Yellow Corp (YELL) 2017 Q3 法說會逐字稿

Good afternoon, and welcome to YRC Worldwide's Third Quarter 2017 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 of Investor Relations. Please go ahead, sir.

Thanks, operator, and good afternoon, everyone. Welcome to YRC Worldwide's Third 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 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 to adjusted EBITDA on a segment bases. 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 the earnings release, and is available on our website.

The format of this afternoon's call will include an overview 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. With the color provided, when we issued preliminary third quarter 2017 results a few weeks ago, combined with today's earnings release, we'll keep our prepared comments brief before taking any questions.

We have worked diligently in recent years to reinvest in the company, with the firm belief that it's in the best interest of our customers, employees and investors. 2017 has been no exception to this strategy with the onboarding of additional revenue equipment weighted towards later in the year as we focused on successfully amending and extending the term loan that was completed in July.

We expect to take delivery of more than 1,300 new tractors in fourth quarter 2017 and first quarter 2018 for a total of more than 3,700 since the beginning of 2015, which is an upgrade of approximately 25% of our fleet. We expect to also take delivery of more than 2,400 trailers in the fourth quarter 2017 and first quarter 2018 for a total of more than 7,300 since the start of 2015.

As we look for opportunities to enhance productivity, YRC Freight is implementing a major change of operations this month. We're very excited about this large and high-impact upgrade to YRC Freight's network, and you'll hear more about this from Darren in a few minutes.

Between the current economic demand environment and the ongoing recovery efforts from the hurricanes, the economy continues to gain strength. We're also excited about yield momentum, additional new revenue equipment, the change of operations at YRC Freight and the investments we're making in our operating company's P&D and linehaul systems. We intend to stick with our strategy to improve price, freight mix and profitability.

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

Thanks, James, and good afternoon, everyone. For the third quarter 2017, the company reported consolidated operating income of $40.1 million compared with $38.8 million in the third quarter 2016. The year-over-year results were favorably impacted by a 2.4% increase in revenue, primarily due to higher fuel surcharge revenue and yield, combined with an improvement in volume at the Regional carriers.

These items were partially offset by contractual wage and benefit increases, higher purchase transportation costs and an increase in operating expenses and supplies. On an adjusted EBITDA basis, the company reported $81.4 million for the third quarter 2017 compared to $85.5 million in the same period last year.

Turning to the financial results by segment. In the third quarter 2017, YRC Freight reported operating income of $20.3 million, which is in line with the $20.8 million reported in 2016. Adjusted EBITDA for the quarter was $42.6 million compared to $45.3 million in the same period last year.

Moving to the Regional carriers. They reported operating income of $21.5 million for the third quarter of 2017, which is also in line with the $21.9 million in the third quarter of 2016. Adjusted EBITDA for the quarter was $38.7 million compared to $40.2 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 results.

At YRC Freight, the third quarter 2017 year-over-year tonnage per day was up 0.7%. This was comprised of year-over-year decreases of 0.1% in July and 1% in August and an increase of 3.2% in September. In October, YRC Freight's year-over-year tonnage per day is up approximately 1.7%.

For the third quarter 2017, year-over-year revenue per hundredweight, including fuel surcharge, was up 3.4%, and revenue per hundredweight, excluding fuel surcharge, was up 2.4%. For the third quarter 2017, year-over-year revenue per shipment, including fuel surcharge, was up 3.8% and up 2.8% when excluding fuel surcharge.

Turning to the stats for the Regional segment. The third quarter 2017 year-over-year tonnage per day was up 4%. This was comprised of year-over-year increases of 5.3% in July, 3.5% in August and 3.5% in September. In October, the Regional segment's year-over-year tonnage per day was up approximately 4.3%.

For the third quarter 2017, year-over-year revenue per hundredweight, including fuel surcharge, was up 1.3%, and revenue per hundredweight, excluding fuel surcharge, was up 0.3%. For the third quarter 2017, year-over-year revenue per shipment, including fuel surcharge, was up 4.1% and up 3.2% when excluding fuel surcharge.

In terms of our liquidity, our cash and cash equivalents and managed accessibility under the ABL facility at September 30, 2017 was $209.8 million. As a reminder, during the third quarter, we used $35.2 million of the available cash to pay down the term loan in conjunction with the extension through 2022. Total debt has been reduced to $962.4 million, which is the lowest it has been at the company since the first quarter 2005.

Finally, regarding our credit facility covenant, through September 2017, our last 12-month adjusted EBITDA was $273.4 million and the funded debt to adjusted EBITDA ratio was 3.52x compared to a maximum credit facility covenant of 3.45x.

At this time, I will now turn the call over to Darren to discuss YRC Freight.

Thanks, Stephanie, and good afternoon, everyone. YRC Freight's 3Q operating income and adjusted EBITDA were fairly consistent with last year's results. Yield and tonnage were positive year-over-year for the second straight quarter, with Q3 2017 revenue per hundredweight, excluding fuel surcharge, up 2.4% versus prior year, which sequentially is a 130 basis point improvement compared to the same metric in Q2 2017.

In October, we continued to see positive yield compared to a year ago. As mentioned on previous calls, moving the yield metric can take time, and we are very encouraged by the momentum we have in this area of our business. We believe this is due to specific actions we have taken as a company, in addition to strong overall freight industry pricing trends.

Q3 customer negotiations averaged price increases of 4% to 5%. Year-over-year, tonnage per day improved 0.7% for Q3. And as you heard from Stephanie, September was the strongest month of the quarter at 3.2%, with October tonnage up 1.7% per day compared to 2016.

The change of operations that James mentioned and that we discussed on our earnings call last quarter has been approved and will be implemented the weekend of November 11. As a reminder, this network enhancement adds volume capacity to YRC Freight's network, with nominal facility expenditures required since we are essentially increasing the utilization of dock doors at our existing terminal.

The network design is expected to improve productivity and reliability. Additionally, we will be implementing the use of more flexible utility employees and adding meeting terms that will reduce layovers and hotel stay and allow more of our drivers to return home within the same trip.

In closing, the yield and tonnage momentum balance we are experiencing, along with the additional capacity created and efficiencies we expect from the network enhancing change of operation, continues to give me confidence that YRC Freight is moving in the right direction. I appreciate the contribution of our employees at YRC Freight, who persevered and worked safely through the adversity of the hurricanes of Q3 and stayed focused on our customer.

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

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

James, first question, can you guys quantify at all what you think the hurricane did to Freight and Regional? I'm assuming it hurt Freight more so than Regional. But can you give us some context on what you think it cost you in terms of dollars?

Sure, we'll give it a stab. And you're right, it definitely hurt our YRC Freight a lot more than it did the Regional. Only Holland had a couple of facilities in that area. And we spent some time trying to quantify -- excuse me, quantify it, Brad, but it's really hard to just get it down to a specific dollar. But we certainly believe it's in the low double-digit of millions range at YRC Freight. If you think about their length of haul of 1,255 miles and having freight stacked up all over the entire country and in their network and how they had to gradually get it down to that area. And the time of -- the effort that it took to re-handle a lot of freight or having to call every customer once it got there, having to use expensive purchase transportation, short-term rentals, lost revenue opportunities. I mean, we certainly know that it had a bigger impact at YRC Freight.

And yes, so we could see that in sort of some of the rentals and PT, I guess.

Absolutely.

And then of course, you had roughly 1.5 less working days. The point I want to get to, the results were pretty similar to a year ago, with what seemed to be some more headwind. So what do you think is on the positive side that was driving these results to be fairly similar, at least at Freight from a year ago with the hurricane in addition to fewer working days. Because I imagine some of the linehaul optimization is starting to help. But anything specifically you can call out?

Yes, really the biggest driver of our improvement is on the yield side. There's really nothing that we could do operationally or from an investment of technology that will drive our results like yields. So with capacity tightening, other carriers pushing the yield button, it's certainly been a good opportunity for us to do the same thing. And more importantly, take the opportunity to look at our freight mix on a continual basis, adjust out freight or raise prices at Freight that's just not meeting our needs from a profit standpoint. And so yields have been really the main driver that's allowed us to hang tough and have some general improvement here and there.

And then if I can ask, maybe this is for Darren. The change of operation -- and I think most of us understand this will add some additional capacity. I don't know that we're as focused on YRC needing additional capacity. We're probably more focused on improved profitability. Can you put into context what type of savings this might provide as opposed to just may be some of the comments on the capacity that this will allow you to have?

Certainly. From the aspect of having the 8 additional facilities, when you think about a shipment in our network and the path that it travels through our network, having 8 additional facilities around the country rather -- in addition to the 23 we've already got, it certainly creates density and reduces miles, which drives that linehaul profitability in the largest segment of our expense category. The other piece is the enhanced productivity. These facilities will be more productive and have a faster time through Freight than our current facilities. That's where the big efficiencies come from on the cost side. The other piece is, you've got to consider our Accelerated service and the higher revenue per hundredweight that it carries and these additional 7,000 shipments a day that these new facilities from a capacity standpoint provide, allow that service to keep expanding. It's certainly grown greater than our expectations, and we want to make sure that our network is prepared for what comes in '18 from that aspect.

A little bit more color on that, Brad. This is James. I'm very excited about the change because it's going to allow us to take, as Darren said, some freight out of them, some large and unproductive facilities. For example, in Harrisburg, Pennsylvania, we'll be able to go from 1 -- or 2 docks down to 1 dock. In Dallas, Texas, we'll be able to go from 2 docks down to 1 dock. And inefficiencies of running a 2-dock operation are not good. And so I think, just being able to put freight in these other facilities that will have a higher dock bills per hour handling ratio is going to be a big benefit to our ship rate and give us some more consistent service offering, I think.

The next question will come from Amit Mehrotra of Deutsche Bank.

So I wanted to ask just about the sequential movement in earnings or cash flow -- or EBITDA, rather, from the third quarter to fourth quarter. At least, what's implied by the new guidance. I understand, obviously, the extraordinary headwinds in the third quarter. But I guess I just would have expected to see some sequential uptick as some of those disruptions reverse. If you could just kind of walk us through the sequential walk, I'd appreciate it.

Yes, Amit, this is Stephanie. So if we think about the fourth quarter and we think about the impact of the hurricane, we're still -- well, I guess, into October, we were still trying to get equipment back in the proper positioning and making sure that the shipments were back at their rightful terminals for delivery. So we still had a little bit of overhang from the hurricanes in early October. Additionally, if we think about where we're at from an equipment perspective, that equipment shortage won't automatically just disappear in the fourth quarter. So those short-term rentals will hang around into the fourth quarter, especially if capacity continues to tighten. And so those things will continue into the fourth quarter as well as we'll continue to manage through one of our Regional operating companies, who isn't operating very well. We'll continue to manage through that. So we've still got some headway -- winds running into the fourth quarter. But hopefully, we can get those taken care of and behind us as we move into 2018.

Okay. And then can you just update us when all the revenue equipment is actually going to be delivered? I know you mentioned end of this year and early next year. Is that a January number? And you're kind of on a good position to prospectively go from there? Or just any thoughts around when that final delivery will happen?

Well, we'll continue to invest in revenue equipment as we move through 2018. But the 1,300 that we mentioned on the call, a big chunk of that, I think will come in December and then another big chunk in February and March. So it will kind of be spread out over the next 4 to 5 months here in kind of a couple of big chunks as we move through the next 2 quarters.

Okay. And then just one from me as a follow-up. You guys talked about the $25 million of efficiency or I guess, cost reduction earlier this year. As we kind of -- I think most of that was in Freight. I think there was about $10 million or so in Regional, if I remember correctly. But as we walk from '17 to '18, can you just talk about how much of that will actually be incremental? Because I guess you started implementing that this year. And then I guess you'll have some reversal -- hopefully, some reversal from the hurricane impact. Hopefully, there won't be another type of event next year. But can you just talk about, I guess as you start '18, what kind of tailwinds on a year-over-year basis to the bottom line do you see from just those 2 items cycling through?

So, Amit, we'll have that $25 million of cost savings at full speed for 2018. That will continue to carry on. Those were hard dollar savings that won't find themselves back into the income statement. The other thing that we have to think about for 2018 is the wage and benefit increases. The wage increases April 1, benefit increases for the union, August 1. All in, both of those together, it's about a 3% increase in wages and benefits there. So those are the big headwinds for the year.

Amit, this is James. Let me jump in and give a little more color why I'm excited about 2018. We have volume about where we want it. And so we're going to be working even harder on yield as we move forward here. That major change of operations at YRC Freight, I have a lot of high expectations for that. Missed the equipment that you've -- the equipment question you asked us a second ago, which is a good one. We're just looking at the fuel mileage we were getting on these new tractors coming in versus our older fleet. And that's going to be a good positive effect on the company based on the number of miles we run. Better fuel mileage, less maintenance expense, which is something that hurt us in Q3, a certainly better safety technology, downtime, better service, better driver morale. And so capacity is tight out there, and we think there's more opportunities for us to work on that side and grow as we want to. We can always bring on new business, but it's going to have to be at the right price. In the current environment, we think certainly, it allows us to adjust the business that's not meeting our profitability goals and our goals. And we even have some large customers that are trying to lock up some capacity right now based on what they're seeing in the marketplace. So just to tell you again, we have a very good balanced environment for yield and growth. And then finally, I would tell you that we're not too far from entering the harvest zone for some of these technology investments that we're making -- that we've been making for some time. So when you add that up and counter that with a couple of the headwinds, we think that '18 is going to be a good year for us.

Yes, thanks for that. It certainly does seem that the run way, I guess, for the first time in a while has been -- is somewhat clear for you guys and especially as you enter '18. So I wish you the best of luck in, I guess, executing on that opportunity.

The next question comes from David Ross of Stifel.

James, that was a good lookout into 2018. But as you look back through 2017, you're here in November now, what would you say has gone better than you expected this year? And aside from the hurricanes, what has been worse than expected this year?

Yes, I certainly think that the yield momentum that we've got underway at this point is positive. I'm happy with that. Disappointed, quite frankly, with our productivities across all 4 operating companies. We've just haven't made the move there that we wanted to make, we thought we could make. Certainly, not having the right mix of equipment at times has hurt that. Short-term rentals has been a big drag on us that we weren't anticipating. The maintenance has been higher than we thought. And as we all know, our equipment is older than what we would like. But we're committed to keeping the equipment safe out on the road for the public and our drivers, and that has cost us more money than we had thought. But the other thing that I like about '17 is we gained some new business that we like, and we've had the opportunity to adjust some business out that we didn't like. So there's a lot of puts and takes that are good and bad. Overall, I'm not thrilled with the year but not totally disappointed with it either.

And when you talk about productivity not coming in line with expectations, is there any specific area, whether it be dock, P&D, linehaul that is more troublesome or not as easy as you would have thought?

I'll let Darren comment on this as well. But I think we've had issues and opportunities and challenges in all 3 of those. A lot of the 3PL business we do is one bill-type pickups and that hurts our productivities a little bit. Plus we continue to see a lot of pressure from some of our larger retail accounts to help them with that residential delivery, and that's not good for productivity. And then the linehaul with again some of the equipment mixes, some of the expensive use of purchase transportation has been a bit of a drag. But those are few of my comments. But there's opportunity that we have in all 3 of those that, again, excite me for the future based on some of the technology that we think is going to start to come alive in '18. But Darren, any thoughts on that?

Yes, absolutely. David, and it is a mixed bag from what James said. At YRC Freight specifically, our pickup and delivery performance we're proud of. In 2017, that's been a win. When I think about the things that are going right and things that are going wrong, I think about 2017 in terms of the really big project implementations that YRC Freight has taken on. And that also is part of my encouragement around 2018. but when you think about the linehaul piece that we did with Optym, the pickup and delivery systems with Quintiq, our network enhancement through SYSNET and this large change of operations that's happening in just a few days, all of those together are the big steps in '17. And also where the efficiencies in '18 are going to come from. But at YRC Freight specifically, we struggled with our dock production more than we have together. From a period load average standpoint, that's a large financial metric for us internally. Those numbers are positive year-to-date. But in Q3, there was a struggle because of the equipment mix. And what James means by that is, when we take on rentals, you can't rent 28-foot trailers, we have to rent 53-foot trailers, and you lose that acute utilization and efficiency by running those 53s versus the set of doubles.

That's very interesting. I wasn't aware about the 53-rental challenge. If you look at the fleet count, you ended 2016 with 14,300 tractors between Regional and National. How many tractors do you have today in the fleet? And what would that number look like if you were able to get rid of all the rentals and do all that with your own equipment?

That's still around 14,000 as I recall. Stephanie? We still have about 300 rentals, I can't remember for sure. We'll get back to you on that. But we still have around 300 rentals.

I think that's right, too.

Short-term rentals.

And last question, Stephanie, on the liquidity side. It seems like the lowest number in terms of availability that we've seen in a while. Can you remind us of any restrictions in the liquidity covenants? I think, they were wiped away in the last negotiation. But how you view liquidity? And where you are and where you want to be?

Yes, great question, David. If you remember correctly, in the fourth quarter of 2016, we made a $40 million debt pay down and then in the third quarter of 2017, we made a $35 million debt pay down. So just in the last, call it, 9 months of the year, we've paid down $75 million of debt. That kind of helps bridge the gap between the $290 million and the $210 million of liquidity. We still feel good about the $210 million and feel like we've been given the opportunities that we needed throughout the year, either to pay down debt or to purchase or lease equipment. So you know, as we've said in the past, $200 million of liquidity is kind of our sweet spot. And we'll continue to manage around that number.

Okay. So $200 million is where you want to be. Do you have a minimum number that you don't want to go below?

Of course, I'd say $200 million as I sit here as the CFO. But we can let that number get in the $150 million, $125 million to $150 million if we have to. Remember, that first quarter is the cash stock for us with revenues being down and that being a huge outflow of cash for licensing, those kinds of things in the first quarter. So first quarter gets a little lower than we would like, definitely lower than the $200 million. But then we start building cash in second and third quarter.

Okay. But more is better? Or is there...

More is better. More is absolutely better. More trucks. But you know, if you think about the amount of tractors that we're going to bring online here in the fourth and first quarter, that's going to be a pretty good suck on liquidity. So we manage it tightly.

Well, at least at all, it should help the EBITDA portion of the leverage ratio.

That's exactly right.

And our next question comes from Scott Group of Wolfe Research.

Can you say what the -- with the October tonnage numbers, what's weight per shipment up in Freight and Regional?

For October? We don't have those stats at this point in time.

I'd say it's similar to up just a bit versus third quarter. It's not going down.

So you're seeing a pickup in shipment counts, not weight per shipment?

No, I'm saying weight per shipment is as good or maybe perhaps a little better in October than it was the third quarter.

Okay, okay. Can you say if New Penn was profitable or not in the third quarter? And what kind of drag on Regional OR do you think New Penn is right now?

Well, number one, we don't report individual opco results in that Regional segment. But I can tell you we're very positive on the New Penn brand. One of the challenges that we had at New Penn is they were lagging, really the technology that the other 3 operating companies had in place and we spent a lot of time, energy and effort to implementing about 7 projects this past year. And I think it got them a little focused off their day-to-day business just a bit because we were changing so many things. But I feel good about the recovery plan, feel good about the president-hired [Mosier], like the direction that we're already headed there. But the environment that we're in from a yield perspective and business opportunities, I think you'll see New Penn rebound next year.

No, no. I mean, that all makes sense. I'm just trying to get a sense of where the other 2 seeing -- I mean your margins at Regional were flattish, down 20 basis points in the quarter. Were you seeing good improvement at the other 2? And just one fell out of pressure and you've got a plan to fix it? Or is that not the way to think about the third quarter?

Certainly, the other 2 Regional companies operated better than New Penn, I can say that. And yes, we do have a plan in place that we think will fix New Penn, with just what I mentioned a minute ago.

Okay. Stephanie, can you just walk us through, what is the CapEx -- it would helpful if you had the cash and then the CapEx equivalent number for '17 and then your view on '18?

So if we think about the projections that we've given throughout the year, we expect CapEx to be -- and including CapEx equivalent, to be at that 6% to 8% of revenue so, call it, $250 million to $300 million of CapEx equivalent. As we move forward, and we continue to refresh the fleet, we know that the industry average is 5%. We know that we have more work to do than just to be average. So we'll probably still push the higher limits of that, probably in that 6% range as we move forward through 2018 and probably beyond.

Okay. And then -- so most of this is in leases. What's the -- is there a good number to just think about the rent expense of that or the drag on margin next year, with all the new equipment coming on?

Yes, it's probably...

I understand there's benefit from the equipment. But I just want to understand just the financial impact of the leases on operating income.

Yes, that rent expense is probably an additional, probably 1% to 1.5%, maybe 2% of additional lease expense there. And if we think about the magnitude of leases that are coming on here in the next 4 to 5 months, it will be probably in that 1.5% to 2% range.

1.5% to 2% of what?

Of additional costs as we think about how much lease cost that we have today.

Okay, relative to current leased cost?

That's exactly right. Yes.

Okay. Great. And then just last question. So for the covenant, if I'm -- I think the covenant gets all tougher in the fourth quarter. There's not like a ton of cushion there. Are you in any -- can you say if you're in any discussions with the banks to get another amendment? Or are you comfortable you don't need one?

At this point in time, we are comfortable that we don't need one. The projections we gave more than get us above that covenant range. And we'll continue to manage it as we move forward.

And now we have a follow-up question from Brad Delco of Stephens.

Stephanie, maybe just to follow-up quickly on what Scott just asked. The 1% to 2% of additional rent expense, is that as a percentage of revenue? Or are you just saying from what the expense is now, it will be up 1% to 2%?

From what the expense is now.

Okay. I just want to make sure that I clarified that. And then, I noticed below the line there was $10 million of other expense. Can you -- what was that?

Yes, so as part of the term loan extension, we had to expense some of the costs related to that. So that was about $7 million of expenses related to the term loan that were expensed as part of the accounting of that extension.

Okay. So kind of non-recurring in nature, I guess, it's fair to say?

You bet.

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

Okay. Again, to summarize, we're certainly optimistic about improving our fourth quarter performance compared to a year ago, and we're excited and looking forward to what should be a solid start in 2018 for the trucking industry. So we appreciate all your time and interest in the company, and have a good rest of the day. Thanks.

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