Yellow Corporation
Q1 2022 Earnings Call Transcript

Published: 10 May 2022

[Operator:]

Good afternoon, and welcome to the Yellow Corporation's First Quarter 2022 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Tony Carreno, Vice President of Investor Relations. Please go ahead.

[Tony Carreno:]

Thank you, operator, and good afternoon, everyone. Welcome to Yellow Corporation's first quarter 2022 earnings conference call. Joining us on the call today are Darren Hawkins, Chief Executive Officer; Dan Olivier, Chief Financial Officer; and Darrel Harris, President and Chief Operating Officer. During this call, we may make some forward-looking statements within the meaning of federal securities laws. 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 our 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 loss 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 8-K, along with the earnings release and is available on our website. I will now turn the call over to Darren.

[Darren Hawkins:]

Thanks, Tony. And good afternoon, everyone. Thank you for joining our call. In Q1 we continued our steady staircase of financial improvement and reported our best first quarter adjusted EBITDA and best first quarter operating income, excluding property disposals since 2016. In addition, as of the end of Q1, the last 12 months adjusted EBITDA has doubled compared to a year ago. Consistent demand for LTL capacity has kept the pricing environment strong. In Q1 year-over-year LTL revenue per hundredweight, including fuel, increased 30.5% and favorable pricing trends that carried into Q2. For the month of April Yellow average between 10% and 11% on contract negotiations. As mentioned on our Q4 2021 earnings call, we started seeing a rapid increase in COVID-19 cases among our employees in the final weeks of December that carried into the first quarter. Despite in cases along with adverse winter weather pushed our network out of cycle which led us to take actions in February to limit terminal operations and sled markets that lasted a few days. The percentage decline and year-over-year LTL tonnage per workday peaked in February, and by April and return to a level more in line with internal expectations. As we transform the network to operate as a super-regional carrier, we expected to be more agile and recover more quickly from extreme weather events. We also fully expect to return to growing LTL tonnage per day. The transformation of our company continues. And with the conversion to the One Yellow technology platform behind us, our focus has turned to integrating the linehaul network to support both regional and long-haul service as well as the optimization of pickup and delivery operations. We're managing the network transformation in the same manner as the technology transformation. With a careful well thought out plan to minimize execution risk, and to apply lessons learned as we move from one phase to the next. You'll hear more about this from Dan. Looking ahead, demand for LTL capacity still appears to be strong, with inventory levels remaining below normal and a manufacturing sector played catch up from supply chain disruptions and a tight labor market. With the significant capital expenditure investments made in recent years and the progress we're making this transformation to One Yellow, we believe we are well positioned for 2022. Once the network transformation is complete, we expect improved asset utilization, enhanced network efficiencies, cost savings and added capacity without the need to add new terminals. We will be operating as a modernized super-regional carrier that will provide our customers with an all in one solution. I will now turn the call over to Dan, who will share additional details about quarter.

[Dan Olivier:]

Thank you, Darren. Good afternoon everyone. For first quarter 2022 operating revenue was $1.26 billion, compared to 1.2 billion in 2021. Operating income was $9.2 million, including a $5.5 million net gain on property disposals, compared to an operating loss of $27.6 million in the prior year, which included a $1 million net loss on property disposals. Adjusted EBITDA for the first quarter 2022 was $52 million compared to $13.2 million in 2021. Adjusted EBITDA for the last 12 months was $341.4 million as of the end of the first quarter, compared to $171 million a year ago. Our revenue growth of 5.2% in the first quarter, compared to a year ago reflects continued strong yield performance and higher fuel surcharge revenue partially offset by lower volume. Including fuel surcharge first quarter LTL revenue per hundredweight was up 30.5% and LTL revenue per shipment was up 24.8% compared to a year ago. Excluding fuel surcharge, LTL revenue per hundredweight was up 22% and LTL revenue per shipment was up 16.7%. LTL tonnage per day in the first quarter was down 20.1% driven by a 16.5% decrease in LTL shipments per day and a 4.3% decrease in LTL weight per shipment. Sequential LTL tonnage per day trends compared to the prior year were as follows; January down 15.9%, February down 27.4% and March down 17.8%. On a preliminary basis, April LTL tonnage for workday was down between 14% and 15% compared to last year. Total capital expenditures for the first quarter was $36.4 million compared to $202.4 million a year ago. Our full year 2022 guidance for capital expenditures remained $325 million to $400 million. However, as a result of continued supply chain disruption, and production capacity for tractors and trailers, we will likely be near the lower end of this range. Turning to hourly wages and mileage rates for our union employees. For 2022, our National Master freight agreement includes contractual wage increases of $0.40 per hour, and $0.01per mile on both April 1 and October 1. In addition, the contract also includes the cost of living allowance clause, which provides for an additional increase effective on April 1 of each year, based on the year-over-year change in the Consumer Price Index published in January. Based on this year's measurement, our union employees qualify for a cost of living adjustment of $0.60 per hour and $1.5 per mile, resulting in a total April wage increase of $1 per hour and $2.5 per mile. For full year 2022, we expect our total union wage benefits to increase by approximately 5%. And finally, in February Standard and Poor's upgraded Yellows issuer credit rating to B minus based on our improved operating performance and the progress we are making as we execute our One Yellow strategy. This follows an upgrade to B3 for Moody's Investors Service in December. I will now turn the call over to Darrel.

[Darrel Harris:]

Thank you, Dan. And good afternoon everyone. While the first two months of the quarter presented some unique challenges, I'm proud of our employees for finishing on a strong note in March to partially offset the challenges we encounter. Turning to our One Yellow transformation, we will complete the transition to a super-regional carrier around the end of the year in three phases. We have completed the planning and analysis of the first phase to integrate our linehaul network in our pickup and delivery operations. We expect Phase 1 to be implemented this summer in the western part of the US, which has the lowest execution risk profile. This will include the optimization of 89 legacy YRC freight and runaway terminals. We will apply lessons learned during the remaining phases. This is very similar to how we recently executed our successful transition onto a single technology platform. We expect the remaining phases to be implemented in the second half of 2022, with Phase 2 occurring in the Northeast and Midwest, positively impacting approximately half of our terminals. Phase 3 will be the final phase impacting the southeast and central U.S. We look forward to providing you with updates on how the transformation is progressing on our second quarter earnings call. As we transform the network to operate as a super-regional carrier, we are integrating the line haul network to support both regional and long haul service as well as optimizing our pickup and delivery operations to eliminate redundancy. When completed, the linehaul optimization efforts will help drive speed, efficiency and consistency in our network. The city pickup and delivery optimization efforts will eliminate the overlapping coverage that currently exists between brands. And we will have one yellow driver interacting with our customers for both regional and long haul services. Overall, we expect the network transformation to enhance customer service lead to greater efficiencies and cost savings and create capacity in the network. As an added benefit, operating as a super-regional carrier will promote fluidity and consistency in the network. That will allow us to mitigate some of the negative impact of winter weather in the future. We continue to place a priority on recruiting. And in March we opened Yellow’s 17 Truck Driving Academy in Carlisle, Pennsylvania to help reach our goal of training 1000 new drivers in 2022. Our academies provide career opportunities with good jobs and competitive benefits while strengthening our partnership, with the U.S. Department of Labor's apprenticeship program. Yellows more than 30,000 employees are the most important assets that we have. And we plan to continue recruiting drivers, mechanics and dockworkers to join our team. In closing, we remain pleased with our progress, but not satisfied with our results. The yellow team managed through a challenging first quarter, and stay focused on safely meeting the needs of our customers. I'm more excited each day about the path ahead and what One Yellow will mean for our customers, employees and shareholders. I will now turn the call back over to Darren, for some closing comments.

[Darren Hawkins:]

Thank you, Darrell. The Yellow team continues to make progress and position the company to successfully complete the transformation to One Yellow. I am grateful and proud for the efforts of our employees who provide essential freight transportation services to our customers and our communities. Thanks for your time this afternoon. We would now be happy to answer any questions that you may have.

[Operator:]

Our first question comes from Jack Atkins Stephens. Please go ahead.

[Jack Atkins:]

Okay. Great. Good afternoon, everybody. Thank you for taking my questions. So I guess maybe if we could start, I guess, as you guys begin to implement the network changes in the west over the next few months, I guess how quickly, would you expect those savings to begin to materialize in results? And maybe you can help us think about -- I know you don't want to quantify it, I'm not going to ask you to like what buckets on the P&L do you think will be the most impacted by. Anyway to kind of think through that. And would you expect those savings to be noticeable in the second quarter? Or will it really be the third quarter before we start to see that?

[Darren Hawkins:]

Jack, this is Darren, I'll start with that. And then let Darryl, take it from there. The good news is all through the One Yellow transformation. We don't have to wait on it to be completed to see financial improvement, just like this being the fourth quarter in a row that we've delivered, improving results. That's going to continue while this is in progress. When I think about Q2 specifically the strong March we just had, our sequential improvement in Q2, I believe will outpace what you seeing from our company in the past. The good news is with this optimization and have us it not only allows us to create more capacity for our customers, but to be more efficient doing it, and two of our largest cost buckets, the city pickup and delivery operation and the line haul operation. And I'll let Darrell speak to those.

[Darrel Harris:]

Good afternoon, Jack. Yes, as we mentioned in the script, this impacts 89 of our terminals outlet, or 28% of the overall network. So some of these cost savings that you can obviously imagine would be near immediate facility related costs, operational management synergies, the reduction in pickup and delivery routes, and the optimization of such, those are near immediate, and we expect those savings to start coming on board right away. To Darren's point, certainly linehaul, and pickup and delivery, are the top two cost in an LTL trucking environment. So we're excited that the optimization here is going to impact those, in each and every phase. Also, the reduction in line haul schedules, that may take a little bit longer as the entire network gets impacted with the optimization component. But that is a huge component of this as well as we start to bring everything together under One Yellow.

[Jack Atkins:]

Okay, now, that's, that's encouraging. So we're going to start -- start to really begin to see the rubber hitting the road here this quarter and then accelerating, I guess, as we go through the year? I guess maybe just so we're all on the same page in terms of historical sequential trends. Dan, I mean, in the past, we've seen 400 basis points or so of sequential improvement is that the baseline that we should be expecting results to be better than or I just want to make sure we're all on the same page there?

[Darrel Harris:]

Yes, Jack, good question. I’ll first to Darren and comment and let me first say, I'm pleased that, for the fourth straight quarter, we had an improved operating ratio over the prior year. If you call it out, historically, from Q1 to Q2, we do see about a 350 to 400 basis points of improvement there. In my opening comments, I did mention the 60% per hour cost of living wage adjustment that our union employees qualified for, which is over and above the normal wage increase. And that went into effect on April 1. And we expect the impact of that to be roughly, a 40 to 50 basis point headwind from an OR perspective. But even with that, we expect that we can outperform that historical sequential OR improvement.

[Jack Atkins:]

Okay. That's very encouraging to hear, very encouraging to hear. So yes, I guess, shifting gears a bit and kind of taking a step back. I mean, obviously, everyone was sort of experiencing the COVID related challenges in January, February, and whether, I guess, as you guys look forward, and once the One Yellow, integration is complete, I guess what specifically about the network will be different, which will maybe make the network less susceptible to some of the shocks that we've seen from time to time in the past?

[Darren Hawkins:]

Jack this is Darren and you've got the right group to speak to that. I've worked in a super-regional carrier format, so as Darrell and so as Dan, we're all very familiar with the network that we're becoming. And because of that, winter weather affects all LTL companies the same when it's happening. It's the recovery period that a super-regional carrier can put together quickly quicker than a hub and spoke system like the heritage network operated at YRC freight. So when we talk about One Yellow, we're talking about a network that actually will complete and come to finality on the weekend, and then restart after weather events, you can actually reset the network in a matter of weeks, where in our case, depending on the length of the weather event that happens, it can sometimes take several weeks, even a month to recover and lead to what we had to do in February by limiting operations for a few days. So allow our network to reset. The great news is that worked. We recovered nicely in March. Our network is fluid and operating well, in April. However, you saw the tonnage decline that we took in February because of that, but fortunately, it paid and we returned to a more normalized place from a tonnage standpoint after we took that action, but we'll be able to respond to those events quicker than we have been in the past. The other piece that I'd like to address on the One Yellow changes in the West that Darrell was speaking to, those actually implement in the summer. So when you were referencing it, you mentioned Q2, but that will be Q3 opportunities around the Western changes.

[Jack Atkins:]

Okay, no, that makes sense. Thanks for that. Thanks for that clarification. I guess in Arkansas, it already feels like summer. So I'm already there kind of memory. So…

[Darren Hawkins:]

It's the same in Nashville as well.

[Jack Atkins:]

Okay, great. Last question, and I'll turn it over to somebody else. But, when we think about the trends that you saw in April, is there any way to kind of think about tonnage trends relative to normal seasonal patterns? I guess there's an awful lot of concern out there about just the freight economy in general, and perhaps maybe seeing some signs of slowing in certain places. Would you say that April was in line with, better than, worse than normal seasonality? Any way to kind of help us think about that? And what are your customers telling you about, their expectations as we move through the remainder of the year?

[Darren Hawkins:]

Jack, this is Darren again. So the encouraging part about April is the 10% to 11%, contractual price increases. So when Dan mentioned that we were down 14% to 15% and tonnage, when I've got contractual pricing increases that are in double digits like that I'm very comfortable in that range. I do think that balances over time, we're bringing a much stronger value proposition to the market, starting at the beginning of Q3, and that's the One Yellow plan all along is that we will grow tonnage at this company, but we will do it profitably. On the second half of your question about the overall outlook and what we're seeing, from an industrial demand standpoint, things are firm. In our company, like most LTL, companies, we have a larger exposure to the industrial side. But on the interesting note, even though our percentage of business is larger, on the industrial side, our largest customers are actually in the retail and home improvement sectors. And when you look at what's happening there, we're also seeing strong demand. So I believe we're in a good position on our contractual business to go through the summer. And I'll let Dan add anything that I might have left out on that.

[Darrel Harris:]

Yes, I just say Jack that on a sequential basis, historically, from March to April, we usually are about flat from a tonnage per day basis, but this year was actually up 3%, a little bit of that was still recovering from the actions we took in February. So if I look at the entirety of Q2, I would expect that from April to March or April to May, and then May to June that we would see our normal historical change, which is about 1% improvement in tonnage each of those two months.

[Jack Atkins:]

Okay, that's super helpful. Thanks again for the time, guys.

[Darrel Harris:]

Thank you, Jack.

[Operator:]

Your next question comes from Bruce Chan of Stifel, please go ahead.

[Unidentified Analyst:]

Good afternoon. This is Matt on for Bruce, thanks for taking our questions.

[Darrel Harris:]

Hey, Ed.

[Unidentified Analyst:]

How's it going? Could you guys provide some details around your current fleet age where it stands, perhaps maybe compared to a year or two ago? And then, as well, maybe some of the key components underlying the CapEx guidance.

[Darren Hawkins:]

Matt, this is Darren and we still don't disclose the fleet age. But from that aspect, what we've added and the percentage of tractors that we've added, we brought it down by a couple of years. I'll let Dan, what specifics that he can.

[Dan Olivier:]

Yes, as Darren mentioned our tractor fleet age specifically has come down by about 2.5 years. So big improvement there, even though we don't share what the absolute ages. As I mentioned, in my opening comments, the full year CapEx guidance for this year still remained $325 million to $400 million. But some of the disruptions in the supply chain have impacted production capacity there, especially for tractors and trailers, as well as the lead times for production. As a result of that will be at the lower end of that range. We continue to work closely with the OEMs to keep updated on the supply chain and the impact it has on production timing specific to us. But it's still too early in the year to have a complete picture for the full year. But we should have a better view of that as we move through the second quarter.

[Darren Hawkins:]

And Matt, this is Darren again, what I'd like to add is, one of the benefits of One Yellow is we're going to increase our asset utilization dramatically as we make those changes, not standing two tractors, two trailers, two drivers to the same customer that actually frees our fleet up. So even if we do see delays on for instance, bringing trailers into the network, Darren his team has done a good job of keeping the rental costs down. We will run some others longer if we need to. But also we will free equipment up through the One Yellow optimization efforts that will be iteratively throughout Q3 and Q4, so, I feel pretty good about where we're at, in the way we're positioned around having the equipment we need to take good care of our customers.

[Unidentified Analyst:]

Excellent, super helpful. I guess with respect to the One Yellow timeline, in light of the current environment, how might the plan change, should broader market conditions really deteriorate here meaningfully.

[Darren Hawkins:]

Now, this is Darren again, it doesn't change the One Yellow execution phase. Actually, we're in an ideal market to be making these changes. When we look at our tonnage decline. That is why I say we're well positioned to get the changes in place to create the efficiencies. And to have that opportunity, regardless of the external economic conditions. We'll stay on track, because this is no longer a multi-year transformation like we were referring to last year. We're in the final year of it, and we're going to wrap up the One Yellow plan in 2022.

[Operator:]

Your next question comes from the line of Scott Group of Wolfe Research. Please go ahead.

[Unidentified Analyst:]

Hi, good afternoon. This is actually Aaron on for Scott, thanks for taking the time today.

[Darren Hawkins:]

Hello, Aaron.

[Unidentified Analyst:]

Hi. First, can you give us an update on your terminal reduction plans? What is the latest plan for the rest of the year? Thanks.

[Darrel Harris:]

Certainly, we're at 316 terminals today as we speak. The changes we're making in the west, will reduce that by nine. As where we're going to land at the end of the year? It'll be right around 300 plus or minus a few as we go through optimization. But I do want to add Aaron, that when you look at door count. And I'll give you an example. Let's take the State of California. Right now Yellow has 33 total terminals in California, when we make these changes, over the next several weeks that number in California will go from 33 to 28. So we will reduce it by five. But from a door standpoint, that'll only be 184 door reduction. And we will still have over 1700 doors available at those facilities in California. And I just want to make it clear that we're not giving up geographical coverage. And we're also going to protect capacity for our customers, because we do plan on growing when we complete One Yellow.

[Unidentified Analyst:]

Got it? Great. Thank you that was helpful. And thank you for color. I guess as you look out for the rest of the year and given recent tonnage and yield trends, yields have been pretty strong. Right now, I guess moving forward as your focus here, more on price or volume? Or, are you just trying to, as you mentioned, get back to more of a growth and tonnage is how do you think about pricing moving forward?

[Darren Hawkins:]

This is Darren, and I'll start and then let Dan fill in any gaps that I leave. So I will prioritize yield over volume. The volume levels that we're at right now I'm comfortable with I think it's an ideal environment for us to make the changes that we're making to position the company for many years to come. The 10% to 11% contractual price increases we saw in April, and then the 14% to 15% tonnage decline. I think we can close the gap on that as we move forward throughout the year. But I'll let Dan make any other comments around that.

[Dan Olivier:]

Yes, just on the yield favorable pricing trends that definitely continued through Q1, we continue to execute our pricing strategy, putting a strong emphasis on getting paid appropriately for the work we perform. As I mentioned before, there's always more work to be done on that front. So what I'd say I guess the big picture is that overall, we're pleased with what we've gotten done so far. And I expect that the yield performance going forward is going to remain strong.

[Unidentified Analyst:]

Great, thanks. And if I can just make it one more. Just on the impact of fuel in the quarter. Have you -- did you guys see any impacts in the diesel shortages just in the Northeast right now?

[Darrel Harris:]

No, we haven't seen any impact of the shortages in the Northeast. When I say broadly speaking on higher fuel prices and fuel surcharge, during Q1 diesel prices were up roughly 50% compared to last year which resulted in our fuel surcharge revenue being up between 55% and 60% year-over-year. When we evaluate the net impact of higher oil prices, if we only look through the prism of higher fuel prices and higher fuel surcharge revenue, offset by higher fuel prices or fuel expense, it looks like a benefit to the bottom line. When you take into consideration the increase in other costs that are tied to higher oil prices, like PT costs, propane tires or even the raw materials that go into the production of equipment, we believe that whatever incremental benefit there might be there, if any is relatively small.

[Unidentified Analyst:]

Okay, thank you guys for the time.

[Darren Hawkins:]

Thank you, Aaron.

[Operator:]

This concludes our earnings call, I would like to turn the conference back over to the company for any closing remarks.

[Darren Hawkins:]

Thank you, operator. 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.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.