Yellow’s net falls sharply as it completes network optimization in West

Yellow Corp., which controls slightly more than 10% of the $46 billion-a-year less-than-truckload (LTL) market, is paying a small price for completing a costly network optimization in the West. Slower freight demand by retailers pulling back in the quarter also affected Yellow’s profitability.

Yellow posted third quarter net income of $4.8 million on $1.36 billion revenue in the third quarter. That was about half its year-ago net income of $8.3 million on $1.30 billion revenue.

Third-quarter operating income was $49.1 million, which included a $1.1 million net gain on property disposals. In comparison, operating income for the year-ago quarter was $48.4 million.

In the second quarter this year, Yellow posted one of its best quarters in a decade with net income of $60 million, compared with a net loss of $9.4 million in the second quarter of 2021.

For the last 12 months Yellow’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) as of Sept. 30, 2022, was $401.7 million compared to $248.4 million as of September 30, 2021. Yellow officials were buoyed by the latest results.

“For the sixth consecutive quarter, revenue and operating income improved on a year-over-year basis,” Darren Hawkins, chief executive officer, said in a statement.

He noted operating income improved despite a $19.4 million increase in third-party liability claims expense compared to a year ago. That was mostly due to unfavorable development of prior-year claims, including the resolution of several of its most significant outstanding claims. He said he didn’t believe this was a long-term problem.

“We continue to closely manage purchase transportation expense and as a percentage of revenue, it was the lowest it has been in more than two years,” Hawkins said.

Hawkins said while demand for LTL capacity is moderating compared to the elevated levels over the past several quarters, the LTL pricing environment remains what he called “favorable.”

Contract rates are being renewed with an average increase of about 5 percent, Hawkins said.

In September, Yellow successfully implemented phase one of the network optimization in the western United States. This included integrating 89 legacy YRC Freight and Reddaway terminals to operate as a super-regional network that it calls “One Yellow.”

“This One Yellow is a growth story—but it’s growing the right way with profitability,” Hawkins said.

The transformation to One Yellow puts the company in the “best position” to continue improving operationally and financially, Hawkins said.

“It’s living up to our expectations,” Hawkins said in a conference call with analysts. “We’re picking up Yellow freight and Reddaway freight with one driver—instead of two.” He expects the transformation to yield further results as it expands nationally.

An investment of both people and processes is expected to yield much greater financial results going forward, Hawkins said. He said Yellow’s optimum network was around 290 terminals, down slightly from the start of the year.

“We have capacity for the right freight. I’m not interested in culling any more freight,” Hawkins said. “With demand environment we’re seeing now, we’re going to protect our yield. “The early results are meeting expectations and customers benefit by having one driver pick up and deliver both regional and long-haul shipments. That process will be implemented elsewhere in the nation in the next two quarters.

“We expect the network optimization to lead to improved asset utilization, enhanced network efficiencies, cost savings and to create capacity without the need to add new terminals,” he said.

In October, Yellow enhanced its liquidity by extending the maturity of its asset-based lending (ABL) facility from January 2024 to January 2026. It also increased the size of the facility from $450 million to $500 million and reduced the fixed portion of the interest rate by 50 basis points.

From an operational standpoint, Yellow’s operating ratio for third quarter 2022 was 96.4 compared to 96.3 in third quarter 2021. Including fuel surcharges, third quarter 2022 LTL revenue per hundredweight increased 24.6% and LTL revenue per shipment increased 22.4% compared to the same period in 2021.

This was due to strong demand on Yellow’s industrial customers. Retail shippers, however, started to pull back due to slower consumer spending, Yellow officials said.

Excluding fuel surcharges, third quarter LTL revenue per hundredweight increased 12.8% and LTL revenue per shipment increased 10.9%. Yellow’s third quarter 2022 LTL tonnage per workday decreased 16.2% when compared to third quarter 2021.

Also in third quarter 2022, Yellow invested $68.1 million in capital expenditures. This compares with $96.7 million in the third quarter last year.