Third quarter earnings performance reflects ongoing challenges for YRC Worldwide

Mixed results could have served as the theme for less-than-truckload transportation services provider YRC Worldwide.

The company reported late yesterday that consolidated operating revenue for the quarter—at $1.253 billion—was up 1.3 percent annually, while consolidated operating income fell from $27.3 million to $5.8 million year-over-year. YRC said that the $21.5 million dip in operating income included a $1.3 million loss on asset disposals. And third quarter EBITDA—at $62.4 million—was down $16.4 million compared to $78.8 million a year ago.

YRC CFO and Executive Vice President Jamie Pierson said on the earnings call that the decline in EBITDA was due to the change in operations at the company’s biggest unit, YRC Freight, which was designed to continuously improve customer service by reducing the handling of shipments and excess time in transit and went into effect earlier this year. Pierson explained that the change in operations is currently hindering service and subsequently led to “some customer flight” in its higher margin channels. Another factor he cited was its driver shortage in which YRC had to pay a fair amount of overtime to its existing drivers, and in some cases, had to pay a third-party carriage carrier to deliver the freight.

Pierson said that YRC reduced its outstanding letters of credit by $21 million, from $386 million at the end of the second quarter, to $365 million at the end of the third quarter, which he said is in addition to the $57 million decrease in the first half of 2013, and is a result of the safety initiatives the company started in late 2011.

Performance results: Tonnage in the third quarter per day at YRC Freight was down 0.5 percent, while regional tonnage for its New Penn, Holland and Reddaway units was up 6 percent per day. Revenue per shipment at YRC Freight increased 0.6 percent, with a 2.2 percent decline in revenue per shipment and a 2.8 percent increase in weight per shipment. For the regionals, revenue per shipment was up 0.8 percent, revenue per hundredweight was up 1 percent, and weight per shipment declined 0.2 percent.

YRC Worldwide CEO and YRC Freight President James Welch said on the call that the company is not pleased with its third quarter results.

“After exceeding our internal financial plan for 8 consecutive quarters with this management team around in 2011, we had a rather large steep up during the third quarter,” he said.  Several different factors contributed to our overall disappointing performance.”

Among the factors cited by Welch for the poor performance was YRC Freight’s performance, which was related to challenges from the network optimization plan that took effect in May. One main factor with the implementation, he said, was not having enough drivers relocate to the terminals that gained freight volume as a result of the change of operations.

“The overall vehicle fill rate was relatively high as compared to previous changes of operations,” he said. “However, we still ended up short on manpower, and the shortage was amplified by the normal vacation season on the docks and in the city P&D, as well as our line haul operation.

Also contributing to the performance was what Welch termed a manpower shortage, with too many YRC Freight network locations where freight was not processed properly and in turn left the network out of cycle, which led to increased capital expenses on purchased transportation which led to paying out a lot of unplanned over time to help clean out the freight that was clogging the network.

Other related issues included service being under pressure for the entire quarter, due to manpower shortages, he said, and a decline in productivity compared to those experienced before the network optimization. And the momentum from the change in operations spurred by the company’s sales efforts regressed in the third quarter. But on a more positive note, Welch said much of that sales momentum has been regained, with a good portion of lost sales having since been re-secured.

“We can say that certainly there were self-inflicted wounds by YRC Freight during the changes of operations,” noted Welch. “However, there were other issues as well and it started with the timing of the change. Originally, we wanted to implement the change at the end of last March, which we believe would’ve caused less disruption than the change in May. However, we were unable to implement the change at that time.”

While the performance is clearly not where Welch and YRC want it to be, Welch stated that restoring YRC Freight is the company’s top priority, adding he is pleased with the progress over the last 30 days.

“We are focused on growing the business versus just cutting cost, which will require YRC Freight to maintain even higher service levels,” he said. We’ve seen improvements in the performance of YRC Freight in October. Volume levels have improved in comparison to 2012, and this is the first time since March of 2012 that we’ve seen this. Load average is also up considerably…However, we still have a lot of work to do at YRC Freight.”

YRC separately announced yesterday that on November 5 its management team met with officials from local unions affiliated with the International Brotherhood of Teamsters, with both parties maintaining an ongoing dialogue. It said that local unions have indicated support for the Teamsters National Freight Industry Negotiating Committee (TNFINC) to begin discussions about the company’s financial future, with YRC Worldwide hoping to extend the current contract for 5 years from ratification and achieve cost savings for YRC Freight, Holland, Reddaway and New Penn, with the current contract set to expire on March 31, 2015.

“We have listened to the market and it has resoundingly said that we need a more competitive contract for the IBT, and that’s exactly where we are today,” said Welch. “The path is clear. In order for us to more holistically refinance the capital structure, we need a more competitive contract. This is an incredibly important step in the long-term success of our company, and we will provide our employees with long-term job stability. In addition to securing jobs over 26,000 union employees, it will substantially increase the likelihood of a refinancing that will address the debt maturities in 2014 and 2015.”