YRC's stock takes a hit as LTL benchmarks come up short relative to peers

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Investors did not like what they heard about the earnings of LTL carrier YRC.

Although the company’s earnings were released Thursday and rose by the end of that day, YRC stock (NASDAQ: YRCW) plummeted Friday. Just before the close, on a day when broader market indexes were higher, YRC’s stock had declined 7.8% to $9.21.

In a very strong earnings period for trucking stocks, YRC reported second quarter net income of $14.4 million compared to $19 million in the corresponding quarter a year earlier. Most other companies reported significantly higher net income. Its EBITDA was up only $9.7 million to $100.8 million.

YRC’s consolidated operating ratio for the quarter worsened to 96.2 compared to 95.8, during a three months in which LTL company Old Dominion Freight had an OR less than 80 and the LTL division of XPO Logistics was in the low 80’s.

Total picked-up revenue per hundredweight excluding fuel surcharges, a key benchmark for measuring yield, was up to $22.17, a 2.9% increase. The overall measure of total weight/shipment in pounds rose 3.5% to 1,217 pounds, a 3.5% increase.

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That yield benchmark brought this line of questioning on the call from Brad Delco, an analyst with Stephens Inc.

Delco, on the earnings call with analysts, asked YRC executives why YRC’s yield measurements were lagging other LTL providers. “Do you feel like you’re being aggressive enough with pricing?” he said, according to a transcript of the call provided by SeekingAlpha. “Right now, it seems like you have a lot bigger opportunity in this market than what you’re sort of realizing today,” he said.

In response, Thomas O’Connor, the president of YRC Freight, said second-quarter contract negotiations had averaged an increase of 7.2%, “and that continued into July.” Darren Hawkins, the company’s CEO, said YRC will continue to prioritize “yield over tonnage,” and that the contract negotiations—which he said is a “leading indicator’’—“don’t appear to have peaked as they continue to have that momentum.”

But one thing LTL carriers do not like to do is see truckload demand spill over into its market, because the economics of what makes truckload service profitable and what makes LTL service profitable are completely different. O’Connor says that is happening. “Growth in shipments over 10,000 pounds was especially strong in the second quarter, as the truckload market created opportunities for YRC Freight,” O’Connor said. “While the absolute number of truckload shipments handled remains a small percentage of our overall shipments, the much higher weight per shipment in excess of 14,000 pounds had a meaningful impact on the revenue metrics we report. While unfavorably impacting our overall revenue per hundredweight results, the increase in volume shipments had a positive impact on our tonnage and revenue per shipment statistics.”

CEO Darren Hawkins said when YRC encounters such demand, it is “proactively pushing back on these shipments through contract adjustments and dynamic volume pricing to accept the heavier shipments that are complementary to our networks and avoid those that are not through their higher volume rates.”

O’Connor said YRC is “confident that we are pricing the volume shipments appropriately.”

Scott Group of Wolfe Research noted on the call that the different paths that yield figures and the contract pricing discussed by Hawkins and O’Connor were taking, inquiring when the yield benchmarks would fall more in line with the contract pricing.

Hawkins said that already is occurring at the regional divisions of YRC. “I certainly look at the contract negotiations,” Hawkins said. He also noted the other benchmarks he looks at: revenue per shipment, revenue per hundredweight, and length of haul. At YRC Freight—the national company, as he called it—“those mixtures can cause that number to vary. But overall it’s translating into the improvement that we’re looking for.”

Hawkins also cited improved technology that has been implemented that gives the company “a better handle on what we’re moving inside our trailers., and that allows us to more accurately price it.” The data coming off that technology is showing more “consistency through the contract negotiations and that actual operating ratio aligning with where we projected it.” As a result, the pricing information the company is receiving, Hawkins said, “is as accurate as that at any time in my career.”

YRC consists of YRC Freight and the regional carriers. Hawkins said YRC had its fifth consecutive quarter of positive year-over-year increases in revenue per hundredweight. The regional carriers’ revenue per hundredweight benchmark excluding fuel was the highest in three years, he said. Their OR was the best in two years, Hawkins added.