemption of the Roadway and one tranche of the USS notes. And we believe this was a prudent move given the unrest in the broader capital markets and the notes were at higher interest rates than the revolver.

We also have satisfied all meaningful debt maturities until April of 2010. We will continue to monitor the financial markets for opportunities to further optimize our capital structure.

Moving to capital expenditures. We spent a gross amount of $27 million in the third quarter and generated $68 million of proceeds from disposals generating a cash inflow of $40 million. We continue to lease our equipment when appropriate and have stopped the equipment CapEx as a planned part of the National integration which gives us the flexibility to remove older equipment from our fleet and sell excess facilities.

For the full year 2008 we now expect gross CapEx to be between $150 million and $175 million, a little lower than our initial guidance of $200 million. And with proceeds from disposals of at least $100 million, we now expect net CapEx of $50 million to $75 million for the year. We will provide 2009 CapEx guidance when we talk in January, but we would expect it to be significantly lower than our previous annual spend of more than $300 million as our requirements have changed due to the integration.

Before I turn it back to Bill, let me comment on the impairment test that we are currently doing. Due to the recent decline in our stock price, we are required to accelerate our annual impairment review. At this time, we do not have the test completed but we expect it to be final before the filing of our 10-Q in early November.

If we do report an impairment charge, it is important to remember that is a non-cash charge that doesn't impact our financial position and will be excluded from our leverage ratio. At this point, I will turn it back to Bill for his closing comments.

Thanks, Tim. Given the uncertainty in the economy, we won't be providing specific earnings guidance for the fourth quarter. We do believe the economic environment remains challenging and we are not planning for economic improvement in the near term.

With that said, there are a couple of points I would like to emphasize before taking questions. First, we continue to accelerate the National integration and increase our confidence with each step. We also feel comfortable with the financial benefits from the integration. Second, we are aggressively addressing our near-term liquidity and improving our balance sheet. This includes asset sales and debt paydown, among other things.

Finally, we continue to remove significant costs from the business and identify further opportunities to improve efficiencies and enhanced service. In summary, we feel good about the things we can control and our ability to weather the things we cannot. We remain focused on serving our customers and providing long-term shareholder value and we will now take your questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Tom Albrecht from Stephens, Inc. Your line is open.

Hey, Bill and company, couple of different questions here. Can you give the pre-tax amount of the curtailment gain? You mentioned the earnings per share amount, but given the low tax rate I want to make sure I have the right dollar amount.

Pre-tax amount is 63.

Okay, and then on the property and disposals. That is net figure, 15.46. Is, what was the gross amount on the sale of all that? In other words, are there some equipment gains or losses in that or is that strictly property disposals?

Minor equipment gain, losses.

Some minor equipment.

It's a net number but it's mostly property.

It is almost all property, Tom.

Okay. And then, so you borrowed $250 million yesterday, I think, on your credit agreement. I am a little confused on what you have available versus what you have done? In your 10-Q filing from August, you talked about being able to potentially borrow over $600 million, but it was really probably closer to $300 million due to some of the constraints with your covenants. So of that $300 million what did that relate to? Was that just the credit agreement separate from the revolver?

Yes, Paul Liljegren can kind of walk you through the math there.

Sure. As we ended the quarter, we actually had $600 million, or actually $700 million of liquidity available within our facilities. As you recall, we used $325 million of that to redeem the Roadway notes and the USF notes. That left us roughly $400 million available, of which we drew $250 million yesterday.

All right. I guess that helps a little bit. And then back to the 22% tax rate, the primary reason it was so low was the propane tax credits? The broadcast was real fuzzy for a little while. It was difficult to hear everything.

It primarily is because of the lower income. And the income allocation among the operating companies and their respective tax rates, Tom. And because we didn't have enough PBT, the propane credits start to impact that rate and the credits are irregardless of the PBT.

Go ahead, I'm sorry.

I was going to say I can walk you through the math if you want to give me a call afterwards.

Yes, I am a a little confused, so I may. If your core profitability is going to continue to be weak at least in the fourth quarter, why wouldn't you have another very low tax rate?

Well, why don't you call me afterwards, the accounting rules allow us to look more at a nine months given some the noise that is going on.

Okay.

We are trying to normalize the tax rate for the year so we don't have the wild swings, Tom, and so the accounting rules allow us to kind of smooth that a little bit so we don't have these wild gyrations on the tax rate. That's what we are trying to do is kind of normalize the tax rate.

All right. Bill, back to the volumes. Your experience has been no different than anyone else, but I'm curious what the tonnage levels were in September? Other companies helped us get a sense of what that was. We know what the aggregate number was but I imagine the month of September at National and Regional was worse than what you reported for the whole quarter.

We are not going to go into specific numbers by month, Tom, but let me paint the picture for you. We would normally see absolute volumes build every month in the quarter. So they would start out at a level in July and would show an increase in August. And then again September. And they actually went the other direction from an absolute volume standpoint. So that shows what the economic trend was as we went through the quarter.

So just for the purposes of modeling, I'm imagining it is like a 12% tonnage decline we should be thinking about for the fourth quarter at National and probably greater than 20% at Regional? Or would that be too much pessimistic?

No, that's a little pessimistic. I also think the Regional numbers are still tainted by the footprint change. If you backed out about 10% as a place holder for the footprint change. Underlying decline in volume is probably around 7%. So, that's kind of the base you are coming off is a 9% decline at the Nationals and 7% decline at the Regionals.

All right. And then lastly, if things continue to really deteriorate for the economy at large, because there is obviously a lot of speculation about you guys. But would you be willing to monetize non-core assets such as Logistics and/or New Penn or anything else or just your thoughts on that?

Those are two pretty valuable pieces of the Company. We would have to be in a whole different place to want to do that. We are really very confident no matter what happens to the economy here over the next six months that we're going to be in solid financial condition.

And the ability to monetize some of the real estate, which has been a very big asset of ours that we just kind of have sitting around, gives us a lot of leverage there and we will have a big impact on the balance sheet going forward. So we're pretty comfortable that we'll be in good shape regardless of the economy over the next six months.

Okay.

After that, of course, we start to get significant impact from the integration. So, we are feeling pretty good about where we are right now.

Okay. I will let somebody else on. Thanks for the color.

You bet.

Your next question comes from Tom Wadewitz from JPMorgan, your line is open.

Good morning.

Hey, Tom.

I wanted to just make sure I understand a little bit more on the revolver side and how the covenant works. Was the number you gave us, the 3.18 debt to trailing EBITDA, that was before drawing down the revolver? And does that put you beyond the covenant when you draw it down? Or help me understand how that works?

Sure. No, that was before the draw down, but what we are really doing is reducing our debt leverage as we do. That is because we are using those cash proceeds to do some other things. And now, we have basically said our target for the end of the year will be about the same ratio as we had at the end of the third quarter even with that revolver draw down. We will not increase our debt levels and we will end up well within the covenant.

Tom, remember the test is just quarter end. So, we will take care of other debt prior to the end of the quarter.

I understand the notes that you, the Roadway and USF notes and when you drew down the $325 million, that makes sense to me. You are not changing the debt to EBITDA ratio because you are just drawing down one thing off to another. What else is out there that you can pay off with this additional $250 million?

We still have a lot of other options for the use of that cash and without getting into a lot of specifics. We will look for lower cost debt to swap out, if we can do that, and other opportunities to delever the balance sheet.

So, there are other pieces of debt or is it the accounts receivable facility?

No, we still have about a billion dollars in debt. There is other debt we can swap out.

Okay. So you do that by the end of the quarter and it is a push in terms of what you drew down from the revolver versus what you find to pay down?

Exactly. It is just lower cost interest on lower debt.

Okay. And then you will still have, you think, another $150 million left in the revolver you could still access?

Yes.

Okay. What about the, you have given us a pretty significant number on asset sales in 2008. How much of that, have you actually signed contracts of that $100 million? And do you know what is the visibility to the cash flowing on that $100 million?

$75 million was done as of the end of the third quarter and the $25 million for fourth quarter is basically all under contract.

Okay. So you've got strong visibility for that?

Yes, we do.

Okay. And then, I guess, on the sale/leaseback of, it sounded like maybe terminals, what percentage of your terminals are unencumbered or the magnitude of the terminals that are unencumbered assets that wouldn't be tied to the revolver or something else where you can freely take those and do a sale/leaseback. I don't have any sense of the order of magnitude when you talk about when you mention sale/leaseback in terminals.

Sure. All the assets are really options, because if we, even the ones that are collateralized if we pay down the term loan with the proceeds from that, the banks are happy. There really is not anything that is encumbered in that sense.

Do you think there is a decent market for that type of transaction now? Is that market available to do transactions?

Yes, there is a surprisingly robust market for that right now.

Okay. Getting away from all the detailed questions on the cash side, what about pricing in the quarter? You talked about how tonnage, now, got materially weaker in September. Did pricing also fall off along with tonnage in September or was pricing similar through the quarter?

No. It actually fell off as well in September. Pricing was a little stronger in August. And we were assuming that that would continue into September but it dropped down, as I said, by about a half a point below where we expected it to be.

So, it was down maybe 1.5 in September? You had to be down 2?

No. It is a little under, it is about 1% below a year ago.

But we only expected it to be down 0.5%, Tom.

It is down one for the quarter. But you are saying it was worse than that in September. So it might have been down 2% or 3% in September?

No, I think it is on the margin.

It was under 2%.

Okay. Great. Thank you for your patience and then for the time.

Thanks.

Your next question comes from John Barnes from BB&T Capital Markets. Your line is open.

Hey, thank you. Good morning,guys. Bill, as you go through the impairment tests if you have to take an impairment charge I understand that it is non-cash. But would that be in your EBITDA calculation and cause a potential covenant trip?

No. It is excluded from the calculation on the covenant. It has no impact.

Okay. is there anything else out there that could trip you up on the covenant other than just weaker EBITDA? Is there anything else out there that we should be aware of that could cause you an issue?

No, I think the 3.2 that we are targeting we feel very good about. There is nothing else.

Okay. We are kind of surprised about your comment to Tom about the tonnage numbers he threw out there for the fourth quarter as being a little too pessimistic. We've heard a deceleration story from most everybody else in terms of volumes through the quarter.

And October has gotten off to a little bit slower start it sounds like for most. I recognize that sooner or later you will overcome, kind of the loss business in Regional as a result of redefinition of that footprint, but it's still going to impact you in the fourth quarter. Could you give us some color around why you feel like volumes are at least going to be stable with 3Q levels or even potentially a little bit stronger than 3Q levels?

I will start by saying I have no idea. We have not been able to forecast volume very well throughout probably the last 12 months. All I am doing is telling you where we are now and so the numbers Tom threw out were probably a little pessimistic based on where we are.

Now, if the economy takes another turn down, I could be wrong. So just based on current trends.

Okay. Knowing that there is no peak season, or very little, knowing that November and December are typically seasonally weaker months anyway because of holidays and somebody has made the case that there is an extra Monday in December, but that's after Christmas and I'm not sure that week is going to be that busy anyway.

I am just kind of curious, what steps have you taken proactively to get your cost situation prepared for what is likely to be a weaker number November and December?

Normally around Thanksgiving, we are pretty aggressive in terms of reducing the infrastructure we have got, which is primarily labor but also involves equipment. And this year we are going to be even more aggressive just because we are very uncertain about where the economy is headed. The primary focus for us is always to make sure that we have the right number of people to handle the business volume and the right equipment.

Okay. Do you have an idea how much cost you are planning on taking out in those couple of months?

Well, we're usually very aggressive once we get to Thanksgiving. All I am saying, we will be a little more aggressive than we would normally be just because we really want to make sure that we are planning for the worse and hoping for the best here.

Okay. You know, in terms of asset sales. I asked you the question briefly last night but the more I have gotten to think about it, I want really want to understand -- two questions.

Number one, real estate transactions, tight credit markets. They don't necessarily go hand in hand. I know some of the carriers you are selling property to, probably a little bit cleaner balance sheet and, therefore, could write a check for it.

But I am curious as to the pace of these sales. Do you think it is going to stay as a robust as it was in the third quarter, that you continue to generate these sales pretty consistently? And then my second question is, and probably more importantly, I am sure you have competitors listening to this call and everyone can read your financials.

I am curious as to, do you think you are being squeezed on what people are willing to pay based on some perception of your viability or not?

Well, let me let Tim talk about the real estate first because he's been closer to that. And then I will answer the second question.

High, John, it is Tim. With regard to the quantity of real estate sales that we may be able to do and what we are finding in the market is we actually have been approached by a number of investors who have a significant amount of interest in the core assets of the Company.

They see those assets as a great opportunity because of the future cash flow capability that will come to them by virtue of our keeping those in our network for the foreseeable future. We see a very good market out there. We see a significant amount of interest and we're in the process of beginning to move forward on those transactions as we speak.

Okay.

And, John, let me talk a little bit about the second question. You know, the environment, obviously, is weak right now. And any time you get into a weak environment like this the laws of supply and demand take over pretty effectively. That results in pressure on yield.

But I will tell you that our day-to-day management of the business really hasn't changed. We continually make trade-offs between volume and price. We'll continue to do that even though the environment is a little bit weaker. I think it is weaker for everybody.

And we have got still the ability to serve our customers well and hang on to and grow the business. The demand weakness is across the board and the macro impact of that is pretty consistent with what it had been historically and I don't see much difference there.

Okay, very good. Thank you for your time. Appreciate it.

Your next question comes from Justin Yagerman from Wachovia Capital. Your line is open.

Good morning, guys. This is Rob [Salmon] on for Justin Yagerman. During the quarter, you guys had found -- realized a curtailment gain. Given that what you guys ended, I think, in Q2, if memory serves correctly. Given the turbulent financial markets is there any chance we could see any sort of reversal on that gain?

No, that's a value that is determined at a point in time. And so, it is really based on future liabilities. And that will not shift.

It has nothing to do with the cash funding.

It has nothing to do with the cash portion of it. It's a valuation.

Okay. Fair enough. And I guess during the quarter, you had announced or in October, you had announced that you had exchanged $13 million of convertible debt for stock. What are your thoughts on potentially structuring some additional transactions similar to that one and if you can go into that a little bit?

As we think through the exchange that we did in early October. And we think about where the stock price is today, our expectation is that we will continue to look at opportunities in the market. But we would be more interested in doing more of those transactions if we saw the stock price move up further so that we could a larger impact on delevering the Company.

That makes sense. And one final one on terminal sales and leaseback activity. Have you guys given any sort of clarity in terms of the number you would be looking to do sound leaseback and the number you'd be looking on doing sales given those terminal disposals that you are expecting later this year and next year?

We are thinking about it a little bit differently than how you phrased it. It is less around the quantity of the terminals as much as it is looking at the options we have to delver the balance sheet and considering what the size of those transactions are that we'd be interested in doing in order to do that delevering.

And as I was mentioning a little bit earlier, as we think about the transactions we may do and where we're having conversations with investors, I think it is also important for you to have a sense that where a number of earnings calls are focused on transferring assets back and forth among carriers, the conversations we are having are of quite a different nature with institutional investors who really look at this as a significant asset diversification opportunity for their investors.

Thanks a lot for the time, guys.

You bet.

Your next question comes from Edward Wolfe from Wolfe Research. Your line is open.

Hey, good morning.

Hey, Ed.

First of all, can you talk a little bit about the intention for further pension curtailment gains whether in the fourth quarter or 2009?

No, there are no plans for anything further.

Also, Bill, you talked about, during the network integration, under the timing of taking out some of the small terminals first and then some of the larger ones. How much revenue loss have you factored in into the $200 million in cost savings?

We have an appropriate number in there. We're not going to get into specifics. It is a much bigger than we expect and, again, it kind of goes back to our history here with the Roadway acquisition when there were a lot of people predicting significant loss and we didn't get any.

So our customers have bee supportive of this. I named a few of them. There are hundreds of others I could have named but all in all the customers are supportive. Our labor partners are supportive and our employees are in the process of executing. So we don't expect any customer loss, but we have built in some just to make sure we're being conservative.

I think everybody is in favor of the integration. I guess the big question, is there enough time to do it and clearly Tim is laying out or alluding to some ability to bringing capital. Tim, if you could give a little more sense of that. Are you talking about pools of real estate assets or what is it and how quickly can you bring in that cash? Is that something that can happen within --?

Ed, it is hard to predict exactly the time frame in which the size of the transactions could get done. We have a very significant target in front of us that we are working toward for Q4 and then into Q1 and Q2. And as we think about that what we mentioned earlier, is if you look at the overall size of the asset pool in terms of real estate it is approximately a billion dollars as an asset pool.

So what we are trying to do is look through the opportunity to break off bite sized pieces that we're able to do that will have a meaningful impact on delevering the balance sheet that we can aggressively get done quarter-by-quarter. We have pretty aggressive targets and we've got partners who are very interested in joining us in executing on those targets.

I think the combination of those and the difference in their capital, where their capital is coming from and frankly their ability to bring equity to the table and not just be going out to the market to get debt in order to close those transactions is vital to the partners we are considering working with.

And that billion dollars, who put that valuation on it and what percentage of that or what amount of that is secured in some form?

In terms of their security, Bill mentioned earlier that where we have assets that are collateralized, the one underlying obligation we have under our credit agreement is to be able to take those proceeds to repay the term loan.

And as we do that, there is a draw against that term loan and that's what gives us the flexibility to be able to put the asset pools together to take to market and release the collateral if there are cases where the assets are collateral.

That makes sense, but still where is that billion coming from? That number you put out there. And what percentage do the banks that are in your revolver pool and your debt pool, what percentage of the total real estate dollars, they have some --

Ed, this is Sheila. When we amended the credit agreement back in April, we gave the banks about 160 something properties which valued about a billion. But as Tim said the value of our real estate is well over a billion. And we probably estimate it closer to $1.4 billion, $1.5 billion.

That's been mark-to-market recently.

That is based on our market values. That is not book value.

That gets back to the question of now how quickly can you get somebody to bring some cash to the table? Your sense is even with the credit markets and such where they are, is that feels like it is impending. Is that a fair way to term it?

Yes, I think the reality is that people are coming to us with these ideas and as I said earlier it as way for us to monetize an asset that we haven't been able to leverage in the past. So we have got partners we are working with right now.

We have had other people come to us with additional ideas and concepts. So, there is a real market out there. And we would expect to be able to execute over the next several months.

Ed, the other piece that I would add is not all of those partners are U.S. based and so the folks who have capital are coming from different parts of the world where they have interest in these type of assets and in some cases it's a very different structure than what might happen if it were someone who is just a domestic investor.

In terms of tonnage loss, Bill, you said you are on a run rate of 9% in Longhaul, or National, and 7% net of restructurings in Regional?

That's where we ended the quarter, right.

That is what you modeled in as you go forward or have you assumed that changes one way or another?

We have kind of modeled in what we have seen in September and October as a going forward run rate and then tried to give ourselves a little bit of cushion by assuming things could get a little bit worse and it still allows us to be in pretty strong financial condition by the end of the year.

Remember, our comps do get easier each month as we go along.

Thank you very much for the time under difficult circumstances. I appreciate it.

You bet.

Your next question comes from Chris Ceraso from Credit Suisse. Your line is open.

Thanks, good morning. A couple of things. Should we start to see D&A coming down already in the Q4 from the assets that you have sold?

No, it will be about the same in the fourth quarter.

Most of the assets we are selling are assets we've suspended depreciation on anyway since we're not operating in those.

Okay. I missed the comment, Bill, about the expected level of customer attrition. Can you just repeat that and tell us what you've seen so far?

I think we have modeled in a loss that we really don't believe. But we are trying to be conservative here and make sure that we still feel really solid about the costs coming out and the impact on income that that will have. So, we have modeled in, we've modeled in an appropriate level. But, again, as I said, we feel very good about being able to retain the customers we want.

We will have some business that does not make sense in the combined network and as I said we have got three options there. One is to move it to one of our other companies where it makes more sense and fits the network better. Either the Regional companies or the Logistics company. The second option is to reprice the business with the customer.

And the third option is to let that business go back to the market. We think there is a lot of leverage here to improve our customer mix in a pretty significant way and we have got a very conservative, we think, outlook that generates an additional $200 million of operating income and we think that could be much better based on the fact that we are being pretty conservative on the volume side.

Okay. Did you book a gain on the repurchase of the Roadway and USF notes that you purchased at a discount so far?

No.

Okay. Just to revisit one of the other comments about the tax rates, just so I'm clear. The fact that the tax rate is going to be higher in Q4 that's not an indication from you that your operating results will be better. Is that what you said?

No. It is more of a normalization of the tax rate for the year. We didn't want to be showing wild changes in the tax rate. So we tried to normalize for nine months and assume that we will have a tax rate in the fourth quarter that will be more of a normalized tax rate.

Last one. Implicit in the 3.2 times target for leverage for the end of the year, is there an assumption of how much cost savings you will realize from integration in Q4 and what is that?

Yes, there won't be anything meaningful in the fourth quarter. As I said, it is really the smaller locations that will be combining. And there may be, and there will be some cost savings location by location. But it will not be a significant number. We will start to see the significant numbers in the first quarter of 2009.

Okay. Thank you very much.

You bet.

Your next question comes from Jason Seidl from Dahlman Rose. Your line is open.

Morning, everybody. Bill, could you give me a break down on the average age of the tractor and trailer fleet from both the National and the Regional divisions?

Yes, everything is pretty close to where we would want it. Our road fleet is about four years in both Regional and National and one of the things we will have an opportunity to do as we integrate these networks on the National side is actually get rid of older equipment and improve the age of the fleet. But, right now, it is pretty close to where we would like it to be.

Okay. So, if need be, you can defer some spending even as we get here into 2009?

Yes, I think an important part of the story here is that our appetite for capital on the National side will come down dramatically. Tim mentioned in his remarks, we had historically spent $300 million to $350 million just on replacement equipment for the National business and that is going to come down very significantly as we integrate these two networks and that, obviously, frees up a lot of cash as well.

Bill, could you give us a little more color on what you mean by significantly?

It won't be half, but it will be significant.

Okay. Fair enough. Also, when you are out there, and signing new contracts with customers, whether it be on the National or the Regional side are you trying to lock in longer term contracts at this point or is it sort of business as usual on the length?

It really depends on the customer and depends on the relationship we have and the profitability of that account. There really is no one size fits all there. If it makes sense to the customer and it makes sense to us then we will try and do that. The vast majority of our contacts are still annual.

Okay. I mean, I notice you guys issued a little bit of stock to pay down some debt that financially you guys thought made sense. Is there anything else coming up for the share count like that that we should model in?

No, I think as Tim articulated we would be more apt to do that at a higher stock price and so as the stock price recovers we will be looking at that more opportunistically. But right now there is nothing planned.

All right. I appreciate the time. Hang in there, guys.

Thanks.

Your next question comes from David Ross from Stifel Nicolaus. Your line is open.

Good morning, gentlemen, and Sheila. First of all, can we just talk about YRC Logistics and what is going on there. Saw a significant gain on property and off some reorganization charges?

Yes. There are a few things going on there. And Paul, can give you a little bit of detail on that.

Certainly. On the Logistics segment you will notice a gain on property sale. We really had a property that had high appreciation since we acquired it that was part of sale and leaseback strategy in the third quarter. And then Logistics reorganization charges, we closed a facility in Europe in relation to some severance charges, but those are the big items in the Logistics restructuring charge.

Okay. Talk about Glen Moore improving as well. Is that just a function of better asset utilization of the trucks now that they are doing Linehaul work for Yellow and Roadway? Or is there something else going on there?

Yes, Mike can give you an update on that.

Yes, there are a couple of things that have gone on with Glen Moore. First of all a repositioning of their assets and drivers to slightly different markets. A little bit longer haul as well as addressing some of the regions that they had not. The second is a more diverse customer grouping. At one point as much as 30% of their business was related to a customer several years ago. And they have been very aggressive in terms of diversifying the customer group.

Third, the cost structure or the revenue sharing structure back and forth between the National companies really at kind of a cost type basis. So it does help them with their fixed cost or overhead cost, but really doesn't on a net basis add significantly to their profitability.

They have done a nice job in repositioning themselves. Their equipment utilization has increased significantly outside the dedicated. On the dedicated side, it is a very, very high utilization, 98%, and they have been able to move to 96% plus on the remainder of the equipment. That is the combinations of changes that we have made with Glen Moore over the course of the last year.

Okay. Then can you talk a little bit about the Exact Express business and how that is doing in this environment?

Yes, Exact Express and Time Critical, all of our expedited services are continuing to grow. I think that's a function of market dynamics as well as a function of further penetration of our customer base. Right now people are very reluctant to put anything into inventory so it does increase the demand for express type offerings. And so that is a part of our business that is continuing to grow at all of our companies.

Here is the last question. Just a number of issue. The pre-tax curtailment gain was $63 million, was the after tax $49 million?

Just apply the 22.3 to it. That sounds about right.

Okay. Thank you very much.

I think we have got time for one more.

Your last question comes from Justine Fisher from Goldman Sachs. Your line is open.

Good morning.

Good morning.

My first question is about -- sorry to kick the dead horse here on the debt covenants. So $1.183 billion of debt at the end of the quarter. The first question about that is, are there any other adjustments as per your credit agreement that we need to make to total debt levels when we are looking at the leverage ratio?

There are some pretty minor adjustments. For example, the bank agreement of debt is at par. We have some premiums and discounts of a pretty immaterial nature on our balance sheet, but it is substantially a GAAP number.

Okay.

Justine, you do take out the property gains and losses so we won't get credit this quarter for the $15 million gain. Typically on a 12-month rolling those aren't that much. But with the $15 million in there that becomes higher.

Okay, so, it is. What -- even if they are minimal, do you have any idea of what those adjustments are that we need to be making to our total of that number?

We can talk offline.

Okay. Okay. And then working pro forma. So there was $1.183 billion at the end of the quarter and then pro forma for the revolver draw there is about $1.43 billion, right? Just not assuming any repayments yet. But that's just $1.183 billion and plus 250. Right?

Yes. One point.

On a pro forma basis.

Right. Pro forma.

Yes.

And then as far as repayments from that pro forma level that are already in the bag, we have this $13 million or so of converts that you repaid, and then I think, Sheila, you said earlier that of the asset sales $75 million were closed at the end of the third quarter and $25 million were already contracted. So that is $100 million in the bag of asset sales already?

Correct.

Okay, so there is potential for additional repayment besides the $13 million and the $100 million in the fourth quarter, but those are things like sale/leasebacks, et cetera, that clearly haven't been closed yet?

Correct. And like Tim talked about earlier the draw we did yesterday, we intend to use that to pay down other debt.

Right. So that was my next question. So when you are talking about paying down low cost debt the converts have pretty low coupons. It seems to me that if you were going to pay down other debt you would either pay down the 8.5% notes because either a) they have higher interest, or, b) there's sale/leaseback covenant in those notes. Or you pay down the term loan to free up that collateral, is that right?

Justine. It is Tim. And clearly what we are doing is we are walking through very much of that type of analysis to look at opportunistically where we think we have got the real bang for the buck as we look at delevering. So we are actively walking through that analysis and looking at where we see those opportunities as the market for our data adjusts.

Are there sale/leaseback covenants that would restrict your actions in the 8.5% notes that had only bonds left or are they not that restrictive? My assumption was they wouldn't be hugely restrictive.

No.

No.

And then is there any vastly different collateral package for the term loan versus the revolver? I know earlier when you said, when you were saying --

It is identical.

It's identical, so how would you be freeing up collateral if you drew down the resolver to pay down the term loan?

The paydown of the term loan conversation we had is that we do real estate sale/leaseback as we sell the assets that are in the collateral pool are obligations under the bank revolver that use those proceeds to first pay down the term loan. The term loan is from the bank group. It is from the revolver. It's the same group of banks.

Right, but if you are drawing on the resolver that is also secured how are you -- if the net amount under that total secured package is the same how would you be freeing up collateral?

Our intention would be to pay down more debt than just what is on the term loan.

Okay, so I guess you would have to do a sale/leaseback for some assets that are currently unencumbered in order to net/net reduce the level of encumbrance?

Justine, its Tim. I'm thinking it may be helpful for us to just offline walk you through what our thinking is so that you can have a sense of the different pieces because I think the question that you are asking mixes together a couple of the different strategies. And I think it is important to delineate the differences between them and their respective impacts.

Okay, thanks. I really appreciate the time.

Okay. We appreciate you joining us today and we will talk to you again at the end of the year. Thanks.

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