Yellow Corp (YELL) 2009 Q3 法說會逐字稿

Good morning. My name is Courtney 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 session. (Operator Instructions)

I will now turn the call over to Paul Liljegren, Vice President Investor Relations and Treasurer.

Good morning and thank you for joining us for the YRC Worldwide third-quarter 2009 earnings call. Bill Zollars, the Chairman and CEO of YRC Worldwide; Tim Wicks, our President and Chief Operating Officer; and Sheila Taylor, our CFO, will provide comments this morning.

Now for our disclaimers. Statements made by management during this call that are not purely historical facts are forward-looking statements. This includes statements regarding the Company's expectations and intentions on strategy 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 full discussion, please refer to this morning'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.

Thank, Paul, and good morning. Let me start by saying that we continue to make significant progress in our comprehensive plan to improve operating efficiencies, restore financial strength, and position our Company for future success.

As discussed last quarter, our plan is focused around specific actions involving efforts for the following stakeholders. First, our union and nonunion workforce; second, our lending group; third, our note holders; fourth, our insurance providers; and finally, our shareholders. We will give you an update on where we are with all these stakeholders here in a minute. In addition, we are continuing to transform our network capabilities, our cost structure, and our capital structure to allow us to effectively compete during this challenging economic period.

As you review the third-quarter results, you will see significant improvement from the first and second quarters. Operating income was up $80 million from the first quarter to the second quarter and $170 million from the second to the third quarter, a total of $250 million improvement in operating income since the first quarter. And remember that there is still several actions that are not fully reflected in the third-quarter numbers.

We will get into these in more detail, but keep in mind that the most recent labor contract changes were ratified during the quarter, so most of the cost benefit was not achieved until August. In addition, we expect incremental fourth-quarter ratification and additional headcount reductions to generate further savings. So a lot of progress here, but still a lot to do.

As we outlined earlier in the year when we discussed the National network integration, the benefits from that integration were expected to build throughout the year, and they are. We are also continuing to optimize our network operations and the phased removal of redundant service centers in the National network. Tim will provide some color in a minute but we have made additional reductions in our nonunion workforce as well that resulted in further severance charges. The savings will far exceed these upfront costs, but the costs are reflected in the third-quarter results while the benefits won't be fully realized until the fourth quarter and into 2010.

In terms of the operating environment, it remains very challenging as we continue to face a difficult economy that appears to have stabilized but has not shown any sustained positive momentum. We remain cautiously optimistic that the economy has bottomed out, but it is still too early to know for sure. We are not anticipating growth from the economy for the remainder of this year and at least for the first half of next year.

Pricing in the industry remains very competitive and market demand remained weak during the third quarter. Our year-over-year volume changes for the quarter however were relatively flat at National and Regional but monthly operating cash flow and earnings trends improved sequentially during the quarter due to our cost actions and our yield discipline. While year-over-year yield trends declined due to lower fuel surcharges, yield for National and Regional was consistent with the second quarter.

Volume and yield trends obviously reflect the economic and pricing environment as well as the financial malaise that we hope to put to rest as we continue to execute our plan.

We do believe the on-time service levels we have sustained for the past several months and continue to improve upon are important as we demonstrate our long-term service commitment to our customers.

Moving now to our segments and starting with National, as mentioned, our sequential daily volumes have stabilized from the second quarter to the third quarter and our yield has firmed. Although the lower than anticipated volume levels are still mitigating the full benefits of the integrated network, we remain on target with achieving our operational improvements in unit cost savings from the integration and believe there are significant incremental margins to be realized as shipments return to the network.

Our earnings for National have improved dramatically from the first half of 2009. To put that into perspective, National operating income improved by $50 million in the second quarter from the first quarter and by another $100 million from Q2 to Q3 or $150 million improvement in total since Q1.

In response to lower volumes, we reduced the number of YRC service centers during the quarter by eight locations and expect an additional reduction of 25 locations during the fourth quarter that will result in approximately 360 service locations by the end of the year compared to 450 at the start of the integration on March 1 and approximately 550 at the start of 2009. We believe the combined network provides the comprehensive service platform necessary to efficiently support current volumes, enhance our service levels to customers, and gives us enough flexibility to add significant shipments as the economy recovers.

Moving to our Regional companies, they were profitable in the third quarter as operational and cost enhancements have gained traction and that is indicative of the kind of sequential improvement we can provide. As mentioned earlier, the third-quarter results do not fully reflect the benefit of the recent labor contract changes. Even so, we reported slightly positive operating income and showed sequential operating income improvement of nearly $50 million from the second to the third quarter and about $75 million since Q1. Tim will provide further details about the Regionals and specifically Holland's turnaround in a minute.

YRC Logistics reported $6.3 million in positive operating income, which is its best quarter going back to the end of 2006. Clearly good things are happening at Logistics during the challenging environment, as they prudently manage pricing and costs without negatively impacting service.

Before turning it over to Tim, let me talk a little bit about the functional organization changes we announced earlier this month. As part of that change, Tim Wicks was appointed President and Chief Operating Officer. Tim has provided great value to the Company since he joined us in October of last year. Tim's prior experience has included significant leadership in developing business strategy and resulting tactical execution. He has been actively involved in both finance and operating decisions since he got here and has been instrumental in moving forward our comprehensive plan.

In addition, Sheila Taylor brings extensive experience to the CFO position given her former finance and investor relations roles and her significant relationships with our customers. She has been the key contact with the bank group since adding treasury to her responsibilities earlier in the year.

As a result of Sheila's capabilities, we felt the timing was right to have Tim fully devoted to the operating side of the business. In this new role, Tim will be responsible for finance sales and ops in order to enhance execution and drive bottom-line results.

With that being said, I will now turn it over to Tim to provide some more operational details on the third-quarter results.

Great, thank you, Bill. Throughout 2009, one of the keys to successfully executing our comprehensive plan is that we've specifically targeted critical operating areas where we needed to rapidly adjust performance and we put a SWAT team on each area while the existing management team continued to operate in the core business. What I would like to do this morning is organize my comments around these key areas of focus and the results we have delivered. It is important because those results in those key areas are already translating into the improvement you are seeing in our financial and operating results.

Clearly liquidity has been a focus in 2009 and as Sheila has recently stepped into the role is CFO, it will be more appropriate for her to cover this with you in a few minutes.

The key areas of focus in 2009 beyond liquidity have been labor costs, the Regional companies, safety, and operational rightsizing and service. We focused first on labor costs, given that it is the lion's share of our cost structure. Next, we focused on the strategic, operational, and financial turnaround of our Regional companies, led by Holland.

The next area is safety. Safety is important because it impacts liquidity related to letters of credit that support our workers compensation programs and we are also firmly committed to offering a safe workplace to our employees. SG&A cost reductions in our nonunion employee labor force are important as we simultaneously right size our union labor force and the operational footprint to reflect the demand in the market.

Let me start first with labor costs. First, as Bill indicated, the third quarter did not fully reflect the benefit of labor contract changes that were ratified and effective for over 90% of our Teamster employees on August 7 and subsequently passed by New Penn on September 9. Fourth-quarter ratifications should produce further cost reduction. As a reminder, the labor contract changes included an incremental 5% wage reduction for an aggregate 15% reduction over the remainder of the contract and an 18-month cessation of union pension fund contributions that will not need to be paid back at a later date.

The incremental wage reduction went into effect with the first pay period after their respective ratifications while the pension reductions were based upon the timing of ratification of the labor contract changes and the 18-month termination of participation of our operating companies by the various pension fund.

For example, the termination of participation in the largest pension plan, Central States, was effective on July 9 in advance of the August ratification. As a result, the third-quarter numbers still reflect approximately $22 million of wage and pension expense incurred prior to the labor contract changes that are now fully effective and $13 million in wage and pension expense from labor contract changes that are expected to be effective during the fourth quarter.

In terms of our long-term pension reform discussions, we are encouraged by the feedback we have received as we seek to resolve the issue of funding orphans -- quote unquote. Those are participants who have never worked for us. As you know, we have been funding the pension obligations for thousands of participants who never worked for our companies for a number of years. We estimate that we have paid out more than $3 billion since the 1980s to fund the benefits for these orphans. While it is too early to know the likely outcome and timing of these discussions, we feel progress is being made as evidenced by the recent introduction of congressional legislation.

Let me now cover Holland. At Regional, the turnaround of Holland has led the dramatic improvement in this segment's performance. Recall that we eliminated the geographic overlap in the Northeast between Holland and New Penn Networks at the end of the first quarter and adjusted the number of terminals in the Holland network during the second quarter. Finally, the labor contract ratifications during the third quarter and an increased Holland focus on the next day market all contributed to the improvement in Holland's operating performance.

Safety, early in 2009, our safety performance had fallen behind our historical experience. The increased cost to settle prior-year claims and the ratio of 2009 claims to our shipment levels has adversely impacted our earnings. As a result, we have begun to implement new operational programs which we expect over time would drive our safety metrics to substantially better than our historical performance. Early indications are encouraging that third-quarter trends for new claims are considerably favorable as compared to our first-half results. We expect to see significant incremental earnings improvement from these actions going forward.

For example in the first quarter, we posted letters of credit related to workers comp of $130 million and because of our focused effort with one of our SWAT teams, we have successfully reduced letters of credit requirement by $35 million over the last two quarters. We believe we have further opportunity in this area.

Next, let me talk about cost reductions. The headcount reductions that Bill mentioned earlier we are in the process of working through and we are removing 900 non-union positions from our cost structure and we are doing that in order to match headcounts with our current volume levels and to implement the streamlined functional organization announced in June. These changes involved many difficult decisions as we have had to let dedicated employees go.

We are now 75% of the way to our January 1, 2011 target of $200 million in annual run rate cost reductions, primarily SG&A. This effort is not merely about SG&A reductions. It's also about driving process, consistency, and efficiency. This will allow us to better meet our customers' needs more efficiently.

In addition to the initiatives mentioned, we strongly believe there are additional opportunities to drive incremental improvements to the bottom line even without the benefit of an uptick in the economy or shipment levels. We are still generating labor productivity and cost efficiencies as we retool the new integrated national network and make operating improvement. Our on time for service levels continue to hit all-time highs and we continue to improve every day with the actions that we are taking.

While the economic and pricing environments are somewhat out of our control, achievement of these cost savings are within our control. We expect that the actions we have taken and continue to take will get us to the point we are generating positive cash -- positive free cash flow during 2010. As we saw for that side of the equation, we believe that customer confidence will continue to be restored and our market share will increase.

Now let me turn it over to Sheila to comment on our new bank amendment and progress with other stakeholders.

Thanks, Tim. I would like to start by expressing our sincere thanks to the entire lender group, especially the dedicated and hard-working team at our agent bank JP Morgan. A number of people worked tirelessly over the last several weeks to complete the amendments on both the credit facility and ABS. It is unheard of to obtain a 100% approval on amendments that defer the lender's interest and fees, so we were extremely pleased with the level of confidence and support our lenders have in this Company, which was even further demonstrated by the early renewal to ABS.

The amendments have numerous aspects to them, so I'm not going to cover every detail, but let me give you the highlights. First, the Company continues to have access to up to $50 million of the existing revolver reserve if needed for certain operational purposes. Once the note exchange is complete, which we expect by mid-December, we will have access to the entire $106 million in the existing reserve. Open access is based on meeting a rolling four-week EBITDA and cost targets, which we feel comfortable with. If for some reason the Company is below these targets, then two-thirds of the lenders can simply approve the borrowing. This reserve will remain in place until January 2012.

In addition, a new reserve has been created with the lenders portion of future asset sales. The Company will have the ability to borrow against the new reserve with a two-thirds lender approval and assuming the existing reserve has been fully utilized. As I mentioned a minute ago, the entire interest and fees on the revolver and term loan and most of the ABS will be deferred upon the completion of the note exchange and continue through 2010. On a full-year basis, this totals about $100 million. Also the lenders will have the option to continue deferring into 2011 with a two-thirds approval. In general, the deferred amounts will be due in December 2011.

In regards to covenants, there will not be an EBITDA covenant for the fourth quarter of 2009 and the first quarter of 2010. Although we continue to make significant improvement in our results, our lenders felt an EBITDA covenant was not necessary as we complete our restructuring plans over the next few months and show our customers that our financial position is solid. EBITDA covenants will resume in the second quarter of next year with the levels reset. You should also note that the leverage ratio and interest coverage ratio that was supposed to resume for 2011 have been eliminated through the life of the facility, which is 2012.

There will also not be a minimum liquidity covenant until mid-December, when the note exchange should be completed. At that time, the Company will be required to maintain minimum available cash of $75 million and pay down the revolver when we exceed $125 million in unrestricted cash. We feel good with these provisions as it makes more sense for us to pay down the facilities instead of holding excess cash. The cash used to pay down the revolver can then be borrowed back if needed.

As for sale leasebacks, the Company has about $50 million still planned for the remainder of this year. We will continue to monitor this market and if the options are attractive, we will work with our lenders to complete additional transactions. However, with the deferral of interest and access to the revolver reserves, our appetite for doing future sale leasebacks is much more limited. As a note, we expect proceeds from the sale of excess properties to now be around $125 million for the year.

Before moving on, let me comment briefly on the ABS. The facility has been renewed until October 2010, well before the original February expiration. The renewal is subject to the successful completion of the note exchange. We set the facility size at $400 million based on our projected level of AR over the next year. As I mentioned earlier, the ABS lenders will defer most of their interest in fees. The deferred amount equals the difference between our current rate and the rates in effect prior to February of 2009.

In addition, the $10 million fee that was initially due on September 30 has been deferred until next October when the facility is scheduled to renew.

After going through these highlights, it should be clear that the lenders have taken extraordinary steps to continue supporting YRC Worldwide. They do this because they believe in our comprehensive plan and that we have additional opportunities to further enhance efficiencies and reduce our cost structure. They also believe the company's other stakeholders will do what they can to support the plan. This was clearly the case when the Teamsters ratified the Second Amendment to the labor agreement, further reducing wages and temporarily halting pension benefits.

It was also supported when the pension funds deferred multiple months of pension payments in exchange for first lien real estate. So given all of this, it should not be a surprise that the Teamsters have certified this bank amendment as acceptable under the MOU. In addition, nearly all of the pension funds have agreed to amend the deferral agreement entered into earlier this year. This amendment would be effective on approval of all the funds and upon completion of the note exchange would defer the payment of interest and the repayment of the principal through at least 2010 with the option for the funds to continue deferring principle and interest in 2011. The amounts deferred with this amendment are currently scheduled to be paid at the end of 2011.

These are significant commitments by the stakeholders and reflect the dedication they have to protecting our employees and our customers. Although we still need to successfully complete the bond exchange, our actions over the last year have been doubted by some every step of the way and yet we continue to prove the naysayers wrong.

As for the proposed note exchange offer, we have had discussions this week with the committee of our note holders. We expect to officially launch the note exchange offer by means of an S4 filed with the SEC. The public offer will be open for 20 (inaudible) days. After closing, we would expect to tender the bonds for equity in the Company.

Before turning it back to Bill, let me comment on the rating agencies. Both S&P and Moody's understand our comprehensive plan and are encouraged by our progress. They have rules that they follow when companies engage in debt for equity exchange offers like we are launching. These rules will likely result in temporary downgrades to our ratings. It is important to understand if this does occur, it should be temporary and we would actually expect our ratings to be higher upon completion of the exchange.

With all that said, I will not turn it back to Bill for closing remarks.

Thanks, Sheila. Let me briefly summarize some of the recent progress we have made towards our plan as we focus on the future. We have recently right sized our leveraging our new integrated network and expect additional savings as we progress into the fourth quarter and 2010 for the National business. We've also made significant and obvious improvements in our Regional and logistics segment. We streamlined our organization structure and right sized our support functions and expect additional savings as we progress into the fourth quarter and 2010.

We have decreased our labor costs throughout the year and have materially reduced our unit costs with the third-quarter ratifications of the new labor agreement and I expect additional benefit from fourth-quarter ratifications.

We renewed our ABS facility and have finalized an amendment with our banks that should provide additional liquidity and shows the support of our long-term plans.

We have reached an agreement with nearly all of our pension plans that should defer payment of their interest and principal payments and we are engaged in ongoing productive dialogue with our note holders related to the planned note exchange. We expect the note exchange to materially improve our balance sheet leverage by a reduction of debt, improve our credit rating, and provide further liquidity to the Company.

In the third quarter, we have made significant progress and have created significant momentum. 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. I will now take your questions.

Justin Yagerman, Deutsche Bank.

Good morning, Tim, Bill, Sheila, Paul. I wanted to get -- I guess first question is a lot of moving parts here. Besides the negotiations with the banks, is there any discussion with any type of white knight or private equity investor here outside of the current negotiations that are going on?

Well, I think we've been really careful to outline our plan for recovery here and we are really stepping through that plan fairly effectively. The next step in the plan is the bond exchange which we've talked about.

Got it. And I guess on that bond exchange, obviously considerable questions around what potential dilution could look like. When I think about that, do you guys have any preliminary thoughts on an exchange rate on those bonds?

As we continue those negotiations, Justin, we will start to release the details of the planned exchange that will come out in the S4, as we mentioned in our prepared remarks here.

Okay, and then when I think about, Sheila, you went through a bunch of different points on the amendment. Am I right in looking at the 8-K and that you guys need 95% of the debt to convert in order for this bank amendment terms to hold? How should I be thinking about that in terms of that from a threshold standpoint?

Yes, we either need 95% or something else that we would agree to with the two-thirds of the lenders.

Okay, so in other words, if for some reason you didn't get 95%, there is another avenue and you just need two-thirds approval from a bank group that just gave you 100% approval?

Correct.

Okay. I guess just moving over to operations, tonnage trends in the quarter, Bill, you said that things strengthened throughout. Can you comment a little bit about what you are seeing in October here? Are you seeing some of those customer deferrals that you'd talked about in prior quarters slow down and maybe even start to reverse?

I think what I said was we have seen stabilization in both volume and yield. I think there was a certain amount of anxiety on the part of our customers because of the October 30 date that it was in a lot of the previous amendment work. So hopefully this will go a long way toward putting that to rest. But I think Tim wanted to give a little bit more detail.

Justin, it's Tim. One of the things I think is important to understand is that sequentially all through the quarter we were very, very stable as it relates to shipment volume. And there is a normal seasonal decline that occurs and has occurred as we go back historically and look at every time you make a move from September to October. I think it is important to understand that seasonal decline exists and we are right in line with that in October.

Okay, then lastly, you made a couple comments around the prepared remarks, but can you just talk about what pricing maybe looks like net of fuel? Obviously that's something that -- would have been up on a year-over-year basis? How are you guys looking at that right now? How should we think about where you guys are on the pricing scale, there's obviously a lot of competition in the LTO market.

Yes, there is. I think a couple of headlines there. First of all, we do -- we have seen it stabilize, which has been a little different than maybe some of the competitive reports. We've been really focused on being disciplined there. The other piece of the pricing equation of course is the fuel surcharge, which still year-over-year is much lower than it was previously. But I think the headline is stabilization on the pricing front and we are paying a lot of attention to discipline there. But Tim may want to add something to that.

Justin, the only other piece that I would add is in addition to what Bill has said and in terms of what we are seeing in the market is we are active as it relates to looking across the segments of our business to make sure that we are growing market share in the segments that we are most anxious to improve our OR. And those segments on a mix adjusted basis allow us to take our yield up and that's separate from any pricing actions. It's really a mix-driven strategy that we are driving.

All right, thanks for your time, guys. I appreciate it.

Tom Wadewitz, JPMorgan.

Yes, good morning. I wanted to see if Bill or maybe Sheila, if you could run through some of the cash flow performance in the quarter. You gave us some details in the release, but I guess just kind of back of the envelope, it looks like you had $218 million in liquidity at the end of June and you went down to $171 million of liquidity at the end of September so there is something like a $47 million reduction. And then you've got some comments on the asset proceeds, but can you tell us how much of the asset proceeds you kept in the quarter? And then perhaps give us a sense of what is the right number in terms of operating cash that you would have used in the quarter ex those asset proceeds?

Let me start, Tom, and then Sheila give you more detail. I think probably the important thing to focus on, at least the thing that we think is most important is the operating cash burn of the business. And that has improved as we have gone through the quarter. We've got other nonoperating uses of cash that did not improve throughout the quarter, but I think the trend on the operating cash flow is positive and that's probably the most important underlying factor.

Having said that, Sheila has got more detail on the total cash usage.

Yes, I think to Bill's point, the operating cash is the big piece of it. When you look at the asset sales, you can really back into it, Tom. If you will recall in one of our previous amendments, we were able to keep 100% of the asset sales in August up to $50 million and we took full advantage of that $50 million and really hit that.

And so that's why when you look at the revolver reserve and you compare the balance at the end of June, which I think was around $95 million, and now at the end of September, we are at $102 million, you are not seeing a significant change there because we kept 100% of those asset sales of the $50 million in August.

Okay, there were some other -- I guess in the press release, you have got let's see $21 million of sale and leaseback transactions and then $68 million of excess property. And I guess you say you are kind of netting out 10, and so what -- I understand the $50 million, but what would the total proceeds in the quarter be that you could keep from sale-leaseback and excess property?

Take the total of the two, excess and sale leaseback, so $88 million, $89 million. Back out the $50 million that we kept -- that we got to keep 100% of, and then take 50% of the remainder. So we're still in the 50-50 with the lenders right now. We haven't maxed on our $300 million, so as of now exclusive of the $50 million we kept in August, everything else is still split 50% with the lenders and 50% with us.

And then we should take out I guess the $10 million in pension -- that deferral payment that is --?

Right. Correct.

Okay.

Any first lien collateral that we sell goes directly to the pension funds, not to the lenders. So that was $10 million in the quarter.

So you're basically looking at something like $65 million in proceeds. So if I look at the -- again, going back to how you characterize liquidity at the end of second and comparing that to the end of third, it looks like about $47 million in cash burn, but then if we add to that kind of $65 million adding back the proceeds, you get something like $112 million. So that's I don't know -- call it whatever $35 million, $40 million a month -- is that a reasonable way to look at the operating cash burn and can you give us a sense -- you talked about improvement in the quarter. Are there any kind of numbers you can provide to give us a little clarity about how much improvement there was in cash burn in the quarter?

Yes, as you know we don't break it down by month. I think you are looking it correctly, but I wouldn't just straight line that. I would say that we saw significant improvement as we went through the quarter and as you got to September. So I would definitely front half load that cash usage to back in July and early August. We have taken significant costs out of the business and I think you'll see the full run rate of that as we go into the fourth quarter.

So, can you give us a rough sense of kind cash burn ex asset proceeds or sale leaseback in September? Kind of broad -- was it 10, 20, 30, any rough sense of that?

Let me just add one other factor in here, Tom, and that is when I talk about the operating cash for the business I exclude all of the fees we are paying to advisers, which is significant at this point. So at the point where we are completely back on our feet here, those will disappear and in order to look at the operating performance of the businesses, we remove that cost from the operating cash flow. So that's another piece of the puzzle here.

Tom, just at a high level, we did not close any sale leasebacks in the month of September and I believe we closed about $20 million of excess in the month of September. Jeff, tell me, was their pension in September, though?

Yes.

How much was the pension? We will get that number for you, Tom.

(Inaudible - microphone inaccessible)

Pension proceeds of the $20 million excess. All of it was in September. Okay, that $10 million we were talking to about pension proceeds, it's included in the $20 million that we had in September. So in total, about $10 million of asset sales was split between us and the lenders in the month of September.

But in terms of the business, kind of setting those things aside, any rough sense of cash burn in September?

Not that we're going to talk about.

Tom, it's Tim. We're not going to give you specific numbers, but let me tell you what the trends looked like through the quarter because I think that's instructive in terms of what we are doing from an operating turnaround.

Yes, sure, that would be helpful.

In each month in the quarter, each one of the operating businesses, whether it is National, Regional, Truckload, or Logistics, at an EBITDA level, all improved. And we talked earlier about the fact that the Regional companies were profitable and were EBITDA positive in the third quarter, and so I'm not going to go through the various sequential amounts. But there was a very substantial turnaround that has been driven by Holland all through the year and specifically really drove the size of the turnaround in the third quarter for the Regional Transportation Group.

And maybe to put this in more perspective, in the month of September, we got close to breakeven from an EBITDA standpoint, total Company.

Okay, great. That's very helpful. One other question I want to ask you, the notes exchange I think you said in response to Justin, something like 95% is the approval you need in order to go forward with the notes exchange. And help me understand what happens if you get a lot less than that, what the -- how you would address the notes issue if you just don't get a good response.

Yes, obviously, Tom, that is not our expectation. We have been in conversations with the note holders advisors for a while now and we are actually talking directly with some of the larger note holders, so we feel good about the progress of that. The 95% is what we negotiated with our lender group. And as we talked about earlier, if for some reason we don't get that, we will go back and have discussions with the lenders, but we feel pretty confident that the note holders understand our comprehensive plan and will do their part.

So if you -- I guess it's just a function if you have holdouts on that you can pay -- obviously you wouldn't want to -- but you could end up paying the holdouts in terms of the note and then you just have to rework things a little bit with the bank group but that's a possible alternative as well if you got a high percentage that approved but you didn't make the 95?

It was something we would have to work out with the lenders, but I would not expect that. We also have entered into agreements with the pension funds. So given these deferral agreements that we've entered into with the pension funds and the lenders, it doesn't really call for us to do cash outlays to the bondholders.

Right, okay, great. Thank you for the time and patience with the questions.

Jason Seidl, Dahlman, Rose.

I'm having some phone problems here, so I apologize ahead of time for being on the speaker. Bill, I just want to make sure that I heard you correctly. Did you say that you expected to be free cash flow positive next year? Did I hear that in your comments?

Yes, during 2010, we will be free cash flow positive. Obviously the most challenging part of the year is the first quarter, as it always is, but we will be free cash flow positive.

Okay, that's helpful. Can you also talk a little bit about net-net your gains or losses in terms of customers? Because as you know, there's lots of rumors flying around about you guys on a daily basis, forget weekly. Net-net, are you guys getting more customers or losing more customers? Walk us through what's going on.

Sure, I think there are kind of three buckets I've talked about this before. I don't think it has changed a lot. We've got new customers coming on board all the time. As Tim mentioned, one of the real areas of focus for us has been to really work on our customer mix to make sure we are bringing on board the most profitable customers possible, and we are doing that, which is having an impact, a positive impact on our yield. So there are new customers coming on board every day.

We've also got a very stable base of customers that have not left and are still doing business with us at about the same level adjusted for the economic environment we are in. Then we have customers that are leaking business that are moving away from us, have moved away from us.

The sum total of all of that is the stabilization that I talked about before, so we've seen very stable shipment volumes through the quarter and we are frankly seeing pretty stable shipment volumes now for a couple of quarters. So it is a mixed bag in terms of customers and we fully expect that as we continue to provide evidence of the plan that we are implementing that we will continue to increase the likelihood of more customers coming on board.

Okay. Sheila, this one is for you and congratulations on the promotion, by the way. Could you break out a little bit of the cost savings that we should expect on a sequential basis from 3Q to 4Q because some of these things did start late? Could you put some dollar figures around those things for us?

Yes, I think Tim or Bill talked about it a little bit in their script. We do have the full ratification that will be in effect for the fourth quarter that we did not have in the first quarter. That's like $22 million. And then there's another -- what is it $12 million $13 million that we expect to get ratifications during the fourth quarter. Timing of that is still yet to be determined but our expectation is that we would get those here soon. And then we've got the SG&A reductions that Tim was talking about that should give us probably another $15 million to $20 million.

That includes the $900 million of corporate layoffs?

It does. That's right, Jason.

Okay, I just wanted to make sure we are talking apples and apples here. Okay, that's helpful. Sheila, can you talk about -- you said I think in your remarks that you are going to have 360 terminal locations by the end of the year. Am I correct?

Yes, that's what we said, Jason.

By the end of the year, assuming you make no further sale leaseback arrangements from here on out and the existing ones you have closed, what number will be fully owned by Yellow?

We will have about 50% to 52% that we still own, which is pretty consistent with what we know across the market.

And if I was looking that on a percentage of your doors, would that number change much?

I wouldn't expect it to.

No, I think that is pretty close to the number.

That would be pretty close to the number?

Yes, about half.

About half. Okay, fantastic. I appreciate the time as always, guys.

Edward Wolfe, Wolfe Research.

Congratulations, Tim and Sheila. Can you start by giving us an update on the liquidity number? Where are we today on the liquidity number?

Yes, I don't think we're going to go into where we are today, Ed. As you know, the lender group has been very flexible on the things that they have done for us. We do have access of that $50 million if for some reason we needed it between now and the note exchange. But I don't think it would make sense to go into our liquidity given that it fluctuates on a daily basis and weekly.

When you say access to $50 million, you're talking about the revolver reserve?

Correct, correct. If we needed it for operational purposes, we could get to that.

Okay. Well I understand where you might not want to be giving it day-to-day, but could we take a look back and can you give it to us kind of in the past quarter? You gave it to us September at 171. We know it was at 218 in June. What was it like in July and August at the end of the month?

I'm not sure I want to again get into giving interim months. It does fluctuate through the quarter. But I think you can probably do the extrapolation between June and September. I'm not sure if it adds much value at that point.

If I could, I would. That's why I'm asking. It's obviously the critical issue. You've got $171 million of liquidity and under the new proposed revolver, you've got to keep $75 million in cash, so there's not a lot of cushion here. I'm just trying to understand it.

Well, keep in mind the $75 million is cash and liquidity. It is availability under the facility and that doesn't kick in until the note exchange, which at that point in time I can access the revolver reserve. So that minimum cash does not kick in until mid-December or when we expect the note exchange to be done.

Okay and right now is the $100 million still suspended?

Yes, that's what I'm saying. The $100 million effectively goes away, Ed. So the old $100 million minimum liquidity number that you are used to is gone. We don't have a minimum liquidity number in place right now. By mid-December, which is when we expect the note exchange to be complete, we have a new covenant, which is minimum available cash, which is the old definition of liquidity. It's the cash on hand plus the unrestricted access to the revolver and the ABS. That $75 million kicks in in mid-December, but at that time again, we expect the note exchange to be done and we can fully access the $106 million revolver reserve if we needed to to meet that $75 million.

Right now if before we get to that point there's $171 million, of which only $8 million is left to tap, but you are saying you can also tap $50 million?

Yes.

So (technical difficulty) that liquidity number?

No, the $50 million is not in that number.

You can tap that freely or only when you sell assets?

I can tap that freely for certain operational needs. I can't tap it to go do an investment or CapEx, but for operational needs.

why isn't that in your liquidity number?

Is not in our liquidity number. We have never included the revolver reserve in our liquidity number, as you know. I would expect that once we get the note exchange done, it does go into a liquidity calculation with the lenders, but we now have two or three different definitions of liquidity. We have never included it in there, so I would look at that as additive to the $171 million.

All right. Just to understand a little bit more, the expected savings from the bank PIK and the bond exchange would be $20 million per quarter going forward? Is that right on a cash flow basis?

From the -- well, it's a little apples and oranges. The $100 million that we talked about was from the lenders, so about $25 million a quarter for the lenders. The notes actually have interest of about $30 million a year, so that was not included in the numbers that we're talking about. So once we do the exchange, then yes, that $30 million from the notes would go away. The $100 million from the lenders would be deferred until December of 2011.

(inaudible) and I'm looking for right now in the agreement that it says $20 million a quarter is the savings going forward. What is that referring to? Upon effectiveness of deferral, the Company expects deferred interest and fees under the credit agreement to be approximately $20 million per quarter.

Yes, that is for the credit facility and the ABS. Right? Or just the credit facility. Credit facility and term loan and then about $5 million on top of that would be the ABS, so you get to $25 million. I think they are in two different places in the 8-K.

That's helpful. What is the timing of that? So if the deal gets done on let's say December 1, does it go backwards or do you have to pay that cash right now as the payments come due on the 15th of the month or not?

The deferral kicks into effect upon the note exchange, so whenever the note exchange is done, any interest after that would be deferred. Typically, our revolver interest and fees are paid quarterly. The interest would be paid at the end of a quarter and the fees are typically paid at the beginning of the quarter. And ABS is paid throughout the quarter

What happens if you don't get 100% of the funds in the Teamsters amendments to agree? And when you refer to 99% have agreed, is it just Chicago at this point or are there others who have not?

This is related to the pension funds agreeing to the deferral, so there's I think two small little funds; it's not Chicago. We actually do have 99.7% of the funds signed up, which is pretty amazing given we just finalized the deferral agreement on Monday and got it out there to them. So we fully expect to get those other two signed up. I think one is Hawaii, so they are pretty small and hard to get some responses, but we feel really good about getting them. Their dollar (multiple speakers)

And if don't (multiple speakers) what's the impact?

If we wouldn't, again, we would have to go back to the lenders and have two-thirds approve something less than that, but again, we fully expect to get them and dollar-wise, it is very small.

Now Chicago, the group of Teamsters that haven't agreed to the last 5% in the pension, what happens -- first of all, is that Holland or is that Yellow or Roadway or all of the above?

It's everybody in those locals, Ed, and that is being addressed. We fully expect that to be resolved shortly.

Does that mean there is going to be another vote or there is going to be closures?

It will be resolved shortly is about all I can.

That's fair enough. In terms of asset sales, has there been anything in October yet that is closed?

We continue to close them, yes. We talked about $50 million, I'd say at least $50 million of sale leasebacks through the fourth quarter, and we have closed some of that.

Can you give a little bit of a sense in terms of -- are you halfway there to your target or --?

Ed, you can actually kind of back into it because in the 8-K, we talk about this new revolver reserve or new block that we have established for future asset sales and that actually includes the 50% to the lenders that we closed in October.

Bill, you mentioned some fees that you've been paying to advisers. Can you give us a sense what was that in third quarter?

I don't want to quantify that, Ed. The point I was just trying to make was that when we look at underlying operating cash flow of the business we don't include those fees. And I think as we recover here and continue to implement our plan, those fees will begin to disappear. But they were fairly significant as we went through the quarter.

Okay. So just to kind of recap things, you've got $171 million of liquidity plus $50 million in reserve to get you to hopefully this amendment which will reduce your cash flow by another $25 million a quarter. And you talked about some further savings that expect as you have full ratification in fourth quarter and then further ratifications in fourth quarter. And I'm guessing that's offset to some degree by seasonality getting a little bit weaker.

What are you seeing in the marketplace recently? There's been some talks about some of the carriers getting more aggressive recently and does that impact as you -- is that in your numbers as you think about where you need to get in your plan?

I think we've got a fairly reasonable perspective on both volume and yield in the fourth quarter, but I think if you compare our yield numbers with the rest of the market, you will see we've been a little more disciplined than many. We will continue to do that as we move forward and we will end up with strange competitive behavior and different locations with different customers. But I think what you saw in the third quarter will be very consistent with what you are going to see in the fourth from us.

Well, I guess what I would say is if you are holding your yields and the rest of the industry is getting more aggressive, the shipment count down 40% at National, does that get worse before it gets better? What are you seeing?

No, we wouldn't expect it to get worse. Obviously we will have the regular seasonal impact as we move through the balance of the year, but we would not expect it to get worse. It has been stable for some time and we would expect that to continue -- and we would also expect our yield to continue to be a little bit better than the rest of the market.

Ed, it's Tim. The other thing I would add is when we talk about yield and the improvements that we are seeing, those are being very strategically driven by how we are going after certain customer segments.

I understand that, but can you just give us a sense in October, are shipment counts down 40 similar to last quarter or are they better, worse, different?

They are consistent with the seasonal pattern, as Tim said.

So year-over-year they are the same, taking seasonality out of it give or take? Or

Roughly, yes.

Thanks, guys, for the time. I appreciate it.

Jon Langenfeld, Robert W. Baird.

Good morning. On this debt for equity exchange, are those shares issued under the shelf or is the shelf separate?

They are separate.

So the shelf will remain in effect -- I think what -- there was like -- was it a couple hundred million dollars of potential availability under that shelf?

Correct.

Yes, John, it was set up at $200 million of availability.

Okay, but this is completely separate. And is there a limit anywhere else that limits the amount of -- or I guess what is the limit in terms of number of shares you can issue based on your current structure?

120 million.

Okay, so you are covered there. And then could we walk through these benefits again just to understand what is in 3Q, what is in 4Q both from a cash flow perspective as well as a P&L perspective? So first off from a cash flow perspective, the absence of the pension payments was fully realized in the third quarter. Is that correct for the union pensions?

No, it was not fully realized.

So you were contributing the cash to (multiple speakers)

Bill is thinking of earnings. We have not paid the multi employer from a cash standpoint at all in the third quarter.

Okay, so no cash flow impact there, but there is a cash flow impact from the fact that the wage side of it only took effect in August and it didn't take full effect. So could you give us some idea what -- just on that wage component, how much additional would be reflected in the fourth quarter above and beyond the third quarter?

Yes, about $8 million.

Okay, and then in the third quarter, how much would have been realized?

That's what it is.

The fourth-quarter run rate is?

$8 million is incremental to what we got in the third quarter.

And what did you get in the third quarter?

Let me find that number.

Okay, because I was under the impression that the wage side was roughly $7 million to $10 million in total on a quarterly basis. Do I have that number wrong?

We're double checking here.

Okay, I will go on while you are checking there. Are you current on all your lease payments?

Yes.

Okay, and then on the asset sale sides, can you just remind us just so we're all on the same page in terms of the number of assets sold and sale leaseback on a quarter -- on a year-to-date basis through 3Q?

You are talking about the proceeds, Jon?

Correct.

We have $300 million of sale leasebacks that we have done year to date (multiple speakers)

And about $106 million of excess property.

Yes.

$106 million of excess property?

Yes.

And is the [Nat made] from Q1, is that included in either of those numbers?

Yes, it would be included in that sale leaseback number, because I'm looking at the debt side of it, what's on the books.

And the limitation of $400 million in the year applies to just the [DIP], just the $300 million or is there an addition to that?

The $400 million applies to everything except the initial Nat (inaudible) transaction. That was excluded.

So essentially you are -- on that $400 million, you have used $300 million of that theoretical availability of sales?

That sounds about right. I don't have the exact numbers in front of me.

But rough numbers, okay. Then if I think about the components that are being deferred here, the pension expenses not being deferred, that was -- I know you had the one piece of it from the second quarter, but the additional pension concession, that is not a deferral. That is an outright expense reduction.

Correct.

So the only deferrals, let' say between now and the end of next year incremental would be this $25 million then on top of the one-time $10 million fee to the asset-backed securitization. Is there anything else?

The only other thing that I would look at as a deferral as we get the rest of these pension funds signed up, the other 0.3%, you might recall that we were supposed to start repaying the principal in January of 2010 and we would pay that over a three-year period. That first year is now being deferred until December of 2011, so we will be differing that but the debt is already on the books.

And then the interest that we have been paying on that, which is about $0.5 million a month, so $6 million to $7 million a year, that interest would be deferred through 2010 and then payable December 2011.

Got you, okay. And then any luck on the -- kind of think about the cost side and what was in the quarter what we were talking about originally? Did you get that number for the labor?

They are calculating it or looking (multiple speakers)

Okay, okay. Then the other question I had in terms of the revolver reserve, what's does access to it mean? Does that mean that money becomes yours outright upon successful completion of the exchange and there's no other (technical difficulty) things have to it?

What happens upon the note exchange is we can access the $106 million in the existing revolver reserve. We have rolling four-week EBITDA targets that are set and so as long as we're within those EBITDA targets, we can fully access it. If for some reason we miss those targets, then two-thirds of the lenders can approve us to borrow that.

But it is a borrowing relationship, it's not a relationship where you take the money on an unrestricted basis? Like if you are within the reserves and you take $50 million out, does that revolver reserve then reduce to 50 or are you required to pay that back up to be back to $100 million?

Well, we would pay it back up as our cash get to certain levels, so there are -- like we are talking about earlier, $125 million of unrestricted cash, I would have to start paying it back.

Got it, so it's not completely unrestricted in terms of that -- the revolver reserve still exists.

I would say it is more -- we have always had the revolver reserve but if you will recall, it was supposed to reduce the capacity of the revolver back in July and then we kept extending that. So I think what's important with this is it is now extended until January 2012. So the reason we didn't include it in our liquidity is because it was supposed to be a permanent reduction. Now that that is not going to happen, I think it is very reasonable to include it in our liquidity and as long as we are within these rolling four-week EBITDA conditions that we have worked through with the lenders that we feel good about, then yes, I can go out and borrow it without approval from them.

If we have a hiccup and we are not in compliance with that rolling EBITDA, then we just have to go to the -- really effectively the steering committee makes up more than a super majority and they can approve for us to borrow it.

Understood, so the key thing here it's not reducing their revolver reserve or not reducing the revolver at least until -- what did you say -- January 2012?

Correct.

Okay, great. Thank you. If you get that number, I will take that too.

Bill does have it, Jon.

From a realized expense savings in the third quarter, we had roughly $90 million from the second MOU. We mentioned the $22 million additional savings related to ratification that has already taken place, and then on top of that, there would be ultimately $12 million additional for locations that have not yet ratified.

And that's all on a P&L basis?

Correct.

All right, thank you.

Thanks, Jon. I think we've got time for one more question.

Chris Ceraso, Credit Suisse.

Thanks for taking the call. So just to clarify on the comment about the change as you walk from Q3 to Q4 on a cash basis, it's only $8 million relative to those two things that you just outlined? The rest is P&L only?

On the wage side and the pension, yes from the MOU.

Okay, are there other changes outside of whatever happens with volume and rate on a cash basis that would improve the cash flow as you walk from Q3 to Q4?

We have -- Chris, it's Tim. We have obviously the changes that we are driving as it relates to the SG&A reductions that we talked about earlier. The fact that I mentioned we are expecting that by 12/31, we are at 75% of our target. We have more of that to go between now from October 31 until December 31. Those savings will be in there. We're not going to disclose specifically what that is because it relates to targets we are achieving as it relates to FTD reduction as well as other SG&A savings.

Chris, I would say that if we get the note exchange done by mid-December as we are planning, the revolver interest is paid at the end of the quarter, so you've got potentially $10 million of interest and fees there that we would start deferring in the fourth quarter.

Okay. But seasonally, we are going to be weaker from Q3 to Q4, so net-net given weaker expected volume seasonally plus some of these positives, should we expect the cash burn to be in the same neighborhood in Q4 as Q3?

I think roughly that's appropriate. We also -- Bill mentioned in his comments earlier, Chris, in terms of what we're doing to take down the network to have it reflect the size of the market demand. That's both a facility reduction and it is also a labor production. And so when I talk about the FTE reductions, those are SG&A reductions. There's an entire other side of the operation where we work to get the expense out as rapidly as the business goes through its seasonal cycle.

So that is both the facility reduction as well as the labor reduction that occurs with Teamsters labor so that we can continue to drive toward being cash flow positive. The other side that happens as well is what we are doing specifically related to customer mix changes and the improvement to our revenue per shipment.

Okay, then purely from a cash flow standpoint, we typically get a working capital benefit in the fourth quarter as well because of the reduction in volume, collection, receivables?

Okay, it sounds like a lot hinges on the exchange being successfully completed. What is Plan B if that doesn't work out? Is there any way that you can have the union for example tender for the notes? Or what's -- I know that if you get close, you can probably convince two-thirds of the lenders to say that's okay, but if it fails outright, what's Plan B?

We are fully confident that we are going to be able to execute the bond exchange, and I think I'd just leave it there.

Okay. And then last question, given the let's say loss in market share that you've experienced as well as the reduction in the number of terminals or the size of your business, where do you think in a more normal freight market a year from now or two years from now, what sort of size of the business are we looking at relative to, say, the $10 billion that you used to do?

Well, I don't think there's anything that would make us think that we can't be back there at some point in time. I think the reality is that there are two pieces to that. One is the financial overhang that we have had surrounding the business. Hopefully, as we continue to execute here, that goes away.

Secondly, the economy recovering is obviously a key for not only us but other members of the industry. So it really depends on those two factors, but longer-term, there's no reason we can't be back where we were and we've got a lot of upside opportunity here as those two things change.

So basically even given the significant reduction in your assets, you think you could get back to that level?

Yes, I think that in this industry, we can add assets as the business volumes expand and we certainly are prepared to do that.

Okay, thank you very much.

Thanks to everybody. We really appreciate it and we'll talk to you at the end of the next quarter. Thank you.

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