Yellow Corp (YELL) 2010 Q2 法說會逐字稿

Good morning. My name is Amanda 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 Paul Liljegren, Vice President Investor Relations and Treasurer.

Good morning and thank you for joining us for the YRC Worldwide second-quarter 2010 earnings call. Bill Zollars, Chairman, President, and CEO of YRC Worldwide, 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 a full discussion, please refer to this morning's earnings release and our SEC filing including our 10-K and today's 8-K filings.

In addition, please see today's release for reconciliation of our GAAP measures to non-GAAP measures such as operating loss to adjusted EBITDA is defined in our credit agreement. During this call, we will refer to the non-GAAP measure of adjusted EBITDA simply as EBITDA.

I will now turn the call over to Bill.

Thanks, Paul. Let me start by saying we are pleased with the significant traction we've gained with our key initiatives of disciplined pricing, customer mix management, and cost improvement. In addition, we appreciate the continued confidence demonstrated by our customers who have either returned their business to us or have increased their shipments with us. And they have significantly helped create operating momentum which we achieved throughout the quarter.

To put that in perspective, our EBITDA went from $3 million in April to $22 million in June. Still have a lot of work to do, but we are encouraged by our trends. The general economic outlook reflects modest growth prospects for the second half of 2010 and the LTL industry dynamics appear to be improving. We have seen volume increases absorb excess capacity in the industry and pricing actions appear to be more disciplined as compared to last year's trends.

Moving on to our joint committee discussions with the Teamsters and the Multiemployer Pension Funds. As you may recall, these discussions relate to the reentry of our operating companies into the Multiemployer Pension Funds and also market competitiveness. We'll keep you updated as the discussions with these two key stakeholders move forward on these two important issues.

Turning to the business performance, we feel that the organizational changes we talked to you about last quarter are a key part of our improved operating performance, which you can now clearly see in our results. Pricing in the industry remains competitive, but we are seeing it tighten. Our traditional annual contractual increases have continued to improve and the results of our focused efforts on our profit improvement accounts are generating positive impact.

Our quarter-to-quarter volume changes were up 11% at National and almost 16% at Regional. The quarter-over-quarter revenue per shipment for National improved by about 1% and Regional revenue per shipment grew by about 0.5% as increasing weight per shipment impacted the sequential change in our yields. On a year-over-year basis, our revenue per shipment improved almost 4% at National and almost 5% at Regional.

Moving onto our cost initiatives, last quarter we talked about our $300 million cost reduction targets, which as you may remember was incremental to the third quarter of last year. This cost reduction initiative is focused on SG&A, safety, and operational process improvements. To date we have exceeded a $250 million run rate and we still expect to achieve our run rate of $300 million by the end of this year.

As you look at our operating results in the second quarter, you will see the third quarter of year-over-year improvement and the fifth quarter of sequential improvement. Our consolidated results included positive EBITDA for the first time since the third quarter of 2008.

Moving to our segments and starting with National, EBITDA for National was positive also for the first time since the third quarter of 2008 and it improved by more than $210 million from last year despite the year-over-year reduction in our revenue base. This improvement includes the benefit of the union pension cessation of about $60 million for the quarter.

Sequential improvement from first quarter was more than $65 million, which represents an incremental margin of 85%. Given that our historical incremental margins from volume growth are about 20% to 25%, it's very clear that our cost reduction initiatives were major drivers of earnings improvement, along with disciplined pricing actions. We expect pricing to be a large factor as we move through the second half.

Our Regional business improved its EBITDA by over $50 million from the same quarter a year ago. We benefited from year-over-year volume growth of almost 5% and have significantly reduced our operating costs including the benefit of the Union pension cessation of about $25 million for the quarter.

Holland's volume growth has constrained to its driver capacity in many locations and has allowed them to be more selective on customer mix and the shipments moving through the network while New Penn and Reddaway continue to make solid progress. Glen Moore, our truckload business, reported breakeven EBITDA in the modestly favorable revenue operations -- sorry, revenue comparisons for second quarter.

As a reminder, we expect to close during early August on the sale of YRC Logistics to Austin Ventures. This is a good move for our customers and the Company. Through a continued commercial services agreement, YRCW will continue to offer our customers across the globe supply chain solutions while additional liquidity from the transaction will help YRC Worldwide focus on our core strengths.

As a result of this transaction, our YRC Logistics segment is being reported as a discontinued operation for all periods. Its net loss of $11 million this quarter is largely due to the operating loss and shutdown charges related to the flow-through and pull distribution service, which we have discontinued as of June 30.

Importantly, we have retained our two strategic operations in China which enhance our global capabilities. The first is JHJ, a 50%-owned freight forwarding operation and Jiayu, a 65%-owned ground transportation operation. Our share of JHJ is reported below the line as a nonoperating item. Beginning this quarter, we have included the revenue and operating income results of the Jiayu business in our consolidated results since YRCW assumed management control of this entity during the quarter.

Sheila will now provide more color on our financial results and recent actions taken with the lender group.

Thank you, Bill, and let me apologize in advance. I'm fighting a head cold. As Bill mentioned earlier, our operating results improved significantly throughout the quarter, which put increased pressure on our liquidity to fund our growth. We continue to proactively address this pressure through a combination of more effective working capital management and additional actions with our lenders. Let me take a moment to go into each of these in a little bit more detail.

Some of you may recall after the integration of Yellow and Roadway in 2009, our ABS lenders amended the agreement to carve out the negative impact to the integration on our receivables. At the time this kept us from making a fairly large repayment on the ABS, but also created a hurdle for us to overcome before we could borrow additional funds. With the significant growth we experienced this spring and projected in June, we worked with our ABS lenders to temporarily remove this block so that we could further borrow against our receivables and fund our volume growth.

This amendment provided an incremental liquidity of about $22 million that will fluctuate with seasonality of our AR. During this process, we also started conversations with our credit lenders to amend their agreement that should provide further incremental liquidity and flexibility around certain transactions. This amendment was completed last week and announced in an 8-K this morning, so let me give you some of the specifics.

First, the lenders consented to the sale of YRC Logistics, which was required given their collateral position. Under a previous credit amendment, we had negotiated the ability to retain 50% of the proceeds from the sale. We have now agreed with our lenders that the Company will retain 100% of the proceeds from this transaction after receiving consent from the pension fund.

With the closing of the Logistics sale, this would result in the Company increasing its unblocked availability by an initial $30 million and a corresponding reduction of 50% of the proceeds or approximately $15 million against the facility size of 950.

In addition, we have agreed to switch the waterfall on the next $20 million of sale leasebacks which means the Company would maintain 75% of the proceeds in exchange for the lenders receiving a permanent reduction of $15 million on the facility. This additional liquidity incentive comes to the Company if we successfully address the 2011 operating costs and add backs prior to late October of this year and again after receiving consent from the pensions.

Combined, these two transactions would reduce the block on the facility that is subject to a two-thirds lender vote by around 30 million. We have also agreed to freeze the growth of the two-thirds voting block and allow the lender's portion of future asset sales to become additional reductions to the facility. You might recall that this was the initial intention prior to last October's amendment when the blocks were established.

The lenders were very supportive and flexible as the Company worked through its restructuring last year and allowed us to rebuild liquidity with their portion of asset sales. We appreciate that support and believe it is only reasonable that they start to get some reduction the facility especially given the Company's size now versus when the facility was established.

Other notable items in the amendment are the conversion of $150 million of the revolver to term loans and a reduction of the LC supplement of $550 million. These do not change the economics of the facility from our standpoint but enhance some of the administration for the lenders and create a reasonable balance when resetting the facility composition. We appreciate the overwhelming support given by our lenders through these most recent amendments.

I mentioned a few times that some of these provisions require approval of the pension funds under our CDA or 26 separate funds. We are in the process of receiving approval from the funds and feel good about their support. We have received approval from about half of the funds and expect to receive the remainder shortly.

In terms of the 5% contingent convertibles that are puttable to us next Monday, we expect to fund those later this week. Proceeds from the issuance of the second tranche of 6% notes that were funded back in February this year are expected to be released from escrow today and will be used for this purpose as they were originally designated.

We know that the funding for these notes has been a concern of many of you and our customer and we are pleased that this noise can be put behind us.

As we have provided economic benefits through equity participation to other stakeholders, we have temporarily modified the conversion rate for a portion of the 6% convertible notes to allow up to 59 million shares to be issued upon conversion at $590,000 of par value of note.

It is also important to remember that the total shares available for the 6% convert remains subject to the original cap under the indenture, which was 19.9% of the outstanding common stock as of February 23, 2010 or approximately 202 million shares. We believe the 6% noteholders have been an important stakeholder in our restructuring and we look forward to continuing to work with them and our other stakeholders as we move forward.

In regards to the reverse stock split, our Board of Directors continue to evaluate the timing and at this time has not finalized the date. We have every intention of working with NASDAQ to stay in compliance with listing requirements.

As for additional liquidity that we generated during the second quarter, we received $15 million of net proceeds from our aftermarket equity issuance program, which we get to retain 100% and we filled $24 million of surplus and completed sale leasebacks of $22 million, which allowed us to reduce pension debt by approximately $10 million and retain 25% of the remainder under our credit agreement or about $9 million.

In terms of working capital, our operating companies hit targets that we have not seen in many years from both a productivity standpoint and DSO. We handled the sequential volume improvement of YRC of 11% with 3% fewer people than last quarter and around 4% more people at the Regional compared to their 16% volume increase.

In terms of DSO, our consolidated performance improved by four days with DSO at YRC eight days less than last year and the best it has been in over 4 1/2 years. And at the Regionals, DSO improved by one day. As a rule of thumb, a one day improvement in our consolidated DSO equals around $10 million of liquidity. We are very pleased with these results and the continued commitment of our employees across the organization to remain focused and deliver improved performance.

Our second-quarter working capital cash outflow of $48 million includes increased AR of $26 million from revenue growth and $22 million of operating expense disbursements. The operating expense items are primarily settlements of liability claims and the front-end loaded timing of quarterly unemployment tax payments. We would expect the third-quarter working capital requirement to be driven primarily by increased AR from sequential revenue growth.

Now moving to the income statement for a few quick comments. We did reverse $83 million of the first-quarter non-cash charge related to the Union SARS issued in March since our shareholders approved a conversion to stock options. The accounting cost of these options is now fixed as they are fully vested and therefore fully exercisable at a stock price -- or at a strike price of $0.48 per share.

We also booked a $12 million non-cash impairment charge as a nonoperating expense related to Jiayu that basically removed the remaining goodwill for this investment. We no longer have any goodwill on our books. As Bill mentioned, given our assumption of management control at Jiayu, we will now consolidate the 65% investment and the results will be reported in our corporate and other segment. Over the next few quarters, we expect Jiayu to be about breakeven, so I wouldn't expect it to be meaningful for modeling purposes.

One last item to note on the income statement is a gain on foreign currency of $5.5 million reported in other nonoperating income. This gain relates to the dissolution of a Canadian entity that was comprised entirely of an intercompany note with Reimer. Given the changes in tax rules, the entity was dissolved this quarter and the accumulated foreign currency that had been building in equity was reversed to the income statement. We would not expect any future impact from this dissolution.

We provided some guidance in this morning's release, so I won't go into that here and instead I will turn it back to Bill for closing.

Thanks, Sheila. With the significant operating momentum we achieved throughout the second quarter and have experienced in July, we are positioned to generate positive EBITDA earnings in the third quarter in excess of the second quarter. We have been working toward enhancing our liquidity in advance of our peak shipping season, so our customers and the marketplace can remain focused on our service offerings.

We believe the steps we have taken demonstrate the continued support of all of our stakeholders including the lenders, our noteholders, the IBT, and our customers. We look forward to the opportunities in front of us and reporting further success. We will now take your questions.

(Operator Instructions) Justin Yagerman, Deutsche Bank.

Good morning. I wanted to just dig into a few things here. First, Sheila, I guess -- could you -- at the end there you talked about -- was it 5.9 or 5.5 a benefit from the Canadian entity there?

5.5.

Okay. 5.5. Is that number included in the $0.01 loss that you guys reported or where do we find that in terms of showing up?

Yes.

Okay. So that was beneficial to what you guys were calling out as adjusted EBITDA in the quarter?

Well, it's not -- yes, sorry. It is. It's in the $0.01 loss that is in the adjusted EBITDA number. It's in the nonoperating income line.

Okay, okay, but it's included in that. All right, and I guess I was just a little confused. The statement in the press release where you guys talked about increased business volumes putting pressure on your liquidity. I guess when I think about your liquidity position, I think about you guys being able to access more accounts receivables even if DSOs are expanding. And I guess DSOs came in in the quarter so it seemed a bit of a contradictory statement. Maybe you guys could go into a little bit more depth on why that would be having such a negative impact on you.

I think, Justin, what we're trying to say there is the timing, so if our customers aren't paying us for 38 or 40 days, and as the business is growing, we have to obviously pay our employees and our vendor -- our employees within a week or two and our vendors in most cases within 20 days. So it's the timing gap there as the business starts to grow and we are bringing on those volumes, we are paying our employees now and we are not collecting those receivables from the customers, so 38 or 40 days later.

With just (multiple speakers) from the AR facility, are you guys now able to match those a bit better?

Well, I think some of the challenges -- it's not a great advance rate on the ABS. It is in the low 40s, so I would much rather collect a receivable and get 100% of that dollar than borrow on the receivables where I am only borrowing $0.42-ish, $0.44 on the dollar.

Okay.

Justin, this is Bill. Just to add to that, historically in our business the first half of the year we use cash. The second half of the year, we generate cash. It's just part of the seasonality of the business and obviously this is a situation where we are recovering customers as well as experiencing the normal seasonal growth. So that's putting pressure on our working capital.

So I guess in the back half, you would expect that the operating leverage would hopefully kick in and your labor levels and vendor levels wouldn't be going up as fast as hopefully your EBITDA is improving.

Yes, that's right. Particularly in the fourth quarter, that is our biggest cash generation quarter.

And then, Bill, you mentioned the Teamster and pension issues that you guys are negotiating right now, but really didn't go into too much detail. I'm sure there's not a huge about you can say, but is there anything more than just that there are discussions ongoing or is that about it right now?

Not right now, Justin. I think as things develop there, we will be happy to share them with you. But for right now, that's all we can say.

Okay, and then I will turn it over to somebody else, but I wanted to just ask -- shares going forward, you've got now these convert shares they're going to be issuing. What kind of share count should we be using for the next quarter or two?

Justin, this is Paul. Probably somewhere in the 1.2 billion range.

Okay.

We were a little bit less than 1.1 billion for the second quarter weighted average, so 1.2 billion going forward.

Great. All right, thanks a lot for the time, guys.

Tom Wadewitz, JPMorgan.

Yes, good morning. So I've got one question just here on the split in the -- before I get into some other things here. The $83 million equity add back, what's the split on that between the Regional and National?

Let us get you the exact number.

Do you want to go on to another question, Tom?

Sure, of course. Let's see, so in terms of the pension, I think you had mentioned, Sheila, something about the bank agreement that something was contingent on I think an agreement regarding the pension, the costs that are coming back in 2011, that you needed that by October. Is it -- did I hear that correctly and can you maybe just give us a sense of what are some of the reasonable time frames for when you need to have an agreement so that you have time to ratify and that type of thing?

Yes, there's a couple different things, Tom. A couple of the items under the bank amendment are contingent upon pension fund approval because of the deferrals that we did with the pension funds last year. If we do certain things under our credit agreement, the pension funds also have to approve. So on keeping the logistics sale and reducing the facility size under the credit agreement, that requires the pension funds to approve that.

The other thing was the sale leasebacks, and really what that is is that is an opportunity for us to have some incremental liquidity and a little bit of an incentive from the lenders that if we do address the snapbacks that are supposed to come in next year from an operating cost standpoint and a labor cost, if we address those early, we basically get some incremental liquidity from that. And that's sale lease back.

So when you say addressing them early, what is the definition of early you have got?

Late October.

Okay, and when you say addressing, also does that just mean a tentative agreement or does that mean something that's actually voted on by the Teamsters and ratified?

It's really more of an agreement.

Okay, so, Bill, what do you think is the necessary timeframe for you to reach a tentative agreement with the Teamster leadership in order to have -- not scare the customers too much and -- in order to give time for the Teamsters to get it ratified?

Well, Tom, you know we are working pretty hard on dealing with the 2011 snapback issue. I wouldn't want to put any specific timing out there at this point. I think it's just something that we need to address and we need to address it obviously sooner rather than later. But I wouldn't want to put a specific time out there right now.

Okay, do you think there is pretty good recognition of the Teamsters' leadership of what your parameters are, what you need to achieve in order to continue making progress in your broader business? I don't know if I am characterizing that right, but do you think there's a good openness and recognition from leadership and the Teamsters of what you need?

I think the best example of that, Tom, is these two committees that have been set up, one focusing on competitiveness and the other on the pension. So I think that is a good example of the recognition of where the issues are.

Okay, you made -- one other question or two here and I'll pass it along. But you made some good progress in regional OR on an adjusted basis. The National I guess progress is pretty good as well but you are just at a better point in terms of sub 100 OR and Regional than you are in National -- I think adjusted at 105.

What are you doing to drive to profitability on National? Is its further cost reduction? Is it kind of waiting for the pricing to improve or is it kind of, you know, anticipating the cycle improving further in the volume side? Or what are the keys to make that National OR get below 100?

I think the trend is really encouraging, Tom. I think obviously we're going to continue to be very disciplined on the pricing side as we wring out the excess capacity. We are making real good progress on the cost side of the equation there. The seasonality of the business will help us there as well as customers continuing to return. So it's really all of the above there, but we like the trajectory that we are seeing on the YRC side.

Is there much more to go on cost or is it pretty much -- I would think you would be pretty close to right sized at this point, given all the work you've done on cost.

There's always more to do on cost. We have done a tremendous amount of work. Mike Smid's team has really responded well. I think we've now got a pretty good balance between the capacity that we've got in the big network and the volumes that we are seeing. But obviously as you heard from our incremental margin conversation earlier, the more profitable business that we put into the network at this point, the more it falls to the bottom line. So we're going to continue to work on customer mix management.

We have been very kind of aggressive in terms of making sure that we remove all the non-profitable business from the network, so we're going to continue to do that. We're going to continue to encourage customers to bring their business back and we're also going to continue to work on costs. All of that is moving forward, and as I said, we're feeling good about the trajectory there.

Sheila, did you get the split on the $83 million or should I just follow up after the call?

This is Paul. I can follow up on that. In the release today, we put a bridge in by segment for both National and Regional to get to their adjusted EBITDA and in those bridges the add back for National was $64 million during the quarter and for Regional, it was $18 million.

Okay, great. Thank you very much. Thanks for the time. I appreciate it.

Ed Wolfe, Wolfe Trahan.

Thanks, good morning. Sheila, can you take us through how you get from EBITDA to adjusted EBITDA? Because I'm getting about $16 million of EBITDA in the quarter at it's $40 million of adjusted the way the banks look at it. Can you kind of give us the add backs to get there?

Yes, I think it's in the press release, so, Paul, what page?

Yes, it's on the supplemental following the segment information. On that page, Ed, for the quarter we had operating income as reported. It's on the supplemental page following the segment information. We reported on a consolidated basis -- first of all, we provided the monthly data for April, May, and June and the second-quarter total, but if you look at the second-quarter total, reported operating income of $48 million and the add backs consist of the equity comp that we talked about in total. And the normal add backs, the depreciation and amortization along with the add backs per the credit agreement of letter of credit expense and professional restructuring fees. And then the all other net gets us to the $40 million of adjusted EBITDA as compared to the operating income of $48 million.

What is in that other net, that $7.6 million?

That excludes the foreign exchange gain that we talked about earlier that we booked at National in the month of May. That's the biggest component of that.

That FX gain you said was related to the Canadian dollar strength relative to the US dollar?

Yes, for one of our subsidiaries that we dissolved during May.

So that won't be on going regardless of what happens with currency is what you are saying?

Correct. That was a one-time event. It was economic, but it was over a period of time, so from an accounting standpoint, we recognized it in May but it's a one-time event not expected to recur.

Was it a cash or non-cash?

It was non-cash.

Okay, so it's a non-cash event. And the guidance of better adjusted EBITDA than the $40 million in third quarter, obviously says on an operating basis we're going to overcome that $5 million one timer. So it's really almost saying better than $45 million. Is that the right way to read it?

Correct.

Okay. Can you go through some of how the tonnage looks in July so far and the sequentials through the quarter?

Sure, we have seen since March as tonnage trends that have exceeded what we would consider to be normal seasonality. So in July for example, which is usually a weaker month than June kind of across the board for all of our operating companies, National was down about 0.3%. Normally we would expect it to be down about 2.5%, so a couple of percent better there.

On the Regional side, we were down about 2%. The seasonal norm is down about 3.2%, so in both cases a little bit better than seasonality sequentially.

I got that, so that's June -- July over June?

Correct.

Can you go year-over-year for each of those months, April through July for the two?

Sure, let's do July versus June, because that's the only thing I've got in front of me here, Ed. We can get you the other numbers, but year-over-year down 14.3% at National and up 5.5% at Regional.

Okay, and then just what's your sense of pricing out there? We have heard from some people that some of your competitors are firming up on price and capacity is tightening a bit, and then sometimes you hear stories where that's not the case. What are you seeing out there and what's your expectation for pricing going forward?

We think it's going to continue to improve. We have heard some public statements from our competitors. We're actually seeing that play out in the marketplace in many cases, so we would expect over the balance of the year to see pricing continue to get better.

At some point does it make sense for you to price a little volume in if that's helpful or what's your view on taking rates being the rate leader or being a little more aggressive maybe to getting some density back?

Well, we have historically I think been kind of on the disciplined side of the pricing equation even through the recession. I think our situation right now is that our networks are in much better shape in terms of capacity than they have been in the past, which allows us to be more aggressive about the customer mix.

So I think you will see us continue to be very disciplined as we go through the third quarter, very focused on the best mix of profitable customers we can get across all of our businesses. (multiple speakers) We will probably lean I guess, Ed, in the direction of price versus volume at this point.

And then the last question, Thom had asked about the timing of the pension. Where are we with the timing of the cash interest? And can you explain -- there's an option of whether that comes back in in '11 or '12, where we are and what -- I'm assuming it is the bank's option unless you hit certain numbers. Can you just remind us about that?

Yes, it's just a matter of us coming back to the table with the banks toward the end of the year and talking about it and it requires a two-thirds vote to extend that through 2011. We are obviously always talking to our lenders. We haven't officially put in a request or broached that topic at this point in time, but would expect to here in the near-term.

So without that two-thirds vote, then the $25 million or $30 million of cash interest would come back January but based on the way things are going with the lenders you would assume that that would get pushed out to 2012. Is that a fair assessment?

I wouldn't assume anything. I would talk to them, but the way it's set up, we would start paying cash interest in January but the amount that we deferred in 2010 still would not be due until December of 2011.

So even if you got the two-thirds majority of the bankers, the 25 or 30 comes in but the interest from 2010 doesn't?

Correct, that is a December 2011 balloon. So the only thing that would come in in January would be the normal interest would -- we would start paying.

So do you expect at this point to start paying that normal interest in January of 2011?

I think it will be something that as we finalize our forecast for next year that we will have the discussion with the lenders as to what makes the most sense.

Okay. Sorry, Sheila. Maybe this is my own ignorance, I just want to make sure I get this now. So what does the two-thirds vote get you? It just gets you the deferral of 2010's interest or does it also get you the further not paying of the interest in 2011?

No, when we set it up at the beginning of this year or late last year, it took 100% vote from the lenders to defer interest and fees. And when we set up that agreement we agreed that if the economy still wasn't coming back and the Company wasn't in a position to pay interest in 2011, then with a two-thirds vote from the lenders we could continue to defer into 2011. But it requires us to come back to the table with them at the end of this year and make that determination.

Okay, so if you make that determination, two-thirds vote, then your cash interest remains at $10 million to $12 a quarter throughout 2011, right?

Correct, correct.

Thank you. Sorry about that. I appreciate the time.

Jason Seidl, Dahlman Rose.

A couple quick questions. Bill, you mentioned you are in discussion with Teamster leadership. Recently your main competitor, Arkansas Best, reached an agreement with the leadership of the Teamsters but couldn't with the rank-and-file members. Talk to me how you are going to look at that and how you want to address that going forward, because really you need to reach the agreement with the rank-and-file?

Sure. Well, we are in a position that's very different from ABF and I really couldn't comment on what happened there. But I can tell you that our employees have been extremely supportive of the steps necessary to the Company position to be successful long-term. And we are continuing to talk to Teamster leadership about that. But I wouldn't want to compare the situation with the one at ABF.

Is there a timeframe we should think about sort of like a -- I don't want to call it a drop dead date -- but like sort of when you sort of need to get an agreement in place at least with the leadership to go out to a vote to the rank-and-file?

You know, it's obvious that it has got to be done this year. I think we would love to get it done early enough so that our customers don't get nervous, but beyond that, I wouldn't want to be more specific.

Okay, you mentioned you are seeing sort of some of your competitors put their money where their mouth is finally on pricing. Are you seeing any difference between the Regional and the National networks in terms of pricing?

Not really. I think it's been pretty consistent across all the operating companies, Jason.

Okay, fair enough. That's all I have, guys. Thanks for the time.

Thom Albrecht, BB&T.

I wanted to just clarify, on the equity-based compensation, the reason that won't be a factor going forward is because shareholders approve the conversion to stock options. Is that what you said?

Correct.

What's the Q3 EBITDA target that the banks have now? I know you have laid that out in the past in 8-Ks, but I don't have that right in front of me.

It is a cumulative $50 million for second and third quarter combined.

What was the description you gave, Sheila, I believe $60 million that favorably impacted the EBIT at National for the quarter? Or did I --?

(multiple speakers) That was the benefit of the pension cessation at National. It was roughly $25 million for Regional for a total of $85 million.

On a year-over-year comparison.

For the quarter.

Okay, how many terminals do you have at National right now?

We are about 330.

And as you see things now, there's not going to be additional shrinkage?

Well, I think we will continue to trim the network. Obviously that helps us with density which improves the service product we are delivering and it also reduces our costs. So we will continue to kind of streamline the network by trimming the network on a go-forward basis. So again, something you are probably never done with.

Right, I want to make sure off of Ed's point with the banks and the two-thirds approval, at the end, you said that if they do approve the interest expense would be $10 million to $12 million a quarter, kind of about where we are. But earlier it did sound a little confusing like maybe you would start paying the deferred '10 interest but if the banks approved, you would defer the '11. And I want to make sure that literally if they approve, it is just the lower amount, the $10 million to $12 million. You wouldn't be adding back '10 but getting deferral on '11 interest. Is that correct?

That does sound confusing, doesn't it, Thom?

Yes.

No, you are correct. The $10 million to $12 million is basically our sale-leaseback, which is treated as interest. So that's why we have cash interest now. But you are correct in that the way the lender agreement works is with a two-thirds vote, they can continue to allow us to defer interest in 2011. But the 2010 interest that is building now is not paid back until December 2011, as a balloon.

All right. From an accounting perspective, though, we would want to model the additional, call it, $25 million of '10 interest in our '11 quarters.

Yes. Well, the expense has been going through 2010. We've been booking interest expense all along. It's just the cash payment has been deferred. So it has been building up on the balance sheet as a liability.

So you will continue for your modeling purposes on the income statement, you will continue to book that expense, and we will continue to recognize it on the income statement. But on the cash flow you will see it as a benefit until we pay that back later next year.

Okay, that's helpful to hear. Thank you.

And I think to clarify one of your questions earlier when you said the benefit to National is $60 million something, were you talking about what ran through the current income statement?

I may have to listen to the replay. I was just writing so quickly. I wasn't sure what I was hearing the comment in reference to. I thought it was a benefit on the EBIT line.

Well, we talked about the benefit we got from the equity-based compensation expense.

Yes, that was $64 million at National.

$64 million, correct. Because I want to make sure that we clarify the difference between that and obviously what we are not paying from a pension standpoint this year versus last year. Those numbers are very similar.

And these talks that you're having with the Teamsters, they're going to cover both the pension and the wage, or only pension at this point?

Well, all I can say, Thom, is we've set up these two committees and the two committees are working, and they are working on the two areas that I mentioned earlier. One is competitiveness and the other one is the pension issue.

Okay, thank you very much.

Chris Ceraso, Credit Suisse.

This is Allison Landry in for Chris this morning. I know a lot of people have asked about the pension snapbacks, but if we assume that there is another agreement with the Teamsters or a change in the orphan pension legislation, what is the expected amount of expense and cash contribution that should resume in 2011?

If there is not a deal worked out?

Right.

I would expect it to be a little north of $300 million annually.

Then on the 15% wage concession, could you remind us if there was a specific profitability level or a date was attached with its restoration?

Yes, the date was -- it ran through the end of the contract, which is 2013. No other specific parameters there.

Okay, and then if we could maybe focus a little bit on peak season. Do you guys think that you are seeing any pull forward in demand in June or July due to the tight truck load or container capacity?

No, not really. I think in our situation it is pretty difficult to peel that onion back because we've got customers returning to the Company and then we have the normal impact of seasonality and then the third factor is obviously the recovery from the recession. So it's pretty difficult to unscramble that egg.

But in the kind of final analysis, we are seeing volumes that are trending higher than what we would normally expect from a seasonal standpoint. But it's difficult to tell how much each of those factors is playing in that overall result.

Okay, thank you for the time.

Jon Langenfeld, Baird.

Good morning. Bill, does your wage rate -- do you have a scheduled rate increase that goes into -- or wage increase that goes into effect here?

Yes, we do. We've got healthcare that kicks in August 1, yes.

And the next, what -- April it's wage?

Yes, it's $0.40 then and next April it is another $0.40? (multiple speakers) Yes. We'll get back to you with that one, Jon. I think it's in April, but I think it's $0.40.

Okay, and then how much of the pension expense that you accrued back a year or so ago before you got the deferral, how much of that is outstanding -- that's not paid?

The pension accrual? We're looking that up.

Okay, and then sale leasebacks, you have the $40 million to $50 million in the year. What did you do in the first half?

Do you have that number, Paul?

We'll get that to you.

And then of the stock, how much stock are you left authorized to issue I guess assuming this -- well, I guess where we are at today, how much more stock do you have left authorized to issue?

We probably have around 300 million shares.

Okay, and then we will net off of that assuming there's some conversion of this $59 million?

Well, that is exclusive of that. The 202 million shares that again didn't change as part of the 6% (technical difficulty) versus -- exclusive of the 300 million we have available.

Okay so what would be your intention on those 300 million?

We still have an aftermarket program that is in place. We haven't been active on that, but it's always available to us if the opportunity makes sense.

Got it, got it. Okay, and then what does the capacity -- so if we fast-forward to the end of the third quarter and assuming these things go through, where does the 950 on the revolver loan and the 400 on the ABS facility, what does that look like?

Well, the ABS is at 350. That changed in June.

350, excuse me.

Yes, when we did last amendment. The capacity on the revolver changes as these steps go in place from this last amendment, so I would expect it to go down to about $920 million once we sell Logistics and once we do the sale-leaseback and receive a larger portion of that. And then I would take about $150 million off of that, which will convert to a term loan.

So you are probably looking around $770 million and then as we sell future assets, the lenders portion of 75% will continue to bring that down. So you are probably looking somewhere in the mid $700 million range by the end of the year.

Okay, good. The last question I have for you, can you get to -- are you to the point or would you get to the point where you would look at streamlining the network and removing coverage from unprofitable geographies?

That's what we are doing now, Jon. We have been doing that for a while in terms of utilizing the operating companies to address part of that. The other part of that equation obviously is unprofitable customers, but that's part of kind of the customer mix management approach that we have been taking for some time now.

Sure, but I don't think you've walked -- or you have a limited coverage in any area.

I think one of our real competitive advantages is the fact that our networks go everywhere every day and that's a big advantage for our customers. So we would want to be really careful about walking away from any coverage area until --

Understood, understood. I can follow up off-line on those other questions if you don't have them.

We've got a little cleanup for you here. So it is $0.40. 4/1 2011 is the wage increase.

Jon, this is Paul. On the sale leaseback, as Sheila mentioned, we did $22 million of sale leasebacks in the second quarter. We did another $4 million in the first quarter, so the year-to-date number that you asked for is roughly $26 million.

Great, okay. Thank you.

There are no further questions at this time. I turn the call back over to the presenters.

Thanks for joining us. We'll join you again at the end of the next quarter.

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