Yellow Corp (YELL) 2002 Q3 法說會逐字稿

Good morning. My name is David and I will be your conference facilitator. Today at this time I would like to welcome everyone to the Yellow Corporation third quarter conference call. All lines are placed on mute to prevent background noise. After the speaker's remarks, there will be a question and answer period.

If you'd like to ask a question Press star and the number 1 on the telephone key pad. To withdraw your question, press the pound key. With us today Bill Zollars, Don Barger, CFO, James Welsh, President of Yellow Transportation and Jim Ritchie. I will now turn the call over to Stephen Bruffett, Treasurer.

Welcome to the Yellow Corporation third quarter conference call. During our conference call this morning we'll make certain forward-looking statements regarding our outlook on various matters. Company outlooks are subject to various risk factors. We will try to highlight these risk factors as we make these statements. However, the format of the call prevents a more thorough discussion of these factors.

For a full discussion of these factors refer to our annual report 10-K, 10-Q and forward-looking disclosure in the news release. I'll now turn the call over to Bill Zollars, our CEO.

Thank you.

In case there's any doubt, we had a really good quarter. There's been a bit of confusion and falls into the category of no good deed goes unpunshed. You need to add together the earnings reported last Friday to the earnings we reported last night to really get a picture of the way things looked prior to the end of the quarter. But due to the spinoff of that SCS, we had lots of questions so I'll begin be giving you clarity around the numbers that we did release and all these numbers obviously are in our press release.

Just in the spirit of full classification let me talk about what would have happened had we reported as we normally did before the spin of SCS. We have not spun off SCS our earnings would have been 51 a share. That's made of up 37 from the new Yellow and SCS. This morning doubles our consolidated results in the third quarter of last year and doubling your earnings in this environment as I've said, we had a good quarter. In addition this compares solidly to the first call consensus estimates for the combined companies 5.5 a share.

By the way, all of the analysts estimates for the third quarter did include the SCS earnings. However, accounting principles require that assets distributed to shareholders be reported as discontinued separations. Since the spinoff was completed September 0th SCS was treated as a discontinued operation. Results last Friday so makes sense they should not be reported as part of ongoing results and hopefully that clarifies the confusion. We feel we had a really good quarter.

Moving now to more of a discussion of the New Yellow. We did accomplish a great deal. Perhaps the most significant achieve was the implementation and continues execution of our strategy ad excellent cost controls. Those two things had us on course to double our earnings per share on what would have been similar business volumes in July and August. While the economy weakened somewhat during the quarter, we were still able to manage our cost and our business mix including rapid growth in our prem ill services to produce better results.

In September as you all no, the closure of consolidated freight ways enhanced an already good quarter for us. In the second quarter we experienced modest Chrises driven by modest economic growth. In our conference call in July we told you we expected that trend to continue; however, as you are aware, economic growth did not materialize as we saw the comparisons for July and August flatten out and become negative. Business volumes received a significant boost due to CF. We estimate September would have been similar for July and August if you exclude that impact. Income from continuing operations was 37 per share up 9 a percent from the 19 per share earned by the New Yellow doubling our earnings. Valuing the opportunities by industry consolidation has been to ensure market share and pricing at the same time. Consistently we want to grow volume and yield together. And we've been very successful in implementing this approach.

We are experiencing revenue increases in the mid-teens because of CF and margins of 20% on the new business. We are being selective about the type of business we bring into the network and focused on maintaining the quality of our service. We think that's really important as a leading indicator of future success. You've heard us in the past discuss the fact we can plous 20% incremental mrgins on increases in volume taking advantage of the operating volume and that's holding true in this situation which is reassuring.

The second accomplishment during the third quarter as I already mentioned was the spin offof SCS transportation by Yellow shareholders. The spinoff was successful and proven to be beneficial to the shareholders and the companies involved. We were qunsed Yellow and SCS were worth more separately than together. The market value of Yellow and SCS was 161 million. As of yell the combined value was $1.1 billion. That's an increase of about 26%. We did unlock shareholder value through the spin.

The New Yellowchisting of Yellow Transportation and Meridian IQ is uniquely positioned to execute growth strategy. That strategy is focused on providing customers a portfolio of services to meet all their transportation requirements. One-stop shopping for those customers. A powerful contribution of asset-based services through Yellow Transportation and non-asset-based services through Meridian IQ and both provide customers with best in class technology. A key component for the gross strategy for the Newiel is premium services.

We have about 400,000 customers so it's a large and diverse customer base. These premium services such as Definite Delivery are growing rapidly better than 25% so far this year and that's in an economy that's not growing in a market that's not growing. The good news is we have plenty of room left to sell these services and improve the penetration.

In addition the strength of our balance sheet positions us to accelerate growth strategies. This has been going on in the bakground. We have improved our ppx financial position through the spinoff of SCS. The equity offering in April and the generation of free cash flow. One of our competitors is fond of saying they have the strongest balance sheet in the industry. I'm not sure they can make that claim any more.

Don Barger will further discuss the financials in a mother. Another reason it is note worthy, Meridian ik was modestly profitable. A significant accomplishment for a company that existed mine months. We are looking forward to continued growth from Meridian IQ as they continue to move the needle. Freight ways will have and continue to have a positive effect on Yellow and our industry.

We were well prepared for this situation, taking on a disciplined approach to bringing on additional business and that paid off. We estimate CF was 1.5 billion in revenue when they shut the doors and about 25% or so of that business that we really weren't interested in. That leaves bout $1 billion of revenue which we think will generate ur fair share in the neighborhood of $300 million on an annualized basis. As a result of the selective approach, the added business comes with incremental margins of 20% as I mentioned.

In addition, this incremental volume will improve the ideal on the entire base of business and another important factor. We'll provide more information on this topic throughout our call today. Now I'll turn it over to Don to cover financial highlights.

Thank you, Bill.

My comments will be primarily focused on the financials for the New Yellow which excludes SCS Transportation. Revenue for Yellow $683pmillion was up $43 million from the third quarter of last year and we generated an additional $7.1 million in operating income. That works out to be 17% incremental margin. While we did detain an excess of 20% margin on the new business in September, we were blow that for the full quarter due primarily to an additional $5 million to increase reserves associated with worker's compensation claims. Without that we would have exceeded the 20% objective.

This worker's compensation is important because in our 51 we reported with the combination of scs and the New Yellow, that's a penny above the guidance we gave of 50-60. That worker's compensation expense equates to about 10 a share, again, another reason why we feel good about the results for the quarter. On the subject of worker's compensation, we have analyzed our processes and claims management very carefully over the past severe months. We are proactively managing this issue and we expect future expenses to moderate. I need to add that our safety and claims statistics continue to improve year-over-over and the best in the company's history so the leading indicators to worker's compensation expenses are trending in the right direction and we expect significant improvement going forward.

Operating income excluding unusual items for the New Yellow was 19.2 million, a 59% improvement from the third quarter of last year. As Bill mentioned, third quarter did benefit from the bankruptcy in September but the majority of this third quarter compruvement was achieved through the same type of cost management, discipline and attention to detail we have displayed over the past 18 months. Continues down the income statement, unusual charges for the quarter of $5.7 millionchisted almost entirely of cost related to the spinoff of SCS Transportation. With the spin off completed, we expect unusual charges to be minimal in 2003.

Nonoperating expenses of $2 million are down significantly from the 4.9 million in the third quarter of last year. This is due primarily to less debt and lower interest rates. You will notice that beginning this quarter we added a line to the nonoperating essex of our income statement entiled aba s charges. These are expenses associated with the ABS facility. Recall this facility provides us with the lowest cost debt we can access currently. In economic terms these are economic concerns but GAAP does not allow it to be treated as such.

We separate ABS charges in the interest of dsclosue. Even though it is off balance sheet we treat the balances as if they were on balance sheet when we discuss debt. You will notice the tax rates for the New Yellow were lower than with SCS in the picture. That's because they have higher tax rates plus our most rebut the -- recent tax strategies.