Yellow Corp (YELL) 2019 Q4 法說會逐字稿

Good afternoon, and welcome to YRC Worldwide's Fourth Quarter and Full Year 2019 Earnings Call. (Operator Instructions) After today's presentation, there will be a question-and-answer session. Please note, this event is being recorded.

I would now like to turn the conference over to Eric Berg, Vice President of Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everybody. Welcome to YRC Worldwide's Fourth Quarter and Full Year 2019 Earnings Conference Call. Joining us on the call today are Darren Hawkins, Chief Executive Officer; the newly appointed Chief Financial Officer, Jamie Pierson; and T.J. O'Connor, our Chief Operating Officer, will be available for the Q&A.

During this call, we will make some forward-looking statements with the meaning of federal securities law. The 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 therefore, actual results may differ materially. The format of this call does not allow us to fully discuss all these risk factors. For a full discussion of these 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 Form 10-K and 10-Q. These items are also available on our website at yrcw.com.

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

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.

I'll now turn the call over to Darren.

Good afternoon, everyone, and thanks for joining our fourth quarter and full year 2019 earnings conference call. As everyone knows, 2019 was a tough one for the entire LTL space with a downturn on the industrial side of the economy, which also negatively impacted tonnage and yield for the YRC Worldwide portfolio of companies. Even with the challenging backdrop, I'm proud of our accomplishments in several key areas: one, ratified a new 5-year labor contract; two, we refinanced the term loan with improved and more flexible terms; and three, we moved to a single and unified enterprise sales and operation structure that is inclusive of all our brands under one coordinated leadership team, all rowing in the same direction with the same objectives and goals.

As I've been sharing for the last few quarters, my vision and our strategy is to operate as one company with 1 network and 5 very proud brands that provide exceptional service to our more than 200,000 customers. Our customers continue to rely on us to bring value to their supply chains and have clearly indicated that we are improving their experience and providing that value. The enterprise transformation strategy remains consistent as we work through 2020 with the continuation of the following initiatives: operational optimization and structurally improving the network to increase property and rolling stock asset utilization; expand service offerings and leverage operational flexibilities gained with our new labor contract.

Next, from a technology perspective, we intend to consolidate several different company systems on to a single platform, which will in turn allow us to use one operating system with a single set of data from the same source. All with the end goal of allowing us to improve the service we provide our customers and increase the speed by which we do it.

And finally, we will continue evaluating our footprint and service areas and will rationalize the number of physical locations in the network while maintaining geographic coverage and service offerings. While we may have fewer physical locations, we will continue to cover the same geographic service areas and expect this will increase density, reduce mileage, facilities and equipment. We believe that this will be visible to our customers through continued improved service and satisfaction and should also have the added benefit of improved operating efficiencies and future financial results.

Having planned for this change for the better part of 2019, our path forward is clear and currently underway with the right team on the field in the right positions to aggressively execute the enterprise transformation strategy.

I will come back at the end with some closing comments but would now like to reintroduce you to Jamie, who will share some more details on the quarter and the year.

Thank you, Darren, and good afternoon, everyone. Before I jump into numbers and bore you to death by reading the tape. Let me begin by saying it's great to be back. It's great to see familiar faces, great to be back "home," and it's even great to be back in this crazy industry. I look forward to reconnecting with everyone, which I will shortly do after this call.

With that out of the way, let me run through the results, and we'll end with a little more color as I know that's really what you want. For the full year 2019, YRC Worldwide reported consolidated revenue of $4.87 billion, which is down from the $5.09 billion or 4.3% when compared to prior year.

Operating income for the full year was $16.2 million compared to $142.9 million for the full year 2018. Additionally, the company reported adjusted EBITDA of $210.6 million for the full year 2019 compared to $307.8 million for the prior year, which is restated from the previously reported $337.5 million to align with the new covenant definition.

For the fourth quarter of 2019, we reported consolidated revenue of $1.16 billion, down from $1.25 billion in 2018 and operating income of $9.8 million, which included a $10.1 million net gain on property disposals compared to $55.1 million, which included a $28.1 million net gain from property disposals in 4Q '18.

And finally, we reported adjusted EBITDA of $47.3 million this quarter compared to $77.5 million in 4Q '18.

Turning to our operating results. YRC Freight reported its fourth quarter 2019 year-over-year LTL tonnage per day was down 6.6%. We had an 8.5% decrease in LTL shipments per day, offset by a 2.1% increase in weight per shipment. Additionally, year-over-year LTL revenue per hundredweight, including fuel surcharge, was down 1.1%. And LTL revenue per hundredweight, excluding fuel surcharge, was flat.

Finally, year-over-year LTL revenue per shipment, including fuel surcharge, was up 1% and was up 2.1% when excluding fuel surcharge.

Moving to the Regional segment. The fourth quarter 2019 year-over-year LTL tonnage per day was down 7.4% which is due to a 7.9% decrease in shipments per day as weight per shipment was up 50 bps year-over-year. Additionally, year-over-year LTL revenue per hundredweight, including fuel surcharge, was down 70 bps and LTL revenue per hundredweight, excluding fuel surcharge, was up 20 bps.

Finally, year-over-year LTL revenue per shipment, including fuel surcharge, was down 20 bps and was up 70 bps when excluding fuel surcharge. As for investment back into the company, we are committed to reinvesting in our fleet. And during the year, we spent $143.2 million on capital expenditures. Additionally, we entered into new leases for revenue equipment with a capital value of $131.8 million for a total of $275 million or a 5.7% of operating revenue.

Turning to liquidity. Our cash, cash equivalents and managed accessibility at December 31, 2019, was $80.4 million, which is a decrease of $123.4 million when compared to December 31, 2018. The vast majority of the decrease is a result of our disciplined and continued investment back into the business via CapEx.

Now let me pause here for a second catch my breath. As I know everyone is itching to get to Q&A but before we do, I would like to make a few points that go above and beyond the numbers and answer some of your questions before you ask them. One, why the hell did I come back? Well, I feel like I can make a difference. I actually want to be a part of something greater than myself. And you might say, I actually have some unfinished business. Two, what are my plans? First of all, I plan on keeping the financial runway clear, so Darren and the sales and ops teams can focus on running the business, serving our customers and growing the top line. Then I'm going to focus and support them and do it again but better. Rinse, wash and repeat. Specifically, I'm going to focus the organization in areas that move the needle and support Darren and the team and the other senior leadership in the transformation that has a real possibility of changing the trajectory of this company and its investment profile. If we do those 2 things and do them well, results should follow.

Third, what about the covenant? Everyone knows that the covenant under our new term loan requires us to maintain a minimum of $200 million in adjusted EBITDA. Now everyone knows that we ended the year at $211 million and everyone also knows that seasonality of the industry and that the first quarter is the weakest one within the calendar year. However, it's a very sublime thing to be obvious, please keep in mind that it is an LTM calculation. So it's important to compare the year-over-year change. If we need to address anything, I will absolutely let you know. But right now, we are in compliance and laser-focused on the network and the operational optimization thereof. Again, if we do it right, results should follow.

And lastly, as for the 4Q '19 LTL tonnage by month, and preliminary January results are as follows: at YRC Freight, total LTL tonnage per day was down 4.5% in October, down 10.2% in November and down 4.7% in December; for a quarter, a decrease of 6.6%. At the Regional segment, October was down 5.7%, November was down 11.2% and December was down 6.0%; for the quarter, being down 7.4%. As for January, at least preliminarily for January, YRC Freight is only down 80 bps, and the Regional segment is only down 3.7%.

In closing, if you can't tell, I'm excited as hell to be back. I'm excited to do what I can to help return this company to its rightful place as an industry leader and a formidable foe. It won't be perfect and I am but one, but it starts with one. One person, one company, one network, one team and 5 incredibly proud and powerful brands.

I will now turn the call over to Darren for some closing comments. Darren?

Thank you, Jamie. And once again, welcome back home as CFO, and also, as our newest Board member. Holland, New Penn and Reddaway are 3 best-in-class regional LTL brands. And then the size, scope and endless capabilities of YRC Freight, to go anywhere in North America, partnered with the agile, non-asset HNRY Logistics gives me confidence about the continued expansion of the YRC Worldwide value proposition in 2020. Thanks for your time this afternoon. We would now be happy to answer any questions that you may have.

Operator, can you queue them up, please?

Our first question is from Scott Group of Wolfe Research.

Welcome back, Jamie.

Scott, sorry about the the technical difficulty there.

All good. So just on the monthly trends, do you also have the total freight monthly trends? And just some thoughts on the improvement you're seeing in January? And what's causing it?

Yes. We actually -- well, I tried to break it out, Scott, with the first set of numbers I gave was Freight. So that's the negative 4.5%, 10%, negative 4.7%. And then the only -- it's only down 80 bps for January. So from our perspective, as you go through the fourth quarter, you'll see it being down on that 4% to 10% range, really closer to 6.6% for the quarter and then a pretty good reversal in the month of January.

Yes. And I would just add from -- after coming out 15 months of negative industrial activity, coupled with 5 months of negative ISM and then getting some green shoots this week on ISM, specifically, that lined up with what we saw from a tonnage recovery in January, also some favorable weather.

But -- just so I'm clear, what you gave us for Freight was LTL only or total tonnage?

LTL -- sorry, Scott, I think I said LTL tonnage per day.

Okay, okay. And you don't have the -- do you have the total tonnage?

Yes. I'll give you the total tonnage as well. So for the month of October, it's actually up 1.2%, the month of November was down 2.9% and then for the month of December was up 70 bps.

And January there?

Yes. Let me get back with you on that. That's the one number that I'm missing, Scott.

Okay. Well, we can follow-up. So on the covenant. Just, I guess, understand your comments, but 2 questions. Just remind us how gains on sales are included in that, just so we understand that as a potential lever. And then just more theoretically, how do you think negotiations on covenant amendments may or may not be different with Apollo relative to a more traditional bank, if you have thoughts there?

Yes. So in terms of the easier one. Technical answer to your question, gains on sales are excluded under the definition EBITDA, under the new credit agreement. Now in terms of how negotiations go with someone like Apollo, Scott, I don't know. We haven't had those conversations. We haven't had the need to have those conversations. And candidly, as we roll through the end of the year being compliance, we're more focused on the network and the optimization and customer service above and beyond anything else.

Is this something you got comfort with before deciding to come back?

You know what, I have got comfort in the team. I wouldn't say that I had any agita over the covenant. Unfortunately, given my background, which I think everybody on the call probably knows -- you, in particular -- I had a little expertise in this area.

Okay. And then just last question on the liquidity below $100 million, where do we need that to be? What can we -- what leverage do we have to help get that going higher again? How do you think about first quarter, I think, that's usually a tougher seasonal quarter for liquidity?

Yes. So liquidity, and I'm not being cheeky at all, always want more, right? Sitting in my seat, you always want more, not less. And I think we -- I don't think, I know we ended the year at about $80 million, $100 million is the threshold. Levers that we have to pull, really, first and foremost, is operations. So we've got -- simply got to perform better outside of that being outside of our control. On a macroeconomic basis, the ones that we have controllable by us, the levers really have to do with the [investment] back into the business. If you look at the last 2 years, Scott, we plowed another almost $300 million of CapEx back into the business. $145 million last year, $143 million this year. That's probably the single most controllable lever that we've got at our disposal.

What's the 2020 plan?

We haven't given any guidance on CapEx just yet.

The next question is from David Ross with Stifel.

Welcome back, Mr. Pierson. On the -- just follow-up on Scott's question about the $80 million of availability at the end of the year, where did that stand at the end of January?

We don't give inter-quarter guidance on the liquidity. I'll tell you what it was, give me one second and I'll tell you what it was on a quarterly basis. It's no secret that it's the lowest amount that we've had probably in the last 2 years. But as we roll through the first quarter, that's the one probably where we can have the most impact on in terms of shutting off CapEx to preserve liquidity. As you go through the end of the first quarter then into the second quarter, the AR increases, which is the collateral for our ABL. We get a lot of availability back in around that time. This really happened to be a low point on that borrowing base.

And Jamie, how is the average fleet age now versus when you were last at the company?

It's still over than we would like, David, and not reporting out on that. But since 2015, with the addition of 5,000 tractors and also a consistent investment last year, coinciding with network optimization efforts that also frees up equipment. I feel good about where we're standing on that, naturally. No secret: we want to reduce our fleet age over time.

And Darren, do you have visibility into when the brands might disappear, if the network gets consolidated into looking more like 1 than 5?

No, the brands is where the value is, David. From that aspect, I can give an example. We put a theoretical example out. As a matter of fact, we started with that example at your conference last year, around what a network optimization would look like on a brand consolidation and that would be where 3 or 4 terminals in the same service footprint would become a single brand. That's no longer theoretical. We've got that implemented in 1 location, that's in Northern Michigan. And in that footprint, we had 2 YRC Freight terminals and 2 Holland terminals. The YRC Freight terminals consolidated into the 2 Holland terminals, which freed up those 2 buildings for YRC Freight. The YRC Freight employees became Holland employees and then the customers in Northern Michigan, that were using YRC Freight, they improved their service to next day in many lanes where they were getting second and third day from YRC Freight. So any lane that was in the Holland footprint immediately got the Holland service. And then anything that went into YRC Freight's network, it just goes into YRC Freight through a connector facility.

So that's an example of being able to take buildings out, take tractors out, take trailers out, allow the employees to transition to another company. The customer gets better service and we move forward with a better, more streamlined cost structure and productivity improvements as well. So the 5 brands will stay intact. The holding company will take the 1 operating system from a technology standpoint and the back office piece as well.

And were you able to get better rates for that better service?

On the YRC Freight shipments, the YRC Freight rates apply, which in the Regional network, that works well. Regional shipments -- shorter length of haul shipments in YRC Freight's network actually pays well.

Okay. Yes, because the customer is getting a better service. So I would expect them to pay more. I guess, the other way it would work is if your cost to provide that better service is lower than the slower service.

You're exactly right. And from -- even though with the Regional challenges in 2019 because of the volume situation that we were in, David, as you're aware and most other analysts, the Regional networks are more efficient than YRC Freight's, and there's a lesser cost of handling with better productivity.

The next question is from Jeff Kauffman with Loop Capital Markets.

Welcome back, Jamie. So maybe kind of go at the covenant question a different way. We know you're about $211 million, we see the calculation for adjusted EBITDA in the back of the presentation, but can you give us an idea of what the adjusted EBITDA calculation would have been for first quarter '19 and second quarter '19, so we have an idea of how close it gets based on certain EBITDA generation?

Yes. Give me one second, Jeff. So for the first quarter, it'd be $30 million. Second quarter, $67 million. Third quarter, $66 million. Fourth quarter, $47 million.

Okay. So even though we're close, it's some favorable comparisons in theory for the next 2 quarters, given everything you got going on. HNRY Logistics, can we get an update on that? I don't know if you're comfortable disclosing run rate, size or anything like that. I don't know if you're thinking about disclosing HNRY as a separate unit in 2020 but I just thought I'd ask.

Jeff, great question. And yes, since I was public on some targets for HNRY Logistics last year, I will give you an update. 2019 finished at $140 million in revenue for HNRY Logistics from our target of $150 million, naturally, in the truckload space. HNRY Logistics did a great job of expanding their shipments with double-digit growth rates. The revenue per shipment was down, as everyone knows, in the brokerage area of the Truckload segment but the margins were good. So I'm pleased with HNRY Logistics, their performance and expecting to see that growth continue. Unique value proposition there is we named HNRY, H-N-R-Y for Holland, New Penn, Reddaway, YRC Freight, specifically because of the power that HNRY Logistics garners from having 4 asset-based brands behind it and a national enterprise sales force selling it on a daily basis. So every one of our sales people now with the changes we made in 2019, when they go into a customer, they represent all 5 brands. We're excited about that and anxious to see what HNRY Logistics does in 2020.

Okay. Jamie, I think I interpreted your response to be capital spending can be a bit of a safety valve as we work through the typical first quarter liquidity. You haven't given a capital budget for 2020 yet. But given the environment out there, is there any urgency to continue to spend the way you're spending? Do you feel like there's certain areas of spending where you're where you need to be? I know Darren alluded that the fleet is not quite there yet but I thought I'd ask about other projects.

Yes. If I would to add anything to that, Jeff, is this our investment back in the technology side of the house. I think -- I don't think, I know the returns on investment are much greater, depending on the actual space that we invest in, in terms of the company. But we'll be doing a lot of 2020, 2021 investments will be in the consolidation of the operations in the network and transformation that goes around that. So there's going to be a fair amount of tech investment as we roll through 2020 and 2021 that you can easily put on par with the revenue equipment.

The next question is from Amit Mehrotra with Deutsche Bank.

I just -- I wanted to follow-up on the covenant. So I guess, just based on some crude math, it just looks like the adjusted EBITDA in the first quarter can still be down 30%, 31% year-over-year. And you wouldn't dip below the $200 million threshold. That seems doable just given the trends in January but maybe it would be helpful because the year-on-year growth or decline in adjusted EBITDA accelerated dramatically in the fourth quarter to down like 40%. And obviously the macro environment was a lot weaker and maybe you're getting a little bit of a tailwind in January. But you've also got the $60 million to $80 million of savings, some of that volume-dependent; maybe a lot of it is. You got the $25 million of employee headcount savings that I assume will incrementally help the first quarter. Just help us think about like the inflection in the first quarter on a year-over-year basis and the earnings power of the company based on kind of all those maybe positive things relative to what you guys did in the fourth quarter. I think that should be helpful.

Yes. Amit, thank you for the question. On the $60 million to $80 million, we'll start there. That blueprint, it remains intact. We're not wavering, but the industrial market slowdown and the corresponding negative impact on volumes in the industry certainly impact that time line on the $60 million to $80 million. The $25 million in cost reduction is in play. T.J. and his team did a great job with that. As we work through Q4, and we will remain lean until we see more green shoots than we've seen so far in January. It's certainly encouraging but there's a lot of winter left. We'll stay focused. We'll keep the operations tight and we'll add back the headcount into our operations, only when it's justified by expanding shipment and tonnage levels.

So with the network optimization that we're pursuing, we were right on track with that as we closed out 2019. We landed at our total facility count of 351. The 25 facility target that I gave, we achieved that. We've got the next 25 teed up right now and working through that with our team. Our team is experienced. We've got language contractually that allows us to pursue those timely. And because of that, I'm confident in what we're doing from an operational optimization standpoint.

The previous investments that we made in our city pickup and delivery operations, and also our line haul networks are still there and in play. And certainly, when volumes are declining, productivities are challenged, but one area that we continue to create density in and progress is our load average metrics on our longer length of hauls and also the new containers and the purchase transportation pieces that our contractual agreement allows us to do. So with all those in play, I think we're positioned well and certainly watching things closely. But we're a lean organization at the right time, and we will certainly stay lean until we see volumes return to a more normal state or even less bad, if you will.

So I'm just going to ask a follow-up a little bit on that and ask you to make it a little bit easier for us. I mean, Darren, just looking at it now, I mean, EBITDA went down 40% in the fourth quarter. Do you think as you see it now, that EBITDA will decline 15%, 20% in the first quarter, just based on all the trends you're seeing now? I mean, what is the right calibration because it's just hard to kind of put all the moving parts in order because there's a lot of things that depend on volume. And it's just hard looking at from outside in.

Amit, I'll let Jamie give you some direction there as we're getting in the guidance. So Jamie, go ahead and give some perspective.

Yes. Amit, you said it perfectly. It's so much dependent on volume. So from my perspective, as we sit here, we're only 1 month into a 3-month quarter, and everyone is laserly focused on this one. From our perspective, you've got the math. You've already done it. I can see that you've done it. We did $30 million in the first quarter of '19; 30% decrease would put you at $20 million to be kind of the threshold of the floor. From our perspective, we really need some tailwind from the macro side of the economy. Specifically, when you do manufacturing side to recover, or at least rebound a little bit.

Just as a reminder, I mean, the contract in and of itself, excluding or irrespective of volume, the new contract is about 4% per annum more expensive in 2020 than it was in 2019. So we do have some headwinds coming at us there. So you've got 2 things that I think we would need to see that would benefit -- at least benefit us as you go into the first quarter. One is a little bit of recovery on the manufacturing side and I guess a lack of deterioration with the price. I don't want anyone to lose sight of the fact that the contract is more expensive this quarter than it was a year ago at this time.

Right. Okay, that's helpful. And then just one kind of maybe a bigger picture question because I feel like your company has a pretty storied history and it's close to $5 billion of revenue. But here, we are sitting at less than $100 million of equity value. I mean, the equity is basically an option value territory. And you have all these legacy issues, whether it's the price competition kind of 10 years ago. As a result, the underinvestment in the asset base, limited flexibility and work rules related to the unions, a large pension deficit, which you're managing and you can manage but nonetheless, is structurally impaired.

So why isn't the right -- just given where the equity is trading at today -- why isn't the right pathway just to pursue a large recapitalization of the company, so you can maybe more fully, like, invest for the long term? Or is that just something you feel you don't need to do right now because you have a pathway to like organically improve the business without diluting equity holders? Like help us think about that.

Yes. Amit, I'd tell you what, I agree with you in terms of being $100 million is the option value at this point in time, [seems to be] in the $5 billion revenue at the top line. We are an 800-pound gorilla. We are [operating in that we] still have 350, plus or minus, locations around the country. So from my perspective, the recapitalization has less to do with the $5 billion and it really has to do with the fact that we only spend about $110 million, maybe $115 million a year in interest expense. Assuming that we had no capital structure, you would only save about $100 million to $110 million. At $2 a share, whatever it is now, I have no interest in issuing equity at that level.

This concludes our earnings call. 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 Eric with any additional 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.