YRC Worldwide

I purchased YRC Worldwide (NASDAQ: YRCW) last week @0.54 per share.

About YRC Worldwide

YRC Worldwide Inc., a Fortune 500 company and one of the largest transportation service providers in the world, is the holding company for a portfolio of successful brands including YRC, YRC Reimer, YRC Glen Moore, YRC Logistics, New Penn, Holland and Reddaway. YRC Worldwide has the largest, most comprehensive network in North America with local, regional, national and international capabilities. Through its team of experienced service professionals, YRC Worldwide offers industry-leading expertise in heavyweight shipments and flexible supply chain solutions, ensuring customers can ship industrial, commercial and retail goods with confidence. The company is headquartered in Overland Park, Kan.
(as taken from yrcw.com)

YRC Worldwide does transportation of goods mainly across North America, and main business is in the Less Than Truckload and Full Truckload market segment. Its division YRC Logistics in charge of international freight forwarding and providing full logisitical support.

What is Less Than Truckload and How Does it Differ from Full Truckload?

As the name suggests, LTL serves the middle ground between parcel services and full truckload services, and its goods weigh between 50kg to approximately 9000kg. LTL shippers will collect freight from various shippers and consolidate the freight at the terminal for sorting before delivering the freight.

Although LTL is cheaper than FTL, it takes longer to reach its customer as there are many intermediaries along the way. LTL delivery time is dependent on the number of terminals between the sender and the destination, while FTL is dependent on the distance. A visual example will be passing the parcel down the row till it reaches the final destination, while FTL would be throwing the parcel from the first person to the last person.

The key point here is that if the amount of LTL freight a company has is large, it is able to reduce cost by cutting the number of terminals between the sender and the destination by using FTL carriers to deliver from terminal to terminal.

This is why large freight carriers are good investments as it provides a cheap method of transporting items over long distances. This model works in countries with large land mass and a large population.

Freight carriers, esp LTL and FTL carriers across land are close to pure plays on the economy of the country.

YRC's Bankruptcy Issue

YRC Worldwide was extremely close to bankruptcy at the end of last year, due to its high rate of cash burn, and only managed to evade bankruptcy due to a debt for equity swap done at the end of the year. This resulted in the dilution of outstanding shares from 90million to 2billion.

The trigger for the large cash burn was due to macroeconomic conditions and other conditions in the industry. As we all know, consumer confidence in the USA has taken a downturn over the past 2 to 3 years, since the subprime crisis started and turned into what we know it as today. The economic downturn meant that less goods were demanded by retail outlets, resulting in a drop in volume of freight services, reducing the revenues earned industrywide. Freight service providers would then cut their prices in order to maintain their volume, sending price spiralling.

This macroeconomic effects of the economic crisis resulted in excess capacity in the freight sector, and even at present, this excess capacity still exists. Many have viewed that should there be a bankruptcy filing by YRC Worldwide, it would restore the supply and demand balance across the industry.

YRC Worldwide Financials
I am viewing this company as a turnaround. Just some notable figures that back up my decision include

• Pre tax loss for FY2009 was USD899million, an decrease from a pre tax loss of USD1,149million for FY2008
• 4Q2009 pretax loss was USD95million, down from pretax loss of USD335million in 4Q2008
• 4Q2009 pretax loss decreased the loss from 3Q2009 pretax loss of 118million, however, 2% to 4% of revenues are seasonal
• 4Q2009 National shipments down 39.9%, revenue down 4.2% compared to 4Q2008
  
• 4Q2009 Regional Shipments down 19.9%, revenue down 7.7% compared to 4Q 2008

The lower volume and revenue for 2009 was attributable to cost cutting measures. YRC has cut 2,000 jobs since the start of this year, and plans to reduce an additional USD300million in costs by the end of the year, of which USD200million should be done by the end of the year. Much of these costs are manpower related.

What lies ahead?

I do not believe that the American economy will turnaround and give the LTL freight industry a boost. In my opinion, in order for the economy to turn around, it requires a 2 prong boost.

1. The increase in consumer confidence
2. The increase in employment rate

Right now, the latest results that were released shows that consumer confidence is down and employment rate is constant at 9.7%.

However, what is attracting me is the massive cost reduction that is carried out by YRC Worldwide. Their aim to reduce costs by 200million by mid of 2010 would strengthen its balance sheet. Furthermore, since YRCW had completed the debt for equity swap, it has retained approximately 85% of its customers as customers are more confident about YRCW's ability to continue as a going concern.

YRCW analysts are predicting the company to be solvent in 2010, and may occur solvency issues in 2011. I am of that same view that insolvency may trouble YRCW in 2011, if (1) they are unable to meet cost cutting targets, and (2) USA's economy doesn't pick up. I believe that should cost cutting targets be met, YRCW would exit this crisis with a stronger, albeit smaller, company.