YRC Worldwide's CEO Presents at Deutsche Bank 2012 Aviation and Transportation Conference (Transcript)

| About: YRC Worldwide, (YRCW)

YRC Worldwide, Inc. (NASDAQ:YRCW)

Deutsche Bank 2012 Aviation and Transportation Conference Call

September 6, 2012 11:30 am ET


James L. Welch – President and Chief Executive Officer

Jamie G. Pierson – Executive Vice President and Chief Financial Officer


Justin B. Yagerman – Deutsche Bank Securities, Inc.

Justin B. Yagerman – Deutsche Bank Securities, Inc.

All right, we’re going to get started here. We’re in short on time; we wouldn’t want to not be able to ask questions. Without further ado, we've got two gentlemen to my left from YRC Worldwide to present on the LTL industry and the YRC story, CEO, James Welch and CFO, Jamie Pierson; so without further ado.

James L. Welch

Thank you, Justin, and thanks for taking the time to attend our session. We’ll get started; we have quite a bit of material to go through. So I’ll be breezing through these slides relatively quickly, because I want to be sure Jamie has a chance to cover some of the financial information that I’m sure you’re interested in, and we want to be sure we give you a little overview of what's going on.

Obviously, the forward-looking statements that are more normal course of activity. We’ll do our quick introduction, I mean some things that were up to the 2011 July transaction, some financial updates and conclusion.

YRC Worldwide is made up primarily of four operating companies, YRC Freight, which is the combination of the old Yellow and Roadway Companies, Holland, Reddaway and New Penn.

A quick fact sheet on YRCW, still a $5 billion dollar company in spite of the things that have occurred at the company over the last several years, 431 locations in U.S. and Canada, 15,000 trucks; 51,000 trailers; $14.1 million annual tons, almost $22 million shipments, and we drive about 1.1 billion miles a year.

Global history on the company, for those of you that are not familiar with the companies that make up YRC Worldwide, virtually all the companies were founded between 1919 and 1931, within a 12-year period; Reddaway, Yellow, Holland, Roadway and New Penn all came into existence. As you can see to the timelines, there really wasn’t much going on between 1930, and really as we approached 2000 in lot of ways.

Obviously, a lot of activities started occurring in the 2000 timeframe, arguably maybe some bad activity as the things have played out, but the floor of activity with acquisitions of Roadway and then USF. Then the start of (inaudible) ventures into China, and then what happened with the economy, with the over leverage situation, and then the July 11; or July 11 the transaction and the things that have occurred since then.

From a market share standpoint, if you look at the regional carriers and YRCW, we still command about 23%, 24% of the market share. So we’re still certainly a viable player in this industry, and a company that is certainly on the move again and having good progress with our customer relationship rebuild, but still a major player in the industry.

Descriptions again, we'll go into this a little bit more in detail. YRC Freight again the combination of Yellow and Roadway. National network the regional carriers are again New Penn, Reddaway and Holland. If you look at Freight almost 200,000 customers, 282 service centers, 15,600 dock doors. Our average length of haul at Freights about 1300 miles, average weight per shipment is around 950 pounds, approximately 22,000 employees an average days in transit is 3.7.

You can see down at the bottom, how we have work towards becoming more of a two day and beyond, a carrier with the network changes that we've made over the last several months 60% of our business is delivered in three days or less, but 42% is four days or more. YRC Freight they are really concentrating on becoming more of a 500 to 3500 miles length of haul carrier and have less in their emphasis on next day even though as you can see, we still do a next day business, but still broadly represented across the United States, Canada and Mexico.

If you look at the regional transportation group, Reddaway is primarily a 11 Western States Company, Holland, Midwest and Southeast, New Penn, a legendary carrier in the Northeast. 114 facilities about 3900 dock doors, average length of haul 500 miles. Their average weight per shipment at the regional group is about 1300 pounds and a 98% of their shipments are delivered in two days or less.

New Penn’s average length of haul is really the shortest of the three and as primarily over in that carrier, but all three companies give outstanding service and their footprints and really are likes what’s happening at the regional companies.

As far as the July 2011 transaction, new board was placed. I came on board, July 27, 2011, quickly moved to do some things differently at the corporate office from a structure standpoint. I’ll cover that here more in just a second.

Additional liquidity was provided at that time for the company and the maturities on all major credit facilities were extended to late 2014 to early 2015. Really one of the things that we wanted to try to accomplish was to get the company very focused on what we do best, and no matter how hard this company had tried to diversify away from its original roots, 90%, 95% of the revenue always came from trucking, and about 98% of the profits back in the day always came from trucking.

And so we really tried to be very laser light focused on North American LTL operations. When I got there, there were still this Yellow Roadway issue that was brewing, and still hadn’t been really put to bed. We closed down the Roadway zonal office in Akron, Ohio in March of last year.

And when you enter Akron, you felt like you were Roadway, and when you run over (inaudible) you felt like you were Yellow, and if we were ever going to get YRC Freight moving as one company, and moving on the right direction, we have to talk about, Yellow is gone, Roadway has gone, it’s YRC Freight, this is where we are going to do our business. And unfortunately during the time that they integrated back in 2009, they really didn’t make some tough decisions that should have been made to make the integration more successful than what it had been.

We needed to have one vision at YRC Freight, one culture one mission, we wanted to again get rid of any distractions that took our attention and focus away from being a better LTL company than what we had been seeing in the past. We exited Glen Moore, Jiayu sold excess real estate that hadn’t been being used wasn’t going to be used, and we’ve done some things with those proceeds to help ourselves out and there is a work comp and certainly invested in the P&L, I’ll show you some slides in just a minute to talk about the things that we have to do it YRC Freight to get it to tipping in the right direction.

The one thing that I feel really good about is that since the new management team was put in place, we’ve done a good job of meeting or beating our internal forecast. We built credibility with our lenders, starting to build some credibility with the analyst that have followed this company back in the past and that’s something that’s very important to both Jamie and I as we move this company forward.

One of the things that attracted me back to the company, for those of you who don’t know I was with the former Yellow transportation company for 29 years, I left in 2007. So coming back after four and a half years, was kind of a strange spot to be on, but one of the things that finally convinced me to come back was just the quality of a board that the search committee put together.

And really when we look at this board we’ve got all four corners of very important pieces of our business, solidly anchored by really good board members from an audit standpoint we’ve got Ray Bromark, who was a retired Vice Chairman, a retired partner of PWC from a finance standpoint, we’ve got a couple of young guys that are very sharp, Matthew Doheny and Harry Wilson, so from a Wall Street perspective, we think we’ve got some great advisors there from a legal perspective Bob Friedman, who just retired as General Council of Blackstone; and then from an operation standpoint, we’ve got an ex-UPS Senior Vice President, James Winestock, and then Doug Carty, who used to be the Chairman of Laidlaw transportation.

And so from an operation standpoint both those guys have been very influential and very good to work with. So I really like this board as they are much, much, much different Board of Directors than we had in the past and obviously we have the Chairman Jim Hoffman who was primarily from the healthcare and telecommunication standpoint, but non-executive Chairman. So I really like what’s going on from that perspective with the guidance council leadership that the board is providing.

Little bit about the management team, I won’t go into great amount of detail because we are running short on time. 120 years experience with the management team, I obviously was with the company a long time before leaving on 2007, was lucky enough to convince the Jamie Pierson to come on as the CFO, he had been managing partner with Alvarez & Marsal during the restructuring process.

So I left in 2007, I think he came on in 2009. And so he had a good experience and knowledge of the past and what had occurred during the restructuring process, so very fortunate to get him on board. Jeff Rogers is the President of YRC Freight, he led the turnaround of Holland. Holland was losing a $1 million a week, and Jeff will take that position over so I convinced him believe Holland and come leave the turnaround of YRC Freight, which is where we’ve got to put our emphasis and energy that’s the key to our success moving forward.

A tough assignment, but the Jeff is making progress as President of YRC Freight to replace Jeff, we put in Scott Ware as President of Holland, he had background at Saia Con-way who’s VP of operations at the Holland, a stepdown and we haven’t missed to be, in fact we’ve continued to improve how we are doing business at Holland. At Reddaway T.J. O' Connor that was past Roadway, a legacy employee. He has had a tough assignment in integrating Reddaway in best way.

And as we all know integrations in this industry are pretty tough, but we really like to progress that T.J. is making it Reddaway. They’ve bounced back really pretty well from losing a large amount of the bill count, to a change that one of their primary, customers made from a distribution process that really hurt their business, but really liked that, the leadership that he was provided there, and we really liked that, the attractive run.

And Steve Gast, President of New Penn had worked his way up through the organization. So, I am really blessed in a lot of ways to be working with this group and they are very committed to what we are trying to do at this company. We are very aware of the problems that the company has had and the things that we have to do to work out of it, and we’ll make a nice progress.

From a structure standpoint, I wanted to get into this a little bit, when I came back there was just this attitude that everything was going to be controlled at the Corporate Office, whether it was sales, customer service, HR, IT, equipment services, maintenance, legal security everything was at the corporate entity. I felt very strongly, certainly after running Yellow Transportation for seven years that we needed to push as much of the operating authority, backed out to these operating companies as possible and then hold them accountable for the results. We had lost the identity of our companies with the way the organization had been put together.

Too much, [although] this is the YRCW way of doing business and I wanted to come in and say, New Penn go be New Penn, Holland be Holland, Reddaway be Reddaway and then we will get YRC freight, the culture, the mission and the mantra, the processes we’ll get it worked out to be YRC freight even though that’s the bigger challenge, but I have to tell you the attitude of the employees, the way that they embrace the challenge to say we are going to push the step back up to you guys. Jammie and I hold them strictly accountable, we do four, five hour of business reviews on a monthly basis.

So, I moved very quickly to do that. Eliminated the Chief Operating Officer, the Chief Marketing Officer, the Chief Administrative Officer, the President of customer care all within just a few weeks and really sent the message that we are not going to be a company that’s controlled at the holding company.

The new structure, again pushing sales, customer service HR, IT, Equipment Services back up their up coast and at one point there were 2000 employees sitting at that corporate entity level, we still have about 400 of which the majority are in our Accounts Receivable Department, if you really adjust that number down. The holding company is very skinny compared to what it used to be and we kind of have this joke around Overland Park, we just want to be squatters on the tenth floor and an insignificant part of that building and really put the energy of the resources towards the operating companies.

And then Jamie and I are holding them accountable to justify those 1600 employees that we push back out to the operating companies to justify whether that’s a needed resource or can we continue to make adjustments there and we are having a very detailed conversations about that even as we speak.

As far as YRC Freight, I mean again that’s where the game is going to be won or lost. No doubt if you follow this industry for any length of time, you know that integrations are very tough whether you are thinking about a FedEX Watkins or ABF, Carolina or an overnight motor cargo, or you know (Inaudible) I can go on and on and on, innovations are very difficult.

I think this integration was done haphazardly, again no judgment towards the past management team because of the pressure they [rend] with economy, tanking etcetera, etcetera, I get all that but we’ve had to really go in and really clean up a lot of things to try to get this company moving forward and one of the biggest pieces at the hall when I walked in was how lousy service was. Service absolutely stunk at YRC Freight and we certainly invested in the P&L to improve that I’ll show you a slide in just a minute that substantiates that. And then we knew we had to get away from this Yellow Roadway crap that kept going on.

We knew we had to get into a situation where we were focused as one company, thus we have switched the name to YRC Freight. We definitely have focused on improving the customer experience, service, becoming more operational efficiency we have a large change of operations in April.

We certainly think that there are things we will do from a timely prospective that will make this company upright and produce better in the future, but we will shut it of with one simple mantra, you know pick it up on time, deliver on time, don’t bust it and do it consistently and we had to get that mind set because in some ways employees may be had kind of given up so to speak. So we really had to reignite their passion for a competing in the marketplace, and obviously here I hit the wrong thing. How I could read that?

Justin B. Yagerman – Deutsche Bank Securities, Inc.

David, look at that.

James L. Welch

Yeah. Got it, so, we put together a flywheel concept that’s said, by a timeline these are things that we want to accomplish. Number one, when we had the improved service it was absolutely terrible. We have to get the network and cycle. There wasn’t a repeatable, dependable, executable network on a daily basis. We knew, we had to perform better on our expedited product, which is really just went down to the total, so to speak. We knew we had to win the hearts and the minds of our employees.

We knew that at least maintain our productive and cost levels while we went to work on these other things that are going to be critical to the success and we thought as we belong as we get into cycle productivity will improve. Our quality will improve, our failure related cost will improve and gradually volume would pickup and we would able to be asked for a better price in the marketplace from the yield perspective.

So all of that has gone along pretty well, I think we kind of got caught a little bit in April with economy turning down that’s kind of put us a little bit behind where I would like to sales from a revenue standpoint, very pleased with the progress that they are making from yield perspective about 70% to 80% of their business is contractual business of YRC Freight, and the 20% or 25% is affected by the GRI and we are starting to make progress in that area from a customers' specific negotiated increase standpoint after we did the things that we needed to get this companies straightened out. So that this gives you a little bit of flavor for sometime minds we are working with.

This is the one I really wanted to show you to give you proved positive that we're making progress at YRC Freight. If you go back to last July, I walk in the door July the 27, and our on time performance from on standard measurement was 62% on time. And on standard is, if it’s a three day lane, did you get it down three days, no matter if it’s whether a tender, a trap, appointment, road construction, you know, all of us in this space use about 30 different reason codes for adjusting your service that allows all of us to get our service into the 90s, but true on standard service, did you get it there, when the standard said you, but no matter what it was 62% on time, it was absolutely terrible.

So, you can see the progress that we made starting in August and right on through to this year, even our regional companies which are best-in-class giving 96%, 97%, 98% on time reported, their on standard is about 85%. So, we’re not quite where we want to be, but we’ve made a huge amount of progress, and I was with two large customers last week in New Hampshire, Massachusetts and as said you know the best thing about what you guys are doing is, we don’t hear our customers talk anymore, they were free feel customers.

We don’t hear them complaint and so we know that we are making progress in this area, that’s going to be critical to being able to ask for higher price, to be able to go back into customers that we have, that we lost during the integration, we try to get that business back. If you can’t lead to a service you might as well go do something else and so that’s been one of the things that I have been very strongly advising all of our President’s of (Inaudible) you got to give that service to make this thing work.

With that I’ll get off the stage and I’ll let Jamie come up and talk about the financials.

Jamie G. Pierson

I know I’m on borrowed time, so I’m going to try to do this as quick as possible, obviously we can follow up afterwards if you have any more questions. But in terms of, just the Q2, if you look at what’s going on, we present this as freight on the left, regionals on our right, we report on two segment basis.

For the second quarter of 2012 because of our active pricing and mix management James referred to earlier, we are actually getting rid of some of our low profitable accounts at Freight, tonnage was actually down, regions under their hand, they are in their will house, I keep saying this. They are also – they are continuing to actually increase their market share, they are best-in-class across the board.

If you look at, so that was volume, this is revenue per shipment and revenue per hundredweight. Because of that active customer mix management we talked about, which is shedding some of that lower OR business, largely freight, it’s actually increasing their prices period-over-period. The good news is, for us the regional business actually increased it more. So they’re not only increasing their volume, they’re increase their weight, and they’re increasing their pricing more than the market, I think at large, and that shows up in the results.

On a consolidated basis, YRCW shows a slight decline in revenue period-over-period. If you exclude some of the dispositions that we did on a discontinued operations basis, revenue actually increased about 1.5% to $1.2 billion, $1.3 billion.

2012 2Q EBITDA this shows an increase period-over-period of about 9%, actually it’s more than that. If you think about, and I know everyone is aware, the peaking contributions that we did not make in 2011, that we do make now, so if you are actually performer, that’s down sort of an apples-to-apples basis. That number in 2011 would be $50 million relative to $70 million that we disposed in the second quarter of ’12, about a 40%, 50% increase, that’s actually from the way we look at it. And if you don’t look at it on pinching adjusted basis, you are comparing apples and oranges.

I love the slides by 27, we show you EBITDA as reported so you can always tie it back to financials, but also adjusted for the pinching contributions that we didn’t make in ‘11, that we’re contractually obligated to do now. So if you look at the second quarter, we just posted our highest EBITDA in four years, this quarter. First time we actually reported all positive operating income, since 2008, that’s on a single-quarter basis.

If you look at on an LTM basis, EBITDA is up 21% to $181 million, adjusted for the pinch and payment is actually up 2.5 times, still $181 million, but $73 million is what it was on a prior-period basis.

Cash flow and liquidity, we actually used about $30 million in cash, the second quarter, so a good chunk of that goes to interest, some that’s also going to go to our single-employer pension payment.

If you look at it on an adjusted basis, because we didn’t make cash payments on interest on a comparable basis in the second quarter of ’11 that actually is an increase of $46 million period-over-period. So we used $13 million in the second quarter of ’12, on a comparable basis we would have used $16 million, so a substantial increase in the way that we’re managing the business, not only operationally, but from the balance sheet perspectives as well.

And then lastly, what I’d say here, as on a liquidity basis, we were at the highest second quarter liquidity that we had since 2008, we can’t all ascribe it to the operations because of the July 2011 transaction that James talked about. The good news is, from us is that increased our liquidity about $100 million, that should attract liquidity on the balance sheet, so we have some opportunities there. The good news is for us, we continue to slightly outperform our internal forecast, but we also continue to beat the consensus forecast as well.

So in conclusion 2011, was kind of a demarcation period for us, for James and I in particular, the new board repeated, extremely active, approved, very well granted, selective for a reason. I knew, we mentioned a team, our new monitor, we are laserly focused on being the best in the LTL carrier in North America. If we don’t fit in that statement, we consider it non-core and non-strategic and we’ll live to get out of it. We talk about the culture with 32,000 employees; to get those 32,000 people run in the same direction is a monomial task, a great job there.

We talked about rationalizing some of these other assets, investing in YRC Freight. What I would say on a concluding basis is, forced in a row positively comping on a EBITDA basis, just posted our best EBITDA quarter in the same four years. Best liquidity we’ve had since 2008, and I’m going to put on timeslots, open up for question, Justin anything else you want to say before we do that?

Justin B. Yagerman – Deutsche Bank Securities, Inc.

Yeah, I’ll start and I guess one of the questions that’s been on people’s minds relative to the improvement that you’ve shown is obviously the current state of the fleet and how do you think about that and capital expenditures and cash outlays versus leasing decisions and all the like, how are you guys planning as we look out and hopefully you are growing the business now over the next few years?

Jamie G. Pierson

Yes, so there is actually some growth CapEx, I think the maturities values will be on a replacement basis. So we’re looking at it very opportunistically unlike in the past when one site fits across all of YRCW, we mandated that down to all the operating companies.

Now we are letting them make some of those decisions, we’ll control it corporately, but we’re not only looking at the purchase of its lease, we are looking at operating leases, the U.S. market, we’ve some very opportunistic buys on the U.S. market stuff that looks maybe six years old in terms of age, but only has two or three of miles on it, so we are picking up some (inaudible) then lastly gliders, we’re looking at doing some substantial either financing opportunities of gliders as well. So we’re stretching those CapEx dollars as far as we possibly can on a revenue equipment basis.

Justin B. Yagerman – Deutsche Bank Securities, Inc.

Based on your projections in looking out, what do think maintenance CapEx is for the company?

Jamie G. Pierson

We don’t comment on CapEx, in terms of guidance.

Justin B. Yagerman – Deutsche Bank Securities, Inc.

From an economic standpoint, just curious – I’ve asked every company that’s been up here today, we are seeing some deceleration as FedEx come out yesterday, two days ago and talk about a slow down and Landstar’s pre-reported and [ISEMS] been sub 50 for the last three months. What are you guys seeking from where you sit, you have a broad spot of the economy that you look at?

James L. Welch

Yeah, what I’d say is that, quarter-to-quarter, we’re no different than anybody else in this particular instance, we look at IPI, and we look at IHM more than anything else, also look at consumer sentiment.

So, those three metrics are down on a period-over-period basis, it is not down that much but it is down, I’ll say you that our results might be a little bit misleading because of what our freight is doing in the customer mix management. Because we are pushing harder on price, so we are going to loose some of that volume intentionally, we’re putting to that risk, so we’re getting tired, at the same time we are putting those bills at risk, the economy is certainly slowing just like everybody else.

Justin B. Yagerman – Deutsche Bank Securities, Inc.

Okay. James you know it’s a good segway, obviously we saw freight tonnage down at (inaudible) freight. It did push the market on pricing, as we were positive on that. One of the things we’ve seen LTL carrier struggle with over the years is that balance between tonnage and pricing and it’s a fine line, especially when you’re talking about service and you have serviced focused on, you want to get compensated for it and pricing moves to the dial from bottom line standpoint. How are you thinking about that as you are attacking this market? I mean you’ve seen they’ve gotten a nice balance of regional, but on the freight side, it’s still kind of sorting itself.

James L. Welch

I have always subscribed the philosophy that it’s tonnage yield and cost and we got to keep those things in balance, we’re going to have a great yield on your last time business. So you’ve got to be sure that you have balanced out the best that you can be and as you say, we really like everything that’s gone for regional’s, all three, freight definitely has been the room and have this whole transaction.

You have to go back and really think about what happened to fleet during the financial turmoil and the integration. They’ve lost a lot of good business and probably kept on business that maybe some of our competitors didn’t want and or our freight we probably shouldn’t have been handling in the first place. And so trying to go back and get that right sized as no short fix, it’s going to take us a while.

But with this improving, our service we think that we’re able to go about and work on freight that better fits our system and certainly has a better characteristic more profitability standpoint, but other were sort of bullet they were just going to require lot of study service and lot of activity on the sales side to convince the customers, that they can put their trust in YRC Freight and that's definitely the challenge.

Question-and-Answer Session

Justin B. Yagerman – Deutsche Bank Securities, Inc.

Do have any questions from the audience? No questions, right. Okay, one of the things that I think would notably the question here is, you guys have spent a lot of time over the last two years trying to take as much cost out of this company as possible to get the bulk out. If the economy were to really like down here, do you still feel like there are enough levers that you can call to make sure that you can insulate your sales from sharp tonnage decline?

James L. Welch

Yeah, the answer to that is two-fold, one is almost, if you think about the regional, they are at the market if not a little bit better in terms of their margin. So I don’t think there as suspected or is actually as exposed to if you will, YRC Freight that is going to be the challenge.

What we are doing right now from the change of operation, they are trying to decrease the number of times we touch it. So can we improve that absolutely, are we doing it today on it quizzically. But also one thing that not showing up the numbers today that we’re investing in is the technology, we’ve been behind on that perspective.

So we fully anticipate that the investment that we are going to make and not only the handheld devices that we are rolling at by the end of the year, but also investment and training will help us just and how much of that will offset the decline was depending on how much that decline is. So can we do it true and what is to decrease that absolutely is

Justin B. Yagerman – Deutsche Bank Securities, Inc.

Where are you guys right now in terms of employee morale in terms of employee buying and then as you go through these operational changes how easy is it to work with your teams or for us to get them done?

James L. Welch

I think our morale is much improved over this time last year, the guarantee of that it’s, I think again pushing the operating authority back up to his up course as increase the morale. From a labor standpoint again I was gone for four and half years before I came back and I think we’ve done a nice job over the last year of reestablishing a better relationship with the Union.

As a matter of fact, Jamie and I will be traveling to Washington D.C. next Wednesday. The whole day business review meeting with the teams, to directionally holding a three-hour business review with Mr. Hofller and Ken Hall, the number two guy in the organization that we’re going to, then afterwards.

And if that were to happen, and years gone by, but we’re going in and basically doing a – here’s where we are the first half of the year, listening to your suggestions, criticism, comments and the part owners of the company, and so they have a vested interest that I think is making their attitude and effort towards upping us get thing to run better that it’s ever been in my career in the past, the relationship is always a little contingent, but it’s not where compared to where it was.

Justin B. Yagerman – Deutsche Bank Securities, Inc.

Fantastic, I think that’s all the time we have. Thank you so much, gentlemen.

James L. Welch

Thank you.

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