YRC Counsels Patience After Poor Second-Quarter Results While Investors Count Their Burnt Fingers

If YRC Worldwide, Inc.'s YRCW second-quarter results could talk, they would tell investors and shippers to give them the benefit of the doubt. But after a disappointing quarter, an equity price that's down nearly 80 percent in the past 12 months, and a model that has destroyed untold amounts of wealth in the past 14 years, is anybody listening?

Like most of its less-than-truckload (LTL) carrier brethren, YRC felt the sting of declining revenues and volumes in the second quarter. However, unlike other carriers who reported year-over-year improvements in their operating ratio (OR) – the ratio of revenues to expenses – YRCs ratio went the other way. Its long-haul unit, YRC Freight, reported an increase in OR to 98 percent from 96.8 percent. Its regional unit – comprised of three carriers – fared worse, posting a ratio of 99.4, up from 94.1 percent. The trends are unfavorable because they indicated that YRC spent more for each dollar in revenue it generated.

The financial and operating results were not good but not unexpected. Operating revenue at YRC Freight fell 3.2 percent to $800.8 million, while operating income dropped 40.3 percent to $16 million. Daily shipments and tonnage were down 5.2 percent and 6.8 percent, respectively. At the regional units, operating revenue dropped 5.5 percent to $471.8 million, while year-on-year operating income fell by nearly $23 million to $2.6 million. Shipments and tonnage fell 5.1 percent and 4.9 percent, respectively.

YRC reported $58 million in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter, well below the consensus of $70 million.

Shares traded down more than 20 percent in late morning trading, and are off from a level of $10.31 reached in late August 2018. Earlier in the decade, YRC executed two "reverse" stock splits which eliminated massive amounts of supply from the marketplace. Adjusted for those splits, YRC shares traded, as of April 2005, at more than $443,000 a share. 

Founded in 1926, the company was a solid operator for nearly 90 years. It began to spiral out of control in 2003 after it overpaid to buy rival Roadway Express and then experienced a disastrous multi-year integration. In 2005, YRC took on enormous debt to acquire LTL carrier US Freightways. Burdened by massive financial obligations, high costs, lost business and a brutal recession following the financial crisis, YRC was days away from insolvency at the end of 2009 when significant concessions by its Teamsters union employees compelled its lenders, who also stood to lose their collective shirts if YRC went down, to keep it afloat. In the process, union workers had their equity wiped out, lost about 75 percent of their pension benefits, and endured wage cuts and freezes for a number of years. 

For both units combined, second-quarter operating income in the quarter was impacted by a one-time, $12.4 million charge for increased vacation benefits called for under a five-year collective bargaining agreement with the Teamsters, which was ratified in mid-May. YRC blamed much of the bottom-line weakness on higher costs associated with the agreement, which was retroactive to April 1, 2019, with little, if any, of the benefits accruing to the company in the quarter. Uncertainty over the labor outlook also hit revenues in the quarter as customers either were reluctant to tender freight to YRC or diverted traffic to rivals. Union leadership had warned YRC's rank-and-file in the early spring that failure to ratify the agreement would likely result in the company's collapse by Memorial Day because customers would flee in droves.

YRC CEO Darren D. Hawkins and other company executives sought to assuage analysts that the company has just begun to scratch the surface on the cost and efficiency improvements to be realized under the labor contract. For example, it has brought on 170 box trucks, operated by employees who don't require commercial driver's licenses, to handler local moves once the province of cartage contractors. YRC never had this flexibility prior to the current contract, company executives noted.

YRC has begun to close service centers – most of which it doesn't operate from – as part of a plan to shutter 25 centers by the end of 2019. The moves will generate $25 million in cash proceeds, YRC said. It has also shut the New Lebanon, Pennsylvania headquarters of regional unit New Penn Motor Express and consolidated its corporate functions at YRC's headquarters in Overland Park, Kansas. That will save the company about $25 million a year, it said.

Increased efficiencies as part of the company's "network optimization" program will result in $80 million in margin improvements during 2020, Hawkins predicted.

The lone bright spot in the quarter for both units were increases in revenue per hundredweight, or revenue for each 100 pounds shipped. The gains were due in part to low to mid single-digit rate hikes on contract renewals. Echoing comments from other LTL heads, Hawkins said that industry pricing remains rational. Despite weak macro conditions that have hit carriers' top lines, all are reporting year-on-year increases in contract renewal rates, a function of pricing power in the LTL market, which is dominated by the top 10 carriers. According to data from ShipMatrix, a consultancy, in 2018 the top 10 providers controlled about $30 billion of the $42 billion a year segment.

Hawkins said July tonnage and shipment activity were also down, but were a sequential improvement over a weak June.

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