Yellow Corp (YELL) 2022 Q4 法說會逐字稿

Good afternoon, and welcome to Yellow Corporation's Fourth Quarter 2022 Earnings Call. All participants will be in a listen-only mode. 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 Tony Carreno, Senior Vice President of Treasury and Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Yellow Corporation's Fourth Quarter 2022 Earnings Conference Call. Joining us on the call today are Darren Hawkins, Chief Executive Officer; and Dan Olivier, Chief Financial Officer.

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 therefore, actual results may differ materially. The 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 afternoon's earnings release and our most recent SEC filings, including our Forms 10-K and 10-Q. These items are also available on our website at myYellow.com.

Additionally, please see today's release for a reconciliation of net income or loss to adjusted EBITDA. In conjunction with today's earnings release, we issued a presentation, which may 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 will now turn the call over to Darren.

Thanks, Tony, and good afternoon, everyone. Thank you for joining our call. In Q4, we saw a notable drop in demand for LTL capacity as the economy continued to cool down. With fully stocked inventories, the retail sector had already begun to require less capacity from the supply chain prior to Q4.

During the quarter, the manufacturing sector also began to slow down following several quarters of growth. In response, we kept our focus on meeting our customers' needs while adjusting our cost structure to help mitigate the near-term headwinds. The adjustments, including reducing the size of our workforce to align with demand in addition to closely managing the use of purchased transportation.

We also benefited from a gain on the sale of an excess terminal no longer needed as a result of the efficiencies from Phase 1 of our network transformation. We used the net proceeds from the sale to pay down a portion of the term loan. Even in the face of an economic slowdown and declining tonnage, this is one of the most stable LTL pricing environments we have experienced in many years. We have stayed consistent with our strategy of improving yield on the freight moving through Yellow's network to improve profitability and offset inflationary cost pressures.

In Q4 year-over-year LTL revenue per hundredweight, including fuel, increased 21.1%. For the month of January, Yellow averaged between 5% and 6% on contract negotiations. Despite the economic slowdown later in the year, the company made significant financial improvement in 2022 and reported its best operating income and operating ratio since 2006.

Turning to Phase 1 of the network optimization in the Western U.S., the realigned and optimized terminal coverage positioned us closer to the customers, which has enabled us to make pickups and deliveries more efficient and timelier both of which are critical to the Yellow customer experience.

Concerning the Phase 2 network optimization in the Eastern U.S., we are following the same contractual process as Phase 1. The Phase 2 recommended changes have been mailed to the local unions, and we are in process of meeting with those unions to field any questions or concerns around the optimization. We plan to communicate externally when an implementation date is determined.

Looking ahead, our priorities in 2023 include continuing to enhance our customer experience with technology investments to provide new transactional capabilities and self-service features on our website. We also plan to provide a streamlined suite of service offerings utilizing the speed of our super regional network. Serving our customers in a first-class fashion will help us grow shipment count and profitably grow our company.

Thank you again for joining us today. I will now turn the call over to Dan, who will share additional details about the quarter.

Thank you, Darren, and good afternoon, everyone. Full year 2022 operating revenue was $5.24 billion compared to $5.12 billion in 2021. Operating income in 2022 was $197.8 million, which included a $38 million net gain on property disposals. This compares to operating income of $103.6 million in 2021.

Adjusted EBITDA for full year 2022 was $343.1 million compared to $306 million in 2021. For the fourth quarter 2022, operating revenue was $1.2 billion compared to $1.31 billion in 2021, and operating income was $40.3 million, including a net gain on property disposals of $28.2 million. This compares to operating income of $55.8 million in the prior year.

Adjusted EBITDA for the fourth quarter of 2022 was $54.6 million compared to $115.5 million in 2021. The 8.3% decrease in year-over-year operating revenue in the fourth quarter was attributable to lower volume partially offset by continued strong yield performance and higher fuel surcharge revenue. Including fuel surcharge, fourth quarter LTL revenue per hundredweight was up 21.1%, and LTL revenue per shipment was up 17.8% compared to a year ago.

Excluding fuel surcharge, LTL revenue per hundredweight was up 12.4%, and LTL revenue per shipment was up 9.3%. LTL tonnage per day in the fourth quarter was down 25.1% driven by a 23% decrease in LTL shipments per day and a 2.8% decrease in LTL weight per shipment.

Sequential LTL tonnage per day trend compared to the prior year were as follows: October, down 23.9%; November down 24.8%; and December, down 27.1%. On a preliminary basis, January LTL tonnage per workday was down approximately 17% compared to last year. On a sequential basis from December to January, our LTL tonnage per day was up approximately 8% compared to our historical trend of down roughly 1%.

Capital expenditures for the fourth quarter were $51.1 million compared to $54.7 million a year ago. Total capital expenditures for 2022 were $191.8 million compared to $497.6 million in 2021. Total liquidity at the end of the fourth quarter was $241.8 million compared to $358.8 million at the end of fourth quarter 2021.

As a reminder, in December, we paid the remaining $42.8 million due for the deferral of certain payroll taxes under provisions of the CARES Act. In early January, we paid the remaining $66 million due on the CDA notes that matured at the end of 2022 consistent with the terms of the agreement. The payoff of the CDA notes, combined with $32 million of net proceeds from the sale of excess facilities used to pay down the term loan, have reduced our outstanding debt by nearly $100 million in the fourth quarter through early January. Much like the extension of our asset-based funding facility in October, we continue to strengthen and simplify our capital structure.

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

Thank you, Dan. 2022 was another year of tremendous progress at Yellow. When I think about our team's accomplishments, I'm very proud of our employees' dedication and passion to meeting the needs of our customers and executing one of the largest network changes ever implemented by unionized LTL carrier. We expect customers, shareholders and employees to benefit from the execution of this multiyear strategy.

As we head into 2023, which is just a year away from the company's 100-year anniversary, we couldn't be more excited about the future of this company.

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

(Operator Instructions) The first question today comes from Jack Atkins with Stephens.

David and Dan. I'm going to have more than one, I promise. So I guess maybe if we could start, I don't know who wants to take this with January. January, I think we've kind of heard pretty consistently for most folks was a little bit better than expected or better than feared. You're seeing January up better than normal seasonality. Anything that you would attribute that to, maybe an easy comp versus December, just better weather? Just if you could maybe talk a little bit about that, that would be great.

Yes. Certainly, Jack. This is Darren. We were pleased with the direction of January, especially from a pricing standpoint as well as those contract renewals were up 5% to 6%. And what we saw there was positive from a customer aspect, I'll also comment -- now that we've got our entire sales force on the sales force technology, I'm also encouraged with the top line that I'm seeing for Q1. And I think there's opportunity for Yellow and the value proposition we're bringing to the market. Dan, I'll let you get into any more specifics.

Yes. Jack. I'll talk just a little bit about tonnage trends. As I mentioned in my opening remarks, LTL tonnage per day on a year-over-year basis for the fourth quarter was down 25.1% and that was roughly a 11% sequential decline from Q3 compared to our historical sequential decline of approximately 4%. Specifically, November and December, sequential declines were certainly more pronounced than what we would have expected. However, as you just called out, the sequential increase from December to January was up 8%, which was much better than the historical average of a 1% decline.

So when I think about the first quarter in its entirely our historical sequential change in LTL tonnage per day from Q4 to Q1 is typically about a 3% decline and with January outperforming that. And of course, we don't yet know how weather could impact the remainder of the quarter, but I believe we have a decent chance to outperform that historical 3% sequential decline.

Okay. Now that's really helpful commentary. And I guess maybe kind of thinking about the bottom line impact from that. I know that the original plan would have been to kind of perform in line with normal seasonality, if I'm not mistaken, in the fourth quarter. But obviously, the market had a different kind of idea just given how challenging November, December were. Now that it feels like maybe things have stabilized a bit here in the first quarter, you're going to have the benefits maybe of, one, Yellow kind of showing up perhaps a bit more. I mean, can you maybe help us think, Dan, about the seasonality of operating ratio versus the fourth quarter?

Yes. Sure, Jack. So our OR for the fourth quarter was 96.6%, which included the $28 million gain on property disposals. So excluding that, OR would have been right at about 99%, which as you called out, is a little worse than we would have expected driven, like I said, by the tonnage declines we saw in November and December. When I think about sequential changes now from Q4 to Q1, we historically see degradation in OR of about 200 basis points.

And considering a few things, the sequential tonnage per day from December to January, which was a little better than we expected, but then also considering though that we're still incurring some costs associated with the execution of Phase 1 and in preparation for Phase 2 and now without expecting really any benefit from Phase 2 during the first quarter, I would expect we would probably be in line with that historical sequential change.

Okay. Okay. And I guess maybe kind of shifting gears and kind of thinking about One Yellow for a minute. I mean if we go back to the third quarter call, I think the idea was to be effectively wrapped up with Phase 2 by this point. Can you maybe kind of walk us through what's maybe dragging that process out a bit? And can you kind of walk -- kind of just explain that for a moment, would be great.

Jack, this is Darren. So for Phase 2, we're working through a similar planning process as we did with the successful implementation of Phase 1, and that's to ensure we have the best execution strategy. Phase 2 includes approximately 70% of our network and 3 of our legacy operating companies compared to Phase 1 is at about 20% of the network and 2 legacy operating companies. We're using the lessons learned from Phase 1 to execute this much larger phase.

The Phase 2 recommended changes, we've been through 2 mailings on that, the most recent mailing to the local unions. And we're in the process of meeting with those unions and fielding any questions or concerns around the optimization. So we do plan to communicate externally when the implementation date is set, but Phase 2 is still moving forward and with the number of employees, local unions and also the importance of the number of customers involved, we're certainly being very stable and focused in the way we're approaching Phase 2.

Okay. Okay. That sounds good. I guess, Darren, in terms of communicating externally, at what point do you think you'll be in a position to maybe communicate to the market the impact that One Yellow kind of cumulatively could have on the cost structure or your stability to kind of be more competitive in the broader market? I mean do you think that's something that, this year, you guys will feel more comfortable talking about, more broadly? Just any sort of thoughts around that.

Sure. The asset utilization, we're already seeing in Phase 1 in the West. The customer convenience of not having the congestion of having 2 of our brands at their facilities at the same time. Already seeing the reduction in pickup and delivery miles driven. The cost benefit on our dock and of course, the pickup and delivery operation, along with better customer on-time service, all of those things together, along with the reduction in debt from freeing up facilities that are just creating redundancy. And keep in mind, we're not giving up any geography and we're only improving transit times through this process. So absolutely, we'll be able to lay out the benefits in all of those categories as we do this significantly larger change in the coming weeks.

Okay. Okay. Maybe one last question for me, and I'll hop back in queue. But Dan, can you maybe talk a little bit about interest expense this year? You're paying down debt, which is good. You've been able to rework some things on the balance sheet in terms of refining a couple of things. But overall, interest rates are rising. How should we be thinking about interest expense on the P&L in 2023? Any kind of way to think about that broadly?

Yes. So I'll start. Interest expense for the fourth quarter was $45.9 million, it was $162.9 million for the full year. Our current run rate right now is between $180 million and $190 million per year of interest expense. Cash and interest for Q4 was $24.6 million and $127 million for full year 2022, and our current run rate for cash interest is between $135 million and $145 million per year. The interest rates on our term loans, of course, have a LIBOR component with the floor of 1%. So naturally, like you called out, we are incurring incremental interest expense right now and cash interest compared to the prior year, and that's reflected in the annual run rate I just provided.

The next question comes from Scott Group with Wolfe Research.

Can you just -- can you give us an update on where you are in the terminal count, where you think you'll be end of the year? And then any CapEx guidance in case I missed it?

Scott, this is Darren. As of today, we're at 308 when we are complete with Phase 2, we will be at 290.

Yes. I'll jump in, Scott, on the CapEx. Let's start with 2022. Total CapEx came in at $192 million. We did have about $14 million-or-so related detractors that carried over into 2023 just based on timing of deliveries. Those would have been -- delivered as expected, we would have been within that $210 million to $230 million guidance range we provided on the third quarter call.

For 2023, we aren't quite in a position yet where we feel comfortable providing full year CapEx guidance. Once we get through the completion of Phase 2 and maybe have somewhat of a clearer picture of the economic environment, we'll have a better line of sight as to what our '23 requirements will be, specifically for equipment.

Okay. Just taking a step back, obviously, last year, a lot of price gave up a lot of volume. What's the plan this year? Are we hoping to regain volume? Are we -- can we keep pushing price? Do we have to give up a little price to get some volume back? What do we -- how we go to market?

This is Dan, and we continue to prioritize yield. As I said in the script, we're finding the yield equation across LTL to be strong. And certainly, to cover the cost and the inflationary costs, we'll continue to prioritize that. The One Yellow efforts are truly about a growth story. We've got capacity in this network. As we eliminate the redundancies in Phase2, we'll be poised and ready when the demand cycle changes.

When I think about what's going on in America right now with the infrastructure investments, the number of -- the 600,000 jobs that are going to be involved in that, being in direct competition for driving jobs, I think we've got an opportunity to see demand exceed capacity, and Yellow will certainly be ready for that while also protecting our value proposition by holding the line on price.

I think after today, earlier, there's some concerns about the competitive dynamic, maybe some guys going after share with national carriers. Are you seeing anything that troubles you from a competitive dynamic right now?

Our contract renewal is in January. I was pleased with where they landed. We've been -- we took our general rate increase back in October. I was glad to see other carriers be around that 6% range as that typically sets the pace for the larger contract negotiations. I'm encouraged with what I'm seeing from the Yellow perspective, and I haven't seen predatory pricing that has me concerned.

Good. And then just last thing. Can you just remind us, just in this environment, what are the covenants we should just be keeping an eye on?

Yes. The only covenant we have right now, Scott, is LTM $200 million of EBITDA.

And does it stay there? Does it step up at some point?

No, it stays at $200 million.

Okay. Can you feel how we -- I guess we'll need to start growing EBITDA from where we are at Q4, Q1 run rate to maintain that, but hopefully, we can -- if it gets better we can start getting back to those run rates.

I think...

Our next question comes from Jeff Kauffman with Vertical Research Partners.

I want to follow up a little bit on Scott's question. Down 25% tonnage. That's not a little number. And it was a lot bigger than the rest of the industry. And I know there's some strategic review and the focus on yield, but can you talk about -- not all tonnage is the same, what kind of tonnage is falling away more in this number?

And there's been some debate as to whether what we're seeing is simply a very large inventory correction. Or is there something a little more nefarious going on beneath the hood? And you did allude in your comments to a bit of a slowing environment that you saw, particularly on the manufacturing side. So can you kind of address, a, the bigger picture, what you think is really happening? Is 80% of what we're seeing just a timing issue on inventory that will come back? And then kind of talk about the tonnage that you're -- is in your down 25? Is there a difference in the tonnage that's down more than the others? And when tonnage starts to come back, how is that mix going to change?

Jeff, this is Darren. And I'll start with the part of your question about how I see things. I'm bullish on America, and I'm bullish on LTL. I think there's incredible opportunity for national carriers, then we'll have capacity available.

As we see in the coming months, the supply chain really starting in America again. So that is an incredible opportunity. And the moat around these national LTL carriers, I still see it as strong in the meantime with the tonnage that we no longer move through our networks, we're certainly adjusting our cost to match the tonnage that we are moving. The waterline we're currently at is okay with me with the very large Phase 2 implementation coming up. I think that is an ideal time to make that transformation in the eastern part of the United States.

As far as the business that's no longer with us, we certainly saw a decline in our retail shipments in Q4, right at the end of Q3 and into Q4. Yellow's business is pretty evenly divided. In the past, we quoted more of a 60-40 range. It would actually be closer to 50-50 on retail and industrial. The retail customers tend to be very large shippers, and there's portions of that business that do very well in our network and operate well for us. But a lot of that, that we've adjusted over time was in retail. And then also on the industrial side, as far as the business is no longer with us, if it's not operating and adding to the profitability of this company, we're better off pulling back on purchase transportation and other areas and focusing on the business that operates well for Yellow.

As our value proposition expands with the completion of Phase 2, I think we're going to be uniquely positioned, where we don't have to add any terminals or build any terminals or lease any terminals. We will have the capacity to bring on a tremendous amounts of shipment count. And through our driving schools, we've proven that we can bring the drivers on to handle that increased capacity.

So I think we're positioned well, and certainly, we'll continue to watch the cost line until we're through the other side of Phase 2 implementation. And then our value proposition will do the work on expanding and growing our business as demand improves.

The next question comes from Jack Atkins with Stephens.

Okay. Great. I guess maybe 2 questions. One, just on -- following up on Jeff's kind of question on the demand outlook. I mean there's a thought that we're going to see the market -- freight markets generally stabilize here around the second quarter and maybe start to build back a bit in the second half of the year once we get through this destock phase. Darren, I'd just be curious to get your take on that. Is that something you're willing to underwrite? Or is it just too early to tell?

Hello again, Jack. And absolutely. You know that I will typically share what I believe is going to play out. And as I said, I'm bullish on America, and I'm bullish on LTL, and I think nearshoring, reshoring from an industrial standpoint, we're going to have a great awakening in America that's going to be a big benefit to the LTL industry over time.

Now certainly, the timing of those benefits come into play. In more near term, we're going to get our Phase 2 implemented, work through those processes and be prepared for when demand exceeds capacity. And I do want to comment on the infrastructure investments that's going to happen. I personally believe that this summer, and with 600,000 jobs being added in that capacity, good jobs, and we know that, that construction area is the #1 competitor for drivers to the LTL and truckload industry, so I think we're right back in a situation where there will be a shortage of drivers, and we'll see capacity challenged. And that's an opportunity that we'll be watching for at Yellow.

Okay. Okay. Now that's great. And I think we're all kind of pulling for that same build back in the second half. Last question for me, and I'll let you guys go. But there was discussion earlier this week with one of your unionized competitors about finding ways to -- on their conference call to maybe find ways to collaborate with other unionized carriers in a way to reduce costs, improve efficiency, improve density, that sort of thing. You guys really are leaving no stone unturned in your effort to get Yellow back on track. What do you think about that? Is that something that you guys would be willing to explore? Do you think it makes sense? Just be curious to get your thoughts on it.

Well, Jack, I've been working with 4 companies under the Yellow umbrella for the last 5 years. So we're well down the road on a lot of that discussion just right here at home with the companies that we're part of. And we're -- it's been a multiyear transformation for us, and we're in the final year of that. And we're just terribly excited about what's going on at Yellow. I don't really have any input for those competitor comments. But it's -- we've had 4 companies that we're working through, and we're proud of where we're landing here.

So there's enough wood to chop with your own organization before thinking about maybe collaborating with other unionized carriers. I mean that makes sense. I just kind of want to get your thoughts on it. It's been on folks' minds. So...

The moat that's -- and I think the reason so many people are interested in LTL. The barriers to entry are so high, which you're aware of and everyone that follows and as part of the industry is aware of. But we just simply got a real estate portfolio that cannot be replicated. And as we're approaching our centennial anniversary next year, that real estate portfolio and then those 30,000 employees, we've got back ended up. We've got tremendous opportunity right here in front of us at Yellow, and that's what we're wholly focused on, and looking forward to what 2023 is going to bring, especially after the nice progress we had in 2022 of delivering improvements that we hadn't seen in over 16 years. So it's just an exciting time to be at Yellow.

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 Tony with any additional questions 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.