YRC Worldwide, Inc. (NASDAQ:YRCW)
Cowen and Company 9th Annual Global Transportation Conference
September 08, 2016 11:25 AM ET
Jamie Pierson - Executive Vice President and Chief Financial Officer
Jason Seidl - Cowen and Company
Everyone we’re going to get started again. So Cowen and Company is very pleased to have YRC Worldwide present once again at our conference. Representing YRC Worldwide is Jamie Pierson, the Chief Financial Officer. So Jamie is going to go through a little presentation and then join me over here for the fireside chat. So without further ado, Jamie.
Thank you, Jason. Appreciate it. And thanks for having us back great conference and really appreciate the invitation to speak with some of your clientele and your investors and market movers in the space. Look, I’m going to skip the forward-looking disclosures and trust that if you guys have insomnia. You guys can read it for yourself to sleep just know that they’re in there.
I go straight to Page 4, for those of you in the room and following along by phone. YRC Worldwide is really a collection for a very proud, very distinct less-than-truckload carriers. YRC Freight which is a national and a longhaul network I’ll talk about that a little bit more in a second.
It’s a combination of the old yellow and roadway companies and so that’s what we call our national YRC Freight segment. And then the others are Reddaway, Holland and New Penn they actually aggregate up into our regional segment. So YRC Worldwide is the holding company for four very distinct, very proud, very different less-than-truckload carriers.
What’s unique about YRC Worldwide in this sense is that when you buy one share of YRC Worldwide you actually get a portfolio of LTL carriers that have very different operating characteristics. And those are actually shown on Page 6. So if you look at the left hand side of the slide YRC Freight has a revenue of about $3 billion on a LTM basis.
As LTM adjusted EBITDA of about a $156 million in terms of the difference in the operations between the two segments YRC Freight has an average length of haul about 1,300 miles. So almost halfway across the country and has an average weight for shipment of about 1,200 pound compare and contrast that to the regional segment which is on the right hand side of the slide and it has revenue of $1.7 billion adjusted LTM EBITDA of $164 million, but their length of haul given the fact that the regional is only 400 miles and their weight for shipment is 1,300 pound.
So you’ll see here in a segment a second when I show you the networks. We have four very distinct companies, very different geographies, different clientele, different customer basis and that really is shown on Page 8. So if you look at Page 8 and see what our customers are kind of made up of it really is the economy.
By and large if you guys buy it and it fits in a dry van truck we’re going to shipping. Our top 10 customers probably make up about 10% of our revenue and in terms of the composition on a sector basis were probably 50% plus or minus I’d say 40% to 50% retail and the other piece 50% to 60% on a manufacturing basis. So very diverse and very diversified customer base across all of our operating companies.
If you look at Page 10, I will catch up with here so I’m on Page 10. This is really the holding company management team to get James Welch, our CEO and myself. Justin Hall is our new Chief Customer Officer, glad to have him on Board especially as industry continues to change dynamically everyday underneath us.
And then Jim Fry is the General Counsel who we’re able to get us with. So that’s the holding company management team. I think the real value and where the rubber meets the road is on Page 11. If you look at our Operating Company President, you got Darren Hawkins, President of YRC Freight 27 years in the industry. Scott Ware, President of Holland, he has 27 years. Don Foust, President of New Penn and he have got 35, and TJ O’Connor has 34 years in the industry.
So if you look at our operating company President, you arguably have a 120 years of experience, you add James in there, you have a 150 years of experience in YRC Worldwide on the management side of equation. Heart pressed to say that there’s another company in this industry that has some experience as we do.
If you look at - you kind of changing I guess addressing if you look at Page 12 and you look at our capital structure. We’ve been able to reduce debt by over $300 million since the end of 2013. If you’ll see on the left hand side of this page and look at 12/31/2013 it was a quilt of a capital structure and that’s being very kind it was the result of a acquisition strategy that probably preceded the five to 10 years prior to them James remains arrival.
But at the end of the day, we had $1.4 billion of debt, we had nine different debt securities and as many if not more covenants. And in fast forward that to when we refinanced the Company in the first quarter of 2014, we are able to take debt down to $1.2 billion. We had six securities and in fast forward the event the end of the second quarter of this year, we got debt down to $1.1 billion.
We haven’t really done the three securities you see here on the page plus we have an undraw ABL that supports our letters of credit. But over this time, we’ve gone from $1.4 billion and nine securities to $1.1 billion and three securities and we’ve also been able to save our interest in LC fees being able to decrease that by about $40 million.
So went from paying a $150 million to $110 million, we have one meaningful covenant and that’s funded debt-to-EBITDA and we will talk about that in a second. So, we’ve got a much more simplified capital structure and as stable and as manageable as it’s been probably in the last decade.
If you look at Page 13, we try to show here what’s happening or what has happened with funded debt-to-EBITDA. And if you go back to 2011, we went from almost 8.5 times funded debt-to-EBITDA – adjusted EBITDA to 3.3 times on the latest 12-month basis and how do we do that?
It really wasn’t by just paying down the debt as we showed on the prior slide, but it really was more of an operational turnaround. So we are growing the denominator of that equation really on a stair step function. If you see here on the left hand side of Page 13, we had about a $115 million of EBITDA in 2011, the next stair step to $215 million for the next three year. And then if you look at LTM 2015 through LTM 2Q 2016, we are in that $320 million range. So it’s much less about financial engineering and much more about operational improvement above anything else.
So go to Page 14, you look at the one meaningful covenant that we have and this is funded debt-to-adjusted EBITDA. At the end of the second quarter of 2016, the covenant was 3.75 times and we ended the quarter at 3.32 times which is about a $37 million a little bit less than $40 million cushion, that stair step is down.
At the end of this year it’s 3.5, first quarter of 2017 it’s 3.25, for the next three quarters and then in the fourth quarter of 2017 to be enter the expiry of the term-loan is at three times. So you will see here that we’ve got about $40 million, less than $40 million of cushion. It steps down through time and this is one of those things that we talk about all the time about how we’ve been able to de-risk the balance sheet, decrease leverage to say in compliance and under those covenant levels.
On Page 15, this is a very blank slide and it’s intentionally a blank slide. Because when we refinance the Company at 2014, we set out a path with markers. By the time the term loan matured in the first quarter of 2019, we had a much clean air in front of us to continue to focus on our operational turnaround and that’s exactly what you see here. That’s not an event, that’s not a maturity, that’s not an expiration - at that point in time almost five years. If you look at where we are in September of 2016, we still have almost 2.5 years before any event occurs that we have a maturity and expiration that we can continue to focus on the operational improvement of this Company.
On Page 16, I’m going to spend a second talking about this quarter and I’d rather talk about more about where we’re going and where we are. But I think it’s important to note that for the second quarter probably the best achievements that we had and sitting here as CFO and here for me was the launching of a different level of service.
We launched a accelerated service which fits perfectly between our standard and expedited service and it really is competitive on a market basis because it’s one to two days faster than our standard service, but comes with about a 10% to 15% increase in costs or increase in revenue for us at least.
And the only way we’re able to do this was the network is in as good a shape as it’s been in the last probably three to five years. So to launch a new level of service right in between our two prior core offerings was an incredible win for us operationally. On the financial side, we reported about $91 million of EBITDA in the second quarter which is down a little bit from the 109 that we’ve reported in the second quarter of 2015 and that’s mainly due to three or four different things.
Decrease in the fuel surcharge revenue and profitability, the increase in our modernly injury expense and I’ll talk about that in a second because that’s expenses from claims that it happened in prior years not current year. A little bit of an increase in operating expense and an increase in our salaries, wages and benefits.
At the end of the day, we continue to reinvest back into this business for the second quarter for about $65 million back into in terms of CapEx and CapEx equivalent. And we actually were able to mend our ABL facility. So we were able to decrease our expense on ABL by about 50 bps under certain conditions where we are able to extend the maturity from February 19 to June of 2021.
And for me, as we see here today one of the most important things that we’re able to do was free up about $40 million or $50 million of cash that we can reinvest back into this business. We’re going to pick up on a very reoccurring theme as I kind of go through this presentation as reinvesting back into the business.
Previously, the Company was under invested in and we’re trying to catch up on that today and the ability to clip that coupon off of our balance sheet to use our own cash to reinvest back into the business. I think is an incredible win for all of us especially at the operating company level.
And then lastly, we ended the quarter with a little bit less than $300 million of liquidity, $278.8 to be exact which is about a $50 million to $53 million increase from the prior year. Why is that important? We only get 33 million shares outstanding, driven incredible amount of cash on the balance sheet for us today relative to my opinion of market value of this Company.
So that was today. And then let’s talk about tomorrow where we’re going with this Company. If you look at Page 17, and you look at the black bar on the right hand side of the slide, the LTM EBITDA margin is a little bit less than 13%. And we have a target for – a long-term target for each one of our segments that are different.
If you look at the regional company, there are about 9% LTM EBITDA margin relative to that 13%. We think we can get them up by another – this is 1.6% if I could range it say 1% to 2% incremental margin points and the same applies to the freight. Right now there are about 4% LTM EBITDA margin. We think that we can actually increase that by another 3% to 4% given where the market is today.
So market goes up from there, our ranges will slide up and goes down from there. It ranges for slide down, so it’s certainly a sliding scale. The takeaway for me here is if you look at the regional company at $1.7 billion in revenue. If we can get another 1% to 2% margin out of them, that’s another $17 million to $35 million in EBITDA and simple math that applies to the freight segment as well.
If we can get another 3% to 4% of margin out of them that’s under $90 million to $120 million of EBITDA margin. So call it about $100 million of margin under a market environment that is around call it 12% to 13%. Now the question shouldn’t be, how do you plan to get there?
Well, if you look at Page 18. It doesn’t come from anyone particular item, it comes from a myriad of different initiatives and market conditions. The very first one of those has to be volume and yield growth. We need to have some semblance of economic growth if the economy goes backwards it’s hard pressed to say that the market will continue to yield 12% to 13% EBITDA margins and the same would also apply to the market price rationalization.
We need to see the market continue to be rational on not only a volume perspective that is equally if not more important on the price that as well. So that’s the revenue side. Now flip over to the other side of the business and think about the expenses. We need to improve our productivities and we’ll talk about how we do that in a second because salaries, wages, and benefit is our single largest expense item.
So to the extent that we can improve our productivity that’s going to have a disproportionate impact to the bottom line. Part of the ways we’re going to this is a focus on safety. You heard me say earlier that part of the step back in the first quarter 2016 results had to do with bodily injury and property damage.
That had to do with accidents that had occurred prior to 2016. For those old accidents and those injuries sometimes have a propensity to actually get worse not better. And this is one of those areas where we’re investing in our in-cab safety technology to help mitigate if not completely avoid accidents on a go forward basis. So we retrofitted 15,000 of our trackers with an aftermarket safety to different types of safety technology. So if it doesn’t completely avoid the accident it will certainly mitigate the ones that we do have.
And then the last part on this Page on 18, item six, is to continue to invest in the technology not just in-cab, but on our linehaul and our P&D aspects of our business as well, as well as our revenue equipment. I think we replaced about 1,600 tractors since the beginning of 2015 a little over 3,000 trailers since the beginning of 2015 as well. And that bodes nicely actually kind of leads nicely into Page 19, which is the continued reinvestment in this business over the long-term.
And if you look at Page 19. You’ll see that in 2011 to 2014 we’re only reinvesting about 1.5% to 3% of our revenues back into the business. Now pause there and then look at the fiscal year 2015 where we actually stair step that up to 5%. So that’s not only just CapEx but it’s also the capital value equivalent of those new tractors and trailers that I was referring to on the prior slide. On a LTM basis it’s even higher it’s 5.4%.
On a historic basis looking through the entire cycle not looking at an individual quarter, not looking at an individual year, but looking at entire cycle. I think the industry would tell you that in normal reinvestments levels probably around 4% plus or minus where above that level now and we need stay above that level. So that we can continue to reinvest not only in the technology side of the equation, but on the revenue equipment that we’ve got as well.
A lot of people underestimate the return on a trailer and it’s not just for us, it’s for anybody because the new trailers are not only come with the few I mean the aerodynamic skirts, but also come with low bars inside the trailers where we can actually stack freight on low bars not stack freight on itself so that the claims damages goes down, but also allows us to fit more freight on a single trailer than before. So while may just “seem like a trailer” there’s a good return on investment on trailers as well.
So if you think about you know going from the second quarter of 2016 where we talked about how we performed, talked about our longer-term EBITDA margins and how we’re going to get there. We didn’t talk about what YRCW’s competitive strengths are. If you look at Page 21, it really bolds down to four things people, our networks, physical assets, and then generation-skipping technology and I’ll just flip through these real quickly.
On Page 22 and 23 and we have 32,000 very experienced professionals inside this company. On average our unionized employees have about 15 years of tenure underneath their belt and our unionized employee turnover rate is all less than 10%. And I don’t know what your expectations are but in a market environment where a driver shortage is huge and most likely getting worse. Our ability to hold onto these assets is incredible.
If we can hold on to them for more than a year we have found that we’re able to hold on to them for a decade if not more. So if there is not – unlike a tractor or trailer [indiscernible] buy those today and unlike a terminal where I can go build a terminal today, there is no driver store where I can go buy a driver.
Hiring these drivers, keeping these drivers is incredibly important to our business and keeping the turnover rate is equally as important to us. And as I said earlier having an executive management team that has 150 years of experience is actually not replicable in this industry.
If you looked in on Page – and I told you we would come to this on the middle, look at Page 24. We have 384 terminals across North America. You can’t go out and buy 384 terminals today that they actually expand coast to coast not only in United States but if in Canada and Mexico as well and if you think about our physical assets it’s not just within our 384 terminals with a 15,000 tractors to drive almost a 1 billion miles a year.
In our case 15,000 tractors it’s not only the ones that has retrofitting on a safety basis, but the 1,600 new ones as well plus 45,000 trailers. And so for us having a network in a physical asset presence that is almost impossible to replicate is a great competitive strengths for YRCW and then you combine that with, we look that on the next page, Page 26.
The catch up investments that we’re making on a technology basis. I’d say that we’re leading the industry in some areas. And that’s only because we’re so far behind that we skipped not one, two sometimes three generations of technology. So we spent again $37 million in technology CapEx in 2015 twice as much as we spent in 2014 and probably as much as we’ve spent in the three years combined you can see where we’re investing is dollars.
It’s not just in-cab safety technology, but we’ve got 70 Dimensioners working across both segments of our Company. We’ve rolled out Dock Supervisor tablets at our larger DCs. We’re rolling out now and the things that we’re looking back in the latter half of 2016 and going into 2017 is optimizing our linehaul network and even optimizing our pickup and delivery operations as well.
So there’s a lot of things that we have done in terms to catch up on our technology side. But there are a lot of things that we are doing today and intend to do still yet even this year moving into 2017. That’s going to allow us to capture that incremental margin that I showed you on the prior slide. So in terms of competitive strength just to kind of wrap this up, it’s our people with networks of this classic, the technology that we’re seeing in today.
And if you look at 2018, in terms of an investing best month basis, you can read across these, the team is second to nine. The one thing I didn’t touch on is our industry position varies somewhere between 20% to 25% of the public market tonnage on a very, very consistent basis. So it’s almost impossible to work around this. Our footprint cannot replicate today. You couldn’t go out and build 384 terminals. Not only from a cash basis, but even the regulatory environment is difficult to get terminals build today.
The capital structure is probably the easiest thing, because it’s a result of the improvement in the operation. And then we still think that even in the current environment that we still have a little bit of margin expansion opportunity available to us even today.
And that’s not to say that we don’t think there will be some headwinds and it’s not a linear recovery, it certainly going to be a stair step and there will be time when we start, when we stop. But we still think there’s some incremental margin that we can still equip even on the existing company today. So I think a minute and half over Jay, so come over and join me on the podium.
Q - Jason Seidl
Jamie, very good presentation. I want to ask a couple quick questions and then I will give the audience a chance here. You talked about your investments and it looks like you had about maybe five years of what you call under investing in the Company and 2016 is really sort of the second year that you are now over investing the average. Should we read it as there is another three years of over investment to catch up.
I would say yes. I would say it’s a journey, it’s not an event. If we understand for five years, I’m not going to say that we’re in over spin for the next five because what we’re doing right now is every incremental dollar that we’re able to clip out of this company, we’re putting it right back into the operation. So if we’re at you know call it 5% to 5.5% now.
And it’s going to take multiple years Jason to catch up not only in terms of the technology that I keep talking about, but given the fact that we do have 15,000 tractors and 45,000 trailers. It’s going to take some time to catch up. So I would say at least for the near-term, we’re going to continue to invest every penny we have back into this Company.
So expects slightly elevated CapEx going forward.
You talked about the in-cab technology for the drivers on that very interesting I guess the first question again. That you have to get approval from the teams for support that?
No, we did not.
And the other thing that you brought up, I’ve heard several companies mention this. It seems like more companies now are playing catch ups to all accidents. Was there something that changed or did everyone just sort of underestimated their prior accidents because you’re not the first trucking company in the last, let’s call it six months that I’ve heard and we are making a little bit of an adjustment.
Yes. So the public guidance that we’ve given is that in any given quarter we think there will be either a positive or negative $5 million adjustment. And if you think about that on a $400 million liability, it’s less than 1%. So it has a disproportionate impact on our profitability relative to the size of the liability on the balance sheet. But to answer your question directly what’s happening is that accidents that have occurred prior to 2016 are negatively developing worse than we had originally or we actually had originally anticipated.
And that’s why the investment in the retrofit was so important because if we don’t avoid the accident in total two other things are going to happen. First of all, we are going to avoid accident in total. Two when we do have accidents, the audible alert that this technology has is going to alert the driver that even back half accident, we’re lagging to take invasive action, slow down and to mitigate the severity of it. That’s what’s popping on us. So severity of these old accidents is what’s popping on it.
But there’s also a third benefit and a lot before overlook and that’s the exoneration of our drivers statistically proven that anywhere between 60% to 70% of the accidents on a highway today are not caused by our drivers, but the other driver. And so some of these units that have the in-cab event recorders in there, they’re able to exonerate our drivers if not literally on the spot once the [DPS] officers are able to get that video or that event. And show that some people actually are causing accident and saying it’s ours and once we show in the video the lawsuit is immediately dropped.
So I don’t want to discount the exoneration aspect of this. And at the end of the day, this is for as much of the benefit of the drivers. Yes, if the union needed to approve it. It is for their benefit as much as it is the public safety at large. We want our drivers to go home to their families safe and sound every night. So while there’s always pushback or change with any technological change. There’s always pushback, but I think we have found that there’s been a very high rapid adoption.
Excellent. You mentioned Dimensioners there been very few investments in trucking that I have seen and had the immediate payback almost of the Dimensioners. Where you guys are reporting them across the system?
So, I’d say we’re predominantly complete for now and we’ve got 70 of them across the entire network. I think it is 55 or obviously I think it’s about 15 additional companies plus or minus. And the reason those numbers are with YRC Freight, we put two or three of them at our largest DC and anywhere 80% to 90% of freight pass through those DC’s, so we don’t need to put those at the smaller $10, $20 aren’t $10, $20, it would say $20, 10 to 20 door in the line terminals. So we’ve got pretty good saturation there. That doesn’t mean that as a cost of the technology comes down that we won’t continue to roll those out.
So the payback Jason is incredible, but it’s not just the immediate payback that I’m looking at, but it’s the ability to scrape data off of every single shipment that we’ve put through that Dimensioners and it’s not just the height, the width and the length of that shipment, but it’s also the characteristics of that shipment. That actually speaks directly to claim.
So we are scraping data off every shipment and we put through Dimensioners that’s going to allows us to better cost. I should at the end of the day what do we sell? Space on a trailer. So we can actually Dimensioners, we can accurately cost it and that’s another hidden benefit of them or we may not be seeing immediate payback. I think in the long-term, this is where this industry is going and we want to be post if not ready to go leading the charge there.
Perfect. You may Dimensioners pretty much if you buy basically will deliver, right, I mean which is sort of the whole trucking industry. We’ve heard a lot of different things about the stated economy. I’d love to hear your current thoughts on where we are right now, you mentioned you can still probably pull little more profitability out even in this current environment, describe the environment that you’re seeing right here?
Yes. I would say mixed at best and so we got two minutes forty seconds and give it one minute being open it up to the crowd here. I’d say the retail side of the equation continues to anemically grow 2% to 3% plus. I think people immediately look at same-store sales for brick and mortar and say that the retail market is falling apart. I don’t see that. E-commerce is growing more than offsetting same store sales, so I think the retail side and environment continues to grow a little bit inversely. I think the manufacturing side of the economy continue to struggle.
And if you look at PMI as I still indicated there is an incredibly strong correlation to PMI and LTL volume or tonnage. That would have you believe that it should have been expanding for three at the last probably six months, but if you rip out the utility impact and the mining impacts at PMI. I would venture to say that it actually is and has been in contraction territory for a period of time. I think that showing up in the industry as a whole lower tonnage and we will wait for shipment, because retail is a latter wait for shipment then is the manufacturing side of our entire economy.
So the way percent has been has much mix than the economy?
I think so.
Okay. Let’s give the audience to shot here to ask any question in last minute 29, so we have a mic, if anybody ask questions. Yes, Vince over there.
You put out your EBITDA target margin range, but even with those enhancements that you planned to put in place that still be below the industry average. What is about your Company that you will have margins, 200 basis points below the industry average even when you get to more optimal levels?
We are giving that predominantly in non-union industry. There is two or three of us a left that has significant union operations. And I think there’s a structural difference that will stand between us and a predominantly non-unionized margin.
End of Q&A
Any other questions for YRC [indiscernible]. Please join me in thanking Jamie of YRC.
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