Financially struggling YRC Worldwide, which collectively represents the second-largest group of carriers in the $43 billion less-than-truckload (LTL) sector, will benefit from closings and reduced capacity in the $340 billion full truckload (TL) market, analysts and top YRC officials are telling Logistics Management.
“The year 2019 probably ended with close to 800 closings in the truckload industry,” YRC Worldwide President and CEO Darren Hawkins said in an interview. “That lessens capacity. Plus, the driver shortage, increased alcohol and drug screenings, the insurance market, all those things will impact capacity. The truckload market is (nearly) 10 times the size of the LTL market. But a ripple in truckload can create a tidal wave in LTL,” Hawkins added.
One top analyst is agreeing with Hawkins. Satish Jindel, principal of SJ Consulting, which closely tracks the LTL sector, said he believed LTL contract rates for shippers would rise at a higher rate than TL rates in 2020.
“One reason LTL will perform better is retailers are converting TL shipments to LTL because of e-commerce demand,” Jindel said. “LTL carriers are handling more retail shipments than ever before. That will continue. The caveat is the LTL industry must learn how to handle those shipments.”
As far as shippers are concerned, Hawkins told LM that rates will continue to track internal operational costs – led by soaring insurance rates and equipment prices – that continue to rise in the “mid-single digits.” But some of those costs are being offset through internal YRC efficiencies, he added.
Hawkins said the YRC companies – its 91-year-old long-haul unionized unit and its three regional freight haulers – and nearly all of its top competitors are focused on three things:
Operational optimization. Specifically, that means improving all of YRC’s long-haul and regional networks to take advantage of operational flexibility in its contract with the Teamsters union;
Technology improvements to help streamline and modernize different systems as well as deploying new technology to add in pickups and deliveries; and
Creating freight and lane density to protect its service offerings and geographical coverage
Going forward, Hawkins said, YRC will have fewer physical locations, but the same geographic service areas.
“We expect this will increase density, reduce mileage, facilities and equipment and better serve our customers,” Hawkins said, adding it consolidated 25 terminals last year and will “continue to evaluate” facilities to meet current and future business expectations.
“We need to do that in a simpler format – one where the customer has one contact,” Hawkins said
Last year was a busy one for the YRC companies even as their financial picture worsened slightly. YRC companies lost $104 million last year compared with net income of $20.2 million for its long haul and regional units in 2018 when the overall economic picture for the entire trucking industry was much stronger.
But Hawkins emphasized the positive, citing four major accomplishments last year that he said are the foundation of his company-wide strategies going forward. Last year YRC:
Ratified a new 5-year labor contract;
Refinanced term loans with improved and more flexible terms;
Reorganized its leadership team to streamline decision making and enhance execution across all functional areas of the organization; and
Completed reorganization of the enterprise-wide sales force
Hawkins said YRC’s full year financial results from 2019 are hurt with comparisons with 2018, which was a boom year all around for trucking. Last year’s results, he said, were hurt by a slump in U.S. manufacturing.
“The comparables in 2019 were difficult because 2018 was a very good year,” Hawkins told LM. “For us, 2019 was a year of managing costs, protecting our customers’ positions and getting lean to get to the bottom of the dip. What we’re seeing now is we’re not out of the bottom of the dip. But things are improving.”
Analysts have been waiting a long time for sustained profitability from YRC companies, which together represent the second-largest group of LTL carriers after FedEx Freight. YRC Worldwide, parent of the fourth- and seventh-largest groups of LTL carriers, lost $104 million last year, compared with $20.2 million net profit in 2018.
YRC’s total revenue for last year fell 3.4% to $4.871 billion from $5.092 billion in 2018.
“No one should be counting on external environment for improving one’s profitability,” says analyst Jindel. “They should focus on managing capacity. Then you will have higher profit margins. Period.”
One bright spot for YRC companies, Hawkins said, is their commitment to “last mile” deliveries from the booming e-commerce business.
“We’re very well positioned for last mile,” Hawkins said. “With our facilities, we’re everywhere our customer wants us to be, covering 95 percent of the population.”
But Hawkins noted that “all last mile deliveries are not created equal,” meaning some are more complicated than simply an LTL pickup or delivery. For more complex logistical needs in the last mile space, he said YRC calls in his HNRY Logistics unit if last mile deliveries require more than YRC-controlled assets to deliver.
“Final mile is a very important part of what we do,” Hawkins said. “We do several thousand lift gate deliveries every week. At the end of the day, we’re seeing ‘middle mile’ (Deliveries to various pickup locations) as important as well. We’re in the process of repositioning several large retail warehouses to be closer to customers. The trend I see there is very positive for YRC Worldwide.”
From an operations standpoint, analyst Jindel believes the key to YRC’s profitability is correctly managing its freight demand to its operating costs. Do that, he says, and the profitability situation will take care of itself.
“In all the years I’ve been in the industry, I don’t know once where shipper couldn’t get freight moved,” Jindel said. “All they had to do – even in the tightest of freight markets — was pay more. They never could not find trucks. Let the shippers complain about not having capacity. That’s not the carriers’ job.”
One longer-term worry for YRC is its liquidity and loan situation. Jamie Pierson recently returned to the company after a three-year hiatus.
Under YRC’s new term loan covenants, YRC must maintain a minimum of $200 million in adjusted earnings before interest, taxes and amortization (EBITA). YRC ended 2019 at $211 million EBITA. With seasonality of the industry being that the first quarter is the weakest one within the calendar year, YRC officials know they are close to operating in the “red zone” of its loan restrictions.
Jamie Pierson, who recently returned to YRC as its chief financial officer after a three-year hiatus, is seen as a stabling influence within the YRC hierarchy under Hawkins. Pierson was YRC’s CFO from 2011 to 2016 under former CEO James Welch, who has retired from the company. Pierson also joined the YRC board.
“Having Jamie Pierson back as CFO should be a positive for them,” analyst Jindel said. “He’s a very sharp guy. He should help Darren progress.”
Asked about YRC’s liquidity on a recent conference call with analysts, Pierson was candid when he responded: “I’m not being cheeky at all, (you) always want more, right? Sitting in my seat, you always want more, not less. And I think we — I don’t think, I know — we ended the year at about $80-to-$100 million as a threshold. Levers that we have to pull, really, first and foremost, is operations. So we’ve simply got to perform better.”
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