Yellow Corp (YELL) 2010 Q3 法說會逐字稿

Good morning. My name is Louisa, and I will be your conference facilitator today. At this time I would like to welcome everyone to the YRC Worldwide third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (Operator Instructions) I will now turn the call over to Paul Liljegren, Corporate Controller and Vice President, Investor Relations.

Good morning. And thank you for joining us for the YRC Worldwide third quarter 2010 earnings call. Bill Zollars, Chairman, President and CEO of YRC Worldwide, Mike Smid, President YRC and Chief Operations Officer 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 expectation, and intentions on strategies regarding the future. It is important to note that the Company's future results could differ materially from those projected in such forward-looking statements due to a variety of factors. The format of this call does not allow us to fully discuss all of these risk factors. For a full discussion, please refer to this morning's earnings release and our SEC filings, 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 our operating loss to adjusted EBITDA, as defined in our credit agreement, and our adjusted EBITDA to cash flow from operations. During this call, we will refer to the non-GAAP measure of adjusted EBITDA, simply as EBITDA. Now, I'll turn the call over to Bill.

Thanks, Paul. Good morning. Let me start by saying that we are gratified by the significant momentum in the third quarter operating performance, driven by our key initiatives of disciplined pricing, customer mix management and cost improvements, which I'll talk more about. Bur first, let me remind you, that we are making significant progress on our comprehensive recovery plan. The ratification of our new labor contract is obviously a major step, and the renewal of our ABS facility is another key accomplishment. We'll cover both of those items in more detail in a few minutes.

But first, I want to talk about the operating environment. The general economic outlook reflects modest growth prospects for the balance of this year, and into 2011. While the LTL industry dynamics continue to improve, we have seen industry volumes increases in absorbing the excess capacity in the industry, and pricing actions continue to be more disciplined as compared to last year's trend. Pricing in the industry remains competitive, but we are seeing it tighten. Our contractual increases now stand about 3.5% ahead of last year. And the results of our focused efforts on customer mix management have generated positive results. Finally, our action to take a September general rate increase for our non-contractual customers, led the industry. And this action has now been followed by most of our competitors, which further strengthens the pricing environment.

To date, our retention of the GRI has been better than it has been in recent years. Our quarter-over-quarter shipment volumes were up 1.6% at national, and up 1.8% at regional. The year-over-year revenue for shipment for national improved by about 2%, and regional revenue per shipment grew by almost 4%. Moving on to our cost initiative. Last quarter we told you that we had achieved more than $250 million of our $300 million cost reduction target, 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. And we still expect to exceed our run rate of $300 million by the end of the year.

As you look at our operating results in the third quarter, you see the fourth consecutive quarter of year-over-year improvement, and the 6th consecutive quarter of sequential improvement, all following the integration of Yellow and Roadway in March of 2009. Our consolidated results include positive EBITDA for the second straight quarter, and importantly, positive operating cash flow for the third quarter.

Moving to our segments and starting with National. EBITDA for National was positive for the second quarter in a row. And it improved by more than $100 million from last year, despite the year-over-year reduction in our revenue base. Our Regional business reported a year-over-year revenue increase of nearly 5%, and an OR of 97.6, its second consecutive profitable quarter.

This performance was led by Holland and New Penn, while Reddaway experienced a year-over-year revenue decline and a softer operating performance than either Holland or New Penn, as it works through a volume reduction, related to a change in the Logistics network for one of its larger customers. We do expect Reddaway to benefit from its new labor contract, which, as you may recall, is seperate from the multiple labor contracts that govern YRC, Holland and New Penn. Those operations are under different contracts. But we do expect that Reddaway contract will be ratified during the fourth quarter. Glen Moore, our truckload business, reported break even EBITDA, as it works to improve its mix of customers and pricing. Sheila will now provide more color on our financial results and recent updates with the lenders.

Thanks, Bill. As you read in our release last month, we renewed our ABS facility for another year. We know there was speculation in the market about our ability to renew this facility. But, I assure you the lenders remain supportive, as we work through our recovery plan. That was also demonstrated by the amendment that we recently completed with the credit lenders, to retain 100% of the Logistics proceeds.

It is premature for us to provide any specifics on our current discussions with the lenders. But as we work through the next phases, we do intend to seek replacement facilities for the ABS, with an enhanced long-term structure, designed to significantly increase our advance rate. For example, at September 30, our ABS borrowing base was fully drawn a at $195 million, against applicable receivables of around $480 million, for an effective advance rate of about 40%. The relatively low advance rate is due to the high credit quality designed into this commercial paper conduit. Replacing this facility with a longer term facility which better fits our capital structure, should provide us incremental liquidity to fund working capital, both seasonally, and as we grow our revenue. Until then, our ABS lenders have provided the flexibility we need, to support our current business levels with attractive refinancing incentives, as we progress through 2011.

As for our operating cash, during the third quarter we produced $5 million of positive cash flow from operations. As our level of adjusted EBITDA exceeded our working capital requirements, cash interest and restructuring professional fees for the quarter. This was a sequential improvement of $38 million from the second quarter, and if you exclude our tax refund, it is a $68 million improvement from first quarter.

In terms of DSO, our consolidated performance improved by three days, with DSO at YRC five days less than last year. And at the Regional's, DSO improved by three days. As a rule of thumb, a one day improvement in our consolidated DSO, equals about $10 million of liquidity.

As you know, we closed on the sale of YRC Logistics, and reported net proceeds of $23 million in our cash flow statement. It is important to note that this GAAP number is shown net of the foreign cash we sold, and transaction costs. And it excludes the amounts deposited into escrow for indemnification holdbacks. We expect to receive at least $10 million in additional cash proceeds during the fourth quarter, related to the working capital adjustment associated with this transaction.

In addition, we sold $36 million of surplus property, and completed sale leasebacks of $3 million in the quarter. In October, we completed another $18 million of sale leasebacks, of which we retain 75%, and effectively used the remainder of our special $20 million basket, agreed to under the July amendment to our credit agreement. At this time we do not have additional sale leasebacks scheduled.

Another reminder is that we implemented the shareholder approved reverse stock split on October 1, and as expected, have regained compliance with the NASDAQ listing requirements related to minimum bid price. Our share counts and EPS for all periods presented in this release, reflect the reverse flip.

Sorry. Moving to our income statement, I wanted to provide some additional color around our third quarter results. We incurred EBITDA charges of about $10 million, primarily for the settlement of a couple large accident cases and additional amortization of debt issuance cost to non-op expense, associated with the reduction in our revolver capacity this quarter. We also recorded favorable revenue adjustments for bad debt and re-rate experience during the quarter, which basically offset the unfavorable adjustments I just mentioned. As our self-insured accident expense tends to be variable, we don't expect large [targets] as a normal quarterly item.

However, the favorable revenue adjustments are indicative of operational process improvements, which we expect to benefit us going forward. The collaboration across our pricing, billing, collections, and sales functions, has been dramatically enhanced, allowing us to provide more accurate invoices, and collect our receivables sooner. We are extremely pleased with how these teams have stepped up and shown improvement, despite our challenges.

Before turning it over, let me comment on guidance. We will continue to refrain from providing specific earnings guidance, but I would say, with our operating momentum, we expect to again, generate positive adjusted EBITDA, and be well within our lender covenants for the fourth quarter of this year. As a reminder, when we reset our covenants for 2010, we agreed with the lenders to review the 2011 covenants as that year approached. We still fully expect to do that.

We have provided some full year expectations in our earnings release, so let me just make a quick comment on our CapEx. As a reminder, the reduction in our fleet over the last two years, due to the integration and economy, has allowed us to maintain a reasonable age, as we have primarily disposed of the older units. As we move into 2011, and work to our comprehensive recovery plan, we do expect to resume our CapEx program more consistent with our new fleet size. We will plan to give 2011 CapEx guidance on next quarter's call. At this time, I'll now turn the call over to Mike Smid for any comments on the new labor agreement.

Thanks, Sheila. The percentage of our employees voting, yes, is evidence of their strong support of our plan. The plan is designed to protect jobs, and provide for long-term growth. The new labor contract is important in many ways. First, it improve our competitive cost position in the marketplace, and allows us to be more efficient and better serve the needs of our customers. Second, its extension through March 2015 positions us for long-term growth. Third, it provides re-entering into the multi-employer pension funds, at a more affordable contribution level. This labor contract provides for resuming monthly pensions contributions, in the range of $6 million to $8 million, starting in June of next year.

The expected savings from the work rule changes in this contract, which are being implemented now, are designed to offset the costs of resuming those pension contributions. A large portion of the work rule savings comes from a change in vacation rules which impacts the accrual for 2011 vacation. In addition, the work rule changes allow us to better match our workforce in each network, and respond to the dynamic demand of our customers supply chains. For example, we can better meet peak demand times, which occur during each workday, through the use of four-hour shifts and additional staggered start times. And the use of multiple start days for our employees, allows us to manage the normal variability and customer demand during the week. Finally, we'll be able to keep the freight moving faster. Fewer hand-offs with these new efficiencies in our network operations. All of this means we can provide better response to our customers' needs, while improving the cost and productivities at the same time.

Moving on. As you probably know by now, ABF has filed a suit in the US District Court of Arkansas, attempting to nullify our contract with our teamster employees. Their claim is in direct contradiction to the laws governing labor contracts, and in direct contradiction to their specific statements regarding their intention to not be bound by any agreements with TMI and the IBT. They are not a party to our labor contract.

Let me give you some historical background. For the five-year labor contract, which began on April 1, 2008, ABF decided not to bargain with YRC and Holland. And in August, 2007, a letter from Bob Davidson, former CEO of ABF, stated, "ABF will not consider itself bound to any such agreement reached between TMI and the IBT." In another August 2007 letter to the teamsters, Mr. Davidson stated, "ABF hereby gives notice, that it will conduct future negotiations directly with the IBT, in order to enter into a new collective bargaining agreement, applicable only to ABF." ABF then dropped out of our negotiations for the 2008 contract, and never became a party to our contract. Later, ABF was unable to negotiate a deal of their own, and decided to enter into a contract with their employees, that we have been told, was on the same terms as the agreement that YRC and Holland had negotiated. We are not a party to their labor contract with their employees.

Early this year, ABF again tried to separately negotiate, this time it was for an amendment to their 2008 labor contract. ABF's proposed amendment was presented to its employees for ratification, and was voted down. This very amendment stated that ABF was not part of our contract, or our multi-employer bargaining unit. With their recent actions, ABF is now interfering with our contract, with our employees. We sacrificed so much, and approved three amendments. We will vigorously defend the decision that our employees have made. Due to the pending litigation, we won't comment further on this call, but we will update you as we file our quarterly response. Now I'll turn it back over to Bill for closing.

Thanks, Mike. Before wrapping up, as you know, I've informed the Board of my intention to retire, and the Board has formed a search committee, with the focus primarily on external candidates. I'm happy with the quality of leadership shown throughout the Organization, and believe it is a key contributor to our improved operating performance. I look forward to being involved in the process to find my replacement that will lead the Company through its next chapter.

Let me close by reiterating what Sheila said, in that we are in an ongoing discussions with our stakeholders in order to complete the final steps in our comprehensive recovery plan. We believe the steps we have already taken demonstrate the continued support of all of our stakeholders, including our employees, the IBT, our lenders, the pension funds and, of course, our customers. Because of where we are in the process, we're not going to be taking any specific questions on this topic today. We'll now take your questions related to the business. And we would ask that you limit yourself to just one question, with one follow-up.

(Operator Instructions)

We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Edward Wolfe with Wolfe Trahan.

Hello. Morning, guys. It's Scott Group in for Ed.

Morning.

First, can you just give an updated liquidity balance through October?

No, we're not going to provide that, Scott. But I'd say it is fairly consistent. We had positive EBITDA in October and continue to show that trend.

Okay, that's helpful. I understand you don't want to talk much about some of the next steps with the banks. But just, directionally, can you talk about -- have you figured out how much of the debt needs to go away and if not, what's the timing to figure out that number and then just -- let's start there in terms of what's coming up?

As I said, we're not going to talk about where we are in those discussions. But they are ongoing with the lender group and we're obviously working on the solution to many of those issues.

Okay, can't talk about that. So then, the next question is when I look at the yields, both in National and Regional, they were pretty flatish sequentially over second quarter. We've seen some nice yield improvements from some of the other LTLs. What's going on, why we are not seeing the yield improvement? Is that there's some business that's coming back to you, that's having some mix issues, or is it or it is tough to get the real rates up?

Well, because we had a bit of a shift in weight per shipment during the quarter, probably the more relevant numbers to look at are revenue per shipment rather than revenue per hundredweight. The revenue per shipment was up about 2% at the National company versus a year ago, and up about 4% at the Regional Company. So, pretty good growth in revenue per shipment year-over-year and again, if you looked at the -- at the shift from quarter to quarter, we're reasonably flat on the National side and up a little bit on the Regional side.

So, we're fairly consistently providing disciplined pricing. It's nice to see some of the other competitors that haven't been in the past starting to get religion. We think that can only help the industry dynamics. We continued to be pretty disciplined in our pricing approach.

What kind of impact do you think we can see in fouth quarter from the GRIs and some other rate initiatives?

Well, as we mentioned, the GRI is holding well, better than it has in recent years. And we're continuing to see good momentum on the contractual side of our business. So, I would expect those trends to continue in the fourth quarter.

Okay, thanks for the time, guys.

Your next question comes from the line of Jason Seidl with Dahlman Rose.

Hello, guys. Hello, Sheila. Well, first, I just want to congratulate you guys on being the first carrier to go out there and take in out of cycle GRIs and showing leadership in the LTL industry, I think it was much needed for the group. Sheila, as we look out to 2011, I know you mentioned you wouldn't give any specific CapEx guidance. But, I'm assuming we're going to have to be materially higher than $20 million to $30 million? Can you talk to us about the average age of some of your equipment in both your tractors and your trailer fleet to give us an idea of what might need to be spent?

Yes. Like I mentioned, Jason, our -- the age of our fleet has been fairly consistent given the integration and what we've been able to do there. Line haul tractors, on average right now, are about four and a half years and city tractors are about ten. And remember, we run them in the city for about seven and then move them into the -- sorry, run them on line haul for about seven and then move them into the city. And then on the trailer side, they're about nine years on average.

Okay. That's helpful. Bill, you talked a little bit about the contractual rate increases that you -- were being signed, can you talk to the progression of your contract rate increases this year and how they've been improving? So, the 3Q over 2Q over 1Q.

Yes, I think it is fair to say that they've improved sequentially every quarter as we entered 2010. So, there's good momentum here in the right direction.

If I can get one more in, on Reddaway, Bill, just so I got this right, there was a customer adjusting something, did you lose some business at Reddaway, what was going on there?

Well, the situation at Reddaway is that one of our larger customers there has changed their supply chain and has moved away from LTL, in terms of the percentage of their freight mix and that is having a knockdown affect to Reddaway.

Okay, so it wasn't you lost it to another LTL carrier? It's just that they've changed their distribution patterns?

Exactly.

Alright. I appreciate the time, as always, everyone. Thank you.

Yes, Jason

Thanks, Jason.

Your next question comes from the line of Tom Wadewitz with JPMorgan. Your line is now open.

Good morning. It is actually Alex Johnson in for Tom.

Hello, Alex.

Good morning. So, the first question that I wanted to ask is, in terms of, the lawsuit that Arkansas Best filed, you gave good detail there in terms of your defense of that. Are there any expenses that would be associated with defending yourselves on that, that we should be aware of?

It is really hard to predict that. I think, obviously, anytime you file a lawsuit, there is expense. We would expect to win the day, in both defending ourselves against a suit that's been -- already been filed and then would expect to win any lawsuit that we counter file.

Is it the type of thing where you think that, that could be resolved pretty quickly? Is that the guidance that you are getting from your legal counsel?

I have no idea.

No idea? Okay. And then my follow-up question is in terms of just looking at some of the items, the working capital items within the quarter, it looks like payables were a use of cash in the quarter. Is that consistent with normal seasonality? Was there anything that reduced the payables and then caused that to be a use of cash in the quarter and what does that mean for the fourth quarter?

No. I mean, it's pretty consistent with what we would normally see from a seasonality standpoint. I don't expect anything significantly different on the receivables or the payables side. Obviously, we continue to work with our vendors to negotiate more favorable payable terms, and try to better match our DPO and our DSO, and I think we're doing a pretty effective job at that.

Okay. And what's -- just one more, what's within -- what's contained within the other liabilities that was a -- roughly $50 million benefit to cash in the quarter?

Alex, that's where the interest that we're booking on the on the income statement, the interest accrual, is being deferred by lenders. That's showing up in accrued liabilities.

Okay. Great. Thank you very much.

Sure

Your next question comes from the line of Tom Albrecht with BB&T. Your line is now open.

Hello, good morning, everyone. I just wanted to get the latest number of service centers at both National and the Regional Companies.

Give us one moment, Tom.

350 at National and 128 or so at the Regionals.

And are you essentially done, I know a network, whether it's you or others, there is a little bit of a dynamic nature to it? But, in terms of wholesale plan shrinkage, are you essentially done at this moment?

This is Mike Smid. Actually, no, we will continue to work, particularly on the YRC Network, to refine the pickup and delivery areas and there will be some further consolidation of facilities as we progress through this year into next.

Do you have a stated goal on desired or -- amount of properties you hope to sell? I know you gave us what you did in the quarter and that.

No, I mean, we still have some excess that we're selling from the integration, that they're still on the market that we will be selling. And I would expect over the next couple of years, you know you'll continue to see proceeds coming from those, but they will definitely come down from where they've been over the last two years.

Mike, is it fair to think about your network as probably not going below 300 service centers?

I think, we'll continue to work at least toward that number. I would suspect that, ultimately, it would be slightly less than that.

Okay. Thank you.

Thanks, Tom.

Your next question comes from the line of Chris Ceraso with Credit Suisse. Your line is now open.

Thanks, good morning. I was hoping you could just help me understand something about this suit. I know you can't say too much. But, wouldn't a win by ABF threaten Yellow solvency and if that's true, doesn't that leave ABF holding the bag on central state's pension?

Well, we, as I said previously, we think the suit is completely without merit and we are approaching it on that basis as we defend ourselves here. But, we don't see that as a possibility.

Okay. And then, another pension related question, what's your view on the change in Congress, does that put at risk the likelihood of getting the orphan Pension Relief? Is that still relevant for you?

I think it is relevant. We don't see that as having much impact on chances for success, there. We have had good support on both sides of the aisle.

Any update on where that stands?

Not really, they are just coming back to work here, and we're going to continue to work with Congress on the fixes that are required there.

Okay. Thank you.

That's all the time we have for questions. Now, let's turn the conference back over to our presenters.

Thanks very much for joining us and we'll speak to you at the end of the next quarter.

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