Yellow Corp (YELL) 2018 Q3 法說會逐字稿

Good afternoon, and welcome to YRC Worldwide's Third Quarter 2018 Earnings Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Bri Simoneau, Vice President and Controller. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to YRC Worldwide's Third Quarter 2018 Earnings Conference Call.

Joining us on the call today are Darren Hawkins, Chief Executive Officer of YRC Worldwide; Stephanie Fisher, Chief Financial Officer of YRC Worldwide; and T.J. O'Connor, President of YRC Freight.

Before we begin, I must remind you of the inherent uncertainties in any forward-looking statements in our discussion this morning. 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. This format of this call does not allow us to fully discuss all of these risk factors. For a full discussion of the risk factors that could cause the results to differ, please refer to this morning's earnings release and our most recent SEC filings, including our forms 10-K and 10-Q. These items are available on our website at yrcw.com.

Additionally, please see today's release for reconciliations 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 the earnings release and is available on our website.

The format of this morning's call includes an overview of the third quarter from Darren, followed by Stephanie, who will discuss our financial results, and T.J., who will provide an update on YRC Freight. Following their prepared remarks, Darren, Stephanie and T.J. will be available for a question-and-answer session.

I'll now turn the call over to Darren.

Thank you, Bri, and good morning, everyone. For third quarter, our LTM adjusted EBITDA improved $15.8 million to $289.2 million, the highest level in nearly 2 years, which reflects the continued execution on the strategies we laid out at the beginning of the year.

Our focus has been on yield discipline, reducing expensive local purchase transportation and exiting short-term rentals. We saw positive progress in all 3 of these areas during the quarter. The strong trade environment has served as a catalyst for solid yield expansion as each of our segments continued to execute on improving freight mix, while also driving price, which are evidenced by our contractual rate increases averaging approximately 7.4%. And the deployment of dimensioners throughout our company continues to protect these positive trends. Looking into October, these pricing trends remain strong.

As I stated in the past, as long as our companies are in the band of slightly negative to slightly positive tonnage, we will continue to prioritize price over volume to ensure we maintain optimal mix in our network, while balancing our revenue equipment and drive our capacity to meet the supply chain needs of our 250,000 customers.

On a segment basis, YRC Freight reported its sixth consecutive quarter of positive year-over-year increases in revenue per hundredweight, excluding fuel. As you'll hear from T.J., YRC Freight had positive expansion in revenue, revenue per hundredweight, revenue per shipment, operating income, operating ratio and adjusted EBITDA.

The Regional carriers reported their highest year-over-year increase in revenue per hundredweight, excluding fuel in more than 10 years. However, our largest regional carrier with a footprint and one of the most competitive driver hiring markets in North America was forced to turn away profitable business due to capacity constraints, which, along with fleet maintenance, negatively impacted the overall Regional segment results.

Our Regional companies have invested in additional recruiting resources, including dock-to-drive programs, internal driving schools, military recruiting partnerships and CDL tuition reimbursement. The fleet is always the underlying story. We continued to make solid progress on the reinvestment for tractors and trailers in Q3. Through the first 9 months of 2018, we have taken the liberty of more than 1,000 tractors, the majority of which benefited the YRC Freight segment and provided operational improvement in our Q3 results.

We expect to take delivery on another 300 tractors in the fourth quarter, which are being deployed at our largest regional carrier to offset the rise in maintenance expense. We've also taken delivery of more than 2,300 trailers with another 1,500 expected to be delivered this year.

As a reminder, our new tractors come with enhanced safety equipment and generate positive returns due to improved fuel mileage, lower maintenance expense and enhanced driver satisfaction, while driving short-term rentals out of our networks.

On the labor front, we are in the fifth year of a 5-year agreement that expires March 31, 2019. As a reminder, we renegotiated our largest debt instrument in the third quarter of 2017 and extended the maturity date to July 2022, which separated the maturity of the loan from the expiration date of the labor agreement.

We have not formally started negotiations, but anticipate that occurring later this year or in early 2019.

In closing, we expanded revenue while executing our yield strategy. While generally in line with expectations, we incurred unfavorable adjustments primarily associated with a single significant third-party claim and higher-than-expected vehicle maintenance, which we address with the on-boarding of new equipment.

I would like to thank our nearly 32,000 employees for placing safety-first in everything they do and for their continued loyalty and dedication to deliver award-winning customer service. With these comments, I will now turn the call over to Stephanie for a review of our financial results.

Thank you, Darren, and good morning, everyone. For the third quarter 2018, YRC Worldwide reported consolidated revenue growth of 4.2% or $1.3 billion, which is up from the $1.25 billion in the third quarter 2017. Operating income was $41.2 million, which included a net loss on property disposals of $1.9 million. This compares to operating income of $43.4 million, which included a net loss on property disposals of $1.3 million in the third quarter 2017.

On an adjusted EBITDA basis, the company reported $84.2 million for the third quarter 2018 compared to $81.4 million for the same period last year. The earnings release and presentation issued this morning includes segment financial information and statistics. Therefore, I will keep my segment comments focused on a few key third quarter stats.

At YRC Freight, the third quarter 2018 year-over-year tonnage per day was down 4%. This was comprised of year-over-year decreases of 3.8% in July, 3.1% in August and 4.9% in September. Preliminary results for October indicate YRC Freight year-over-year tonnage per day was down approximately 7%. For the third quarter 2018, year-over-year revenue per hundredweight, including fuel surcharge was up 7.1% and revenue per hundredweight excluding fuel surcharge was up 4.8%. The year-over-year revenue per shipment, including fuel surcharge, was up 6.8% and up 4.4% when excluding fuel surcharge.

In terms of October tonnage, it's important to note that the decline is largely influenced by our truckload shipments, which are showing a year-over-year tonnage decline for the first time in 2018. While shipments over 10,000 pounds have a meaningful impact to our tonnage statistics, our shipment per day trends are consistent with the 3 prior quarters in 2018.

Turning to the stats for the regional segment. The third quarter 2018 year-over-year tonnage per day was down 5%. This was comprised of year-over-year decreases of 6.3% in July, 3.4% in August and 5.4% in September. Preliminary results for October indicate the regional segment year-over-year tonnage per day was down approximately 6%. For the third quarter 2018, year-over-year revenue per hundredweight including fuel surcharge was up 8.5% and revenue per hundredweight excluding fuel surcharge was up 6.3%. Year-over-year revenue per shipment including fuel surcharge was up 10.6%, and up 8.4% when excluding fuel surcharge.

Overall, our operating performance is consistent with our expectations. Growing yield while minimizing third-party transportation costs. As Darren noted, we expected volume declines in our networks as we worked to manage our fleet mix for profitability and address capital reinvestment to our fleet and driver capacity constraints that are affecting certain markets.

Having said this, I want to address our performance with respect to operating income. On the positive side, we successfully executed on our commitment to reduce the usage of local purchase transportation and short-term rentals for revenue equipment, which resulted in a decrease of $6.2 million for the third quarter compared to the same period in 2017.

Offsetting this progress in purchase transportation are unfavorable adjustments on third-party claims for the third quarter 2018 resulting in an increase of $5.5 million as compared to the same period in 2017 and unfavorable vehicle maintenance expense of nearly $2 million for our regional segment as most of the new tractors placed into service in 2018 went to YRC Freight.

Finally, as it relates to operating income, our results reflect increased costs for the third-party customer specific logistics solution. It's important to note that these services result in incremental margins and our expansion of our existing logistics business to address the increasing complexities of our customers' supply chains and [evolving] business requirements. In the environment that we operate in, our customers are looking for a suite of solutions that complement the LTL services we provide.

Additionally, during the third quarter 2018, we incurred a nonunion pension settlement charge of $7.2 million at YRC Freight. We expect an additional charge in the fourth quarter ranging from $3 million to $7 million, based on projected lump sum for the remainder the year.

Moving to liquidity, our cash and cash equivalents and managed accessibility under the ABL facility at September 30, 2018, was $225.2 million, which is an improvement of approximately $15 million from the end of the third quarter 2017.

The company's total debt at the end of the third quarter 2018 was $904.4 million, which is a reduction of $58 million compared to a year ago.

Consistent with Darren's earlier comments, we are committed to reinvesting our fleet and during the third quarter we spent $45.9 million on capital expenditures.

Additionally, we entered into new leases for revenue equipment with capital value equivalent of $32.2 million for a total of $78.1 million or 6% of operating revenue. Regarding our credit facility covenant, at the end of the third quarter 2018, the last 12 months consolidated adjusted EBITDA was $289.2 million and the funded debt-to-adjusted-EBITDA ratio was 3.13x compared to a maximum credit facility covenant of 3.5x. The covenant maximum remains at 3.5x through the end of 2018. This week, YRC Freight closed on the sale of 1 of 2 docks at their Harrisburg, Pennsylvania facility. Harrisburg remains a critical location for YRC Freight. However, due to the network enhancements that were implemented in 4Q '17, the operations at Harrisburg are now managed on only 1 dock. The sale generated approximately $31 million in net cash proceeds and our fourth quarter operating income and adjusted EBITDA results will reflect a property gain of approximately $29 million. This gain will not be excluded from our adjusted EBITDA as we have continuing operations at this facility on the remaining dock. Net proceeds from the sale are first offered to our term loan lenders, which will reduce future required principal payments for the near term.

At this time, I'll turn the call over to T.J. to discuss YRC Freight.

Thank you, Stephanie, and good morning, everyone. In the third quarter, YRC Freight reported year-over-year increases in revenue, operating income, operating ratio and adjusted EBITDA with adjusted EBITDA reaching the highest third quarter level since 2007, 11 years ago. We obtain customer contract increases averaging 7% in the third quarter, which reflects the overall strength of the freight industry as well as our continued efforts to secure the right kind of business at the right price for our network.

Our current business levels, along with the receipt of new tractors, have allowed us to make meaningful reductions in our use of expensive local purchase transportation, virtually eliminating short-term tractor rentals while improving our fuel efficiency and reducing our vehicle maintenance costs. We are encouraged with our earnings growth, which would have been stronger if it had not been for a single third party claim, which occurred in 3Q. Similar to last quarter, while our overall tonnage was down in the third quarter, we experienced year-over-year growth in shipments over 10,000 pounds due to the tight truckload market and efforts of our sales force to secure this business. As a reminder, although the absolute number of truckload shipments handled remains a small percentage of the overall shipments, the much higher weight for shipment in excess of 14,000 pounds can have a meaningful impact on the revenue metrics we report. While unfavorably impacting our overall revenue per hundredweight results, the increase in volume shipments had a positive impact on our tonnage and revenue per shipment statistics.

We remain confident that we are placing the volume shipments appropriately for them to be profitable and also to assist in balancing the YRC Freight network.

As stated by both Darren and Stephanie, we made good progress on replenishing our trailer fleet in 3Q and have now received over 2/3 of our orders for the year.

Looking forward, our focus will remain on executing the strategic initiatives of enhancing safety, service, efficiency and quality as well as driver hiring. I'm pleased with the progress we're making and remain confident in our continued improvement. I would like to thank all members of the YRC Freight team for their continued efforts to meet our customers' needs and expectations each and every day. Thanks for your time this morning. We'd now be happy to answer any questions that you may have.

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

I guess, I just the real big question I think on most people's minds is we're in one of the strongest LTL environments we've seen with yields, and we haven't really seen the margin improvement or the operating or EBITDA performance I think that most were expecting. So I know there've been some puts and takes on the local PT, on rentals, on third-party claims and on maintenance, but at the end of the day, how can we have some visibility on this really strong yield environment driving margin improvement and earnings growth?

Brad, this is Darren and I'll start out with that and let Stephanie jump in as needed. Certainly, the yield piece we're proud of, that initiative has played out like we described. As I mentioned in the script, the fleet is certainly always the underlying story of our company. We've made a lot of progress there this year and moved faster than we have and certainly this environment has allowed that with the over 1,000 tractors that we brought in. From a maintenance perspective, YRC Freight showing good progress in that area and outside of the significant claim that we mentioned, YRC Freight had good progress in Q3. From a regional perspective, certainly, driver hiring is a focus there, but also the tractor and trailer situation caught up with us as the largest regional carrier, which we're correcting as we speak with the 300 tractors that's coming into their networks. With the EBITDA margin, we see at the regional carriers and the value proposition they bring, I've got a lot of confidence there in what we're doing and certainly, with the additional insertion of tractors and trailers, it makes all the difference. But if you were to say, what is the main difference between us and some of the other competitors in the market is, our fleet is older than we would like, and we're on a dedicated mission of changing that as quickly as we can.

Okay. And Stephanie, did you want to comment at all on that?

The only other thing I would add is to help on Darren's final point on CapEx is that, as we continue to move into 2019, we're going to continue on this cadence of additional equipment into the fleet, both at the regional segment and at YRC Freight to help alleviate the vehicle maintenance issues, any additional purchase transportation we experience from short-term rentals, that started in third quarter last year. We really got a good handle on that here in 2018, and now we'll continue to focus on the vehicle maintenance expense with additional equipment. So this will be a cadence that you'll continue to see as we move into 2019 as well.

Okay. And then, Stephanie, I just want to touch base on something you said. You said there would be a $29 million gain in the fourth quarter and that would not be excluded from adjusted EBITDA?

Yes, that's correct. So according to our term loan adjusted EBITDA definition, property gains and losses from properties that have continuing operations are not an exclusion. And so therefore, it will be part of our adjusted EBITDA calculation in the fourth quarter.

Brad, and just to elaborate a little further on that from the Harrisburg, Pennsylvania standpoint, that was one of the largest facilities in YRC Freight's network, and you'll remember when we did the network enhancement in 2017 and opened additional sort centers, that relieved congestion and pressure at Harrisburg. We went into some detail back then about the inefficiency of operating a single facility with 2 separate docks. We also gained efficiency at the larger dock that we still operate out of and use in Harrisburg.

The next question will come from Scott Group of Wolfe Research.

So is there a tonnage level where you say, hey, we've gone too far on price and we need to sort of soften that because we can't have tonnage down 7%?

Yes, when I talk about that narrow band, Scott, and especially when we look at what played out in October, the tonnage decline was larger than what we've been seeing, but that was in the truckload category. The shipments stayed consistent with where we've been throughout the year. Certainly, with our recapitalization plan, we're going to continue to prioritize price over volume.

And so we've had 3 LTLs report so far and they're all seeing weaker tonnage, slower tonnage in October. At some point, you guys think slower tonnage leads to slower pricing for LTLs, or when do you get -- start to worry about sustainability of some of these pricing increases that are obviously really good right now?

Certainly, we see October with the same strength that we saw in Q3, that hasn't let up any. We see our peak in the fourth quarter, the second week of November through the second week of December, that's largely been the case for the last 4 or 5 years with our increasing exposure to e-commerce. I feel good about where we're at, what's in front of us, the pricing discipline that we got in play. I think a lot of that comes as much from the full deployment of dimensioners. In the past, we would see decline quicker, now we've got such a clear view of the actual pounds per cubic foot for shipments that are moving in our networks, that we're able to stay very consistent with pricing and also, as we bring on new business, we know right away whether it's contributing like we planned, and we address that much earlier in the shipping cycles with our customers. When I look at the volume of negotiations that we've done this year, it gives me confidence just because of the large majority of those in the second half rolled all the way through the second half of next year, it -- the LTL side of the business still feels firm to us.

Okay. When I think about this truckload rated freights sort of going away again, is this better or -- higher or lower-margin business than your LTL -- traditional LTL freight?

Typically, the heavier weight shipments we handle come with nice margin because we are pricing those based on empty lane movements in our network, and they have a high contribution to our overall efficiency. So the point T.J. was making in his statement was just that. At our national carrier, it makes a nice positive contribution. And typically, even when the truckload market is not as tight as it has been, we're successful in securing those loads on a spot basis as with the number of customers we've got doing business with our companies. We have a high level of quoting activity on our spot markets on a daily basis, which typically provides value to the customer and is a very nice complement to our network.

So with that in mind just big picture, if we have -- if next year is a year of mid-single digit yield, with mid-single digit decline in tonnage, is that an environment where you think margins and freight will improve?

I really like the position YRC Freight is in and when I mentioned with Brad about the equipment, the fleet always being the underlying story, that's just that. What I'm seeing going on at YRC Freight right now just with the injection of the large number of tractors and as Stephanie mentioned that we're going to stay on that cadence, it really makes a big difference for them. I'm excited to see that same game plan play out at the regionals over the next 2 quarters and the fleet's the underlying story and with what we're doing in that area and launching these into our linehaul networks gives me a lot of confidence about 2019.

Okay. Wanted to just ask so there's talk about potential labor disruptions at UPS freight. Are you hearing anything from the customer about maybe moving some business your way? Do you think that the business is going to want to move -- if there is business moving around, do you think it's going to want to move to another union carrier? Are there customers that would just like to deal with unions and so you have the first shot at that business?

Well, certainly we've seen this movie before and specifically with us involved, so I won't comment specifically on what's going on there. I will say that from a timing aspect, October is -- when you go way back, October used to be one of the peaks of the year; it's no longer the case. E-commerce and changes in the industrial economy overall have changed that. October is typically a month now, for the last in modern times, last 6 or 7 years, where LTL carriers get an opportunity to really get their networks reset after the summer and after all the employees are back from vacation. We get in a good level set. We typically get into some good efficiency in October because our networks are running much smoother. So from a timing aspect, there is some capacity at YRC Worldwide. And even when I mentioned about our largest regional carrier, their network is current, and they're capable of handling additional shipments and tonnage. So when I look at the position we're in, if there were to be -- if next week were to be busier than it normally is, the YRC Worldwide companies are in a decent position to handle that. Now I will say nothing changes with our pricing philosophy, our focus on not bringing a lot of short-term rentals into our network from a tractor and trailer perspective. We will be very disciplined around our network and not exposing our sales to expensive short-term rentals. There's been such nice progress last quarter in that area, I'm not willing to give that back.

Okay. And then just last one, just real quick from me. If you're willing to share any sort of insights as you prepare for your labor negotiations. Should we think that -- is the goal more about maintaining prior concessions from past deals or is the goal about winning additional concessions?

Yes, I'm glad you brought that up. It actually allows me to address it publicly. And what I said in the script is our only comments. Naturally, that's not something we will talk about publicly while we go through the process and address that with what I can say at this time, and we anticipate those negotiations beginning either late this year or the beginning -- early beginning of next year.

And the next question will come from David Ross of Stifel.

So back on the equipment side. Darren, you mentioned keeping up the same cadence on equipment. Does that mean about 300 tractors per quarter, is that what's going to be added in 4Q, so would that be the, I guess, quarterly delivery expected in the next year?

I'll let Stephanie address that one, David.

Yes, as we look at our 2019 plan for CapEx, it's about 300 a quarter give or take, and we're trying to be diligent about making sure that, that gets both at YRC Freight and the regional companies. Obviously, the YRC Freight will be taking more just due to the size of their network.

And do you have length of haul in the quarter?

It is T.J. So length of haul for the quarter year-over-year was up 5 miles, 1,276 versus 1,271.

And I guess, Darren, if you could go back to the IT rollouts in the Optym and the Quintiq and the efficiency gains that you've been talking for a couple of years. Where do we stand on that? Don't seem to be seeing a lot of the benefits. Is that to come or there have been holdups?

Yes, great question. That -- the lion share of that investment is at YRC Freight and I'll let T.J. comment on that. I'll just say that from a Quintiq standpoint -- as a reminder for everyone, that's our pickup and delivery technology that we've been installing at the facilities. T.J. will have close to 100 terminals up and running by the end of the year on the Quintiq technology, and in Q3, even though we don't report out on individual operating internal metrics, that pickup and delivery progress at YRC Freight was part of their success, especially in eliminating that expensive local purchase transportation. From an Optym standpoint, we've been able to expand Optym's presence not only at YRC Freight, but also throughout the regional companies. And also, with a focus from a network aspect, not just on 1 individual company but on the 4 as a whole as we do interchange freight between the regional companies with each other and then also with YRC Freight. So now we've got the ability to plan for that across the entire network, not just an individual network. So both those moving nicely and YRC Freight seeing the lion share of the benefit. I'll let T.J. make a few comments as he's seeing that positive exposure in Q3.

Thanks, Darren. So David, I would say that while we'll be up to close to 100 installs by the end of this year, each install is a unique application. We don't have an off-the-shelf solution that we can deploy across 259 locations simultaneously or even sequentially. Rather, we have to understand unique customer requirements by location. So it is intensive labor work to document, standardize and implement plans to take all of those requirements into account. We're making nice progress on it. When I say that we're into close to 100 terminals by the end of the year, naturally those are smaller size terminals, so we're getting into -- next year we'll see some of our larger operations impacted by this technology. And so far, what we've seen has given us confidence that we'll see some efficiencies not just now, but as we go forward and it'll be more obvious as we get into larger facilities.

And Darren, the stock's down 21% today. So somebody doesn't like what they read, obviously. Are you anymore encouraged today than you were at the beginning of the year about the margin opportunity and what's going on at YRC Freight?

Yes. YRC Freight specifically, they were -- the progress they made in Q3, I like what I see. Outside of that, none what we believe is an unusual event that we spoke about, I think YRC Freight is in a very good position and they're in a stronger position from an equipment aspect. And that's really been a big holdup for YRC Freight. We've got very good operators in place, the network enhancements that we made at the end of 2017 have worked well and also contributed in a positive way. I see the regionals in a similar position that YRC Freight got into in the second half of 2017 from an equipment aspect, but the good news there is it gets corrected much quicker at the regionals with the injection of equipment that's coming into the network. So from where I see it, I think we're in a good position to show the progress that we've been talking about, and we still stand by our statements earlier this year that our financial performance is weighted towards the second half of the year, and we haven't changed our thoughts about Q4.

The next question comes from Amit Mehrotra of Deutsche Bank.

It's Seldon on for Amit. Could you just give us an update on your monthly tonnage fronts?

Yes, so do you want for the full third quarter or just for October?

I guess, September and October as well.

Okay. So for YRC Freight in September down 4.9% and October is projected to be down approximately 7%. And then for the Regional segment, September was down 5.4%, and October is projected to be down approximately 6%.

Okay. And I think, you mentioned earlier that you're comfortable managing like both YRC Freight and Regional and kind of like the plus or minus tonnage growth. Is this like what we're seeing in October and September a little bit weaker than where you are comfortable managing the business or is that still in the range that you feel comfortable?

Thank you for the question. And when I look at that, from a shipment aspect, and also from the health of a network standpoint, I'm comfortable where we are. Certainly, as I mentioned earlier, even though we were in some capacity constraints early in Q3, this is the time of the year where we do have additional capacity available, but we're capable of running our networks efficiently with the shipment counts that we have. So in our situation and what I've said about the fleet, we will continue to focus on the pricing side of the equation. Keep the rentals out of the network, keep the expensive local purchase transportation out of the network and gain these efficiencies from the new equipment as we go.

Okay. So could you give us just sense of like how much freight you are pushing away and what the actual underlying demand is with some of your more like profitable smaller accounts?

Well, from a customer aspect, that's one of the big advantages of our company. When you think about the 250,000 customers that we do business with, the long-term relationships we have and then also 384 facilities across North America, it puts us right where our customers want us to be. I think that's driven a lot of our success in the contractual negotiations. We bring a tremendous amount of capacity to the marketplace and the marketplace certainly places value on that, and I think they will continue to do that. From an economic standpoint, the direction of the economy always plays into service related businesses like ours, but this unique situation of the driver shortage across truckload and LTL, and I believe has gotten more into LTL this year than ever before in my career, I think that keeps things consistent for us to maintain our strategy of prioritizing price over volume and that we stay sufficient on the volume side as we just manage our networks with a cost-conscious mindset.

All right, that's helpful. And then, I guess, just looking at next year, is there -- you gave an update on the number of tractors you're bringing online, but is there a kind of like a bogey you need to hit in terms of fleet replacement to start seeing volume growth come back or tonnage growth come back and to see like really any meaningful improvement in operating leverage?

So from a tractor perspective, we just need to continue on that normal cadence of that 6% to 7% of operating revenue. Industry average's in that 5% to 6% range. So we would be a bit ahead of the industry by bringing on additional tractors and trailers. Most of that will be just replacement tractors and trailers and not really growth, but there is capacity in each of the networks today that we can find from a growth perspective.

Okay. I'll ask a little differently. I guess, when should we start to see that replacement, like the new equipment coming online, start to meaningfully translate into margin improvement?

Well, we saw that in Q3 at YRC Freight. When we bring the tractors on, there's a 15% improvement in efficiency and there is no execution risk. Those tractors go into service and go into the longest lanes immediately. So the benefit comes quickly on all these and with that cadence staying at the pace that we've done previously this year, it will drive improvement every quarter in those areas.

Okay. Could you give us a sense of just on that and I'll wrap up after this. Just how the average age of your fleet has kind of trended this year and maybe if you don't want to give specific numbers, just give us a sense of how it's changed and maybe how that should change next year, just so we can understand really like how meaningful these replacements are in terms of your entire fleet?

Yes, we don't comment on average age, it's certainly older than we would like. But I will say, the progress that we're making in our overall line haul networks. We've got a segment of tractors that are used in the pickup and delivery. We've got a segment of tractors that are dual use, that are used in both pickup, delivery and line haul. And then we've got a set of tractors that are in our line haul operation specifically. We're getting those tractors that have the exposure to the most miles replaced quickly and we've made a tremendous amount of progress on the overall percentage of miles that we run as a company on equipment that's 3 years or newer.

The next question comes from Jeff Kauffman of Loop Capital.

Quick question for Stephanie and then a couple for Darren and T.J. Stephanie, if I look through the noise in the quarter, what's the right effective tax rate that I should be thinking about for third quarter and for fourth quarter?

Yes. So from a tax rate perspective, our tax expense is impacted by state and foreign taxes, which obviously don't affect our quarterly tax rate. I think for us, with the NOLs that we have, having a normalized tax rate is probably not something that we will have as we think about the state and foreign taxes that we have. So unfortunately, without giving you a forecast I can't really give you that number, but normalized from a tax rate perspective probably doesn't exist for us.

Okay. Let me move on to the fleet and maintenance then. If I look across both the Regional and the YRC Freight, approximately how many tractors and trailers do you have in the total fleet right now?

We have 14,000 tractors and 45,000 trailers.

All right. And can you help me understand as -- let's compare, whether you want to look at it as maintenance expense per vehicle or maintenance expense per mile, whatever metric you think is right. Can you help put in perspective for me what your maintenance expense is for say a truck in its first year versus say a vehicle truck or trailer in its fourth year versus say its 6th or 7th year, just so I can get an idea of magnitude of differential?

Jeff, from my perspective, what I can share is since 2015, those numbers Stephanie gave, since 2015, we've replaced almost 30% of the tractors and 21% of the trailers. That 15% return we mentioned, that's even with a leased unit from a tractor perspective. YRC Freight saw very nice progress in lowering their maintenance expense throughout Q3. The opposite happened at the Regionals as YRC Freight got the lion share of the tractors this year. As we transition to the Regionals getting those tractors, as we speak, I expect to see that same trend there from a maintenance expense perspective and it continuing to go down.

Maybe a different way to ask it. If you replaced 30% of the tractors since 2015, is it safe to say that 60% to 70% of your tractors are still getting less than 6 miles a gallon?

We don't comment on the actual fuel miles per gallon, but when you get into the age of that category and with the majority of those being in local pickup and delivery operations, I would not argue that point at all Jeff.

Okay. And as you brought in the new equipment, have you changed the nameplates at all or is it still the same models of truck that you were buying previously?

Well, we've got -- we use several OEMs, we use Freightliner, Peterbilt, Kenworth, Volvo. We even go beyond that on some of our straight trucks and other pieces. So we've got a pretty good mix across the board. We do have a large internal maintenance group and certainly we take into account the number of different models we have in our fleet to ensure that we are not driving maintenance expense in the wrong direction by not having good consistency there.

And next, we have a question from Willard Milby of Seaport Global Securities.

Just had one on capacity, kind of touching on where Scott was going. You mentioned there is available capacity across the network. UPS is stopping their pickups as of -- for long-haul as of today or tomorrow I believe. Does it make sense to go after incremental freight like that? Is it -- do you see freight like that as long-lasting or maybe flash in the pan. Is it as you look at your network is a kind of a surge of freight from an event like this more disruptive than it's worth. Can you kind of comment on strategy-wise what makes sense?

Will, yes, I'll make a few comments and I'll let T.J. make a few comments. Certainly, YRC Freight has the most exposure here in this situation, and anytime you get a hurricane or weather disruption, one regional network that may be impacted, things like this come along where there is a lot of shipments that become available in a very short period of time. We have a priority process that we go through existing customers that come to us and make requests. And then it goes from there depending on capacity at individual terminals and other pieces. So we do have a very disciplined process that we go through to work through this event appropriately and make sure it doesn't disrupt our operations for a long period of time. I'll let T.J. make comments specifically around YRC Freight.

Well, thank you, Darren. Well our approach for this, we've had a few inquiries recently. It's really a hierarchy of how we're going to judiciously use our capacity. And certainly, the hierarchy would include honoring commitments to existing customers and those customers that ask for additional capacity beyond what we currently give them, we would be respectful of that to the degree that we can. And then, certainly we would look for -- we're not going to turn our operation inside out to accommodate a unique opportunity for a week or 2 from customers that don't have a relationship with us. So we're going to honor our long-standing relationships. We're going to work in conjunction with our customers to help them as best we can, and we've got a hierarchy setup that really analyzes each opportunity on its own merits. But there is a hierarchy and there is a disciplined approach to how we'll use our capacity in any situation that creates new opportunities for us.

And presumably, there is a volume commitment at certain prices that you guaranteed. Assuming a customer at the top of the hierarchy comes to you with more volumes, how much more incremental is the pricing say if they go above and beyond what was already agreed upon?

Well we don't really get into that, but I would tell you that in this market it doesn't make sense to do anything irrational.

Okay. And actually, one more on the new equipment. Looking to pick up the remaining tractors and trailers here in Q4, has there been any constraints from the actual pick up of the tractors. Has that limited your ability to bring in those -- bring those into the networks? It looks like I guess, Q3 maybe picked up 100 tractors with the 300 anticipated in Q4. Was there a supplier constraint that kind of limited the Q3 additions or was that more intentional?

Yes, I think that's just the way our orders were placed for the year. We got quite a few in the first and second quarter. So it's just the way the orders were placed for the year, no constraints from the OEMs.

Yes, I'll add. We ran into that early at the beginning of the year and actually used some of our drivers to retrieve the tractors from the delivery point, but that has not been the case in the second half of the year. Their networks appear to be operating well and we're getting the tractors timely.

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

Thank you, operator, and thanks, again, to everyone for joining us today. Please contact Bri with any follow-up questions that you may have. This concludes our call and operator, I'm turning the call back to you.

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