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YRC Worldwide (NASDAQ:YRCW)

Q2 2013 Earnings Call

August 07, 2013 9:30 am ET

Executives

Stephanie D. Fisher - Vice President and Controller

James L. Welch - Chief Executive Officer and Director

James G. Pierson - Chief Financial Officer and Executive Vice President

Jeffery A. Rogers - President

Analysts

Robert H. Salmon - Deutsche Bank AG, Research Division

Allison M. Landry - Crédit Suisse AG, Research Division

Willard P. Milby - BB&T Capital Markets, Research Division

Scott H. Group - Wolfe Research, LLC

Operator

Good morning. My name is Jake, and I will be your conference operator today. At this time, I'd like to welcome everyone to the YRC Worldwide Second Quarter Conference Call. [Operator Instructions] Stephanie Fisher, you may begin your conference.

Stephanie D. Fisher

Thank you, Jake. Good morning. Thank you for joining us for the YRC Worldwide Second Quarter 2013 Earnings Call. James Welch, Chief Executive Officer of YRC Worldwide; Jamie Pierson, our CFO; and Jeff Rogers, President of YRC Freight, will provide comments this morning. James, Jamie, and Jeff will be available for questions following our comments.

Now for the disclaimers. During this call, we may make some forward-looking statements within the meaning of federal securities law. These forward-looking statements and all other statements that might be made on this call which are not historical facts are subject to uncertainty and a number of risks, and thus, actual results may differ materially. This includes statements regarding the company's expectations, assumptions of future events and intentions on strategies regarding the future. The format of this call does not allow us to fully discuss all 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 Forms 10-Q.

Additionally, please see today's release for a reconciliation of operating income and loss to adjusted EBITDA and the reconciliation of adjusted EBITDA to net cash flow from operating activities and adjusted free cash flow and deficit. During this call, we may refer to the non-GAAP measure of adjusted EBITDA simply as EBITDA.

I'll now turn the call over to James for some introductory comments.

James L. Welch

Thanks, Stephanie, and welcome to our second quarter conference call. The second quarter results reflect that we are continuing to make progress on our turnaround efforts at YRC Worldwide. While our performance shows incremental improvements, there is still no doubt that many opportunities remain to make additional progress on our operational and financial results.

During the second quarter, we continue to focus on investing in the long-term future of our business. For example, at YRC Freight, we implemented the second largest network optimization in the company's history. The re-engineered YRC Freight network will operate more efficiently and we believe that the new structure will operate more profitably. Additional details surrounding the network change will be provided by Jeff in his comments later in the call.

We also successfully completed the rollout of 10,000 handheld devices in our P&D operations which will enhance driver productivity and facilitate the transmission of information that is important to our customers. This is the first time in 6 years that we made an investment of this magnitude in advancing our technology platform. We expect to make additional upgrades to these devices in late 2013 and 2014, which will further enhance productivity and service.

Additionally, we took delivery of new tractors and trailers at each of our 4 operating companies. This is the first meaningful investment in our equipment in 4 years and the first step in getting back into a more normal CapEx cadence, which Jamie will address in his comments.

The results of our dimensioning pilot project had been positive thus far and have exceeded our expectations. Based on our success to date, we plan to roll out additional units and we'll continue to do so as we believe the industry will eventually transition to dimension-based pricing. While it will certainly take some time to play out, we are working to ensure that our companies are on the front for this transition.

Our investment in network optimization, equipment and technology was matched by continued investment in our employees. We stay true to our commitment to our employees by rolling out our third round of field safety training meetings. This investment is paying off with reduced injuries and frequency and is working its way through our financials as lower workers' compensation cost. We truly believe that the cost we have built around working safely, working efficiently and going home every night accident-free will continue to bear fruit for the foreseeable future.

We are also wrapping up training for our field operations and sales personnel. It is widely acknowledged in the industry that our sales and operations training program were once the gold standard for LTL carriers. I'm glad to say that we're returning to that standard and the process is well underway. We've already hired new sales and operations trainers for the field and we're updating training practices to coincide with our new technologies.

Our history of success with sales, operations and processing training, combined with our recent experience in safety training, shows us that this is another long-term investment well worth making.

Similar to our investment at rolling stock via operating leases, these investments will not show up on the balance sheet, but will be expensed to the income statement and make professional margins in the short term. However, we are not managing the company for the short term and we believe this fits very well to our long-term vision.

The potential story for our second quarter performance is really a tale of 2 tales. Our regional carriers performed exceptionally well, turning in a 94.3 operating ratio on $445 million in revenue. Holland, Reddaway and New Penn are service leaders in their respective markets, and they're well-positioned for continued growth in the second half of 2013 and beyond.

At YRC Freight certain of the change of operations in May was a big hurdle. However, there's no doubt that YRC Freight is the company with the most potential. The $55.2 million operating income improvement in the first half of 2013 indicates that they continue to move forward in a positive way. YRC Freight turned in a second quarter operating ratio of 101.1 on almost $800 million in revenue inclusive of costs associated with the network optimization. Would we like their progress to be faster? Of course. But sometimes we need to stand back and realize that YRC Freight is a company that is reestablishing itself and starting over in many ways as a new company. YRC Freight is certainly in a better position today than it was in 2011 and even coming out of 2012. And we firmly believe they have the right strategy in place to continue their progress.

On a year-to-date consolidated basis, we continue to track favorably against our internal business plan. During our first quarter call, we emphasized that 2012 was a year of progress and that 2013 would be a year of performance. For the first 6 months of 2013, compared to 2012, we improved operating income by $57.4 million despite a comparative difficult winter season and challenges experienced during the YRC Freight network optimization. We certainly performed better in the first half of 2013 compared to 2012. And while encouraged with our improved trends, we know there is still much left to accomplish.

I want to close my comments with a congratulations to our drivers who will be competing at the National Truck Driving Championships this month in Salt Lake City, sponsored by the American Truck Association. This is an ultra-competitive skills based event and is considered the Super Bowl of Safety. We're very proud of our 31 state champions and we will be in the hunt for another national champion. That concludes my comments and I'll turn it over to Jamie.

James G. Pierson

Thanks, James, and good morning, everyone. For the second quarter of 2013, we once again improved our year-over-year results despite the network optimization headwinds experienced at YRC Freight. As for the year-over-year stats, YRC Freight's tonnage per day was down 3.6% and regional tonnage per day was up 1.2%. The decline at YRC Freight was due to the customer mix management to shed unprofitable business which began in 2Q '12.

YRC Freight's revenue per shipment grew by 1.5%, which included an increase of 0.4% in revenue per hundredweight and an increase in its weight per shipment of 1.2%. While the regional carriers increased their revenue per shipment by 0.1% and the revenue per hundredweight by 1.5%, their weight per shipment decreased 1.4% on a year-over-year basis.

On the earnings side, YRC Worldwide reported consolidated revenue of $1.2 billion for 2Q '13, slightly lower than 2Q '12 due to the decline in revenue at YRC Freight which is primarily offset by revenue growth at the regional carriers. Additionally, we report consolidated operating income of approximately $14.3 million for 2Q '13, a slight decrease of $1.2 million when compared to 2Q '12.

Finally, we reported adjusted EBITDA for 2Q '13 of $74.7 million, that includes a onetime charge of $6.3 million related to the network optimization and is an increase of $4.6 million over the $70.1 million reported in 2Q '12. This brings adjusted EBITDA for the latest 12 months period to $291.1 million.

On a segment basis, for the second quarter of 2013, YRC Freight reported an operating loss of $8.5 million, which included a $6.3 million charge related to the network optimization implemented in May and with an increase of $3.4 million over the prior year. Additionally, YRC Freight reported an operating ratio of 101.1, which represents a decrease of 50 basis points for us in 2Q '12. Further, it reported adjusted EBITDA of $30 million, an increase of 7.5% from the second quarter of 2012, and adjusted EBITDA margin of 3.8%, a slight increase over the prior year.

Our Regional segment reported operating income of $25.2 million, an increase of 10% over 2Q '12 and an operating ratio of 94.3. Additionally, they reported adjusted EBITDA of $42.5 million, which was a 4.4% improvement over the second quarter of 2012.

Now turning to cash flows and liquidity. We ended the second quarter with balance sheet cash and ABL availability of $219 million, which is an increase of $4 million from the first quarter 2013. Our ability to maintain liquidity at this level is due to our continued operational improvement and continued active management of our balance sheet and working capital.

As with our last call, I would like to leave you with what I consider to be a few key takeaways for the quarter. One, we took delivery of new tractors and trailers as part of the 2013 leasing program we mentioned on our first quarter call. This is the first meaningful addition of new equipment to our fleet since 2009. Additionally, we completed the rollout of 10,000 productivity enhancing driver handheld devices. As you can see by the $22 million that we spent on CapEx in the second quarter, we are increasing on investment in equipment and technology to position us for the future and are beginning the process of returning to a more normal CapEx spend, whether it be directly on the balance sheet or by entering into operating leases for new revenue equipment that will again flow through the income statement.

Two, we discussed our -- we decreased, I'm sorry, our outstanding letters of credit by $43 million or another 10% from $429 million at the end of the first quarter to $386 million at the end of the second quarter. This is in addition to the $14 million decrease in the first quarter 2013, and as a as a result of the safety initiative that we started in late 2011. Once again, our work comp and BIPD liabilities have decreased, which enabled us to bring down the outstanding LCs backstopping these programs and to continue de-risking our balance sheet and allows us to save the cash otherwise spent on LC fees.

Three, in the second quarter of 2013, approximately $13.2 million of aggregate principal amount plus PIK and may call interest of our Series B notes were converted into 714,000 shares of common stock. Since June 30, 2013, there've been an additional 15.1 million of principal amount plus PIK and may call interest of notes converted into an additional 817,000 shares. All of which decreased our leverage in noncash interest expense going forward.

Four, as everyone is aware, we filed a $350 million universal Shelf Registration Statement on July 22, 2013. As you're also aware, it's customary for public companies to have a Shelf Registration Statement on file. Our previous shelf expired in 2012. So we're simply updating our filings to provide optionality for the company in case the window or opportunity would present itself to tap the market and a lot of my next point is both wise and prudent to be prepared.

My fifth final point and I apologize for so many, we've been pretty busy this quarter, as everyone is equally aware, we have a couple of maturities in 2014 and early 2015. Even though the bulk of these maturities are literally over a year way, we recently retained Crédit Suisse in combination with our financial advisor, The MAEVA Group, to assist us in developing a broad range of refinancing and recapitalization options. In order to accomplish any transaction of this magnitude, we have a number of constituents to consider and we are currently in the process of evaluating all of our alternatives. And as much as it may disappoint you, and as a general reminder, before you ask in the Q&A portion of this call, we are not able to provide further details regarding these activities at this time, but we will provide updates when and as they develop and appropriate to do so.

In closing, I'd say that we're continuing to make progress on our turnaround and the management team is delivering on its commitments. We know there's still a lot of work to do, but we are focused on continuing to execute on our long-term strategies. Now I'll turn the call over to Jeff Rogers to talk about YRC Freight and the progress he and his team have made.

Jeffery A. Rogers

Thanks, Jamie, and good morning, everyone. Despite the fact that we faced challenges with the implementation of our network optimization, we continue to make operational improvements in the second quarter of 2013. Our ops planning team spent months analyzing data on how we can derive more efficiencies into the system and the end result is an enhanced network that is designed to increase density, allow fewer touches of shipments, increase load averages and reduce line haul miles.

During implementation, our execution was hampered due to increased shipment volumes we were experiencing at the time. Consequently, service, operations and second quarter financial performance were adversely affected. But I'll take that trade-off for the long-term gains that we anticipate for the future. With full implementation now achieved, we're starting to see improvement in key areas, such as reduced handling and improved load average. I am more confident than ever that we will reduce operating cost while improving service.

Additionally, during the last 11 out of 12 months, we have improved our claims ratio due to our focus on better freight handling and we're experiencing ratios better than James or I have ever seen here before. This focus has led to a decreased cargo claims expense and increased customer satisfaction.

Both James and Jamie referenced our safety initiative, and I want to add some important numbers to those comments. In the second quarter, we added 55 1 million, 14 2 million, 2 3 million and 1 4 million consecutive accident-free mile drivers. These professionals joined our more than 2,400 YRC Freight drivers, with 1 million or more consecutive accident-free miles.

As we've said before, 2013 is the year of performance. The team is focused. We have a clear strategy and we're executing better each and every day. Today, more than ever, we're an organization powered by professionals.

In closing, I'd like to thank our employees for working safely and for their hard work toward improving YRC Freight's operations and profitability. With these comments, James, Jamie and I are ready to take your questions.

Stephanie D. Fisher

Okay. I think we're ready to move to Q&A now.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Justin Yagerman from Deutsche Bank.

Robert H. Salmon - Deutsche Bank AG, Research Division

It's Rob Salmon on for Justin. Jeff, in your prepared remarks, you had kind of highlighted some of the challenges associated with the reorganization that you had completed at YRC Freight. Could you give us a sense if you realized any of those annualized benefits in the quarter and if we should still be thinking about that as roughly $25 million to $30 million from a profit improvement standpoint?

Jeffery A. Rogers

Yes, we did face some headwinds. No question the timing of the change and when we implemented it, it created some problems for us from increased volume and density. But at the end of the day, we're extremely confident that we are still going to realize the savings that we expected.

Robert H. Salmon - Deutsche Bank AG, Research Division

Okay. So is it fair for us to assume that not much of the benefit was realized in Q2 if we strip out the $6.3 million charge?

Jeffery A. Rogers

Yes. That's a true statement.

Robert H. Salmon - Deutsche Bank AG, Research Division

And then Jamie, you had kind of talked to a little bit about the CapEx investment that YRC has been embarking on in the second quarter. Could you give us an update in terms of what your expectations are for the full year as well as how we should be thinking about some of the potential cost headwinds associated with that CapEx as we look out to the back half?

James G. Pierson

Yes, we don't give guidance, Rob, on the CapEx. But what I'll say I guess on a more qualitative sense is we're just starting to reenter into what I consider a more normal cadence. It's going to take us 1 year or 2 to get there. Again, just a gentle reminder that as we roll in this new equipment this year, it's going to be on an operating lease basis, so it's not going to show up on the balance sheet. But in terms of the magnitude, we don't give guidance on the CapEx, Rob.

Robert H. Salmon - Deutsche Bank AG, Research Division

Did you mention how much of operating leases you guys engaged in, in the quarter?

James G. Pierson

No. That actually would be tantamount to giving guidance on it. So we're not going to do that.

Operator

Your next question comes from the line of Allison Landry from Crédit Suisse.

Allison M. Landry - Crédit Suisse AG, Research Division

Earlier in your comments, you mentioned the shift towards dimensional pricing. And I was wondering if you could give us some color on how customers are responding to that approach and maybe how much of the book that you've already gone through?

James L. Welch

We're very, very early into that project. So far the results have been encouraging. By the way, this is James. Customers have been, for the most part, receptive. And that was one of the things that I was very curious about when we put our first dimensioning effort in place was how will the customers react and I was curious what would be the collection rate for the customer satisfaction. And so far, it's exceeded our expectations. Obviously, we're not through the book of business to integrate the rate at all because we have a very limited number. So this is going to be a longer-term effort, but I would just say that initially, we're very pleased with what we're seeing.

Allison M. Landry - Crédit Suisse AG, Research Division

Okay. Great. And then as a follow-up question, I was wondering if you could discuss maybe some of the reasons behind the divergent trends in weight per shipment at the operating companies?

James L. Welch

This is James again. I'll talk about the regionals and let Jeff jump in for some more color commentary on YRC Freight, but we've really looked at this at a detailed level and really can't come up with anything that's unusual. I think from the regional perspective, the late spring that we had transcended into some flatter weight shipments in May and June. But conversely, we're seeing heavier weight per shipments at YRC Freight, so we can't put our thumb on exactly what's happening. And it's not like we're trying to arbitrarily get one way or the other. But so far, it's just been kind of the seasonality of what we're seeing. I'll let Jeff comment on what he sees at YRC Freight.

Jeffery A. Rogers

Sure, Allison, this is Jeff. That's part of the strategy of our mix management. We do feel that we needed to bring on a better mix, so we are targeting heavier weight shipments at YRC Freight, not because I want to get everything heavy, but I want to have a better mix so therefore I can have more revenue on a trailer, which is ultimately what we're trying to accomplish. So I think that's why our weight per shipment might be going higher, faster, but that is part of our strategy.

Operator

Your next question comes from the line of Willard Milby from BB&T Capital Markets.

Willard P. Milby - BB&T Capital Markets, Research Division

I believe earlier you said that the cost associated with the change in operations would be in the range of $8 million to $12 million for severance and buyouts and leases. Is that all included in the $6.3 million or is there some additional cost to come?

James G. Pierson

Yes, there's still some initial cost to come. The net $6.3 million there's also some stuff and gains and losses below the line, Will. But there's still, to answer your question directly, we just paid some of the costs until they rolled [ph] through.

Willard P. Milby - BB&T Capital Markets, Research Division

And do you have an estimate on the, I guess, the hidden impact loss in revenues during this transition period?

Jeffery A. Rogers

Yes, Will, this is Jeff Rogers. We're not going to comment on the very specifics. I can tell you that one of the headwinds we saw was our volume was increasing, which is a good thing as we entered the implementation and the time to implement it just wasn't ideal. We had hoped to do it earlier in the year and had implemented in May. But it would definitely impact us from a service perspective and in the efficiency perspective.

Willard P. Milby - BB&T Capital Markets, Research Division

Okay. And one last thing, I'll turn it over. Can you give the nonunion pension expense in the quarter?

Stephanie D. Fisher

Will, probably about $7 million I want to say, but I can check that number and get back to you later today. It should be in the 10-Q that was filed earlier.

Operator

Your next question comes from the line of Scott Group from Wolfe Research.

Scott H. Group - Wolfe Research, LLC

So the $6.3 million, I just want to understand, is that kind of true onetime costs, was it severance or closing terminals or is that including the kind of the operating challenges? I'm just trying to get a sense if it was really bigger than $6.3 million, including just kind of some of the integration headwinds beyond just true onetime stuff.

Jeffery A. Rogers

Scott, this is Jeff Rogers. That $6.3 million is clearly onetime costs associated with either closing facilities, severance or moving employees around. So those are truly onetime costs. There was absolutely additional cost beyond that because of the inefficiencies we experienced as we try to implement the change.

Scott H. Group - Wolfe Research, LLC

Is there any way to get some color on kind of what that -- how much that inefficiency may have cost you? I guess what I'm getting at is so if you back out that $6.3 million, you saw a pretty similar first quarter and second quarter operating income, which is unusual. You typically see second quarter a lot better and just trying to get a sense of what's the right run rate to think about as we model going forward?

Jeffery A. Rogers

You know Scott, it's tough to give exact and specifics for what the impact was, but I would clearly say our run rate in second quarter was better than first quarter and we expect the run rate to be better going forward.

Scott H. Group - Wolfe Research, LLC

Okay. In terms of the letters of credit, down $43 million, Jamie, do you have a sense on kind of what your -- where you're at versus your peers or what you're targeting, anything you feel comfortable sharing in terms of how much more improvement you see potentially in letters of credit?

James G. Pierson

Well, I'll say relative to our peers, Scott, we're probably at about twice where our peers are, in terms of where we forecast to be. I mean, we truly intend to continue decreasing them as we continue to actually increase the stability of the company. But this is going to be a 1 year or 2 or 3 long process. We only meet with the states once a year, so literally by the time you meet with the state and actually can even talk to these guys, you're at 12 to 24 months behind the cycle and, obviously, I know everybody on this call is aware that we just started this improvement process literally within the last 18 months. So this is no different than the investment in the income statement via the safety and the improvement in safety. This will take time to also roll through.

Scott H. Group - Wolfe Research, LLC

Okay. And then just last thing, I know you're not giving kind of the absolute number on operating leases. But can you give us the rates you're paying on those leases as we try and come up with some numbers on what the operating income and operating ratio impact is?

James G. Pierson

Yes, I won't give you the specific rate, but I'll tell you it's better than our funded debt today.

Operator

Your next question comes from the line of Willard Milby from BB&T Capital Markets.

Willard P. Milby - BB&T Capital Markets, Research Division

Is there anything really systematically that will keep freight from reaching, let's say, 96 OR in the next 18 months?

Jeffery A. Rogers

Will, this is Jeff Rogers on. We don't give forward-looking guidance so I'm not really going to give any specifics around that, just tell you that I'm confident with the direction in our strategy and we're going to keep getting better.

Willard P. Milby - BB&T Capital Markets, Research Division

Okay. Fair enough. And just to try to pin down cost here, on that $6.3 million charge, is that mostly in the operating supplies and expenses line or would some of that severance and SWB?

Stephanie D. Fisher

Yes, some of the severance inflow [ph] , Will.

Willard P. Milby - BB&T Capital Markets, Research Division

Okay. But if you can split those or can you split those?

Stephanie D. Fisher

Yes, I can. So in the SWB line item, we have, sorry here, $1.3 million and $5 million in operating expenses and supplies. Hey, Will, just to follow up on your nonunion pension costs, that was $4.9 million for the second quarter.

Operator

There are no further questions at this time. I turn the call back over to the presenters.

Stephanie D. Fisher

Thanks, Jake. That concludes our call for today. Thanks, everyone for joining us. Please contact me with any follow-up questions you may have. Operator, I'm turning the call back over to you.

Operator

That concludes today's call. You may now disconnect.

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