Universal Logistics Holdings Inc (ULH) 2013 Q2 法說會逐字稿

Hello and welcome to the Universal Truckload Services, Inc. second 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 host, Mr. Scott Wolfe, Chief Executive Officer; Mr. Don Cochran, President and Mr. David Crittenden, Chief Financial Officer for Universal Truckload Services. Thank you. Mr. Wolfe, you may begin.

Thank you. Good morning, everyone. On behalf of the entire Universal team, welcome and thank you for joining us for the Universal Truckload Services Inc. second quarter earnings conference call. The second quarter of 2013 has been an interesting, at least to say the least.

The general economy is growing -- it's slow-growing, but yet from an industry perspective, we see automotive continue to improve. Certainly that's good news for us. This is our largest industrial sector. We've seen solid solar volume this quarter and improving recent projections of up to 15.6 million units for the year. Contrarily, on our other industrial sectors, we've experienced some softness.

Our second-largest sector, steel and metals, were generally flat, as were retail and consumer. But alternative energy, shipments have started to return in this quarter. The intermodal business has continued to grow and is up 15.5% over the second quarter of 2012.

Value-added services improved substantially, with an increase of 15% over the same period last year. Our largest segment remains transportation services, which was down 6.3% compared to the second quarter of 2012. Gains offsetting declines, revenue was essentially flat compared to the second quarter of 2012. David will speak to our financial performance in more detail shortly.

Our value-added business continues to perform very well for us. We've experienced solid and improving volumes with our customers and stable pricing. In addition, we have successfully launched several expanded business operations with customers, including Cummins, GM and Nissan. Moreover, we'll be launching three new [award] expansion programs in this coming quarter. We know our customers adapt to changing demand and our business model is flexible enough to allow us to adapt to their needs and still maintain margins.

We continue to focus on growing the contractual side of our business. In calendar year 2014, we will have two sales contracts up for negotiation. The first is an annually renewable contract we've held with Ford since 2001. The second is a two-to-three-year contract with Chrysler. We've maintained this business for the last 15 years. In addition, we've successfully negotiated six union contracts. With only one more to go later this year, we anticipate no issues.

With commitments in place on our existing value-added labor and sales contracts, well into the 2015, 2017 timeframe, we will focus on growth opportunities. The acquisition of LINC last year was a transformational acquisition. One of the opportunities is cross-selling our services to our customers.

As expected, sales lead generation from most value-added customers for truckload shipments began almost immediately. However, selling value-added service is more complex sales effort. So we began developing an enterprise sales process to complement our agent network and drive greater service content with our customers. With that we identified a need for new sales positions; four, to be exact.

We just added three new members to our enterprise sales team, covering Ontario, Chicago, and Mexico. The remaining open position is in Los Angeles and we should have a decision on that position shortly.

Overall, we set a timeframe for the integration process and we're pleased with the progress to-date, as we move towards the finish line. We will continue to execute our strategy, focusing on higher-margin business, long-term relationships, supporting and enhancing our agent network and building our enterprise accounts. We remain focused on refining and promoting our brand with our customers, our agents, our contractors with expanding service offerings.

Additionally, we're looking at several acquisition opportunities that fit our strategic direction, customer focus, service offerings, and geographical fit. We will maintain our discipline in executing that strategy. Finally, we were honored to have been selected as a 2013 Top 100 Logistics Provider by Inbound Logistics, The Top 100 Provider in Transport Topics and as a 2013 Great Supply Chain Partner by SupplyChainBrain and our customers. We appreciate the recognition.

At this time, I'll turn the conversation over to Don Cochran. Don?

Thank you, Scott. We would like to thank Todd Fowler at KeyBanc and Kelly Dougherty at Macquarie, both who have recently initiated coverage on UACL, as well as Armstrong and Associates, with whom we have just finished a site visit and case study.

Starting with our intermodal business, we have been strong throughout the first half of 2013. Revenue was up 23% in the first half of 2013 versus the first half of 2012. The pace of the increase slowed sequentially from 31% in Q1 to 15% in Q2, because of some short-term projects that were completed, but we expect it to have a strong pace throughout the second half of 2013.

Our transportation operations saw both ups and downs in revenue last quarter, depending on the industry. On the positive side, energy-related businesses improved, as wind energy projects returned and oilfield production increased. Automotive-related businesses did well. Building products delivered mixed results in the second quarter with residual construction outperforming industrial and commercial.

As it is, we continue to diversify our customer base, growing retail and consumer products, which have offset volumes. The volume impact will lag in other sectors. For instance, our metals business continues to lag through the first half of 2013. Rates decreased slightly on some volume lanes and accounts, although revenue was up seasonally from Q1 to Q2 in our flatbed business. For comparison, we had several projects repatriating heavy military equipment from the Middle East last year. We don't have them this year. This year, we expect to see lower volumes on government services and we expect the business to continue at slightly slower pace.

Our managerial structure has been modified in conjunction with new sales organizations. We have taken cost out, we trained our sales organization and are opening the door to additional sales support, driving business opportunity for our agents. We will continue to work on IT system upgrades and better control tools for our managers. We are seeing bottom-line impact from our cost structure improvements.

Universal is also improving our independent contractor business model to recruit more agents and truckers. Our average truck count increased by 10 units over last year and now totals 3,338. Yet we see the overall pool of owner-operators continuing to shrink. The general business conditions had not impacted our leased contractors, but they have lowered the pool of available freight with good margins available for our brokerage operations. We saw brokerage revenue drop down 29% in the first half of 2013 versus the first half of 2012, although margins have held the same.

Our industry's regulatory environment continues to evolve and increase in complexity. To help our independent contractors wade through these changes, we have added safety and recruiting staff and are developing driver and contractor training programs. One such regulation is the New Hours of Service rule, which we recently saw start. While we do not expect a major impact on our fleet, overall, we may have some exposure on the 34-hour restart. This change may put an undue burden on contractors who typically spend their weekends at home. So we are watching for that impact. Our business is always dealing with change and I remain as convinced as ever that the asset-light business model, using agents and independent contractors provides the flexibility that is one of our greatest assets.

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

Thank you, Don. Good morning, everyone. It's always a pleasure to be the bearer of good news. For the first quarter ended June 29, we reported net income of $14.1 million and income from operations totaling $23.6 million, on revenues of $264.2 million.

Our aggregate operating revenues in the first quarter were essentially unchanged from the prior year, when we recognized aggregate revenue totaling $255 million. However, as discussed, the slow pace of our transportation services in both the truckload and dedicated businesses is masking the continuing growth of our value-added services and intermodal services.

As reported, Universal's second quarter 2013 earnings per share, both basic and diluted, were $0.47, above both published and consensus analyst estimates. On a reported basis, this compares to $0.52 per share in the second quarter of last year. However, the more relevant second quarter 2012 comparison is the $0.35 per share, when you consider the proforma tax impact of the LINC acquisition last year.

Our per share performance is the result of a 22.9% increase in income from operations. On a proforma basis, our EPS for the first half totaled $0.85 per share, compared to $0.74 per share last year, a 14.9% increase. Therefore, despite flat revenue growth in the aggregate, a shift in mix towards more profitable logistic services and general margin improvements across our business are having the expected favorable impact on our bottom line.

Don and Scott just commented on the current environment and demand for the three service categories for which we break out revenues. In the numbers, our transportation services, as Don mentioned, declined 6.3% in the second quarter. The decline offset revenue increases that exceeded 15% in both value-added services and our transportation -- and our intermodal services, which is driving our profitability improvements.

Second quarter performance does suggest some firming of demand for transportation services in the quarter compared to the late winter and early spring. By way of illustration, in the first quarter of 2013, demand for truckload-based transportations have declined 10%. For the first half, our transportation services are down 8.1% from the first half last year.

When you look at the operating data we included with the earnings announcement, you can see that most operating metrics for transportation services are fairly stable compared to the second quarter last year. However, our total load count for transportation services, including both truckload and dedicated, which is the principal underlying driver of transportation service revenue, is down almost 9.5% in the quarter.

Our brokerage business has been slow this year and the lower revenues also continued to reflect underperforming agency relationships we exited last year. Fortunately, the margin impact of these revenue changes is less than the revenue impact. Perhaps more encouraging, as Don just mentioned, we are seeing some strengthening of demand for specialized hauling, including from our wind energy customers.

Our industrial steel hauling business improved in the second quarter, although it remains below last year's levels. Going forward, we don't think the New Hours of Service Regulations will have a significant impact on our Q3 results, but the continuing moderation of customer demand from our key metals and energy segments, along with an aggressive competitive landscape indicate that revenues from transportation services, in general, will continue to lag last year.

Revenues from our value-added services, as Scott mentioned, increased 15.1% in the second quarter of 2013, compared to last year. Extending some of Scott's thoughts in this area, the increased revenues from value-added services have been broad-based, with several new operations complementing net increases in demand from existing automotive and industrial customers.

Second quarter expansion compares to a 5.5% increase in the first quarter. Although the size of certain programs can impact the absolute growth rates between our accounting periods, we did experience firmer demand in Q2 versus earlier this year.

We operated at 44 facilities as of June 29, compared to 40 last year. Our average headcount, which is significantly impacted by growth in value-added services, delivered inside company or customer facilities increased by 16.2%.

Finally, I think the continuing double-digit growth of our intermodal service business is noteworthy. At the end of the first quarter, we were anticipating a slowdown in growth due to a transaction with one of our customers, as Don mentioned. However, comparable to our first quarter performance, we recorded solid growth in both customer drayage operations connected to these services, as well as our domestic container-related fare revenues. Although the actual number of loads is up a modest 3%, operating revenue per load increased to 11.5%.

Universal value-added services and intermodal services comprise 32.1% of operating revenues in the recent quarter. That compares to 27.7% in the comparable quarter of 2012. Primarily as a result of this shift in revenue mix, our reported operating margin increased by 168 basis points. Income from operations increased 24.5% to $23.6 million or 8.9% of operating revenues for the second quarter, compared to 7.3% operating margin reported last year and 7.8% in the first quarter of 2013. I do want to clarify that last year's comparable operating margin is really more like 8% when a second quarter 2012 adjustment is considered.

Now, let me take a moment to comment on the non-GAAP financial measures that we do use in considering our business. On the last page of the earnings announcement, you will see that Universal's EBITDA margin increased to 10.8% in the second quarter. This compares to a 9.7% adjusted EBITDA margin in the second quarter of 2012, a 118 basis point increase.

A comparative analysis of our income statement will show you that when calculated as a percentage of revenues, our cost of purchased transportation and our commission continues the trend I commented on during our April 29 conference call. Specifically, that our purchased transportation expense, expressed as a percentage of revenue, has declined and personnel costs and operating expenses increased, as our revenue mix shift towards value-added services.

We encourage you to take a look at our quarterly report on 10-Q around August 7, and if you do have a chance to review the Q, you may be interested in the additional information shown in connection with our reportable business segments. We will break out revenue, profit and asset information in two broad categories. First, our Transportation Business segment, which includes our truckload, intermodal and specialized services operations. Second, our Logistics segment, which is generally comprised of our value-added operations and our dedicated transportation services.

Our two reporting segments are distinguished by the amount of forward visibility we have regarding pricing and volumes, also by the extent to which we dedicate resources and company-owned equipment. For example, in the Transportation segment, revenue generation is a result of individually booked loads and we work closely with agents and owner-operators, as well as third-party carriers. Pricing may be established with certain customers in advance, but routes, loads and shipping commitments are not exclusive. In contrast, the Logistics segment has higher forward visibility, improved demand guidance by our customers and more dedicated commitments by [observed] operating resources. Supply chain programs for individual customers typically result in higher margins and returns.

So, in the second quarter, our Transportation segment generated income from operations of $7.5 million on $178.3 million of operating revenues, or a 4.2% operating return on sales. In contrast, we achieved income from the Logistics segment operations of $16.9 million or 19.7% on $85.8 million in operating revenues. Compared to the same period last year, operating revenues from the Transportation segment declined $12.1 million, but the decrease was substantially offset by an $11.3 million increase in the more profitable Logistics segment operating unit.

In future announcements and on future conference calls, we will continue to enhance our disclosure around these two segments. But these results demonstrate why we are laser focused on maintaining Universal's traditional business base with development initiatives targeted at enterprise sales, targeted vertical markets, and expansion of value-added services.

Turning now to the consolidated balance sheet, at June 29, we had $6.2 million of cash and we had $128 million of debt outstanding. That represents an $8 million reduction in borrowings since March 30. As I mentioned on our conference call three months ago, we are focused on coordinating capital planning actions with anticipated capital requirements and corporate development opportunities. Certainly, we want to ensure that we have adequate resources to pursue acquisition candidates that fit our strategic profile and to invest in other areas and other opportunities as they arrive.

On May 22, the SEC affirmed the effectiveness of our Shelf Registration Statement, which will permit us to offer securities to the public totaling $350 million. The Shelf Registration also registers up to about 6.5 million of secondary shares, called collectively by Universal's largest shareholder, which allows us to consider strategies to improve liquidity in UACL, which we believe will benefit all Universal shareholders.

More recently, on June 18, we announced our intent to offer long-term senior secured notes to private institutional investors, subject to market and other conditions. As you may have read in yesterday's earnings announcement, we have temporarily suspended this effort, due to recent debt market volatility. However, we do remain poised to consider opportunities to lock in interest rates that remain near-historic lows for extended duration.

In other corporate actions I wanted to just report to three other items real quickly. One, Universal's Annual Shareholders Meeting was held back on June 7, and at that time our shareholders, as anticipated, approved all persons nominated for election as Directors and they ratified our new accounts BDO for this year. More recently, on July 22, Universal filed an amended Schedule 13D with the SEC on behalf of our principal shareholders. That was in connection with an annuity payment due from one principal shareholder to another.

Third, yesterday we announced that our Board of Directors has approved a new dividend policy. I suppose leaving this item until last is what journalists will call burying the lead. But this management team does appreciate our Board's confidence in Universal's solid financial position, strong free cash generation and prospects for continuing profitable growth.

Targeting about a 1% yield to our shareholders, the Board initiated a quarterly cash dividend of $0.07 per share, which is payable to our shareholders of record on August 5, with the next dividend date of August 1, and which we plan to pay on August 15.

As you can see, although we have many irons in the fire, Universal continues to take significant strides to capitalize on opportunities before us in the transportation and logistics industry. We thrive on responding to complex customer challenges in effective ways and our managers, employees, agents and owner-operators are actively engaged in executing strategies that we believe are critical for our growth and value creation. We are pleased to have made important progress in the second quarter in securing key parts of our business for the near future and we look forward to seeing how our market penetration strategies play out in the next few quarters.

So let me stop there. We love the opportunity to answer your questions. So, Steve, could you please open up the lines.

(Operator Instructions) Todd Fowler, KeyBanc Capital Markets.

Great. Thanks. Good morning everybody and congratulations on the quarter. I guess, where I wanted to start, Scott, your comments on the three -- I think you termed them as new or expanded value-added services programs coming online in the third quarter. Can you give an idea of the magnitude of the revenue that you're thinking about and also what verticals the business would be in?

I'll start to answer the last question first. Two of the operations are automotive-related and one is heavy industrial. From a revenue perspective, the combined revenue for all three operations will be approximately $15 million on an annualized basis.

And would you expect to see a quarter of that, the $15 million come through in the third quarter or should that ramp up as the contracts come on line?

Typical with this type of business, it will ramp up. We will [ramp] to a run rate that we will probably see the greatest impact in the fourth quarter, not the third.

Okay. And, I guess, the other piece I'm trying to get to with the value-added services is just to try and get a sense of what will happen with the revenue sequentially. I'm assuming that there's probably some scheduled shutdowns and some volume changes between the second quarter and the third quarter. So, if I think about our revenue run rate, what would value-added services look like sequentially in the third quarter versus the second quarter with those moving parts?

First, I would guide you to look at kind of the growth rate relative to the third quarter of last year, because we do have that kind of seasonal impact, even the shutdowns that you mentioned. And I think (inaudible) Scott amplified as, but I think we view that the -- the run rate that we're on right now, the 15-ish growth rate is something we would expect to see in the third quarter next year -- that low-teens growth rate for the third quarter.

Right. I think in our last call and hopefully this will bear fruit, we were kind of asked, what we did expect as a growth rate and we looked at it. We were a little over 5% in the first. And I think at that time I said low-teens, somewhere between 10% and 12% and I believe that to be the correct target for us.

Okay. And then the last one I had on value-added services, Scott, you comment about the two contracts coming due in 2014. Is that just to make sure that we're aware that those contracts are coming due? Do you anticipate any significant changes, either in the scope or the size of those contracts, or how should we think about the retention of that business going forward?

The purpose in putting it in their list was to inform you certainly that we were going to face it. But we also told you that we've maintained these contracts for decades. We fully intend to maintain them. The emphasis that I'd like to place on it is to provide you an understanding that for 2014 we have a solid foundation that we can count on right now, based on the contractual commitments we've got. We absolutely believe we will be able to maintain our business and the margin rates associated with that business. And the new items that we are adding will be incremental [to us] into 2014.

Okay. That helps. And then, Don, I guess on the transportation services side, you gave a lot of comments about some of the things that were happening during the quarter and I think some commentary about expectations for the third quarter. I guess, do things stabilize as you move through the second quarter? Have you seen any sort of improvements in trends? Now you're into July, would you expect a normal seasonal movement into the third quarter or are things still kind of bouncing along the longer lower level?

It's kind of hard to say. We are just closing out our July period. So, what we see is a consistently lower level than what we experienced last year in transportation services, but it's about the same as it was in Q2. Perhaps it will turn out being a little bit better because of the mix. So dollars and transactions may be a little bit different, but it's flat, it's really not growing.

Okay. And then, do you say that you're seeing some wind energy shipments already coming back during the second quarter, or was the expectation there that is going to start to move into the third quarter and the back half of the year?

No, we saw it start roughly six or seven weeks into the second quarter. We expect we'll have a full quarter of wind energy in Q3 and Q4 and the pace there is encouraging.

And that should also have a favorable impact on the mix as well?

Absolutely, yes.

Okay. The last one I have and I'll turn it over. David, I mean, on the cost side, you gave some comments about as a percent of revenue and all that makes sense. I was trying to get an idea of -- anything different that we should think about on some of the non-variable costs, things like the general and administrative, the depreciation, as you move into the back half of the year? Are the quarterly run rates that you've had for the first part pretty representative of what we should see going forward?

Around here -- I think we made the point that everything is variable at Universal. So (multiple speakers) out there. No major change in depreciation, although we do anticipate some substantially, I'll say, larger increase in CapEx. We've been very restrained in CapEx through the first half of this year, kind of below our budget. And so, that's going to have an impact, kind of, in the fourth quarter, I would imagine.

And then with respect to SG&A, we were running at 3.3% of revenues in the first quarter -- the second quarter of this year. That compares to 3.5% a year ago. So a little bit better. We continue to focus on it. Scott is in my office every day on that subject. We did have some incremental expenses in the second quarter in connection with some of the activities that we did, would be the money markets or the capital markets.

So, it's actually maybe a little bit higher than it otherwise would have been reported. But we do see kind of continued progress in taking that down. I don't think you'll see it significantly in the third and fourth quarter of this year, but trending down.

Okay. And then, CapEx still 2% to 3% of gross revenue on a full-year basis? Okay.

Yes.

Okay, thanks a lot for the time. I'll let somebody else have it.

Thank you, Todd.

Kelly Dougherty, Macquarie.

Hi, thanks for taking the question. Just wondering if we can go in a little bit more detail on the transportation side of the business, the 9.5% load count decline you saw in the quarter. Was that market-driven or was there any kind of internal decision maybe to walk away from some business that you didn't consider attractive? So, you think maybe things should get a little bit better in the back half of the year, if maybe that was the case earlier on?

That 9.5% does include some businesses we eliminated, primarily in brokerage, from last year, so the year-over-year comparison does reflect some of that drop.

Can you give us any kind of sense on, how much of it was intentional versus maybe if you kind of take your whole revenue, I think about 6.3%, how you think maybe about what pricing will look like in the back half of the year versus your expectations for load count?

The load count will kind of flatten out, we think, and probably towards the end of the third quarter and early fourth quarter will be increased a bit. Now, we're just simply saying that based on the belief that the economy is not getting worse, but it's not getting better fast.

As far as rates, we will see a better mix of rates, because of the higher-end freight that is moving out and by that, I mean both oilfield work and wind energy. So, the pricing will look a little bit better, load counts will improve slightly, but still it's overall being driven by the economy. We would like to see a better industrial economy.

And just to maybe add a little bit of granularity to that, Kelly, the brokerage relationships that we exited on a first-half basis was about $11 million of the decline. For the second quarter specifically, it was about $4 million. That was done -- that action was taken in the latter half of the year. So, we do see that negative impact kind of going away as we work through the end of the year.

That was helpful, thanks. Can you also give us kind of a sense of, from a dollar perspective what you are expecting for wind, and maybe in the second half of the year and then maybe as you look into 2014, if you think that that continues going on, just kind of give us a sense of perspective for that business?

The pace will increase in the third quarter and we've been told that it will not be quite at the 2012 pace by the fourth, but pushing towards it. There is an order book and a prep time to get these orders done. So we're at the mercy of the builders and manufacturers, and the erectors, I guess, of windmills, but they're all prepping for pretty strong business and so we think it's going to improve.

Can you put any dollar numbers around those numbers -- dollar amounts around those numbers?

(technical difficulty) I think in this quarter, it was almost $5 million in this quarter. So, given that that was really only half of the quarter, perhaps maybe a $10 million quarterly pace is what we would expect for that piece of business.

Okay.

And in the first quarter, we had $900,000 of that business. So there is a significant difference.

Great, that's helpful. And then, just a question about your interest in kind of maybe streamlining the different trucking subsidiaries, how we can think about the progress there? There may be any incremental costs or once you're able to complete that how you think about maybe growth or any kind of cost savings if the business is a bit more streamlined?

Internally, we call it our [de-saddling] project and we mentioned that in previous releases. But what that involves is streamlining our field organization. And while we will continue to have four separate full-truckload operations within that transportation group, there's reasons for that. Some of that has customer loyalty, agent loyalty, and some other things, but what we're trying to do is eliminate the overlaps in how we market the business and how we manage the business.

So, ultimately, that group is reporting on a North-South basis to me and we then try to make sure that we have eliminated -- for example, two region managers on separate companies driving past each other in the afternoon on Interstate 20. So, the realignment of the territories and the structure eliminate some costs long-term and it streamlines the reporting structure.

Kelly, the back-office activities for all of our operational transportation companies are already consolidated in our headquarters building.

Okay. So when, I guess, will that be complete and is there any way to think about maybe the cost savings on an annualized run rate that you guys might be able to enjoy from this?

Well, in the lead up to the acquisition of LINC last year, that question was framed several times in different ways. We don't -- we did not see nor did we predict operating synergies greater than $2 million, because of the high degree of variable cost that's already in the business models of both companies. We're actively working now kind of through all of this kind of second-generation programs to streamline various processes in the Company, but that's an ongoing process. So we've worked through the immediate opportunities for cost reduction. We've already seen that reflected in the results. We're not anticipating several million dollars more in the quarters ahead.

Okay, great, thanks. I just have one more then. You mentioned you're still actively pursuing acquisitions. Maybe if you could give us some kind of sense of what you're most interested in, if you're looking on the value-added side, intermodal, trucking, maybe something else altogether, just kind of a sense of, in your pecking order, how things stand from an acquisition perspective?

Yes. It's a broad perspective. We've certainly told everybody before that we want to and had significant interest in growing the value-added business. So there are a candidate or two that we're looking at that would fall in that particular category. We were also looking at a candidate that would help us again in our intermodal segment, which is another critical piece for us from both current contribution and what we think the future holds. So someone related to intermodal type business that would add to our existing concentration. Generally, that would be the areas that we'd look at.

Kelly, we've also talked about Mexico and even though our interests are broad and focused, so I don't think you would scratch your head when we announced an acquisition. We would -- it would make sense in terms of either geographic scope, customer scope or service scope.

And is there anything that you're looking to acquire? I know you want to kind of broaden the industry verticals. So, might that be something as well, like a company that might have more focus on one of these key verticals that you're focused on?

Generally, certainly, that would be one of the attributes that we've looked for in any acquisition.

Okay, thanks very much.

Tom Albrecht, BB&T Capital Markets.

Hey, good morning, everyone.

Hey, Tom.

I had kind of a couple of cost questions and couple of other questions. Given that we're all still kind of getting familiar with this seasonality of your business in that, I want to make sure we've got the best possible estimates going forward. Would you expect that the September quarter's earnings would be equal to or greater than the June quarter or more likely less, given some of the traditional plant shutdowns in automotive and machinery?

We're not at the point yet, Tom, where we're going to kind of predict our quarter-ahead EPS. I think from a business perspective, as we commented, our growth, in the third quarter of this year, will be kind of look back to the third quarter of last year in terms of seasonal impact and I think you can probably extrapolate from our margins kind of we'll go in terms of EPS. We do look at it very closely, but I think you do have to recognize that the second quarter is typically, across the Company, a solid quarter, third quarter. Particularly on the value-added and the dedicated side, has a little bit more of a downward seasonal impact. I know that doesn't answer your question, but I hope you will accept that.

Yes. Well, I mean that's at least hopeful. I mean this year may defy a little bit, because at some point, transportation services is going to bottom out, some of the things Don shared, et cetera. So, that's a good guy. And then maybe value-added and dedicated is seasonally a little bit of a bad guy, that's too negative. But you know what I'm saying?

So yes, I would tell you -- I'm sorry to interrupt.

No, go ahead.

Well, particularly with -- you've bee very gracious in covering Universal for a long time. Other folks on the phone that have already spoken are the people listening. There are several people that express interest. We look and track kind of analysts expectations for where we're at and relative to that, it's something that I pay attention to. So if we started -- if there's starting to be a substantial disconnect and we had a need to communicate something from the public's perspective, we would do that, but at this point we're just -- we would rather continue to meet or exceed everyone's expectations just through our operating performance.

Setting aside seasonality, the rate of growth that you had in value-added was very impressive, 15% revenue growth. Would you expect double-digit again in the third and fourth quarters? Comparable to that or more like 10% to 12%? Obviously, you've got the new three projects that Scott described too?

Right. But in our discussions as well and using your point, if we adjust for some of the seasonality that occurs, some downtimes due to plant changeover to new models, et cetera and we add back in the new gains, we would net as -- we'll try to express people, we believe we could see a low double-digit 10% to 12% range.

Now, I guess the reason I asked that too is the 15% growth in VAS this quarter was impressive, because it was against a quarter with 5.5% growth a year ago, but this third quarter comps against something that was down 15% a year ago. So, I mean it looks like it could be pretty nice quarter. That's why I asked the question.

David, on the depreciation, I couldn't tell quite from your answer, if you said the depreciation is going to hang out around $5 million or a quarter or we actually had it going up a little bit?

I think it will hang around $5 million for the quarter. I guess my point is, particularly when you look at our CapEx for the first half, it's been restrained, it's been below the 2% to 3% range. And we do anticipate making some investments, both in low-end stock as well as some value-added opportunities later this year. That will not necessarily show in the third quarter. So I think it's more of a run rate depreciation in the third quarter. And then you're going to start to see it flow back up as we start to make investments. As a general rule, though, depreciation, the way I think about it Tom is, it doesn't move that much as a percentage of revenues, because we do kind of keep it within in that 2% to 3% investment category. It would be unusual for us. We would be doing something different in our model if we stepped too far outside of 3%.

Yes. Now I hear you. And your average interest rate right now is approximately what, blended?

Blended is, I am going to say 2.5%.

Okay. And then, lastly, Don, I think at the beginning of the year, in January, you expressed a desire to grow the trucking fleet about 600 units. Does that still make sense to think about that? I don't think we have that modeled, because I was a little skeptical of that, but what are your thoughts?

From a performance point of view, I'm skeptical too, Tom. We're going to be able to recruit more independent contractors and we are adding some Company equipment to the mix. So we're going to have more trucks, but 600 is probably -- especially where we sit in the middle of the year, is overly optimistic. So we will probably tamper that a little bit. It may take us longer to get to that 600 trucks, but it's still a goal. A lot of it involves improved recruiting and retention processes, as well as figuring out how to broaden the scope of the things that we do.

So several steps here and there are trucks available. We are seeing them, we are talking to them. So our recruiting program has been pretty effective. Our turnover rate remains better than the industry average, but we simply have to improve both sides of that.

Yes, and I hear you. It's a perpetual challenge. And then, lastly, I know you did give some guidance, or at least some thoughts, not guidance, on wind and where the revenues might be headed. But as a reference point, what was Q4 wind revenues of 2012? So we get an actual number before I got weak.

I don't have it right in front of me, Tom, but we had a great year last year.

Yeah.

It will probably be -- I know it was low-double digits, but I'm not sure exactly what it was.

Okay, that's all I have. Thank you, guys.

Thanks, Tom.

Scott Group, Wolfe Research.

Hey, thanks. Morning, guys.

Good morning.

So just a few things more -- just a follow-up on that last question on the owner-operators. Don, do you have an owner-operator account in this quarter and then the year-ago period?

I think, at the moment, we're at 33, 38, what I think I said and that is up about 10. So it's not substantial, but it's positive.

Okay, perfect. In terms of some of the new value-added contracts, should we think about those as having the same kind of protection on the downside if the volumes and revenues aren't showing up like we think it, typically about the auto side?

We've been pretty methodical in our pricing approach to all of our business, historical and new. So, yes, we would typically have a fixed and variable pricing model. We will be very consistent in that in the value-added services.

Okay. Great. On that 15% topline growth on value-added this quarter, can you break out the traditional auto versus the non-auto within that and did we hear right that you think you can kind of sustain that 15% rate in the third quarter and then maybe it gets better in fourth quarter as some of these new contracts kick in, is that the way to think about the growth rate from here?

My notes show me that Scott said 10% to 12% twice, so I am going to just repeat that and I think going into fourth quarter, probably about the same.

Yes. As far as the breakdown between auto and non-auto, I don't have that data in front of me and I would prefer not to speculate at this juncture.

Okay. Maybe we can get that offline. And two last things. Within the transport side, Don, you mentioned mix a little bit. Can you just help us think about what's going on in Van versus Flat when you think about maybe some signs of things getting a little bit better, are you just talking about more on the Flat or the Van side?

The core of the agent business is still flatbed business. So -- and just looking at where we are, that means that we're looking at heavy industry. That means the economy has to be doing well, people building machinery, capital goods, construction materials. That's what really drives that transportation business. We have made improvements, however, in our Van operation, in that we have more commercial, retail account in the mix. Our automotive improvements also sit in that Van operation. So, it's good to be in the Van operation and we've done that for a long time with our automotive exposures.

So, those are the most optimistic things. Again, we're hoping that heavy industry picks up a little bit and that means that our economy needs to grow.

Okay, great. And then lastly, the Chrysler deal next year, what percent of the business is that and any updates on some of the new plants coming out in Mexico and whether or not you're able to penetrate those?

Relative to the Mexico, too early to tell there, because like you say, they're coming on and the manufacturers are focusing on getting facilities built and equipment in place and those kinds of things. So, from a logistics perspective, we haven't truly addressed that yet. What was the first one?

Well, from Chrysler's materiality perspective, our largest automotive customer is not Chrysler, it's less than 10%. Our largest -- I'm not even sure Chrysler is one of our top five accounts.

From a revenue perspective, it was approximately -- it should be approximately in the $15 million range.

For that particular (multiple speakers).

I think to reinforce Scott's earlier point, from a strategic standpoint, we have put to rest some of the things that we've had to focus on in the second quarter in terms of the portion of our business that generates a lot of our profits. And so that gives us more management time to continue to focus on new initiatives that we think are very value-enhancing. I mean, it's not suggestive that we're doing a lot of things and we are, but for us it's really important that we lock down on some of these key legacy projects that we have to address. And now having kind of put them to rest for a few years, we get more energy and time to allocate to enterprise sales development, brand unification, and then some of the other things that we've talked about on the last several months.

Got it. Okay, thanks, guys. Appreciate it.

David Tamberrino, Stifel.

Great. Thank you. Just to piggyback off of the Mexico question, obviously focused on getting the buildings equipment put in place. But when do they start thinking about wanting to have a value-added service provider kind of be a part of the process? Is that a couple of months before production or just kind of -- could you frame our expectations of when you may be in discussion with the new guys coming online in Mexico?

Beauty is kind of in the eye of the beholder. It will vary. They can't wait to two months before the start of production. They have to make the evaluation of the entire material flow process that they're going to utilize. Historically, the manufacturers that are going in there do use third-party logistics companies on the front end of the business. From a planning perspective, they'll do most of that internally. From a selection perspective, I would tell you, it would be eight months to ten months in advance of production.

Okay. So, probably expect to have some conversations coming soon then?

Next quarter.

Yeah. Next six months, okay. And then, I don't know if it's been touched upon yet, but can you kind of flesh out the new enterprise sales strategy that you've laid out? I think you're hiring four sales guys. How much of an impact is that going to have? Is that going to be all in 2014 and 2015? And how will that add to the long run secular growth rate?

We would certainly expect that the benefit of the enterprise sales group, since it's still forming, will be expected, probably based on what we typically see lead time from lead generation, etcetera, we'll see the results of that in the second half of 2014 and into 2015.

We're going to use more or less a geographical approach to enterprise sales. We're hiring experts in specific regions that have logistics expertise. I was just -- it's following from our customer base, some with very special skills relative to international freight forwarding and NVOCC type activities.

So, again, based on lead development, we really see them providing true benefit to us in the second half of 2014 and later.

Okay. And then maybe just one last one. Looks like the tax rate has been about 38% for the first half of the year. Is that probably a good expectation going forward?

Yes.

Great. Thank you.

Tom Albrecht, BB&T.

Hey. Just kind of thinking this through a little bit more. So on the intermodal, the growth rate had slowed, and David had talked to me about that a little bit in the second quarter on a year-over-year basis. Normally, the intermodal is a pretty big second half of the year business. How should we think about the growth rate there, either in terms of loads or revenue growth? Should be more like the second quarter on a year-over-year basis, 14%,15% or -- I feel a little bit clueless here again this -- till we get through the full year of you guys being together, learning all the seasonalities will help?

Why don't you describe a little bit about earning momentum (multiple speakers)?

Yes. Some of the swings, Tom, had to do with the fact that we purchased domestic boxes last year, as you probably recall.

Yeah.

So, we have been marketing our domestic intermodal services in a different fashion than what we had previously, and we had always done some domestic intermodal. So, what we enjoyed in the first quarter was some one-time opportunities with that equipment as opposed to every day, every week business. So as that terminated, that's why we've been talking about a drop-off. However, we have, again, the enterprise sales workforce out, pushing that same product, process. And as Scott referred to, some of that business is picking up, but it's a little bit hard to predict the pace on the domestic intermodal piece.

Our international business looks pretty strong. Quite honestly, third quarter and early fourth quarter has always been strong on the international side and that's where we differ from some of the other guys who report intermodal numbers. Three, four years ago, we were almost 100% international versus the domestic. So, as a summary, the domestic intermodal has changed how we predict and look forward. Does that answer --?

That's helpful at least. I mean, I'm just trying to blend art plus science here, if you will. So, that's helpful. And then I'm going to just have one more and I've got to hop to another call. But back on the value-added services, so trying to get this revenue right for the third quarter, and I know Scott kind of talked about 10% to 12%, but except for kind of years where automotive is falling off, your value-added services grew sequentially in the September quarter from the June quarter. I don't know if that reflected contract wins, but 10% to 12% revenue growth, it would be definitely a sequential fall this year and it just seems inconsistent, except for bad years.

The challenge of value-added service and we touched on that a little bit, I guess, in my formal comments. Yes, it is -- it can be driven around at the margins by when we launch a program and we have benefited in recent years from the timing of those losses. I don't think we have that effect, looking at the third quarter of this year versus the third quarter of last year. So that's kind of why I'm kind of refocusing you on just the third quarter of last year as the starting point.

Okay. All right. Well, only time will tell. But I appreciate all the commentary. Thank you.

Assuming there are no further questions at this time, I'll turn it back to Scott Wolfe for any closing comments.

Well, thank all of you for your great questions, your interests, your participation in this earnings call. Wish you a really great day and have a fun weekend. Thank you.

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