YRC turns a corner, but the road remains uphill

The equity valuation of trucking firm YRC Worldwide has fallen 34% since the turn of the year, but its recent trading update wasn’t as bad as many feared and indicates that its less-than-truckload (LTL) portfolio of assets is making good progress, although its capital structure remains problematic.

YRC has been in restructuring mode for some time – the company’s cash balances are now one of the most important value drivers for shareholders, who might have some good reasons to continue to support its management team, at least based on recent developments.

In its quarterly trading update, released on 28 April, it said that at the end of March “the company had cash, cash equivalents and Managed Accessibility under its ABL facility totalling $222.1m,” which compares with cash and cash equivalents and other short-term funds of $175.6m one year earlier.

Its total debt-to-adjusted EBITDA ratio fell to 3.2x from 3.9x in the first quarter, when YRC reported $62.9m in adjusted EBITDA, up 7% year-on-year. That level of underlying cash flow implies an adjusted EBITDA margin of 5.6% on $1.1bn of quarterly operating revenues, which fell 5.5% year-on-year.

While operating revenues remain under pressure, quarterly figures show that YRC is carefully managing its cost base, with total operating expenses down 6.4% at $1.1bn. Net quarterly losses amount to almost $15m but narrowed significantly from $22m one year earlier.

A relatively more stable working capital cycle has allowed it to burn less cash from operations, although receivables rose $35m to $463m, and currently account for 61% of its total current assets. To some it appears that YRC should target a lower level of receivables in the region of 40-50% of its total current assets in order to strengthen its short-term liquidity profile.

Nonetheless, operating cash flow at -$11m was much better than -$25m one year earlier, even though that cash-burn rate doesn’t include the investment in quarterly capex, which stood at $19.8m in the first quarter. On this basis, YRC is still burning roughly $30m a quarter.

Given its lowly trading multiples, there remains a possibility that investors will want to back a management team that is betting on a sustained recovery, although its balance sheet looks overstretched.

Chief executive officer James Welch said that results were driven by consistent and improved customer service, base rate increases, tightly managed costs and productivity gains.

“Additionally, our ongoing focus to improve price, freight mix and profitability has contributed to higher year-over-year revenue per hundredweight, excluding fuel surcharge, for eight consecutive quarters at YRC Freight and 20 consecutive quarters at the regional segment,” Welch stated.

“While we have made significant strides, we must balance the volume equation with our strategy to get the right freight at the right price running through our networks,” he continued.

“Our intention is to remain disciplined and true to this strategy. We believe that reinvesting in our people, technology and equipment, combined with projected capacity constraints from regulations and eventually a stronger economic environment will bode well for us over the long term.

“Despite near-term headwinds from decreasing fuel surcharge revenue and an inconsistent industrial economy, we believe LTL pricing remains rational.”

YRC Worldwide is a holding company for a portfolio of less-than-truckload (LTL) companies including YRC Freight, YRC Reimer, Holland, Reddaway, and New Penn.

Source: Transport Intelligence, 4th May 2016

Author: Alessandro Pasetti