Yellow Corp (YELL) 2017 Q2 法說會逐字稿

Good afternoon, and welcome to YRC Worldwide Second Quarter 2017 Earnings Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Tony Carrion, Vice President, Investor Relations. Please go ahead, sir.

Thanks, operator, and good afternoon, everyone. Welcome to YRC Worldwide Second Quarter 2017 Earnings Conference Call. Joining us on the call today are James Welch, Chief Executive Officer of YRC Worldwide; Stephanie Fisher, Chief Financial Officer of YRC Worldwide; and Darren Hawkins, President of YRC Freight.

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 laws. 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 to adjusted EBITDA on a segment basis. During this call, we may refer to our non-GAAP measure of adjusted EBITDA simply as EBITDA. In conjunction with today's earnings release, we issued a presentation, which will be referenced during the call. The presentation was filed in an 8-K, along with earnings release and is available on our website.

The format of this afternoon's call will include an overview of the second quarter and an update on recent events from James, followed by Stephanie, who will discuss our financial results. Darren will conclude the prepared comments with an update on YRC Freight followed by a question-and-answer session.

I'll now turn the call over to James.

Thanks, Tony, and good afternoon, everyone. For the second quarter 2017, our consolidated adjusted EBITDA was consistent with a year ago and in line with our internal plan. However, we had to manage through an inconsistent end of 2016 and a sluggish start in 2017 to achieve these results. To that point, YRCW has consolidated OR improved 430 basis points from the first quarter to the second quarter of 2017. The consolidated results on the second quarter were favorably impacted by executing our strategy to improve yield at YRC Freight and reducing overhead cost aided by an improving industrial economy. We anticipate the momentum from our actions to continue, as we move through the rest of the year and contribute to better year-over-year financial results.

In particular, YRC Freight made significant progress during the quarter in its efforts to return to positive year-over-year revenue per hundredweight, excluding fuel surcharge, and improved adjusted EBITDA by approximately $4 million compared to last year.

Our Regional carriers, Holland, Reddaway and New Penn are comping to a solid quarter a year ago, when they reported an OR of 93.2 versus 94.6 this year. Year-over-year tonnage per day was up and year-over-year revenue per hundredweight, excluding fuel surcharge, was slightly positive. These favorable items were not enough to completely offset increases in contractual wage and benefits. Revenue equipment leasing expense and liability claims contributing to a decrease in adjusted EBITDA of approximately $5 million compared to last year. We do have or anticipate increases in volume and yield to help deliver better year-over-year adjusted EBITDA results in the second half of 2017 at the Regional segment.

Our efforts to eliminate approximately $25 million of costs over the course of the year by streamlining overhead expenditures and augmenting operational efficiency remained on track during the second quarter. And just a week ago, we completed an amendment to extend the term loan by more than 3 years from February of 2019 to July of 2022.

YRCW has made significant progress since the current term loan was put in place and that was important to proactively seek an extension and position the company for continued long-term success. In conjunction with the refinancing amendment, we paid down another $35 million of the term loan, lowering the outstanding balance to $600 million. Since the end of 2013, we have improved our capital structure by reducing long-term debt by almost $400 million while reinvesting in the company.

In summary, we took actions during the first half of 2017 that we expect to benefit the company the rest of the year, and in July, we worked with our lenders to strengthen the company's capital structure. We plan to continue evaluating additional opportunities to strengthen the company for our customers, employees and investors. Pricing in the LTL industry remains rationale and has been so for a while. Our nearly 32,000 talented freight employees are dedicated to be the best-in-class in safety and helping our customers meet their needs.

With these comments, I will now turn the call over to Stephanie for a review of our financial results.

Thanks, James, and good afternoon, everyone. For the second quarter 2017, the company reported consolidated operating income of $50 million compared to $57.2 million in the second quarter 2016. The year-over-year results were favorably impacted by a 4.4% increase in revenue, primarily attributable to increased volume and higher fuel surcharge revenue, combined with savings from streamlining our back office support structure and a decrease in liability claims expense. These items are partially offset by contractual wage and benefit increases.

Second quarter 2017 adjusted EBITDA was $91.1 million and in line with the $91.4 million reported in the same period last year.

Turning to the financial results by segment. In the second quarter 2017, YRC Freight reported operating income of $28 million, which is in line with the $28.4 million reported in 2016. It's important to note that last year's second quarter operating income results included a gain on property disposals of $11.2 million at YRC Freight compared to $1.4 million this year. Second quarter 2017 adjusted EBITDA, which excludes gains and losses from property disposals, was $48.3 million compared to $43.9 million in the same period last year.

Moving to the Regional carriers. They reported operating income of $25.3 million for the second quarter 2017 compared to $30.6 million in the second quarter 2016. Second quarter 2017 adjusted EBITDA was $42.2 million compared to $47.7 million a year ago. Our quarterly stats are included in the earnings release in the presentation filed earlier today. So I'll focus my comments on a few key 3 results.

At YRC Freight, the second quarter 2017 year-over-year tonnage per day was up 2.7%. This was comprised of year-over-year increases of 6.2% in April and 3.3% in May and a decrease of 1% in June. In July, YRC Freight's year-over-year tonnage per day was essentially flat. For the second quarter 2017, year-over-year revenue per hundredweight, excluding fuel surcharge, was up 1.1% and revenue per hundredweight, including fuel surcharge, was up 2.2%. For the second quarter 2017, year-over-year revenue per shipment, excluding fuel surcharge, was down 0.1% and up 1% when including fuel surcharge.

Turning to the stats for the Regional segment. The second quarter 2017 year-over-year tonnage per day was up 3.6%. This was comprised of year-over-year increases of 1.4% in April, 3.9% in May and 5.1% in June. In July, the regional segment's year-over-year tonnage per day was up approximately 4%. For the second quarter 2017, year-over-year revenue per hundredweight, excluding fuel surcharge, was up 0.2% and revenue per hundredweight, including fuel surcharge, was up 1.2%. For the second quarter 2017, year-over-year revenue per shipment, excluding fuel surcharge, was up 1.9% and up 3% when including fuel surcharge.

In terms of liquidity, our cash and cash equivalents and managed accessibility under the ABL facility at June 30, 2017, was $253.4 million, reflecting an increase of more than $50 million compared to the end of the first quarter 2017.

Regarding our credit facility covenant. Through June 2017, our last 12-month adjusted EBITDA was $277.5 million and the funded debt-to-adjusted-EBITDA ratio was 3.61x as of the end of the second quarter 2017 compared to a maximum credit facility covenant of 3.85x.

Finally, it was a significant step for the company to extend the maturity of the term loan through the middle of 2022. And I greatly appreciate the support of our lenders. By completing the refinancing amendment, we are able to maintain our focus on operational execution and separate the term loan maturity date from the expiration of our current labor agreement in March of 2019. In addition, Moody's recently changed the company's outlook from stable to positive in a nod to the progress that we are making.

At this time, I'll turn the call over to Darren to discuss YRC Freight results.

Thanks, Stephanie, and good afternoon, everyone. On our Q1 2017 earnings call, I outlined some of the actions that we were taking to improve yield at YRC Freight. At that time, I also stated that we expected our efforts to drive positive yield by Q3 2017. I'm glad to report today that the actions we discussed led to positive results earlier than previously stated. Q2 2017 year-over-year revenue per hundredweight, excluding fuel surcharge, improved to a positive 1.1%, which sequentially is a 280 basis point improvement compared to the same metric in Q1 2017.

With year-over-year tonnage per day strong, as the second quarter progressed, we strategically reduced our exposure to 3PL resellers and truckload tonnage. Although YRC Freight has a limited number of truckload shipments that are used to supplement the linehaul network, the typical weight per truckload of over 14,000 pounds has a meaningful impact on our reported tonnage results. We made these changes to not only improve profits, but to also ensure the quality of service that our core LTL customers expect.

Another sign of progress at YRC Freight is the second quarter operating ratio of 96.5, which is the second best quarterly operating ratio we have reported since Q3 of 2007, a span of nearly 10 years. The only quarter with a better operating ratio over this time period just happens to be the 96.2 reported in Q2 of last year, which was aided by the unusually large gain on property disposals of $11.2 million, as mentioned by Stephanie. The gain had a favorable impact on last year's OR of 150 basis points. This compares to property gains in Q2 2017 of $1.4 million, which had a favorable impact of 10 basis points.

From a pure price increase standpoint, Q2 pricing renewals averaged 4% to 4.5% and the new business pipeline is holding steady. I would also like to provide an update on 2 of our strategic initiatives. First, during Q2 2017, YRC Freight achieved a year-over-year productivity improvement in our second largest cost bucket, which is pickup and delivery operations. It's the sixth consecutive quarter of year-over-year improvement, and we expect to gain additional traction with the full implementation of our route optimization solution, Quintiq, that is currently running in approximately 50 of our 260 terminals. The system provides greater visibility to driver routes, driver position, trailer capacity and driver communication, which leads to more efficient delivery and pickup service to our customers. Additional terminals will continue to be upgraded with full implementation expected in 2018.

Second, as the supply chain changes at a rapid pace, shippers expect faster transit times with steady and reliable service. To evolve with our customers, we are working through a large and impactful change of operations to transition 8 or YRC Freight's terminals into regional distribution centers that will serve as quick start operations within our network. Specifically, we will begin utilizing more than 800 existing terminal doors as distribution center dock doors where we can transfer freight and add capacity at key points within our network.

We are also planning to implement the use of utility employees that will be able to perform multiple job functions. This is a very significant structural upgrade to our network, and we expect these changes to enhance productivity and add to our ongoing linehaul strategy of creating density and reducing miles through shipment path optimization. The anticipated implementation date of these changes is early October, and once completed, the number of distribution centers in our network will increase from 23 to 31.

In closing, the yield momentum we are seeing, along with continuous improvements in our linehaul and pickup and delivery projects, continues to give me confidence that YRC Freight should deliver improved adjusted EBITDA results for the full year 2017 compared to 2016. I appreciate the safety and service contributions of the hardworking employees of YRC Freight that delivered the improved Q2 results.

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

(Operator Instructions) And the first question comes from Brad Delco of Stephens.

James, can you talk about -- I don't want to ask this question inappropriately, but it seems like there's a little bit of a whack-a-mole here, where first quarter looked like we had some pricing issues in freight. That was addressed. We saw good results, but looks like pricing deteriorated a little bit in regional, and the regional results weren't bad, but obviously not as impressive as freight. So can you just talk about what sort of differences we're seeing in yields between the regional and freight?

Sure. Number one, I think YRC Freight has done a very nice job of recovering from a couple of issues that were creating their problems during the fourth quarter of 2016 and the first quarter of 2017. That being said, things ebb and flow from quarter-to-quarter on freight mix. And as we work through those issues, at times it's favorable and at other times it's a little bit challenging. That being said, I'm a little disappointed with the Regional's yield results. And I can tell you than we were on a better track than we were in the second quarter. So I agree it does, at times, appears like it's a whack-a-mole, but our processing philosophy has not changed at any of the companies. We're still trying to get the right freight at the right price and headed in the direction. And so some of it is some freight mix, account mix that we've seen, especially at one of the regional companies, but we're working through that and feel comfortable about the track that we're on.

Okay, great. And then maybe a follow-up. Darren, you talked about the rollout of the Quintiq system for P&D productivity. Could you give us an update on what you're seeing from the linehaul optimization software and kind of where we are? I guess, by my math, you said you rolled out Quintiq in 50 of the 260 terminals, so that's rolled out 20%. Can you kind of provide a similar update for us on the linehaul piece?

Certainly, Brad, and good afternoon, this is Darren. On the network excellence, linehaul optimization piece, I think the easiest way to give you a time line is to say, we're probably in the fourth inning of a 9-inning ballgame there. It's certainly a process that's never complete. There is continuous improvement as the optimization occurs, but we are seeing the benefits of that and the process is on track, then it certainly lines us up well for the change of operations that I talked about as well.

The next question comes from David Ross of Stifel.

I guess, first, you talk about the increase in PT, we saw it up 17% year-over-year. Is that mainly due to the growth in leases? Or is there something else there? I know there were some PT issues last year in the regional group.

You're exactly right. It's a combination of several things. PT is up certainly on the cartage side at all 3 companies actually. And the equipment leasing is taking a bigger bite out of EBITDA as we go along here. Of course, obviously, we would like to get to the point where we're purchasing more equipment than releasing, but those 2 things are really having an effect. And certainly we're trying to combat that. We don't like the amount of cartage that we're using, and we've got full court presses in the (inaudible) driver hiring and we're making some progress, but it has been little bit of a headwind for the Regional's especially.

David, the other piece of that is about an $8 million increase in rail miles and rail rates at YRC Freight. That offset the salary, wages and benefits for the use of our drivers. And so we typically use that a little bit more in the second quarter due to the summer vacation season.

Okay. And then, Stephanie, with the new debt agreement, how should be thinking about interest expense going forward? It's been at a steady $25 million, $26 million run rate. Should that step up meaningfully? And then what can you tell us there?

Yes. So, it'll be about a 1% increase on a go-forward basis. But on a lower balance, because we paid $35 million at closing, but we're looking at about a 9.5% to 10% rate depending on LIBOR on the $600 million.

Okay. So would, I guess, the $26 million be a better number?

Probably.

Okay, good. Right now you're tracking around $100 million. 10% on $600 million is only $60 million, but I guess, you got the other pieces besides the term loan.

Yes, we've still got the sale leasebacks and the CDA note.

Okay. And then maybe just talk a little bit more about the Regionals. Is there a stark difference among the west, the central and the east? Is there any issues with customers, networks, labor that you think is going to either stick around for a little while or that you may resolve in the near term?

Sure. Again, if you go back and look at the performance, there was only 4 factors that drove that purchase transportation: the equipment leasing expense, they have some significant liability claims expense and then their wage and benefit increases. If you look at all 3 of the companies, they all have some driver shortage challenges. It's a bit more pronounced out West and in the Northeast. Operationally, they've been running fairly at capacity. So I don't see any fundamental problems, Dave, that say that their networks are broken or in trouble. They have some new business in one of the companies out West that's having a pretty large impact on some startup costs and getting things started, but we think it's a well-worth adventure that we're in. But I was happy with -- they're bounced back in July, and so far in August, like what they're doing. So it's kind of back to what Brad was saying, it does feel like a little bit whack-a-mole because one quarter, the Regionals will be rolling and Freight might be hiccupping and in another quarter, the Regionals might be rolling and -- or Freight might be rolling and the Regionals will get hiccupping. So, I guess if we ever get all 4 rolling at the same time, we'll be dangerous, but again, I'm not overly stressed or feel like easing those companies are broken. We're just working through some mix issues and driver shortages.

In general, you say the capacity is -- the networks are running roughly at capacity as if yields should continue to go up, because that should allow you to put some business that doesn't fit the network at better lane balance off a higher rate?

,

Yes. No, totally, totally right. And currently we're seeing 4%, 4.5% increases at YRC Freight and 3.5% or so with the Regionals. So they still have a way to go. In fact, they were right here this weekend. After our board meeting, we held a presidents meeting and that's certainly one of the things we pressed on was, "We need you to do better on the yield side." So the message is out there, and I think they'll move it forward.

And next we have a question from Amit Mehrotra of Deutsche Bank.

First question is just puts and takes as you guys walk from a recently good second quarter into the back half. If you can just update us on maybe some of the real time trends on tonnage and -- or anything else so far in the third quarter? How much of the incremental cost savings there to be realized in the third quarter relative -- or in the back half or yet to be realized, maybe I should say? And then maybe some pricing initiatives if you have any scope to maybe even -- get even more aggressive on pricing based on what some of the competitors are doing? Any color on all those items would be appreciated.

Amit, it's Stephanie. I'll start and do maybe the first couple of pieces of that question and then I'll let Darren and James jump in on a couple of other things. But from a tonnage perspective, in July, tonnage at YRC Freight was flat. For the Regionals, it was up 4%. So tonnage was strong at the Regionals. Coming back at YRC Freight, as we think about the cost-savings initiatives that we started in the first half of the year, most of those went into full run rate by March or April. So we should see a full second half cost savings of that $25 million come into play as we go into the second half of the year. Now I'll let James and Darren talk about pricing.

This is James. Couple of things before I comment on pricing. There's 6 things that I'm really looking at that should pressure us to have a stronger second half of the year moving forward. Volume is certainly there, as we were talking with Dave a second ago. We think the economy looks good over the foreseeable future. Certainly, yields are improving, and we have a button that we can push harder there, number two. Number three, capacity is reasonably tight within the industry. Four, these technology investments that we're making will come into play more as the year goes along. Five, the competition appears to be rationale with pricing. And six, to Stephanie's point, those cost adjustments that we put in play the first of the year will continue to play out over the next second half of the year and on into '18. So I guess from a pricing perspective, we think there is continued opportunity -- and Darren has said on the first quarter call that he hoped to be positive on revenue per hundredweight by the third quarter. Well, he was able to push that button even harder and made it positive in the second quarter. So that does tell you that the opportunity is out there. And again, when you are working with the count mix and appreciating the right business and bringing on the right kind of business, then it's a win-win combination. So that will continue to be work our focus, and we think we lined up in a good position to take advantage of a reasonably good market.

Okay. Sorry go ahead.

Sorry, Amit. This is Darren. I was just going to mention from YRC Freight perspective, certainly on the second half of the year, there's 2 or 3 leading indicators that I like from a pricing standpoint. The first is our GRI that we took earlier this year. It's holding firm and that's always a good sign and sets the pace for negotiations as we go throughout the year. Truckload is getting firm. And truckloads being firm is always good for LTL. And that [CISNE] or the contract rate increase number that we talked about, a 4% to 4.5%, that's a good leading indicator of the benefits we'll see in Q3 from the pricing negotiations that we completed in Q2.

Okay. That's really helpful. And then just a follow-up, if I could, on weight per shipment in Freight. This was down a little bit, but just if I look at it on an absolute level, it looks like it was -- I could be wrong, but it looks like it was the lowest average weight per shipment in absolute terms since kind of like the first half of 2014. And we're seeing this kind of as a trend in other companies as well as maybe e-commerce accelerated, did you get some mix towards later shipments. And so if you could just talk about what maybe is driving that and what your expectations are for the back half of the year. And then more critically, given that you guys are obviously paid, as well, on a weight basis, how do you think about the absorption or the fixed costs as maybe there is some secular headwinds associated weight per shipment or maybe that is -- anyway, how you think about that, shifts going on in the business?

Yes, and that's an excellent call out. In the last 2 calls, I actually talked about weight per shipment quite a bit, because the impact it was having on my revenue per hundredweight, excluding the fuel surcharge number, and we talked about the balances and the yield was made up of a lot more factors than just revenue per hundredweight. I'm glad you went back to '14 and saw where that trend started. We did a lot of work in '14 in removing absolute minimum charge shipments from our network. We were aggressive on that from a pricing standpoint and that trend continued for many quarters driving that weight for shipment up. We did have something that I mentioned in my script today that also had a slight impact on total weight per shipment, as we include truckload and LTL in our tonnage numbers and that weight per shipment. When I mentioned those truckload shipments that we reduced our exposure to coming in at 14,000 pounds per truckload, and those move on one shipment, so it can have a slight play there as well. So I am glad to see the yield progress even with that slight decline. When I put all the metrics in there and look at length of haul and weight per shipment, the yield progress looks good even with a slight drag in those others, so.

Amit, this is James. On top of that, I really like to comment that was on -- that was made on the OD call the other day. I totally agree with it in thinking about how companies are expanding their distribution centers to multiple locations across the country to get closest -- or to get closer to their general population of customers. And that in turn, I think, is seeing some smaller repetitive-type shipments that are replenishing these distribution centers that, I think, bode well for the entire LTL industry over time. And I think that is what you may be seeing when you're talking about the fact that a lot of carriers are reporting a little bit of reduction there. I think that definitely plays into it anyway.

Great. And just so housekeeping, and just a segue on that is, when you guys are expanding the distribution centers, is there any onetime cost or investment that we should just be thinking about in terms of our models to make sure that we're adjusting for that?

Amit, there is nothing material on that front.

And next, we have a question from Scott Group of Wolfe Research.

Good. So, I wanted to ask about the guidance for full year EBITDA. So if I look, second quarter adjusted EBITDA was basically flat, and I think the guidance implies something like 35% or 40% EBITDA growth in the second half of the year. Can you help -- I understand you've talked kind of qualitatively about you think things are -- why things are getting better, but maybe just more specifically about some of the margin pieces or timing, how much of that's third versus fourth? I'm struggling to get to that kind of magnitude of EBITDA growth in the back half.

Yes. Good question and totally understand that. If you think about it sequentially, we think that the third quarter of 2017 will generally be in line with how the second quarter played out, and then that pickup that we think we'll see in the fourth quarter compared to the third quarter is what it's going to be different, because if you recall last year, that's when we started having some yield issues at YRC Freight. We didn't have a real good fourth quarter last year. So we think that's probably where you're going to see the biggest differences in that fourth quarter.

So unlike some years where EBITDA kind of drops off more sharply in the fourth quarter, you are saying that you think that this year, it'll be less of a drop-off from 3Q to 4Q on a sequential basis? And that's often significantly better year-over-year?

Yes, that's right. And we certainly don't think we will have the yield issues and some of the problems that we're incurring in the fourth quarter of last year, so.

Okay. That's a helpful.

Does that make sense?

No, no, that does. That's helpful. So -- and then clearly, nice kind of improvement in some of the yields at Freight. But just as that's happening, you start to see tonnage kind of down a little bit in June, flattish in July. Are you okay with tonnage being negative in the back half of the year? Or is that something you're not really willing to -- or want to happen?

Scott, excellent question. This is Darren. We talked about this in 2015. And matter of fact, the yield position the company is in it kind of feels like 2015, where that momentum is coming and is coming strong. And at a national company like YRC Freight, when it gets started, it creates a nice wave of improvement that typically lasts several quarters. On the question of whether we would be willing to accept negative tonnage, I will certainly put yield ahead of tonnage. But as I talked about on the last call, balancing that is where I would like to keep YRC Freight. I think in the economy that we're working in right now, outside with some of the truckload adjustments that I talked about and the 3PL reseller work that we do, we have excellent relationships with those 3PLs and we use that reseller blanket business to balance volume in the network. So I think I've got opportunity to keep that balance going. Sometimes you pull back on the reins a little too tight and -- but overall, I think that balances is better, and we're going to work very hard to try and maintain above positive volume and positive yield. But certainly, if you -- if I was forced to pick one, it would always be yield.

Okay, good. And then just one last question. I want to ask about the impact of fuel in the second quarter. So this used to be the kind of environment where fuel is higher year-over-year, but kind of flat to down sequentially. This used to be the environment where LTLs made a lot of money on the fuel. But I know you, in the industry, have changed the fuel surcharge structure. Was fuel a big positive this quarter? And then how are you thinking about the impact of fuel in the back half of the year?

Scott, it's Stephanie. Fuel, for us, in the second quarter was a definite impact for us, but not as big as we've seen in past history. We did see an increase in the fuel price of about, I think, $0.20 or $0.25 per gallon on a year-over-year basis. So we did get a bit of a pickup there, not a significant one. But as we think about what's happening to fuel prices right now, I think in the second half of the year, we will see less of an impact just because fuel prices don't seem to be picking up as much as they anticipated earlier in the year.

And is there any way to kind of frame, is that 0.5 point of OR or full point of OR benefit in the second quarter?

I'm not sure that I have that right now.

And the next question will come from Jeff Kauffman of Aegis Capital.

You hit a little bit on the tonnage trends at the national business. So I guess 3 short questions. I'll start with the national. Can you talk a little bit -- can you give us a little context on what's causing the tonnage to ease of? Is that more a strategic decision on your part to pursue a certain type of business? I know April was an odd comparison, but -- or is it a particular industry? Or is it a particular region where you're seeing anything slowing down? I just want to get a little more context on why the tonnage is kind of drifting down below 0?

Jeff, this is Darren. And based on the comments I put in the script around that, anticipating this question certainly. And yes, some strategic actions on our part around business that's easier for us to control. The contractual negotiations, you can get locked in the business for long periods of time. And in the LTL sector, it's good to have some business that you can moderate or accelerate on a shorter-term basis and that's where that truckload, spot market and 3PL reseller business comes into play, and that was the strategic play that we did to protect the service and quality that our customers expect.

All right. That was very helpful. Second question, regarding the change of operations that you filed with the union, and you did allude to the growth of your distribution centers, but could you help us understand kind of how this affects the business and the flow through the terminals? And are we going to see some odd effects in terms of rev per hundredweight or weight per shipment as a result of moving toward more of a fulfillment model?

No, I don't think you'll see any major swings in those numbers or in length of haul. There shouldn't be huge impacts to the overall metrics. What it does allow us to do is, our accelerated service, which we launched in 2016, it's -- the marketplace has responded very favorably to that. [Fad] is our second largest service by volume. We knew to handle increased accelerated business over a period of time that a change of operations like this would be necessary. It will actually -- from those utility employees, they will be providing some of the dock labor at the facilities they're working at, which improves the cycle time of processing that freight through these quick-sort centers compared to our larger DC model. So I anticipate nice benefit for the customer. Good benefit and efficiency for YRC Freight, and then also a nice benefit for our employees in having more drivers sleep in their own bed each night versus in a hotel room.

All right. And then finally on the Regionals, I may apologize because I think you've already answered this once or twice. Clearly, a cost issue, a driver availability issue, you're working your way through that. Can you help us understand which of these cost utilization issues you probably be able to attack sooner and help us understand the ones that'll take a little bit longer?

Well, certainly, anytime we can do the job that we need to with recruiting drivers in the areas that we're short, that's the best way to both improve our efficiencies and lower our costs, so the market continues to be active and competitive. We have been able to move to some market-based type of pay arrangements, whereas in the past, with the IBT, everyone kind of gets -- not everyone, everyone gets paid the same. So we've been successful in depreciating some markets from a pay perspective and that's just recently occurred, so we think that's going to help us as we move forward. But certainly, PT is an expense that we would like to find ways to lower. And to Stephanie's point, though, when you think about largely freight side, certainly PT will be exposed from the rail percentage and over the rail percentage, but it's something that certainly we're working on as we speak.

Okay. And the PT costs that you're seeing, is this something that was a little bit of an odd duck in the quarter? Or is this a little more systemic and it's going to be a process to get back down?

Jeff, it's Stephanie. From a PT perspective, part of it is just an oddity to the second quarter due to the summer vacation season, part of it is just some timing of some new business coming onboard. So I think it will be easily -- or not easily, but somewhat rectified in the third quarter.

Our next question is a follow-up from Brad Delco.

Maybe for Darren or James, if you want to jump in on this one. So I know we've talked about yields and we talked about tonnage, and obviously logically is there an inverse correlation to lower the price? Your tonnage tends to increase and the higher the price, your tonnage tends to decelerate a little bit. But it kind of boils down to service and the value proposition. And I don't know that we've really updated or given any updates on kind of where service levels are versus where they've been. Darren or James, can you just talk about that and maybe give us an update on where things stand there.

Yes, I'll make some comments and then Darren can jump in if wants. With the summer vacation schedule, service is always a little bit under pressure. But again, I think the networks are reasonably full, and I don't think our service is out of the ordinary for what we typically produced in the summer. And so I feel good, especially with what YRC Freight is doing from a change of operations standpoint to go to more meat in turns, less sleeper teams, less laydown runs, moving freight efficiently through more locations, I think, is really going to help YRC Freight out. And the Regionals typically give market-leading service in their areas. Again, they've been under some pressure over the summer, with the vacation season, but nothing that won't bounce back and is not bouncing back as the summer winds down. So, I'm not overly concerned about it at all.

Brad, this is Darren. Certainly, a trend we've seen over the last several years, peak season or a lot of national carriers now occurs in June. And in past years, that was later in the year, in the third quarter, but was it occurring in June now, it does happen when it's also a peak season for experienced employees to be on vacation now. That's something that happens every year. We certainly higher up to offset that at YRC Freight. During June, we'd hired over 3,000 employees so far just in 2017. Certainly, with the training of those employees, the part-time workers that we use throughout the summer months, our lowest service levels are typically in Q2. So June is typically the low point. And then you see the improvement for the remainder of the year. I don't think that's unusual in the industry as well that most carriers have that cycle.

But in terms of making the comparison to last year or in years past, where do you think YRC stands? Or maybe another way, where do you think you stand relative to your competitors?

I think it's a level playing field and the price sometimes makes that determination of whether business stays onboard or it doesn't. Certainly, through the complicated pricing models that we're using and the number of negotiations that we do, that -- if your price exceeds your value at any carrier, then typically that's when changes are made and that's usually because someone else is cheap.

And this concludes our question-and-answer session. I would like to turn the conference back over to the company for closing remarks.

Thanks, operator. So in closing, we believe YRCW is uniquely positioned in our industry with a portfolio of 4 distinct and, we think, proud operating companies. We believe that our people, network, assets and technology, driven investments, will set us apart from others in the industry and certainly provide us the platform for continued improvement and long-term growth. So thanks again to everyone for joining. If you've got any follow-up information, please contact Tony. And operator, I'll turn the call back to you.

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