YRC’s Performance Improving as Firm Cuts Costs, Zollars Says

This story appears in the May 25 print edition of Transport Topics.

NEW YORK — YRC Worldwide Inc. has received relief from lenders who waived an earnings target for the second quarter, and company head William Zollars said the less-than-truckload carrier’s performance is improving because of several cost-cutting moves, including potential pension-payment relief from the Teamsters union.

The company acknowledged reports that the unionized less-than-truckload carrier also is considering an application for $1 billion in aid from the federal Troubled Assets Relief Program to defray pension costs that currently are a cash drain.

“We are in the process of finishing negotiations with pension funds,” said Zollars, chief executive officer. He declined to give a date when he expected those talks would conclude. YRC hopes to save cash by replacing cash pension payments, now ranging from $34 million to $45 million a month, with pledging of real estate collateral.

Zollars, who spoke May 19 at the Wolfe Research Global Transportation Conference here, said the company was making progress in recovering business diverted when its Roadway and Yellow Transportation LTL units were integrated two months ago. The company has regained three to four percentage points of the 11% business reduction attributed to concerns about the integration process, he said.

“We would expect, as we move through the second quarter, more and more business will return,” Zollars said. He said the company’s operating loss was “60-ish” million dollars in April.

Zollars estimated that YRC’s annual costs would be cut by $665 million because of a 10% Teamsters union wage cut approved in January, savings from the integration, nonunion compensation reductions and other steps. Based on full-year 2008 results, that would represent a savings of about eight percentage points in the operating ratio for LTL services that account for 93% of YRC’s revenue.

Zollars said volume trends during the second quarter remain similar to those in March, and pricing is fairly consistent. The cost reductions have created a lower break-even point for freight, changing YRC’s view of some business that didn’t look attractive in the past.

“You will see us be more competitive,” he said.

He also said that the company’s pace of using cash actually is declining over time and that the company’s cash flow traditionally is stronger in the second half of the year.

“We’ve got a lot of levers left to pull,” Zollars said, citing the ability to increase excess property sales above the current $100 million total this year. YRC is also selling and leasing back terminals.

He also addressed questions about customer confidence levels, in light of recent losses, telling investors, “We have the confidence of the vast majority of our customers.”

As YRC continued negotiating pension savings with the Teamsters union, the company’s creditors on May 15 waived a requirement that the carrier meet a $45 million minimum of earnings before interest, taxes, depreciation and amortization, or EBITDA, in the second quarter. YRC still faces an earnings target of $130 million on that same basis by the end of the third quarter.

In a separate move, the company also said May 20 that it could choose to issue up to $200 million in common or preferred shares or stock warrants, though no date was set for that action.

Analysts were cautious in their assessment of YRC’s latest moves.

“The company’s ability to meet that covenant will hinge on the company’s ability to procure relief on its pension payments over the near term and/or the pace at which freight picks up over the near term,” said Morgan Keegan analyst Art Hatfield.

An investor note from Jon Langenfeld, a Robert W. Baird analyst, said the renegotiated credit agreement should reduce diversion that might have occurred because of worries that YRC would violate its debt covenants.

“It would seem YRC Worldwide’s operating prospects are not improving,” Wolfe Research founder Ed Wolfe said in an investor note. “The banks continue to make it clear that they have little desire to foreclose — perhaps the politics of Wall Street banks closing down 35,000 Teamster jobs is unpalatable.”

YRC’s exploration of the federal TARP program to help it meet obligations to several multi-employer pension plans it participates in makes sense, two industry experts said.

The Troubled Assets Relief Program, or TARP, has helped banks and other financial companies, auto manufacturers and their suppliers in the past six months, though the program doesn’t have a specific provision for less-than-truckload carriers.

“YRC is a League member,” said Bruce Carlton, president of the National Industrial Transportation League. “I want every one of the League’s member companies to prosper and be healthy. I don’t blame them for seeking TARP relief, but TARP is undefined territory.”

“I don’t know whether they are going to get some TARP money,” said Herve Aitken, a Washington lawyer specializing in pension issues. “YRC has a very good argument [for TARP funds]. They [YRC] are very concerned about paying for pension benefits of retirees from companies that are no longer paying into the pension funds.”