When a news headline last week declared YRC Worldwide was “back at (the) brink” of the default and bankruptcy filing it narrowly avoided in late 2009, nerves quickly frayed at the long-troubled trucking operator.
The headline alluded to the mounting losses, cash burn, rising interest and pension payments, and $1.3 billion in debt cited in a Bloomberg article focusing on warnings YRC included in a Feb. 28 prospectus filed with the Securities and Exchange Commission.
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The credit default swaps derivatives market is still gambling YRC will run out of cash and not be able to pay its bills, Bloomberg reported, noting YRC said in the prospectus it may have to renegotiate financial covenants with its banking group.
YRC was quick to respond, insisting the company isn’t “on the brink” of default or bankruptcy, and that it would be able to renegotiate those financial terms with its lenders. (YRC, it’s worth noting, has renegotiated terms with its banks 21 times in recent years, and those lenders now own 72.5 percent of the company.)
Despite an $86.2 million net loss in the fourth quarter, the nation’s largest less-than-truckload operator has the best level of liquidity it’s seen since 2008, Chief Financial Officer Jamie G. Pierson said. YRC “is intent on using the front windshield to navigate the company’s continuing recovery, not the rearview mirror,” he said.
YRC Worldwide may not be “on the brink,” but it certainly isn’t back in the pink.
The company faces serious challenges, not the least of which is a ticking clock.
“Our lending group has been very supportive, but I don’t operate under any pretenses that they’re not in this deal to make money themselves,” CEO James Welch said. “We’ve been given a decent amount of runway to get the company turned around,” he said, but YRC needs to return to the black before that runway runs out.
The company made significant progress in 2011, completing a $500 million restructuring and returning to revenue growth for the first time since 2006. Total YRC Worldwide revenue increased 12 percent to $4.9 billion, with YRC Freight increasing its sales 11 percent to $3.2 billion and the regional group, 14.8 percent to $1.6 billion. YRC Worldwide ended 2011 with $277 million in liquidity, up from $194 million a year earlier, providing better protection from higher costs.
YRC Freight cut its operating loss by nearly half in 2011, from $170.3 million in 2010 to $88.5 million. Regional carriers Holland, New Penn and Reddaway drove their net profit from $3 million in 2010 to $33 million.
Early this year, the company rolled out plans to streamline its long-haul LTL network to limit freight handling and speed delivery, improving on-time performance and reducing damage and claims. YRC Freight will implement those changes, approved by the Teamsters this month, on April 8, Welch said.
But the company desperately needs to stop the hemorrhaging caused by successive nine-figure annual losses. YRC Worldwide lost $354.5 million in 2011. Since 2006, the company has lost some $3 billion, including nearly $1 billion in 2008 alone.
The financial restructuring last July brought in Welch and a new slate of directors to replace the board led by former Chairman, President and CEO William D. Zollars. The restructuring secured more favorable lending terms, including a $400 million line of credit, gave YRC’s bankers nearly three-quarters of the company’s stock, and ensured substantial Teamsters concessions would stay in place through 2015.
That’s the pavement for Welch’s “runway.” With those safeguards in place, can Welch save YRC Worldwide, and YRC Freight, from eventual collapse?
The 57-year-old former president of Yellow Transportation and, most recently, CEO of same-day carrier Dynamex has a plan to do so based on streamlining management, devolving decision making and a laser-like focus on LTL freight.
He not only wants to speed that freight, but also to improve the freight mix to increase profitability. “One of the top things on the list at YRC Freight is to make sure the freight mix is improving and contributing to our profitability,” Welch said.
What he needs is time. Although profitability is the ultimate goal, getting there is a process, one that’s got a good share of bumps and bad days. “A ship this big doesn’t turn on a dime,” he said in an interview at the company’s Overland Park, Kan., headquarters. “Are we where I want to be? No. Am I satisfied? No. Am I happy? No. But I’m encouraged by the changes that we have made. We’re making sequential improvements, and as 2012 unfolds, I know we’ll come around.”
He has data to support that optimism. Over the last four quarters, tonnage per day at YRC Freight increased on average 6.3 percent, rising 6.7 percent in the fourth quarter year-over-year. Compared to the second quarter of 2011, fourth quarter yield excluding fuel surcharges increased 3.6 percent for YRC Freight. Among the public LTL carriers, only UPS Freight, Saia and ABF Freight System did better.
Higher revenue per hundredweight indicates YRC is commanding — and getting — higher rates, and that LTL price increases are moving up at a moderate pace in what Welch called “the most rational LTL pricing market” he’s seen in years.
Welch spends about half his time on the road, visiting shippers and employees. Many remember him from his 29-year stint with Yellow. He projects a down-to-earth approachability not often noted among Fortune 500 CEOs. “When I meet employees, I’ll ask them, ‘Do you want to keep acting like a fighter against the ropes, getting pummeled, or do you want to get off the mat and compete?’ We can’t be successful unless we have all 32,000 people rolling in the same direction,” he said.
Welch is equally candid with the shippers whose freight will ultimately decide YRC’s fate. “We intend to give our existing and potential customers a reason to use us by providing a consistent and more competitive service than this company did in the past,” he said. “I’ve been in front of a lot of customers lately, and I feel there’s a certain percentage out there that are actually pulling for us to stay in business.”
Among them is Mattel’s Bill Leahy. “From an industry point of view, we’re concerned about capacity — irrespective of mode,” the vice president of U.S. logistics at the $6.3 billion toymaker said. “It’s important they continue to play a role as a national LTL service provider. More selfishly, we’ve had a working relationship with them for over a generation. They’ve got an intimate knowledge of our service requirements.”
LTL shipping without YRC Freight “would be more complicated,” Leahy said. “We’d have to have more partners, more niche players.”
YRC Freight service, he added, is improving. “Our teams in the field believe they’re performing at a very high level, at the highest level for a couple of years,” Leahy said.
Welch said YRC Freight’s on-time performance has improved from 87.5 percent to 94 percent. “That’s a monumental effort when you’re handling thousands of shipments and thousands of lanes and multiple trailer combinations.”
Shippers concerned about rising LTL costs should “hope and pray” Welch is successful, said Mike Regan, president of logistics services company TranzAct Technologies in Elmhurst, Ill. “He’s a very sharp and capable guy, and they’re doing a lot of positive things. In the grand scheme of things, it’s important that YRC Freight survive. YRC shippers should be actively rooting for YRC Freight to succeed. What’s going to help them is that they are operating in a stronger LTL market.”
The top 25 LTL carriers in the U.S. and Canada increased revenue 12 percent in 2011 to $27.6 billion, according to a report from SJ Consulting Group and published by The Journal of Commerce. Although YRC Worldwide is less than half the size it was in 2006, it still commands some 15 percent of the $31 billion LTL market, according to SJ Consulting. YRC Freight is the third-largest LTL carrier in the country, holding about 10 percent of the market. In terms of revenue, only FedEx Freight and Con-way Freight are bigger. And according to SJ Consulting, YRC Freight is still the biggest long-haul LTL carrier, holding 29 percent of the three- to five-day shipment market. FedEx Freight is second with a 27 percent share.
“Take that capacity out, and LTL pricing is going to change in a hurry,” Regan said.
The loss of a carrier YRC Freight’s size “would throw the whole marketplace into absolute disarray,” said Mark Scates, director of corporate logistics and transportation at Cenveo, a $2 billion manufacturer and YRC customer. From a shipper’s perspective, he said the loss of YRC Freight would cause more disruption than the 2002 collapse of Consolidated Freightways, “because there are fewer companies out there now, and they’ve all downsized capacity since the recession.”
Cenveo manufactures products consumers see and handle almost every day, from drug labels for pharmacies to packaging for consumer products and food. The company, which has 109 manufacturing plants nationwide, produces one out of every four envelopes in the U.S.
Cenveo uses all four YRC operating carriers to ship LTL freight, typically within a one- to three-day window. “When you look at Holland, Reddaway and New Penn, that’s what they do,” Scates said. The regionals “fit really well with what we’re trying to do, where our plants are, and they provide best-in-class service.”
With YRC Freight, however, “I’m concerned about their plans to focus on the long-haul market,” he said. “They’re going to be competing against the super-regionals that offer three-day service anywhere. Why would I want to delay delivery?
“I think they’re a great company,” Scates said, “but they still have a lot of challenges ahead of them.”