Yellow Corporation (YELL) Q2 2022 Earnings Call Transcript

Yellow Corporation (YELL -2.32%)
Q2 2022 Earnings Call
Aug 03, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

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 -- Senior Vice President of Treasury and Investor Relations

Thank you, operator, and 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 law.

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 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, 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 a release, we issued a presentation, which may be referenced during the call. The presentation was filed in an 8-K, along with earnings release, and is available on our website. I will now turn the call over to Darren.

Darren Hawkins -- Chief Executive Officer

Thanks, Tony, and good afternoon, everyone. Thank you for joining our call. In Q2, Yellow achieved a 93% operating ratio which is nearly a 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 production trends have carried into Q3.

For the month of July, Yellow averaged 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 transform the network to operate as a superregional 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 Reddaway terminals in the Western U.S. and will integrate the line 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 remains 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 superregional carrier that will provide our customers with an all-in-one solution. Thank you again for joining us today. I will now turn the call over to Dan who will share additional details about the quarter.

Dan Olivier -- Chief Financial Officer

Thank you, Darren, and 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 of 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, the borrowing costs 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 a 15.2% decrease in LTL shipments per day and a 1.5% decrease in LTL weight per shipment. Sequential LTL tonnage per day trends compared to the prior year were 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 disruption and 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 -- President and Chief Operating Officer

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 superregional carrier around the end of the year. Phase 1 will include the optimization of 89 legacy YRC Freight and Reddaway terminals in the Western part of the U.S., which has the lowest execution risk profile. Our plan to integrate the line haul 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 phases. As we transform the network to operate as a superregional carrier, we are integrating the line haul network to support both regional and long-haul service, as well as optimizing our pickup and delivery operations to eliminate redundancy. When completed, the line haul optimization efforts will help drive speed, efficiency, and consistency in our network. The steady 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 long-haul 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 state professional drivers, and we recently added four company-sponsored Driving Academies 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 1,000 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 is 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 -- Chief Executive Officer

Thank you, Darrel. I am proud of our employees and their efforts to focus on our customers and communities that they live in. Their hard work helped 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.

Questions & Answers:

Operator

And ladies and gentlemen, our first question today comes from Jack Atkins from Stephens. Please go ahead with your question.

Grant Smith -- Stephens Inc. -- Analyst

Hey, good afternoon, guys. This is Grant Smith on for Jack. So, could you all provide a little bit of an update on July trends 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 -- Chief Executive Officer

Grant, this is Darren. 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 comment on other July stats.

Dan Olivier -- Chief Financial Officer

Yeah, 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 trends. So, based on that, from a tonnage perspective, absent 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 -- Stephens Inc. -- Analyst

Yeah, 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 that normal seasonality look like? And would you expect that to underperform or outperform seasonality this quarter?

Dan Olivier -- Chief Financial Officer

Yeah, 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 adjustment 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 have been in the 93.8% range, which still would have been 410 basis points better than last year and 550 basis points better than the first quarter. So, now as it moves from Q2 to Q3, we historically see degradation in our OR of about 50 to 100 basis points. With our jumping-off point, if I think about that as being that 93.80% that I just mentioned, I would expect that our sequential change in OR from Q2 to Q3 to be in line again with the historical trends.

Grant Smith -- Stephens Inc. -- Analyst

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 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 toward here long term over multiple cycles, is there any structural reasons why you can't ultimately get there?

Darren Hawkins -- Chief Executive Officer

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 superregional network rather than having a holding company and 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 of 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'll let Darrel, our president, talk about some of the benefits that One Yellow will bring us. So, go ahead, Darrel.

Darrel Harris -- President and Chief Operating Officer

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, we have opportunities to better utilize our facilities, 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 four different line haul 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 -- Stephens Inc. -- Analyst

Thank you, guys, and congrats on a great quarter.

Darren Hawkins -- Chief Executive Officer

Thank you, Grant.

Operator

Our next question comes from Bruce Chan from Stifel. Please go ahead with your question.

Bruce Chan -- Stifel Financial Corp. -- Analyst

Everyone, good afternoon, and congrats on all the progress here. 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 line haul network, can you maybe help us to think about what your spend might need to be in order to get back toward a more kind of normal industry average fleet age? And when do you think that, you know, we'll see that capex investment get back to a normal level?

Darren Hawkins -- Chief Executive Officer

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 utilization we'll 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 what our thoughts are. So, go ahead, Dan.

Dan Olivier -- Chief Financial Officer

Yeah. On a long-term basis, Bruce, when I think about capex, really, a lot of it is 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 again the huge investment in 2021, which gives us the time and space now, as Darrel executes the transformation, to evaluate where ultimately, we need to land long-term.

But when I think about in the 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 -- Stifel Financial Corp. -- Analyst

OK. 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 -- Chief Financial Officer

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 of $1.6 billion, our leverage ratio is now less than four 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 not until 2024, that we still have some more room for improvement there. And that will give us even better options than what we still would have today.

Bruce Chan -- Stifel Financial Corp. -- Analyst

OK. 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 superregional one, is there anything to think about, you know, as far as the yield dynamics, you know, length of haul, revenue per shipment, you know, that might affect how that top line looks?

Darren Hawkins -- Chief Executive Officer

Bruce, this is Darren. When we think about the superregional 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.

And then the shorter length of this haul, 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 of 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 upstream, and it's in a foundation that we're going to protect.

Bottom line, we know that giving the customer what they want will 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 in terms of better value for the customer and an improving revenue per shipment over time.

Bruce Chan -- Stifel Financial Corp. -- Analyst

OK. Great. Well, I appreciate that color, and congrats again on the results.

Darren Hawkins -- Chief Executive Officer

Thank you, Bruce.

Operator

And our next question comes from Scott Group from Wolfe Research. Please go ahead with your question.

Unknown speaker

Hi. Good afternoon. This is Erin on for Scott. I guess, first, you had a pretty large spread between growth 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 -- Chief Financial Officer

Yeah, 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, that's what really drives that gap including versus excluding fuel.

And of course, as we've all seen, 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.

Unknown speaker

Got it. Thank you for that. And then I guess just on terminal count, I know on the last earnings call, you guys had 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 -- Chief Executive Officer

Erin, this is Darren. We're currently at 316 when we execute the Western changes here in the next few weeks. That will 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're 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 will be in that ballpark once One Yellow comes to full fruition.

Unknown speaker

Got it. OK. 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're seeing like 10% to 11%. I guess are you seeing any sort of moderation in pricing so far into July? I know that you kind of touched on this earlier, but I guess do you expect, just in general, more stable pricing trends throughout the rest of the quarter?

Darren Hawkins -- Chief Executive Officer

Erin, this is Darren. The contract renewals, when we comment on those, it's a bellwether 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, 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 of where our pricing is at, I'm pleased with what I see from the industry pricing, and I still have a lot of confidence in our yield path for 2022 and beyond.

Unknown speaker

Great. Thank you. I appreciate all the color. Thanks for the time.

Darren Hawkins -- Chief Executive Officer

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 -- Chief Executive Officer

Thank you, operator. Thanks again to everyone for joining us today. Just 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

[Operator signoff]

Duration: 0 minutes

Call 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

Grant Smith -- Stephens Inc. -- Analyst

Bruce Chan -- Stifel Financial Corp. -- Analyst

Unknown speaker

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