Yellow Corp (YELL) 2023 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to Yellow Corporation's First Quarter 2023 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. At this time, I'd like to turn the conference call over to Tony Carreno, Senior Vice President of Treasury and Investor Relations. Sir, please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Yellow Corporation's First Quarter 2023 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 model. 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 these risk factors. For a full discussion of the risk factors that could cause our 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 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 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. The Q1 results were in line with our expectations when considering the slowdown of the economy combined with the One Yellow network transformation that we are undergoing. The number of daily shipments was consistent throughout the quarter without the typical early spring acceleration and demand that we are accustomed to seeing in March. In the near term, demand continues to be relatively flat due in part to ongoing destocking. Turning to pricing. In Q1, we improved year-over-year despite following strong growth a year ago. We have been consistent with our strategy to improve yield on the freight moving through Yellow's network, and this is the 10th consecutive quarter where LTL revenue per hundredweight, excluding fuel, has increased on a year-over-year basis. Looking ahead, we plan to stick to our strategy and our goal was to maintain the pricing gains made in recent years, which will be balanced with managing through the stagnant demand environment and fuel price headwinds.

For the month of April, Yellow averaged between a 1% and 2% increase on contract negotiations. In Q1, our results were also impacted by elevated costs associated with the network transformation, including remaining expenses following the successful implementation of Phase One last September and planning in preparation for Phase Two. Phase One included approximately 20% of our network in the Western United States. The realigned and optimized terminal coverage positions us closer to the customers, which has enabled us to enhance our service. Following the implementation of Phase One, our customers have seen improvement across a broad range of areas that positively impact the customer experience, including an improvement in the percentage of shipments going out for delivery before 9:00 a.m., a reduction in missed pickups, and improvement in the percentage of shipments to parting origin by 10:00 p.m. Our goal is to exceed customers' expectations with a red carpet experience and the improvements that we are seeing in Phase One are examples of why moving to a super regional carrier is in the best interest of our customers, employees and shareholders.

Phase Two consists of legacy YRC Freight, Holland and New Penn terminals in the Midwest, Northeast and Southeast and covers approximately 70% of the network. We plan to communicate externally when an implementation date is determined. It's imperative that we complete our One Yellow strategy, which will strengthen the company, protect 22,000 union jobs and ensure that our customers are well cared for and received the range of services that today's market demand. Phase One is a success. And as we look ahead, we plan to work with the IBT to determine the best path forward to implement Phase Two and then turn our focus on refinancing the capital structure. Turning to purchase transportation expense, we continue to show improvement, primarily due to targeted efforts to reduce the use of over-the-road purchase transportation and to reduce equipment lease expense. In Q1, purchased transportation expense was down to 13.1% of revenue, which is a 160 basis point improvement compared to a year ago and a 360 basis point improvement compared to 2 years ago. We recently announced the addition of David Weber to our Board of Directors. Mr. Weber is a law professor at Boston University and is a nationally recognized expert in pensions as well as shareholder activism and litigation. He was selected by the International Brotherhood of Teamsters to join the Board of Directors pursuant to its rights as the holder of Yellow Series A going preferred stock. I am very pleased to welcome Mr. Weber to Yellow's Board of Directors, and the company will benefit tremendously from his insight. Thank you again for joining us today, and I will now turn the call over to Dan, who will share additional details about the quarter.

Thank you, Darren, and good afternoon, everyone. For the first quarter of 2023, operating revenue was $1.16 billion compared to $1.26 billion in 2022. And operating loss was $9.3 million compared to operating income of $9.2 million in the prior year, including a $5.5 million net gain on property disposals. Adjusted EBITDA for the first quarter 2023 [was] (added by company after the call) $34.3 million compared to $52 million in 2022. Adjusted EBITDA for the last 12 months was $325.4 million compared to $341.4 million a year ago. The 8.1% decrease in year-over-year operating revenue in the first quarter was primarily attributable to lower volume and reduction in fuel surcharge revenue. Including fuel surcharge, first quarter LTL revenue per hundredweight was up 4.4% and LTL revenue per shipment was up 6% compared to a year ago. Excluding fuel surcharge, LTL revenue per hundredweight was up 2.8% and LTL revenue per shipment was up 4.4%. LTL tonnage per day in the first quarter was down 12%, driven by a 13.3% decrease in LTL shipments per day, partially offset by a 1.5% increase in LTL weight per shipment.

Sequential LTL tonnage per day trends compared to the prior year were as follows: January down 17.2%, February, up 1.3% and March down 15.9%. On a preliminary basis, April LTL tonnage per workday was down approximately 16% compared to last year. On a sequential basis, from March to April, our LTL tonnage per day was up approximately 0.9%, which is slightly higher than our average historical trends of up 0.2%. Capital expenditures for the first quarter were $29.6 million compared to $36.4 million a year ago. Total liquidity at the end of the first quarter was $167.5 million compared to $276.9 million at the end of the first quarter 2022. As a reminder, 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. Total debt at the end of the first quarter of 2023 was $1.51 billion compared to $1.61 billion at the end of the first quarter 2022.

Turning to hourly wages and mileage rates for our union employees. For 2023, our National Master Freight agreement includes contractual wage increases of $0.40 per hour and $0.01 per mile on both April 1 and October 1. In addition, the contract also includes the cost of living allowance clause, which provides for an additional increase effective April 1 each year based on the year-over-year change in the consumer price index published in January. Based on this year's measurement, our union employees qualify for a cost of living adjustment of $0.37 per hour and $0.0925 per mile, resulting in a total April 1 wage increase of $0.77 per hour and $0.1925 per mile, which is a wage increase of approximately 3%. For full year 2023, we expect our total union wage and benefits to increase between 4% and 5%. Since the inception of the current National Master Freight agreement that became effective in 2019 through April 1, 2023, we are extremely pleased that we have been able to increase the wages for our union employees by nearly $5 per hour and more than 20%. I will now turn the call back over to Darren for the closing counter.

Thank you, Dan. The financial results on the path to completing one of the largest network changes ever implemented by a unionized LTL carrier are not linear, and we expect the changes that we're making today will benefit customers, employees and shareholders for many years to come. Throughout One Yellow, our goal has been to meet customers' needs, modernize our network, position Yellow for long-term success and strengthen jobs. Thanks for your time this afternoon. We would now be happy to answer any questions that you may have.

Ladies and gentlemen, we will now begin the question-and-answer session. The first question today comes from Jack Atkins from Stephens.

Okay. Great. Darren, Dan, thank you for the time. I really appreciate it. So I guess if we could sort of dive into the One Yellow initiative, I don't think I'm letting the cat out of the bag, but this is definitely dragging on longer than you would have anticipated in terms of trying to get Phase Two and Phase Three done. Can you update us on maybe a timeline for when you would expect to maybe start to be able to execute on Phase Two? And what do you think the sort of the major sticking points are here?

Good afternoon, Jack, this is Darren, and great question to start with. As I mentioned in the script, we continue to work with our union to determine the best path forward to implement Phase Two, and then we'll certainly turn our focus on refinancing the capital structure. The proven success of Phase One really sets the table for Phase Two. Phase Two is much larger. It involves more local unions. It involves more employees. It involves more terminals. Certainly, for the success that we've seen in Phase One to continue with Phase Two, we need to bring all of our employees along with us, make sure they understand what the changes are, how it affects them, their bids, all of those items. We know what it does for the customer. One Yellow is a growth strategy. We've seen the increase in the property and rolling stock asset utilization in the West. We can expand service offerings. We're creating density and reducing miles on a daily basis in the West. We've increased the productivity on our P&D side. And also just by rationalizing those physical locations, we reduced the debt considerably from this time last year. So the benefits lead to us operating as one company, one network under one brand that puts a value proposition out there for our large and loyal customer base that they'll reward us with tonnage and job expansion. The union is about creating jobs and creating membership will work hand in hand. And at the end of the day, I'm confident in this process because both sides are determined to get a deal done that works for everyone involved. Now the path to that still is going to be determined, but the urgency around it and the interest in it, the communication lines are open, and we'll communicate that implementation date publicly once it's determined. So that's where we're at on those fronts, Jack.

Okay. I understand that you're limited in terms of sort of what you could say there, but I appreciate the color. And then in terms of the capital structure, do you feel like you have to get One Yellow done before you can renegotiate the capital structure and the debt that comes due next year? Or is that something that-- is that something that can -- what if this thing just keeps dragging out, I guess, Darren I'll just ask you point blank, -- at what point do you need to pivot to the capital structure?

Yes. So I'll start with and then let Dan jump in as well. So we're picking up and delivering freight today just like we do every day. We're not as efficient as we can be without One Yellow. And the marketplace, they pick winners and losers every day and bottom line, we have to provide a value proposition that's equal to our national competitors in the LTL market. And One Yellow is certainly the way to do that. So it's imperative that we complete our One Yellow strategy. It strengthens the company. It protects jobs and ensures that our customers are well cared for and that the range of services match the marketplace. Bottom line, we're in a very strong position from the collateral that we have in place, and I'll tee that up with Dan speaking to the capital structure.

Jack. Just a reminder, first off, we extended and upsized the ABL facility in the fourth quarter of last year. And then in January, as I mentioned, we paid off the remaining $66 million due on the CBA notes. We have turned our focus towards the term loan and the U.S. treasury loans, which mature respectively, in June and in September of 2024. Now that said, with those maturities still being more than a year away. At this point in time, we continue to stay actively engaged in understanding what the best options will be to deal with those term loans and just to be in the best position possible to address them once we have clarity around the implementation date of Phase Two.

Okay. Okay. Understood. Let me kind of move on to something else if I could. You talked about April trends being, if I heard you right, Dan, I may be mistaken, but a little bit better than normal seasonality. Can you maybe talk about April first half of the month versus second half of the month? Did you see an acceleration trends that's encouraging that we're kind of performing along with seasonality?

In terms of April, it's been a steady first half, second half, pretty consistent throughout the month. Broader speaking from a tonnage perspective, year-over-year LTL tons per day, as I mentioned, in Q1 was down 4%. That was slightly better than we expected. When I look at each month of the quarter, January and February were a little bit better than expected, but March was lower than expected, of course, as a result of not seeing the traditional seasonal lift that Darren mentioned. On a sequential basis from Q4 to Q1, LTL tons per day was up 1.2%. So December to January was better than expected. January to February was right in line with what we expected. And then again, February to March was weaker than expected. Historically, we see about a 5% increase from February to March, but this year, we were only up about 0.5%. And then as I think about LTL tonnage per day for the second quarter, historically, we see about a 6% increase from Q1 to Q2. From month to month throughout the second quarter, we do expect to see the normal sequential changes, but with March being weaker than expected and that being the jumping off point for Q2, I would expect that the second quarter in total would be below that historical 6% sequential increase.

Okay. And so I guess then just kind of carrying that through and this is the last one from me, and I'll jump back in queue. I don't want to hog all the questions. But I guess, how are you thinking about how that translates into operating ratio relative to normal seasonality? If revenue is below trend, tonnage below trend, I would imagine that's probably going to mean OR is going to be below trend, but can you walk us through your thoughts there?

Yes. So operating ratio for Q1 was 100.8. Now it's pretty much in line, like Darren said, is what we expected. And that did not include any significant one-time items. So I would consider that a good checking off point to use when thinking about the second quarter. Normally, sequentially going from Q1 to Q2, we see improvement of 300 to 400 basis points in operating ratio. I would expect some level of improvement from Q1 to Q2 this year, but taking into consideration that we didn't see the seasonal lift in tonnage during March and April combined with the union wage increases that took effect on April 1 and the fact that contractual renewals have moderated, to your point, I would expect the level of improvement to be less than that historical trend.

You would say you would expect some improvement, but less than the historical trend?

That's correct.

Okay. Well, guys, I'll hand it over to the next person in queue. Thanks for having my questions.

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

This is Erin on for Scott. I just wanted to start out. So just looking at 1Q, noticing tonnage increased sequentially, but yields were down sequentially. Like how -- I know that you're focused on, how are you kind of balancing this tonnage versus yield situation this weak environment? And then just to be backing up Jack, you had mentioned that you will see some improvement in OR from 1Q to 2Q. Is that -- can we expect also some like revenue improvement as well? Like how should we think about rev per hundredweight sequentially from 1Q to 2Q?

This is Dan. Let me start now, I'll pass it to Darren for some further comments. As Darren mentioned in his opening comments, in Q1, we saw a year-over-year improvement in yield, and we do expect to maintain the gains we've made over the past couple of years. That said, the year-over-year percentage comparisons and the sequential gains in pricing have moderated just as we expected they would, especially in a weaker freight environment. And that's evidenced by the recent contractual renewals, which on a year-to-date basis are averaging between 2% and 3% compared to more than 10% a year ago. Those contractual renewals, they reflect the execution of the overall pricing strategy to get paid appropriately for the work we perform as well as on a very selective basis, making strategic moves to either protect or to add profitable business to the network.

And this is Darren. I would just add, with the current limitation and the union agreement on the over-the-road portion of purchase transportation, we'll certainly be leaning into pricing to protect our network, and that will be the plan of tech service in Q2 as long as that limitation is in place.

Got it, thank you. And then just if I can ask another one. Like how -- I know that we talked about sequential margin improvement. How should we think about like EBITDA trends for 1Q to 2Q? I know that you had sort of limited one-time like gains on sales this quarter. I'm just curious like where that trend is as well.

Yes. I would just say from an EBITDA perspective, it's going to follow the same trajectory as what the operating ratio changes would be. I think that's a good proxy for thinking about adjusted EBITDA.

Okay. Okay. And then I guess like all in, with these like trends in mind sequentially, like should we expect profitability at the operating line next quarter or this quarter, apologies?

I'm sorry, I missed that. What was that last part?

Just given all like what you've laid out, the sequential trends and where you expect to land versus seasonality, like can we expect that you'll be profitable like an operating basis in 2Q?

Yes. Let me just touch on revenue for a little bit since that was part of your first question. I'll start with actually fuel surcharge revenue. Fuel prices for the first quarter were -- they were up 2.5% compared to last year. The prices were declining throughout the quarter and were down 18% year-over-year in March. So total fuel surcharge revenue in the first quarter, including the impact of the tonnage decline was essentially flat or down 1% to 2%. Sequentially, from Q1 to Q2, fuel prices are expected to decline by about another 7%, whereas last year, they went up by almost 30%. But for the second quarter, we expect steel surcharge revenue to be moderately lower than in the first quarter and significantly lower on a year-over-year basis. From a total revenue perspective, though, even despite a moderate sequential decline in fuel-surcharged revenue. And even if we don't see the normal historical sequential increase in tonnage of 6%, I would expect total revenue could still be slightly higher in Q2 than it was in Q1.

Got it. Okay. Thank you. Thanks for answering the question. I'll go back.

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

Thank you very much. I think all the smart questions have been asked at this point. So let me try and come up with something a little less smart here. You did mention that there was a drag on your operating results from the final implementation of Phase One and the planning stage for Phase Two. Could you elaborate on what you think either the OR would have been or how much of a drag you think you bore in the current quarter? And then with Phase Two being 3x the size of Phase One, but maybe we're a little bit smarter having gone through it, what kind of drag might we see on operating results as you work through this?

Good afternoon, Jeff, this is Darren. I'll start with that and then let Dan add some color on it as well. So from a Phase Two perspective, we're certainly carrying a lot of additional headcount from a planning and execution stage and training states. All that's still in place and will remain in place for all the benefits that I talked about that One Yellow brings once it's implemented across the network. So that's an investment with a lot of people that aren't associated with the daily movement of freight that we're utilizing to be in place to ensure the success of that. The lessons learned from Phase One big time benefit for Phase Two. That's exactly why we did it that way, a smaller part of the network learning the lessons learned and applying to the larger part of the network. So I wouldn't extrapolate the discussion from Phase One to Phase Two on the implementation costs. The other piece is part of the cost in Phase One was utilizing traveling employees in certain portions of the country where we didn't have enough drivers, dock workers, et cetera, which is not completely associated with Phase One, but somewhat associated with parts of the country we're hiring can be a challenge, and we had to supplement that with some traveling employees until we were hired up in those areas. Dan include anything that it might have missed.

Yes, I would just say an additional cost over and above the operational support and training that Darren mentioned would be some costs associated with repositioning of equipment. I think about the financial impact of Q1, I think it's hard to exactly bifurcate those costs, and our best estimate is somewhere between $4 million and $6 million for the quarter.

Okay. And just one follow-up, if I can. You mentioned liquidity of $167 million cash of $154 million to end the quarter. Is there a minimum cash balance that you would like to be at or above as we work through this environment as we work through the integration?

Yes, Jeff, I'd say there's not necessarily a specific number, but more, obviously, of course, is better than less.

Yes. More is always good, right? No, I just didn't know if there was a floor where your mind is, okay, we just don't want to go beneath this, if we have to tweak CapEx or something like that, we do it. But I guess your point is you're not worried about that.

Well, I'd say just from a broader liquidity perspective, liquidity, free cash flow, they're at the top of our priority list every single day. And I am pleased that throughout the first quarter, we were able to maintain a solid liquidity position. As I mentioned in my opening comments, and you called out that liquidity at the end of Q1 was $167 million. That's down $75 million from the end of the year, but that also included the $66 million payment we made in January related to CDA notes. So excluding that, liquidity came down by about $9 million for the quarter, and we had positive operating cash flow in Q1 for the first time in more than 5 years. That's a direct result of our continuous efforts and focus on the balance sheet and our working capital. And from a free cash flow perspective, we continue to exercise prudence in our capital planning efforts, which allows us to remain flexible around CapEx levels in all areas of the business, especially in the near term.

Yes. And I would just -- this is Darren. I would just add that we'll continue matching the size of our workforce to the volume and the network and to the needs of our customers, but also tightly managing purchase transportation, not just the over-the-road portion but the entire piece as well.

All right. Thanks so much and congratulations in a tough quarter. Thank you very much.

And our next question comes from Bruce Chan from Stifel.

Thanks, operator. Just a few quick follow-ups for me here. I know right now in the industry, there's a lot going on, a lot of share shift happening or potentially happening right now. As you think about the change of operations and the network integration, have you seen any customer attrition? And if so, is there a path or of you towards maybe winning some of that business back? Or given some of the network changes maybe do you even have to?

Bruce, this is Darren. Great question. One of the benefits at Yellow with all the brands that we've owned over a large number of years is the large and loyal customer base that we've got because of that. When you look at the publicly reported numbers of total customers in the LTL area for each individual company. Yellow typically is at the top of that list because of all those relationships have been built over a long period of time. And it's not just about having the relationship with the customer. It's what share of their spend that, that customer is giving to you. Certainly, One Yellow is our pathway to take some of the frustration out of the customer service experience that our customers see, where they can do business with one website, one pro number, one account executive, one driver from our company visiting their location on a daily basis, those type things. So we do believe there's a tremendous growth opportunity on the other side of One Yellow. While we're getting there, I like the responsiveness and the loyalty of the customers that we have. They've continued to give us a large number of shipments on a daily basis, and we will continue to protect that through this down cycle in the economy until we see destocking improve somewhat. And once we get to the bottom of that, I believe the majority of customers out there are certainly wise to the fact that there will be a capacity challenge again because of what all carriers have had to do during this downturn and also not being determinative on how long the downturn is going to last.

Okay. Great. That's really helpful. And then maybe just one last question here. I know you all got injection of some new equipment a few years ago. As you think about the integration and network consolidation process, is there an opportunity to bring the fleet age down further as you sort of rationalize terminals and footprint and equipment pools?

Well, it's one of the most exciting things about One Yellow is the asset utilization piece. Not only do we go away from 4 separate line haul networks where we can have one line haul network that creates density and reduces miles across the whole thing. And as long as you've been following LTL, you know what that could be worth. It's a tremendous value, along with creating that density in the local terminals. But also we free equipment up and that oldest equipment can certainly be removed from the system. But bottom line, when we're pulling back on CapEx during a downturn and once things do improve, that we could be in a position to actually create our own capacity, not through buying, leasing or building anything additional from a tractor trailer or terminal property standpoint that we would create that additional capacity just by eliminating the redundancy and that especially applies to tractors.

And ladies and gentlemen, this concludes our earnings call. I'd like to turn the conference call 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 that you may have. This concludes our call. And operator, I'm turning the call back to you.

The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.