Universal Logistics Holdings Inc (ULH) 2012 Q4 法說會逐字稿

Hello and welcome to the Universal Truckload Services Inc 2012 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.

During the course of this call, Management may make forward-looking statements based on their best view 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 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; David Crittenden, Chief Financial Officer; and Don Cochran, Vice Chairman and President for Universal Truckload Services Inc. Thank you. Mr. Wolfe, you may begin.

Good morning. I'm pleased to speak to you today on my first earnings call as Universal's Chief Executive Officer in the first call from our expanded executive team. We anticipate there will be many more conversation to come. From what we've seen, first let me say that I'm excited about the future of Universal and the opportunity before us. It's probably no surprise to say that 2012 was a transformational year for Universal.

Our second acquisition for the year propelled us to a top 50 international logistics company. We're now over $1 billion in revenue per year, and we're growing. We've added services, customers, and new verticals, and I would like to explain in more detail how we've changed and will continue to change. Let's start with our revenues. They are driven basically by agents and our own sales teams and split almost 50/50 between the two. Our internal sales teams work very hard at developing long-term customer relations and in turn we get long-term contracts. With the acquisition of LINC, our business now generates roughly 26% of its revenue from long-term contracts, where as before, we were primarily transactional. This improves the predictability of our revenue and allows us to explore tactics that further improve our margins.

From a business service perspective, we're now more diversified. Truckload and brokerage still represent a majority of our revenue, but we've added a new service category called Value-Added, which came to us from LINC and makes up 17% of our revenue. These services tend to be high-value, complex, customized solutions with solid, sustainable margins and long-term contracts. We employ a light asset structure which results in industry leading returns on invested capital. Furthermore, it is combined with a flexible cost structure, allowing us to manage profitability, despite large fluctuation in customer demand.

Today, as discussed, we have a more diversified customer base. Consolidated revenue for our top 10 customers accounts for less than 38% of our total revenue, while our largest customer is now less than 10% of our revenue. More importantly, we're seeing double-digit sales growth year over year in 8 of our top 10 customers. We also have a more diversified industry mix. We're less dependent on Energy and less dependent on Steel and Metals, and Automotive is 31% of our revenue. We continue to focus on eight verticals -- Aerospace, Automotive, Energy, Government Services, Healthcare, Industrial Retail, Consumer Goods, Steel and Metals. In all, we have a more balanced revenue base.

The Automotive sector continued to perform well in 2012, and the production forecast we've seen reflect the positive growth that is still below historical production high, but is still growing. Steel and Metal forecasts also show positive growth. Last year, we saw oil field and natural gas related Transportation slow in the second half, but the revenue loss was offset by federal contract work related to Sandy. In 2012, the pending election took a toll on Wind Energy products. They essentially fell off at the end of the year, but since the re-election of the administration, those projects have been reinstated. Due to the six-month manufacturing process for windmills, we expect to see a positive impact beginning in the second half of 2013.

For Transportation, we continue to focus on growing our agent network. We're always looking for good quality agents in the right markets, but if we see an opportunity in the right market, and can't find the agent, we'll develop the market internally. We continue to prioritize capacity and to recruit owner-operators to meet demand. Additionally, we see some opportunity in strategically employing Company-managed equipment and employee drivers. Our Value-Added Services revenue continues to grow at high double-digit rates. For 2012, it was 18.4% year over year.

In addition, our Automotive customers and others like Wal-Mart, Case New Holland, are providing us again with good growth opportunities for Universal. Intermodal revenue grew at 17.1% year-over-year, partly because of an acquisition early in the year, but we've also seen organic growth. International trends continue, to improve as do our expectations for the market.

Immediately after the acquisition of LINC, we began integrating the companies. We've consolidated headquarters, began integrating IT system, and have since initiated process improvements of capturing and better managing freight opportunities internal through what we have called the [de-silo] project. With that said I would like to turn it over to Don Cochran, who will give you more detail regarding the de-silo initiative. Don?

Thanks Scott. The de-silo project concentrates on reducing costs, improving communications, and streamlining operation on Universal's four legacy asset light motor carriers, Universal Am-Can, Mason Dixon, Great American Lines, and Louisiana Transportation. It has no impact on our other business units. Having four carriers has always allowed us a great competitive advantage. We can compete in more markets with larger groups of resources. We have a better risk management approach, and for the agents and the people serving those markets we have a faster decision process for Management and growth. It also helps maintain the legacy loyalty of our Management, staff, agents, and independent contractors.

Changing this to a less structured organization allows us a chance to change the structure and it creates better territorial assignments for those parties working in the field organization. The incentive plans have been changed, and they are now structured for bigger concentration on shared revenue across Company lines. We'll also be able to share revenue across equipment sites and Companies. We will be marketing the name of the Company as Universal. We reduced the complexity of sharing freight and capacity among our legacy carriers, and we've streamlined resources. Scott?

Thank you, Don. To support this new direction we've looked at our sales teams, our customers, and our service offerings. In that process, we've found that 84% of our customers use only one of our services, typically with one operating unit. With our new breadth and depth of service offerings, we foresee a significant cross-selling opportunity with customers who are already familiar with our brand and service quality. On this point, we've already begun training our sales people so that we can take advantage of these opportunities.

Additionally, we intend to expand our sales group. We have identified the number of resources required in the preferred locations. We have structured a sales incentive program to promote our cross-selling opportunities. We even created a new logo for Universal, moving us to an integrated brand with a combined enterprise.

In the past, we've done a number of acquisitions. Most were tuck-ins, and they were easily absorbed. Some were more opportunistic. They've all worked out well. But, we're looking at our acquisition strategy differently now. The acquisition of LINC Logistics was transformational. The opportunities for us in Value-Added and Intermodal Services are areas that we must continue to explore. We have a strong acquisition pipeline and we'll continue to take a strategic approach in the future.

All said, we're really just getting started, but I'm pleased with the initial progress that we have made. It's been a pleasure working with both Don and Bob Sigler, both of whom brought Universal to what it is today. When we see challenges come our way, I'm very confident of our team's ability to rise to meet them, and as we look forward to taking Universal to the next level. With that, I will turn the call over to David.

Thank you, Scott. Good morning. I also want to thank you on this morning's call. Don Cochran and I may have met a few of the people on this morning's call at Investor Conferences 10 days ago, but our 2012 earnings were not yet available to discuss. Obviously we could only say so much. I definitely appreciate the chance this morning to be in a position to describe Universal's financial performance last year, and to answer your questions regarding our business.

First I will briefly summarize the financial statements. Then I will spend a little time helping you understand the drivers of our business model so you have a clearer picture of Universal, following what Scott, Don, Bob Sigler, and I are calling the transformational acquisition of LINC Logistics Company. Next, I will try to help you understand our underlying profitability, and then finish with a few comments regarding cash, leverage, and capital planning before we open the phone lines for your questions.

Overall our operating revenue last year increased 4.7% to just a little over $1 billion. The revenue growth trend is apples to apples with 2011, since Universal's accounting for the LINC acquisition is based on what the more seasoned among us remember as [Pullen] accounting. As you probably know or will quickly learn, LINC was a related party to Universal when it was acquired, therefore driving this accounting treatment. Financial statements of both Universal and LINC are combined from the first day of the first period presented, with eliminations only for historic transactions between the two Companies, which were very modest.

As reported, Universal's fourth-quarter earnings per share, both basic and diluted, was $0.08. We achieved total 2012 EPS of $1.59 per share. This compares to $1.71 per share in 2011. In a few minutes, though, I will walk you through some adjustments related to the LINC acquisition that we think are meaningful in analyzing Universal's core profitability.

Scott discussed our new and improved customer mix and blend of vertical markets, where we either already have a significant presence or are seeking greater penetration. If you have followed Universal, you notice right away that we are now reporting operating revenues in three service categories -- Transportation Services, Value-Added Services, and Intermodal Services. These three categories define the nature of Universal's service offerings in terms that are commonly understood in the transportation logistics industry. Internally, we operate with a variety of legal entities tailored to the operating requirements of individual customers of vertical markets, but as Scott mentioned, our sales and marketing organization is tasked to build customer relationships and cross-selling opportunities across these three broad categories.

Our first revenue category, Transportation Services, combines Universal's traditional agent-based truckload business, including brokerage services, with a portion of LINC's business that operated dedicated truckload lanes. We now have a large flexible mix of Company-owned power and owner operator units totaling almost 4,100 units on average. Our pool of trailers and other cargo hauling equipment is equally flexible, with over 2,400 dry vans, complemented by close to 700 flat beds and heavy haul equipment -- our traditional specialties, along with chassis and boxes.

Scott and I are very familiar with Universal's second category of operating revenues, our Value-Added Services, which Universal added to its portfolio of capabilities when it acquired LINC last October, where Scott and I were previously CEO and CFO. Our Value-Added revenues are derived from supply chain solutions dedicated to individual customers, including high volume consolidation centers, material handling, kitting, repack, and high complexity sequencing and subassembly. Universal's third offering is Intermodal, which I will touch on in just a minute.

Our aggregate 4.7% year-over-year growth in operating revenue is comprised of 18.4% growth in our Value-Added Services, and 17.1% growth in delivery of Intermodal Services. Transportation Services were essentially flat in 2012 compared to 2011, where selected new business basically replaced lost revenue from selected dedicated customers, and where our expedited air, ocean, and ground services experienced some softness. We added about 27 million of new Value-Added revenues last year, which benefited in part from a full year of operations from certain businesses that launched midway through 2011.

Although Universal's employee headcount was stable last year, and our number of discrete operating facilities actually slightly down, we increased the use of contract staffing, which is an important labor pool for us. And we expanded the scope of services delivered to several of our top Value-Added customers. Examples of growth here include additional transmission suspension work in Mexico for Universal's largest customer, additional warehouses managed for our Industrial, Manufacturing, and Auto Supply customers, and the full-year benefit of our expanding Wal-Mart relationship, which we began in early 2011.

Like Value-Added Services, our Intermodal business also grew strongly last year, especially in Q4, which comprised about $10.8 million of the $17.6 million total increase in 2012. This increase includes increased utilization of our cargo boxes to carry domestic container freight, inbound and outbound, and the railroad, including for our related parties. Before I discuss our overall operating profitability this morning, let me touch briefly on the changes you may have noticed in how we report operating expenses in our 2012 consolidated income statement. With the integration of LINC's asset light 3PL services into Universal's business model, we concluded it was both necessary, and probably we hope more informative, if we added some additional lines to Universal's consolidated income statement and remapped some existing cost categories to present consistent classifications.

Some of the significant changes that you may be seeing for the first time include, first, the addition of a cost line which we call direct personnel and related benefits, which now reflects both direct and contract personnel engaged in the delivery of all of our services, including both Company drivers working in our Transportation Services business and our Value-Added Services, where a substantial number of our direct employees and contract employees are directly involved in the sorting, segregating, or otherwise adding value to our customers' products. In contrast, due to its agent-based approach, our historic approach was to include the compensation of such employees in SG&A.

Second, the percentage of cost related to purchase transportation, which had historically exceeded 75% of Universal's total cost, is now just 57% of 2012 operating revenues. Third, we've added a new category, operating expense, exclusive of other items, and that reflects the cost of our services not directly related to Universal's over-the-road activities. As you might assume, these costs are a bigger percentage of our Value-Added Services. Fourth and finally, another new category, occupancy expense, is derived from the greater mix of 3PL services which we now deliver inside a building rather than on roads, ocean, or air. Traditionally, Universal operated with a combination of both owned real estate and leased facilities; all of LINC's operations were in leased facilities or located inside a customer operation. This new operating expense line in our P&L gives separate visibility to this cost category.

With all that as background, let me now point you to the portion of our earnings announcement labeled non-GAAP financial measures, including the cautions implied when you hear me using them. In the last couple of pages of our earnings announcement you will see that Universal's adjusted operating margin increased from 6% to 8.5% in the fourth quarter of 2012, and from 6.7% to 7.7% when comparing all of 2012 to 2011. Part of this is due to our Transportation Services, which benefited from high-margin Government business in Q4 due to Hurricane Sandy, which helped the year-over-year comparison. But our Value-Added Services also showed solid margin improvement as we captured efficiencies from new customer programs we launched in 2011.

I won't go into detail here to describe our reported numbers for costs related to the LINC acquisition. These we described in the press release, and I'd be happy to answer additional questions on this call, but Scott and I are obviously pleased that our operating colleagues kept their eye on the prize, delivering margin improvement during a year when us corporate guys had a few other things on our agendas. I also want to quickly mention that because Universal is positioned to deliver industry leading ROI and free cash flow metrics, and with the credit facilities we put in place in October, we are also now interested in non-GAAP metrics such as EBITDA.

Again, referencing last Thursday's earnings announcement, you will see that Universal's adjusted earnings before interest, taxes, depreciation, and amortization, the margins there increased from 7.8% to 10.4% in the fourth quarter, and from 8.5% to 9.4% when comparing all of 2012 to 2011. In any given year we expect CapEx to equal about 2% to 3% of our operating revenue, so our EBITDA margins and operating margins should move together. Our balance sheet at December 31 included $2.6 million of cash. Our marketable securities portfolio was $10 million. I should highlight that we recognized non-operating income totaling $2.8 million in 2012, primarily due to gains on sales of securities in the portfolio. We did however, [ignore] these gains in the adjusted operating and EBITDA margins that I just commented on.

We are hoping that you will take a look at Universal's 10-K report, which we anticipate filing at EDGAR during the week of March 11. It will include, we hope, everything you want to know about the LINC acquisition and the debt that was incurred as part of that transaction, along with more details surrounding our commentary on this call. Suffice it to say that our leverage ratio, which we define as total debt divided by adjusted EBITDA is about 1.5 times as of December 31, 2012, which we think is just about right for an asset light 3PL.

Enhanced by the acquisition of LINC, Universal has an excellent track record of pursuing high ROI investment opportunities, especially in pursuit of enhancing our existing long-term customer relationships or to secure new ones. We've increased visibility we have through longer-term contracts on a portion of our business, we are not reluctant, in fact, pleased, to make investments in customer programs where the returns can be reasonably predicted with manageable downside. As a result, we do expect that leverage will continue to play a role in our capital structure, both as a way to address capacity requirements, and as Scott suggested earlier, to pursue strategic acquisitions.

With that, I'm going conclude with a thank you. Personally, I'm deeply grateful to Scott for his leadership and to Universal's Board for their confidence in choosing me as Universal's new CFO. Bob Sigler leaves big shoes to fill. Universal is certainly not an overnight sensation but this is a compelling time for our Company as we step up to a larger stage. There are certainly challenges ahead as we continue to integrate the Company's broader capabilities, and as we introduce these capabilities to our customers, but we are optimistic about Universal's positioning in the 3PL industry and our long-term prospect for growth and value creation. Now for perhaps the interesting part of this morning's call, Scott and I would love to answer your questions directly. Melissa, can you please open up the lines?

(Operator Instructions)

Scott Group, Wolfe Trahan.

This is Carol Krakowski on for Scott Group. So first things, can you just give us a little bit of color on how your flatbed and your overall truckload volumes have trended, both throughout fourth quarter and then as well for January and February?

We're heavily involved in the wind energy business and so it was very, very strong in the early part of the fourth quarter. It tailed off about the second week of December and really there was nothing by the end of the month. As we go into the first quarter, there's a little bit of cleanup work that is occurring, but we don't expect much of that to come back until roughly the third quarter.

As far as the metals work, because a great deal of the metals work that we do is involved in the automotive sector, that was strong. Those parts that were involved in energy production, a little bit softer, but all in all, we trended like most companies, a little bit softer in the fourth quarter than what we would have anticipated. A little bit unsure how that translates long term, but still we had a great year, and where we did see some losses, it was offset by some of the FEMA work.

Carol, I might just add that first quarter for that business, March is particularly important, because there's always a slow start in January and early February. So we're just now starting to get some visibility on what March might look like.

And you're feeling better about that?

I'll know what it is at the end of March.

Fair enough. (laughter) Okay. How about on the pricing side for similar throughout the quarter for fourth quarter and 1Q, and do you think it could be sustainable throughout the year even?

We don't see much chance for pricing improvement in the first quarter. Business is always softest in the first quarter, and this year probably will be similar to that in comparison to the rest of the year. So if we see price increasing, I think it will happen later in the year when capacity tightens.

I will say, though, that we have dedicated contract transportation. We ended the year in negotiating increases for several of our truckload contracts at that point in time, so on the dedicated side of the business we'll see some improvement.

Okay. And within the intermodal section, you guys are reporting the domestic intermodal volumes and revenues. Is that mainly part of the TFX acquisition you guys did back in May, or is some of that residual business that you guys had before that just wasn't being broken out?

It was part of the residual business. We used to show that in the old Universal as part of brokerage in 2011 and prior years, but as it grew, we started to move it over so it could be identified.

Got you. Okay. And you guys had a pretty strong quarter for fourth-quarter intermodal. Are you guys buying new containers this year, or do you think that's going to be -- the strength is sustainable?

I think we actually -- we're working ourselves into capacity that we have, and so we don't have any kind of looming CapEx to maintain that growth. I think the fourth quarter was -- did benefit from certain specific factors, so maintaining that business in the first quarter will be important for us. But we don't have any capacity constraints in the short term on the growth of that business.

Okay. That's helpful. And just from a modeling perspective, how do we think about the value added services revenue this year?

We would anticipate growth rate. We have some new contracts in the value added side of the business that we are just launching. We started launching in December; we'll continue to launch through March. So new opportunities always bring growth with it.

Additionally, in 2012, we went through several labor negotiations with our represented employees, and additionally to that end we had to negotiate our customer contracts as well. So that will enhance our top line revenue within the value added services, and we're continuing to see other opportunities which should avail themselves to us in the second half of the year.

Okay. And are there any major auto contracts coming up?

Depending on customer contracts. In 2013, we only have one remaining contract, automotive, and that expires in December of 2013.

We worked through a lot of contract renegotiations that were aligned last year because of the events of three years ago in the automotive industry, so a variety of things got kind of the normal cycles were disrupted and kind of all anchored to one base, one year. So last year we worked through a lot of our contract business in the automotive sector, so as Scott just mentioned there's just one left for this year.

Got you. And then last thing, just kind of a few housekeeping items, what can we expect in terms of CapEx and cash flow for 2013?

Well, as I commented, generally our CapEx runs 2% to 3% of our revenues, $20 million to $30 million. It tends to be maintenance CapEx related to tractors and trailers and things like that. We have historically enjoyed very high return on investment, particularly where we've made an investment in our value added services. And those can be sometimes difficult to predict, because we may have a very large program that only requires $1 million of investment, and we might after smaller program that requires a few million dollars. So depending on when we win those projects and how long it takes to install, it can move our CapEx in any quarter around, but generally 2% to 3% is a pretty good baseline for our -- for us.

Okay. Thanks for the time, guys.

(Operator Instructions)

John Larkin, Stifel.

I was talking to a couple of flatbed carriers at the end of last week and they had not really seen much of an impact from the recovering housing market, which I know you don't participate necessarily directly in, but should have some collateral impact you would think. They were suggesting that once the ground thaws in the northeast and the Sandy recovery efforts spools up full bore with the $50 billion or $60 billion of federal recovery money available, that there could be a real shortage of flatbed equipment starting, say, in the March, April, May timeframe. Is that how you read the flatbed market as well?

Generally, yes, John. Building materials is important to us, but we never expected the pick up until March to start with. So everything that we're seeing from our customer base, and we do have some significant customers in that field, does say that they expect some increase in the late March area or in March and then into the second quarter. So I agree.

Okay. Thank you. And then Scott you had mentioned that the first half of 2013 would have some model changeovers, retooling, and that sort of activity at that auto plants, some of which you serve. I've noticed that the auto numbers coming out of the railroads have been flat to down a little bit this year. Is that panning out the way you thought it might in terms of its impact on the LINC side of the business?

It started out -- traditionally, the first quarter is a tough quarter. The automotives do so much at the end of the year to get product onto the street. In the month there were a couple of automotive assembly plants that were shut down, one for the entire month of January, one for a couple of weeks here in February. So, yes, it has a slow start associated with it. The changeover for basically the pickup truck lines inside of General Motors will impact three or so assembly plants in the first half of the year, but the good news is is that when the launches are over, the market seems to be acceptable, looking for new product. And the projections of 15.5, we're currently using about 15.3, so we think that the second half will be exceedingly strong.

Thank you for that. And then a lot has been discussed about the upcoming potential change in the hours of service rules, the 34-hour restart, which essentially requires everybody to take the weekend off and get the two full night's sleep over the weekend in order to reset your hours of service clock. What type of impact will that have on the Universal operation and then the LINC operation? Is it going to require you to have to retool and redesign some of the solutions that you have for some customers?

Relative to the dedicated transportation, do not anticipate it having a significant issue. We can structure our work crews because most of the dedicated is done with Company power, Company drivers, Company equipment. We can flex those shifts to balance out across the seven-day-a-week operation, so it will not impact us that negatively. It will have some impact, but certainly not as much as a transactional long-haul truckload business.

Okay. Do you have to adjust pricing to reflect those adjustments that you have to make to deal with the hours of service?

As they are determined, if we determine again that there is a cost impact, we will absolutely solicit to offset those costs in our customer contracts.

Maybe finally, I've heard from a number of carriers that this has been one of the more difficult periods for finding company drivers and owner-operators. How successful have you but in that arena?

Again, Don and I will each try to handle this one. From the dedicated side, we haven't had a substantial problem. The type of business that the dedicated provides allows either a company driver or an owner operator basically to be home every night. That's a substantial advantage. So from that perspective, we can get drivers.

Are we seeing the cost of drivers escalate? Certainly somewhat. That being said, again, we go back and renegotiate with our customers because the service is more critical than the price.

On the general owner-operator marketplace, it is getting tougher. We do feel that we were successful this year in the reduction of the number of independent contractors that we typically lose in the fourth quarter and first quarter, but we haven't seen much encouragement just yet in the numbers available. So I think it will be a tough year for all of us to grow our fleets and putting that into perspective with changes in hours of service. A lot of these guys are thinking about how they're going to manage their business, so I think it will affect them.

That's very helpful. Thank you very much.

(Operator Instructions)

Tom Albrecht, BB&T Capital Markets.

This is John Washington on for Tom. On the margin side, for 2013, the 14-C filing implies an organic pro forma and EBITDA margin of 10%, and given the fourth quarter of 2012 had an adjusted EBITDA margin of 10.4%, should we expect margins in '13 to run north of 10%?

That's a really tough question because a 40-basis point margin adjustment in our business is not unusual. So I would continue to look at current experience for the balance of the year. I mean, we do continue to have efficiencies that we're picking up in the value added project, but sometimes that can be offset, for example, by launch costs and start-up costs that we don't have visibility to yet, where we might -- we generally try for recovery of those kind of costs, but to the extent they're not, that can negatively impact margins as well. So I would say that the 10% plus or minus, if I can be cheeky that way John, is kind of about where we expect to be. And we'll see how the year plays out. Still a little early.

Okay. Great. Thank you. On the capacity addition side, over what timeframe do you all expect to achieve your goal of adding about 500 units?

It will probably take most of the year to do that. Typically we see a lot of moving around in the owner-operator marketplace in the first quarter, and we've seen some over the course of the last 60 days. But we are going to try to add strategically in certain markets, and that means that we're going to go out and work on recruiting plans that are a little more specific than what we've done in the past.

Additionally, it's not going to take a lot of CapEx, but we're going to try to make sure that we keep all of the Company trucks that we have fully seated. And we may add a few Company trucks over the course of the year, but it won't be a huge push on CapEx.

Okay. So on the 500, you think you can get all those in '13?

We hope all of them in '13, yes.

Okay. Great. That's all I have. Thanks for your time.

There are no further questions at this time. I would like to turn the call back over to the presenters.

Thank you for the opportunity to talk to you today. We hope we answered your questions. We look forward to further discussions in the future. And again we thank you very much and appreciate your attention. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.