Hello, and welcome to Universal Truckload Services Incorporated First Quarter 2014 Earnings Call. [Operator Instructions] During the course of this call, the management may make forward-looking statements based on their view of business as seen today. Statements that are forward-looking relate to Universal's business objectives or expectations and can be identified by the use of words such as believe, expect, anticipate and project. Such statements are subject to uncertainties and risks, and actual results could differ materially from those expectations. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Scott Wolfe, Chief Executive Officer; Mr. Don Cochran, President; and Mr. Dave Crittenden, Chief Financial Officer for Universal Truckload Services. Thank you. Mr. Wolfe, you may begin your conference.

Thank you, Tiffany. Good morning, everyone, and welcome. Thank you for joining us for the Universal Truckload Services First Quarter 2014 Earnings Conference Call. We'll begin our discussion with the top line for the first quarter of 2014. Overall, revenue was up $31.3 million or 12.6% to $279.4 million for the first quarter of 2014 over the first quarter of last year. The improvement was driven by an increase in base transportation revenues of $12.9 million over the first quarter last year and the additional revenue from our most recent acquisition, Westport. The overall increase for the quarter came about despite a $3.5 million decline in value-added service revenue, which came primarily from 2 contracts that we spoke about last quarter. One of those was the insourced business by an industrial customer and the other, an aerospace customer that was lost due to the government sequester. Likewise, our intermodal business experienced a $3.3 million decline in revenue. Now it's predominantly due to an affiliate LTL customer's change in strategy and partially offset by revenue growth in our intermodal drayage business. These changes continue to evolve and have resulted in a shift of our business mix. Transportation revenue now accounts for 64.4% of total revenue. Value-added is 24.9% and the intermodal is now 10.8% of total revenue. First quarter this year continued to see the impact of weather that we saw in the fourth quarter of 2013. Here in Michigan, we experienced the snowiest winter in record of 133 years, with the coldest average temperatures in 36 years. There is no question it had an impact on our operations, selling productivity and compressing margins. EBITDA was impacted negatively, and David will speak in more specific detail in that in just a moment. January and February were among the worst in history.…

Thank you, Scott, and thank all of you for joining us. The slow start in our truckload business in January was not just that weather held us back, which is not uncommon with so much of our business in the Upper Midwest, but it created a larger concern when it lasted all of January and continued into February. In a sense, we could feel improvement in much of our core truckload. But as demand built, we just simply had to wait for improved conditions on the road. Our operating expenses in the first half of the quarter were high, but they improved after that. The tough operating conditions for load counts, total revenue pricing and load counts improved considerably by the end of February. We're excited to see our rates improve year-over-year. The business mix improved, including conditions in our energy sector, both wind and oilfield services. Both of these businesses have contributed to significantly better rates per mile. Our average rates per mile improved over 10% in the year-over-year quarterly comparison. As the quarter move forward, demand continued to improve. The increased average rate per mile improved 10% year-over-year, helped offset the slow start. Load counts were up 0.5%, solely because of the early quarter conditions. We believe the pricing improvements will hold, especially in the flatbed industrials, as truck demand seems strong, and the truck shortage is starting to have an effect on pricing. Customers are concerned about capacity. We are seeing discussions develop about dedicated capacity in surprising places. Our brokerage business reflects higher demand that compressed margins, with purchased transportation costs rising by nearly 5% year-over-year. Year-over-year volumes on brokerage are down about 7%, but they improved sequentially as the weather improved and the quarter advanced. We expect tight capacity going forward, and we'll need to…

Thank you, Don. Good morning. As we highlighted in yesterday's earnings announcement, our first quarter financial performance reflected a mixed bag from a revenue perspective and a challenging operating environment that impacted aggregate operating margin, particularly in January and February. Universal ended 2013 with the acquisition of Westport, which we think will be an important component in our growth strategy in the years ahead. Over the course of the first quarter of 2014, revenue momentum increased in transportation services with 7.7% year-over-year revenue growth. Revenues from value-added services increased 45.4%. However, when Westport results are excluded, revenues from value-added services actually dropped $3.5 million or 7.4% from 1 year ago. As Scott indicated, this was the direct result of the cessation of an operation for an industrial customer and an aerospace customer. And while our overall intermodal revenues were down 10% from a year ago due to one domestic intermodal account, as Don indicated, our international drayage business is enjoying strengthening demand. So for the first quarter of 2014, we reported net income of $8.1 million on income from operations of $14.6 million and revenues of $279.4 million. This compares to net income of $11.4 million on operating revenues of $248 million in the 2013 first quarter. Earnings per share were $0.27 compared to a reported EPS of $0.38 in Q1 2013. Our reported revenues are near the top of the range that we had estimated in our March 24 press release. Our aggregate Q1 operating revenues exceeded the quarter that proceeded it when we recognized aggregate revenue of $259.5 million. However, Q1 operating income of $14.6 million and EPS of $0.27 per share compares to operating income of $19.1 million and EPS of $0.38 in the immediately preceding quarter. So the impact of margin compression is obvious. In Q2,…

[Operator Instructions] Your first question comes from the line of Chris Wetherbee with Citibank.

I guess, maybe if we could just start out. I'd love to sort of maybe see if we can dig in to what maybe the direct weather impact was in the first quarter, if you can really tease that out from the operations.

Okay. This is Scott Wolfe, Chris. I'll try to give you, by example, some of the things, certainly, that we experienced. In the dedicated transportation side, we have contract requirements that require us to fulfill our obligation in providing service. And in the first quarter, our cost at providing that service increased by 18%, specifically because we had to go to the open market to secure purchased transportation. So an 18% increase in cost on transportation, certainly, is a -- has a significant impact attached to it. On the value-added side, I would take an example of a couple of facilities here that we operate in the city of Detroit, predominantly, certainly, for the automotive business. When we look at that from a revenue perspective, we were up slightly, 1%, 2%, but our cost of providing that service increased 27%. That's created because of, again, loss of productivity, added significant operating cost, additional labor, additional equipment, overtime. Each expense item that we experienced were substantial increases. So again, 27% increase on 1% or 2% improvement in revenue. Then when I look at the other value-added services -- an example would be we had 6 of our primary value-added services locations had an aggregate of 21 weeks of downtime on a period that would typically have 78 weeks potential. So again, in other words here, another 26% reduction in our top line without having variable rates -- only the fixed rates kind of covered on that business. So when you put all of those things together, as example. That's what we faced in the first quarter.

Okay. That's helpful. A great sort of example there. And when you think about what that might translate as an impact to operating income kind of running through those numbers, it sounds like we're talking about probably mid-single-digit millions at least. Is that the right way to think about it?

That would be very accurate, mid-single-digit.

Okay. Okay. That's very helpful. I appreciate it. And then could we just talk quickly about the auto OEM that, I think, is transitioning out. Any more detail as far as the sort of specific timing, how we should be thinking about that and maybe the magnitude of the customer?

The -- it will happen in the beginning of the third quarter. And the impact from us from a revenue perspective would be a $5 million hit in the second half of the year.

Okay. So about a $10 million revenue annually is the way to think about that?

That would be correct.

Okay, perfect. And then, David, just switching gears, I guess, a little bit to the forward guidance. I just wanted to make sure I understood the commentary relative to, I think, consensus estimates. It sounded like the context was that there's a few things that, maybe, need to work in your favor to get towards where consensus is for 2014. Is that the right way I should be thinking about it? Do you sort of need May and June to work in your favor to get back to it? But I guess, April, maybe, is a little bit of a slower ramp into the second quarter? Things aren't completely cleaned up yet.

April has not concluded yet. It actually, for us, closes tomorrow. So it's just very early for us to be able to get a view -- March wasn't there. The weather has obviously been a little bit more pleasant, but I think it's 53 degrees to get -- 53 degrees today here in the Detroit area, which is still unusually cool. But I think we'll have a better sense in mid-May. Again, May and June are really important for us in terms of what the actual margin comes in at. So I think how I said it, Chris, was we need to get to the restored margins to have confidence in the guidance that's out there. And we're -- it's just premature for us to express absolute confidence for the second quarter right now.

Okay. Okay. That's helpful, and I guess, maybe my final question would just be on you sort of commented a little bit on excluding some of the potentials for new business wins. When you think about that, the pipeline, maybe how -- how do you characterize, I guess, the pipeline and, maybe, when we should we start seeing some potentials for some of those the new business opportunities showing up?

In the pipeline, Chris, is -- it's an extended pipeline. I would tell you that we will do a transportation management/dedicated transportation opportunity that's -- we'll call it in the launching stages as we speak. We will start to see top line revenue for that in mid-June, and we'll have that business, certainly, for the second half of the year. And another significant value-added opportunity, as an example, we're in the final stages of an RFQ process. It's a large award in the $22 million to $25 million range, but even if we're successful, that will not launch until mid-2015 and will not conclude or get us to a full top line revenue until mid-2016. So you can see the kind of -- the timeframes that we're talking about here.

Your next question comes from the line of Todd Fowler with KeyBanc Capital Markets.

I guess I just want to make sure -- I want to make sure I understand what's happening with the value-added services margins. I understand that there was the weather impact during the first part of the first quarter, but it sounds like into March and maybe now, even into April, you haven't seen those fully recover. I guess, what are the headwinds? Or why is there the drag? Is that more related to capacity cost in the market? Or is it just something that takes longer to kind of get those operations to rebound after the significant weather?

Todd, it's David. It really is just early in the second quarter. We are still a accumulating -- one of the elements of the margin compression in the first quarter was the challenge of meeting our service obligations to our customers for which there are penalties. We're still seeing a little of that come in because our OEM customers aren't necessarily the quickest people in the world. So it creates a little bit of ambiguity about what to expect. We don't expect it to be large. There's nothing that's fundamentally changed in how we operate, either in terms of our cost structure, our pricing or our contract. So we think we'll get there. It's just we're still reticent this early in the quarter to actually get all the way out there and say, "We're going to be there for the entire second quarter." We're walking towards it. We made significant improvements in March from February, but even by the end of March, we weren't there. And like I said earlier, I think by the middle of May, I'll probably have a better sense of how close we're going to get in because I'll have April results in the belt.

Okay. That helps. And just so we're on the same page, I mean, we are talking about normalized margins within value-added services. Is that something like you're able to put up in 2013, that high-teen type margin? Or is there something that changes because of the mix with Westport coming in now and some of the contracts that have transitioned out?

It will -- there are a couple of factors, Todd. I do expect us to be in that mid-teen range, and certainly, we will evaluate all of our costs to get there. Westport margins, I think, will move toward that mid-teen number as well. But the mix -- taking on a transportation management project for us, a substantial one, as we are seeing, will not give us the same level of margin rates that we would get in the typical value-added side. So that will have some impact.

And if I could just, maybe, add some color on the Westport. I mean, we can go back and look at the transcript later. I think we said that including amortization, we did about $3 million on $25 million in the first quarter on Westport. And that's after a couple of million dollars of amortization. Their machining activity has a little bit lower return on revenue than the other proportions of the value-add business. So inside of Westport, I can depend a little bit on their revenue mix. But as Scott said, if you -- depending on how you're looking at the amortization of the intangible, they look a lot like our -- the value-added business if you stuff the intangible amortization aside.

Okay. Yes. I know, I was doing the same math last night. And then just to be clear also on the revenue growth on a full year basis, the 10% to 12%. That does -- that -- how do I say this the right way? That reflects the business that you know that's transitioning away, that you're not going to have. But it doesn't reflect any additional potential contracts that could be awarded at some point later on this year.

Correct. To maybe restate that, we know what we've lost. We can't quantify yet the timing or the amount of what we've gained. So we're being cautious, but obviously, we're very comfortable with the overall model and the approach. It's just that we -- the one transportation contract, whether that starts in the 4th week of June or the 2nd week of July, will obviously make a difference in the second quarter.

Okay. And then the last one I have and then I'll turn it over. David, the $7.6 million of depreciation and amortization on a consolidated basis in the quarter, is that a good placeholder to use on a quarterly basis going forward? Or does that need to go up because of the equipment that it sounds like that you're going to be adding?

It will trend up. Honestly, most of our equipment is kind of average, 5, 7 years. So it won't trend up that quickly before this year. I mean, I could -- if -- actually, I don't know if I have that in front of me. It will trend up, Todd, but not extravagantly.

[Operator Instructions] Your next question comes from the line of Matthew Frankel with Macquarie.

It's actually Kelly Dougherty. I'm just kind of multitasking back on -- sorry about that. I just wanted to follow up and see, talk about the customer contracts. Are there others up for renewal or ones at risk that, maybe, we should think about? And just get a little bit more detail. It seems like customers are insourcing. So has everybody kind of changed and what they can do on their own versus what you can offer them? Just to kind of help us think about the shift to a few of them starting to insource a bit more?

Certainly, Kelly. In the loss -- I'll go all the way back into 2013. The loss at the industrial, it was a cost issue for the customer at that point in time. And they felt that they could do the job simply at a lower cost than they could outsource the business, and that's to be determined. We have leased to them our systems. They're using our systems to operate this business. So it is a to-be-determined. On the piece of business that we will lose here in the midyear, the customer faced the situation where they would have the significant layoff of their own employees, well in excess of the number of folks that utilized the service. To avoid that layoff, the customer determined that they would absorb the work because they had the capacity to be able to do it. Is it a trend? I don't believe it's a trend. I believe it's circumstances that individual customers face within their own business model, and they make business decisions to support that.

Okay. That's helpful. Can you also just talk to us about the customer concentration maybe in the segment? It seems that there's big moves if you do lose one customer here or there or are you kind of getting to a bit more balanced where one customer wouldn't have as much of an impact?

When we look at our customer mix, our biggest customer is approximately 10% -- 12% of revenue. So from that perspective, it can have an impact. But what we're seeing, with the addition of Westport, as an example of, that introduced in our top 50 accounts, 4 new customers that moved in to that top 50 because of that acquisition and the business model that Westport has. Westport will also help us from less concentration in the pure automotive side of the business. So our concentration in automotive is reducing. However, when I say that, I must look back around now and say, "We're really going to do a piece of automotive business in this dedicated transportation segment." But we think it will be stable. Our growth curve, we have always for the last 5 years, improved our other than automotive concentration. That's certainly a goal for us. And as we look at continued business development, specifically on the acquisition side of the house, we will look for targets that help us spread out our business and our revenue.

And Kelly, I might just add 2 comments. One, the new managed transportation contractors with an automotive OEM, that currently is not in our top 20. So I think that's important to call out. Secondly, specifically with respect to Westport, manufacturers of Class A trucks are enjoying the golden years of production right now, and that's having a direct benefit to Westport as well. Obviously, the deferred capacity in the -- over the last several years, had deferred investments. And the new emissions in fuel mileage requirement are driving demand for those kinds of trucks. And therefore, our customers, Volvo and M.A.C. and others are benefiting from those trends as well. So Scott spoke to basically diversification, and I think both of those anecdotes show why we're comfortable in the long-term positioning of Universal.

If I may just switch gears really quickly. You talked about remaining acquisitive of full-type line of opportunities, looking for things that kind of help diversify a little bit. Can you help us think about which segments you're most interested in? And then are you looking for something that you can integrate pretty easily? Are you looking maybe to get a fixer upper at a good price? Can you just help us think about, when you evaluate acquisitions, which are the most important criteria for you?

Certainly, a broadening of the key service of verticals that we're looking at, a further diversification away from the automotive. Not that the automotive is a bad thing to have, but added vertical, added customer concentration, a greater spread of our revenue across those verticals. We want to ensure that any company that we have, certainly, is accretive to our business. And other specifics, we get a lot of opportunities to evaluate a lot of companies. Some of them do value-added work. Some of them are pure transportation providers. So we're looking at broadening concentration in all of the verticals and all of the services that we provide. If there's an additional service that comes along, that would be an added benefit as well because we can, in turn, look to our current customer base to sell "new expertise."

So we've talked a little bit -- Don commented specifically about capacity as well. And opportunities to continue to be one of those players that unlock the capacity question. And the transportation services, it's going to be important. We also understand that our position as a strategic buyer as opposed to a lot of the other companies in our segment, maybe in the hands of private equity, gives us some unique opportunities and some unique challenges in terms of the types of transactions that we can do. And so we occasionally get ideas presented to us that we're uniquely positioned to do something special with, and we're also presented with a lot of opportunities that are -- it's pretty clear, it's a bidding war and we might never get close to first place on it. So those are the kind of conversations that we have daily, weekly around here.

Your next question comes from the line of John Larkin with Stifel.

Had a question regarding the balance sheet. It looks like your total leverage to EBITDA is somewhere in that 2 range. With all of the acquisition opportunities you're contemplating, how much additional leverage, if any, would you be comfortable with going forward? And what do you think the probability is of, perhaps, layering in another acquisition sometime during 2014?

3 to 3.5x top. It's early in 2014, so we've done 2 major acquisitions in 18 months. I've got to say that our prospects are pretty good that we'll do another one.

In 2014?

Yes, yes.

There could be a couple of kind of tuck-in type of acquisitions that, again, help us with that capacity issue that we'll bring in.

Got it. And then, maybe over to Don's area. Just about all of the truckload carriers that we know, even some of the private fleets, some of the draymen of some of the LTL carriers, who historically never had problems with recruiting or retention, are all bellyaching quite loudly about how difficult it is to recruit and retain quality people to operate the equipment. Where do you all stand? And is that a major impediment to you all, growing your business at mid- to upper-single-digit numbers on the transportation side?

John, it is really tough, and I'll bellyache a little bit. It's as tough as anything we've ever experienced. We have changed some of the things we're doing in that we are increasing the number of trucks that we own, and that will continue throughout 2014. The owner-operator recruiting and retention process is pretty darn tough, especially in our mature business in the flatbed world. There seems to be a larger concern for those flatbed operators departing the industry. So included in buying equipment, we're also doing a training process, which we had never done before. Meaning, that we now take on entry-level drivers in some markets and put them through a training process. We're recruiting directly out of the military on military bases, which we had never done in the past. And I guess what we're trying to do, in addition to that training process, is a build some deeper relationships with some training schools and training processes. So we're not just simply looking for guys that are moving from one carrier to another that might have a good looking flatbed or something that we can keep busy. We're trying to create some capacity, and that does require us to put lots of effort in staffing in place to do that. So it has been a challenge for our cost, but again, we don't see this as a short-term problem. We know that we have to train and retain better, and we're putting dollars in that.

So as you add more company power, perhaps, and fewer owner operators, it's because that's the only way you can go in this very tight market. The business model changes a little bit and becomes more asset-intensive, which requires maybe a little more margin. How far along this continuum is the company willing to go in terms of moving towards more of a company-powered truckload and dedicated operation?

We have a long way to go. In the older-style Universal work world, we're only at about 150 units that are now operating as company power with employee drivers. The dedicated side is quite a bit larger, that it's in excess of 600. So when you put the total mix together, 700-some employee drivers is a whole lot bigger than what we used to be. And we will add with this new award of business, perhaps, another blend of company trucks when it could reach as high as 100. And we would also add owner-operators as available in that same series of lanes, but in order to take on that business, we've got to add equipment.

That's helpful. I also noticed in looking at the income statement that the insurance and claims expense jumped up a little bit. Was that all weather-related? Or was there some other -- something else going on there?

I'll need to look through it, John. Hang on.

$6.6 million versus $4.6 million in the prior period.

There were some settlements that were made. I would say a couple of things. Ordinary course, which obviously included some weather incidences. There are also couple of settlements in connection with past issues that would flow through that account. And there -- I think, yes, that's about it. Nothing out of the ordinary that no significant single incident or anything like that. There was 1 or 2 claims that I know we settled for a few hundred -- for $300,000 that we had earlier anticipated being -- having like $50,000 reserve. It would have flown through that. But other than that, nothing out of the ordinary course. It may be reflecting the addition of the Westport business as well.

Got it. Then maybe just as a last kind of broader question. An awful lot has been written and talked about in the area of sort of outsourcing logistics services. There have been quite a few more people entering the business. As you walk your way through these various bit of opportunities that you see most of -- I would think, given your size and expertise, do you find that anything has changed about the bidding process, has it become more competitive? Is it becoming a lower-margin opportunity? Or is it every bid is compelling as it was 3, 4, 5 years ago?

I would say that, is there more competition more entering the market? Yes, but it's on the lower end of the outsourcing model. It doesn't address, typically, the more complex or the ones that require some capital expenditure to be able to support the customers' needs. So I believe -- and what we're still seeing is there is still value in the value-added business. There's a perception about the customer value. I think that, that continues in the general business sense. I think there are opportunities with the kind of customers we're seeing now are new to us, John. It's taking a little bit longer in the development of the business. But as we walk through it, they're a very unique design and create the same opportunity from a margin perspective that we've historically experienced.

There are no further questions in queue. I would now like to turn the conference back over to the presenter.

Again, thank you very much for participating in today's call. We thank you for your interest. We thank you for your questions. We look forward to talking to you, again, here in the future. Have a great day and a great weekend. Thanks so much. Bye.

This concludes today's conference call. You may now disconnect.