Universal Logistics Holdings, Inc. (ULH) Q3 2018 Earnings Report, Transcript and Summary

Hello, and welcome to Universal Logistics Holdings Third Quarter 2018 Earnings Conference Call. [Operator Instructions] During the course of this call, management may make forward-looking statements based on their best views of the 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 the words such as belief, expect, anticipate and project. Such statements are subject to risks and uncertainties, 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. Jeff Rogers, Chief Executive Officer; Mr. Jude Beres, Chief Financial Officer; and Mr. Steven Fitzpatrick, Vice President of Finance and Investor Relations. Thank you. Mr. Rogers, you may begin.

Thanks, Amy. Good morning. Thank you for joining the Universal Logistics Holdings Third Quarter 2018 Earnings Call. Another quarter, another record for the Universal team. Third quarter results represented our largest revenue quarter ever and our highest third quarter for earnings and earnings per share. Consolidated revenue increased over last year's $61.3 million or 19.6% to $374.3 million. Our third quarter operating income of $22.5 million increased 62.4%, earnings per share of $0.53 increased over last year by 99.2%. Both of these comparisons are excluding legal reserves that were booked last year in third quarter. I am pleased about the results and the solid execution the Universal team delivered again this quarter. We saw growth in 4 of our 5 service lines, with 3 of the 5 posting extremely strong growth. Our sales pipeline remains in the $0.75 billion range, and we continue to see significant opportunities across all our verticals. In truckload services, which excludes brokerage, our revenue was down 3.1%. The decrease was driven by a 7.4% reduction of loads, offset by an increase in revenue per load of 9.6% on a very difficult comparison as spot rates last year spiked. If you recall, the third quarter of last year also had $4.7 million of revenue from FEMA loads. Pricing remains firm and we continue to secure double-digit increases on contractual business. Spot rates remain higher than normal, but are not posting the significant increases seen last year. We added 43 new agents year-to-date, and our revenue from all new agents is over $16 million on a run-rate basis. Brokerage services revenue increased 34.8% year-over-year, driven by load count increases of 19% and revenue per load increases of 18%. Our stand-alone brokerage company delivered their highest revenue and margin percentage ever in third quarter. Our intermodal team continues to impress. They delivered another record quarter on the top and bottom line. Overall, revenue increased 68.2%, driven by a 36.7% increase in loads and 21.9% increase in revenue per load. These results include a full quarter of Fore Transportation and 7 weeks of Southern Counties, which we acquired in mid-August. Both the Fore and the Southern Counties acquisitions have delivered or exceeded our expectation to date, and we expect nothing less from Specialized Rail, which we acquired in October. Dedicated services revenue increased 39.8% year-over-year. We continued to negotiate rates lane by lane and we are making progress on our underperforming lanes. I expect solid growth to continue in this space as customers ship more to dedicated capacity. The third quarter is typically a tough quarter for our value-add businesses due to plant shutdowns in the auto and heavy truck. Our value-added operations supporting heavy truck revenues grew 20.6% as Class A truck production continues at elevated levels. Forward-looking production schedules continue to increase as 2019 is projected to be even stronger. For our legacy value-add business that supports our auto, aerospace, retail and industrial customers, revenue decreased slightly year-over-year. However, the margins in our legacy logistics business were very strong. This team delivered their best month ever in September. We have great confidence that our high-margin, value-added operations will continue to execute and perform very well going forward. The environment continues to be robust. The economy is strong. I get so encouraged when I drive around Metro Detroit, or any other city that I visit, and see so many small- to medium-size businesses thriving. The capacity crunch is still alive and well and I see no changes to that anytime soon. As I said earlier, we are very pleased with the acquisitions we have made. We are staying disciplined, focused, but we do feel very good about additional acquisition opportunities. As we have third quarter behind us, looking at the remainder of the year, I expect Universal's revenue to be just north of $1.4 billion. Taking into account the 3 acquisitions we closed over the course of 2018, our pro forma revenue would be over $1.5 billion. Our momentum continues to build. I'm very confident in the team at Universal, and we have no intention of letting up. With that, I'll turn it over to Jude.

Thanks, Jeff. Good morning, everyone. Universal Logistics Holdings reported net income of $15.1 million or $0.53 per share on total operating revenues of $374.3 million in the third quarter of 2018. This compares to a third quarter 2017 net loss of $3.3 million or negative $0.12 per share on total operating revenues of $313 million. The reported results for last year include a $17.4 million or $0.38 per share charge to income for pending litigation matters. My remaining comments on operating income, operating margins, EBITDA, EBITDA margin, operating income in our transportation segment and fluctuations in each are adjusted to exclude the third quarter 2017 litigation charges. We believe these adjustments provide a better comparison of our normal operating results on a year-over-year basis. Please refer to the full details of Universal's earnings release for actual 2017 results as reported. Consolidated income from operations increased $8.7 million to $22.5 million compared to adjusted operating income of $13.9 million in the third quarter of 2017. EBITDA increased $11.8 million to $38.3 million in the third quarter of 2018, which compares to adjusted EBITDA of $26.4 million 1 year earlier. Our operating margin and EBITDA margin for the third quarter of 2018 are 6% and 10.2% of total operating revenues. These metrics compare to adjusted margins of 4.4% and 8.4%, respectively, in the third quarter of 2017. Looking at our segment performance for the third quarter of 2018, in our transportation segment, which includes our truckload, intermodal and freight brokerage businesses, operating revenues for the quarter rose 24.9% to $248.5 million compared to $199 million in the same quarter last year. Income from operations increased $2.2 million or 22.7% to $11.9 million compared to adjusted operating income of $9.7 million in the third quarter of 2017. In our logistics segment, which includes our value-added logistics, including where we serviced a Class A heavy truck market and dedicated transportation business, income from operations increased $5.8 million to $10.5 million on $125.4 million of total operating revenues. This compares to operating income of $4.7 million on $113.7 million in total operating revenue in 2017. On our balance sheet, we held cash and cash equivalents totaling $2.5 million and marketable securities of $10.4 million. Outstanding debt net of $1.1 million of debt issuance cost totaled $329.6 million. At the end of the third quarter, our net debt-to-EBITDA ratio was 2.5x on a trailing 12-month basis. Capital expenditures for the quarter totaled $22.6 million. For 2018, we are expecting capital expenditures to be in the $65 million to $72 million range, and interest expense between $14 million and $15 million. On Thursday, our Board of Directors declared Universal's regular quarterly dividend of $0.105 per share. This quarter's dividend is payable to shareholders of record at the close of business on November 5, 2018, and is expected to be paid on November 15, 2018. With that, Amy, we're ready to take some questions.

[Operator Instructions] Your first question is from Chris Wetherbee of Citi.

This is Liam on for Chris. So I know that your logistics -- you said your legacy logistics business is still seeing very strong margins and that overall logistics saw a really strong improvement in its margin year-over-year. I was just wondering if you can kind of talk to what kind of drove the 300 basis points step down in margins sequentially in the third quarter. Was that just kind of related to the plant shutdowns you mentioned for the value-added division?

Sure. Before I answer that question, just let me apologize to everybody that's on the call for the technical difficulties. We were sitting here just talking away and went all the way through the script and we're actually asking each other questions and everything else, but we just never got back on to the call. So sorry about that. It had dropped and we weren't aware of it. But Liam, to answer your question, it's tough to look sequentially from second to third quarter because the automotive and the Class A truck, both of those segments, those plants shutdown in -- on the automotive side, it's usually around the 4th of July and in July for a couple of weeks, and the Class A truck always shuts down for 2 weeks in August. So sequentially, you always have typically a step down. When I'm talking about the margins very strong, if I just exclude the normal shutdown and look at the operations when they're performing and operating, and especially in September, the margins were extremely strong and what we expect and even better. So it's just that normal shutdown process that creates a little bit of that noise sequentially.

Got it. And also I know you had previously talked about reaching 8% margin this year or, I guess, in the near term. But I'm just kind of wondering how you think about that target given this quarter is at 6% margin and no progress over the last -- or year-to-date. So I'm just wondering how you think about that and when do you think you can achieve that type of margin?

Yes, I think, on the last quarter, I told Chris, we feel pretty good that we're on track, and I still say that. Again, the normal seasonal decline that we see in July and August is always going to be there. Part of why we're growing the intermodal portion of the business is to maybe offset some of that noise and that seasonality. If you kind of normalize the quarter, we would have been right there at like $91.6 million, which is a little better than second quarter. So I feel really good that we're on track to get to that 8% short term and beyond. So I feel pretty good about where we're at.

Got it. Just one other final question about some of your growth in the quarter. So I saw that brokerage saw very significant load growth in the quarter. I was just kind of wondering what drove that rate of increase and if you think that rate of increase is sustainable going into '19?

Yes, that load -- the growth on the brokerage load drill has been occurring for quite some time. If you go back to the previous quarters, it's all in that -- it's massive growth because the shift of capacity and people are trying to find capacity. So if you don't have the drivers, then you've got to broker or find a broker load and there are drivers available that they just make this choose to broker versus being employee or an owner-operator for us. So that growth in brokerage, we expect it to continue. Is it going to sustain at 20%, 30%, 40%? I can't tell you, but it's going to continue to be very robust. We have no intentions of slowing that down at this point.

Your next question is from Bruce Chan with Stifel.

I want to talk for a moment about the truckload division. You'd called out $4.7 million of revenue from the FEMA loads last year due to the hurricane impact. But if we normalize that, it looks like growth would still only be maybe in the 2.5% to 3% range. And I'm wondering if that's symptomatic of a softening in demand, just relative to the growth that you'd seen in 1Q and 2Q, or is that some sort of supply-driven constraint? I know you'd called out difficulty finding OOs as maybe they look for kind of employee with brokers under their own shingle, so to speak.

Right. It's really a fact of not having drivers. And if you look at our driver count, our driver count is down in that division, which is our owner-operator, agent base, irregular route, truckload long haul. And I think I've commented on that on previous quarters. That's the most difficult space to recruit and find drivers. And that's what makes up our truckload -- legacy truckload agent business. So I would say, it's definitely not a decrease in supply because -- I mean, a decrease in demand because there's freight available. If you got a driver and a truck, you're going to get freight. Our issue is where we've lost drivers in that segment. We find a much easier time or we're being much more successful in the dedicated space, the intermodal space. It's just that irregular owner-operator agent base model that's just very, very difficult to hire right now.

Got it. That makes sense. And I guess, if I look at dedicated average number of tractors is also down, I don't know if that's because of the same type of driver recruitment dynamic or if maybe that has to do with customer consolidation, but it looks like tractor count there is down 14-plus percent. So maybe you can give us some color around what's behind that.

Yes, it's the owner-operator issue again in that space. I mean, and also the load count, I think, is up, but we've shifted the makeup of the loads that we're hauling. We're trying to go to more short-haul regional type freight in that dedicated. So you're getting a lot more loads, but there are still less owner-operators.

Okay. That makes sense. And then, it's encouraging to hear your commentary around the robustness of the environments. As I'm sure you know, there's been a lot of talk about concerns with the macro picture. Just sort of wondering if you can give us a little bit more color on what you're seeing out there that gives you so much confidence. I mean, we've heard about maybe some declining SAAR numbers, some difficulty in the automotive space. So just from the perspective of your business and your customers, what are you seeing there?

It's varies a little bit. As I'm out traveling, and again, everybody travels and talks to different customers, I don't hear any softening from anyone as far as their business goes. When I'm talking to the automotive guys, there's clearly a shift, and everybody is well aware of it, away from autos to pickup trucks and SUVs. And that's kind of been going on for quite some time. The beauty for us is we support every one of the largest automaker manufacturer, every one on their pickup truck and SUV plants. That's where we do their inbound logistics. So that's been a really good win for us. But you clearly see softening in the auto space and that impacts us at one of the plants that we support. But I don't hear from anybody, any customer, or any of our agents even, per se, that are saying that they're seeing a slowing down or a concern that anything is going backwards. Everybody is still very encouraged and everything I see sure is very optimistic about what we see going forward.

Bruce, it's Jude. Also reiterating Jeff's comments, we're seeing that also in our pipeline is $0.75 billion. So we're not -- there is a steady flow of new customer opportunities that we have as well, regardless of what's going on in the general economy.

Okay. That's definitely encouraging. And then just one final question here on the intermodal side. Obviously, a strong top line result there. Is there a way to parse out how much revenue growth is coming from drayage versus some of the ancillary services, the storage fees and whatnot? And can you give us some color on maybe what the growth prospects within each of those different service lines looks like and how to think about growth going forward there?

Yes. Intermodal -- I mean, 90-plus percent of revenue in intermodal is drayage. I mean, we provide M&R, we provide storage, but that's really is not where the growth is coming from. It's clearly drayage, which is what we believe to be the best opportunity in intermodal. So that's the vast majority of the growth, is really the trucking and drayage side. Of intermodal, we expect that to continue. And the acquisitions that we've done are all drayage providers. They really don't play in the M&R and storage space at all and that's not really what we want to grow in. We want to grow on the drayage side. So we expect that -- and again, it's -- I would say, it's a little difficult for me to say what that growth percentage is going to be going forward because we're still looking at potential acquisitions. We -- once everything rolls in with the ones we've done, then we'll have a better feel for what the growth rate's going to be in intermodal going forward, but we sure feel that's going to continue be very robust.

Okay, great. And I lied before, I actually have one last question here. Talking about the M&A, I imagine most of it's going to happen on the intermodal side. Can you give us a little bit of flavor as to what kind of the integration process looks like with some of these intermodal bolt-ons? I imagine the process is a lot easier, but how long does it typically take before some of these targets or properties are kind of fully rolled in and operating in kind of the margin levels of the base platform?

Well, to be honest with you, the 3 that we've acquired actually operate at least as good, if not better, from a pure margin perspective in our existing intermodal. That's part of our criteria for acquisitions that we talked about, is we're not going to buy anything that's going to deteriorate our existing margin. So we feel really good about the businesses that we're buying, that they're as profitable, if not more profitable than our existing intermodal business. Now what we're doing from an operational perspective is we're pretty much letting them operate. We're not going to see any real changes there. We are incorporating the back offices as soon as possible. And there will be a little bit of a benefit there from an SG&A perspective, and that happens almost immediately. It takes a while to get it fully integrated from a payroll, AP, purchasing, all of those things that you would expect. But that takes several months, not super long time. But from an operational perspective, they operate immediately as good, if not better, and that's what we're seeing in the performance and why we feel very, very good about what we've done and what we're going to do.

[Operator Instructions] Your next question is from Jeff Kauffman of Loop Capital Markets.

So a question for you. Particularly as it pertains to intermodal, that's been where more of the acquisitions have been, as you've mentioned, and you're going to grow the drayage. Is that because that's where the better values are in the acquisition market or is that more a focus of this is where we want to concentrate the acquisition dollars?

Well, I'd say both. We clearly want to grow that intermodal space, as we've said. We think that's the best play. We think that there is growth opportunities from a macroeconomic perspective or just how things are shifting. So we feel that's a good growth model. So we love the intermodal play, but we also are seeing very good values. We're buying these business that we think is a very fair value for us and for the acquired -- companies that we're buying and the margins and what we're seeing there are very, very good. So it's immediately accretive, which has to meet our criteria or we're just not going to buy it. So I think it's a little bit of both, Jeff.

And a question. I kind of knew the story. You've got 2 very large railroads that have announced they're going to adopt precision scheduled railroading. Union Pacific in the West and Norfolk in the East. And historically, in the early stages of PSR, the railroad service product struggles a little bit. How does that affect your intermodal business as you are in the drayage business?

Well, I would say the only thing in effect is maybe there might a little bit more dwell time, there might be a little more delay time at the rail hit at either place, beginning or the end. But as far as the ability to still need somebody to move that box, that doesn't change. So that would be the only real impact. There might be a little bit more delay time from our perspective.

Okay. And financial question. Are you -- again, I'm new to the story here. You've announced the potential for a special dividend in the first quarter. How do we -- what kind of signal is that sending? Is that sending the signal that we're still going to acquire, but prices are high, so a better use for cash might be rewarding shareholders? Or is this more of a long-term structural decision on capital allocation?

I think it's long term. But I think, as we talked about, our uses are we're going to continue to reinvest in our fleet. We're going to look at continuing to [ keep it ] -- if we need to, to fray down that or if we want to, we're going to use the dividend policy depending on the performance of that year. So each year, we'll take a look at it and the board will decide if we want to go up to 40% of our earnings and pay out a special dividend and then also continue with the M&A strategy. So I think it's really kind of a four-pronged approach and I don't see anything changing going forward. But that special dividend will really be depending on the results of that year -- the year that we just finished.

Okay. And final question. Jude, I think you said CapEx $65 million to $72 million for 2018. Is that correct?

Correct.

Okay. Is that a net number or is that a gross capital number?

It's a gross.

It's a gross. Okay. So from a financial modeling perspective, how should I think of CapEx in '18?

In '18, I would leave it at what we guided. Most of the stuff that we have that we're selling is old, and so we're taking losses on a lot of that old equipment as we recapitalize the fleet. So I would just use the gross number to be conservative.

Your next question is from Jason Seidl of Cowen.

I just have one. I was on a call this morning with another carrier and they were talking about how busy season has been pulled forward a little bit on the truckload side and there's just a bunch coming due soon. Wanted to know if you're seeing that as well? And what do you think the market is going to look like in terms of rate increases in 2019?

Jason, I agree with that. I think what we're seeing is people are just going more from the spot to a contract basis. And our truckload and intermodal businesses both are 50% spot historically. But we are seeing more discussions around people trying to shift more of their supply chain to a contractual basis. So that's probably generating a lot of that activity on the contract side. What we're seeing on contract is 10% to 12%, typically. So it's still -- it's very robust and very, very firm on the contract side. I expect that to continue into next year. Maybe it's high single digits or low double digits, but I don't see anything that tells me that contractual rates aren't going to be very, very solid next year just because people want to stay out of that spot market because it's just so uncertain.

Right. So given that your mix is like that, do you foresee your mix changing as we go into 2019?

It might, it might. We haven't seen a huge change because still a lot of -- the intermodal is so transactional and just depends on what's coming in, what shows up at the port, so that -- I don't know that the intermodal will change much. The truckload very well could, to be more contractual.

And last question. On the intermodal side, there's been a lot of talk on pull forwards. I don't know if you've seen any of the surveys that we put out on the rail side. Clearly, there has been some, and even with some discussions with some shippers, I have talked to some people who pulled forward like 6 months of inventory. Do you think that could create a slowdown in 1Q for business because of the pull forward?

Jason, I don't know. We've seen it. I mean, the ports are just crazy busy. I think -- what everybody's reading is everybody's concerned about the tariffs, what's going to go with John. So I do think that there is definitely some pull forward, whether that create the slowdown -- if the economy continues to hum along like it is, I don't know if there's going to be a slowdown or not.

There are no further questions at this time.

Super. Thank you all for joining. We appreciate your support, and we don't have another call till next year, so I want everybody to be safe, have a great holiday and a Happy New Year and we'll talk to you next year.

Thank you for participating in today's teleconference. At this time, you may all disconnect. Presenters, please hold.