Yellow Corp (YELL) 2009 Q2 法說會逐字稿

Good afternoon. My name is Steve, 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 period. (Operator Instructions).

I will now turn the call over to Tim Wicks, Executive Vice President and CFO.

Good afternoon, and thanks for joining us for the YRC Worldwide second-quarter 2009 earnings call. Bill Zollars, the Chairman, President and CEO of YRC Worldwide, and I will provide our comments this afternoon. Mike Smid, our Chief Operations officer; John Garcia, our Chief Sales Officer; John Carr, YRC Logistics President; and Paul Liljegren, Our Chief Accounting Officer, are here to help us answer questions as we get to that part of the call.

At the outset I want to apologize, as Sheila Taylor is out this afternoon, working through a personal family matter at home, and we expect her to be back in the office next week.

Now for our disclaimers. Statements made by management during this call that are not purely historical are forward-looking statements. This includes statements regarding the Company's expectations and intentions on strategies regarding the future. It is important to note that the Company's future results could differ materially from those projected in such forward-looking statements due to a variety of factors.

The format of this call does not allow us to fully discuss all of these risk factors. For a full discussion, please refer to today's earnings release and our SEC filings, including our 10-K and today's 8-K filing.

I will now turn the call over to Bill.

Thanks, Tim. Before I jump into some of the details, let me start by giving you some perspective on how we view the results and to give you some insight into our present situation.

We believe when looked at from this standpoint, you will not only get a better appreciation of what has been accomplished to date, but more importantly, should see the basis for our guarded optimism about our future.

First, please keep in mind that when we started the second quarter, we were only a month past the integration of our Yellow and Roadway networks, which was a once-in-a-lifetime event. And while that process wasn't perfect, and we had quite a few bumps in the road two weeks following the integration, we feel very good about what we have accomplished in a short time and are now beginning to reap the benefits of increased efficiencies from the integration and better service product.

We also want to thank the customers that stayed with us through the integration, and appreciate their patience.

As we continue to phase the reduction of our service centers and removal of our costs from the business, we will continue to show improvement.

Second, as we streamline our networks to adjust to lower volume levels and make significant reductions in our headcount, we fully expect these savings to be apparent going forward and to far exceed the upfront costs that we incurred during the integration.

And finally, we've made some significant progress on addressing our per-hour labor cost that, assuming ratification by our contractual employees, will become apparent as we move through the third quarter.

I want to go back to the second quarter for a minute. We were focused in the second quarter on making additional progress towards our comprehensive plan to realize efficiencies from the YRC integration, restore our financial strength and position our operating companies for future success. Our comprehensive plans focused around four specific action items involving efforts within the following stakeholder groups. First, our union and nonunion workforce; secondly, our lending group; third, our noteholders; and fourth, our insurance providers.

We will get into the progress we've made on several of these areas in a moment, but first, I would like to remind you that the operating environment remained very challenging during the quarter. So even as we are making strides in addressing our cost structure, we have not reflected the full benefits because of the macro economy and its significant impact on our top line.

As we move into the third quarter, the global recession that has plagued our industry for the last few years appears to have stabilized, but we don't get much growth from the economy -- don't expect much growth from the economy for the remainder of 2009, or, for that matter, in 2010. While we have seen some normal seasonal trends in volumes, our year-over-year volume changes have not moved significantly from where we ended March. Customers have returned shipments to our networks, but not as quickly or at the levels we were expecting after the integration. We do believe this is due to the financial overhang that continues to perpetuate itself in the marketplace.

We also believe our volumes are being impacted by tactics from our competitors that are clearly targeted at buying market share at any price and attempting to make our financial position seem worse than it is.

Our volumes have stabilized, and we have taken capacity out in response to those current levels of volume. As we continue to be successful in our operational and financial actions, we fully expect customers to return more of their shipments to our networks.

It is also important to note that our largest customers continue to express their loyalty with their business, and we are committed to providing them with exceptional service. In fact, as we work through our recovery plan, we have remained a primary carrier for both the Home Depot and Wal-Mart, and we really appreciate their continued support. In addition, we've had a number of new customers come on board in the second quarter, and we look forward to serving them well into the future.

Moving to the tentative labor agreement that we've announced, as you know, our union employees are currently voting on modifying the terms of the agreement that includes a proposed incremental 5% wage reduction and an 18-month cessation of union pension fund contributions. It is important to understand that the pension fund contributions for this 18-month period would not need to be paid back at a later date, which is very different than the pension deferrals from the second quarter.

The agreement also provides the Teamster employees up to an additional 20% in stock options, allowing them to further share in future Company performance through stock price appreciation. This agreement helps reduce our cost structure, improve our liquidity and increase our competitiveness in the industry.

Both our union and nonunion workforces have continued to demonstrate their understanding of the cost structure changes necessary in this environment. We appreciate the sacrifices our employees have made in an effort to preserve jobs for the entire Company.

After the contract ratification, we expect to have cost savings across the Company of approximately $45 million to $50 million per month. This is really a game-changing event for the Company.

On the national side of our business, the operational improvements and cost savings from the integration of our networks remain on track. However, the full benefit of the new network is being somewhat mitigated by the lower than anticipated volume levels. We still feel strongly the national integration improves our position as the market leader, reduces our costs and significantly enhances the service we provide to our customers. Our productivity and load average metrics continue to improve, even at lower than expected volume levels, and are solid indicators of the success of the integration.

We've been able to reduce the number of YRC service centers faster than originally expected, and ended June with approximately 390 service centers, a reduction of roughly 160 centers since the start of the year. The new integrated network aligns our capacity with our current volume and has dramatically reduced our breakeven point.

By increasing the utilization of our service centers, we have additional opportunities to further rightsize the network without impacting service to our customers. As a result of all that, we expect to remove another 30 centers from the network by the end of the third quarter, with no negative impact to our service, and still have the ability to add significant shipments as volumes recover.

Moving on now to the regional companies, we feel good about the progress that is being made there, as well. When excluding the significant charges in both first and second quarters attributable to the regional companies, which included some significant workman's comp expense, operating income improved sequentially by about $10 million. So we are encouraged by the operational changes we have made across all of the regional companies, especially in Holland.

The footprint changes we made at Holland to eliminate the overlap of service centers with New Penn has achieved the cost savings we expected in the Northeast. After the union ratification of the labor changes, we expect Holland to immediately become cash flow positive, which is a big accomplishment.

Similar to the regional companies, logistics results were impacted by some of the noise related to the significant charges in the second quarter discussed on our earnings release, as well as lower revenue due to the global economy. Despite these economic challenges, YRC Logistics remains focused on keeping its costs in line with volumes without negatively impacting service and continuing global growth, specifically in China.

Finally, I would like to comment on the role of several key advisers we have retained, the news of which generated some publicity and, frankly, some misunderstanding. These advisers have been involved with many of our initiatives, including operational improvements and communications with our lender group and several significant debtholders. This allows us to tap into specific experts in these areas while our management team remains focused on our core business and taking care of our customers.

I will now turn it over to Tim to provide some more details on the second-quarter results and our financial condition.

Great. Thank you, Bill. Let me start by spending a few minutes on the second-quarter financials. In the release, we identified $114 million of significant charges during the quarter that impacted our overall results. Of these charges, approximately $67 million related to National, $13 million to Regional and $4 million to Logistics.

The remainder of the charges relate to a non-cash impairment charge on our August 2008 65% equity investment in Jiayu, an LTL provider in China. The adjustment was based primarily on the declining Chinese and global economies.

A portion of the significant charges were associated with adjusting our networks, including the accelerated service center closures as part of the integration mentioned earlier by Bill. In addition, we are making investments in our business to rightsize our networks and staffing levels, and that required additional terminal closure and severance charges in the second quarter across our businesses. The cost savings from these actions should be apparent beginning in the third quarter.

As we make network and headcount changes in this environment, there is the potential for these types of costs going forward, though I would expect them at a much reduced level.

As we indicated, our volume levels are lower than initially expected and are decreasing the magnitude of the savings we have recognized from the YRC integration. Our service levels have hit all-time highs during the quarter, and we remain focused on our service commitments to our customers.

Our productivity and load average metrics has made steady progress, and as we rightsize the network for our current volume levels, we will see additional improvements in this area. We estimate that the lower volume levels impacted our expected realization of productivity improvements by approximately $21 million in the second quarter. Based on the network changes we have implemented that will ramp up over the next two quarters, we expect to recover these benefits relatively quickly.

In terms of reserve accruals, we experienced higher than expected costs related to workers' compensation claims across all of our operating companies, and took incremental charges of approximately $33 million in the second quarter.

When you consider the kind of changes we went through with the integration and the reduction in the number of employees, increases in these types of costs are not uncommon and are consistent with others in the industry in the current economic environment. We are focused on minimizing these expenses and cash outflows going forward. While these types of costs will continue to move around in this environment, we believe we are adequately reserved for our exposure, based on our review of the claims data and increases in our monthly provisions.

We also recognized some rewrites in the second quarter that primarily related to first-quarter revenue. With the switch to one billing system in March as part of the integration, it took several months for the correction of certain invoices to be identified and processed. Approximately $12 million of these revenue adjustments were recorded at National in the second quarter, and those primarily related to first-quarter shipments. We have seen the billing adjustments come down and stabilize during the second quarter, and we don't believe this will be an issue going forward.

Now let me spend some time updating you on additional progress we've made toward our comprehensive plan. While we continue to fundamentally change the cost structure of our business, we have also taken some significant steps to manage our financial position and address our capital structure. We maintain an open dialogue with our lender group to discuss our comprehensive plan to restore financial strength and position our operating companies for the future. As part of those discussions, we finalized an amendment with our lenders just this week that provides some immediate relief on covenants and allows us to retain some additional asset sales proceeds.

We continue active dialogue with our lenders regarding the progress on our comprehensive plan, and we will continue to evaluate the need for longer-term modifications to our credit agreement.

Regarding the outstanding notes, I mentioned in last quarter's call that we will continue to monitor the financial markets and evaluate opportunities as the year progresses. Bill mentioned before that we retained a financial advisor several months ago, and they have initiated preliminary discussions with several significant noteholders. These discussions continue to progress, and we will provide more clarity surrounding these discussions as we get further along in the process.

Let me now provide an update on the pension funds. We finalized an amendment last month with our largest Teamster pension fund, Central States, to provide certain of our real estate as collateral in lieu of pension contributions during the second quarter. We also had the remaining funds join as participants in the same agreement for a total deferral of $128 million. This was an effective way to generate near-term liquidity at a time when the debt and equity markets were essentially closed. We are currently working with our pension funds to add the July payments to the deferral agreement.

While on the topic of pensions, we continue to remain focused and interested in long-term pension reform to resolve the issue of funding orphans, those participants who never worked for us. We have been funding the pension obligations for thousands of participants who never worked for our companies, and estimate that we have paid in excess of $3 billion to fund those orphans since the '80s. We believe this issue needs to be addressed, given the undue burden placed on the surviving companies in these plans.

We also talked last quarter about continued back-office reductions as we further streamline the organization and reduced headcount response to declining volume levels. As a result, we eliminated approximately 4400 union and 1100 nonunion positions throughout the second quarter.

With regard to sale-leasebacks, another effective financing method we've utilized, we closed $127 million of transactions during the quarter. We have around another $35 million of sale-leasebacks under contract, and we are in the process of negotiating additional contracts as we speak. We expect these sale-leasebacks to close in the next few months. Note the timing and amount of the sale-leasebacks will change as part of the normal due diligence process in closing these transactions, and we will continue to evaluate additional opportunities in this area and will execute more if the market conditions are favorable.

With respect to additional asset sales, we now expect excess property sales of a little more than $100 million for the year, with $53 million completed through June. We have also reduced our expectations for our full-year growth CapEx to approximately $65 million. With the progress of the integration and the number of pieces of equipment we have been able to remove from the fleet, we expect our CapEx needs will be less this year and well below historical levels for the near future.

In terms of other significant cash flow items, our nonunion pension payments in 2009 will likely now be zero, based on our use of certain pension credits. We expect interest expense of approximately $35 million to $40 million in the quarter, excluding rental payments for our sale-leaseback transactions.

Lastly, we still do not expect any large, unusual cash outflows this year, so you can basically model cash using your operating assumptions.

Before turning it back to Bill, let me remind you that our focus remains on liquidity as we manage through this economic recession. At June 30, our total liquidity was $218 million, comprised of $165 million of cash and $53 million of unused capacity under our facilities.

One thing to note that impacts the unused capacity is letters of credit. We have been aggressively evaluating our letters of credit, and this resulted in a $32 million drop in these from the first quarter to the second quarter.

As we think about the proposed changes with the Teamsters and the continued rightsizing actions we have taken, we feel we have an opportunity to materially change our cost structure and get back on offense in this industry.

In addition, the recent bank amendment should send clear signals that our lender group continues to remain supportive of our comprehensive operating plan.

I will now turn it back to Bill for additional remarks.

Thanks, Tim. Let me briefly summarize some of the recent substantial progress we've made towards our comprehensive plan as we focus on the future.

First, we've successfully completed the integration, as I mentioned earlier, and have taken significant costs out of the business while achieving record service levels, although we had a couple of weeks there that were pretty rough.

We are now rightsizing and leveraging our integrated network, and expect additional savings as we progress through the year. We've also decreased our labor costs throughout the past year and expect an incremental $45 million to $50 million per month of savings once the new labor agreement changes are ratified. And we finalized an amendment with our lenders that provides additional liquidity opportunity and shows support of our long-term plan. Finally, we are engaged in ongoing productive dialogue with our noteholders.

Now let me give you a feel for the operating results we are achieving at current volume levels. If we had the full impact of the labor adjustments in July that will be ratified here in early August, we would be close to breakeven EBITDA for the month, and August should be better than July.

In summary, we plan to come out of this economic recession stronger than ever, with significantly less cost, an improved capital structure and a focused, dedicated workforce that is aligned with meeting our customer expectations every day.

Our critics and competitors have been using aggressive tactics in the marketplace to create noise and confusion for our customers. We believe our actions have answered those who speculated on our future and planned for our demise.

We would like to thank all of our supporters, including our employees, the lender group, the equity and debt holders, and most notably, our customers that have stood by us.

We will now be available for questions.

(Operator Instructions) Tom Wadewitz, JPMorgan.

Good afternoon. Bill, I wanted to see if you could give us a sense of the progression in tonnage through the quarter, so if you could just give us the tonnage at National on a year-over-year basis in April, May and June. And then if you had any thoughts on what tonnage looked like so far in July.

It has been remarkably consistent, Tom. You know, normally we would have a little bit of a seasonal drop in July. We are seeing about what we would normally expect, which is a couple of percent lower. But really, apart from the seasonal decline in July, which is consistent with history, it has been remarkably consistent through the quarter.

Did the year-over-year -- what did the year-over-year tonnage look like in National in June compared to what it was in May? Did it improve, or was it quite similar, or how would you characterize that?

I would kind of describe it as quite similar, Tom, every month over the quarter, year-over-year.

Okay. And so is July down less than 40%? Tonnage?

Yes.

It is? Okay.

Yes. There isn't really anything remarkably different from month to month when you look over at the year-over-year comparisons.

Okay. What about the -- if you look at the operating income trends in the quarter, did you see a material difference in the operating income -- what operating income was in each month of the quarter?

Well, you know, we continue to get more traction as we work our way through the quarter from a pure operating standpoint. But clouding that a little bit is the cost associated with the continuing to downsize the network. So we had costs as we closed facilities throughout the quarter; most of the cost was in June from the closures. We closed 38 facilities in June, I think is the right number. And so we had a little bit more back-end loaded costs from closure. But apart from that, we continue to get pretty good traction on the underlying operating cost.

Okay. What about on the bank agreement? Can you give us a little more detail in terms of the revolver and the size of the revolver? I think prior to the two-week extension, it looked like the revolver was going to be squeezed down in size, because you had paid down some of the revolver size with some of the escrow proceeds. So can you give us a sense of what happened with the revolver, and also what happens with the revolver reserve, which I think is still $95 million?

That's correct, Tom. It's Tim. How are you?

Good, good thank you.

As you think through the revolver size and the revolver reserve, essentially in this amendment what we did, there is no change to the size of the revolver, first of all. And as it relates to the revolver reserve, this amendment essentially extended the revolver reserve out to 8/31. And so the last amendment that was merely a two-week extension, this amendment moves that out to 8/31, and there is no change to the size of the outstanding balance and availability under the revolver. So it remains unchanged.

The two other areas, Tom, that are important in this amendment relate to covenants, the change in covenants that we put in the press release. And then the ability to produce additional liquidity during August. Much like the specified transaction we had in the amendment in February that allowed us to retain 100% of the proceeds of some specific transactions, we have that similar circumstance in August, where we have a specified -- an amount that we are able to keep under certain conditions as we go through August that will help us produce an additional form of liquidity for asset sales up to $50 million.

So what happens to the revolver size, then, on September 1?

At September 1, you are in the same situation that we essentially were a few days ago, where you look out to that period of time, and at this point in time, you would see that the revolver reserve would expire, and the revolver would be reduced by that as a permanent reduction in capacity.

And clearly what we would expect to do during August would be in the midst of discussions with the lender group around the similar type of discussions we had that produced this amendment that allowed us to have an extension.

Right. Okay, and then one more question and I'll pass it along. I guess when you run some rough numbers, and even if you just look at June, it appears you've burned, I think -- or you used up something like $24 million in cash in June, and you were already effectively not paying the pension for the Teamsters.

So it would appear even with what you get in the Teamster agreement that you still would be burning some cash. So what are the other factors that you would focus on to try to get back to a cash neutral position as you look forward?

A couple of things that I think are very important that really drive the ability to be at operating cash flow breakeven or positive. One is, as you know, as you think about the June numbers that you walked through just a moment ago in your example, this certainly wouldn't conclude the change to the wage and benefit -- or at least the wage structure related to the agreement with the Teamsters that is being ratified at the moment. And we would expect ratification on the sixth of August. So that would change the cost structure.

And then the other pieces that I would be thinking about are we continue to drive productivity changes in the business as we rightsize the business. Much of what Bill talked about in his comments related to the ability to take out the fixed costs as we rightsize the network to match the demand in the marketplace. As we do that, that drives productivity changes in our labor that drive out the operating cost. So the combination of those, at a minimum, would be a substantial impact.

Right, okay. Thank you for the time.

Edward Wolfe, Wolfe Research.

Good afternoon. Tim, I'm guessing there is also a $50 million benefit if you sell that real estate that is cash flow in the quarter. Is that right -- or in the month?

That is correct. That is the right way to think about it, Ed. I was -- with Tom's question was focusing more on the operating side.

No, I understand that. I want to just get at these covenants a little more. The EBITDA covenant of $15 million in fourth quarter and $20 million in first quarter, those are not cumulative anymore?

The first -- I'm sorry -- the fourth quarter and the first quarter are not cumulative. And then when we file the 8-K, we will put in all the details surrounding the future quarters. I am glad to give those to you, but we will file those when we file the 8-K, as well.

But it will become consecutive and cumulative as you get into the second, third and fourth quarters of 2010. So you have what we put in the press release, which was fourth quarter of $15 million, first quarter of $20 million. And then the second quarter is a cumulative number for the two quarters of $80 million. Third quarter is three consecutive quarters, with a cumulative number of $145 million. And then full-year 2010 is $210 million.

All right. Now, right now, you have the $100 million liquidity. And if I'm reading the way the wording in the press release is, that gets suspended, but only for the month of August, and then September 1 it is back in?

Correct.

Why only the month of August to do these sales and to have the liquidity? Is it because July has started so badly, or why this timeframe? It seems unusual to me.

Because we have a number of strategies that we are working through during August, and we want to have maximum flexibility as we work through those strategies and we have the support of the lender group to work through those strategies.

Okay. So to understand the revolver reserve right now, the $165 million as of June 30, we should really think of that in terms of $63 million as of September 1? Am I thinking about that right?

No, I'm not sure how you are thinking through that way, but that is not how I would think of it.

Well, let's go through it right now. What is the revolver at right now? What is the capacity?

The total capacity of the revolver is $950 million. As it relates to the outstanding balance on the revolver -- hold on for a moment, Ed. I am just grabbing some data.

Ed, as we go through where we are related to total cash on hand -- and I'm trying to think through how you're asking your question -- when we think of cash and cash equivalents, that is exclusive of the revolver reserve; so that is true cash on hand. And so if what you are doing is essentially thinking about on September 1 that you lose the revolver reserve amount, that is not the right way to think about the $165 million that we have on hand.

Okay, so we have the $165 million cash on hand. We have -- what is in the reserve right now, $92 million?

In that approximate area, yes.

And is that the same as it was as of June 30?

Since June 30, it has -- it is about the same amount, around $93 million, $95 million.

Okay. So you know, assuming that the revolver reserve, the next $50 million that you sell in real estate goes into your pocket theoretically in the month, it doesn't go into the reserve?

Correct. It goes into our pocket, as we put in the press release, subject to certain conditions that we will work through. But we have the ability as we work through those conditions to have full access to that $50 million.

Okay, so if we get to September 1 and the revolver reserve was still $92 million, the $950 million would go down to $950 million minus $92 million. Am I thinking about that right?

That is assuming there is no changes and the reserve comes off of the revolver balance. I think we chose those words just to make it a challenge to get through the discussion.

No, I understand that. So that would mean that on that day -- right now, as of today, you've got $63 million capacity on that revolver, is that right? Or cushion in that revolver? Untapped in that revolver?

No, that is not how I would think about it. You have the revolver reserve amount that is available at a vote of the lenders.

Okay, so outside of the $165 million in cash right now, is there any room on the revolver for you to draw down if you wanted to?

There is in fact.

There is?

Yes.

And that is the $50 million from the real estate, or is it something beyond that?

No, it is beyond that. The real estate that we are referring to, Ed, that is real estate sales. That is prospective. That is looking forward into August to the sales that we can make in August up to a $50 million amount that we have the ability to retain up to 100% of.

Okay. So I'm just trying to find out what is that number that you can -- of the $950 million, how much -- is it $900 million? Where are you on that right now?

So on the borrowing availability at the end of June under the revolver, there was $53 million of availability at the end of June.

Okay, and has that changed materially between then and now?

Not materially.

I'm guessing it is less than $53 million.

I would tell you it is not a material change.

Okay. Now, again, if there is no change in the $92 million reserve on September 1, does that $53 million stay as $53 million? Assuming everything else stayed the same, would that still be $53 million, or would that be reduced?

That's the right way to think about that.

Okay, let's move on to other things. I'm sorry; I just wanted to be very clear on that. Can we talk a little bit about the pension? The $126 million in pension deferred from second quarter, what is the timing of when that needs to be paid back?

The agreement that we've entered into with the pension funds is that those payments are expected to begin in January of 2010, and they go over three years.

So should we just assume it is straight-lined, or there is a ramp up?

I would assume it is straight-lined.

Over three years?

Yes.

Okay. And the Teamster ratification, what happens in terms of the timing of this? If it comes in and it doesn't go your way, what is Plan B?

You know, our expectation, Ed, and all of the information that we have, we are expecting that it will be ratified on the sixth.

Okay. And is any of these bank covenants that we talked about, the $50 million provision or any of that, subject to that ratification?

Small portions of releases against the $50 million are conditioned on that.

Okay. And Tim, I think it was in your words, not Bill's, that said -- it might have been -- I think it was your words that said, we are getting to the point where we are ready to get back on the offense. What did you mean by that? What does that mean?

When we think about being on the offense, we think about it from the perspective of ensuring that we have the service levels that enable us to meet our customer needs and be able to provide them operating confidence in what we are doing. So a lot of that relates to, as you think about what Bill talked about, and you think about the changes structurally to the business during the second quarter to resize the business based on the demand in the marketplace.

And essentially when I think about that, I think about being in a good position to have a network that matches the size of the demand and to make sure that we can deliver on time and to deliver to meet and exceed our customer expectations. So while I said that, it was a reference back to the work that Bill is walking through and the success that we've had post-integration of hitting high levels of service throughout the quarter.

So selling on service, not selling on price in terms of offensive is what you are saying?

Correct.

Okay. Thanks for the time. I appreciate it.

You bet. Thanks, Ed.

Jon Langenfeld, Robert W. Baird.

Tim, how many of these one-time charges were cash in nature that was paid out in the second quarter?

All except the impairment that we talked about specifically with regard to the real estate -- I'm sorry -- not the real estate, the Jiayu transaction, all of those were cash.

And were they all paid during the quarter, or they vary?

No, I'm sorry -- the other one that was not as well was workers' comp accrual adjustment was not, and the union employee stock awards was not.

Okay. But the rest was cash paid in the quarter?

(Inaudible)

I'm sorry?

It was either cash or it was a dilution as it relates to bad debt and so on. There are small reserve accruals related to bad debt, but otherwise, it was really cash or dilution of cash proceeds.

Got you. And I know you're -- switching gears to the pension payments, I know your pension payments vary. But in general, the $128 million deferral that you got, that essentially accounted for March, April and May accruals? Aren't those paid at the middle of the next month. And so the comments you made about getting your July payment covered by a similar transaction, that would account for June's accrual. Am I looking at that correctly?

Yes, that is correct. You are, John.

And then the contract would then basically cover July forward.

That is correct. That is the way to think about it. It is July hours forward.

Okay. And then the incremental -- if I just think about it on a cash basis, you had about $128 million benefit in 2Q on a cash basis, and you are basically saying $45 million a month from the new contract. So the incremental cash benefit is just about $7 million. Am I thinking about that right?

Yes, essentially, what -- you have to assume that hours worked are essentially the same. But yes, if hours worked are the same and you took the low end of the range we talked about $45 million, the incremental difference is about $7 million.

Okay. And so if I think about kind of your free cash flow burn in the quarter, it looked like $150 million. How do I get from that $150 million to be something substantially different at the end of the third quarter? Could you just kind of maybe walk through a bridge of things? Because the concessions on the contract don't get you a lot incrementally, so where would the other pieces come from?

Well, the actual contract, the wage reductions on the contract -- and there are some other reductions related to health and welfare benefit reductions that actually are fairly substantial -- but the wage reduction, if you think about what we talked about when we did the 10% wage reduction, is that on the hours at that time being $20 million to $22 million per month, an additional 5% wage reduction on the number of hours being worked at this point in time is -- and again, it varies by month on hours worked -- but think about that as in the $8 million to $10 million per month range.

But is that in the $45 million per month?

It is not. We are thinking more as you think about the $45 million is really more around the pension side.

Okay, so there is the wages on top of that?

Correct.

Okay, that was unclear. All right, so that is an incremental $10 million a month. And other things we should be thinking about?

Not beyond what we talked about earlier as it relates to the productivity improvements and the approach to be able to make improvements as it relates to the operations as we drive out fixed costs.

Okay. And then on the -- I kind of missed the comment in your prepared remarks. You talked about Holland breaking even on a cash flow -- or being cash flow positive. What were the steps that it would take to get that to cash flow positive, and how much cash flow negative is it today?

John, this is Bill. Let me take that one. That one is a combination of things that were already underway, plus the pop you get from the new pension and wage impact from the union once it is ratified. So the combination of those two things takes you from a negative to a positive at Holland.

How big of a swing is that?

Well, we didn't get it into any specific operating numbers for the companies within the Regional group, but it is a significant improvement from where the recent past has been.

Okay. And then my understanding of the contract, the employees are voting on that. That will be come to light here in early August. But the pensions still need to sign onto this. So who is working with the pensions to get them to agree to it?

Well, we've been working directly with the pension funds, and even though it is part of the agreement with the Teamsters, it also has to be agreed to by the pension fund trustees. But we've been working with them right along on this process.

And will they -- when will they be to the point -- because I am assuming you need to work through them so that it doesn't generate a withdrawal liability, but I mean, they have a fiduciary responsibility to all their other contributors. So how do they balance those things?

One of the things I think is really important to understand is the date that the CBA is ratified, the benefit accrual automatically terminates. So you are in a situation at that point where any funds that have not terminated in advance of that point automatically terminate at that point.

So even though there is a deficit that they are funding and that other companies are funding to the pension, that -- it does not require their approval for you to terminate the pension benefit?

Sorry for the delay, John. Clearly, we are working with all of them. The IBT is working with them. We continue to work with them. I think the most important point is that all of them are agreeable to the approach. So I think the key question is how much risk is there to getting the full amount as it relates to the temporary termination under the agreement. And our belief is that the risk is relatively straightforward, because many -- almost all of the funds are agreeable to the approach to termination.

Okay. Thanks for the time.

You're welcome. Thanks, John.

Jason Seidl, Dahlman Rose.

Evening, everyone. A couple quick questions. One, Bill, I want to go back to one of your comments. You mentioned that you brought on some new customers during the quarter. Can you give us some more color -- when did you actually bring on customers? Was it early, mid, was it late?

This gives me an opportunity to get John Garcia on the phone here. John can talk a little bit about it. I think we've been pretty consistent in terms of bringing on customers throughout the quarter, but I will let John give you more color on that.

Good afternoon, and glad to be here at YRCW. Actually, we've been very consistent. I would categorize most of our wins as mid to upper-midsize businesses. Obviously, it is a very competitive environment out there from a pricing standpoint. We are remaining competitive, and we are actually encouraged by the signs that we are seeing.

And John, when in the quarter did these new customers come on? Was it throughout? Was it more back-end loaded?

Really throughout. And the thing you have to keep in mind is the new business takes a while to [gen'd] up and start showing up in our shipment counts. So it has really been throughout. We are pretty pleased with the progress we are making there.

Okay. And John, you have a competitor out there that clearly has been aggressively cutting rates, but you look at their results and they won enough tonnage out there to move the needle. Is there any thought to sort of change the approach you've already been undertaking, say, the last six months?

Let me take that one, Jason, because it is kind of a combination question. I think the proof will be in the long-term performance. I think right now, we are focused on recovery, and we think we have a good balance in the marketplace. Now we've got a good, solid service product to sell at competitive rates. And we think if we can eliminate some of the financial overhang on the Company, we will create a tipping point where we will get a significant amount of volume back from customers that are doing business with us already, but maybe trying to mitigate their risk.

So we are happy with the balance we've got. We think it is just a matter now of continuing to work hard to get back some of the shipment volume that we've lost.

Okay. Tim, this one is going to be for you. In terms of just your cash drain on a monthly basis, if July is really not that much different from June, you see normal seasonal patterns and you might be bringing on new business, how impactful should we view the 38 facilities closed in June in terms of the cash basis for YRC in 3Q?

You know, as we think through that, we are probably not going to walk through in great detail the degree to which we drive the overall operating expense changes and the degree to which we are going to walk through that. But what I would tell you is earlier in the comments that I made, and we think through the degree to which we are not getting the full benefit of the integration as quickly as we would like, we talked about the $21 million that we would have expected we would have seen in this quarter as it relates to the integration, if we had not had the volume drop off. And our expectation we mentioned earlier is we would expect to see that relatively quickly. I think if you think about that over the quarter, that is the right way to think about that.

Okay. And I apologize, because you guys are throwing a lot at us right now. You talked about some of the rewrites in the quarter costing you $12 million. Can you just go over that again real quickly for me?

I would be glad to. Essentially, if you think about the integration that we did, and we moved from two information systems really to one information system, and the customer invoice information changing from one of those systems to the other, we had some pricing information that turned out not to be correct. And when we put out those invoices, we had to spend a significant amount of time working with those customers to adjust invoices, rewrite those invoices, get them priced correctly, in order to collect the revenue.

So think about freight we would have handled during March as we were doing the integration, and the fact that we would have invoiced for that freight sometime during March, but we would have been collecting it during April and May. And then understanding how much we needed to adjust those invoices and working through that in June, we had much better visibility to what that number was by the time we got into the May/June timeframe. And so we've taken that as an adjustment to the revenue, based on the collection of those invoices, as well as our understanding that we had inaccurate pricing information in the customer files that transitioned in those cases.

Okay. And Tim, this next one kind of goes to your comments that you said almost all the funds, the pension funds, are agreeable to the termination. Two parts. One, are the large funds in agreement in terms of the almost all? And also, what happens to the funds that don't agree? Can you walk us through that scenario?

First of all, it is a highly concentrated group. And so by the time you get beyond the first five funds, you've covered more than 75% of the monthly payment flow. And I would tell you right now that the largest of the funds are all agreeable. And so we are in very good shape as it relates to capturing substantially all of that benefit.

For those ones, we can end up with some that ultimately don't, and essentially what happens is the benefit accrual is frozen for those funds. But we would not have reached a position where we would have reached an agreeable approach to a temporary termination and we would still be obligated to make payments.

Okay. And I guess this kind of piggybacks on Ed's question again; I'll ask it maybe a different way. If the agreement doesn't pass -- and I know it doesn't happen often, but it did happen with a hauler in Canada earlier this year -- is there a chance to go back again and try to change the agreement and vote it again quickly, or would there not be enough time, based on where you are burning cash now?

You know, we feel really confident, Jason, that the agreement is going to pass and the ratification will be done early in August. So we really are assuming that will be the case.

Okay, fair enough. Guys, good luck and send my best to Sheila.

Justin Hagerman, Deutsche Bank (technical difficulty).

Hello? Did we lose Justin? Steve, are you there?

Just a moment, sir, I'll grab his line. He seems to have gotten disconnected here.

Maybe go onto the next one and come back to Justin.

Chris Ceraso, Credit Suisse.

Good afternoon. Just a few things here. So it seems like you've made a lot of the progress on getting the cost structure and the capital structure repaired to some degree. And it would seem that the primary challenge now is to convince your customers that you are not going to go away.

So what is the game plan, and how do you intend to communicate this to customers and let everybody know what you've done and how you've done it and what the Company is going to look like going forward so that they stop leaving?

I think the first and most important piece of the puzzle is to make sure that our service is good. And as we've already talked about several times, we feel really good about where we are there.

I think the second piece is just good, solid communication. We've really tried to make sure that we communicate effectively with all of our customers through our sales force and really through all the other touch points we've got, including the Internet.

And then we are going to be going out kind of on the road here shortly to talk about the plan and the progress we've made, and we will be able to get face-to-face with some executive level customers here in the next couple of weeks. So it is a matter of really just getting out and making sure they understand the plan, where we are in the plan, the progress that we've made.

Okay. Of the customers that left your network in the quarter, and clearly there were some, because your tonnage was down more than the market, how many would you say, maybe in percentage terms, left because they had service issues related to the integration, and how many left because they were concerned about your solvency?

That is a really tough one, Chris, because it is hard to untangle some of this. When a customer leaves it is usually not just one thing, it is a combination of factors. So we really don't have any clear visibility into the specifics in terms of the percent of customers that left for each reason.

We can tell you that all of those came into play. The integration bumps in the road that we hit in the first couple of weeks in March certainly didn't help. The continued press that we got about our immediate demise certainly didn't help. And there were probably other situations where there were other factors. But clearly those were two of the big ones, and it is kind of hard to parse those.

Okay. If I understood the comments correctly earlier about workers' comp, and maybe I didn't, is that something that you said you think will remain an issue over the next couple of quarters, or was it a one-time adjustment and now it is done?

Well, we think there is still going to be a tail there, based on the dramatic impact that we've had on the workforce in a short period of time. But we have taken into consideration a more than historical amount to be accrued to cover that anticipated increase. We do expect, though, that we've probably peaked out there for the year. We probably will have some further adjustments. They shouldn't be anywhere near as big.

So you called out the $33 million because that is kind of a catch-up provision, and then subsequent amounts, you won't call out because they will be smaller?

Yes, I think we tried to call this one out because we did feel like it was unusual in terms of the adjustment that we made. So we wouldn't expect to call it out if it were in more normal range.

Okay, and then just lastly, just to clarify to make sure I've got this right. The $45 million to $50 million in savings that you expect will come into effect once the new plan is ratified does not include the extra 5% wage cut, right? That is an extra 10, so you would save 55, going to 60?

No, we may have confused you there. The $45 million that we have stated publicly does include the 5% which kicks in here in August. And then it goes up to $50 million as we move into 2010, and we pick up a little bit more from health and welfare. So those are the correct numbers.

Okay.

And, Chris, the additional way to think about that is the $45 million to $50 million, as Bill talked about, includes the health and welfare and adjusts as it relates to the number of hours worked. So it is volume-based, as well. And I think I confused earlier when we talked about the $45 million including that.

Okay, terrific. Thank you very much.

John Barnes, RBC Capital Markets.

Good afternoon, guys. Bill, a couple things. One, on the sale-leaseback transactions, obviously I think as we progress through the year, they've slowed a little bit. I mean, you are still having some success at them, but could you just elaborate?

Is the big issue YRC is the creditor on a sale-leaseback transaction, or is it just an inadequate number of partners out there? Is it credit availability? Is it a combination? Why -- and why are you confident that you are going to be able to kind of complete them going forward?

I think the real issue is that if you look at the capital markets today and you look at the availability of credit for just about any rated company, the credit markets are incredibly tough. Irrespective of that kind of a credit market, we have been successful doing sale-leasebacks and also selling the excess properties throughout the year. And it is really against that backdrop that we look at an incredibly tough capital market, say, we expect -- and as we put in the press release -- that we expect essentially $300 million of cash proceeds in 2009 from sale-leasebacks.

We are negotiating additional contracts right now. We continue to have opportunities. We continue to find investors. There are sources of capital out there, but it is just fundamentally a very challenging capital market environment right now.

Okay. I think clearly you have generated a lot of savings through the network integration, the initial wage rollback, both on the union and nonunion side. And not to be flip about it, but clearly, it is not showing up in the results yet. I mean, it is a lot of savings. The numbers start to get pretty big pretty quick.

At this point, are you just to giving more of it away in order to protect yourself? It just seems like you get savings out the front door, but it's going right out the back in terms of lower price. And what is to prevent -- at what point do you draw the line and say, okay, we've just got to stop giving away the cost savings in the form of lower rates? Can you just elaborate on that a little bit?

Sure. Of course, the big hit is coming with the ratification of the Teamster contract. That $45 million a month hasn't kicked in yet. So we had -- we've got that in front of us, and we are looking forward to that.

Secondly, we've had a lot of what I would call maybe one-time costs associated with the integration and some of the other things that we've done in the first half of the year, which has been not trivial.

And then I think the third thing is just the cost of rightsizing the networks, particularly about YRC network, to make sure it was a network that had the capacity consistent with business volumes. And that has taken some time to get to. And as you know, in a network environment like this, it is a pretty big engineering task to resize a network. So there have been costs associated with that.

Most of that resizing is behind us now, and we've got the Teamster adjustments and some other adjustments to the nonunion side that will kick in in second half. So that is really driving a lot of the improvement.

All right. But I mean, again, just a balance of price versus volume, protecting yourself, I mean obviously, the savings thus far kind of allowed you to be a little bit more aggressive on price and to kind of protect yourself and match where need be. At what point do you just have to say, we can't do this anymore, or it is just going to --?

I think we feel like we are competitive right now in the marketplace from a price standpoint. That doesn't seem to be the big issue in terms of retaining and bringing on new customers.

So it is more about this financial overhang and making sure that we've got good service product than it is pricing. We don't see on the horizon anyway the need to lower price significantly to retain volume.

All right. Two other things real quick. Given that this is the second time, or third time if you include the pensions, that you've gone back to the IBT and looked for the wage rollbacks and the like, at what point -- is there an opportunity to go back to them and, instead of this kind of death by 5000 cuts, revisit the entire agreement? I mean, you know, Rahm Emanuel says, why waste a good crisis? Why not go after something a little bit more hefty than just 5% here, 10% there?

I would guess that if you talked to the Teamsters, they would consider this a pretty significant change in their agreement. It is $45 million to $50 million a month, which is not trivial, as I said. And I think the fact is that they've stepped up because they are focused on the success of the Company long-term. So I do think it has been a very significant effort on their part.

But 42,000 jobs or something, that is -- you see what I'm saying? The environment -- the environment seems appropriate to maybe look at some of the other aspects of the contract beyond just wages that would allow you more flexibility. Is there an opportunity to do that, whether it be job classifications or work rules or what have you?

No, I think we are pretty satisfied with where we came out in this negotiation, John, and I think it does give us a foundation to be successful.

Okay. And then lastly, just your conversations with the bank group, obviously they've been extremely accommodating. But I'm curious. I mean, people don't do something for free. How much money have you had to pay, either aggregate or the last couple of amendments, could you give us an idea of what you are paying the bank group, and is that just sheer dollar amounts going out the door?

There have been -- for these last several amendments, there have been no incremental payments to the lender group. For this amendment that we did today, specifically related to the ABS lenders, there was a 50 basis point fee, as it related to the ABS lenders, for those who signed the agreement. Beyond that, there have been no fees for any of the recent amendments.

Okay, all right. Very good. Good luck, guys. Thanks.

I think that was the final question, and we appreciate your attending the call, and we will talk to you at the end of the next quarter. Thanks a lot.

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