Yellow Corporation (NASDAQ:YELL) Q3 2022 Earnings Conference Call November 2, 2022 4:30 PM ET
Company Participants
Tony Carreno – Senior Vice President, Treasury and Investor Relations
Darren Hawkins – Chief Executive Officer
Dan Olivier – Chief Financial Officer
Darrel Harris – President and COO
Conference Call Participants
Grant Smith – Stephens
Erin Weed – Wolfe Research
Jeff Kauffman – Vertical Research Partners
Andrew Cox – Stifel
Operator
Good afternoon. And welcome to the Yellow Corporation’s Third Quarter 2022 Earnings Call. All participants will be in listen-only mode. After today’s presentation, there will be a question-and-answer session. Please note, this event is being recorded.
And now, I would like to turn the conference over to Tony Carreno, Senior Vice President of Treasury and Investor Relations. Please go ahead.
Tony Carreno
Thank you, Operator, and good afternoon, everyone. Welcome to Yellow Corporation’s third quarter 2022 earnings conference call. Joining us on the call today are Darren Hawkins, Chief Executive Officer; and Dan Olivier, Chief Financial Officer. In addition, Darrel Harris, President and Chief Operating Officer will be available during today’s question-and-answer session.
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 income 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 Q3, revenue and operating income increased compared to a year ago, marking the sixth consecutive quarter of year-over-year improvement.
Operating income improved despite an unfavorable impact from higher third-party liability claims expense compared to a year ago. Our strategy includes mitigating incremental purchase transportation expense and as a percentage of revenue, it decreased by 120 basis points in the third quarter compared to a year ago.
Throughout 2022, we have consistently kept our focus on improving the quality and profitability of the freight moving through our network and that continues to be our plan as we execute the final steps in the transformation to One Yellow.
In Q3, year-over-year LTL revenue per hundredweight, including fuel, increased 24.6%. Overall, the demand for LTL capacity appears to be moderating, following a period where demand exceeded supply. However, the pricing environment remains favorable. For the month of October, Yellow averaged an increase of approximately 5% of contract negotiations.
In September, we successfully executed Phase 1 of the network optimization. Phase 1 impacts 89 legacy YRC Freight and runaway terminals in the Western U.S. and integrate the long-haul network to support both regional and long-haul service, as well as the optimization of pickup and delivery operations.
We went into the transition with a straightforward set of goals that would define success. First, we stood the terminals up to begin operating as a super regional network. Our employees move customer shipments across the network and delivered them as designed.
We make things simpler for our customers by having one driver picking up and delivering both YRC Freight and Reddaway brands, which resulted in reduced congestion at our customer’s docs. We realigned and optimized more than 4,600 terminal zip codes, positioning our facilities closer to our customers, enabling earlier pickups and deliveries and reducing city miles travel.
Finally, our employees remain highly engaged throughout the implementation of these changes, allowing us to capture valuable data and lessons learned as we prepare to integrate the rest of the network.
The performance of the network following the implementation of Phase 1 is meeting our expectations and we are excited about what this means when the entire network is operating as a super regional carrier. We plan to have the rest of the network transformation completed around the end of the year.
One of the benefits of optimizing an LTL network with more than 300 terminals such as ours as we will be able to dispose of terminals in close proximity to each other that have overlapping service territories.
However, we do not plan to sacrifice customer service or geography. We will look for opportunities to sell the excess terminals that we own and we expect to continue derisking the balance sheet by paying down debt with these proceeds.
Turning to our recently extended asset-based loan facility, the progress the company has made during the transformation of One Yellow helped to position us to improve the terms of the facility, including enhancing our liquidity. You will hear more about this from Dan.
Thank you for joining us today and I will now turn the call over to, Dan, who will share additional details about the quarter.
Dan Olivier
Thank you, Darren, and good afternoon, everyone. The third quarter 2022 operating revenue was $1.36 billion, compared to $1.3 billion in 2021. Operating income was $49.1 million, including a $1.1 million net gain on property disposals, compared to operating income of $48.4 million in the prior year.
Adjusted EBITDA for the third quarter of 2022 was $90.6 million, compared to $94.4 million in 2021. Adjusted EBITDA for the last 12 months was $401.7 million as of the end of the third quarter, compared to $248.4 million a year ago.
Our revenue growth of 4.5% in the third quarter compared to a year ago reflects continued strong yield performance and higher fuel surcharge revenue, partially offset by lower volume. Including fuel surcharge, third quarter LTL revenue per hundredweight was up 24.6% and LTL revenue per shipment was up 22.4% compared to a year ago. Excluding fuel surcharge, LTL revenue per hundredweight was up 12.8% and LTL revenue per shipment was up 10.9%. LTL tonnage per day in the third quarter was down 16.2% driven by a 14.8% decrease in LTL shipments per day and a 1.7% decrease in LTL weight per ship.
Sequential LTL tons per day trends compared to the prior year were as follows; July down 17.2%, August down 15.7%, and September down 15.8%. On a preliminary basis, October LTL centers per workday was down approximately 24% compared to last year. On a sequential basis from September to October, our LTL tonnage per day was down between 6% and 7% compared to our historical trend of roughly 4%.
Our results during the quarter were negatively impacted by a $19.4 million increase in third-party liability claims expense compared to a year ago, mostly due to the unfavorable development of prior year claims, including the resolution of several of our most significant outstanding claims.
Total liquidity at the end of the third quarter was $325.8 million, compared to $49.2 million at the end of the third quarter 2021.
Capital expenditures for the third quarter were $68.1 million, compared to $96.7 million a year ago. Total capital expenditures for the first nine months were $140.7 million, compared to $442.9 million for the first nine months of 2021. We are also adjusting our full year 2022 capital expenditures guidance range from $250 million to $300 million, down to $210 million to $230 million.
Also pertaining to liquidity, a reminder that in 2020, we deferred payment of $85.6 million for certain payroll taxes under provisions of the CARES Act. We paid the first half of that deferral $42.8 million in December of 2021 and the remaining $42.8 million is due in December of this year.
Finally, we recently completed the extension of our ABL or asset-based lending facility. In addition to extending the maturity by two years from January 2024 up to January 2026, we also increased the size of the facility from $450 million to $500 million and reduced the interest rate by 50 basis points.
We appreciate the support of our lenders, and as we move forward, we will continue to seek opportunities to strengthen our capital structure.
I will now turn the call back over to Darren for some closing comments.
Darren Hawkins
Thank you, Dan. When I think about Yellow’s accomplishments in 2022, I am very proud of our employees and the execution of moving our network into the final stages of super regional service. Customers, shareholders and employees should see strong benefits as we bring this together in the near term. The transformation to One Yellow puts the company in the best position possible to continue improving operationally and financially.
Thanks for your time this afternoon. We would now be happy to answer any questions that you may have.
Question-and-Answer Session
Operator
Yes. Thank you. And the first question comes from Jack Atkins with Stephens.
Grant Smith
Hey. Good afternoon, guys. This is Grant on for Jack. Thank you for taking my question.
Darren Hawkins
Hello, Grant.
Grant Smith
How is going? I guess if we could start on One Yellow with the first part of the integration. Just a lot an update on kind of how it’s going and any cost savings you are seeing on a per shipment level that you could share, maybe kind of quantify a little bit?
Darren Hawkins
Thank you, Grant. This is Darren. As I stated in the script, the Western change, which involved 89 of our terminals went well. It’s living up to our expectations. We are picking up and delivering YRC Freight and Reddaway Freight with just one driver rather than two. Those pieces are coming together.
The facilities that we generated from the changes that we no longer need without giving up geography or service in those areas, when you look at that in total, those will be available to sell and also generate debt reduction for the company moving forward.
When I think about the changes as a whole, I am excited that we are going to be wrapping up another 200 terminals between now and the end of the year. When you put all of this together, we can start expecting to see different areas of cost savings.
Certainly, the facility related costs is it’s going to free up 28 terminals that we are no longer going to need and those costs will go away immediately and then those benefits will be applied to debt reduction immediately.
The operational management synergies will be early on, already exceeding those come into play and then the reduction in the city pickup and delivery miles is also a near-term benefit. The creating the density and the linehaul benefits will be iterative over time.
But I do want to make a comment about the size of these changes, Phase 2 that we are doing between now and the end of the year involves 200 facilities, 15,000 employees. It requires the investments of people and processes to get these things accomplished without any disruption to the customers and that’s what we will be focused on. But it is an exciting time to wrap this up and have One Yellow operating with super regional service as we go into 2023.
Grant Smith
Yeah. Thank you for the color there. And you mentioned a little bit on customers and on service, I just wondering if you could maybe provide us a little detail on what you are hearing from customers and maybe how One Yellow is impacting service levels and how you see that trending going forward? And maybe also a little bit on just what customers are telling you on demand and what kind of trends you are seeing there out of them? Thanks.
Darren Hawkins
Yeah. I will take the demand side first and then go into the customer discussion. Certainly, in October, we saw a slackening of demand in our retail channel. Even though like most LTL carriers, a larger portion of our revenue is in the industrial channel and it held up, but some of our largest customers are actually in the retail channel and we saw slackening demand in the retail channel.
So, overall, when I look at six straight quarters of improvement in revenue and operating income, I feel good about our pricing plan. I like our strategy on what we have done overall and that retail stacking is to be expected with what we have seen in the broader economy.
From a customer perspective, that’s the great thing about Yellow. We have got a large customer base with a long-term loyalty in place and our employees have also benefited from these changes in the West and we have seen a high level of engagement, as I mentioned in the script. And those employees being able to operate as One Yellow as we have been talking about it for a while and they are excited to see it come into play.
So I feel confident from a customer standpoint, a customer service standpoint, and certainly, going into whatever the economy may throw at us, we have got a great opportunity to capitalize on the benefits that reducing the redundancies throughout our network will bring depending on what happens in the broader economy.
Grant Smith
Great. Thank you guys for the time.
Darren Hawkins
Thank you.
Operator
Thank you. And the next question comes from Scott Group with Wolfe Research.
Erin Weed
Hey. This is actually Erin on for Scott. Thanks for taking my questions.
Darren Hawkins
Good afternoon, Erin.
Erin Weed
Hey. So I guess just — maybe just an update on thinking about fourth quarter a little bit and just the sequential progression. I know you mentioned a few puts and takes in costs with the payroll expense next quarter. How should we think about the sequential trend of OR from here and would you expect it to kind of underperform outperform seasonality, just anything — any color on that?
Dan Olivier
Yeah. Good afternoon, Erin. This is Dan. First, let me say that, as Darren mentioned, I am also pleased that we were able to improve revenue and operating income on a year-over-year basis now for six consecutive quarters.
Our operating ratio for the third quarter was 96.4%, which was 10 basis points worse than the prior year. However, as I mentioned in my opening remarks, our third quarter results were negatively impacted by the year-over-year increase of $19.4 million in third-party liability claims expense, mostly due to the unfavorable development and resolution of claims from prior years.
That elevated level of expense, which was unusually high for any single quarter in which we do not expect to continue have a negative impact on the third quarter OR of 140 basis points. So excluding that, the OR would have been approximately 95%, which would have been 130 basis points better than last year and more in line with our recent trends of profitability improvement.
Now as I think about sequential changes from Q3 to Q4, we historically see degradation in our operating ratio of about 100 basis points. So if I consider our jumping off point from Q3 being the 95 OR that I just referenced, I would expect our sequential change in OR from Q3 to Q4 to be slightly better than that historical trend.
And then, finally, you touched on the repayment of the deferral of the Cares Act payroll taxes, that’s only going to be a cash impact to Q4. That’s fully accrued and that will not impact expense in Q4.
Erin Weed
Got it. No. That’s very helpful. And then also just GRI plans, do you guys expect to — are you planning that right now or like when are we going to hear about the next one?
Dan Olivier
Yeah. This is Dan again. So we actually implemented a GRI at 5.9% effective October 3rd. That’s been in place for about a month now.
Erin Weed
Got it. And if I could just ask one more, on the contract renewal side, I noticed like you mentioned 5% in October and that’s sort of trended or decelerated throughout since April, I believe. I guess, how do you think about that moving forward and like why was that, is that just you had maybe lower priced renewals up in earlier in the year and now you are kind of lapping some stuff now? Any puts and takes there and then also just kind of the balance of volumes and price from here as we go through 4Q?
Dan Olivier
Yeah. Well, let me start with that. We saw a strong yield performance again on a year-over-year basis during the third quarter and we saw continued sequential yield growth sequentially from Q2 to Q3, excluding fuel surcharge, LTL revenue per shipment was up 1.6% and LTL revenue per hundredweight was up 3.2%.
So although the level of our contractual renewals has come down from a historically high level in recent quarters, we believe that we can continue to achieve sequential yield growth, even though the year-over-year percentage comparisons will continue to moderate.
Erin Weed
Got it. Okay. Thank you, guys. Appreciate the time.
Darren Hawkins
Thank you.
Operator
Thank you. And the next question comes from Jeff Kauffman with Vertical Research Partners.
Jeff Kauffman
Thank you very much. Hi, guys.
Darren Hawkins
Hi. Good afternoon, Jeff.
Dan Olivier
Hey, Jeff.
Jeff Kauffman
Good afternoon. So if I think about the $19.4 million is more of a one-off payment and true-up and not really related to current operations, 95% is probably the right bogey to think about how you performed in the quarter. Is that a fair statement?
Dan Olivier
Yeah. That’s fair, Jeff.
Jeff Kauffman
All right. So let me switch gears to the tonnage, because we have — I know you have been going through and improving the yield on your customer mix, something that was needed. But at this point, we have been down almost double-digit tonnage for six straight quarters now and the world slowing down. What is the right network size that you are seeking to have or how much more tonnage is out there to be renegotiating cold, because it’s still at the wrong price?
Darren Hawkins
Jeff, this is Darren. I am not interested in pulling any more tonnage at this point. It’s been the right strategy for our company when we were making these changes and also on the road to profitability that we have been on.
With the demand environment that we are seeing right now, we are certainly going to protect our yield and we are going to prioritize profitability through the process. But when you think about our new network and the changes that we have laid out, we are going to land at 290 terminals. We are not giving up any geography or service area. We are basically giving up 6% of our dollars.
So if you take those 28 facilities that are going away through Phase I and Phase II, we are giving up 1,200 doors, which is 6% of our doors throughout the system. So we have got capacity for the right freight. We certainly don’t want to bring on any shipments or tonnage that doesn’t contribute and that will not be our plan.
But absolutely, when we complete the One Yellow changes and in 2023, our value proposition as we work through whatever the changing landscape in the economy is, and we will control our costs along the way through the reduction of purchase transportation, cartage, CapEx, all the normal pieces and matching our labor to our overall volume.
But this One Yellow plan is absolutely a growth story, but it’s growing the right way profitably and also by providing our loyal customer base with the value proposition that will make them want to expand the utilization of the Yellow nationwide.
Jeff Kauffman
That was helpful. Thank you. One last follow-up. As I look at how the freight market is changing through your eyes and you have seen some upturns, you have seen some downturns. What’s a little bit different about this one and kind of which areas, whether you think of it as customer industry or product buckets or things like that, where are you seeing incremental weakness, where you see an incremental strength right now?
Darren Hawkins
Yes. This is Darren and you are certainly right. This is an unusual progress that we have seen from the demand cycle that we were in. And as we have seen it just over the last 60 days challenging, it was noticeable in October to me and to our data at Yellow and that’s what was happening in the retail channel.
Our largest customers, if you look at our top 10 customer base, over half of those will be in the retail channel. And even though we haven’t lost any significant accounts in that area, we saw across the Board shipment and tonnage decline in those areas in October. So it’s definitely evident in the retail channel.
And the interesting thing is in some of the industrial book of business that we have got demand is still firm. So as our economy moves forward and as America gets a clear line of sight on reshoring, near shoring and also the amount of confidence they have moving forward with inflation involved that’s going to be interesting to watch.
But the big difference for us is this retail piece that we have seen in October, which makes sense. I mean, we have got data that shows us where inventory levels and others are, and that will change over time.
So the good thing about our company as we can respond to that, although we have spent a lot of time and money in 2022 through our driving academies and all of our hiring efforts and then also a lot in training and we would like to keep those employees on board. And in doing that, we will be focusing on reduction of cartage, purchase transportation, other areas.
And also, we are going to need those employees to make sure that Phase 2 goes well for our customers. So that’s kind of how I see the next — between now and the end of the year playing out for Yellow.
Jeff Kauffman
Okay. Well, thank you very much and congratulations.
Darren Hawkins
Thank you, Jeff.
Dan Olivier
Thank you, Jeff.
Operator
Thank you. And last question comes from Bruce Chan with Stifel.
Andrew Cox
Hey. Afternoon, team. This is Andrew Cox on for Bruce. Good afternoon.
Darren Hawkins
Yeah. Good afternoon, Andrew.
Andrew Cox
Hey. Good to hear from you. So I am just trying to understand how the fleet refreshment is coming along? I heard you guys guided down CapEx for the rest of the year. I am just looking for a little bit more insight there. Is that related to equipment delays and any insight into how much more of the fleet is still needed to be refresh from here, that would be helpful? Thank you.
Dan Olivier
Yeah. Good afternoon, Andrew. This is Dan. As I mentioned in my opening comments, our full year guidance for CapEx has come down to a range of $210 million to $230 million. About half of the reduction from prior guidance is due to the projected timing of spend around year end between 2022 and 2023.
And the other half due to some items that we scaled back on, just because of the amount of equipment needed to support lower volume trends. We do continue to work closely with the OEMs to keep a good line of sight to production capacity, but none of the reduction in our guidance was due to production delays.
Andrew Cox
Okay. That’s helpful. And I guess along that same note of kind of expectation for softer volumes moving forward, how has that expectation changed the time line or the scope of the One Yellow project? If things evolve further from here, what ability do you guys have to flex up or down in that process?
Darren Hawkins
Andrew, this is Darren. We are right on track with One Yellow. That is something that will not change regardless of external inputs of economy, inflation, other pieces. This is a long-term strategy and we are right in the final chapters of it.
Very excited to be bringing the marketplace this opportunity to have super regional service from a brand like Yellow. So that will — the time line between now and the end of the year, we will be certainly very prepared and we will be executing that time.
Andrew Cox
All right. Well, that’s all I had. Thanks so much for the time and congratulations on the progress. Look forward to seeing what happens from here.
Darren Hawkins
Thank you, Andrew.
Dan Olivier
Thank you.
Operator
Thank you. And 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, and 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 am turning the call back to you.
Operator
Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.
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