Yellow Corporation

Good afternoon and welcome to the Yellow Corporation's Third Quarter 2022 Earnings Call. All participants will be in the Sonali mode. After today's presentation, there will be a question and answer session. Please note, this event is being recorded. And now I'd like to turn the conference over to Tony Carino, Senior Vice President of Treasury and Investor Relations. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Welcome to the Yellow Corporation's Third Quarter 2022 Earnings Conference Call. Joining us on the call today are Darren Hawkins, Chief Executive Officer, and Dan Olivier, Chief Financial Officer. In addition, Darrell Harris, President and Chief Operating Officer, will be available during today's question and answer session. 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 therefore actual results may differ materially. The format of this call does not allow us to fully discuss all of these risk factors. For a full discussion of the risk factors that could cause the results to differ, please refer to this afternoon's earnings release and our most recent SEC filings, including our forms 10-K and 10-Q. These items are also available on our website at myyellow.com. Additionally, please see today's release for a reconciliation of net income to adjusted EBITDA. In conjunction with today's earnings release, we issued a presentation which may be referenced during the call. The presentation was filed in an 8K along with the earnings release and is available on our website. I will now turn the call over to Darren.

Thanks, Tony, and good afternoon, everyone. Thank you for joining our call. In Q3, revenue and operating income increased compared to a year ago, marking the sixth consecutive quarter of year-over-year improvement. Operating income improved despite an unfavorable impact from higher third-party liability claims expense compared to a year ago. Our strategy includes mitigating incremental purchase transportation expense, and as a percentage of revenue, it decreased by 120 basis points in the third quarter compared to a year ago. Throughout 2022, we have consistently kept our focus on improving the quality and profitability of the freight moving through our network, and that continues to be our plan as we execute the final steps on the transformation to One Yellow. In Q3, year-over-year LTL revenue per hundredweight, including fuel, increased 24.6%. Overall, the demand for LTL capacity appears to be moderating following a period where demand exceeded supply. However, the price of environment remains favorable. For the month of October, yellow averaged an increase of approximately 5% on contract negotiations. In September, we successfully executed phase one of the network optimization. Phase one impacted 89 legacy YRC freight and Retaway terminals in the western U.S., and integrated the long-haul network to support both regional and long-haul service as well as the optimization of pickup and delivery operations. We went into the transition with a straightforward set of goals that would define success. First, we stood the terminals up to begin operating as a super-regional network. Our employees moved customer shipments across the network and delivered them as designed. We made things simpler for our customers by having one driver picking up and delivering both YRC Freight and Red Away brands, which resulted in reduced congestion at our customers' dots. We reallied and optimized more than 4,600 terminal zip codes, positioning our facilities closer to our customers, enabling earlier pickups and deliveries, and reducing city miles traveled. Finally, our employees remain highly engaged throughout the implementation of these changes, allowing us to capture valuable data and lessons learned as we prepare to integrate the rest of the network. The performance of the network following the implementation of phase one is meeting our expectations, and we are excited about what this means when the entire network is operating as a super regional carrier. we plan to have the rest of the network transformation completed around the end of the year. One of the benefits of optimizing an LTL network with more than 300 terminals such as ours is we will be able to dispose of terminals in close proximity to each other that have overlapping service territories. However, we do not plan to sacrifice customer service or geography. We will look for opportunities to sell the excess terminals that we own and we expect to continue de-risking the balance sheet by paying down debt with these proceeds. Turning to our recently extended asset-based loan facility, the progress the company has made during the transformation of OneYellow helped position us to improve the terms of the facility, including enhancing our liquidity. You will hear more about this from Dan. Thank you for joining us today, and I will now turn the call over to Dan. who will share additional details about the quarter.

Thank you, Darren, and good afternoon, everyone. The third quarter of 2022, operating revenue was $1.36 billion compared to $1.3 billion in 2021. Operating income was $49.1 million, including a $1.1 billion net gain on property disposals compared to operating income of $48.4 million in the prior year. Adjusted EBITDA for the third quarter of 2022 was $90.6 million, compared to $94.4 million in 2021. Adjusted EBITDA for the last 12 months was $401.7 million as of the end of the third quarter, compared to $248.4 million a year ago. Our revenue growth of 4.5% in the third quarter compared to a year ago reflects continued strong yield performance and higher fuel surcharge revenue, partially offset by lower volume. Including fuel surcharge, third quarter LTL revenue per hundred weight was up 24.6%, and LTL revenue per shipment was up 22.4% compared to a year ago. Excluding fuel surcharge, LTL revenue per hundred weight was up 12.8%, and LTL revenue per shipment was up 10.9%. LTL tonnage per day in the third quarter was down 16.2%. driven by a 14.8% decrease in LTL shipments per day and a 1.7% decrease in LTL weight per shipment. Sequential LTL tenders per day trends compared to the prior year were as follows. July down 17.2%, August down 15.7%, and September down 15.8%. On a preliminary basis, October LTL tenders per workday was down approximately 24% compared to last year. On a sequential basis from September to October, our LTL times per day was down between 6% and 7%, compared to our historical trend of roughly 4%. Our results during the quarter were negatively impacted by a $19.4 million increase in third-party liability claims expense compared to a year ago, mostly due to the unfavorable development of prior year claims, including the resolution of several of our most significant outstanding claims. Total liquidity at the end of the third quarter was $325.8 million compared to $409.2 million at the end of third quarter 2021. Capital expenditures for the third quarter were $68.1 million compared to $96.7 million a year ago. Total capital expenditures for the first nine months were $140.7 million compared to $442.9 million for the first nine months of 2021. We are also adjusting our full year 2022 capital expenditures guidance range from $250 to $300 million, down to $210 to $230 million. Also pertaining to liquidity, a reminder that in 2020, we deferred payment of $85.6 million for certain payroll taxes under provisions of the CARES Act. We paid the first half of that deferral, $42.8 million, in December of 2021, and the remaining $42.8 million is due in December of this year. Finally, we recently completed the extension of our ABL, or asset-based lending facility. In addition to extending the maturity by two years, from January 2024 to January 2026, we also increased the size of the facility from $450 million to $500 million, and reduced the interest rate by 50 basis points. We appreciate the support of our lenders, And as we move forward, we will continue to seek opportunities to strengthen our capital structure. I will now turn the call back over to Darren for some closing comments.

Thank you, Dan. When I think about Yellow's accomplishments in 2022, I'm very proud of our employees and the execution of moving our network into the final stages of super regional service. Customers, shareholders, and employees should see strong benefits as we bring this together in the near term. The transformation to OneYellow puts the company in the best position possible to continue improving operationally and financially. Thanks for your time this afternoon. We would now be happy to answer any questions that you may have.

Yes, thank you. And the first question comes from Jack Atkins with Stevens.

Hey, good afternoon, guys. This is Grant on for Jack. Thank you all for taking my question.

Hello, Grant.

How's it going? I guess we could just start on one yellow with the first part of the integration, just a little bit of an update on kind of how it's going and any cost savings you're seeing on a per shipment level that you could share, maybe kind of quantify a little bit.

Thank you, Grant. This is Darren. As I stated in the script, the Western change, which involved 89 of our terminals, went well. It's living up to our expectations. We're picking up and delivering YRC freight and Retaway freight with just one driver rather than two. Those pieces are coming together. The facilities that we generated from the changes that we no longer need without giving up geography or service in those areas, when you look at that in total, those will be available to sell and also generate debt reduction for the company moving forward. When I think about the changes as a whole, I'm excited that we're going to be wrapping up another 200 terminals between now and the end of the year. When you put all of this together, we can start expecting to see different areas of cost savings. Certainly the facility-related cost is going to free up 28 terminals that we're no longer going to need, and those costs will go away immediately, and then those benefits will be applied to debt reduction immediately. The operational management synergies will be early on, already seeing those come into play, and then the reduction in the city pickup and delivery miles is also a near-term benefit. The creating the density and the line haul benefits will be iterative over time. But I do want to make a comment about the size of these changes. Phase 2 that we're doing between now and the end of the year involves 200 facilities, 15,000 employees. It requires the investments of people and processes to get these things accomplished without any disruption to the customers, and that's what we'll be focused on. But it is an exciting time to wrap this up. and have One Yellow operating with Super Regional Service as we go into 2023.

Yeah, thank you for the call there. And you mentioned a little bit on customers and on service. I'm just wondering if you could maybe provide us a little detail on what you're hearing from customers and maybe how One Yellow is impacting service levels and how you see that trending going forward, and maybe also a little bit on just what customers are telling you on demand and what kind of trends you're seeing there out of them. Thanks.

Yeah, I'll take the demand side first and then go into the customer discussion. Certainly in October, we saw a slackening of demand in our retail channel, even though like most LTL carriers, a larger portion of our revenue is in the industrial channel and it held up. But some of our largest customers are actually in the retail channel and we saw a slackening demand in the retail channel. So overall, When I look at six straight quarters of improvement in revenue and operating income, I feel good about our pricing plan. I like our strategy on what we've done overall, and that retail slackening is to be expected with what we've seen in the broader economy. From a customer perspective, that's the great thing about Yellow. We've got a large customer base with a long-term loyalty in place, And our employees have also benefited from these changes in the West, and we've seen a high level of engagement, as I mentioned in the script. And those employees being able to operate as One Yellow, as we've been talking about it for a while, and they're excited to see it come into play. So I feel confident from a customer standpoint, a customer service standpoint, and certainly going into whatever the economy may throw at us, we've got a great opportunity to capitalize on on the benefits that reducing the redundancies throughout our network will bring, depending on what happens in the broader economy.

Great. Thank you guys for the time.

Thank you. Thank you. And the next question comes from Scott Group with Wolf Research.

Hey, this is actually Erin on for Scott. Thanks for taking my questions.

Good afternoon, Erin.

Hey, so I guess just maybe just update, thinking about fourth quarter a little bit and just the sequential progression. I know you mentioned a few puts and takes in costs with the payroll expense next quarter. How should we think about the sequential trend of OR from here, and would you expect it to kind of underperform, outperform seasonality, just anything? Any color on that?

Yeah, good afternoon, Erin. This is Dan. First, let me say that, as Darren mentioned, I'm also pleased that we were able to improve revenue and operating income on a year-over-year basis now for six consecutive quarters. Our operating ratio for the third quarter was 96.4, which was 10 basis points worse than the prior year. However, as I mentioned in my opening remarks, our third quarter results were negatively impacted by the year-over-year increase of $19.4 million in third-party liability claims expense, mostly due to the unfavorable development and resolution of claims from prior years. That elevated level of expense, which was unusually high for any single quarter and which we do not expect to continue, had a negative impact on the third quarter OR of 140 basis points. So excluding that, the OR would have been approximately 95, which would have been 130 basis points better than last year and more in line with our recent trends of profitability improvement. Now, as I think about sequential changes from Q3 to Q4, we historically see degradation in our operating ratio of about 100 basis points. So if I consider our jumping off point from Q3 being the 95 OR that I just referenced, I would expect our sequential change in OR from Q3 to Q4 to be slightly better than that historical trend. And then finally, you touched on the repayment of the deferral of the CARES Act of payroll taxes. That's only going to be a cash impact Q4. That's fully accrued, and that will not impact expense in Q4.

Got it. No, that's very helpful. And then also just GRI plans. Do you guys expect to, are you planning that right now, or when are we going to hear about the next one?

Yeah, this is Dan again. So we actually implemented a GRI at 5.9% effective October 3rd. That's been in place for about a month now.

Got it. And if I could just ask one more. On the contract renewal side, notice you mentioned 5% in October. and that's sort of trended or accelerated since April, I believe. I guess, how do you think about that moving forward, and why was that? Is it just you had maybe lower-priced renewals up earlier in the year, and now you're kind of lapping some stuff now? Any puts and takes there? And then also just kind of the balance of volumes and price from here as we go through 4Q. Yeah.

Yeah, well, let me start with saying we saw strong yield performance again on a year-over-year basis during the third quarter, and we saw continued sequential yield growth. Sequentially from Q2 to Q3, excluding fuel surcharge, LTL revenue per shipment was up 1.6%, and LTL revenue per hundredweight was up 3.2%. So although the level of our contractual renewals has come down from a historically high level in recent quarters, we believe that we can continue to achieve sequential yield growth, even though the year-over-year percentage comparisons will continue to moderate.

Got it. Okay. Thank you, guys. Appreciate the time.

Thank you. Thank you. And the next question comes from Jeff Kaufman with Vertical Research Partners.

Thank you very much. Hey, guys. Good afternoon, Jeff. Good afternoon. If I think about the $19.4 million as more of a one-off payment and true-up and not really related to current operations, $95 is probably the right bogey to think about how you performed in the quarter. Is that a fair statement?

Yeah, that's fair, Jeff.

All right, so let me switch gears to the tonnage because I know you've been going through and improving the yield on your your customer mix something that was was needed but at this point we've been down almost double-digit tonnage for six straight quarters now and the world's slowing down what is the right network size that you're seeking to have or how much more tonnage is out there to be renegotiating cold because it's it's still at the wrong price

Jeff, this is Darren. I'm not interested in culling any more tonnage at this point. It's been the right strategy for our company when we were making these changes and also on the road to profitability that we've been on. With the demand environment that we're seeing right now, we're certainly going to protect our yield and we're going to prioritize profitability through the process. But when you think about our new network and the changes that we've laid out, we're going to land at 290 terminals. We're not giving up any geography or service area. We're basically giving up 6% of our dollars. So if you take those 28 facilities that are going away through phase one and phase two, we're giving up 1,200 dollars, which is 6% of our dollars throughout the system. So we've got capacity for the right freight. We certainly don't want to bring on any shipments or tonnage that doesn't contribute, and that will not be our plan. But absolutely, when we complete the one yellow changes, and in 2023, our value proposition, as we work through whatever the changing landscape in the economy is, and we'll control our costs along the way through the reduction of purchase transportation, cartage, capex, all the normal pieces and matching our labor to our overall volumes. But this one yellow plan is absolutely a growth story, but it's growing the right way profitably and also by providing our loyal customer base with a value proposition that will make them want to expand their utilization of Yellow Nationwide.

That was helpful. Thank you. One last follow-up. As I look at how the freight market's changing through your eyes, and you've seen some upturns, you've seen some downturns, what's a little bit different about this one and kind of which areas, whether you think of it as customer industry or product buckets or things like that, where you see an incremental weakness, where you see an incremental strength right now?

Jeff, this is Darren, and you're certainly right. This is an unusual progress that we've seen, you know, from the demand cycle that we were in and as we've seen it just over the last 60 days changing. It was noticeable in October to me and to our data at Yellow and what was happening in the retail channel. Our largest customers, if you look at our top 10 customer base, over half those will be in the retail channel. And even though we haven't lost any significant accounts in that area, we saw across the board shipment and tonnage decline in those areas in October. So it's definitely evident in the retail channel. And the interesting thing is in some of the industrial book of business that we've got, demand is still firm. So as our economy moves forward and as America gets a clear line of sight on reshoring, nearshoring, and also the amount of confidence they have moving forward with inflation involved, it's going to be interesting to watch. But the big difference for us is this retail market. piece that we've seen in October, which makes sense. I mean, we've got data that shows us where inventory levels and others are, and that will change over time. So the good thing about our company is we can respond to that, although we've spent a lot of time and money in 2022 through our driving academies and all of our hiring efforts and also a lot in training. And we'd like to keep those employees on board. And in doing that, we'll be focusing on reduction of cartage, purchase transportation, other areas. And also, we're going to need those employees to make sure that phase two goes well for our customers. So that's kind of how I see the next, between now and the end of the year, playing out for Yellow.

Well, thank you very much, and congratulations.

Thank you, Jeff.

Thank you. And the next question comes from Ruth Chan with Stifel.

Hey, afternoon, team. This is Andrew Cox on for Bruce this afternoon.

Yeah, good afternoon, Andrew.

Hey, good to hear from you. Hey, so I'm just trying to understand, you know, how the fleet refreshment is coming along. I heard you guys guided down CapEx for the rest of the year. I'm just looking for a little bit more insight there. Is that related to equipment delays and any insight into how much more of the fleet is still needed to be refreshed from here? That would be helpful. Thank you.

Yeah, good afternoon, Andrew. This is Dan. As I mentioned in my opening comments, our full year guidance for CapEx has come down to a range of $210 to $230 million. About half of the reduction from prior guidance is due to the projected timing of spend around year end between 2022 and 2023. And the other half due to some items that we scaled back on just because of the amount of equipment needed to support lower volume trends. We do continue to work closely with the OEMs to keep a good line of sight to production capacity, but none of the reduction in our guidance was due to production delays.

Okay, that's helpful. And I guess along that same note of expectation for software volumes moving forward, how has that expectation changed the timeline or the scope of the One Yellow project if things devolve further from here?

know what ability do you guys have to flex up or down in that process Andrew this is Darren we're right on track with one yellow that is something that will not change regardless of external inputs of economy inflation other pieces this is a long-term strategy and we're right in the final chapters of it very excited to be bringing the marketplace to this opportunity to have super regional service from a brand like Yellow. So the timeline between now and the end of the year, we'll be certainly very prepared, and we'll be executing that timely.

All right. Well, that's all I had. Thanks so much for the time, and congratulations on the progress. Look forward to seeing what happens from here.

Thank you, Andrew.

Thank you. And this concludes our earnings call. I would like to turn the conference back over to the company for any closing remarks.

Thank you, operator, and thanks again to everyone for joining us today. Please contact Tony with any additional questions that you may have. This concludes our call, and operator, I'm turning the call back to you.

Thank you. The conference has now concluded. Thank you for attending today's presentation. We now disconnect your lines.