YRC Worldwide Inc. (NASDAQ:YRCW) Q2 2016 Results Earnings Conference Call July 28, 2016 4:30 PM ET
Tony Carreno - VP, IR
James Welch - CEO
Jamie Pierson - CFO
Darren Hawkins - President, YRC Freight
David Ross - Stifel
Scott Group - Wolfe Research
Brad Delco - Stephens
Good afternoon, and welcome to YRC Worldwide’s Second Quarter 2016 Earnings Call. All participants will be in listen-only mode. After today’s presentation, there will be a question-and-answer session. Please note this event is being recorded.
I would now like to turn the conference over to Tony Carreno, Vice President, Investor Relations. Please go ahead.
Thank you, operator, and good afternoon, everyone. Welcome to YRC Worldwide’s second quarter 2016 earnings conference call.
James Welch, Chief Executive Officer of YRC Worldwide; Jamie Pierson, CFO of YRC Worldwide; and Darren Hawkins, President of YRC Freight, will provide comments on the second quarter 2016 results and will be available during the question-and-answer portion of today’s call.
Before we begin, I must remind you of the inherent uncertainties in any forward-looking statements in our discussion this afternoon. 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 the risk factors. For a full discussion of the risk factors that could cause 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 available on our website at yrcw.com.
Additionally, please see today’s release for a reconciliation of net income to adjusted EBITDA on a consolidated basis, and operating income or loss to adjusted EBITDA on a segment basis. During this call, we may refer to our non-GAAP measure of adjusted EBITDA simply as EBITDA. Finally, in conjunction with today’s earnings release, we have issued a presentation, which will be referenced during the call. The presentation was filed in the 8-K along with the earnings release, and is available on our website at yrcw.com.
I will now turn the call over to James to provide comments on our second-quarter 2016 results.
Thanks, Tony. And welcome to our second quarter earnings call. I’ll make a few comments followed by, Jamie who will discuss our financial results; and Darren, who have some comments regarding YRC Freight.
During the recent economic slowdown, all four of our operating companies have been focusing on what they can control, and have leaned [ph] into the headwinds while continuing to reinvest in the business. If capacity tightens and/or the industrial economy shows any signs of improving, we will be better-positioned to take advantage of prevailing conditions. Obviously, we can’t control things like the economy or fuel prices, but we can focus on delivering award-wining customer service and achieving operational efficiencies, while tightly managing our cost.
The investments that we’ve made over the past couple of years, combined with a new talent that we’ve recently hired, along with our improved operational discipline, have helped to rebuild the foundation of our Company.
While our financial results in the second quarter do not meet our expectations, operationally, our regional carriers Holland, Reddaway, and New Penn continued to provide the same level of outstand service that its customers have become accustomed to. And YRC Freight line’s accelerated service, a new level of service, while providing the best on time service it has produced in the last four years.
Financially, there were four primary drivers that negatively impacted the quarter. Number one, year-over-year volume levels stayed weak in April and May, although we were encourage by much smaller tonnage per day decline in June and so far month-to-date in July. Number two was the continued low price of fuel and associated fuel surcharge. And number three, an increase in employee benefit cost. The fourth driver was an increase in liability claims expense of $8.1 million, primarily due to the unfavorable development from a hand full of prior year claims. While the higher expense from prior claims is disappointing, we are encouraged that the number of liability claims in 2016 is down year-to-date compared to last year. And we’re excited about the investment we made to retrofit almost all of our existing 15,000 tractors with accident avoidance technology.
While we like what we are seeing so far, it is too early to communicate those trends. However, the information that we’re gathering allows us to better train our drivers and prove safety on our roadways and in some cases, exonerate our drivers when they are not at fault.
We continue to believe that our strategy of improving price and freight mix has positioned us well for the future. Improving revenue per hundredweight, excluding fuel surcharge for nine consecutive quarters at YRC Freight and 21 consecutive quarters at our regional carriers has enhance the Company’s profitability profile and the Company’s book of business for the long term.
The pricing environment remains much more rational in the LTL space than modes of transportation especially the truckload space. And from our point of view, LTL companies are focused on evolution of the supply chain distribution process and getting an adequate return on the capital. As Jamie will elaborate, we remain steadfast on our commitment to reinvest in YRC Freight, Holland, Reddaway and New Penn during the quarter and are encouraged about what the future holds with expected efficiency gains from technology investments in linehaul and P&D operations.
The improvement in cash from operations and liquidity continues to allow us to selectively choose the best opportunities to deploy capital in areas that provide the highest and most meaningful ROIs. While we still have a long way to go with our fleet upgrade, the improvement is noticeable when at a terminal or out on our nation’s highways. Our goal is to continue making strategic investments to be best-in-class when it comes to safety and customer service.
Finally, I would like to welcome Justin Hall to our team. He joined YRC Worldwide in June as our Chief Customer Officer. Justin is the former President of Logistics Planning Services and has an extensive background in supply chain, transportation, and logistics technology. We look forward to combining Justin’s leadership with the award-winning teams at YRC Freight, Holland, Reddaway, and New Penn to create new market opportunities in an industry that is evolving at a very fast pace.
In closing, I would say that I continue to appreciate the engagement of our employees and their efforts to keep our customers front and center of everything that we do at each one of the YRCW family of companies. They see the progress that has been made; they see the progress we still have to make in order to capture the opportunity in front of us.
With these comments, I will now turn the call over to Jamie for the review of our financial results.
Thank you, James, and good afternoon everyone. For the second quarter of 2016, we reported consolidated revenue of $1.21 billion, down from the $1.26 billion reported in the second quarter of 2015. The decrease can primarily be attributable to decline in fuel surcharge revenue where the price of diesel decreased approximately 20% in the second quarter of 2016 compared to the same period in 2015; and secondarily, softer volumes. The good news is that decrease in revenue was partially offset by continued base yield improvement.
In terms of consolidated operating results, we reported operating income of $57.2 million, including $11.1 million gain on property disposals in 2Q 2016 compared to the $56.9 million reported in 2Q 2015 that included a $700,000 gain on property disposals. Our second quarter 2016 adjusted EBITDA was $91.4 million or a 16% decrease compared to the $109.4 million, reported in 2Q 2015. Our consolidated adjusted EBITDA margin was 7.6% this quarter compared to 8.7% for the same period last year.
As Tony mentioned earlier, as we did last quarter, we posted a presentation on our website and filed it in an 8-K along with the earnings release that includes most of our key stats. However, there are few that I would like to highlight.
First, YRC Freight’s tonnage per day was down 6% this quarter when compared to 2Q 2015. This was comprised of year-over-year decreases of 9.2% in April, 7.2% in May, and just 1.8% in June. And before you ask, YRC Freight is down approximately 2% month-to-date July when compared to the full month of July of 2015.
Revenue per hundredweight including fuel surcharge was essentially flat with just 0.1% decrease, while revenue per hundredweight excluding fuel surcharge was up by 2.9%. Second, at the regional segment, tonnage per day was down 2.4% compared to 2Q 2015. This was comprised of year-over-year decreases of 2.3% in April, 3.7% in May, 1.5% in June; and through late July, the regional segment is down approximately 2.5% on year-over-year basis. Revenue per hundredweight including fuel surcharge was down 1.4% while revenue per hundredweight excluding fuel surcharge was up by 1.3%.
Now, to the financial results by segment. In Q2 2016, YRC Freight’s operating income was $28.4 million, which included an $11.2 million gain on property disposals, compared to $22.5 million of operating income in Q2 2015 and $800,000 loss on property disposals. Adjusted EBITDA for the quarter was $43.9 million, for a margin of 5.8% compared to $53.1 million and a 6.7% margin in the same period last year.
The regional segment reported operating income of $30.6 million for the quarter compared to $37.7 million in 2Q 2015 and adjusted EBITDA of $47.6 million for a margin of 10.5% compared to $56.6 million and a 12.2% margin in the same period last year.
In terms of liquidity, cash, cash equivalents, and managed accessibility under our ABL facility at June 30, 2016, was $278.8 million, which is nearly a $53 million increase compared to the $226.1 million reported a year ago at this time. We ended the quarter with a leverage ratio of 3.32 times, which is in line with where it was a year ago and the ratio 3.33 times.
And as usual, I would like to leave you with a few parting takeaways. First, we remained resolute in investing back into the business. $65.9 million in CapEx and new operating leases for revenue equipment is equivalent to 5.5% of our second quarter revenue and an increase of $18.1 million over the second quarter of 2015 and nearly five times the amount than the second quarter of 2014. The additions included approximately 230 tractors, 1,150 trailers during the quarter which the vast majority of which were leased. And since the beginning of 2015, we have added more than 1,600 tractors and 3,100 trailers.
Second, given the current economic environment, while we’re disappointed with this quarter’s financial results, we are also not that surprised either. Tonnage has comped down for the entire LTL space for the past several quarters and while fuel has been increasing as of late, it’s still lower on a year-over-year basis. For the balance of the year, we intend to focus on what we can control, continue to invest in the Company, weather the current economic environment and continue to position the Company for a stronger freight environment. And lastly, the lending [ph] committee acknowledged the progress we’ve made, as we recently amended our ABL facility. The amendment not only decreased the interest rate by 50 basis points but it also included the option to extend the maturity from February 2019 to June 2021, subject to the refinancing, replacement or extension beyond June 2021 of our current credit agreement. It also has the added benefit of reducing the amount of cash that must be restricted to port [ph] the facility, that’s allowing us to access the cash that would otherwise be unavailable. We’re pleased with the recognition but even more encouraged to able to use the cash to continue investing in EBITDA and cash generating projects.
At this point, I’ll turn the call over to Darren to discuss, YRC Freight’s results.
Thanks Jamie and good afternoon everyone. Consistent with Q1 2016 results, YRC Freight’s volumes were negative while service, cost control and productivities were positive in Q2 2016. Operational highlights in Q2 included, starting with our service, YRC Freight’s new accelerated service launched on the first day of Q2 and provides one to two-day faster transit times than our standard service. The market has responded favorably, and we believe this organic growth should continue regardless of market conditions, as the new service better aligns us with other national LTL carriers on transit times and broadens our portfolio of core services. Our standard service remains a staple in the marketplace for linehaul economy service.
Turning to safety, the in-cab safety technology installations are complete in our U.S. operations, and early indications show positive results including increased miles between incidents. From an efficiency standpoint, the YRC Freight operations team delivered year-over-year improvement in dock, city, pickup and delivery, office operations and linehaul load average metrics. These were achieved while reducing the number of empty miles in our system with improved load planning and repositioning equipment. We also continue to benefit from improved fuel efficiency and maintenance expense from the ongoing upgrades to our fleet. External purchase transportation expense was down from lower rates and from utilizing our internal drivers.
In terms of labor and cost alignment, YRC Freight was negatively impacted from the adverse development of prior year liability claims. We also have higher wage and health care rates including a $0.34 per hour wage increase for our union employees, effective in April, which were partially offset by improved productivities. Further, technology investments are being made in two of our largest cost areas, linehaul, and pickup and delivery operations. The ongoing linehaul investments are contributing to more efficient planning and fewer empty miles. And we expect this momentum to continue as each iteration of the network optimization comes on line.
The pickup and delivery system is in the early stages with a pilot planned toward the end of 2016 and full implementation expected by the end of 2017. By reinvesting in our people, technology and equipment combined with projected capacity constraints from regulations and eventually a stronger industrial economic environment, we believe this will serve our Company well over the long term.
I would like to thank the 20,000 employees of YRC Freight for delivering year-over-year improvement in safety, service and productivities. They have the right attitude about being safe, being reliable and making a difference for themselves, our customers and our communities. I appreciate all their actions that continue to move us in the right direction.
Thanks for your time this afternoon. We would now be happy to answer any questions that you may have.
Thank you. We will now begin the question-and-answer session. And the first question comes from David Ross with Stifel.
It looks like weight per shipment stabilized a little bit at YRC Freight, but it’s still falling at regional. Can you comment on the trends you’re seeing there and if you expect the stability to come to regional soon?
Well, Dave, we report weight per shipment on a total basis, that’s truckload on LTL. So, it doesn’t take a lot of variance in your truckload shipments to drag your weight down little bit here and there or raise it, but it’s really just a byproduct of freight mix, [indiscernible] we are actually trying to do this particular area to raise it or certainly lower it, we kind of like where we’re at, and will bounce around those numbers I think consistently as we move forward.
And the regional segment, [indiscernible] is going to be a little bit better, was that due to some of those insurance adverse developments, was that concentrated in the regionals?
Hey Dave, it’s Jamie. It wasn’t concentrated at the regionals, but they actually had their fair share as well. So, there was a piece of increase I think that went across both segments.
Also regional healed in tonnage where yield was a little bit worse than we had expected, is there any issue at regional that really need to be addressed that you guys are working on behind the scenes because, you got the three companies three, I can’t imagine they are all operating equally all the time?
No that’s right, we look at those -- even though we report those as one segment, Dave, you are right; we look at those companies on an individual basis. But there is really nothing unusual happening as far as we can tell. I mean we gain some business and lose some business as does all of our competitors, but it’s certainly something that we are looking at and making sure that we’re trying to balance our networks with the right freight at the right price. It’s interesting to note on the tonnage trends at both YRC Fright and at the regionals that in June we had the smallest decrease since January 2015 and then we had the smallest decrease at the regionals since March of 2015. But as far as how that relates to yield, certainly we were this time last year, raising rates. And so, we’re facing tougher comps on the yield side, but we’re going to take, we should be facing some easier comps on tonnage side. So, again, that’s nothing that’s unusual from our perspective.
Jamie will have some comments.
It is pretty tough comp. If you go back and look at Q2 2015 at the regionals, revenue per hundredweight excluding fuel surcharge was up a little north 5, and revenue excluding fuel surcharge per shipment excluding fuel surcharge was almost 6.5. So, that’s a pretty comp that that we’re going at.
And then, last question, Jamie, on the facility sales at YRC Fright, were those just excess terminals been sitting around a while that you offloaded or were there any sale leasebacks going on?
No, that’s complete excess, Dave, and something that I don’t -- way too long. So, we’re happy to actually monetize that investment.
The next question comes from Scott Group of Wolfe Research.
So, the tonnage improvement in June and July, can you tell, is that the comp getting easier or do you see, like sequential improvement tonnage, beyond just kind of normal seasonality?
Well, first of all, I think the comp is easier, obviously. And I’m confident we’re seeing a major change in tonnage levels because of the economy. So, may be a little bit at the end of June that helped us. And so far, July is hanging tough; July typically is one of the tougher months of the quarter. So, if I had to put a percentage on, let’s say it’s 70% easier comps and 30% may be a little better market.
Jamie, you gave us July tonnage; can you give us July revenue per hundredweight for freight in regional?
We don’t give guidance on that, Scott, but I would say, if you look just at the tonnage the way it kind of trended in the quarter and then were ended in month-to-date July basis, the rate -- change has moderated a lot in the last two months, especially June and July. And if you look at what’s going on with PMI and ITI, it’s still reflective of what’s going on with the broader economy, in my opinion.
So, I was talking about the revenue per hundredweight for July, if you can, like to month-to-date if you have that?
No, we don’t give guidance on that. But, if I could maybe I guess directly answer your question on Siznet, [ph] we’ve seen 3% to 5% in the freight past year, on a year-over-year basis we expect that to moderate, we’ve been going through a period of 6% to 9% increases excluding fuel. So in the back half of the year maybe 2% to 4%, I don’t know; it really depends on how much tailwind or headwind we face with the economy.
That was kind of on renewals you’re saying?
On the Siznet, [ph] yes.
So, as the tonnage declines are moderating, do you think that this an environment where you can start growing EBITDA again? And I know you don’t guidance, I am thinking more from perspective of the leverage covering at the yearend; it feels like we need EBITDA to stabilize on year-over-year basis, and are you comfortable that that could happen?
Yes, right now, we ended the Scott at 3.32 times; the covenant was 3.75% and that’s around the $36 million maybe $37 million cushion. Our forecast for this being in compliance, don’t get me wrong, it’s certainly helpful if we had some macroeconomic improvement and some internal operating improvements as well. But right now we’ve got about $37 million cushion.
Where is the covenant at year-end?
Okay. [Multiple speakers] Okay, you’re pointing out the $37 million of cushion, that’s on 3.7 time, not the 3.5 time?
Exactly; if we give you 3.5, we’d be giving you guidance.
The next question will come from Brad Delco of Stephens.
Jamie, you made a comment that you thought LTL trends were sort of following PMI or ISM or industrial production, it seems like other peers are saying that there is a little bit disconnect between the two. We saw ISM above 50 back in March. Most people think that it lags or LTL tonnage lags three months. Would you expect tonnage to be bettering LTL a day? And if so, what do you think the disconnect has been?
Brad, it’s Jamie. If you go back and look at the last four prints of PMI March, April May, those are the only ones that were above 50 since probably September of last year. And when I say they’re above 50, they are negligibly above 50, 51.8; 50.8; 51.3, it’s not till June to get something that meaningfully above at 53.2. But keep in mind, PMI includes things that LTL carriers do not ship i.e., utilities, electricity, mining things of that nature, and that’s what really drove the improvement in the first half of this quarter.
So, if you strip those two components out, I’m of the belief that we’d still be in a small contraction territory for those items that LTL carriers will have in our trailers. But, if I go back to your question, I do think that it lags a little bit; how much, we really don’t know.
No. That makes sense and that’s good color. And then second, I know you guys are making investments and obviously these investments are driving good returns. I know, we could see really clear evidence of that with weight research with the investments in the -- help me?
Dimensioners, thank you. But, so, the more recent investments, is there any way you can provide us more color with the linehaul technology, what has that really done with MPGs or what has that done with empty miles or any sort of way to help us quantify the benefits that you’re getting from these?
I’ll make a couple of comments, Brad; this is James, and let Darren jump in there. It’s still too early with implementation of these two technologies specifically the linehaul optimization and then the P&D planning and optimization tools. I think I commented on it several times during recent road shows that we would be implementing the software tools between now and end of the year, and certainly we felt like we would see more benefit in ‘17 than ‘16. So, we are just still too early in there to give you some sort of a good dialog, like we could around the Dimensioners that was pretty fast and we could track it specifically to the dollar, so. But to give you little more color about the -- what we are doing, I’ll let Darren talk about the opportunities we have with these two implementations.
Thanks James. And good afternoon, Brad. We’ve got a variety of efforts underway and YRC Freight in various stages, some already contributing that I mentioned in my opening comments. Certainly, the linehaul technologies that we’re seeing, Optum [ph] technology installed, Siznet [ph] is our driver visibility piece, that’s already providing benefit and also those two together helping us achieve that reduction in empty miles and also with the size of the YRC Freight network, that’s a tremendous positive for us, when we can reduce the empty miles.
We also have a wireless technology upgrade in all of our distribution centers along with those tablets that came into play last year that are providing benefits. We’ve upgraded all of our forklift technology for our dock workers, which benefits dock productivity, which is also one of those areas that we had nice progress in, in Q1 and Q2. We mentioned the P&D which is down the road and 2017 but also that would be our second largest expense category and we’re already seeing improvements in P&D, just from our efforts around that area without the new technology at this point.
Investments in our fleet and the trailers and tractors not only benefit the fuel efficiency and reduced maintenance cost, but also have contributed to the load average metrics with also, with our current length of haul, has a tremendous impact on earnings potential. With all that together, I would also that our employees did a great job in Q2 around enhancing those productivities and utilizing the tools that we invested in.
So, a long way of answering the question, Brad, but, I think as the year goes along, we’ll be in a much better position to talk more with clarity about what we think we can achieve, but something that we look forward to talking about as the year goes along.
Sounds great. And Darren, it seems like it was a 8-- you were prepared to answer that question. But Darren, if I could ask you one quick follow-up on pricing, Jamie sort of addressed the year-over-year comp versus regional, but I look at pricing on a sequential basis excluding fuel, it looked it was down slightly. Was there a big mix change or weight per shipment or length of haul change in freight this quarter?
No, there wasn’t a significant change in length of haul or weight per shipment. Mix is a moving target that’s always changing depending on the bid cycles that we’re in. I think Jamie’s reference on our contractor yields and the strength that we saw last year in that and the consistency we saw in the first half of the year, Brad with the second half of the year, there could be a slight deceleration there. But, we’re expecting to stay on track and also negotiate through those with the opportunity protecting our capacity for the right freight at the right price.
This concludes our question-and-answer session. I would like to turn the conference back over to the Company for any closing remarks.
Thanks again to everyone for joining us today. This is Tony. And please contact me with any follow-up questions that you may have.
Operator, this concludes the call. I am turning it back to you.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
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