Yellow Corporation (NASDAQ:YELL) Q2 2022 Earnings Conference Call August 3, 2022 5:00 PM ET
Company Participants
Tony Carreno – Senior Vice President of Treasury and Investor Relations
Darren Hawkins – Chief Executive Officer
Dan Olivier – Chief Financial Officer
Darrel Harris – President and Chief Operating Officer
Conference Call Participants
Grant Smith – Stephens
Bruce Chan – Stifel
Erin Weed – Wolfe Research
Operator
Good afternoon, everyone, and welcome to Yellow Corporation’s Second Quarter 2022 Earnings Call. All participants will be in a listen-only mode. After today’s presentation, there will be a question-and-answer session. Please note this event is being recorded.
At this time, I’d like to turn the conference call over to Tony Carreno, Senior Vice President of Treasury and Investor Relations. Please go ahead.
Tony Carreno
Thank you, operator. Good afternoon, everyone. Welcome to Yellow Corporation’s second 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 income or 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 Q2, Yellow achieved a 93 operating ratio, which is nearly 500 basis point improvement compared to a year ago. Operating income of $99.2 million was the highest quarterly result reported by the company since 2007.
And as of the end of Q2, last 12 months adjusted EBITDA exceeded $400 million, which is another milestone on our journey to One Yellow. We kept our focus on improving the quality and profitability of the freight moving through our network, which contributed to another quarter of strong yield performance.
Ongoing demand for LTL capacity has kept the pricing environment favorable. In Q2, year-over-year, LTL revenue per hundredweight, including fuel increased 29.7% and favorable pricing trends have carried into Q3. For the month of July Yellow average between 6% and 7% on contract negotiation.
LTL tonnage per day was down 16.4% in Q2 compared to a year ago, which was consistent with our internal expectations. As we transformed the network to operate as a super regional carrier, we fully expect to return to growing LTL tonnage per day. Our strategy includes mitigating incremental purchase transportation expense, and as a percentage of revenue, it decreased by 150 basis points in the second quarter, compared to a year ago.
Turning to the transformation to One Yellow. We expect to execute Phase 1 of our network integration this summer. Phase 1 impacts 89 legacy YRC Freight and runaway terminals in the Western U.S. and will integrate the long-haul network to support both regional and long-haul service, as well as the optimization of pickup and delivery operations.
We plan to have the entire network transformation completed around the end of the year. We have made many significant changes to the company since starting the transformation to One Yellow. And we believe that we are well-positioned for the rest of 2022 and beyond. Our liquidity remain strong and the significant capital expenditure investments made in recent years has lowered the average age of the tractor fleet by a couple of years.
What is most exciting to me is in Q2, we delivered some of the best financial results at the company in several years, and we believe there is more opportunity to improve operationally and financially. Once we complete the transformation to One Yellow, we expect improved asset utilization, enhance 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.
Thank you again 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. Good afternoon, everyone. For second quarter 2022, operating revenue was $1.42 billion, compared to $1.31 billion in 2021. Operating income was $99.2 million, including a $3.2 million net gain on property disposals compared to operating income of $27 million in the prior year.
Adjusted EBITDA for the second quarter 2022 was $145.9 million, compared to $82.9 million in 2021. Adjusted EBITDA for the last 12 months was $406.7 million as of the end of the second quarter, compared to $216 million a year ago. As a result of having achieved more than $400 million in LTM adjusted EBITDA to borrowing cost on our term loan goes down by 100 basis points from LIBOR plus 750 basis points to LIBOR plus 650 basis points for as long as we remain above $400 million of LTM adjusted EBITDA.
Our revenue growth of 8.4% in the second quarter compared to a year ago reflects continued strong yield performance and higher fuel surcharge revenue partially offset by lower volume, including fuel surcharge second quarter LTL revenue per hundredweight was up 29.7% and LTL revenue per shipment was up 27.8% compared to a year ago.
Excluding fuel surcharge, LTL revenue per hundredweight was up 15.3% and LTL revenue per shipment was up 13.7%. LTL tonnage per day in the second quarter was down 16.4% driven by 15.2% decrease in LTL shipments per day, and a 1.5% decrease in LTL weight per shipment.
Sequential LTL tonnage per day trend compared to the prior year are as follows, April down 17%, May down 17.2% and June down 15.1%. On a preliminary basis, July LTL tonnage per workday was down approximately 17% compared to last year. Total capital expenditures for the second quarter were $36.2 million compared to $143.8 million a year ago.
Total capital expenditures for the first six months were $72.6 million compared to $346.2 million for the first six months of 2021, due primarily to continued supply chain disruptions in limited production capacity available for tractors and trailers, we are lowering our full year 2022 capital expenditures guidance from a range of $325 million to $400 million to a range of $250 million to $300 million.
I will now turn the call over to Darrel.
Darrel Harris
Thank you, Dan, and good afternoon, everyone. As you heard from Darren, our plan is to complete the transition to One Yellow and to begin operating as a super regional carrier around the end of the year. Phase 1 will include the optimization 89 legacy YRC freight and runaway terminals in the western part of the U.S., which has the lowest execution risk profile.
Our plan to integrate the linehaul network and our pickup and delivery operations in the west is on schedule to be implemented this summer. We will apply lessons learned during the remaining phase. As we transform the network to operate as a super regional carrier, we are integrating the linehaul network to support both regional and longhaul service, as well as optimizing our pickup and delivery operations to eliminate redundant.
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 longhaul services. Overall, we expect the network transformation to enhance customer service lead to greater efficiencies and cost savings while creating additional capacity in the network.
Turning to hiring. We remain committed to hiring and training the next generation of safe professional drivers. And we recently added four company sponsored driving academy in Columbus, Ohio, Tracy, California, Maybrook, New York and Detroit, Michigan. This month, we also expect to open an academy in Albuquerque, New Mexico, bringing the total to 22.
These new academies should help us reach our goal of training 1000 new drivers this year. 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. In closing, we are pleased with the results in the second quarter, but we also know that there’s much more opportunity that lies ahead. I’m confident that completing the journey to One Yellow will provide an enhanced value proposition. That will be a positive for our customers, employees, and shareholders.
I will now turn the call back over to Darren for some closing comments.
Darren Hawkins
Thank you, Darrel. I am proud of our employees and their efforts to focus on our customers and the communities that they live in. Their hard work help deliver solid results this quarter. The transformation of 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
Ladies and gentlemen, our first question today comes from Jack Atkins from Stephens. Please go ahead with your question.
Grant Smith
Hey, good afternoon guys. This is Grant Smith on for Jack. And thanks for taking my question.
Darren Hawkins
Good afternoon, Grant.
Grant Smith
Hey, thanks. So could you all provide a little bit of an update on July trend and how the month went relative to your expectations. And maybe are you seeing any change in the pricing momentum in the market.
Darren Hawkins
Grant, this is Darren and I’ll start with the pricing momentum and let Dan comment on the July trends from the script and others. From a pricing momentum standpoint, we’ve seen good consistency, good discipline in the LTL industry as a whole. We’re pleased with our strategy and what’s developing from that. So we’ve got a lot of confidence in what we see from a pricing momentum standpoint. Dan, I’ll let you come in on other July stats.
Dan Olivier
Yes, good afternoon, Grant. As I covered in my prepared remarks, LTL tonnage per day on a year-over-year basis was down 16.4% year-over-year for the quarter and preliminarily July was down roughly 17%. On a sequential basis from June to July, our tonnage per day was down between 3% and 4%, which is right in line with our historical trend. So based on that, from a tonnage perspective [indiscernible] any significant changes in broader economic demand, we would expect to see our normal historical sequential change in tonnage from Q2 to Q3.
Grant Smith
Yes. Great. Thanks for that. So again, looking into the third quarter, can you help us think about how we should look at the sequential progression of operating ratio? And what does that normal seasonality look like? And would you expect that to under form or outperform seasonality this quarter?
Dan Olivier
Yes, sure. First, let me say that I’m pleased that we were able to improve our operating ratio on a year-over-year basis for the fifth consecutive quarter. We did have 3.2 million of net gains on property disposals during the quarter. And we also had roughly $7 million of favorable adjustments to our insurance reserves related to work comp and accident claims. The impact of those two items on the second quarter OR was approximately 80 basis points. So excluding those, OR would’ve been in the 93.8 range, which still would’ve been 410 basis points better than last year and 550 basis points better than the first quarter.
So now as we move from Q2 to Q3, we historically see degradation in our OR of about 50 to 100 basis points. And I think with our jumping off points, I think about that as being that 93.8% that I just mentioned, I would expect that our sequential change in OR from Q2 to Q3 to be in line again with a historical trend.
Grant Smith
Got it. And last one probably for you, Darren, when you look across the LTL industry, most public comps have at least a high 80s OR and you – when you have a unionized peer that generates a mid-80s OR, clearly there are a lot of things that need to happen to be able to execute on a mid-80s OR. But when you think about what you’re working towards here long-term over multiple cycles. Is there any structural reasons why you can’t ultimately get there.
Darren Hawkins
Grant, this is Darren. And as we don’t give guidance, I will make some comments that One Yellow and all that we’ve talked about with One Yellow and the reasons for pursuing the super regional network rather than having a holding company in four separate brands starts with the customer. It’s what the customer wants from Yellow. And we know as long as we align with what the customer wants then all those other pieces will go in the right direction.
Dan called it out, five consecutive quarters of continuous financial improvement. That’s what we’ve been talking about. That’s what we’ve been demonstrating and proving along the way. So to move in and to continue that improvement, it truly is about One Yellow and I’ve let Darrel, our President talk about some of the benefits that One Yellow will bring in. So go ahead, Darrel.
Darrel Harris
Thank you. And good afternoon Grant. As Darren mentioned, when you think about One Yellow, the opportunity that we have in front of us is really around just better asset utilization, when I say that have opportunities to better utilize our facilities and our equipment and our human capital. When you think about all the redundancies that exist still today under the yellow umbrella, we have four different fixed asset LTL trucking companies that are running, four different pickup and delivery operations, as well as the four different linehaul networks.
And so we get really excited when we think about the opportunity for better asset utilization, but to Darren’s point also an improved value proposition that allows us to not only streamline our operations for greater efficiency to drive improved OR. But most importantly, to drive growth with our customers who have been asking for streamlined solution like this for several years. And so many more great things to come as we work to bring these things together. And we’re certainly going to keep everyone focused and updated along the way as we continue the journey here.
Grant Smith
Thank you guys and congrats on a great quarter.
Darren Hawkins
Thank you, Grant.
Operator
Our next question comes from Bruce Chan from Stifel. Please go ahead with your question.
Bruce Chan
Everyone, afternoon and congrats on all the progress here. Just you gave us some good color on the CapEx puts and takes for the year. But maybe as we think a little bit longer term about where your fleet is and some of the rationalization that you can do in P&D and the linehaul network. Can you maybe help us to think about what your spend might need to be in order to get back towards a more kind of normal industry average fleet agent? And when you think that we’ll see that CapEx investment get back to a normal level.
Darren Hawkins
Hey, good afternoon, Bruce. This is Darren. I’ll start with that one. A big piece of One Yellow is asset utilization and moving that in the right direction, where two tractors, two trailers at the same customer. As we eliminate those pieces, then certainly our appetite for equipment will diminish over time, because of the utilization will have on the newer equipment that we brought into the network. And although we’ve improved it by two years, I’ll let Dan comment on a CapEx basis moving forward and what our thoughts are. So go ahead, Dan.
Dan Olivier
Yes. A long-term basis, Bruce, good afternoon. I think about CapEx really a lot of it’s tied up in technology equipment and terminal infrastructure. We have the luxury with our terminal infrastructure to be able to make all these changes that we’re doing and have the capacity to grow without having to invest significant dollars in that. When I take that into consideration, it really comes down on the equipment side. And we made a huge investment in 2021, which gives us the time and space now, as Darrel executes transformation to evaluate where ultimately we need to land long-term. But when I think about any aggregate, we entered this year with guidance for 2022 of $325 million to $400 million range. I would not expect that it would be too materially different from that on a long-term basis as we go forward.
Bruce Chan
Okay. That’s really helpful. And maybe another one for you, Dan, as you think about where the debt is right now, you’re a bit over $1.5 billion. And as you think about that level of debt and where you’ve come with EBITDA, and then what might be happening here with the rate environment, is there an opportunity to pursue a refinancing here?
Dan Olivier
Well, we’ve certainly made some progress in terms of improving our financial performance. And as we’ve talked about growing into our capital structure, as a result of that progress so far with the current cap structure $1.6 billion. Our leverage ratio is now less than 4 times for the first time since 2019, when our total capital structure was just over $900 million.
That said, I’d say with the operational changes that are still coming. We still think with the maturity is not until 2024, that we still have some more room for improvement there and that’ll give us even better options than what we still would have today.
Bruce Chan
Okay, great. And then maybe just a last quick one here. As you think about converting the network via One Yellow and some of the move from maybe a national footprint on a lane basis to more of a regional or Super Regional One. Is there anything to think about as far as yield dynamics, length of haul revenue per shipment, that that might affect how that top line looks?
Darren Hawkins
Bruce, this is Darren. When we think about the Super Regional piece, we’re still going to have a significant transcontinental operation. We’ll have over 10 facilities supporting the transcontinental operation just like we do today. What we will have is different is in those shorter length of hauls, we will have a consistent service that aligns with the overall industry from a competitive standpoint on transit time as well.
And when I think about the network changes that are coming, I just think Yellow is in an ideal position on yield and tonnage right now. Especially when we think about the timing of the Western changes happening in just a couple weeks and then from that standpoint that all the changes will be done by the end of the year that we’ve got the waterline about just right on tonnage to make this go smooth.
And also we’ve got the top line on yield in a good position of strength and it’s in a foundation that we’re going to protect. Bottom line we know that giving the customer what they want, we’ll increase our revenue per shipment. And when you think about our length of haul, we’ve already got the mixture of the regional companies in that. So I wouldn’t think in terms of major changes to our length of haul over time, but I would think of terms and better value for the customer and an improving revenue per shipment over time.
Bruce Chan
Okay, great. Well, I appreciate that color and congrats again on the results.
Darren Hawkins
Thank you, Bruce.
Operator
And our next question comes from Scott Group from Wolfe Research. Please go ahead with your question.
Erin Weed
Hi, good afternoon. This is Erin on for Scott. Thanks for taking the time today and answering my questions.
Darren Hawkins
Absolutely.
Dan Olivier
Hi, Erin.
Erin Weed
Great. I guess, first, you had a pretty large spread between growth and net of fuel yields this quarter. I guess I was hoping you could talk a little bit more about the impact of fuel in the quarter and just what you’re seeing so far in 3Q.
Dan Olivier
Yes. Erin, this is Dan. So for the second quarter, diesel prices were up roughly 70% compared to last year. So that resulted in our fuel surcharge revenue being up between 85% and 90% year-over-year. So I mean that’s what really drives that gap and the including versus excluding fuel. And of course, as we’ve all seen that fuel prices have moderated a little bit over the past few weeks, but we’re still so early into the quarter only having one month behind us. It’s hard to know exactly how the full quarter will look like.
Erin Weed
Got it. Now, thank you for that. And then I guess just on terminal count, I know in the last earnings call you also talked about being around like 300 terminals by year end. Is that still the plan? And then I guess if tonnage kind of stays where it’s at or kind of continues falling, do you see any potential to cut more terminals?
Darren Hawkins
Erin, this is Darren. We’re currently at 316. When we execute the Western changes here in the next few weeks that’ll bring us down to 307. And then by the end of the year, we will be in the 300 range. We have capacity for profitable freight right now. We are going to protect that capacity. We’re not going to give up geography in these changes. So the terminal count could fluctuate around the 300 number plus or minus. But it’ll be in that ballpark once One Yellow comes to full fruition.
Erin Weed
Got it. Okay. Thank you. And then if I could just ask one more, you noted that contractual renewals were kind of trending now in like the 6% to 7% year-over-year range. And I know, I guess in April, you were seeing like 10% to 11%. I guess is – are you seeing any sort of moderation and pricing so far into July, I know that you’ve kind of touched on this earlier. But I guess, do you expect just a general more stable pricing trends throughout the rest of the quarter?
Darren Hawkins
Erin, this is Darren. The contract renewals, when we comment on those, it’s a bad weather around yield. We’ve seen what our yield numbers are compared to those contract renewals we’ve reported out on in the past and the yield far exceeds those numbers as those contract renewals true up. Taking one month and especially a month like July that the number of renewals we have varies, they are spread somewhat evenly throughout the year but taking any one month is typically not the way to look at that. I will say overall, I’m very pleased with whether where our pricings at. I’m pleased with what I see from industry pricing. And I still have a lot of confidence in our yield path for 2022 and beyond.
Erin Weed
Great. Thank you. I appreciate all the color. Thanks for the time.
Darren Hawkins
Thank you.
Operator
And ladies and gentlemen, with that, we’ll be concluding today’s question-and-answer session. I’d like to turn the conference call 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
And ladies and gentlemen, that will conclude today’s conference call. We do thank you for attending today’s presentation. You may now disconnect your line.
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