Universal Logistics Holdings Inc (ULH) 2013 Q1 法說會逐字稿

Hello, and welcome to the Universal Truckload Services, Inc. First-Quarter 2013 Earnings 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 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 hosts, Dr. Scott Wolfe, Chief Executive Officer; Dr. Don Cochran, President ; and Mr. David Crittenden, Chief Financial Officer for Universal Truckload Services. Thank you. Mr. Wolfe, you may begin.

Good morning, everyone. On behalf of the entire Executive Team, welcome, and thank you for joining us for the Universal Truckload Services, Inc.' s First-Quarter Earnings Conference Call.

With the results of our first-quarter in, I'd like to say that overall, we've done well. Historically, our first quarter has been a soft quarter, but then the last year, we had an exception. Our first quarter in 2012 was slightly above normal due to steel and energy spikes. For comparison purposes, we've improved our income from operations by $1.9 million, an increase of a full percentage point over the same quarter last year. The end result is an increase in earnings per share of $0.03 on a tax comparative basis. Moreover, we did that despite the relative softness we've seen in our transportation services group. We continue to execute our strategy, focusing on higher-margin business, long-term contractual relationships, enhancing our agent network, and building our enterprise accounts. We remain focused on defining our brand image with our customers, agents, and contractors to promote our expanded service offerings in the marketplace and improve our visibility.

Meanwhile, our automotive customers continue to perform solidly. We've experienced some softness in metals, retail, industrial, and as we expected, energy. We continue to grow our relationships with our customers. We just launched new business with Cummins last week, and we've expanded our facilities operations with Nissan in Canton, Mississippi. In addition, we continued to concentrate on business development efforts in Mexico. We have renewed and extended all of our contracts in a time-frame between 2017 and 2018, and we've negotiated our first labor agreement there, as well. That has a five-year term. In fact, 30%, now, of our direct head count is in Mexico.

Let's start the discussion with revenue. Overall, we experienced a decline in revenue of 3.1%, again compared to a favorable first quarter of 2012. On the positive side, or intermodal business was up almost 32%, an increase of $8.1 million over the first quarter of 2012. Value-added services increased 5.6%, or $2.5 million over the same period. However, our largest category is transportation services, and it was down 10%, again compared to the first quarter of 2012. Some of that is because we experienced an exceptionally strong first quarter in 2012. Within transportation, we've closed contractual revenue for dedicated customer business and transaction related revenue.

For the first quarter, dedicated transportation services were essentially flat, leading the transaction side of the business as the primary source of our decline. We attribute the declined to several factors. First, the loss of revenue from the alternative energy customers, who, despite having restarted production, won't begin shipping until the end of the second quarter. Secondly, and more importantly, we took action paring down certain under-performing sales channels, and the benefit of those actions are reflected in income from operations. Finally, we experienced the same general economic conditions and weather issues as some of our peers. Both our internal sales teams and our agents are responsible for developing our transactional business. As we discussed before, our revenue is split between the two.

Our internal sales teams are working very hard at developing enterprise account relationships and long-term contracts. This improves the predictability of our revenue and allows us to explore tactics that further improve our margins. Those objectives were visibly achieved in this quarter, and David will provide you more details in a moment. With that said, I'd like to turn it over to Don Cochran, who will provide you an update regarding our [de-siloing] initiative and this past weekend's agent meeting. Don?

Thank you, Scott. Our de-siloing plan has been in motion for over 30 days and is progressing well. The purpose is to rearrange our Management and to do more -- to be effective in our agent relations and to increase the support for many of our growth projects. This project allows our field staff to be more effective and provide significant savings in the use of our managerial resources at the same time we put more sales and national account coverage on the street.

Every year about this time, we celebrate the accomplishments of our agents with an awards banquet. This past weekend, our agents meeting gave our exceptional agency network a view of how we plan to increase support for their growth and efficiency with more services and products. Time was dedicated to the efficiencies and coverage's available with an expanded enterprise sales effort at that creates a united effort with the sales team of the LINC Organization. Time spent on joint marketing efforts gave us a view of the outstanding opportunities available with our expanded coverage. The event highlighted several new agents moving up the ranks as the Organization grows in addition to greeting and spotlighting several outstanding contractors of the year from our carrier group. Perhaps the best part of all is the networking opportunities it gives our agents to reconnect with each other, along with the opportunity to meet Scott, David, and several members of the enterprise sales team.

As a final note, we are planning several projects just starting to come around in wind energy and the oil field services operations. Additionally, we expect an expanded role in the disaster relief services that we have provided for FEMA in the past. The ability to offer these services is the direct result of our efforts in association with the LINC value-added services team. There is a clear indication of the results we will see from our expanded Organization.

At this time, I will turn over the program to David Crittenden.

Thank you, Don. As Don just described, our agents conference brings together several hundred of the independent businesses who support our transactional transportation services. For me, it was really an excellent opportunity to meet many of the entrepreneurs on which so much of our future growth and potential relies. Certainly clear to me after the last few days, that our Organization is really blessed to have some hard-working, passionate, dedicated people who are really pulling a common direction for our growth. And importantly, Universal is a young Company, but our heritage gives tremendous 3PL capabilities. Enduring customer relationships in key industry segments and talented people, in recent days, we filed to important 8-K reports with the SEC. This morning, I will briefly summarize the earnings performance we released last Thursday. Then, I will spend a little time walking through our cash leverage and thoughts on capital planning. Then, I'll conclude with a short summary of the announcements that were included in the 8-K that we felt Friday afternoon before we open up the phone line.

As Scott said, for the first quarter ended March 30, we a reported net income of $11.4 million and income from operations totaling $19.3 million on revenues of $248.1 million. Our aggregate operating revenues in the first quarter declined 3.1% compared to last year; however, we are pleased with continuing improvements in operating profitability due to the strategic decisions made in recent quarters and growth and more profitable service categories. As reported, Universal first-quarter 2013 earnings per share both basic and diluted was $0.38 from net income totaling $11.4 million. This compares to $0.48 per share in the first quarter of 2012. The more relevant first-quarter 2012 comparison, though, is the $0.35 per basic and diluted share when the pro forma tax impact of our LINC acquisition on the first quarter of 2012 is properly considered. Therefore, despite modestly-lower aggregate revenues, we improved overall margins and profitability.

When we look at our three types of transportation and logistics services, our revenues story is somewhat of a mixed bag in the first quarter compared to the comparable quarter last year. As Scott described, out transportation services declined 10% primarily due to an overall reduction in the number of loads moved. In contrast, our value-added services increased almost 6%, and our intermodal services increased $8.1 million or 32%. When you look at the operating data for transportation services, you can see that most of our operating metrics are flat or slightly up compared to the first quarter last year. However, our total load count for transportation services, which is the principle underlying driver of transportation services revenue, is down almost 12%. This is the result of several factors, including actions taken last year to exit a few agency relationships that were not meaningfully profitable. As Scott mentioned, we are also experiencing delayed demand for specialized loads in connection with Universal's wind energy business. Finally, like our other peer transportation providers, we were also impacted by the relatively good weather in the late winter 2012 compared to poor weather in the recently-completed quarter.

Revenues from our value-added services increased 5.5% in the first quarter 2013 compared to last year. In terms of operating metrics, the number of facilities providing these services increased from 39 to 44. Our average headcount, which is significantly impacted by growth in services delivered inside Company or customer facilities, has also increased by over 500 people. We are especially pleased with the continuing growth of our intermodal services businesses. We recorded solid growth in both drayage connectivity services as well as domestic intermodal services. In the first quarter of last year, our value-added services and intermodal services comprised 27.6% of operating revenues. This share of aggregate revenues increased to 32.8% in the recently-completed quarter.

Primarily as a result of this shift, our operating profitability increased by 100 basis points. Income from operations increased 10.7% to $19.3 million or 7.8% of operating revenues for the first quarter, compared to 6.8% operating margin last year. A review of Universal's common sized comparative income statement shows that when calculated as the percentage of revenue, our cost of purchase transportation and commissions declined. Concurrently, our personnel cost and operating expenses increased as a percentage of revenue. Again, these trends follow from the increase in non-commodity business oriented towards our customer-specific supply chain requirements.

Now, let me point you to the portion of our earnings announcement labeled "Non-GAAP Financial Measures." On the last page of our earnings announcement, you will see that Universal's EBITDA margin increased to 9.8% in the first quarter 2013. This compares to 8.5% in the first quarter of 2012, a 130-basis point increase. Q1 2013 operating margin is down slightly from 10.4% in the fourth quarter of 2012, but that is primarily the result of seasonal factors and the impact in Q4 of certain high-margin government business triggered by the recovery from Hurricane Sandy. As I mentioned on our February 25 call, our EBITDA margin trends closely follow our operating margins. Our consolidated balance sheet at March 30 included $4.8 million cash, and we had $136 million of borrowings outstanding under our secured credit facilities. Our marketable securities portfolio was $10.4 million.

To support our continued growth and development, we are focused on preparations which allow us to respond quickly to changing capital needs. Our objective here is to be positioned to take advantage of both windows of opportunity and capital and money markets. Certainly, we want to ensure that we have adequate dry powder to pursue perspective acquisition candidates and other opportunities that might demand access to capital. We also understand that interest rates remain at historic lows, although it does seem the end of this period may now be measured in the next several quarters and not years. We also recognize the need to increase Universal's public float as circumstances allow.

On March 28, we issued a press release announcing the filing of a shelf registration statement with the SEC. Once it becomes effective, the S-3 registration statement will allow us to offer to the public from time to time shares of common stock and other securities. The registration statement will support multiple offerings of up to a total aggregate of $350 million. The securities may be offered at prices and on terms to be determined at the time of any individual offerings. Our shelf registration also registers about 6.5 of million of secondary shares of Universal common stock held collectively by our Chairman and one of our Directors, his father. The registration statement on form S-3 has not yet been declared effective by the SEC, but we do expect this shortly. The securities may not be sold, and offers to buy may not accepted prior to the time the statement becomes effective.

As we discussed in late February, we view our acquisition of LINC last year as transformational. Last Wednesday, our Board of Directors met and approved several actions in connection with Universal governance that lay a foundation for Universal's continued growth and development. Details of the actions appear in an 8-K report we filed last Friday, but I'll briefly summarize them here. First, the Board reviewed and approved our proxy statement that we filed just a little while ago with the SEC this morning in anticipation of our annual shareholders meeting on June 7. At our upcoming shareholders meeting, shareholders of record April 15 will be asked to elect Universal's Board of Directors for the upcoming year. They will also be asked to ratify the selection and engagement of BDO as our auditors for 2013. KPMG, which had served as Universal's independent auditors through 2012, is resigning upon completion of their review of our first-quarter 2013 statement. Following the review of several national auditing firms our audit committee has selected BDO to be our new independent registered accounting firm for the fiscal year ended December 31, 2013.

Our Board also took action to increase Director compensation to be commensurate with the duties and responsibilities of Directors and Committee Chairs for a Company of our expanded size and scope. Similarly, the Board reviewed and approved a 2013 incentive comp plan that will be applicable to, in addition to Don Cochran and Bob Sigler, other members of our transportation services business. The Board also approved the extension of a 5-year consulting agreement with one of our Directors to replace an existing similar agreement that had expired. This gentlemen, our controlling shareholder, provides services to Universal on topics related to strategic planning, operations, and relationship management.

Finally, and I think most importantly, last Wednesday, the Board of Directors voted to increase its size to 10 members. Doing that, the Board, elected Michael Regan is our newest Director. Mike is a recognized expert, columnist, blogger, and frequent conference speaker in the transportation logistics industry. He co-founded TranzAct Systems, which is one of the largest privately-owned logistics information companies in the United States. Among his many accolades, he has been named Executive of the Year by the National Industrial Transportation League and Member of the Year by NASSTRAC. Scott, Don, and I welcome Mike, and we look forward to hearing his thoughts and input on our business strategies. Mike's knowledge of our industry and, certainly, his enthusiasm for Universal's growth and development are, frankly, inspirational. He will serve as a Universal Director until our shareholders meeting in June, at which time we do anticipate he will be formally elected by our shareholders to join Universal's Board.

As you can see, everyone at Universal has been very active in recent months, working to position our Company to fully leverage its position as a leading asset [light] 3PL. From our agents to our operating colleagues to our customer-oriented sales teams and even to our Board of Directors, we are actively engaged in executing strategies that we believe are critical for our long-term success. You can review the details of all these actions I just described in our 8-K filings in our definitive proxy and in our upcoming quarterly report on form 10-Q, which we currently anticipate filing around May 9. When you do have the chance to look at the 10-Q, I direct your attention to the additional information that we will show to describe Universal's reportable business segment. We will be providing revenue profit and asset information for our many individual business operations in two broad categories. First, our transactional transportation services business, second, our contract based business, which is generally comprised of our dedicated transportation services and our value-added operations.

Universal's two reportable segments have many common operating attributes, including customer demand characteristics, overlapping points in the manufacturing and distribution supply chain, similar economic characteristics, and our deployment of flexible business models to deliver various 3PL services. However, our transactional and our contract business are distinguished from each other by the amount of forward visibility we have regarding pricing and volume. For example, our transactional transportation services, including our specialized freight forwarding services, usually relate to individual loads. Pricing may be established for perspective loads, but route loads and shipping commitments from customers are neither exclusive nor assured.

In contrast, our contract business has a much higher degree of visibility regarding future demand as much of the business is provided pursuant to contract at least one year, and in the case of value-added services, often three to five years. To support our contract business, we need various operating tactics to maximize utilization of real estate, rolling stock, and personnel. The result could be a combination of both lower risk and higher return on investment. We do see a real opportunity here at Universal to bundle our broad service offerings to customers in targeted industries, increasing levels of service for them while making Universal mission critical for our customers throughout their supply chains.

And with that, I'm going to conclude our formal comments. Now, [Ryan], we'd love to answer our listeners' questions directly, so would you please open the line?

(Operator Instructions)

Your first question comes from the line of Scott Group from Wolfe Trahan. Your line is open.

Thanks. Good morning, guys. Thanks for doing the call. So in terms of the transportation revenue that was down 10%, I was wondering if maybe if you can walk us through the progression of the quarter, and if you feel comfortable giving us monthly either volume or revenue figures, that would be great. And maybe give us a sense on what you're seeing so far in April. It sounds like you've got some visibility to the wind and energy segment picking up at the end of the quarter, but maybe some other segments that you are seeing and your outlook for second quarter and the rest of the year.

Scott, I'll start, and then I'll turn it over to Don. We had our conference call at the end of February, and at that time, we were already seeing January and February being -- slow down a little bit. But March is such an important month for us in our quarter -- in the first quarter, that we really -- it's hard to see visibility. We do look of at things on a daily basis. It certainly picked up it in March. I don't think it picked up aggressively in March. So I think we're seeing that somewhat lower than what we'd like to see trend, in terms of where we are expecting to be in 2013. Don?

David's response is correct. What we see going forward from that point is the start of the second quarter is perhaps about the same as the end of the third, maybe just slightly slower than that. But at the same time, we are a little more optimistic from this point on because we are starting to see a little improvement in the heavy industry area. Both oil field services and wind energy things are just now starting to crank up with a little indication of some positive trends. We have started moving some volume a little bit better than we were. But it's probably going to be somewhat flat compared to last year.

That's helpful, Don. That comment about flat, is that a volume comment or total revenue comment? So maybe with that at -- any trends you are seeing on pricing would be helpful.

Well, the volume portion is what we're looking at, so that will cause our pricing to be flat as well. We do see some tightness in capacity. But it's not across the board just yet. So, it's going to remain flat, we believe.

Okay. You mentioned in the prepared comments about expanding relationship with FEMA. Can you talk about that and how we should think about the FEMA business going forward?

In conjunction with our new partners through LINC, we made a substantial bid to provide some cross-docking services and some other things that we had not performed before. While these are different to Universal as a Corporation, it's not different to the LINC operation. What will be different is that we'll have to be able to put our strike team in place very quickly for this, but we feel very confident that we'd have game plan that's going to allow us to do that.

Scott, this is Scott Wolfe. The other thing about this opportunity is basically we have a four-year purchase order period that we will continue to work with FEMA over time. And so again, it is an opportunity for us, and it's a springboard for us within the FEMA organization itself as well as other government aspects.

I just want to make sure I understand. So is this more on the value-added side, or is this on the transportation side? I'm just wondering, so we all know a long time ago, Landstar had a contract like this on the transportation side where they were the preferred vendor or carrier for FEMA in disaster relief. Is that what you guys have now?

No. What we have is -- I would call it a management process that incorporates cross-docking operations. So there will be an opportunity for both transportation as well as the value-added services in the cross-dock issue. What we really have is region four, which is predominantly the Southeast United States. And so from that perspective, we will work with FEMA on managing the throughput process from the supplier to distribution.

Okay. Got you. Then, maybe the last thing before I pass it off to somebody else. Scott, you talked about Mexico. I think 30% of the people now are in Mexico. Maybe just at a high level, what percent of the overall businesses Mexico related? And we know that there's a lot of new and expanded auto plants coming online down there over the next few years. What visibility do you have in terms of you guys serving those plants? And any color you can give us there would be helpful.

Well, certainly, what we have is contract business, specifically with General Motors. That portion of business, as far as revenue for what I would call the legacy LINC side of the business, somewhere in the 20% range. Again, the contracts have all just been renewed for that business, and most of that goes into 2017 and 2018.

Our largest customer is just under 10% of our business, Scott. And that would probably represent, as Scott said, about 20% of revenue -- 20%, 25% of revenues from the customer.

And as far as additional businesses down there, we're right now trying to find an enterprise salesperson to help us with that. We've been involved in several RFQs. We're waiting to get the responses from those. And lastly, we've just were presented, literally, last week, with an opportunity to work with a major retailer in Mexico to create cross-docking opportunities for intra Mexico-type business.

So we know about -- there's Honda and Mazda and Nissan plants opening up over the next, call at 12 months. Do you think that there's a realistic opportunity for you to be involved in those plants?

Our opportunity is as good as anyone else's. But it's very preliminary. The customers really haven't put anything out on the street yet, and so we're still in exploratory stages. The customers don't really know totally what they're going to do yet. Facilities are just under construction, particularly for Nissan and I think it's Aguascalientes. So no, it's too early for us to project.

Scott, Nissan is already an important customer for us, so we know a lot about what they do down in the South in connection with that plant.

Got you. All right, well, I will pass it on to somebody else. Thanks, guys.

Your next question comes from the line of David Tamberrino from Stifel. Your line is open.

Good morning, gentlemen, and thank you for taking my questions. I wanted to stick with what Scott started out with in the transportation services business. I was wondering how much of the year over year decline in loads could be attributed to the underperforming businesses that was shed versus the general economic malaise that we saw in the first quarter?

70%.

Those businesses were really centered on a couple of processes where we had very, very low profitability and tight margins. They were in the truckload group. And we don't see that happen very often, but occasionally, we do lose some of that business, and when the margin is that tight, we don't fight so hard to retain it if it is on very, very tight margins.

David, I'm going to dial it back. It was 55% of the transportation.

Okay. Of the loads? And you began shedding that in the fourth quarter?

No, actually, it started to trickle away probably sometime in the second quarter, and by probably the fourth quarter, we had lost a couple of those pieces of the business.

Okay. And then shifting over to value-added services, how much of an impact to the top line were the auto plant shutdowns that occurred in the first quarter?

We actually think it pretty much hit plan. The auto shutdowns, they typically get a slow start after the holiday season. And so we didn't really see a dramatic change from our expectations from the auto volumes in the first quarter.

Yes, and when we look at just pure value-added, in reality, were up 3.8% year over year. So, it was minimal.

Okay. And then with the additional facilities that you just brought online, is there any related upfront cost that should be coming through in 2Q '13?

What we really have, the operation that we've just started (inaudible), certainly, will have some startup cost. Those will last us about 30 days. So again, nothing substantial there. With the ramp ups and those kind of things that we're going through with Nissan, we really already experienced the hit within the first quarter. So we are operating now at an operating production level. So, again, we're okay there. And than lastly, relative to FEMA, our only cost so far relative to developing that is developing a business plan and laying out the model and really, currently, positioning and acquiring some software -- excuse me, hardware that we need to operate the facilities. And again, we will have a small bump in that, and we should see that by mid-May, should be finished.

Okay. And then for the contracts that you just renewed, what type of year over year increases have really been baked into that for the length of the contract, or is that variable on a year-to-year basis?

Well, it varies, particularly because of labor. Our typical labor increases run in the 2% to 3% range. Again, when we price, we price across the term of the agreement. So if we enter into a five-year agreement, we have contemplated all anticipated cost increases because we have to hold our contract firm. So those have some front-end load that dissipates over the term of the contract.

Is that up mid single digits, low single digits, or --

It would be in the, we'll say, 3% to 3.5% range.

Over the life of the contract. Okay. And then I believe I heard Don give an update on the integration process, but I feel like I missed some of that. What phase are you on? When do think you'll be finished throughout the year? And are there any additional costs that you are going to see in the second quarter or third quarter as a result of what -- the integration plan and how it's progressed?

There won't really be any additional cost to this because what we're doing is taking existing staff and rearranging the way the reporting structure is. So in other words, we've somewhat taken the same work force, reshuffled who calls on what part of the country, and then also, the reporting structure up from that level has changed. So some of our key operating Company Executives on the truckload side will have some changed roles, changed reporting responsibilities. But in a nutshell, we actually see, at some point, where there may be some reductions in cost over a period of months. Now, this is going to come in small bits. It's not huge. But what it does is make all of our field staff, our business development staff, a little more efficient. Coupling that with the efforts of our enterprise sales group, that helps put more feet on the street, in a nutshell.

David, I might add that in terms of staging, in might be fair to say that version 1.0 is behind us and implemented. We've done things already with respect to corporate identity. We've pivoted already in terms of back-office types of activities. Now, version 2.0 might be better described as continuous improvement mode, which is now that we've got what we needed to get accomplished done, now we are focused on, okay, what are the next iterations, what are the enhancements and improvements that go with that? And we'll be doing that, certainly, through the course of this year.

Okay. Is there any kind of back-office IT integration that needs to be done for the various business units? Has that been done? Is that on the docket?

There is some integration work being done. We are all on virtually the same type of -- well, I should say same vendor organizations. But we still use the iSeries programs and also some server-based programs. Some of them are easy to integrate; others will take some time. So we have, over the last 90 days, been working on that integration, and we'll see a continued series of changes as that goes forward. But we really don't see a great increase in expenses because we're already using both of those systems now.

Okay. And last one for me, and I'll hop off and maybe circle back if I have any other. For the shelf, once it becomes effective, is it pretty immediate, the timing of the secondary offering?

No. Maybe. (laughter) My son's an Eagle Scout, so the lesson is be prepared. We are doing a lot of things right now in that area both in looking at equity opportunities as well as even debt opportunities. So I'm just going to say stay tuned. We'll share with you as soon as we have something to share with you. But the form that that takes is still a subject of open discussion. What it'll give us, though is three years of flexibility on the equity side, at least going forward, to strike while the iron is hot.

Okay. Thank you.

Your next question comes from the line of Todd Fowler from KeyBanc Capital. Your line is open.

Great, thanks. Thank you for taking my questions, and good morning. Don or maybe David, I was wondering if you can give an idea of the magnitude of the wind energy revenue both in the first quarter of last year and the second quarter of this year just to get an idea of the comparisons that you're going up against.

David, do you have a numeric --

I don't here in front of me. I'm trying to find if I do.

What I can say is that we know that that particular agent is way down -- or that group of agents, I should say, probably in the neighborhood of $6 million.

Okay.

Todd, other than the agent relationships that were exited, that was the second-largest contributor.

Okay. That's helpful. That gives me an idea of the magnitude, and I can obviously follow up off-line if I need something more specific. And then, Scott, I was wondering if you could talk about, there's been a couple of comments on the value-added services and some of the contract wins. But I'm curious to get an idea how we should expect either the sequential improvement as we move into the second quarter, it sounds like you got some new contracts. Obviously, there's some seasonality in that business. Just for modeling purposes and how we're thinking about that, what would your expectations be for sequential growth, and maybe even to talk about how we should be thinking about the year over year growth for that, that segment line on an annualized basis?

I'll take the bold step first and talk about the year over year. We're targeting between 10% and 12%, and we think that we can achieve that. We were up 5% in the first quarter. The ramp ups that we see with the existing business are pretty substantial. The automotive business was very strong. Production plans seem to be holding in tact.

New business that we have achieved within the automotive segment will give us a good boost year over year. I like to say I don't need -- on the existing business, so far, we are hitting at 3% to 4%. Production levels that are forecast through the end of the year are exceedingly strong. Our retail business with Walmart is up about 10% so far this year over last year. We look to see that continue and certainly are looking for additional opportunities with that. More concerned about the agricultural side of the business. If I had a case, New Holland, potentially will be flat. So, overall when I look at what is strongly automotive, a little negativity in the agricultural and the improvements in the retail, again, on an annualized basis, between 10% to 12%.

Okay. That's actually very helpful, and I appreciate the comments there. And then I know there were a couple of comments made about selling the businesses on a combined basis. I'm curious, now that you're six months into being a combined Company, get a little bit more color on where you think you are in that process and the timing of when you'd expect to see some of the fruits of that labor and how they'd manifest themselves either in seeing more as transportation-related volumes. Is it more dedicated business on the transportation side, or is it more business on the value-added services side?

I will start out by simply saying that we have done a lot of work on both. We had a very successful bid in conjunction with an agent of long seniority with our Organization, and it looks very positive, but because the customer's overall volume is a little bit stagnant at this moment, they've chosen to just simply back us off. So we think we're right there. We think we probably will get it, but it's going to probably be backed off a little bit.

The second thing that I will comment about is that the joint effort of FEMA operation, we could never have done that in our previous life without the combined effort of the Universal's really good sales and truck side staff that has been doing government services for a long time. And then, selling the whole organization on the value of this project, bringing the LINC talent together with our talent, we couldn't have done that alone. So that is extremely important to us.

And I would also say that just based on this past weekend, in discussions with the agents, we went through what the expanded portfolio could mean. The level of acceptance -- I was really impressed with how the agents embraced the concepts. I learned some things where they potentially have some facilities on business where LINC would have been noncompetitive in the past because we go at a dedicated type of a business model, that our start-up cost and operating cost being dedicated put us out of it, where we are looking now at opportunities where we can utilize agents' existing pieces of business and expand those opportunities because, hey, it's shared cost. We can be much more competitive as we go forward. So I think we're just beginning to see the real opportunities. Hopefully, by the end of the next quarter, we can be more positive relative to that, but it's to be determined.

Scott, is most of the opportunity -- do you look at it as the agents selling the additional LINC suite of services, or is it a combination of, you've got the national sales team looking at some of the businesses that the agents have and working both ways?

The last comment. It works both ways. It really is just that. Plus, what we are seeing is, LINC has traditionally not been involved in the transportation management piece of the business. It's one of the items in the portfolio that we've really never explored. And what we are seeing are some, quote, opportunities to get now involved in transportation management, because the agents' customers are looking for better systems, better opportunities, and those kinds of things. So again, to be determined.

Okay. The couple last ones I have just from a modeling perspective, so probably for David. But the quarterly SG&A expense here this quarter, is that pretty representative of what we should expect going forward? And then if you have some thoughts on depreciation and interest expense going forward, that would help. (multiple speakers) There was a chuckle room.

That was a fair question. Thanks, Todd. (laughter)

I thought it was straight forward.

I would say that there's nothing really unusual in the SG&A of significance for the quarter. So, yes, it's representative. Depreciation, I think I mentioned a couple months ago, we spend anywhere from 2% to 3% of our revenues in CapEx. It can depend on where that placed as to whether or not depreciation bounces around a little bit. And particularly the value-added business, we don't know where the big investment project might be. But I think that's representative.

In terms of interest expense right now, our capital structure was put in place October 1. We've had it in place for about seven months now. The rate environment is about the same. Until you see our next 8-K that talks about a change, I'm going to say it probably should be about the same. It is all floating, though, so if the rate the environment changes significantly, that would obviously drive it.

Sure. Okay. That was all very helpful. Thanks again for the time.

Your next question comes from Scott Group from Wolfe Trahan. Your line is open.

Thanks for just taking a couple follow-ups. Can you just give us an update about any either auto contracts coming up for renewal this year, and then any labor contracts coming up?

From an auto perspective, we have no contracts in 2013 on the auto side, and that's specifically from customer contract. We have in -- up out into 2014, we have two in 2014. We don't envision any issues relative to those. And then the majority of our agreements from contract customer perspective are in '15, '16 and '17. And '16 and '17 more prevalent than '15. Relative to labor contracts, again, we just negotiated our first labor agreement in Mexico. That's good for five years. And all of our other contracts were really negotiated in 2012, so they will expire in '15 and '16.

Okay. That's really helpful. Did you -- can you talk about -- did you see any labor inflation as part of the Mexico contract? Or better or worse than you would've thought?

Well, we had -- no. It's exactly what we planned. And when I say that, certainly, pattern agreements exist in Mexico similar to what we experience in the United States. Our customer, General Motors, went through a negotiating process, so the model was kind of set. So from a pricing/contrasting perspective, we had a good idea of where we were going to be.

The issue for us was one that when we went to Mexico, we used an outside service provider. And that outside service provider certainly had some profit built into his model for us, which we, in turn, had to pass through to our customer. We have effectively cut out the middle person in this process. So we believe that from an operating perspective, we will be better because we'll see stability. And from an economics perspective, we should probably see some very slight improvement.

I just like to add, so there's two things in understanding what's going on with us and labor in Mexico. One is that for the first iteration, for your iteration of our business there, we had about 350, 400 people provided on a -- as Scott suggested, through a third-party provider. In connection with the new business awards that were launched beginning last year, it's now gone up to like 1,000 people. So we are in the process of moving on to expanded scope of service, anyway, multiple shifts, things like that, and also had this opportunity to bring onto our direct employee headcount that additional labor.

Got you. That's great. And, just last thing. So it sounds like we are going to be getting now transactional versus contractual margins. Can you give us a sense on how those broke out in the first quarter? And if you feel comfortable, how do you think about those two segments from a margin standpoint (multiple speakers) a year or longer-term.

I'm going to ask you if you would, this time, to deferred to the 10-Q. Otherwise, I would've had an incomplete earnings announcement last week. We do anticipate in future quarters having more visibility directly in the earnings announcement so I can answer those questions. Hopefully, in my comments, we do have more predictability, more forward visibility, and different things operationally that we can do in the concept business that drives capacity much higher, capacity utilization much higher. So I don't think it's a secret.

I think we do expect that business to be more profitable. We, right through the fourth quarter, continued to report Universal's business and the legacy LINC business separately. Transactional and contract are not exactly the same thing. What had been the specialized services or indirect freight forwarding, which was a transactional business, would be included now in the transactional -- the transactional segment, reportable segment. So you can broadly consider that as you are looking for it, and it'll -- you would expect the contract business to be more profitable than transactional.

Got you. Great. Thanks guys.

We have no further questions on the line at this time.

Ryan, thank you. We appreciate your coordination this morning. And we want to thank everybody for joining us and listening this morning and point you to the filings we've done in the last couple of days, including this morning, as well as our 10-Q that's coming out in early May. Thank you again.

Thank you.

Thank you.

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