YRC shifts load during drive to stability
Feb 8, 2009, 11:00pm CST
Updated Feb 9, 2009, 6:00am CST
Suzanna Stagemeyer Staff Writer
YRC Worldwide Inc. has battened down the cost hatches, a massive ship trying to stay afloat in the face of a stormy economy.
Efforts to accomplish that included a string of layoffs during 2008, mostly in response to a freight downturn that began in late 2006. It cut more than 12 percent of its work force, going from 63,000 employees at the end of 2007 to about 55,000 at the end of 2008. Overland Park-based YRC, which has about 2,000 local workers, shoves into 2009 buoyed by expectations of $500 million in savings from across-the-board pay reductions and the integration of its Yellow and Roadway units.
The savings position makes CEO Bill Zollars optimistic.
“The challenges are going to be the same for everyone in the industry,” he said. “But the opportunities are unique to us. ... This closes the gap with competitors from a cost standpoint, and at the same time, customers will be able to get better service through one integrated network.”
This year will bring more job cuts, he said. By March, the ax will fall on positions affected by the Yellow-Roadway integration.
JP Morgan analyst Thomas Wadewitz predicted in a Feb. 2 note that 10 percent to 15 percent of the 37,000-member Yellow and Roadway work force would need to be cut this year as freight tonnages fall further. That could save $455 million, he estimated.
Although YRC has plenty of cost-saving potential, last year’s cuts didn’t keep it from reporting a $974.4 million loss for 2008 and a 7 percent drop in revenue to $8.94 billion. The results included write-downs of $141 million for the Roadway trade name and $59 million for YRC Logistics.
YRC had a fourth-quarter loss of $244.4 million on revenue of $1.93 billion.
“The biggest impact on all players in our industry has been the economic downturn,” Zollars said. “The reality is that because we’re the biggest, we have the most infrastructure and therefore the most operating leverage, and therefore we’re hit the most.”
Analysts haven’t put any wind in YRC’s sails. Wadewitz slashed his 2009 earnings-per-share estimate for YRC from $1.07 to a loss of $3.30.
Although YRC “has very significant drivers of cost reduction in place for 2009,” he wrote, with revenue sinking at an alarming pace, the company will find it difficult to realize a quick improvement in earnings-per-share performance.
Con-way Inc. and Arkansas Best Corp., direct competitors a fraction the size of YRC, also posted fourth-quarter losses, though they ended with positive 2008 earnings. Both also have scrambled to cut costs, including jobs.
“We are now over 27 months into a freight recession that is the worst I have seen during my 37 years in this industry,” Arkansas Best CEO Robert Davidson said in a statement accompanying the company’s earnings report.
However, on Feb. 3, Con-way and Arkansas Best shares closed at $22.71 and $24.73, respectively, while YRC shares closed at $3.01.
Zollars said the company also has been hurt by aggressive pricing in the market and played-up speculation that YRC would go bankrupt. YRC is in good shape, he said. In an earnings conference call, executives said YRC is in productive talks with banks for a revised credit agreement, is pulling in cash from sale-leaseback deals and is cutting costs.
Wadewitz said that reaching the credit agreement is crucial for YRC’s stock.
“While we have limited conviction, we still believe that the more likely outcome is that (YRC) reaches an agreement which allows it to continue operating in 2009,” he said in his note.
YRC has been letting less profitable customers go and with the integration can choose which customers will fill the combined networks, each of which is running around 75 percent of capacity.
John Wagner Jr., president of transportation logistics company Wagner Industries Inc., based in North Kansas City, acknowledged the effects of YRC’s fixed costs. And competitive pricing probably is being exacerbated by competition playing on fears about YRC’s stability.
“It’s bad enough when customers are shipping less freight and you’re sitting there with fixed costs, but if you’re losing market share at the same time, that just compounds the problem,” Wagner said.
Combining the Yellow and Roadway units, a process the company accelerated to hasten the expected $200 million in annual savings, also has cost YRC. But Zollars said the company’s acquisitions earlier this decade, which with all the fixed costs have meant rough waters and write-downs now, also meant banner years from 2003 to 2006.
“People forget we had four record years in a row of earnings and revenue,” Zollars said.
Speeding up the integration during a downturn also has created more flexibility than if the networks were at capacity, he said.
Wagner and many in the industry say that when the tide turns, it’ll do so in a big way. Many trucking companies have gone under, meaning that when freight demand lifts, pricing will favor carriers.
“Companies that manage to survive this are going to do quite well,” he said.