Yellow Corp (YELL) 2013 Q4 法說會逐字稿

Good morning, my name is Tracy and I will be your conference operator today. At this time I would like to welcome everyone to YRC Worldwide fourth-quarter earnings conference call.

(Operator Instructions)

Thank you, Miss Stephanie Fisher, Vice President and Controller, you may begin your conference.

Thank you, Tracy. Good morning. Thank you for joining us for the YRC Worldwide fourth quarter 2013 earnings call. James Welch, Chief Executive Officer of YRC Worldwide; and Jamie Pierson, CFO of YRC Worldwide, will provide comments this morning. James; Jamie; Darren Hawkins, President of YRC Freight; and Phil Gaines, Senior Vice President and CFO of YRC Freight will be available to answer questions following our comments.

Now for our disclaimers. During this call we may make some forward-looking statements within the meaning of Federal Securities law. These forward-looking statements and all other statements that might be made on this call which are not historical facts are subject to uncertainty and a number of risks and thus actual results may differ materially. These include statements regarding the Company's expectations, assumptions of future events and intentions on strategies regarding the future. The format of this call does not allow us to fully discuss all of these risk factors.

For full discussion of the risk factors that could cause the results to differ, please refer to this morning's earnings release and our most recent SEC filings, including our forms 10-K and 10-Q. Additionally, please see today's release for reconciliation of operating income and loss to adjusted EBITDA and the reconciliation of adjusted EBITDA to net cash flow from operating activities and adjusted free cash flow 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 Jamie to discuss our fourth quarter and full year financial results.

Thanks, Stephanie. Good morning, everyone. For the fourth quarter of 2013, we reported [consolidated] adjusted EBITDA of approximately $60 million which is a decrease of approximately $17 million from the $77 million we reported in 4Q 2012.

The decrease is primarily a result of three items. First, as we came out of the third quarter we were starting to realize the benefits of the service cycle discipline at YRC Freight. In December the weather disruptions caused increases in purchase transportation and decreases in our corporate productivity.

Secondarily, we experienced a year over year decline in yield primarily driven by an increase in weight per shipment and the residual impact of the network optimization from earlier in the year.

And third, as we discussed in the third quarter call, the magnitude of the favorable experience related to workers comp and bodily injury and property damage claims, or BIPD claims, has diminished. On a year over year basis, declined by $7.7 million from $9.7 million in 4Q 2012 to $2 million in 4Q 2013.

Now for the year over year fourth-quarter stats. YRC Freight tonnage per day was up 3.2% and regional tonnage per day was up a staggering 8.9%. YRC Freight's revenue per shipment was down 1.1%, which included a decrease of 3.2% in revenue per hundredweight and an increase in its weight per shipment of 2.3%.

While the regional carriers increased their revenue per shipment by 0.9%, their weight per shipment increased by 1.3% which in turn caused revenue per hundredweight to decrease by 0.4%. As for the full-year stats, YRC Freight's tonnage per day was down 1.6% due to a third-quarter decline of business and regional tonnage per day was up 4.4%.

YRC Freight's revenue per shipment grew by 1.1%, which included a decrease of 0.4% in revenue per hundredweight, and an increase in its weight per shipment of 1.6%. While the regional carriers increased their revenue per shipment by 0.9% and their revenue per hundredweight by 1.2%, their weight per shipment decreased by 0.3%.

Moving onto earnings. YRC Worldwide reported consolidated revenue of $1.2 billion in the fourth quarter of 2013, an increase of $39.1 million over 4Q 2012 due to top-line revenue growth at the regional carriers. Additionally, we reported consolidated operating loss of approximately $1.6 million for 4Q 2013, a decrease of $31.6 million when compared to 4Q 2012. Finally, as stated earlier, we reported adjusted EBITDA for fourth quarter 2013 of approximately $60 million.

For the year ended December 31, 2013, YRC Worldwide reported consolidated operating income of $28.4 million, an increase of $4.3 million when compared to 2012, primarily due to improvement at both YRC Freight and the regional carriers, offset by additional restructuring professional fees during 2013. For 2013, our consolidated adjusted EBITDA was $257.7 million, a $16.5 million increase over the $241.2 million reported in 2012.

On a segment basis, for the fourth quarter of 2013, YRC Freight reported an operating loss of $15.4 million, a decrease of $36.5 million over the prior year which translates into an operating ratio of 102, a decrease of 470 basis points vs. 4Q 2012. Further, YRC Freight reported adjusted EBITDA of $17.4 million, a $32 million decrease from the fourth quarter of 2012, due to increased purchase transportation, decreases in productivities, and decrease in the magnitude of the favorable experience from workers compensation and BIPD of $12 million as compared to 4Q 2012.

For the year ended December 31, 2013, YRC Freight's operating loss improved by $6.1 million when compared to 2012 to $31.2 million. Adjusted EBITDA for 2013 was $105.2 million, which is essentially flat compared to the same period in 2012.

Our regional segment reported operating income of $22.7 million, an increase of $14.3 million over 4Q 2012 and an operating ratio of 94.7. Additionally, they reported adjusted EBITDA of $40.7 million, which is an increase of $14.7 million over the fourth quarter of 2012 due to increases in shipments and tonnage per day.

For the year ended December 31, 2013, the regional carriers reported operating income of $79.9 million, an increase of $9.9 million compared to 2012 and improved their operating ratio by 30 basis points to 95.4. The also improved their adjusted EBITDA to $150.5 million, an increase of $10.3 million when compared to 2012. While the regional carriers are operating well, we believe there is opportunity for continued growth and improvement in their profitability.

Returning to cash flows and liquidity, we ended the fourth quarter with balance sheet cash and AVL availability of $228 million which is a slight decrease of $6 million from the third quarter 2013. Our ability to maintain liquidity at this level is due to our continued active management of our balance sheet and working capital and current seasonality of the business cycle.

As with the last couple of calls, I would like to leave you with what I consider to be a few key take-aways for the quarter. One, as was the case last quarter, we took delivery of additional new tractors and trailers as a part of the 2013 leasing program we initiated earlier in the year.

In 2013, we spent approximately $67 million in capital expenditures primarily for the replacement of engines and trailer refurbishments. Additionally, we entered into new revenue equipment operating lease commitments for another $70 million, for total of $137 million of CapEx and capital value equivalent delivery. With the recent changes in our capital structure, reinvesting in our equipment, our technology and our workforce will once again be a priority as we move into 2014.

Two, as most of you are aware, we were able to successfully expand our MOU and secure meaningful operating flexibility which we believe will create significant savings over the five-year period. Three, on the 31st of January, we successfully completed a series of transactions that reduced our debt by approximately $300 million with the issuance of $250 million of common and preferred stock and the conversion of $50 million in principal amount of our Series B notes. The proceeds from the equity raise were used to pay off the 6% notes which were due on February 15, 2014, and a series of A convertible notes which we due March 31, 2015.

Fourth and finally, just 14 days ago, we successfully refinanced over $1.1 billion in senior credit facilities. This transaction was the final step in our two-year journey to provide a holistic solution which simplifies the capital structure, provides an anticipated cash interest savings of approximately $40 million to $50 million per year, and extends the maturities such that the nearest dated maturity is March 2019.

In closing, our overall performance in 2013 was not satisfactory. However, with the [revenue] provided from the new capital structure and the new MOU, we can now focus all of our attention on service and our operational improvements.

Now I'll turn the call over to James for his comments.

Thanks, Jamie. I will make just a couple comments about the fourth-quarter and year-end results but will spend most of my time highlighting our priorities and activity to drive positive 2014 result.

First thing, [radio extension] process, while important to the future of our Company, our employees, was no doubt a major workplace distraction as we have literally hundreds of meetings with our employees to explain the urgent need to [refinance] our debt, and the positive opportunity that a successful outcome would bring. The distractions felt by our field workers were also felt by the management team which has now turned it's attention, time and resources to the freight business, not financing.

Secondly, I want to highlight the performance of our regional carriers: Holland, Reddaway and New Penn. As a segment they delivered financial results that were more than market competitive in the fourth quarter, despite severe winter weather conditions in December.

The fourth-quarter revenue growth continues to reflect that their customers value the quality of service that each of these carriers provide. For 2013, the regional companies delivered solid results and continued to draft positive improvements throughout the year and as well as grow top-line revenue. And from an operational perspective, they are executing well on their strategies and continue to deliver outstanding service performance within the different geographic regions that they serve.

The regional companies defined what a successful union carrier can do in this competitive LTL industry. And we are confident that management teams and employees will continue to work together to keep a positive momentum moving in 2014.

YRC's rates results in the fourth quarter were, on the other hand, just simply not acceptable. We did have or experience some noticeable operating performance improvements and made progress with changes to our service cycle in the first half of the fourth quarter, but starting with the December 4 ice storm in Texas we struggled with winter weather on a daily basis somewhere in the YRC Freight network for the remainder of the month and on into January and February of this year.

In December of 2013, we had eight major network low pattern adjustments at freight with peak tonnage diversions of approximately 2 million pounds per day with no such diversions in December 2012. So that was a big change just comparing the December months from 2013 to 2012. Even though the weather was volatile, our freight volumes were stable and shipments and revenue showing growth at YRC Freight during the quarter, reversing trends from earlier in the year.

So judging by a variety of performance measures, 2013 was not the year we forecasted at YRC Freight. Our team is confident, though, that the short-term self-inflicted pain we endured in 2013 will result in long-term improvements as we move forward in 2014 and beyond.

And to lead the way, I'm pleased for this morning to announce Darren Hawkin's appointment as President of YRC Freight. Darren brings a wealth of experience to the position. He spent 18.5 years within Yellow Freight and Yellow Freight's system, in roles of increasing responsibility in operations and sales, then served four years at Conway in a major operations role before rejoining YRC Freight in January of2013.

I have known Darren a long time and I'm confident that he will continue to build on the momentum that we have established over the past 150 days and is the right leader to move YRC Freight forward in 2014. I will be working closely with Darren to ensure a smooth transition.

So let's now move on to our priorities for 2014, which are as follows. One, successfully implement the new MOU. Two, solidify the YRC Freight service cycle discipline. Three, improve our yield management. And four, investment in our technology and revenue equipment.

We are very focused on the full implementation of our new MOU. We have a solid opportunity in 2014 to make YRC Worldwide more profitable.

The new national uniform absenteeism policy at YRC Freight, Holland and New Penn gives us an important tool to reduce cost while improving service to our customers. So instead of trying to match 100-plus different absenteeism policies, for the first time we now have a single absenteeism policy.

In addition, the flexibility to run 6% of our over the road miles with purchased transportation at YRC Freight is a big benefit that will allow us to keep our national network in better balance and provide more competitive service. For example, we averaged 15 million linehaul miles per month at Freight, and we will be able to run approximately 3 million of those miles with purchased transportation.

We will also be able to take down several high-cost rail lanes by executing linehaul trips with purchased transportation which will have the benefit of improving service. We are also excited about the fact that we believe purchased transportation can help us in our pursuit of improvement of profitability at YRC Freight.

Also at YRC Freight under the new MOU, we will now have the ability to rationalize terminal service areas that were not addressed after the Yellow and Roadway integration in 2009. For example, in the past when a Yellow and Roadway terminal were combined due to the integration, we were contractually obligated to serve all of the delivery and pick up points that each carrier previously served when they were two separate companies.

However, some of the points of service simply do not make economic sense with the way the network is now configured and cause an underutilization of our driver and equipment resources. We now have the ability to align points 50 miles or more from our terminals where it makes sense. This is yet another step in finally rationalizing the network at YRC Freight.

The above priorities will enhance our efforts to running a more cost efficient network at YRC Freight and allow our daily service cycle to be standardized and permanently instituted. Taking a regimented approach to working through the 24 hour cycle and making all transitions timely produces network standardization where shipments flow through the system and arrive on time, and customer satisfaction is the end result. The service cycle not only brings efficiencies to the network but it also offers opportunities for customer gains.

Lastly, the new MOU will allow us to be more competitive while still providing our employees with top tier wage and benefit package. With our five-year contract extension and the noise of the ratification process behind us, we believe the new MOU gives us a competitive package to recruit new drivers to our team. Implementing all pieces of the new MOU will not be accomplished overnight and will take consistent management and execution. But we are convinced we will be a more profitable and competitive company once we complete the implementation.

Additionally, our yield management efforts will be an increased focus area in 2014 at YRC Freight and the regional carriers. With the MOU completed and the financial runway clear, we can concentrate on making sure we have the right business on board. With YRC Freight in a better service cycle, we should be in a position to expect timely execution of customer-specific negotiations to help improve yield, performance and, in fact, are meeting and exceeding our [year of] target so far in 2014.

Finally, during the refinancing process we highlighted that one of our priorities was to ship our financial resources from interest payments to investing in our workforce equipment and technology and we plan to do just that. For example, we literally just completed a side by side [dimensioning] pilot in our national Tennessee distribution center where we compared the top two manufacturers with dimensioning technology. We plan to make the decision in the next few weeks which technology we will use and we plan to install 30 to 40 of these units in our 20 DCs across the country by the end of the year.

Our commitment to delivering market competitive and consistent service across all four operating Companies is the cornerstone of what we do. Our commitment to find a new level of cost efficiency is unwavering and is the key to improving our overall financial performance and profitability.

So all in all, the fourth quarter closed out with challenges. I can speak for the entire management team where we are pleased to finish up the financing so we can focus our time and resources on the freight business. With these comments, Jamie and myself are ready to take your questions and look forward to the discussion.

At this time I would like to remind everyone in order to ask a question, please press star one on your telephone keypad. The first question comes from Justin Yagerman with Deutsche Bank.

Hey, good morning guys, it's Rob Salmon on for Justin.

Hey Rob, you are you doing?

Pretty good, James. Congrats on the accomplishments in the fourth quarter. As we're thinking about 2014, I think you in an 8-K had put out expectations for adjusted EBITDA of roughly $350 million to $360 million, and then just our doing some back of the envelope calculations, it looks like based off the latest and greatest MOU you guys signed with the teamsters, it's about $70 million of annualized savings you expect to achieve there.

Can you walk us through how you expect to bridge that remaining $40 million or $50 million from the adjusted 2013, including that $70 million savings from the teamsters up to your next year expectations?

Hey Rob, it's Jamie. I'll certainly address that. A lot of this is just going to be organic improvement in the business, keeping in mind that 2013, as James said, had its challenges. If we were simply just to take those challenges out of 2013 and make it a more normalized level, without the change of operations and the network optimization, I think we can clearly bridge that $40 million to $50 million gap. We can actually decrease our churn, and actually hold our productivities, I think we are squarely in that range.

Jamie, that's really helpful. When I think about some of the headwinds, could you elaborate a little bit more in terms of what you think the cost of weather was in the month of December, what's been experienced year to date as well as remind us what the cost was for the network optimization you guys had completed during the summer?

Sure. Before I get into the details of the weather, I need to say that this is as much as an art -- probably more of an art than it is a science, especially with the conditions that everyone experienced, not just us. What I wanted to say is that for the fourth quarter, we probably had a negative weather impact to somewhere in the $10 million to $15 million range on EBITDA. And then for the first quarter, knowing that February has not yet closed, and we're only two thirds of the way through the quarter, we think we're probably already in that $15 million plus or minus range.

Okay. And then any additional thoughts in terms of the optimization that was completed over the summer?

In what sense, Rob?

In terms of the cost incurred as well as the network disruption from a lost revenue perspective, where you wouldn't be getting the incremental margins that you would typically expect with the business?

Yes, no really incremental [size] Rob. That was back in May. We've worked our way through that and we really are going to be focusing on the service cycle from here on forward.

Okay. Can you give a sense of how much that cost the company in 2013? In total from the optimization? And if you don't have it, I understand, because there's a lot of kind of moving parts there.

Yes, no, we really don't -- we disclosed what it cost in terms of what we wrote off but no real income statement impact, sorry.

We certainly know the impact of this from an over time standpoint, the lack of resources, the service standpoint. We know that we certainly missed out on some opportunities to keep and gain some business. So it was definitely a negative impact, I just don't know that we have a solid number we could put in front of you that would make sense. But, it was definitely not one of our finer moments, I can tell you that.

Understand. I guess as we look forward, the tonnage performance in the fourth quarter was frankly stronger than we expected at both of the segments. How are you thinking about the optimal tonnage and yield mix? In your prepared comments, you had highlighted a bunch of yield optimization that you're going to be focusing on for 2014. I would imagine the dimensionals, when you install them, will provide a nice step up in yield looking out to next year. But how are you trying to find that optimal mix between the two?

I will make a couple general comments, Jamie may want to jump in, or Phil or Darren.

One of the things that has just been driving me crazy is the fact that we haven't had this network at YRC Freight in the motion and in the rhythm that we needed. We know that hurts some of our opportunities on the yield side.

The good thing is that when we have had clear days, the network has running very well. And we also know that the MOU noise from the labor standpoint with customers and we know that the financial noise were concerns, but very impressed with the way that we hung onto the business we had, and obviously missed opportunities there to improve our yield.

Coming out of the gate we have done a really good job on the customer-specific negotiated contracts that we negotiated this year. Darren, I think we've negotiated two hundred and--

647.

Excuse me, 647, with an average increase of 4.1%. So, we're exceeding our internal targets.

And I really think that the noise factor has subsided considerably once we got this refinancing done. We want to do the right combination of yield management mix as we look at each one of these individual four companies and they all have a little different nuance between them and they need different things depending on their balance and situation of where they're at geographically located.

But I think all four companies are squarely focused on yield management. We know that we had some hiccups with the change of operations and then the MOU and refinancing noise. I'm just very impressed with our sales team as how we did hang on to our tonnage and, in fact, really grow it at the regionals, so.

I appreciate the time.

(Operator Instructions) Your next question is from David Ross with Stifel Nicolaus.

Good morning, gentlemen and Stephanie. Jamie, CapEx hasn't really been anything you can talk about in past year on calls because you had such a limit in your old financing agreements. Now that the cap has been raised on CapEx, are there any comments you have on guidance for this year in terms of what you may be spending on tractors, trailers, IT, dimensioners, or just a growth number?

No guidance, David, but in terms of our -- our intent is to continue to do what we did in 2013. As long as we can find favorable rates and counter parties entering into those offering leases, we can continue to do that. I think we showed that we 2013 were not only capable of entering into those, but we were pretty damn successful in doing so.

Does the new cap structure change that lease versus buy decision for tractor purchases at all?

It makes it more difficult, actually, which is a good thing because the funded debt rate is now getting closer to what we actually experienced in 2013 on the operating leases. So to the extent that we can bring that rate down, that certainly makes my decision point a little bit different, but that is a positive thing and not a negative.

Oh, definitely. James, on the purchase transportation side, you talked about 6% of miles not eligible for PT. When we look at the cost savings opportunity there, what would you say would be the cost difference between a purchase transportation linehaul run and a YRC Company linehaul run?

Is it only a factor of the cost differential, or are you also going to be able to reduce empty miles in the system because you won't have to run a tractor out and back and you can just buy a one-way PT move?

Great observation and great question. We are in phase one of the rollout, we started last weekend. We are seeing a 57-mile improvement versus what we're getting from purchase transportation folks versus what it costs us to run it on the network.

And we're also seeing several opportunities, just as you pointed out, to run a purchase transportation in lieu of our own equipment and not be faced with rebalancing the network with returning on empty. And some of those are on high-cost rail lanes that are even above what our over-the-road costs are, but we save on the repositioning via rail. So, this is a win-win-win for this company.

Keep in mind that that 6% is on an annual basis, so there will be months that we will [flex] up or down depending on vacation season, peak business times and really gives an added dimension to both lower our costs, improve our service, balance our network, and we're going to take full advantage of it.

And then my last question is just on tone of business. There's been a lot of moving parts with the December, January, February weather being just terrible all over the country. We hear things are pretty strong and pricing's been off to a very good start in the new year.

Do you guys have a sense -- is that because we're moving the same amount of freight over fewer days, so it just feels stronger when the network's open, or do you think that there is some underlying demand growth that once we get out in a more normal environment, will continue the strong capacity crunch or pricing momentum?

You're almost answering your own question when you're asking it, very good observation. And you are right, when the network is free and clear, business is strong. Then you get bogged down for a couple days and everything gets screwed up and you get out of balance and out of whack, but this has been the worst winter I can remember since December 4.

We've just been fighting it everyday. It feels pretty good when we get a few days -- just like this -- when we've been on a what, four or five day stretch here that it has been pretty clear. It feels pretty good.

We will have to see once we get into a little more stretch of clear weather. I was pretty happy with how the volume held up in December and there have been days, like I said, it's looked pretty good this year. But just hard to get your head around.

Excellent. Thank you very much.

You bet.

Your next question is from Willard Milby with BB&T Capital Markets.

Hey, good morning everyone. The first question deals with the current network and capacity. How much capacity would you say your current network has, and how do you think about balancing maybe further terminal reduction and improving freight in 2014?

The regionals are -- they're busy, no doubt about it. We still have capacity at YRC Freight, not as much as we did. Certainly the change of operations, consolidated 29 terminals and took down three DCs. So, we think we're set up pretty good.

We're probably going to have to go back and actually open a couple terminals where we consolidated because we were getting out of some building rents that were extraordinarily high. So you will see us tinker with the network a little bit here and there but you won't see any big changes of operations at all.

Our service rationalization benefit that we will get out of the MOU will be something we will be working through throughout the year because that's something that can provide a big cost benefit as well. So, I'm okay with where we are at right now from a network standpoint but we will see how business levels go in March.

I certainly don't see us doing any more consolidating, that's for sure. If anything, like I said, you'll see us opening up in few spots where we intentionally changed the geographic location of our terminals based on what we are having to pay for some of these building rents.

Okay, thanks very much. Also just a quick modeling question. With the debt refinancing and the new $700 million facility that you secured, how should we think about interest expense and timing of payments and how that works in Q1 given it was debt in the middle of the quarter? Can you help us out there?

Yes, interest payments, lower. If you look about the entire capital structure, the new rates are going to be -- especially on the term loan -- L700 with a 401 and then the new ABL is going to be an L200- L250 depending on our pricing grid. So, we're going anywhere from a previously on a fully funded basis, from 10.5% to 11%, down to 7.5% in total.

All right, thanks for the help. And I'll turn it over.

Thanks, Will.

At this time there are no further questions in queue. I will turn the call back over to the presenters for any closing remarks.

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

Ladies and gentlemen, thank you for joining. This concludes today's conference call. You may now disconnect.