YRC, back from the abyss, sees a better second half when its rentals fade away

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Several years ago, an analyst wrote about YRC: "Most other companies that went through what YRC went through would be bankrupt by now."

An excessive debt load and years of losses were the feature of the company that has both truckload services in its YRC Freight longhaul division and more regional transportation through three regional subsidiaries: Reddaway, Holland and New Penn.

The company--formerly known as Yellow Roadway until about 12 years ago--did survive, though it would probably be a stretch to say it has thrived. Its stock was about $19.70 per share in August 2015. It's now near $11, and to get there climbed from about $8.25 in the last few weeks.

Stephanie Fisher, the company's CFO, came to the Deutsche Bank Global Industrials & Materials Summit this past week, to make the case that its turnaround is on track. The biggest short-term burden it faces, Fisher said, are short-term leases that will be rolling off the company's obligations as the year progresses.

That is a problem could be traced in part back to the company's earlier issues and debt burden. "What we found in the third and fourth quarters is that we were short on equipment, and in some cases, the equipment was not in the right spot," Fisher said. There were multiple reasons for that, she said, including the effects of hurricane season. But part of it also was that by reorganizing its debt over the past few years, "we had a lot less liquidity in late 2017." As a result, as the market picked up, equipment needed to be leased, rather than purchased or brought in "off the fence." Equipment that had been surplus in earlier years was no longer available.

In April, during the company's first-quarter earnings call, Fisher addressed the long-term rentals issue. "As we went through the quarter, unfortunately those rentals did not come in all at the beginning of the quarter, in fact most of them came in the back half of the quarter in March," she said, according to a transcript of the call provided by SeekingAlpha. "And so, we did experience higher short-term rentals in Q1 on a year-over-year basis, kind of consistent with what we saw in Q4, we were able to reduce short-term rentals slightly towards the end of the quarter but as you can see from our purchase transportation line we did experience a significant increase on a year-over-year basis."

The company's purchased transportation expenditures were almost $21 million more in the first quarter than in the corresponding quarter of 2017.

Bringing in new equipment, finally

Since 2015, Fisher said and illustrated it in a slide, the company has been able to bring 3,300 tractors and 7,300 trailers into YRC's network. They are still coming in, she said. As a result, "the influx (of short-term rentals) we had in late 2017 is expected to go away by the third quarter."

Fisher said during the 2012-2014 period, YRC had a capital expenditure ratio that was "woeful." About 1% to 3% of revenues were spent on capex, when the industry average was about 5%. That ramped up beginning in about 2015, when the new tractors and trailers Fisher mentioned began coming into the system.  In the first quarter, YRC reported capex and operating leases of about 8 percent of revenues.

Fisher touted YRC's efforts at debt reduction. At the end of 2013, the company had debt of $1.36 billion, spread out over nine individual debt instruments. By the end of March, it was down to $918 million, and it was in three instruments. A great deal of that occurred in the first quarter, when it agreed to extend the maturity of its contribution deferral agreement notes with the Teamsters from December 2019 to December 2022, reducing the principal but paying a short-term hit of $25 million.

Cutting an OR that is at 100

Fisher expressed a view that has been heard in the webex's and earnings calls of many companies of late: we're not just going to chase business for the heck of it. YRC assumes an industry OR of 90-91, Fisher said. "We believe we can improve YRC Freight to a 97 OR," she said, "and the regional companies to an approximately 95 OR." That would result in a benefit in the company's EBITDA of $70-$80 million, she added.

The company's consolidated operating ratio for the first quarter was 100.4 compared to 100 a year earlier. It was 100.9 at YRC Freight and 98.9 at the regional carriers. "If we have volume in the network that is not profitable, we are focused on that, anything where we're operating with over a 100 OR," she said. That will be the focus of ongoing contract negotiations with customers, Fisher added.

Deutsche Bank chief transportation analyst Amit Mehrotra, who moderated Fisher's discussion wondered why they would pursue anything even at an OR of 100. She replied that there are times when adding to the density of some lanes may mean a short-term service that doesn't make much sense on its own, but when combined with other activity in that region, "creates efficiencies and helps improve margins."

Getting ready for next year's labor talks

Being a unionized carrier, YRC is not in position of needing to raise wages at this point to attract new drivers. The Teamsters did make concessions during YRC's most difficult days, and Mehrotra said there was has been "bluster" from the Teamsters getting prepared for negotiations on a contract that ends in March 2019.

Fisher would not discuss wage numbers, but said YRC is going to need "flexibility in the work force to actually run the business the way it needs to be run." She discussed a scenario in which a worker would be more of a utility worker, allowed to perform more functions than at present. Mehrotra asked whether it was "realistic" to think the Teamsters would move toward that model. "The good news is we have outstanding (union) leadership," she said. "They have been very helpful in the last 18 months. I think in the next nine months we can spend time talking to them, and letting them know the issues so that this is not a surprise."

Recent price increases have averaged about 6%, Fisher said, though some have topped out at 15%.

(Editor's note: the story has been changed to reflect that Stephanie Fisher, on the earnings call in April, was discussing long-term rentals rather than short-term rentals.)