October 19, 2017

Storms, higher spot market rates to pressure YRC third-quarter results

Results also to be impacted by weak performance at unidentified regional carrier.

By DC Velocity Staff

Less-than-truckload (LTL) carrier YRC Worldwide Inc. said today that its third-quarter results will be pressured by the impact of hurricanes Harvey and Irma on its network operations, higher-than-expected costs of purchased transportation services, and the underperformance of one of its three U.S. regional carriers, which it did not identify but is believed to be New Penn, which operates in the Northeast and mid-Atlantic U.S., eastern Canada, and Puerto Rico.

YRC disclosed in a Securities and Exchange Commission filing in late September that Don Foust had resigned as president of New Penn and had been replaced by Howard Moshier, who had been senior vice president of operations at YRC Freight, YRC's long-haul unit. New Penn has long been regarded as one of the best-run LTL carriers, with an industry-leading operating ratio—the measure of operating revenues to expenses, a key metric of carrier efficiency and profitability.

YRC will release its third-quarter results on Nov. 2.

In today's statement, YRC CEO James L. Welch said the back-to-back hurricanes that struck in late August and early September had a "cascading effect" on its network, delaying deliveries and hurting productivity. YRC said 28 of its facilities were either temporarily closed or had their operations curtailed as a result of the storms. The storms were believed to have affected the entire YRC Freight network and parts of its Holland regional operation.

YRC was also hit with unexpected costs associated with re-allocating revenue equipment to the affected areas, as well as increased overtime as more man-hours were required to support recovery efforts, the company said.

Welch said he couldn't quantify the lost revenue and higher costs due to the storms, but said it would have an "unfavorable impact" on the third-quarter results. He added that heightened demand in the current and coming quarters for LTL services to help with rebuilding damaged areas of Texas, Louisiana, and Florida, will add to what he called an "already positive economic environment."

YRC is the first of the publicly traded LTL carriers to disclose the impact of the hurricanes on third-quarter results. Because LTL operates in a hub-and-spoke-like configuration, service issues at one node will usually have a ripple effect across the network. Due to the hurricanes, most of the public carriers are expected to report subpar third-quarter results, though it is believed the additional business generated by post-hurricane recovery initiatives will boost results in the fourth quarter and into the early part of 2018.

YRC also felt the sting of tightening truckload capacity in the third quarter as it was caught with a shortage of internal supply to meet shipper demand. Welch said that YRC had deliberately back-ended deliveries of new equipment so it could first complete certain financial commitments. Though 800 tractors and 2,400 trailers will enter the fleet during the next two quarters, the shortage of equipment during the third quarter forced YRC into the spot market to buy transportation services. Spot rates have climbed significantly in 2017, and spiked in late summer as the hurricanes pushed truck capacity into the affected regions, leaving fewer trucks elsewhere to meet growing demand.

David G. Ross, who covers YRC for Stifel Financial Corp., an investment firm, said in a note today that the company will need a lot more equipment than what it has ordered if it hopes to improve service and reduce driver turnover. However, Ross said a larger order is very unlikely until the price of YRC equity is much higher, which would allow the company to issue stock to fund new equipment purchases and pay down debt. YRC stock closed today at $13.10 a share, up 63 cents a share on the day. The price of the equity is slightly higher today than it was a year ago at this time.

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