YRC chief, analysts spar over meaning of YRC's Q1 results

YRC Worldwide Inc.'s first-quarter results, released on Friday, have sparked a sharp division of opinion between the company, which claims the numbers indicate positive sequential and year-over-year momentum, and analysts who believe the less-than-truckload (LTL) carrier's financial situation remains dire.

The Overland, Park, Kan.-based company reported a first-quarter net loss of $102 million, compared with a net loss of $274 million in the year-earlier period. YRC posted operating revenue of $1.1 billion and an operating loss of $68 million in 2011's first quarter. By way of comparison, in the 2010 first quarter, YRC reported operating revenue of $987 million and an operating loss of $233 million. The 2011 results were adversely affected by extreme winter weather and included $8 million of "professional fee expenses" related to the company's restructuring efforts, YRC said in a statement.

YRC National Transportation, the amalgam of the old Yellow Transportation and Roadway Express, reported a 7.9-percent increase in average daily tonnage over the 2010 period, and a 3.3-percent increase in revenue per shipment. The company's YRC Regional unit reported a 16.2-percent tonnage increase year over year, and a 7.7-percent gain in revenue per shipment.

A glass half full ...
William D. Zollars, YRC's chairman, president, and CEO, said the company was pleased with the overall quarterly results in light of the severe winter weather and the seasonally weak period. In a conference call Friday with analysts, Zollars said volumes have continued to trend upward into the second quarter, both on a sequential and year-over-year basis, as demand improves. Rates on contract renewals are up about 3 percent year to date, Zollars said.

"In all of our channels, we are seeing pricing improvement on the contractual side and on our GRIs," Zollars said, referring to the general rate increases usually announced once a year and which are imposed on non-contract customers.

Revenue per hundredweight, a closely watched metric of profitability, rose only about 1.8 percent year over year for both YRC's regional and national units. Zollars acknowledged that traffic from large corporate accounts, which are usually resistant to rate increases, is growing at a faster rate than traffic from so-called local accounts, which are traditionally more profitable. He added, however, that many accounts that YRC captured from rivals already had low-yielding traffic because their previous carriers had cut their rates. YRC, by contrast, has remained relatively constant in its pricing strategy, he said.

"Yields are a complicated subject," Zollars observed.

... or a glass half empty?
David G. Ross, an analyst for the investment firm Stifel Nicolaus & Co., wasn't buying the company's explanations. In a research note released today, Ross said that YRC is "stuck over a barrel" by its big corporate accounts that refuse to give it compensatory pricing.

"These accounts also know that if they pull their volume, YRC can't cut costs fast enough and will likely fail, so we don't believe YRC has the leverage to make money on them," Ross wrote.

The analyst said YRC has three choices: raise rates on these accounts, watch the freight disappear and go out of business, or keep rates stable and be stuck with unprofitable freight that will further hamper its efforts to survive on what Ross called an "unsustainable long-term business model."

Another analyst, Jon A. Langenfeld of the investment firm Robert W. Baird & Co., said the quarterly results reflect YRC's "price aggression" in an effort to rebuild freight density.

Langenfeld hinted that the "leniency" shown by YRC's lenders in supporting its restructuring efforts have emboldened the carrier to cut prices without worrying about profitability, at least in the short term.

Langenfeld said YRC's actions remain the greatest obstacles to pricing improvement and greater profitability among LTL carriers. While noting that "industry pricing fundamentals have firmed" in the first quarter, Langenfeld added that "industry profitability [is] still well below adequate levels, and improved pricing remains the primary vehicle to improving margins."

CEO to step down in July
During the analyst call, Zollars reaffirmed his plans to retire in late July, when the company is scheduled to complete its financial restructuring.

"I'm going to be here through the restructuring process" but will step down upon its completion, Zollars said. Zollars had announced his impending retirement last year, and the Teamsters Union has conditioned any concessions from its 25,000 unionized members on assurances that Zollars would step down. It was originally believed Zollars would retire at the end of 2010, but he has stayed on into 2011 as the company's restructuring efforts continue.

As part of the restructuring, the company announced in late April that it will receive an infusion of $100 million in new capital and will be able to cancel a large portion of debt in return for the issuance of new equity—a move that will virtually wipe out all existing shareholders.