Universal Logistics Holdings Inc (ULH) 2014 Q1 法說會逐字稿

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

Thank you, Tiffany. Good morning, everyone and welcome. Thank you for joining us for the Universal Truckload Services first-quarter 2014 earnings conference call. We will begin our discussion with the top line for the first quarter of 2014. Overall, revenue was up $31.3 million, or 12.6%, to $279.4 million for the first quarter of 2014 over the first quarter last year. The improvement was driven by an increase in base transportation revenues of $12.9 million over the first quarter last year and the additional revenue from our most recent acquisition, Westport.

The overall increase for the quarter came about despite a $3.5 million decline in value-added service revenue, which came primarily from two contracts that we spoke about last quarter. One of those was the insourced business by an industrial customer and the other, an aerospace customer that was lost due to the government sequester. Likewise, our intermodal business experienced a $3.3 million decline in revenue and that was predominantly due to an affiliate LTL customer's change in strategy and partially offset by revenue growth in our intermodal drayage business.

These changes continue to evolve and have resulted in a shift of our business mix. Transportation revenue now accounts for 64.4% of total revenue. Value-added is 24.9% and intermodal is now 10.8% of total revenue. First quarter this year continued to see the impact of weather we saw in the fourth quarter of 2013. Here in Michigan, we experienced the snowiest winter on record of 133 years with the coldest average temperatures in 36 years. There is no question it had an impact on our operations, slowing productivity and compressing margins. EBITDA was impacted negatively and David will speak more specific detail in that in just a moment. January and February were among the worst in history, but fortunately in March we saw operations begin to return to normal.

To provide greater color on the business, we will now talk about our industry verticals where we have within our business. As you may know, SAAR forecast for 2014 weakened somewhat from the 17 million units reported at the end of last year to 16.4 million more recently. However, aside from the weather-related impact, we have continued to see solid revenue performance from our automotive vertical. We also saw strong performance this quarter from our retail and consumer goods over what had been a flat period for the last few quarters. Steel and metal business remained flat over the fourth quarter of 2013 as did energy-related revenue, which has leveled out after several quarters of increasing growth.

In February, we discussed three open customer contract negotiations. As an update, we successfully negotiated an annual extension with one OEM, which will allow us time to negotiate a multiyear extension in the coming months. Secondly, we also reached agreement with a tier 1 automotive supplier on a cross-dock operation where we expanded the scope and complexity from the last contract. We expect a signed agreement completed in the next couple of weeks. Unfortunately, the other OEM annual contract was not renewed. They decided to insource the business and utilize their own internal excess capacity to provide the requirements. We will work with them to transition the business over the coming months. From a labor contract perspective, we successfully completed our last labor contract negotiations for the year. Our next labor contract discussion will be in the first quarter of 2015.

We continue to ramp up the integration of Westport acquisition focusing on back office, operations and reporting. We have met with Westport's customers and identified several opportunities to further strengthen the relationship by complementing their current business with additional capabilities from Universal's broad range of services. Westport continues to perform as anticipated.

We continue to focus our efforts on growth, both organic and through acquisition. We have opportunities to cross-sell within our current organization and have a full pipeline of acquisition prospects in front of us to expand and fill our eight key customer verticals, acquire new customers and new services and/or fill in key regional markets. Moving into the second quarter, we are seeing a return to normalcy in our operations. Transactional truckload business is expected to continue growing and we expect pricing to strengthen as well. Don will share additional detail with you again in a couple moments.

Existing dedicated transportation is undergoing an extensive review -- higher cost of service, including increasing purchase transportation costs and customer changing demands. This is forcing us to evaluate this business segment. We anticipate some interim shrinkage in revenue due to pricing renegotiations. However, we feel that the results will be very good for us. Concurrently, we will be incurring startup costs associated with a major transportation management award that is based on dedicated transportation, substantially provided by Universal.

Previously, I mentioned the decision of an existing OEM to insource our operation. That process will impact our cost of service, new close-down costs associated with the transition. There is also residual revenue lost in the second quarter from that insourced industrial business we talked about earlier and was first announced in the third quarter of 2013. For the remainder of the year, we see growth in the mid-single digits range from the value-added services side among the mix within the value-added business segment. David will provide greater detail in his review of our financial projections. With that, I will turn the discussion over to Don Cochran. Don?

Thank you, Scott and thank all of you for joining us. The slow start in our truckload business in January was not just that weather held us back, which is not uncommon with so much of our business in the upper Midwest, but it created a larger concern when it lasted all of January and continued into February. In a sense, we could feel improvement in much of our core truckload, but as demand built, we just simply had to wait for improved conditions on the road. Our operating expenses in the first half of the quarter were high, but they improved after that. The tough operating conditions hurt load counts. Total revenue, pricing and load counts improved considerably by the end of February.

We are excited to see our rates improve year over year. The business mix improved, including conditions in our energy sector, both wind and oilfield services. Both of these businesses have contributed to significantly better rates per mile. Our average rates per mile improved over 10% in the year-over-year quarterly comparison. As the quarter moved forward, demand continued to improve. The increased average rate per mile improved 10% year over year helped offset the slow start. Load counts were off 0.5% solely because of the early quarter conditions.

We believe the pricing improvements will hold especially in the flat bed industrials as truck demand seems strong and the truck shortage is starting to have an effect on pricing. Customers are concerned about capacity. We are seeing discussions develop about dedicated capacity in surprising places. Our brokerage business reflects higher demand, but compressed margins with purchased transportation costs rising by nearly 5% year over year. Year-over-year volumes on brokerage are down about 7%, but they improved sequentially as the weather improved and the quarter advanced. We expect tight capacity going forward and we will need to work hard to keep pricing in brokerage ahead of demand as capacity tightens further.

Our international intermodal business improved sequentially from the early part of the quarter, showing rate improvement in the low double digit range. Volumes improved as the quarter went on. We lost considerable volume however on our domestic intermodal business primarily because of a change in operations from one account. That equipment, which we own, remains important, but we have shifted some of that capacity to road service and to other accounts. It will not impact our operating costs.

In summary, demand improved even with the weather challenges and we saw double-digit rate per mile increases because of the demand and business mix. We expect that improvement to continue into the second quarter until the wind energy business catches up with a restart of that business in May of 2013. Pricing will improve but at a slower pace.

Metals were challenging because of the weather in our core metal market. Capacity in steel is soft but demand relatively strong so we will see hauling capacity tighten as the metal markets move to higher production levels. Tight capacity will continue and it will be our key challenge. Truck turnover and recruiting will continue to be the focus of a large part of our Company. We have increased our owned fleet and we expect that to continue as the year goes on. We are putting lots of effort in owner operator and truck driver recruiting and retention. Regulatory conditions and an aging workforce will take drivers and independent contractor capacity out of the marketplace. Hours of service have already downgraded truck performance as much as it will at this point. Our next challenges are implementation of medical examiner standards, sleep apnea testing and electronic logging devices. We started using electronic logging devices in some areas in 2013, but overall we are still on the early side of implementation and expect to reach 30% of our fleet on ELDs by the fourth quarter, well in advance of the deadline in 2016.

Looking forward, we expect increased demand and tighter capacity to give us an opportunity for better pricing. We expect the organic growth rate to be in the 5% to 7% range. Transportation margins will improve with the exception of work that runs through our brokerage operations. Our intermodal businesses are servicing mostly international trade accounts. The import/export markets are improving, but Asia is running at a slightly slower pace. Domestic intermodal has plenty of capacity, but is moving to rail at a slightly slower pace due to rail service times at the moment. That may slow the migration to some extent and allow improvement in long mile freight. Our drayage business grew at 8.4%. Our rate per mile increased $0.66 or 16% in Q1 2014 versus Q1 2013. Our international intermodal should grow at a high single digit pace in the next two quarters.

Visibility into the later part of the year is not as clear for our truckload business. We know capacity will remain tight allowing rates to look better year over year. If the predicted 3% improvement in GDP holds, we would expect at least 3% increase for the fourth quarter and the later part of the year. It looks like a good year for those who have capacity. With that, I will turn over the conversation to David.

Thank you, Don. Good morning. As we highlighted in yesterday's earnings announcement, our first-quarter financial performance reflected a mixed bag from a revenue perspective and a challenging operating environment that impacted aggregate operating margin, particularly in January and February. Universal ended 2013 with the acquisition of Westport, which we think will be an important component in our growth strategy in the years ahead.

Over the course of the first quarter of 2014, revenue momentum increased in transportation services with 7.7% year-over-year revenue growth. Revenues from value-added services increased 45.4%. However when Westport's results are excluded, revenues from value-added services actually dropped $3.5 million, or 7.4% from one year ago. As Scott indicated, this was the direct result of the cessation of an operation for an industrial customer and an aerospace customer. And while our overall intermodal revenues were down 10% from a year ago due to one domestic intermodal account, as Don indicated, our international drayage business is enjoying strengthening demand.

So for the first quarter of 2014, we reported net income of $8.1 million on income from operations of $14.6 million and revenues of $279.4 million. This compares to net income of $11.4 million on operating revenues of $248 million in the 2013 first quarter. Earnings per share were $0.27 compared to reported EPS of $0.38 in Q1 2013. Our reported revenues are near the top of the range that we'd estimated in our March 24 press release. Our aggregate Q1 operating revenues exceeded the quarter that preceded it when we recognized aggregate revenue of $259.5 million. However, Q1 operating income of $14.6 million and EPS of $0.27 per share compares to operating income of $19.1 million and EPS of $0.38 in the immediately preceding quarter. So the impacts of margin compression is obvious. In Q2, we are focused on restoring margins to historical trends.

Universal offers extensive capabilities in transportation and logistics. The strength of our Company includes the flexibility of our asset-light business model, our expanding breadth and balance across several industry verticals and the solutions that we tune to unique customer demands. Even though margins were compressed in Q1, particularly in our logistics segment, we saw certain bright spots, including Westport, which as Scott said, met our revenue and profit expectations.

A comparative analysis of Universal's consolidated income statement shows that when calculated as a percentage of revenue our Q1 cost of PT and commission continues recent trends. Specifically, our PT expense expressed as a percentage of revenue declined to 50.3% compared to 54.1% in the fourth quarter of 2013. Similarly, operating expenses not shown separately increased to 10.9% of consolidated revenues. In recent months, the shift in our aggregate business model reflects the consolidation of Westport, a value-added logistics business, into our results.

Let me further tear apart our reported results by referencing the detail that appears on page 6 of the press release, which shows the performance of Universal's two reportable segments, transportation and logistics. Universal's logistics segment, which includes our value-added services and dedicated truckload operations, earned $9.7 million in income from operations on $103.9 million in revenue in the first quarter. Operating revenues were up 32.4% from Q1 2013 primarily due to the Westport acquisition. However, profitability declined to $9.7 million from $13.8 million in the prior year as operating margins declined to 9.3% from 17.5% in Q1 2013 and 17.9% through 2013.

Excluding $3 million earned by Westport in Q1 on revenues of $25.3 million, aggregate revenues from our legacy logistics businesses were basically flat at $78.6 million. Income from operations without Westport was about $6.7 million, or 8.5% of logistics revenue in Q1, which compares to 17.6% of logistics revenue a year ago. The flat overall revenue performance reflects the net impact of new business offsetting the operations that ended last year while the margin compression represents cost, productivity and capacity challenges in January and February.

For some context, the customer service challenges we experienced due to the unusually severe weather in January and February impacted the profitability of our ongoing value-added services from a margin perspective more severely than in the second quarter of 2009 when two of our major automotive customers were undergoing restructuring.

In Universal's transportation segment, which includes our agent-based transactional truckload transportation, along with Universal's intermodal services, brokerage and specialized services, revenues in the quarter ended March 29 increased to $175.3 million from $169.5 million, up $5.8 million, or a 3.4% increase. However, income from operations declined approximately $400,000 due to a 40 basis point increase in OR from 94.3% to 94.7%. As Don described a moment ago, favorable pricing has emerged in part to offset tight capacity, which we do think will continue. However, we do think the impact of last year's new hours of service standards are now fully reflected in the spread.

As previously discussed, the purchase of Westport is subject to a post-closing adjustment that we now expect to finalize in Q2. I will mention here that earlier this week the Company that had been the ultimate parent of Westport, [Brazilian Steel Forger Cisco], announced a restructuring plan. Cisco continues to provide Westport with certain raw materials and at this time, we expect no interruption in service.

Footnote 2 on page 75 in our 10-K filing shows that Westport generated $9.5 million of pro forma operating income in 2013 on $88 million in revenue or a 10.8% return on revenue after the pro forma impacts of intangible amortization is included. We have completed the first four months since we acquired Westport and we look forward to great opportunities. In Q1 2014, Westport did achieve its plan achieving income from operations totaling $3 million, which includes about $2 million of amortization on operating revenues totaling $25.3 million.

Turning now to our consolidated balance sheet, we held about $7.3 million of cash, $11.8 million of marketable securities at March 29. Our borrowings totaled $235.5 million and capital leases that are associated with Westport totaled $4.3 million. Capital expenditures in the first quarter totaled $10.8 million, which is up from $6 million in the fourth quarter of last year. However, the recent transportation management award that Scott mentioned may accelerate and even increase our planned 2014 investments in rolling stock to support this dedicated transportation opportunity.

In helping you analyze our overall prospects, I guess, and financial performance, I would direct you to the 10-K that we filed on March 14, which includes detailed descriptions of our service offering. Next week, we will file our annual proxy statement and the following week, we will file our quarterly 10-Q, which provides some additional detail behind the financial performance that we are talking about this morning.

Finally, I would point you to the supplemental information to the earnings announcement itself, which includes other key operational data, our calculation of earnings before interest, taxes, depreciation and amortization as an example. You may also be interested to know that Don and I are attending two equity conferences in May, the World Conference in New York and the Key conference in Boston. We may see some people there that are listening to us this morning.

Don and Scott spoke to general themes that will drive our financial performance throughout 2014, including good demand fundamentals in our key verticals, also stronger pricing for our truckload transportation services, which have seen double-digit price increases in selected markets. These positive drivers are offset by ongoing capacity constraints related to the number of qualified drivers in the specialized markets that we serve. But we also see improving quarterly comparisons in our intermodal business as we move beyond the Q1 impact of a low margin business that we discontinued last year and as the international drayage business grows with the ocean freight demand. And finally, continuing performance by Westport, which we expect will contribute revenues of somewhere between $98 million to $102 million to our consolidated results in 2014.

Overall, we expect consolidated 2014 revenues to increase about 10% to 12% over 2013. This is comprised of aggregate full-year growth at about the rate of GDP growth for our transportation services and intermodal services. And 50% to 55% growth in our value-added services, including Westport, which accounts for all but a few percentage points of the value-added increase, but which also ignores prospective new business awards and recent awards that we have not yet fully quantified.

From an operating margin perspective, we do expect profitability in each of our transportation and logistics segments to rebound to the levels of recent quarters. However, we are not quite there yet as we approach the end of April. In our logistics segment, which is the larger of our two operating segments in terms of income contribution, our full-year 2014 revenue outlook can best be described as cautious. We do have reasonably good visibility to our existing operations where demand fundamentals are good. However, we are still working to scope and quantify some of the new programs we have recently been awarded or where we are well-positioned in the later stages of OEM RFQ processes. Thus, we are being careful in forecasting incremental revenue growth from new value-added and dedicated truckload business.

In the near term, we currently expect Universal's consolidated Q2 results to put us within striking distance of consensus revenue and earnings estimates if we can get to more typical margins. I will note here though, and it is important, that May and especially June are important production months for several of our largest customers due to seasonal schedules in the number of production days. These schedules can be adjusted, which would impact both revenue and margins due to the fixed and variable pricing we use in our value-added contracts. We may also incur some cost in Q2, as Scott suggested, in connection with the transportation management award, but the timing has not been pinned down yet.

We will strive to provide an update to you later in the quarter if it appears that our financial performance might vary significantly from where the market currently expects them to be. More broadly, as we progress through the second quarter, we continue to look aggressively at corporate development opportunities that will build on Universal's unique position as an asset-light third-party transportation and logistics provider. Expect us to move quickly as opportunities arise.

In support of these initiatives, we also keep a watchful eye on the capital markets to ensure that Universal's cost of capital, leverage and the tenor of our debt provide maximum flexibility. Our increased communication efforts during the past 18 months have increased investor interest in UACL and we especially want to thank the investors listening to today's call for their support and for the analysts listening who work so diligently to analyze and interpret our Company for our shareholders. Again, thank you. So with that, we'd like to open the call to your questions and do our level best to respond to you quickly.

(Operator Instructions). Chris Wetherbee, Citibank.

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

Okay. This is Scott Wolfe, Chris. I will try to give you by example some of the things certainly that we experienced. In the dedicated transportation side, we have contract requirements that require us to fulfill our obligation in providing service. And in the first quarter, our cost of providing that service increased by 18% specifically because we had to go to the open market to secure purchase transportation. So an 18% increase in cost on transportation certainly is a significant -- has a significant impact attached to it.

On the value-added side, I would take an example of a couple of facilities here that we operate in the city of Detroit predominantly certainly for the automotive business. When we look at that from a revenue perspective, we were up slightly 1%, 2%, but our cost of providing that service increased 27%. That is created because of again loss of productivity, added significant operating costs, additional labor, additional equipment over time. Each expense item that we experienced were substantial increases. So again, a 27% increase on a 1% or 2% improvement in revenue.

Then when I look at the other value-added services, an example would be we had -- six of our primary value-added services locations had in aggregate of 21 weeks of downtime on a period that would typically have 78 weeks potential. So again, in other words, another 26% reduction in our top line without having variable rates, only the fixed rates covered on that business. So when you put all of those things together as an example, that is what we faced in the first quarter.

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

That would be very accurate, mid-single digit.

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

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

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

That would be correct.

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

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

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

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

Okay, that's helpful. I will leave it there. Thanks very much for the time. I appreciate it.

Thank you.

Todd Fowler, KeyBanc Capital Markets.

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

Hey, Todd, it's David. It really is just early in the second quarter. We are still accumulating -- one of the elements of the margin compression in the first quarter was the challenge of meeting our service obligations to our customers for which there are penalties. We are still seeing a little of that come in because our OEM customers aren't necessarily the quickest people in the world. So it creates a little bit of ambiguity about what to expect. We don't expect it to be large. There is nothing that has fundamentally changed in how we operate either in terms of our cost structure, our pricing or our contracts. So we think we will get there. It is just we are still reticent this early in the quarter to actually get all the way out there and say we are going to be there for the entire second quarter.

We are walking towards it. We made significant improvements in March from February, but even by the end of March we weren't there and like I said earlier, I think by the middle of May, I will probably have a better sense of how close we are going to get because I will have April results in the belt.

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

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

If I could just maybe add some color on Westport and we can go back and look at the transcript later, I think we said that, including amortization, we did about $3 million on $25 million in the first quarter on Westport.

Right.

And that is after a couple million dollars of amortization. Their machining activity is a little bit lower return on revenue than the other portions of their value-add business. So inside of Westport, it can depend a little bit on their revenue mix, but as Scott said, depending on how you are looking at the amortization of the intangible, they look a lot like our other value-added business if you set the intangible amortization aside.

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

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

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

It will trend up. Honestly most of our equipment is kind of average five, seven years, so it won't trend up that quickly, but for this year -- actually I don't know that I have that in front of me. It will trend up, Todd, but not extravagantly.

Okay, I think that makes sense. All right, thanks again for the additional detail this morning. Thanks a lot.

You are welcome.

(Operator Instructions). Matthew Frankel, Macquarie.

Hi, guys. It's actually Kelly Dougherty. I was kind of multitasking. I am back on now. Sorry about that. I just wanted to follow up and talk about the customer contracts. Are there others up for renewal or ones at risk that maybe we should think about? And just get a little bit more detail -- it seems that customers are insourcing so has there been any kind of change in what they can do on their own versus what you can offer them just to kind of help us think about the shift to a few of them starting to insource a bit more?

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

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

When we look at our customer mix, our biggest customer is approximately 10% or 12% of revenue. So from that perspective, it can have an impact. But what we are seeing, with the addition of Westport as an example, that introduced in our top 50 accounts for new customers that moved into the top 50 because of that acquisition and the business model that Westport had, Westport will also help us from less concentration in the pure automotive side of the business.

So our concentration in automotive is reducing. However, when I say that, I am going to flip back around now and say we are really going to do a piece of automotive business in this dedicated transportation segment. But we think it will be stable. Our growth curve -- we have always for the last five years improved our other than automotive concentration. That is a certainly a goal for us and as we look at continued business development, specifically on the acquisition side of the house, we will look for targets that help us spread out our business and our revenue.

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

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

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

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

Thank you very much.

John Larkin, Stifel.

Good morning, gentlemen and thanks for taking my questions. I had a question regarding the balance sheet. It looks like your total leverage to EBITDA is somewhere in that 2 range. With all of the acquisition opportunities you are contemplating, how much additional leverage, if any, would you be comfortable with going forward and what do you think the probability is of perhaps layering in another acquisition sometime during 2014?

3 to 3.5X top. It is early in 2014, so we have done two major acquisitions in 18 months. I have got to say that our prospects are pretty good that we will do another one. (multiple speakers)

In 2014?

Yes, yes. A couple of them -- there could be a couple that are kind of tuck-in type acquisitions that again help us with that capacity issue that we would bring in.

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

John, it is really tough and I will bellyache a little bit. It is as tough as anything we have ever experienced. We have changed some of the things we are doing in that we are increasing the number of trucks that we own and that will continue throughout 2014. The owner operator recruiting and retention process is pretty darn tough, especially in our mature business in the flatbed world, there seems to be a larger concern for those flatbed operators departing the industry.

So included in buying equipment, we are also doing a training process, which we had never done before, meaning that we now take on entry-level drivers in some markets and put them through a training process. We are recruiting directly out of the military on military bases, which we had never done in the past and I guess what we are trying to do in addition to that training process is build some deeper relationships with some training schools and training processes. So we are not just simply looking for guys that are moving from one carrier to another that might have a good-looking flatbed or something that we can keep busy; we are trying to create some capacity and that does require us to put lots of effort and staffing in place to do that. So it has been a challenge for our costs, but, again, we don't see this as a short-term problem. We know that we have to train and retain better and we are putting dollars in that.

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

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

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

I need to refer to it, John. Hang on.

It was like $6.6 million versus $4.6 million the prior period.

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

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

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

Got it. That's very helpful. Thanks very much for taking all the questions this morning.

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

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

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