Strong fundamentals in the less-than-truckload market, marked by considerably higher yields, combined with a companywide restructuring drove a net profit at Yellow Corp. during the third quarter.
Yellow (NASDAQ: YELL) reported earnings per share of 16 cents compared to a net loss of 4 cents per share a year ago. This was the first positive number on the EPS line since the 2020 first quarter. But that period included an asterisk as the company booked almost $40 million in gains on the sale of property, without which another loss would have been recorded.
Several reasons margins are improving
The “culling of less profitable freight” was evident in the results.
LTL revenue was up 8%, to $1.17 billion, as a 9% decline in daily tonnage was more than offset by a 16% increase in revenue per hundredweight (excluding fuel surcharges). The jump in yields produced the company’s best operating ratio in three years at 96.3%, 210 basis points better year-over-year.
On a Wednesday call with analysts, CEO Darren Hawkins said, “Yield has been king,” referring to the impact that better-priced freight that better fits the network has had.
Yellow has also been working to lower its purchased transportation expense by reducing its use of local cartage and outside linehaul service. As a percentage of revenue, the expense has continued to decline sequentially throughout the year but remained 40 bps higher year-over-year in the quarter.
Lower maintenance expenses and improved fuel efficiency will provide additional margin tailwinds going forward.
The carrier has used a controversial $700 million pandemic relief loan to update its aged fleet. By the time 2021 concludes, Yellow will have replaced 18% of its tractors and 9% of its trailers over the span of a little more than a year. Currently, maintenance cost reductions are being partially offset as the company is still incurring expenses taking old equipment out of service and prepping it for sale. Disposal of the assets should be completed in three to five months.
A restructuring dubbed “One Yellow,” under which the company is consolidating its four LTL operating companies and HNRY Logistics into a single entity operating on the same technology system, has already improved the overall efficiency of the network.
The last LTL fleet will be converted to the platform by year-end, and HNRY Logistics will be renamed Yellow Logistics next week. The new look will have Yellow operating as a super-regional carrier with service in one-, two- and three-day lanes nationwide, along with its logistics offering, all running under the same name and off the same platform.
“Our multiyear transformation to One Yellow, and the operational efficiencies that we expect to achieve, should put the company in position to continue improving financial results in 2022,” Hawkins said.
Yellow saw 170 bps of sequential OR improvement during the third quarter, when it normally sees 50 bps of degradation. The sequential change from the third to the fourth quarter each year typically results in 200 bps of deterioration. Even with all of the margin tailwinds, management expects normal sequential patterns to hold this year. It pointed to seasonally lower volumes and the beginning of inclement weather in the month of December as reasons to hold off on providing a more positive outlook.
Yield strength to continue
The runway for improved LTL rates should continue. Contractual rate negotiations came in 9% to 10% higher in October. Yellow will also implement a general rate increase of 5.9% on Monday.
The focus on yield over volumes is still resulting in tonnage declines. October tons per day were down 10% year-over-year.
Hawkins was quick to note that while the company turns down loads and a few redundant terminals have been consolidated, the restructuring is not aimed at shrinking Yellow. “We’re not giving up any geography. We’re not giving up any capacity,” he added.
Yellow has 317 terminals currently and the total count is only expected to decline to 308 or 309 by the end of 2022.
Adjusted earnings before interest, taxes, depreciation and amortization increased 52% year-over-year to $94 million in the quarter. Trailing 12 months’ EBITDA was $248 million, up 38% from the prior comparable period and well ahead of a $100 million covenant that went into effect in this quarter.
YRC ended the quarter with $409 million in liquidity, down $45 million year-over-year, with total debt of $1.61 billion, an increase of $459 million. The changes are largely tied to equipment purchases.