Presenting virtually at the Stephens Annual Investment Conference on Wednesday, Hawkins said he has “a lot of confidence” in the restructuring the less-than-truckload (LTL) carrier has in place, noting that broader demand should continue to serve as a tailwind.
Demand to provide a tailwind
Hawkins commented that the consumer remains strong and willing to spend on a variety of do-it-yourself projects around the home, which he explains have gotten a “turbocharge” during the pandemic. He sees the high-demand environment as a tailwind as YRC’s exposure to e-commerce has grown in recent years.
He also noted recent trends in the industrial markets and housing were encouraging. The Purchasing Managers’ Index, a survey of manufacturing supply executives, surged to 59.3% in October from 55.4% in September. A reading above 50% implies expansion in the U.S. manufacturing sector. This was the fifth consecutive month the index was in growth territory. The shipment of manufactured goods can represent up to 80% of total freight for some LTL carriers.
YRC reported tonnage inflected positively year-over-year in October, up 1% to 2% following a 2% decline in September.
While uncertainty around COVID remains a concern, Hawkins believes the company is in a good position entering the new year as low inventory levels continue to support increased demand in truckload (TL) and LTL.
Hawkins believes price increases in 2021 will yield levels necessary to recoup increases in cost buckets like purchased transportation, insurance, and benefit and wage increases of 3% to 4% per their union labor contract. The current driver situation, down at least 200,000 drivers in Hawkins’ estimation, is expected to support higher rates. He said the barriers to entry are very high in LTL, and no new competitors are showing up to move the freight.
During the third quarter, YRC reported that contractual rates improved throughout the period, with September providing the highest increases.
Restructuring and buying equipment
On 2021 initiatives, none were larger than the planned recapitalization of its fleet. The company has drawn the first $75 million from a $400 million second tranche of its CARES Act Treasury loan. This portion of the loan will allow YRC to replace its aging fleet. Increased costs associated with operating older equipment — fuel inefficiency, maintenance, downtime, and leasing versus owning — have led the carrier to inferior operating results compared to other union LTL carriers.
“We’re really wanting this to be a show-me story; we want to prove that through our actions,” said Hawkins.
The ability to self-fund equipment purchases through the first $400 million and beyond is expected to drive significant expense reduction. YRC plans to take delivery of 300 new tractors and 950 new trailers before year-end. The remainder of the second tranche is expected to be exhausted in 2021 as the company takes weekly delivery of rolling stock.
Network optimization has resulted in a reduction of terminals. Hawkins said the company will likely end the year operating somewhere between 330 and 333 facilities after starting the year with 351. The planned consolidation to 325 units or fewer will continue over time, but the carrier doesn’t want to risk losing out on freight opportunities in a tight trucking market.
YRC will also increase its usage of purchased transportation as allowed under its 2019 contract with labor. The agreement allows them to reach a 29% purchased transportation threshold in the national network and a lesser level at LTL carrier Holland. Management didn’t provide an estimate of the potential cost savings this initiative could bring.
HNRY Logistics growing up
The company’s logistics segment, HNRY Logistics, is getting bigger as well. Hawkins said some of the unit’s relationships with the largest purchased transportation providers in the industry have allowed the segment to expand meaningfully. The unit has been able to provide freight transportation options to customers through third-party capacity and YRC assets. He said most of YRC’s 200,000 customers actively engage logistics solutions, which creates a good cross-sell opportunity.
Results in the division aren’t meaningful enough to be broken out separately in financial reports, but management noted that may change in the near future.