Yellow Corp (YELL) 2013 Q2 法說會逐字稿

Good morning, my name is Jake, and l will be your conference facilitator today. At this time, I would like to welcome everyone to the YRC Worldwide second quarter conference call. All lines will be placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. (Operator Instructions). Thank you. Stephanie Fisher, you may begin your conference.

Thank you Jake. Good morning. Thank you for joining us for the YRC Worldwide second quarter 2013 earnings call. James Welch, Chief Executive Officer of YRC Worldwide, Jamie Pierson, our CFO, and Jeff Rogers, President of YRC Freight, will provide comments this morning. James, Jamie, and Jeff will be available for questions following our comments.

Now for the disclaimers. During this call we may make some forward-looking statements within the meaning of Federal Securities law. 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 actual results may differ materially. This includes statements regarding the Company's expectations, assumptions of future events, and intentions and strategies regarding the future. The format of this call does not allow us to fully discuss all of these risk factors. For a full discussionof the risk factors that could cause the results to differ, please refer to this morning's earnings release and our most recent SEC fillings, including our Form 10-K and Form 10-Q. Additionally please see today's release for a reconciliation of operating income and loss to adjusted EBITDA, and a reconciliation of adjusted EBITDA to net cash flow from operating activities, and adjusted free cash flow and deficit. During this call we may refer to the non-GAAP measure of adjusted EBITDA simply as EBITDA.

I will now turn the call over to James for some introductory comments.

Thanks Stephanie. Welcome to our second quarter conference call. Second quarter results reflect that we are continuing to make progress at our turnaround efforts at YRC Worldwide. While our performance shows incremental improvements, there is still no doubt that many opportunities remain to make additional progress on our operational and financial results. During the second quarter we continued to focus on investing in the long-term future of our business. For example, at YRC Freight, we implemented the second largest network optimization in the Company's history. The reengineered YRC Freight network will operate more efficiently and we believe that the new structure will operate more profitably. Additional details surrounding the network change will be provided by Jeff in his comments later in the call.

We also successfully completed the rollout of 10,000 handheld devices in our P&D operations, which will enhance driver productivity and facilitate the transmission of information that is important to our customers. This is the first time in six years that we have made an investment of this magnitude in advancing our technology platform. We expect to make additional upgrades to these devices in late 2013 and 2014, which will further enhance productivity and service. Additionally we took delivery of new tractors and trailers at each of our four operating companies. This is the first meaningful investment in our equipment in four years, and the first step in getting back into a more normal CapEx cadence, which Jamie will address in his comments.

The results of our dimensioning pilot project have been positive thus far, and have exceeded our expectations. Based on our success to date we plan to roll out additional units, and will continue to do so, as we believe the industry will eventually transition to dimension-based pricing, while it will certainly take some time to play out, we are working to ensure that our companies are out in front for this transition. Our network optimization, equipment and technology, was matched by continued investment in our employees. We stayed true to our commitment to our employees by rolling out our third round of field safety training meetings. This investment is paying off with reduced injuries and frequency, and is working its way through our financials as lower workers compensation costs. We truly believe that the culture we have built around working safely, working efficiently, and going home every night accident-free, will continue to bear fruit for the foreseeable future.

We are also ramping up training for our field operations and sales personnel. It is widely acknowledged in the industry that our sales and operations training program were once the gold standard for LTL carriers. I am glad to say that we are returning to that standard and the process is well underway. We have already hired new sales and operations trainers for the field, and we are updating training practices to coincide with our new technologies. Our history of success with sales operations and processing training, combined with our recent experience in safety training, shows us that this is another long-term investment well worth making. Similar to our investment at rolling stock via operating leases, these investments will not show up on the balance sheet, but will be expensed through the income statement, and may put pressure on margins in the short-term. However, we are not managing the Company for the short-term, and we believe this fits very well into our long-term vision.

A special story for our second quarter performance is really a tale of two tales. Our regional carriers performed exceptionally well turning in a 94.3 operating ratio on $445 million in revenue. Holland, Reddaway, and New Penn are service leaders in their respective markets, and they are well-positioned for continued growth in the second half of 2013 and beyond. At YRC Freight, certainly the change of operations in May was a big hurdle. However there is no doubt that YRC Freight is the company with the most potential. the $55.2 million operating income improvement during the first half of 2013 indicates that they continue to move forward in a positive way. YRC Freight turned in a second quarter operating ratio of 101.1 on almost $800 million in revenue, inclusive of costs associated with the network optimization. Would we like for their progress to be faster, of course. But sometimes we need to stand back and realize YRC Freight is a company that is re-establishing itself, and starting over in many ways as a new company. YRC Freight is certainly in a better position today than it was in 2011, and even coming out of 2012, and we firmly believe that they have the right strategy in place to continue their process.

On a year-to-date consolidated basis, we continue to track favorably against our internal business plan. During our first quarter call, we emphasized that 2012 was a year of progress, and that 2013 would be a year of performance. For the first six months of 2013 compared to 2012 we improved operating income by $57.4 million, despite a comparative difficult winter season and challenges experienced during the YRC Freight network optimization. We certainly performed better in the first half of 2013 compared to 2012, and while encouraged with our improved trends, we know there is still much left to accomplish.

I want close my comments with a congratulations to our drivers who will be competing at the National Truck Driving Championships this month in Salt Lake City. Sponsored by the American Trucking Association this is an ultra-competitive skills-based event, and is considered the Super Bowl of Safety. We are very proud of our 31 state champions, and we will be in the hunt for another national champion. That concludes my comments and I will turn it over to Jamie.

Thanks James, and good morning everyone. For the second quarter 2013 we once again improved our year-over-year improved our results. Despite the network optimization headwindsexperienced at YRC Freight. As for the year-over-over stats, YRC Freight's tonnage per day was down 3.6%, and regional tonnage per day was up 1.2%. The decline at YRC Freight was due to customer mix management to shed unprofitable business, which began in Q2 2012. YRC Freight's revenue per shipment grew by 1.5%, which included an increase of 0.4% in revenue per hundred weight, and an increase in its weight per shipment of 1.2%. While the regional carriers increased their revenue per shipment by 0.1%, and their revenue per hundred weight by 1.5%, their weight per shipment decreased 1.4% on a year-over-year basis.

On the earnings side, YRC Worldwide reported consolidated revenue of $1.2 billion for Q2 2013, slightly lower than Q2 2012 due to the decline in revenue at YRC Freight, which was primarily offset by revenue growth at the regional carriers. Additionally, we reported consolidated operating income of approximately $14.3 million for Q2 2013, a slight decrease of $1.2 million when compared to Q2 2012. Finally we reported adjusted EBITDA for Q2 2013 of $74.7 million, which includes a one-time charge of $6.3 million related to the network optimization, and an increase of $4.6 million over the $70.1 million reported in Q2 2012. This brings adjusted EBITDA for the latest 12 month period to $291.1 million.

On a segment basis for the second quarter of 2013, YRC Freight reported an operating loss of $8.5 million, which included $6.3 million charge related to the network optimization implemented in May, and was an increase of $3.4 million over the prior year. Additionally YRC Freight reported an operating ratio of 101.1, which represents a decrease of50 basis points versus Q2 2012. Further, it reported adjusted EBITDA of $30 million, an increase of 7.5% from the second quarter of 2012, and adjusted EBITDA margin of 3.8%, a slight increase over the prior year. Our regional segment reported operating income of $25.2 million, an increase of 10% over Q2 2012, and an operating ratio of 94.3. Additionally they reported adjusted EBITDA of $42.5 million, which was a 4.4% improvement over an improvement over the second quarter of 2012.

Now turning to cash flows and liquidity, we ended the second quarter with balance sheet cash and availability of $219 million, which is an increase of $4 million from the first quarter of 2013. Our ability to maintain liquidity at this level is due to our continued operational improvement, and continued active management of our balance sheet and working capital. As with our last call, I would like to leave you with what I consider to be a few key takeaways for the quarter. One, we took delivery of new tractors and trailers as part of the 2013 leasing program we mentioned on our first quarter call. This is the first meaningful addition of new equipment to our fleet since 2009. Additionally we completed the roll-out of 10,000 productivity enhancing driver handheld devices. As you can see by the $22 million, that we spent on CapEx in the second quarter, we are increasing ourinvestment in equipment and technology to position us for the future, and are beginning the process of returning to our more normal CapEx spend, whether it be directly on the balance sheet or by entering into operating leases for new revenue equipment that will again flow through the income statement.

Two, we decreased our outstanding letters of credit by $43 million, or another 10% from $429 million at the end of the first quarter to $386 million at the end of the second quarter. This is in addition to the $14 million decrease in the first quarter of 2013, and is a result of the safety initiatives we started in late 2011. Once again our work comp and VIPD liabilities have decreased, which enables us to bring down the outstanding LCUs back-stopping these programs, and to continue derisking our balance sheet, and allows us to save the cash otherwise spent on LC fees.

Three, in the second quarter of 2013, approximately $13.2 million of aggregate principle amount plus picked and [mayco] interest of our Series B notes was converted into 714,000 shares of common stock. Since June 30, 2013 there have been an additional $15.1 million of principle amount plus picked and mayco interest of notes converted into an additional 817,000 shares. All of which decreased our leverage and non-cash interest expense going forward.

Four, as everyone is aware, we filed a $350 million universal shelf registration statement on July 22, 2013. As you are also aware, it is customary for public companies to have a shelf registration statement on file. Our previous shelf expired in 2012. We are simply updating our filings to provide optionality for the Company, in case a window or opportunity would present itself to tap the market. In light of my next point, it is both wise and prudent to be prepared.

My fifth and final point, and I apologize for so many, we have been pretty busy this quarter. As everyone is equally aware, we have a couple of maturities in 2014 and early 2015. Even though the bulk of these maturities are literally over a year away, we recently retained Credit Suisse in combination with our financial advisors, the MAEVA Group, to assist us in developing a broad range of refinancing and recapitalization options. In order to accomplish any transaction of this magnitude, we have a number of constituents to consider, and we are currently in the process of evaluating all of our alternatives. And as much as it may disappoint you, and as a general reminder, before you ask any Q&A portion of this call, we are not able to provide further details regarding these activities at this time. But we will provide updates when and as they develop, and appropriate to do so.

In closing, I would say that we are continuing to make progress on our turnaround, and the management team is delivering on its commitments. We know that there is still a lot of work to do, but we are focused on continuing to execute on our long-term strategies. Now I turn the call over to Jeff Rogers, to talk about YRC Freight and the progress he and his team have made.

Thanks Jamie. And good morning everyone. Despite the fact that we faced challenges with the implementation of our network optimization, we continued to make operational improvements in the second quarter of 2013. Our ops planning team spent months analyzing data on how we could drive more efficiencies into the system, and the end result is an enhanced network that is designed to increase density, allow fewer touches of shipments, increased load averages, and reduced line haul miles. During implementation our execution was hampered due to increased shipment volumes we were experiencing at the time. Consequently service, operations and second quarter financial performance were adversely affected. I will take that tradeoff for the long-term gains that we anticipate for the future.

With full implementation now achieved, we are starting to see improvement in key areas, such as reduced handling, and improved load average. I am more confident than ever that we will reduce operating costs while improving service. Additionally during the last 11 out of 12 months we have improved our claims ratio due to our focus on better freight handling, and we are experiencing ratios better than James or I have ever seen here before. This focus has led to a decreased cargo claims expense, and increased customer satisfaction.

Both James and Jamie referenced our safety initiative, and I want to add some important numbers to those comments. In the second quarter we added 55 1 million, 14 2 million, two 3 million, and one 4 million consecutive accident-free mile drivers. These professionals joined our more than 2,400 YRC Freight drivers with 1 million or more consecutive accident-free miles.

As we have said before, 2013 is the year of performance. The team is focused, we have a clear strategy, and we are executing better each and every day. Today more than ever we are an organization powered by professionals. In closing I would like to thank our employees for working safely, and for their hard work toward improving YRC Freight's operations and profitability. With these comments, James, Jamie, and I are ready to take your questions.

Jake, I think that we are ready to move to Q&A now.

Certainly. (Operator Instructions). Your first question comes from the line of Justin Yagerman from Deutsche Bank. Your line is open.

Good morning guys. It is Rob Salmon on for Justin. Jeff, in your prepared remarks you highlighted some of the challenges associated with the reorganization that you completed at YRC Freight. Could you give us a sense if you realized any of those analyzed benefits in the quarter, and if we should still be thinking of that as roughly $25 million to $30 million from a profit improvement standpoint?

We did face some headwinds. No question the timing of the change and when we implemented it created some problems for us from an increased volume and density. But at the end of the day we are extremely confident that we are still going to realize the savings that we expected.

Okay. So fair for us to assume not much of the benefit was realized in Q2 if we strip out the $6.3 million charge?

That is a true statement.

And then, Jamie, you kind of talked to a little bit about the CapEx investment that YRC has been embarking on in the second quarter. Can you give us an update in terms of what your expectations are for the full year, as well as how we should be thinking about the potential cost headwinds associated with that CapEx as we look out to the back half?

We don't give guidance on the CapEx, but I will say in a more qualitative sense, is that we are just starting to re-enter into what I would consider a more normal cadence. It will take us a year or two to get there. Again, a gentle reminder that as we roll in this new equipment this year, it is going to be on an operating lease basis, so it not going to show up on the balance sheet. But in terms of the magnitude, we don't give guidance on the CapEx.

Did you mention how much of operating leases you guys engaged in in the quarter?

No, that would be tantamount to giving guidance on it, so we are not going to do that.

Fair enough. I will turn it over to someone else.

Thanks Rob.

Your next question comes from the line of Allison Landry from Credit Suisse. Your line is open.

Thanks, good morning. Earlier in your comments you mentioned the shift towards dimensional pricing, and wondering if you could give us some color on how customers are responding to that approach, and maybe how much the book you have already gone through?

We are very, very early into that project. So far the results have been encouraging. By the way, this is James. Customers have been for the most part receptive, and that was one of the things that I was very curious when we put our first dimensioning effort in place, is how would the customers react, and I was curious what would be the collection rate or the customer satisfaction, and so far it has exceeded our expectations. Obviously, we are not through the book to business to any great degree at all, because we have a very limited number. So this will be a longer term effort, but I would just say that initially we are very pleased with what we are seeing.

Okay. And then as a follow-up question, I was wondering if you could discuss some of the reasons behind the divergent trends in weight per shipment at the operating companies?

This is James again. I will talk about the regionals, and let Jeff jump in for some more color commentary on YRC Freight. We have really looked at this at a detailed level, and really can't come up with anything that is unusual. I think from the regional perspective, the late spring that we had transcended into some, a lot of late shipments in May and June. Conversely we are seeing heavier weight per shipments at YRC Freight, so we can't put our thumb on exactly what is happening. And it is not like we are trying to arbitrarily go one way or the other. But so far it has been just the seasonality of what we are seeing. I will let Jeff comment on what he sees at YRC Freight.

Sure Allison, this is Jeff. That is part of the strategy of our mix management. We do feel that we needed to bring on a better mix. We are targeting heavier weight shipments at YRC Freight, not because I want to get everything heavy, but I want to have a better mix, so therefore I can have more revenue on a trailer, which is ultimatelywhat we are trying to accomplish. That is why our weight per shipment might be going higher faster, but that is part of our strategy.

Okay. Fantastic. Thank you so much.

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

Good morning everyone, thanks for taking my call. I believe earlier that you said that the cost associated with the change in operations would be in the range of $8 million to $12 million for severance and buy-outs of leases. Is that all included in the $6.3 million, or are there someadditional costs to come?

Still some additional costs to come. And that $6.3 million, there is also some stuff in gains and losses below the line, Will, but there is still, to answer your question directly, we anticipate some of the costs still to roll through.

Thank you. And give an estimate on the hidden impact loss in revenues during this transition period?

This is Jeff Rogers, we are not going to comment on the various specifics. I can tell you that one of the headwinds we saw was our volume was increasing, which is a good thing, as we entered the implementation, and the time to implement it just wasn't ideal. We hadhoped to do it earlier in the year, and had to implement it in May. But it definitely impacted us from a service perspective and an efficiency perspective.

Thank you. And one last thing and I will turn it over. Can you give the non-union pension expense in the quarter?

Probably about $7 million I want to say, but I can check that number and get back to you later today. It should be in the 10-Q that was filed earlier.

Okay. Alright. Thank you very much. I will hop back in the queue.

Okay.

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

The $6.3 million, is that true one-time costs with severance or closing terminals, or is that including kind of the operating challenges? Just trying to get a sense if it was really bigger than $6.3 million including some of the integration headwinds beyond just true one-time stuff?

This is Jeff Rogers. That $6.3 millionis clearly one-time costs associated with either closing facilities, severance, or moving employees around. So those are truly one-time costs. There was absolutely additional costs beyond that, because of the inefficiencies we experienced as we tried to implement the change.

Any way to give some color on how much that inefficiency may have cost you? I guess what I am getting at is, if you back out that $6.3 million, you still have pretty similar first quarter and second quarter operating income which is unusual, you typically see second quarter a lot better, and just trying to get a sense of what is the right run rate to think about as we model going forward?

Scott, it is tough to give exacts and specifics for what the impact was, but I would clearly say our run rate in the second quarter was better than the first quarter, and we expect the run rate to be better going forward.

Okay. In terms of the letters of credit down $43 million, do you have a sense on kind of where you are at versus your peers, or what you are targeting, anything you feel comfortable sharing in terms of how much more improvement you see potentially in letters of credit?

Well, relative to our peers, Scott, we are probably about twice where our peers are. In terms of where we forecast to be, we truly intend to continue decreasing them, as we continue to actually increase the stability of the Company, but this is going to be a year or two or three long process. We only meet with the states once a year, so literally by the time you meet with the states and can even talk with these guys, you are 12 to 24 months behind the cycle. Obviously everybody on this call is aware of that, we just started this improvement process literally within the last 18 months. This is no different than the investment in the income statement via the improvement in safety. This will take time to also roll through.

Okay. And then just last thing I know you are not giving the absolute number on operating leases, but can you give us the rates you are paying on those leases, as we try to come up with numbers on what the operating income and operating impact is?

I won't give you a specific rate but I will tell you that it is better than our funded debt today.

Okay. Alright. Thanks, guys.

Thanks, Scott.

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

Hi guys. Back again. Is there anything systemically that will keep freight from reaching let's say a 96 or lower in the next 18 months?

Hey, Will. This is Jeff Rogers. We don't give forward-looking guidance, so I won't give any specifics around that. Just tell you that I am confident with the direction in our strategy and we are going to keep getting better.

Okay. Fair enough. And just trying to pin down costs here, on that $6.3 million charge, is that mostly in the operating supplies and expenses line, or was some of that severance in SWB?

Some of that severance is in SWB, Will.

Okay. If you can split those or can you split those?

I can. So in the SWB line item, we have $1.3 million, and $5 million in operating expenses and supplies.

Great. Thanks. I think that is going to do it for me. Thank you very much.

Hey, Will? Just to follow-up on your non-union pension costs, that was $4.9 million for the second quarter.

Great. Thank you.

Sure.

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

Thanks, Jake. That concludes our call for today. Thanks everyone for joining us. Please contact me with any follow-up questions you have. Operator, I turn the call back over to you.

That concludes today's call. You may now disconnect.