Yellow Corp (YELL) 2010 Q4 法說會逐字稿

Good morning, my name is Sarah, and I will be your conference facilitator today. At this time I would like to welcome everyone to the YRC Worldwide fourth-quarter earnings 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 Mr. Paul Liljegren, Vice President, Corporate Controller and Investor Relations. Mr. Liljegren, please go ahead.

Good morning, thanks for joining us for the YRC Worldwide fourth-quarter and full year 2010 earnings call. Bill Zollars, Chairman, President and CEO of YRC Worldwide and Sheila Taylor, our CFO, will provide, since morning. Bill, Sheila and Mike Smid, President, YRC and Chief Operations Officer of YRC Worldwide will be available for questions following our comments. 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 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 in our FCC filings, including our prior 8-Ks, 10-Ks, 10-Q and in addition, today's, 8-K.

Additionally, please see today's release for a reconciliation of our GAAP measures to non-GAAP measures such as our reconciliation of operating loss to adjusted EBITDA as defined in our credit agreement and the reconciliation of adjusted EBITDA to net cash flow from operating activities. During this call, we may refer to the non-GAAP measure of adjusted EBITDA simply as EBITDA. Now, I will turn the call over to Bill.

Thanks, Paul, and good morning. Let me start by saying that we are encouraged with the continued year-over-year improvement in our operating performance as we remain focused on our three key initiatives, disciplined pricing, customer mix, management and cost improvement, will I will talk more about later.

But first, let me remind you that we are in active discussions related to the balance sheet recapitalization. Now, moving on to the industry operating environment. The general economic outlook reflects modest growth prospects for 2011 while the LTL industry dynamics continue to improve. Industry pricing actions are more disciplined than last year's trends, and industry actions are addressing capacity. As we move into the second quarter, industry volume increases are expected to further absorb excess capacity.

As you look back on 2010, remember that our volumes stabilized during the first quarter and then began to grow sequentially during the latter portion of that quarter. As our customer base was stabilizing and recurring shipments to us, we also regained customers and further expanded our revenue base to include new customers. From this inflection point in our customer base during the first quarter of 2010, our year-over-year volume comparisons continue to gain traction as we moved through the year.

For the fourth quarter of last year, national continued to improve its year-over-year comparisons as its volumes were down only 7.7%, much better than the 13% down reported in the third quarter of last year. Regional grew a robust 13.9% from the prior year in the fourth quarter which exceeded the 8.9% growth from the third quarter. It is important to note that the year-over-year comparisons, and these are all tonnage numbers, improved during each month of the quarter in both segments. Pricing in the industry remains competitive, but we are seeing it firm. Our contractual increases continue to track ahead of last year, and we remain focused on efforts to improve customer mix management.

As you look at pricing, changes in shipment mix affected our metrics for both the national and the regional segments. National had a large increase in smaller, but profitable Internet-based retail segments from the holiday season which impacted weight per shipment and revenue per shipment. Nationals total yield was 4.2% higher than a year ago. Regional revenue per shipments grew 7.1% in the fourth quarter versus the fourth quarter of 2009 which included a 5.3% increase in weight per shipment. And the weight per shipment growth here was the highest at Holland in the regional segment, which reflects the ongoing recovery of the manufacturing sector. EBITDA for national was positive for the third quarter in a row and improved nearly $45 million over last year.

Our regional business reported a revenue increase of about 17% and an OR of 98.6%, its third consecutive profitable quarter. Regional's fourth-quarter operating ratio improved almost 300 basis points year-over-year, and all three regional companies contributed to these improvements. Glen Moore, our truckload business, reported an operating loss of $3 million on 11% lower revenues. We have adjusted our strategy for this business and have now phased out the linehaul truckload services provided to national by Glen Moore based on more competitive rail pricing and service. Going forward, the focus of this business will be on external truckload customers as we seek to improve its revenue mix, revenue per truck, and cost structure. In summary then, our operating results in the fourth-quarter delivered the fifth consecutive quarter of year-over-year earnings improvement. Our consolidated results include positive EBITDA for the third straight quarter and positive operating cash flow for the second half of the year. I will now turn it over to Sheila, and she will provide more color on our financial results and the 2011 outlook.

Good morning, everyone. As Bill just mentioned, our operating cash flow was positive for the quarter at around $10 million as our adjusted EBITDA exceeded our working capital requirements, cash interest and restructuring professional fees for the quarter. Keep in mind, we paid about $13 million this quarter and previously deferred interest and fees under our ABF, so that brought the number down. Even with that payment, this was a year-over-year improvement of more than $70 million for the fourth quarter 2009. Excluding our approximately $80 million tax refund received earlier this year, our 2010 full year cash flow from operations improved by about $300 million compared to 2009, driven primarily by a reduction in our operating losses.

I continue to mention our DSO on these calls as we have made significant progress and have one of the best DSOs in the industry, finishing the year at 36.5 days, or 1.5 days lower than last year and 8 days lower than 2006, which was a year of solid performance before the downturn. This is a tremendous accomplishment for us, especially given the restructuring effort and the noise that has been in the marketplace. As a reminder, one day improvement in our DSO equals around $10 million of liquidity. Looking at investing cash flows, during the quarter we received $12 million in additional cash proceeds from the third-quarter sales of the majority of our YRC logistics business which represents the working capital adjustment associated with this transaction. In addition, we sold $14 million of surplus property and completed sale leaseback of $17 million during the quarter.

As we mentioned in our release, we reduced our revolver capacity by $59 million, down to $714 million at year-end. Most of the reduction was related to existing provisions within our credit agreement. Those provisions triggered a reduction in the revolver capacity via a reduction in the new block whenever the Company exceeds $250 million in total liquidity on a five-day average as defined in our credit agreement. We reduced the new block by $36 million during the quarter as a result of hitting the excess liquidity threshold and reduced it by another $23 million triggered by our receipt of cash proceeds from asset sales. We reduced borrowings on the term loan by another $3 million from the lender's share of asset proceeds. The total fourth quarter reduction in the credit facility was $62 million. At December 31, the new block was $21 million, which was a $52 million reduction during the quarter, and the existing block remained unchanged at $50 million for a total of $71 million for the blocks at year end.

After all that, as you look at unstructured liquidity, the Company increased its cash and availability under the credit agreement and ABS facility by $35 million during the quarter. This was primarily a function of the cash items we just discussed in addition to reducing the letters of credit outstanding under the ABS to collateralize our workers comp. As you know, we continue to work with the states and our insurance providers to reduce the required LCs, and we believe there is significant opportunity upon completion of the recap.

Moving to our income statement, I will quickly provide some additional color around our fourth-quarter results. From an operational prospective, our fourth-quarter operating revenue improvement from last year was driven primarily by higher yields, including field surcharge. Our operating income benefited from a $3 million propane tax credit as part of the December 2010 tax extension legislation, which we expect to continue into 2011 at around $800,000 a quarter, depending on volume. In the fourth quarter, the benefit was more than offset by normal year-end accrual adjustments, including prior year work comp development and the large accident at YRC. Our fourth-quarter interest expense and tax provision reflect benefits related to the Company's settlement of an open tax issue with the IRS. This issue was related to the timing of the deduction of Union pension contributions. The non-cash IRS settlement allowed us to reverse approximately $7 million of FIN 48 accrued interest for uncertain tax positions and recognized a $52 million tax benefit in our income statement.

Now, instead of a cash payment to settle this tax obligation, will be able to utilize approximately $130 million of our operating tax loss from tax year 2008 to make this settlement non-cash. You may recall that we elected to carry back the 2009 NOL rather than the 2008 NOL when the tax carry back legislation was expanded last year, preserving the 2008 NOL in anticipation of this possible settlement . As a result of the 2009 bond exchange and its impact on carry forward of NOL we did not expect to benefit of the 2000 NOL going forward anyway. Finally, our fourth-quarter taxes reflect a benefit from the year end remeasurements of our valuation allowance.

Finally, within the non-ops section the other net expense for the quarter reflects a write-off of deferred debt issuance costs from the reduction in our revolver capacity that I mentioned earlier. Accounting rules require the write-off to the non-op rather than interest expense, which is the category when they are simply amortized. You may recall that we recently modified the credit agreement definition of EBITDA to now exclude these non-operating charges as they are financing costs similar to interest expense and do not reflect our core operating performance.

Before turning it back, let me comment on guidance. We will continue to refrain from providing specific earnings guidance. That being said, we do expect to again generate positive adjusted EBITDA and be in excess of our rolling four quarter lender covenant of $140 million for the first quarter of 2011. We would also expect to find CapEx in the range of $150 million to $175 million this year with property sales in the $40 million to $50 million range, non-Union pension contributions of $30 million to our frozen DB plans compared to 2009 contributions of $12 million and reflect recent legislation to provide funding relief for single employer plans. Our interest expense and tax rate will likely change upon completion of the recap. But in the interim, we do not expect to pay cash taxes, and our interest expense is running around $40 million per quarter including a sale leaseback. We expect first-quarter cash interest of around $11 million. Now I'll turn it back to Bill

Thanks, Sheila. Let me close by commenting briefly on our first quarter trends. Despite the terrible weather, our January volumes actually increased sequentially from December, and that is in excess of our historical patterns. National has now achieved positive year-over-year volume growth, and regional continued its positive year-over-year volume performance. The unusually harsh winter, which has continued into February, is having a significant impact on our first-quarter costs and earnings as compared to the fourth quarter. But we expect the year-over-year volume growth to continue as we move through the quarter. If that growth continues, it may provide the lift we will need in March to make up the earnings shortfall in January and early February that we had not initially planned. With that, we will now take your questions. And we'd ask you to limit yourself to one question with one follow-up.

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

Yes, good morning, everyone.

Good morning, David.

Can you give us an update, Sheila, on the deferrals? I know that you had pension deferrals of about $150 million and with some real estate sales, that reduces that amount. And then where you stand on the deferred interest and fees?

Yes, David, on the earnings release down at the bottom of the segment page information, it will show you the pension deferral amount

$139 million?

Yes, so you can see that amount. And then in the income statement, or on the balance sheet, we have about 100 and -- Paul, correct me.

We've got $130 million deferred with a revolver, about $13 million for the ABS and then about $8 million that is deferred related to the pension deferral.

That $13 million for the ABS includes the $10 million fee we are hoping to waive by replacing that facility. So keep in mind that with the ABS, if that gets replaced, then all those fees get forgiven.

And last question is on the restructuring that is going on. Not so much on the financial side, but from an asset sale perspective, the regional seem to be doing fairly well, and I'm not sure if you're looking at carving any of those out. Potentially selling Holland or New Penn or one of those?

I think we are very comfortable with the portfolio as it exists and think all of those brands are driving really good equity in the market, and so we have no plans to do that, David.

Thank you very much.

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

Yes, good morning. Bill, I think there were some comments on the recap, I don't know if you said you're not going to comment on it or you're going to give -- can you give us anything in terms of timing or how you think that will play out?

Really can't at this point in time, Tom, we are in active discussions, and that's all I can say.

Okay. Lets see. In terms of your cost side, what -- would you expect it to be stable looking forward, or are there some step change items that you'd be looking at that would materially reduce the cost side, looking at first half of 2011?

Sure. No, I think if you take weather out of the equation, we would assume we will continue to gain traction as the work rules kick in on the Union side from an MOU perspective. So, those will continue to ramp up as we go through the year. Weather is going to be the big cost issue in the first quarter.

Are there items that are going to cause, I guess in terms of the Union contract, and I guess you have pension that steps up, I think in June. Can you give a sense of what the headwinds would be in terms of the magnitude of cost that may step up in the first half?

Sure, the Union pension is about $7 million a month when it kicks in at midyear. We expect that that increase in cost will be more than onset by the work rule changes that are in the MOU.

And in terms of wage, how much the wage goes up, in April, how much per month type of an impact that would be?

Yes, we've got Mike Smid on the line here, and Mike could probably answer that question for you.

The wage rate after the reduction is about $0.34 an hour. So, depending on which month and seasonally, that impact also should be offset by the changes in the work rules and network changes that we continue to make.

Okay, all right. Thank you -- thanks for the time.

Your next question comes from the line of Justin Yagerman from Deutsche Bank. Your line is open.

Good morning, how are you doing? Wanted to just touch -- the key question for you guys is, surrounding this recapitalization, and I know you can't say much of anything, but maybe just talking about what is on the table. Back to the end of last year, there was talk about $300 million of equity needing to be raised, that was delayed as we went into the end of the year. Are you still talking to outside third parties about somebody coming and investing in the Company? Or are the options more internal in terms of what you're looking to do with your relationship with the Teamsters and with the pensions?

That is an excellent try, Justin, but we are not going to comment on the restructuring process.

Okay. Well, then another piece, when you think about the -- I tried. When you think about the Teamsters side of things and the contribution to the pension which has been deferred and now is coming in at a decreased rate, I know you have gotten some work rule relief, but is there talk at all about capping pension exposure and then moving forward with a cleaner slate so you don't have this kind of overhang? Outside of the recapitalization, is that something that is on the table besides legislative pension relief and that kind of stuff?

Yes, I think that the good news here is that the rate is capped for five years under the current agreement, which is IBT. The other thing that is on the horizon is that there has to be structural change by 2014 in the multi-employer pension plans and obviously, we're working hard on legislation there. But the reality is, we have got five years of good line of sight into the pension costs.

Do you think your employees start to question the benefit of being Teamster labor when they are not necessarily getting pension at the same rate? Is there something else that the Union is doing for them other than taking their dues that keeps you guys wanting to stay? Or at least your labor, I know that it's not necessarily your decision. But do you think keeping your labor wanting to stay Union here? You look at you guys and Arkansas Best, and it has been the biggest struggle in terms of getting cost structure in line. I would think at some point there is some recognition of that.

I think that if you look at this from an employee standpoint, the benefits on the pension side are still very attractive, and most of our employees are seasoned veterans. So, they have been around the Company for a long time and have a lot invested in the Company and as I said, some pretty good pension benefits available. I think the other point it is that what's happened to the MEPA plans is really not the fault of any specific company or any employees. What has happened is that it's become a penalty for the successful companies and as other companies have gone by the wayside, it has created a liability. But at the end of the day, I think our employees are focused on the fact that these are good jobs, they pay well, and they have good benefits and for the most part, I think that's their primary focus.

Fair enough. Thanks, guys, appreciate the time.

You bet.

Your next question comes from the line of Ed Wolfe from Wolfe Trahan. Your line is open.

Thanks, hello, good morning.

Good morning.

Just want to understand the cash requirements in 2011. The $150 million to $175 million of CapEx, what is the net cash out of your pocket? In other words, the proceeds you expect, how much of the proceeds do you get to put into your pocket and how much go to the banks? And how much of the $150 million to $175 million is going to be cash out of your pockets?

We're still in the waterfall where 75% goes to the banks and 25% goes to the Company. So we obviously need to continue to make improvement in the business to invest in the CapEx. And that is part of the discussion on the recap too, as to what kind of a capital investment needs to be made in this Company going forward.

So, the $150 million or $175 million is cash out the door, and you get back 25% of the $40 million that you expect from proceeds? Am I thinking about that right?

Yes. Obviously, the timing is subject to change, but we do believe that over the next 12 months or so, we need to invest that much in the capital.

Okay, what other -- you're talking a $30 million non-cash pension -- or non-Union pension, that's cash out the door. I s there any cash expected in the door from another tax benefit or any taxes out the door? What other payments from cash, in or out, other than the pension and the CapEx net cash proceeds do you see?

Nothing significant, that's why we wanted to point out the pension, that was the other thing. Obviously, we selected the relief under the single employer plan that reduced that significantly here in the near term. And then we did pay some pension this year, which is why we wanted to point out the incremental cash impact going into 2011. But there is nothing significant that we are seeing at this point in time and nothing on tax at the end point.

Okay, last thing I wanted to clarify, because there is a couple of changes in the comparisons without logistics in the comps. They EBITDA, as I understand it, was roughly $40 million, the adjusted EBITDA for the bank's purposes, $40 million in the second quarter, $44 million in the third, $38 million in fourth. I just want to make sure I'm looking at that right, for a total of about $122 million. Am I thinking that right?

This is Paul, this is correct. The only change is, you will recall that we modified the definition of EBITDA, and so the third quarter number changed by about $2 million. So, it's $2 million higher for the third quarter with a change in EBITDA.

So, $40 million, $46 million and $38 million over the last three quarters?

Yes.

Takes me to $124 million. You need to get to $140 million, so we need to $16 million of positive EBITDA to stay within the covenants by March 31, and then an additional $70 million in second quarter to stay within the covenants, am I thinking about that right?

Correct.

Okay, just wanted to make sure I am looking at it right. Thank you very much.

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

Good morning everyone. I want to talk a little bit about pricing. Clearly in your comments and some other comments by some of your peers, pricing is recovering. I was wondering if you could go through price increases you're getting on a contractual basis in both regional and national.

Without getting too specific, Jason, I think we can say that the price increases are low to mid-single digits on the contractual side, are much improved over last year and getting stronger all the time. On the regional side, it's a very similar story.

Low single-digits would seem on the low end of what we have heard. Do you guys feel that this needs to keep coming up for you guys to start hitting some of your EBITDA targets that Ed referenced?

We would expect pricing to continue to firm, but I would point out that the year-over-year comparisons are really a function of where you started. Some of our competitors did a lot of very aggressive pricing, so they are recovering from a very deep hole from a pricing standpoint. We were fairly disciplined throughout the process and throughout the last 18 months. So, we did not go down as far. Therefore, I think when you look at comparison with our competitors, you need to keep in mind that we are starting from different perspectives in terms of year-over-year increases.

Okay, fair enough. Next one is for Sheila. Sheila, when you look at your corporate charter, how many shares are you allowed to issue as per your charter currently?

Jason, this is Paul. We are currently at $80 million with the reverse split.

That you are allowed to issue?

Authorize, yes. Okay, that are my questions, so I appreciate your time as always, guys, and Sheila. Take care.

Thanks, Jason.

You next question comes from the line of Jon Langenfeld from Baird. Your line is open.

Good morning. On the CapEx side, $150 million to $175 million, how much of that will be cash?

Most of it should be cash at some point in time.

Okay. So, will you, additionally on top of that then, be looking at operating leases?

We will.

But that is non inclusive of the $150 million to $175 million?

It would be in there, John. Just at this point in time, we are assuming it is all cash but obviously, as we go through the recap, we would look at the ability to get more attractive operating leases.

Okay, and so in 2010, just so I've got my numbers synched up then, you did about $20 million in cash CapEx?

Correct.

And then the additional operating leases brought it to what?

We didn't really lease anything new in 2010. We did some renewals, but nothing new.

So, effectively $20 million, all right. And then can you just -- I know the definitions have changed here, and you kind of went through this, but if I look at the old revolver reserve -- the new and the old blocks revolver reserve, can you just run through those numbers again? Where are we at in terms of what you have access to? I know you did that on the call, but I was a little confused on the numbers.

Yes, I don't blame you. We still have $50 million under the existing block, which has basically that mathematical test around it, around payroll. We have $21 million on the new block, so those two combined is $71 million. And then we have unblocked availability of $53 million.

$53 million, okay. And the $21 million requires the approval?

Two-thirds for the lenders.

And then the -- okay, $50 million, great. That is what I needed to know. Thank you.

All right, thanks.

Your next question comes from the line of John Barnes from RBC Capital Markets. Your line is open.

Thank you, hello, good morning. Can you talk a little bit on the CapEx builds from the standpoint of -- $150 million to $175 million is below what we've have heard some of your competitors talking about investing this year. If I couple that with the CapEx from the last couple of years, has the business been capital starved at all? And is the lack of CapEx at some point going to catch up with you from an expense standpoint? Are you really battling higher maintenance costs or facility problems or anything like that? And when do you think you would be back on a more normalized CapEx run rate?

A couple of points, John. First of all, as you recall, we had a bit of a CapEx holiday because of the integration of the two big companies. And on top of that, obviously, the lower volumes that we needed to handle over the last 18 months, reduced the need for equipment overall. So, we're really now just beginning to get back on what I would consider a more normal path. We're still benefiting a little bit from that CapEx holiday. I think that over time, we will be moving back into a more normal replacement mode as we run out of the holiday from the integration CapEx. A lot of this obviously depends on the economy and the volumes we handle. And I think the number we have for 2011 is a reasonable number. It keeps the fleet age where we want it, so we aren't running into any issues with respect to that. As the volume grows and the economy recovers, 2012 will probably be a higher CapEx number. But it's way too early to be thinking about that.

Okay, so if I looked at volume levels persisting where the are, maybe slightly better, this $150 million to $175 million, I could project that out, and that would be an okay number and keep you -- keep the equipment well fed, I guess.

Yes, I think as the economy grows, you might throw some more in three. You might use $200 million for 2012 as a placeholder, but in that neighborhood.

Okay. Going back to the recap for just a moment, I don't care about timing and all of that. I know you don't want to comment on that.But can you just at least talk a little bit about the parties involved in the negotiations. And what I'm really curious about is maybe some of the non-traditional participants in this recap effort. Are the Teamsters going to be involved financially, are they going to be somewhat on the hook as well in any of the recap effort along with your bank group at any other third parties? Can you just talk about the total bucket of people that are involved in the process?

I think that the Teamsters obviously will be part of the solution here. Beyond that, I am not going to get into the details of the process or who might help us with a solution, but the Teamsters obviously will be part of the solution.

And them being part of the solution, is that a further a financial contribution to the effort beyond just the employee ownership or Board membership? Is it them actually writing a check into some of the funding?

It really relates more to the MOU agreement that we have that makes gratification by the Teamsters of any restructuring plan part of the process.

Okay. And then lastly, can I just ask one question on the legal dispute between ABFS and the Teamsters and YRCW? Obviously, the judge initially ruled in your favor. Can you talk a little bit about timing and what you think? What do you think is the ultimate decision process from her? What did you here in the judge's original decision that gives you confidence that ABFS will win on appeal or something like that?

Well, we really still feel very comfortable with our position and believe that the judge's decision in the first instance will stand up. It's really hard to predict how long this process is going to take, but we do have the comfort of knowing that the process has now been accepted for expedited handling so that will be good and we will very confident we will end up with the same result.

Thanks for your time, Bill. I appreciate it.

And your last question comes from the line of Chris Ceraso Credit Swiss. Your line is open.

Good morning. This is actually Allison Landry in for Chris today. In terms of funding for the CapEx, I know that you guys have gotten a lot of questions on this, but can you give us a sense of whether you are relying more on a pretty decent improvement in the LTL market or potential cash flow from changes in the recap of the balance sheet?

I think, Allison, it's a combination, obviously. Our covenants are out there, and we feel that the changes that we have made over the last 12 to 18 months, not just in the network, but with the customer mix and the type of rate increases that we are getting that that will continue to improve the bottom line as we go. So, I think it's a combination of that and the liquidity that we would expect to come into the business as part of the recap.

Okay, great thanks again. And can you remind us how much you have left and remaining assets to sell?

As far as facilities or equipment?

Both.

Directionally, I think that we probably have close to, what do you have, Paul, as far as surplus property? 100 and something like that maybe? But they range in size, so to even put an average of that probably would not make sense in this point in time. Many of them are small underlying facilities. Obviously, the equipment market right now is not that great. And the stuff, as Bill pointed out earlier, that we are selling is our oldest equipment. So, you're getting salvage value on that.

Okay. That is fair. And then maybe lastly, do you have any major headwinds related to health care costs on the non-Union side in 2011?

I don't think any major headwinds. Obviously, we will be facing increases, a little hard to decipher exactlly what is going to happen based on all the stuff going on in the courts and on Capitol Hill, but I would say there will be increases, but I don't think it will be a major headwind.

Okay, great. Thank you for the time.

Okay, operator. Thank you. That concludes our call for today.

Thanks everyone.

This concludes today's conference call, you may now disconnect.