YRC narrows loss, cites expenses association with network “cycle”

YRC Worldwide, whose regional and long-haul units provide the second-largest LTL capacity in the trucking industry, narrowed its second-quarter loss to $4.9 million on $1.32 billion revenue, compared with $15.1 million loss on $1.24 billion revenue in the year-ago quarter.
 
YRC has lost in excess of $2.6 billion in the last six years (mostly under previous management). It is trying to get out from underneath debt service in excess of $1.2 billion, and there are signs that it is beginning to do so.
  
Its earnings before interest, debt and amortization were $63 million for the second quarter of 2014, as compared to adjusted EBITDA of $74.1 million for the second quarter of 2013.
  
YRC Freight experienced a 5.6 percent jump increase in operating revenue, despite a half work day less as compared to the second quarter of 2013, according to YRC Worldwide CEO James Welch. The additional revenue is due to increased volumes as well as a slight gain in revenue per hundredweight, he said.
 
“The growth in shipments and tonnage per day is a result of the overall economic improvement and renewed shipper confidence due to the successful completion of our refinancing and modified labor agreement in February 2014,” Welch added.
  
But he said YRC’s network was not “fully in cycle” during the second quarter, which resulted in a decrease in productivities, the re-handling of freight and less than optimal use of purchased transportation.
 
The year-over-year decline in profitability can also be attributed to a $7.5 million increase in expense related to bodily injury claims as well as a $2.9 million increase in cargo claims expense when compared to the second quarter of 2013, Welch said. “The increase in our bodily injury claims expense was driven by an increase in outstanding claims and an increase in development of prior year claims that remain unsettled,” Welch added.
 
YRC Freight, its long-haul unit, posted a 100 break-even operating ratio (improved from 101.1 a year ago) while its three regional units posted a combined 95.1 OR (a slight deterioration from the 94.3 OR a year ago).  
    
David Ross, trucking analyst for Stifel, called YRC’s earnings “disappointing.” He said YRC missed analysts’ expectations because of several factors—worse-than-expected margins in both YRC’s regional and long-haul units, network “churn” that required higher purchased transportation and new and/or part-time dock labor. That in turn created inefficiencies, caused superfluous freight handling, and exacerbated damage and cargo claims, Ross said.
  
“Many of these problems will take a few quarters to work through,” Ross said in a note to investors.
On the bright side, Ross add, YRC management sees a favorable freight environment ahead with good pricing prospects. But he added that YRC management was “slow to the pricing increase game,” hurting margins in the second quarter.
 
“Overall, the freight environment in which we are currently operating bodes well for YRC Freight,” YRC Freight President Darren Hawkins said in a statement. “We are experiencing a robust pricing environment, and at YRC Freight specifically we are being disciplined in obtaining pricing increases on lower margin accounts.”
  
Hawkins said the company opened three new freight terminals, and was planning to convert three of its current terminals into distribution centers during the third quarter.
 
Tonnage was the bright side for both YRC national and regional. Tonnage per day rose 5.9 percent year-over-year at YRC Freight (long-haul) and surged 6.8 percent at its three regional units (Holland, Reddaway and New Penn). Yield was up a scant 0.2 percent at YRC Freight and a healthier 2.5 percent at the regional units.
 
Those revenue yield increases likely will continue for the rest of this year, analysts say, because of the tight capacity market in LTL and throughout the trucking industry.
 
“Customers have few places to go, in our view, with pricing rising consistently through the rest of the industry,” analyst Ross said.