Yellow Corp (YELL) 2016 Q2 法說會逐字稿

Good afternoon and welcome to YRC Worldwide's fourth-quarter 2016 earnings call. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Tony Carreno, Vice President, Investor Relations. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Welcome to YRC Worldwide's second-quarter 2016 earnings conference call.

James Welch, Chief Executive Officer at YRC Worldwide, Jamie Pierson, CFO of YRC Worldwide, and Darren Hawkins, President of YRC Freight, will provide comments on the second-quarter 2016 results and will be available during the question-and-answer portion of today's call.

Before we begin, I must remind you of the inherent uncertainties in any forward-looking statements in our discussion this afternoon. 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. This includes 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 the risk factors. For a full discussion of the risk factors that could cause the results to differ, please refer to this afternoon's earnings release and our most recent SEC filings, including our Forms 10-K and 10-Q. These items are available on our website at YRCW.COM.

Additionally, please see today's release for a reconciliation of net income to adjusted EBITDA on a consolidated basis and operating income or loss to adjusted EBITDA on a segment basis. During this call, we may refer to our non-GAAP measure of adjusted EBITDA simply as EBITDA.

Finally, in conjunction with today's earnings release, we've issued a presentation which will be referenced during the call. The presentation was filed in an 8-K, along with the earnings release, and is available on our website at YRCW.com.

I'll now turn the call over to James to provide comments on our second-quarter 2016 results.

Thanks, Tony, and welcome to our second-quarter earnings call. I will make a few comments, followed by Jamie, who will discuss our financial results, and Darren, who will have some comments regarding YRC Freight.

During the recent economic slowdown, all four of our operating companies have been focusing on what they can control and have leaned into the headwinds, while continuing to reinvest in the business. If capacity tightens and/or the industrial economy shows any signs of improving, we will be better positioned to take advantage of prevailing conditions. Obviously, we can't control things like the economy or fuel prices, but we can focus on delivering award-winning customer service and achieving operational efficiencies while tightly managing our cost.

The investments that we've made over the past couple of years, combined with the new talent that we have recently hired, along with our improved operational discipline, have helped rebuild the foundation of our Company.

While our financial results in the second quarter did not meet our expectations, operationally our regional carriers, Holland, Reddaway, and New Penn, continued to provide the same level of outstanding service that its customers have become accustomed to. And YRC Freight launched accelerated service, a new level of service, while providing the best on-time service it has produced in the last four years.

Financially, there were four primary drivers that negatively impacted the quarter. Number one, year-over-year volume levels stayed weak in April and May, although we were encouraged by a much smaller tonnage per day decline in June and so far month to date in July.

Number two was the continued low price of fuel and associated fuel surcharge, and number three, an increase in employee benefit cost.

The fourth driver was an increase in liability claims expense of $8.1 million, primarily due to the unfavorable development from a handful of prior-year claims. While the higher expense from prior-year claims is disappointing, we are encouraged that the number of liability claims in 2016 is down year to date compared to last year, and we are excited about the investment we made to retrofit almost all of our existing 15,000 tractors with accident avoidance technology. While we like what we are seeing so far, it is too early to communicate those trends; however, the information that we are gathering allows us to better train our drivers and improve safety on our roadways and, in some cases, exonerate our drivers when they are not at fault.

We continue to believe that our strategy of improving price and freight mix has positioned us well for the future. Improving revenue [per hard] weight, excluding fuel surcharge, for nine consecutive quarters at YRC Freight and 21 consecutive quarters at our regional carriers has enhanced the Company's profitability profile and the Company's book of business for the long term.

The pricing environment remains much more rational in the LTL space than other modes of transportation, especially the truckload space. From our point of view, LTL companies are focused on the evolution of the supply-chain distribution process and getting an adequate return on the capital.

As Jamie will elaborate, we remain steadfast in our commitment to reinvest in YRC Freight, Holland, Reddaway, and New Penn during the quarter and are encouraged about what the future holds with expected efficiency gains from technology investments in linehaul and P&D operations. The improvement in cash from operations and liquidity continues to allow us to selectively choose the best opportunities to deploy capital in areas that provide the highest and most meaningful ROIs.

While we still have a long way to go with our fleet upgrade, the improvement is noticeable when at a terminal or out on our nation's highways. Our goal is to continue making strategic investments to be best in class when it comes to safety and customer service.

Finally, I would like to welcome Justin Hall to our team. He joined YRC Worldwide in June as our Chief Customer officer. Justin is the former President of logistics planning services and has an extensive background in supply chain, transportation, and logistics technology. We look forward to combining Justin's leadership with the award-winning teams at YRC Freight, Holland, Reddaway, and New Penn to create new market opportunities in an industry that is evolving at a very fast pace.

In closing, I would say that I continue to appreciate the engagement of our employees and their efforts to keep our customers front and center of everything that we do at each one of the YRCW family of companies. They see the progress that has been made, yet see the progress we still have to make in order to capture the opportunity in front of us. With these comments, I'll now turn the call over to Jamie for the review of our financial results.

Thanks, James, and good afternoon, everyone.

For the second quarter of 2016, we reported consolidated revenue of $1.21 billion, down from the $1.26 billion reported in the second quarter of 2015. The decrease can primarily be attributable to a decline in fuel surcharge revenue where the price of diesel decreased approximately 20% in the second quarter of 2016, compared to the same period in 2015, and, secondarily, softer volumes.

The good news is that the decrease in revenue was partially offset by continued base yield improvements.

In terms of consolidated operating results, we reported operating income at $57.2 million, including a $11.1 million gain on property disposals in 2Q 2016, compared to the $56.9 million reported in 2Q 2015 that included a $700,000 gain on property disposals.

Our second-quarter 2016 adjusted EBITDA was $91.4 million or a 16% decrease compared to the $109.4 million reported in 2Q 2015. Our consolidated adjusted EBITDA margin was 7.6% this quarter, compared to 8.7% for the same period last year.

As Tony mentioned earlier and as we did last quarter, we posted a presentation on our website and filed it in an 8-K, along with the earnings release that includes most of our key stats. However, there are a few that I would like to highlight.

First, YRC Freight's tonnage per day was down 6% this quarter when compared to 2Q 2015. This was comprised of year-over-year decreases of 9.2% in April, 7.2% in May, and just 1.8% in June. And before you ask, YRC Freight is down approximately 2% month-to-date July when compared to the full month of July 2015.

Revenue per hundredweight, including fuel surcharge, was essentially flat with just a 0.1% decrease, while revenue per hundredweight, excluding fuel surcharge, was up by 2.9%.

Second, at the regional segment, tonnage per day was down 2.4%, compared to 2Q 2015. This was comprised of year-over-year decreases of 2.3% in April, 3.7% in May, 1.5% in June, and through late July the regional segment is down approximately 2.5% on a year-over-year basis. Revenue per hundredweight, including fuel surcharge, was down 1.4%, while revenue per hundredweight, excluding fuel surcharge, was up by 1.3%.

Now to the financial results by segment. In 2Q 2016, YRC Freight's operating income was $28.4 million, which included an $11.2 million gain on property disposals, compared to $22.5 million of operating income in 2Q 2015 and an $800,000 loss on property disposals. Adjusted EBITDA for the quarter was $43.9 million for a margin of 5.8%, compared to $53.1 million and a 6.7% margin in the same period last year.

The regional segment reported an operating income of $30.6 million for the quarter, compared to $37.7 million in 2Q 2015, and adjusted EBITDA of $47.6 million for a margin of 10.5%, compared to $56.6 million and a 12.2% margin in the same period last year.

In terms of liquidity, cash, cash equivalents, and managed accessability under the ABL facility at June 30, 2016, was $278.8 million, which is nearly a $53 million increase compared to the $226.1 million reported a year ago at this time. We ended the quarter with a leverage ratio of 3.32 times, which is in line with the way we were a year ago when the ratio was 3.33 times.

And as usual, I'd like to leave you with a few parting takeaways. First, we remained resolute in investing back into the business. The $65.9 million in CapEx and new operating leases for revenue equipment is equivalent to 5.5% of our second-quarter revenue and an increase of $18.1 million over the second quarter of 2015 and nearly 5 times the amount in the second quarter of 2014. The additions included approximately 230 tractors; 1,150 trailers during the quarter, which the vast majority of which were leased, and since the beginning of 2015, we have added more than 1,600 tractors and 3,100 trailers.

Second, given the current economic environment, while we were disappointed with this quarter's financial results, we are also not that surprised, either. Tonnage has comped down for the entire LTL space for the past several quarters, and while fuel has been increasing as of late, it is still lower on a year-over-year basis. For the balance of the year, we intend to focus on what we can control, continue to invest in the Company, weather the current economic environment, and continue to position the Company for a stronger freight environment.

And lastly, the lending community acknowledged the progress we have made, as we recently amended our ABL facility. The amendment not only decreased the interest rate by 50 basis points, but it also included the option to extend the maturity from February 2019 to June 2021, subject to the refinancing, replacement, or extension beyond June 2021 of our current credit agreement. It also had the added benefit of reducing the amount of cash that must be restricted to support the facility that is allowing us to access the cash that would otherwise be unavailable.

We are pleased with the recognition, but even more encouraged to be able to use the cash to continue investing in EBITDA and cash-generating projects.

At this point, I will turn the call over to Darren to discuss YRC Freight's results.

Thanks, Jamie, and good afternoon, everyone.

Consistent with Q1 2016 results, YRC Freight's volumes were negative, while service, cost control, and productivities were positive in Q2 2016. Operational highlights in Q2 included, starting with our service, YRC Freight's new accelerated service launched on the first day of Q2 and provides one- to two-day faster transit times than our standard service. The market has responded favorably and we believe this organic growth should continue, regardless of market conditions, as the new service better aligns us with other national LTL carriers on transit times and broadens our portfolio of core services. Our standard service remains a staple in the marketplace for long-haul economy service.

Turning to safety, the in-cab safety technology installations are complete in our US operations and early indications show positive results, including increased miles between incidents. From an efficiency standpoint, the YRC Freight operations team delivered year-over-year improvement in dock/city pickup and delivery, office operations, and linehaul load average metrics. These were achieved while reducing the number of empty miles in our system with improved load planning and repositioning equipment.

We also continue to benefit from improved fuel efficiency and maintenance expense from the ongoing upgrades to our fleet. External purchased transportation expense was down from lower rates and from utilizing our internal drivers.

In terms of labor and cost alignment, YRC Freight was negatively impacted from the adverse development of prior-year liability claims. We also had higher wage and healthcare rates, including a $0.34 per hour wage increase for our union employees, effective in April, which were partially offset by improved productivities.

Further, technology investments are being made in two of our largest cost areas -- linehaul and pickup and delivery operations. The ongoing linehaul investments are contributing to more efficient planning and fewer empty miles, and we expect this momentum to continue as each iteration of the network optimization comes online. The pickup and delivery system is in the early stages, with a pilot planned toward the end of 2016 and full implementation expected by the end of 2017. By reinvesting in our people, technology, and equipment, combined with projected capacity constraints from regulations and eventually a stronger industrial economic environment, we believe this will serve our Company well over the long term.

I would like to thank the 20,000 employees of YRC Freight for delivering year-over-year improvement in safety, service, and productivities. They have the right attitude about being safe, being reliable, and making a difference for themselves, our customers, and our communities. I appreciate all their actions that continue to move us in the right direction.

Thanks for your time this afternoon. We would now be happy to answer any questions that you may have.

(Operator Instructions). David Ross, Stifel.

Yes, good afternoon, gentlemen. It looks like weight per shipment stabilized a little bit at YRC Freight, but is still falling at regional. Can you comment on the trends you're seeing there and if you expect the stability to come to regional soon?

David, we report late for shipment on a total basis; that's truckload and LTL, so it doesn't take a lot of variance in your truckload shipments to drag your weight down a little bit here and there, or raise it, but it is really just a byproduct of freight mix and there's really nothing that we are actually trying to do in this particular area to raise it up or certainly lower it. We kind of like where we're at and we'll bounce around those numbers I think consistently as we move forward.

And the regional segment, I thought their OR was going to be a little bit better. Was that due to some of those insurance adverse developments? Was that concentrated in the regionals?

Hi, David, it's Jamie. It wasn't concentrated at the regionals, but they actually had their fair share as well, so there was a piece of the increase [in daxanes] that went across both segments.

Also, regional yield in tonnage -- or yield was a little bit worse than we had expected. Is there any issues at regional that need to be addressed that you guys are working on behind the scenes, because we've got the three companies there? I can't imagine they are all operating equally all the time.

That's right. We look at those -- even though we report those as one segment, Dave, you're right. We look at those companies on an individual basis, but there's really nothing unusual happening as far as we can tell.

We gain some business and lose some business, as does all of our competitors, but it's certainly something that we are looking at, making sure we're trying to balance our networks with the right freight at the right price. It's interesting to note on the tonnage trends at both YRC Freight and at the regionals that in June we had the smallest decrease since January 2015, and then we had the smallest decrease at the regionals since March 2015.

But as far as how that relates to yield, certainly we were on a tear this time last year raising rates and so we're facing tougher comps on the yield side, but we're going through a period where we should be facing some easier comps on the tonnage side. So, again, nothing that's unusual from our perspective. Jamie will have some comments.

Dave, also it's a pretty tough comp. If you go back and look at 2Q 2015 at the regionals, revenue for highway, excluding fuel surcharge, is up a little north of 5%, and revenue, excluding fuel surcharge -- revenue per shipment, excluding fuel surcharge, was up almost 6.5%, so that's a pretty strong comp that we're going against.

All right. And last question, Jamie, on the facility sales at YRC Freight, were those just excess terminals that had been sitting around a while that you offloaded or were there any sale leasebacks going on?

No, that was complete excess, Dave, and something that had been on the books for way too long. So we're happy to actually monetize that investment.

Good. Thank you.

Scott Group, Wolfe Research.

Thanks. Good afternoon, guys. So the tonnage improvement in June and July, can you tell, is that the comp getting easier or do you see sequential improvement in tonnage beyond just kind of normal seasonality?

First of all, I think the comp is easier, obviously.

I'm not confident we're seeing a major change in tonnage levels because of the economy. So, maybe a little bit at the end of June that helped us, and so far July is hanging tough. But July typically is one of the tougher months of the quarter, so if I had to put a percentage on it, I'd say 70% easier comps and 30% maybe a little better market.

Okay. That's helpful. Jamie, you gave us July tonnage. Can you give us July revenue per hundredweight for freight and regional?

We don't give guidance on that, Scott, but what I would say if you looked at the tonnage, the way it is kind of transiting the quarter and then where it ended in the month-to-date July basis, it's the rate of year-over-year change has been moderated a lot in the last two months, especially June and July. And if you look at what's going on with PMI and IPI, it's fairly reflective of what's going on with the broader economy, in my opinion.

So, I was talking about the revenue per hundredweight for July, if you can -- month to date, if you have that.

We don't give guidance on that, but if I could maybe just directionally answer your question, we've seen 3% to 5% in the first half of the year. On a year-over-year basis, we expect that to moderate. We've been going through a period of 6% to 9% increases, excluding fuel, so in the back half of the year, maybe 2% to 4%. I don't know. It really depends on how much tailwind or headwind we face with the economy.

That was a comment on renewals, you're saying?

On the sisneys, yes.

Okay. So as the tonnage declines or are moderating, do you think that this is an environment where you can start growing EBITDA again, and I know you don't give guidance, but I'm thinking more from the perspective of the leverage covenant at year-end. It feels like we need EBITDA to stabilize on a year-over-year basis, and are you comfortable that that can happen?

Right now, we ended the quarter at 3.32 times. The covenant was 3.75 and that's on a $36 million, maybe a $37 million cushion. Our forecast shows us being in compliance -- don't get me wrong. It would certainly help if we had some macroeconomic improvement and some internal operating improvements as well, but right now we've got about a $37 million cushion.

Where is the covenant at year-end?

3.50. 3.5.

It only [turns] a quarter of a turn.

Okay. But your point about the $37 million of cushion, that's on the 3.7 times, not the 3.5 times.

That's exactly right. If we gave you 3.5, we would be giving you guidance.

All right. Thank you, guys.

Brad Delco, Stephens.

Good morning, James. Good morning, Jamie -- good afternoon, I mean. Jamie, you made a comment that you thought LTL trends were following the PMI or ISN or industrial production. It seems like other peers are saying that there's a little bit of disconnect between the two. We saw ISN above 50 back in March. Most people think that it lags -- or LTL tonnage lags three months. Would you expect tonnage to be better in LTL today? And if so, what do you think the disconnect has been?

Brad, it's Jamie. If you go back and look at the last four prints of PMI -- March, April, May, June, those were the only ones that were above 50 since probably September of last year, and when I say they are above 50, they are negligibly above 50; it's 51.8, 50.8, 50.3. It's not until June that you have to get something that's meaningfully above it at 53.2, but keep in mind PMI includes things that LTL carriers do not ship, i.e., utilities, electricity, mining, things of that nature, and that's what really drove the improvement in the first half of this quarter.

So if you strip those two components out, I am of the belief that we would still be in a small contraction territory for those items that LTL carriers would have on or in our trailers. But I'd go back to your question; I do think that it lags a little bit. How much, I really don't know.

No, that makes sense and that's good color.

And then, second, I know you guys are making investments and obviously these investments are driving good returns. I know we could see really clear evidence of that with weight and research with the investments in the -- dimensioners. Thank you. So the more recent investments, is there any way you can provide us more color with the linehaul technology? What has that really done with mpgs or what has that done with empty miles? Any sort of way to help us quantify the benefits you are getting from these.

I'll make a couple of comments -- Brad, this is James -- and then let Darren jump in there. It is still too early with the implementation of these two technologies, specifically the linehaul optimization and then the P&D planning and optimization tools.

I think I commented on it several times during our recent roadshows that we would be implementing the software tools between now and the end of the year, and certainly we felt like we would see more benefit in 2017 than in 2016. So we're just still too early in there to give you some sort of a good dialogue like we could around the dimensioners. That was pretty fast and we contracted specifically to the dollar.

But to give you a little more color about what we're doing, I'll let Darren talk about the opportunities we have with these two implementations.

Sure. Thanks, James, and good afternoon, Brad. We've got a variety of efforts underway at YRC Freight in various stages, some already contributing that I mentioned in my opening comments.

But certainly the linehaul technologies that we're seeing, we've got [optum] technology installed. [SZnet] is our traffic visibility piece that's already providing benefit, and also those two together helping us achieve that reduction in empty miles, and also with the size of the YRC Freight network, that's a tremendous positive for us when we can reduce the empty miles.

We also have a wireless technology upgrade in all of our distribution centers, along with those dock tablets that came into play last year that are providing benefits. We've upgraded all of our forklift technology for our dockworkers, which benefits dock productivity, which was also one of those areas that we had nice progress in in Q1 and Q2.

We mentioned the P&D, which is down the road in 2017, but also that would be our second largest expense category and we are already seeing improvements in P&D just from our efforts around that area, without the new technology at this point. Investments in our fleet, in the trailers and tractors, not only benefit the fuel efficiency and reduced maintenance costs, but also have contributed to the load average metrics which also with our current length of haul has a tremendous impact on earnings potential.

With all that together, I would also say that our employees did a great job in Q2 around enhancing those productivities and utilizing the tools that we invested in.

So a long way of answering your question, Brad, but I think as the year goes along, we'll be in a much better position to talk more with clarity about what we think we can achieve, but something that we look forward to talking about as the year goes along.

Sounds great. And Darren, it seems like it was a -- you were prepared to answer that question, but if I could ask you one quick follow-up on pricing. Jamie sort of addressed the year-over-year comp versus regional, but if I look at pricing on a sequential basis, excluding fuel, it looked like it was down slightly. Was there a big mix change or weight per shipment or length of haul change in freight this quarter?

No, there wasn't a significant change in length of haul or weight per shipment. Mix is a moving target that's always changing, depending on the bid cycles that we're in.

I think Jamie's reference on our contract renewals and the strength that we saw last year in that and the consistency we saw in the first half of the year, Brad, with the second half of the year, there could be a slight deceleration there, but we're expecting to stay on track and also negotiate through those with the opportunity of protecting our capacity for the right freight at the right price.

Great. Thanks, guys, for the time.

This concludes our question-and-answer session. I would like to turn the conference back over to the Company for any closing remarks.

Thanks, again, to everyone for joining us today. This is Tony. Please contact me with any follow-up questions that you may have. Operator, this concludes the call. I'm turning it back to you.

The conference has now concluded. Thanks for attending today's presentation. You may now disconnect.