Yellow Corp (YELL) 2015 Q2 法說會逐字稿

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the YRC Worldwide Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Ms. Stephanie Fisher, you may begin your conference call.

Good afternoon. Thank you for joining us for the YRC Worldwide Second Quarter 2015 Earnings Call. James Welch, Chief Executive Officer of YRC Worldwide; Jamie Pierson, CFO of YRC Worldwide; and Darren Hawkins, President of YRC Freight, will provide comments this afternoon. James, Jamie, and Darren will be available to answer questions following our comments.

Now for our disclaimers. During this call, we may make some forward-looking statements within the meaning of Federal Securities laws. These forward-looking statements and all other statements that might be made on this call which are not historical facts are subject to uncertainties and a number of risks, and thus, actual results may differ materially. This includes statements regarding the Company's expectations, assumptions of future events and intentions on strategies regarding the future.

The format of this call does not allow us to fully discuss all of these risk factors. For a full discussion of the risk factors that could cause the results to differ, please refer to this afternoon's earnings release and our most recent SEC filings, including our forms 10-K and 10-Q.

Additionally, please see today's release for a reconciliation of net income and loss to adjusted EBITDA on a consolidated basis and operating income and loss to adjusted EBITDA on a segment basis. During this call, we may refer to our non-GAAP measure of adjusted EBITDA simply as EBITDA.

I'll now turn the call over to James to provide comments on our second quarter earnings.

Thank you, Stephanie, and good afternoon, everyone. I am pleased to report that for the second quarter, YRCW reported diluted earnings per share of $0.80, which is a significant improvement in our operating results on a year-over-year basis. Our financial performance and improvement is due primarily to a continued and steadfast focus on changing our overall freight mix by improving weight and revenue per shipment, along with prioritizing yield gains over tonnage growth.

Our goal has been to secure the right freight and the right lanes at the right price. We have consistently stated since the second quarter of 2014 that improving our freight mix and yield would be our number one priority going forward, and we simply have not wavered. YRC Freight, Holland, Reddaway, and New Penn have each successfully executed these strategies, and in the process made some difficult market share decisions over these past 12 months, that we know, negatively impacted our tonnage levels.

But as a result, our profitability on second quarter significantly improved with adjusted EBITDA at YRCW increasing by $46.4 million from $63 million to $109.4 million. This is the first time YRCW has generated quarterly adjusted EBITDA over $100 million since the third quarter of 2008.

Additionally, our trailing 12-month adjusted EBITDA improved $120.3 million to $326.8 million, again the highest in seven years.

At YRC Freight, the operating ratio improved 280 basis points year-over-year to 97.2. Darren will elaborate further during his comments, but I'm pleased with the results and progress at YRC Freight, and I'm excited that the management team is hitting its stride showing recent improvements in network operations, service, and quality. There are still opportunities for continued operational efficiency gains and the team has those properly prioritized for execution moving forward.

Our Regional carriers improved their operating ratio by 320 basis points year-over-year collectively reporting a 91.9 OR for the quarter. Their financial performance was driven by improved and sustained freight mix and pricing adjustments, along with much better safety performance throughout the second quarter.

Certainly these results at our Regional carriers demonstrate the excellent presence that Holland, Reddaway and New Penn have in their respective marketplace as all three companies continue to provide market-leading performance in areas of service, quality and operating results and is a true testament to the quality of leadership we have in these three companies.

I'll have some quick closing comments before we take questions. So at this point, I'm going to turn the call over to Jamie.

Thanks, James, and good afternoon, everyone. For the second quarter of 2015, we reported revenue of $1.26 billion, down slightly from the $1.32 billion reported in 2Q 2014, largely due to the decline of fuel surcharge revenue and tonnage, offset by improved pricing at both of our segments, as we continued our strategy of placing freight mix and yield growth over market share or tonnage growth to improve the quality of our revenue and earnings.

In terms of consolidated operating income, it increased $36.9 million from $20 million in 2Q 2014 to $56.9 million, and adjusted EBITDA increased $46.4 million to end the quarter at $109.4 million. In 2Q 2015, operating income included a $700,000 gain on asset disposals, compared to a $6.5 million gain on asset disposals in the same period of 2014.

For the year-over-year second quarter stats, YRC Freight's tonnage per day was down 6.2%, but revenue per shipment including fuel surcharge was up. On a monthly basis, tonnage per day decreased 5.2% in April, 5.9% in May, and 7.5% in June. On a contrary, revenue per shipment including fuel surcharge was up by 3.8%, and revenue per hundredweight including the fuel surcharge was up 0.6% and weight per shipment was up 3.2%. Excluding fuel surcharge, revenue per shipment was up by 9.8% and revenue per hundredweight was up 6.4%.

Consistent with YRC Freight, the Regional carriers also experienced a decline in tonnage per day for the second quarter with a total decrease at 3.5%, which was comprised of 4% decrease in April, 3.3% decrease in May and 3.3% decrease in June. However, revenue per shipment including fuel surcharge increased 1.4%, which included an increase in weight per shipment of 1.2% and an increase in revenue per hundredweight including fuel surcharge of 0.2%. Excluding fuel surcharge, revenue per shipment was up by 6.5% and revenue per hundredweight was up by 5.2%.

As for the results, for the second quarter of 2015, YRC Freight improved operating income from the slight loss in 2Q 2014 to income of $22.5 million, and reported adjusted EBITDA of $53.1 million, a $31.6 million increase over the second quarter of last year. The improvement in profitability is primarily due to the continued disciplined pricing strategy and improved safety results, offset by tonnage and fuel surcharge decreases.

Our Regional segment reported operating income of $37.7 million, an increase of $14.5 million from 2Q 2014 and an operating ratio of 91.9. This is largely driven by the same areas as YRC Freight, in other words yield and safety, mostly offset by tonnage and fuel surcharge decreases and continued increase in operating lease expense. On an adjusted EBITDA basis, the Regional segment reported $56.6 million, which was an increase of $14.5 million from the $42.1 million reported in 2Q 2014.

In terms of liquidity, our cash and cash equivalents and Managed Accessibility under our ABL facility at June 30, 2015 was up $50.5 million to $226.1 million from the $175.6 million reported last quarter.

And as usual, I'd like to leave you with a few parting takeaways. First, as a reminder, the operating companies, and especially YRC Freight began their freight mix management and yield improvement strategy in the second quarter of last year. Accordingly, yield and revenue per shipment comparisons excluding fuel will start to encounter a little tougher comps going forward. As we get into 2016, we would expect to deliver a more balanced growth trajectory, inclusive of tonnage, and while our financial results in the first half of this year were stronger than the recent and even distant past, there are still areas in which we need to improve, and getting to that point will take time. Obviously, this quarter was a great step in the right direction, but as we've stated, this is a journey, not an event.

Second, during the quarter, honoring our commitment to invest back into the business, we spent $21.3 million on CapEx, and excluding the sleeper units we normally lease, we entered into operating leases for an additional $26.5 million of capital value of equipment for a total investment value of $47.8 million. In the second quarter of last year, those exact same numbers were $13 million on CapEx and $500,000 for new operating leases for a total of $13.5 million. So you can see, on a capital value equivalent basis, we spent more than 3.5 times as much this quarter than the prior year's comparable period, and we have accomplished all of this while improving our liquidity.

Third, as a result of these investments and improved pricing performance, we have been able to drive down our leverage ratio from 5.4 times just 12 months ago to 3.9 times just last quarter to 3.3 times this quarter. I'm hopeful this deleveraging allows us to improve our credit profile and could position us to: one, lower our borrowing costs; and two, increase our liquidity via reduced letters of credit which are a holdover from our prior credit profile leverage levels and safety performance. These LCs consume liquidity by eating up borrowing capacity under our ABL facility.

At this point, I'll turn the call over to Darren to discuss YRC Freight results and opportunities going forward. Darren?

Thanks, Jamie, and good afternoon, everyone. In the second quarter, our focus on pricing, people and operational processes contributed to continued positive results for YRC Freight. We are very pleased with our EBITDA improvement in the second quarter versus last year, as well as our trailing 12-months increase, which allowed us to make a meaningful contribution to the Company's overall improvement.

Excluding property gains, YRC Freight posted the best operating ratio since Q3 of 2007. Yield growth has been driven by a consistent and strategic focus on pricing and freight mix in 2015. This strategy and tough year-over-year volume comparisons for Q2 drove the decreased tonnage results for the quarter, although, we did see a 3.2% increase in weight per shipment year-over-year and a 9.8% increase in revenue per shipment excluding fuel.

Our customer base remains strong as the vast majority of our tonnage and shipment decline was related to lane and freight mix changes, not customer loss. As an example, some large customers were down in total shipments and tonnage, but up in revenue on a year-over-year basis. Contract rate negotiations continue to produce favorable results of 5.7% in Q2 and 6.6% month-to-date July.

Safety is a top priority of YRC Freight. We continue to focus on training and process improvements with our new hourly employee safety trainers taking hours out of their normal day-to-day routine to train other employees, which as we have stated before, is an investment that is running through the P&L every day. As a result, I am pleased to report reductions in lost time injuries in Q2, which drove the continuous improvement in reducing workers' compensation and liability claims expense by $9.5 million on a year-over-year basis.

YRC Freight has an ongoing commitment to stay in the course in training and technology investments. We remain committed to the full foundational priorities of safety, service, efficiency in everyone sales as we continue to provide safe and reliable transportation solution to make a difference for our people, our customers and our communities.

I will turn it over to James for closing comments, prior to questions.

Thanks Darren. We had a good quarter, and let me leave you with several closing thoughts of my own. Number one, our commitment to improve freight mix and yield paid off, driving much of our improved financial results. Number two, we have invested a lot of time and resources to improve safety and the positive results in Q2 confirm this.

Number three, reinvesting our business is important to our future and our $47.8 million total investment in Q2 is evidence of our commitment. Number four, deleveraging has been a priority and we have made good progress in getting our ratio down from 5.4 times just 12 months ago to 3.3 times coming out of the quarter.

Five and lastly, at the end of the day, driving shareholder value is our primary goal and we plan to pursue that goal through continuing to reinvest in our cash flow back into the business with good OR projects that should position us with improved operating income and EBITDA growth.

So with these comments, we are happy to take your questions.

(Operator Instructions) Your first question comes from the line of David Ross from Stifel. Your line is open.

Yes, good afternoon all.

Hi, David.

James, if you could, or Darren comment maybe on service levels a bit. As there is less freight in the system, it seems like you'd be able to handle a little bit smoother. How are the metrics you track in terms of service trending right now, and how much more is there to go?

David, this is James. I'm pleased with what YRC Freight is doing and the progress that we've made. I'll let Darren give a little more color commentary on it, but they keep making progress and we still have some opportunities that we'll take advantage of but we're getting there.

Good afternoon, David, this is Darren. And yes, certainly echo what James said. In our network, we're at three-year highs on our service levels. From that aspect, the reduced tonnage in the network certainly has the network in cycle. We've done a good job of controlling our costs reducing the empty miles in the network, and that translates into a better customer experience. So I'm proud of what YRC Freight has been able to do this quarter.

And then to take the service to the next level, is that going to come from more trainings, better newer equipment, or is there something else that you need to do?

Technology will be the next big leap. The dock tablets that we implemented last quarter are having a positive impact on our departure times and hitting those times appropriately. We've also seen a nice influx of new equipment into the network and over 1,000 28-foot trailers that have a logistics pose which creates better cube utilization resulting in better load average, and then also a reduced need for the number of drivers required per schedule and that's all translated into better service as we move forward.

And then the average weight per shipment was up both at Freight and Regional, whereas most of other LTL carriers reported big drop year-over-year due to mainly a lack of lower flow of freight in the system. Could you explain, I guess, why you guys are seeing the opposite with increasing revenue -- increasing weight per shipments?

Sure. And obviously, we saw the truckload tonnage fall up as well during the quarter. David, this is James. But when we really try to get our freight mix into a better position of really what we wanted to handle in some of our bids and in some of our pricing adjustments, we looked at the rates that we were hauling some of these 300 pound less shipments and decided to raise the price in order to get compensated fairly for what we do, and we saw some fall-off in that weight categories.

And then last question, just more of a housekeeping issue. Average length of haul at YRC Freight year-over-year?

The length of haul is up 2% year-over-year for Q2. And that's at 1,296 miles.

Excellent. Thank you.

Thanks David.

Your next question comes from the line of Scott Group from Wolfe Research. Your line is open.

Hi guys, nice quarter.

Thank you, Scott.

So Jamie, one for you. Just reading through the $7.8 million reduction in workers' comp and then $6.7 million in liabilities claims. How much of that's one-time? How much of that is ongoing, and -- yes, I guess let's start there.

Yes. So in terms of the improvement on a year-over-year basis, the difficulty in determining if it's one-time or ongoing, we get these turned up to every single quarter, so we're going to have an adjustment every quarter, Scott. It depends on whether it's going to be positive or negative. I think last quarter it was probably $5 million, maybe $8 million. Maybe in this quarter it's positive.

What I've said last quarter and what I believe to be true this quarter as well, is given the magnitude of those liabilities combined, that being workers' comp and bodily injury, I would anticipate $5 million plus or minus every quarter going forward. Obviously given the investments that we're making in our employees in terms of training them to be safer on the work comps side, given the investments we're making in the new tab technology and we'll make it actually more in earnest in probably the fourth quarter and the first half of 2016. I would anticipate those to actually improve going over the next probably six quarters.

But to answer your question is that, one time we get it as an actual trip every single quarter based on the development of our prior year claims and our current year of experience.

Okay. So, just so I'm clear, you're saying kind of expect $5 million good or bad every quarter and that's relevant to the, call $13 million or $14 million positive this quarter?

Yes, I'd say that's fair. You have to keep in mind, Scott, it's about a $430 million I think total liability. It's in the $400 million, $450 million. So we're literally talking the margin of error of 1%.

Yes, that makes sense. So I know you guys haven't done much in the past in terms of guidance and operating ratio targets, but this is the kind of quarter that will get people's attention. So anything that you're willing to share in terms of near or longer term targets for the freight and regional operating ratios?

Yes, Scott, this is James. It's not our intention to give short-term guidance, but certainly we've made a couple of references at the recent conference that our goals to get YRC Freight down to that 95% and 96% level and the Regional is consistently in that 93% and 94% OR levels. So that's our target, and that's what we're working previously to make sure that we accomplish.

And that's kind of an annual target, James?

Yes, sir.

Okay, great. And then just lastly, I don't know if I missed it. Can you give us July tonnage and then if you can give us July revenue per hundredweight trends?

Yes, I think Darren gave -- did you give July hundredweights? I know that on the tonnage basis that it's down about 6.1%.

Yes, the tonnage is 6.1% July month-to-date.

At YRC Freight.

Right. And I did not give any yield numbers for July.

Sorry, I couldn't hear that. Sorry.

Scott, I did give the contract negotiations number for July, and that is 6.6% on our contract renewals that have been negotiated this month.

Scott, this is James. On the Regional side, if you looked at them collectively, it's in that 5.8% to 6% range as well down in July.

That's tonnage, James?

Yes.

Okay, all right. Thank you guys. I appreciate the time.

Thanks Scott.

Your next question comes from the line of Art Hatfield from Raymond James. Your line is open.

Hi, thanks for taking time this afternoon. Real quick going back to safety. You obviously had some bunch of success in the quarter and you've been investing in that area, but are you anywhere near where you want to be, or is there still a big delta of improvement that can occur on the safety side?

Art, this is James. It's still a big priority of ours. We have spent a lot of time training and engaging employees, having employee safety trainers. It is a top of mind priority for us every single day. We still believe that there is opportunities for improvement in this area. I won't commit to what those are today, but certainly, I can tell you that there is opportunities for us to improve moving forward and we intend to do everything - with everything we can to take advantage of the work that we're putting forward.

Thank you. Another broader kind of thought, obviously these are great results in Q2, and you're really - you've made significant process. Do you think this quarter or maybe as you move forward and you continue to put up good results, do you start to see customers that left you over the period of years when you were struggling start to wake up and say, YRC is here to stay, let's start to move freight back to them?

That would be our hope, Art. And certainly over the last four years when I've been back, I think we've done a pretty good job of holding onto customers in spite of some of the issues that the Company went through two or three years ago. But as we continue to put up good numbers and the people see us in a different light, certainly we think that our sales force is good enough to go out there and compete with our LTL competitors and do what's right for what we're trying to accomplish in specific lanes and specific geographic regions of our networks.

Thanks. Last question. And as I look at absolute dollar spent in the quarter on certain line items, and you've addressed a couple of those, but as I look at purchase transportation down to $148 million from $160 million, can you kind of talk a little bit about how much of that was fuel, how much of that was the reduction in freight in your system, and maybe how much of that was just more efficiency on your party?

I'll let Darren tackle that question, Art, since he spends a majority of the purchase transportation.

Well, together the piece of that would be fuel is the big difference. The PT percentages have ran very consistent with our MoU agreement.

Yes, we have to be mindful, Art, that fuel is actually going to be up in the operating expense line; PT is going to be on its own.

Fuel related to PT.

Yes, okay, fuel-related to PT was your question. Sorry, I thought you were trying to get at the overall fuel expense. My apology.

No, I was just getting at the differentials in the year-over-year decline in PT. Was that just on fuel, or is that also a combination of the fact you run in lower volumes today and if there is efficiency, but I think Darren answered that.

Yes.

Thank you. That's all I got today.

Thanks, Art.

Your next question comes from the line of Will Milby from BB&T Capital Markets. Your line is open.

Good morning everybody. Great quarter. So want to ask a question that's already been asked but in a different way. Seems like momentum is on your side here as we head into Q3 with pricing and your strategy. Is there anything other than the 1% swing that we already mentioned that we need to be aware of as we look at how we model where Q3 lands?

We are seeing -- I'll actually say a couple of things, Will, is if you're looking at Q3 and I guess in your models, I'd say that -- and can I go back to my a reminder about there being a little bit tougher comps on the pricing side as they kind of move through the back half of 2015 and into 2016. I'd say that the yield was strong in the second quarter both segments. The increase in base rates have overcome basically have really overcome the loss in the fuel surcharge and so our pricing momentum as Darren said continues into July.

The pricing actions, the safety performance we had in -- at least the safety performance we anticipate to go on keep going forward, leading to the large year-over-year increases in EBITDA. We just comped up $120 million to $327 million on an LTM basis, and we don't anticipate scaling back on our investments that are allowing us to do that. We're a little less than 2 times on the CapEx on a year-over-year basis, including the capital value of the lease equipment were up over 3.5 times, and we continue to invest in the P&L via the training and safety and employee engagements. So I think right now you're right, momentum does seem to be at our back.

Great. All right. And the expenses for, I guess liability claims. Does that land in the other operating expenses? Is that right?

Yes.

What are the other components to that, of that line item? We look at a pretty substantial drop year-over-year in that line, but it's still over 5% I guess of revenues, getting that down to 4% or something like that. What else in that line has to come down, just curious?

Yes, we've got the liability claims, cargo claims and really some insurance-related expenses.

I guess, so that line is just basically insurance - a broad insurance-related line claims and what not, being part of that. Right?

Yes, that's right. It's really -- if you look at the overall size of the total expense, those three are the largest.

Okay. All right, fair enough. And I'm guessing the step-down in operating supplies and expenses, bulk of that's fuel. Any other major changes going on in that line item?

Not really. The vast majority of its lower fuel cost per gallon and a lower volume that drives that fuel down.

All right. Well, that's all for me. Thanks a ton.

Thanks, Will.

(Operator Instructions) Your next question comes from the line of Rob Salmon from Deutsche Bank. Your line is open.

Thanks. Good afternoon guys.

Hi Rob.

If I'm stripping out the $4.5 million combined benefit from workers' comp and liability in Regional, you guys are still getting to a margin which is actually at the low end or at the high end of the margin or low end of (inaudible) longer term target that you had talked to. And we've really got to go back roughly nine years when the Company was operating at these levels. Can you talk to the performance that we're seeing within regional and were there other unique items which drove that sequential strength, or should we be thinking about this as the new normal, given business mix for seasonality that we saw in the second quarter?

Hi Rob, this is James. Certainly, one quarter doesn't make for an eternal operating ratio, but we certainly like what our regional carriers are doing from an operating ratio standpoint. They're always going to have the seasonality, as you mentioned from now until the spring and winter times that will affect us.

But the thing that I like about our regionals is they all have just an excellent presence in our market space. They are very competitive with the entire set of competition that they work against. They're very well perceived by our customers. They've got excellent management teams that I'm very proud of. And I fully expect those three to keep operating as they have. But I wouldn't sit here and say that they would be at a [99] every quarter either, but certainly our stated goal is to keep them in that 92%, 93%, 94% range as we move through the year.

And then James as a point of clarification for the two targets which you had laid out at our conference and reiterated again today. when I'm thinking about those, those are over the course of the business cycle. So the peak of the cycle would actually be higher. Am I thinking about that the right way?

Well, certainly in the first quarter, we would expect the operating ratios to be higher. And then as we move through the year, we would expect operating ratios to come down.

But those would be the --

Does that make sense?

No, those definitely makes sense, but if I'm thinking about on an annualized basis when you're looking at freight for that 95% 96% and reach on that 93%, 94% range, that would be over the business cycle. So you would be doing better than that at the peak of the business cycle, and potentially a little bit lower but that would be just your overall average. Am I thinking about that the right way or --

Yes, my apologies Rob. I was thinking about it more on an annual basis, but yes over the business cycle absolutely, we feel like those are the numbers that we can go get.

All right, great. And then, Jamie, you talked about the opportunity for tonnage growth inflecting positively as we look further out may be even potentially at 2016 event. Can you walk us through how you guys perceive tonnage growth with network today? Clearly historically, we always think about incremental margins to traffic growth. I would imagine you move little bit lower on the seniority scale, so potentially there is some benefits with regard to working comp expense but are there offsets in terms of a little bit lower productivity or impact from a network planning perspective that we should be thinking about?

Well, that covers a lot of ground, and the response, I would start out with saying that the yield trend, even though it comes up against tougher comps, there is a lot more in there than just the contract rate negotiations that we do. We've got our dimensioners in full swing now and that certainly has a very positive impact on the yield number. So I think we've done a very good job of controlling our costs. We'll continue to do that to match our network capabilities around the volume that is in the system and those operational efficiencies are never ending pursuit that we will always be driving continuous improvement in.

I would throw out there from a volume standpoint on - from a strategy perspective, we're over 400 people strong in our sales force. We've got some great technology in our sales force that was brought in last year and is fully up and running and giving us an advantage in the marketplace as our experienced sales force has a really good understanding of our value proposition in how to position YRC Freight appropriately. So from that aspect, it certainly gives me confidence moving forward that we're well positioned.

Yes, this is James. Rob, I think the other thing that will play better into YRC Freight's future is the fact that their services is improving as Darren mentioned a few minutes ago. Their service is at a three-year high and I've been very pleased with them over the last several months especially. So like I said in my prepared comments, I think the management team is hitting its stride and has identified a number of priorities that they have lined up to keep executing on.

Makes sense. Well, congrats on the good quarter. I'll hop back in and turn it over to someone else.

Thanks Rob.

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

Yes, hello again. Back to YRC Freight. Darren, are you making the most progress on the line haul, the dock, or the P&D part of the operation right now, and where do you see the biggest opportunity going forward?

The largest progress and the largest expenses in our line haul group -- our line haul optimization technology and the improvement too, I do expect that to continue to improve, but there is certainly opportunity between now and the end of the year in our P&D side and dock as well, but the line haul side has been where we've had the most progress.

And then you mentioned dimensioners being in full swing. How are you using dimensioners to really benefit the businesses? Is it just trying to get a more accurate picture of the cost of the freights and going back to the customers and saying that's actually costing us more than we thought, and so we need an increase, or is there some other way you're using them for line haul load average or something?

Yes, the dimensioners' primary focus is around capturing the information on the shipments going through our system from a pricing standpoint. Right now 29% of our shipments that we're costing in our costing model, we have the accurate dimensions on because of the dimensioners, and then another 15% of our daily shipments are going through the system to very far class and cube accuracy. And with the length of haul that YRC Freight has, that can be very important to establish from a rating aspect.

And David, this is James. We like what the dimensioners are doing so well at YRC Freight and Holland is getting ready to install 15. So we've got 46 of at YRC Freight -- 44 dimensioners at YRC Freight and Holland is getting ready to put in 15 and Reddaway has two. So we like it a lot.

Excellent. Thank you very much.

Your next question comes from the line of Art Hatfield from Raymond James. Your line is open.

Thanks for taking the follow-up. Jamie, can you remind us how much liquidity you have tied up in letters of credit?

$362 million.

And is that a lengthy process to get those reduced or removed, or do you have to wait for a certain expiration or how can we think about that liquidity potentially fraying out?

Yes, excellent question, Art. So it is more lengthy than short is the way I'd put it is we have to put a better -- we have to do a couple of things, most namely we have to perform better on the safety side, which has fewer claims both on a bodily injury and the work comp basis, and we have to keep growing into our capital structure. If you think about just a pure improvement of our credit profile with those third-party beneficiaries or that those who hold those letters of credit to the extent that they held those when we were at 5.4 times levered and now we're at 3.3 times levered.

It's going to be much, much, much more amendable and easier conversation to have with them to show that we are in a much more stabilized capital structure position today, probably more than we've been in the last seven or eight years. And with our improvement in our safety performance, especially as of recently and what we're about to do with this in cap retrofit technology, I certainly expect those LCs to come down, but it's not going to be a one quarter event. It's going to take some time.

Got it. That's very helpful color. Thank you.

Your next question comes from the line of Will Milby from BB&T Capital Markets. Your line is open.

Hi guys. Looking back, I guess when you first started having capital leases for new equipment, at least in the quarter following, that you gave us how many or what percentage of routes were run on the new equipment. I was curious as to how much new equipment has been added I guess since then and what percentage of loads are getting run on this fresh equipment that you're adding and what that's doing to your miles per gallon and in fuel savings?

Will, this is James. We don't have those specific numbers in front of us, but I can tell you that we've been taking our new equipment to all four companies. They are going to run sleeper teams at YRC Freight which put a lot of miles on and those are relatively new tractors, but Darren, I'll let you comment on that for the numbers.

I'll make a few comments on that. For Q2, miles per gallon improved at YRC Freight and that's certainly got a lot to do with the new equipment that's come on. A specific item about YRC Freight is different than some other LTL companies as we run a slip seat operation in our road groups. So as these tractors come in, they immediately go right back out. So we're able to maximize the mines on the newest equipment. And certainly, the sleeper teams was running over 15% of the system miles, that has a big impact as well. So the fuel mileage goes long ways. The other comment I'll make there is we have installed either skirts or sleds on over 5000 of our 53-foot trailers that is also having a positive contribution. All of the over 1,000 28-foot trailers we brought into the network this year also have the skirts installed.

Hi Will, it's Jamie. I think Darren said it very well, but we're investing our dollars to actually improve our fuel efficiency. One very important clarification is I think at the beginning of your question, you said capital leases. Those leases are also on an operating basis, so make certain we are clear on that.

Okay. And one more, more technical question for you, Jamie. I guess turning the profit here in Q2, we might have expected a more normalized tax rate. Can you tell us a little bit how NOLs work in your favor and how to think about the tax rate going forward, if you can provide that? I know that can change depending on a lot of scenarios but any help is appreciated.

Yes. Well, that's going to be tough. We have probably $700 million of NOLs limited significantly by the change of ownership that we've had over the last couple of years, actually two changes of ownership under Section 382 of the code. I think we went from 8% effective to 61% or 62% effective. I don't think that really will normalize for another probably a year or two until we get done to something that we work through as the many of the NOLs that we possibly can in what I would say we had sustained earnings and profitability. So it's still going to be a little chunky in the next year or two.

All right, fair enough. All right, that's it for me. Thanks.

Thanks.

And your last question comes from the line of Rob Salmon from Deutsche Bank. Your line is open.

Thanks. As a follow-up to Will's question regarding your new equipment. Could you talk a little bit about which of the either Freight or Regional those new trailers are running in and what sort of increased load factor you're getting with regard to those 1,000 trailers?

This is James. The 1,020 pups that Darren was talking about certainly at YRC freight logistics posed seeing some good load average improvements. They are trying to dedicate those trailers for the longer length of haul lanes. And when they took on the 1,020 pups, they repositioned 525 53-foot trailers over to Holland which helped Holland's fleet balance because they were renting so much equipment. And so it's paid off in Holland as well. So we like the new equipment. We intend on trying to stay steady with recapitalizing our fleet. We know it's going to take a while, but when we do get new equipment, we try to be very smart to make sure that we're getting the best utilization out of it.

And then Jamie and James, as a follow-up to those comments, early in the prepared remarks Jamie had mentioned that you guys are kind of thinking about the capital structure more broadly in terms of loosening up the letters of credit which are currently a constrain to the total available liquidity as well as potentially reducing the cost of debt.

Now, given we're starting to see the benefits of the investments you guys have been making across the Company, are there any thoughts of potentially maybe looking at the whole capital structure in aggregate and bringing a little bit more capital earlier to drive an even more investment and underlying benefits to the Company and potentially reducing the leverage further? Is that something you guys would think about here, or is that something you'd prefer just to improve the operations organically and let the deleveraging naturally occur?

Yes, yes, yes and yes. So Rob, to be very specific, I don't think we've quite reached a point where it makes sense for such completely re-rack at this point. 3.3 times is a level that this Company has not seen in any of our tenure in this room today. So certainly heading in the right direction. If you think about the pace of play going form 5.4 to 3.3 in a year's time, I think that certainly warrants a fresh look at what we're able to do. I'd actually kind of go back to two things when I think about raising capital on either side of the ledger and what we do with it.

Right now, we're seeing some extremely high return opportunities with the technology, and there is no reason that, all else being equal, we wouldn't raise money to actually take advantage of those. Essentially, if you think about our cost of our term loan is about 8.25%. The returns we're seeing on some of the in-cap stuff is at least (inaudible) running now. They are in that 40% to 70% range. The dimensioners are off the chart.

So to the extent that we can't utilize all of the liquidity on a balance sheet, there is no reason from my perspective to see that if we don't continue it at this pace of improvement, then we wouldn't look up here in the near future and actually take advantage of that improved performance. So we've been pretty consistent about saying that we're investing in the denominator of that equation, especially given the cost of the debt and returns that we're seeing. I don't have a lot of intent of going and raising 20% and 30% cost of equity to retire 8.25% cost of debt. I'd rather raise that equity and invest in 40% and 70% return in technology projects.

I think that makes a lot of sense. Well, congrats on a good quarter.

Thanks Rob.

And there are no further questions at this time. I'd like to turn the call over to the presenters.

Okay, that concludes our call for today. Thanks to everyone for joining us. Please contact me with any follow-up questions you may have. Operator, I'm turning the call back over to you.

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