Universal Logistics Holdings Inc (ULH) 2014 Q2 法說會逐字稿

Hello, and welcome to Universal Truckload Services Inc.'s second-quarter 2014 earnings call. (Operator Instructions) 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 objective 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; Mr. David Crittenden, Chief Financial Officer; and Mr. Jeff Rogers, Executive Vice President for Universal Truckload Services. Thank you. Mr. Wolfe, you may begin.

Thank you, Sally. Good morning, everyone, and welcome. Thank you for joining us for our Universal Truckload Services second-quarter earnings conference call.

Before we get started today, I'd like to introduce Jeff Rogers. He's our new Executive Vice President joining us for the first time. As part of Universal's succession plan, Jeff will be taking over the CEO role when I transition to the Board at the end of this year.

Prior to joining Universal, Jeff served as President of YRC Freight and of USF Highland Inc. and was Chief Financial Officer of YRC Regional Transportation Inc. Jeff has agreed to take questions during our Q&A session after the review of our quarter.

Universal is heading in the right direction with a consolidated operating revenue up $43.4 million, a 16.4% increase for the second quarter of 2014 over the second quarter of last year. We have seen solid growth in transportation services revenue this quarter, which is up 10.1% over the second quarter of last year.

The transportation services business continues to benefit from increased freight volumes and strong pricing, which Don Cochran will discuss in a moment in addition to discussing our intermodal business.

Overall performance was further improved by our value-added services which grew by 48.5%. Primarily this growth was the result of last year's acquisition. Intermodal revenue was up slightly, an increase of 1.4% over the same quarter last year. In all, Universal is trending back toward historical rates of growth and profitability after last quarter's weather-related impacts.

By design, our business mix as compared to the same period last year reflects a shift. Transportation services revenue is 64.2% of our consolidated revenue versus 67.9% in the comparable quarter last year. Likewise, value-added services revenue at 24.7% compared with 19.4% for last year, and intermodal at 11.1% of total consolidated revenue as compared to 12.6% for the second quarter last year.

From an industry perspective, we continue to see solid revenue growth in our key markets. From a value-added growth perspective, automotive production volumes remain strong, with the latest SAR forecast for June at 16.9 million units. Likewise, heavy truck production volumes are also strong with a forecast of between 10% and 12% growth year over year from 2013 to 2014.

From a transportation viewpoint, the retail and consumer goods vertical has also performed very well. Revenue in this vertical is up 15.3% for the second quarter 2014 over the second quarter of last year.

Energy-related revenue was consistent with last quarter but is up $14 million for the first half of 2014 over the first half of 2013, when windmill production and subsequent transportation was restarting.

Last quarter, I mentioned the award of a transportation management and dedicated services contract awarded with us from an OEM in the southeast. That was a new service offering for a new customer. On June 1, Universal launched this service, which is certainly transportation management, and we are in the post-launch analysis stage.

Now, and over the coming months, we will be balancing the contract service requirements, staffing levels and equipment for margin improvement. We expect to be running at planned margins by the end of the third quarter. This means that the fourth quarter will be our first representative full-quarter performance for the new business.

From a revenue perspective, this will offset some of the lost value-added operation revenue that we've talked about before. But from a profitability perspective, it will lend itself more toward transportation margins in the value-added margins.

Our enterprise sales efforts are beginning to show progress. For example, in the third -- we are in the third round of a bid to supply container management services with a new automotive OEM in the Southeast. We are still negotiating business expansion contract with one of our industrial OEM customers, with a startup expected in the fourth quarter on some existing operations that we have.

Additionally, we're discussing two new business opportunities with the same customer: one in the Southeast, and one in Mexico.

Finally, one of our current automotive OEM customers has specified 18 new business opportunities for us in addition to 10 potential expansion opportunities that have yet to be quantified. Another current customer is discussing new opportunities in the Southwest and in South America. Lastly, a current automotive customer is requesting pricing for an operation in the Southwest and one in Mexico.

Needless to say from our perspective, our value-added business model is alive and well in North America. Interestingly and perhaps more importantly, it's gaining recognition in South America and elsewhere or internationally as customers increasingly ask for assistance with their global operations.

In keeping in line with the automotive industry, third-quarter revenue for value-added services is typically lower than the second quarter, fewer fuel production days, and (inaudible) shutdown periods when the plants are typically retooled for the next model year. This year, that extends into August for a certain specific plant.

Looking at driver recruitment, still a major ongoing topic in the transportation side of the business. Strategies for attracting, hiring and retaining more drivers, more supervisors and logistics associates is a recurring topic in operational meetings. From a labor perspective, our logistics segment, we have all of our labor contracts negotiated through the first quarter of 2015.

Our growth plan continues to accelerate as we strengthen our customer relationships and build new ones. Organically, many of the pipeline growth opportunities I mentioned earlier are a result of strong relationships fostered over years by our acquisitions in both LINC and in Westport.

The acquisitions we're presently considering highlight new opportunities and expansion of our geographical presence. They will also be smaller, tuck-in operations, or agency conversions aligned with our transportation and intermodal business to further expand our capacity.

With that, I'll turn the discussion over to Don Cochran. Don?

Thank you, Scott. The transportation segment is benefiting from an increase in freight volumes, steady and improved economy, and from tighter capacity. As we mentioned in the last quarter, recruiting and retention remained the key buzzwords in our marketplace, and we continue to add options to gain capacity.

The marketplace in general is showing high single- and low double-digit rate increases year over year for flatbed and specialized haulers. In localized instances, we have even seen existing conditions in the van marketplace similar to that. Freight is plentiful, and capacity is tight.

Within transportation services, revenue for both flatbed and specialized heavy haul activity show a 5.3% growth for the second quarter of 2014 over the second quarter 2013, right in line with the overall transportation segment.

Net of fuel surcharges, the van revenue has increased 12.8% for the same timeframe. Brokerage revenue has increased 20.5% year over year for the second quarter of 2014 over the second quarter of 2013. We have seen modest acceleration in the pace of business and in available loads.

Energy accounts lead the way for increased business. Comparing Q2 2014 to Q2 2013, our oilfield revenue gained 7.5% and wind energy gained 27.8%. For the six months of 2014, oilfield is up 7.5% and wind is up 76.3%. The remaining flatbed commodities -- metals, building materials and machinery -- were up slightly at 2% for the first six months of 2014.

All flatbeds are up 10% for the first half of 2014 compared to the first half of 2013. Our van business increased 9.2% for the first half of 2014 compared to the first half of 2013. All of these comparisons are net of fuel.

Conditions have improved in brokerage. Total revenue in brokerage increased to $78 million for the first half of 2014, or 5%. Margins are stable on other brokerage businesses, and rates are increasing marginally faster than purchase transportation.

Several agents have shown significant increases in the first six months of this year. The bulk of those agents showing increases are flatbed agents. We have opened several new agencies in the second quarter that brought with them additional flatbed business with a variety of accounts.

The legacy Universal truckload business is currently 75% flatbed and 25% van. Our view in the next few months tells us that many of our agents expect to grow in the third and fourth quarters on pace with the second quarter.

Growing our fleet is part of the process, so we are continuing to work on recruiting and retention. Our total fleet count is up less than 1%, with part of that coming from added Company power and leased purchase trucks. Company terminal revenue growth grew at roughly 10% over the first half of 2013.

In addition to growing energy business, we see new business from efforts with our enterprise sales team in the automotive, pipe, steel and aluminum accounts.

Safety, retention and recruiting remain our biggest challenges. We expect to have an expanded lease purchase program in Q3 of 2014. Details are being completed now.

Our retention program is giving us modest improvement. Recruiting is tough, as all of our competitors are going all out to find every possible truck. We are installing electronic logging devices at a more rapid pace and expect to be nearly 50% by the end of the year.

We feel very optimistic about the next half of the year. It's a good time to be in trucking, and we are working hard to take advantage of a very good market.

The US intermodal marketplace is growing at a modest pace in 2014. International sector is predicted to grow about 6% on the import side and 2% on the export side. Domestic rail volumes are expected to increase about 6.5%.

Through the first five months of the year, the market has experienced about a 4.7% in increase in imports while exports have been fairly flat. Domestic intermodal volumes are up 5.4% year over year, with trailers showing a greater increase than containers. We can deduce that because of capacity constraints than carriers are putting more equipment on the rail.

Universal's intermodal performance has gained momentum in the drayage area. While TruckCam was stagnant in May, we recently experienced a 3.9% spike in truck count. We have seen spot buy rates increase in most markets as the amount of work continues to grow. However, our domestic intermodal rates are competitive because of the competition for space on the Class I railroads.

A breakdown of our service sectors over the last six months shows that we have outperformed market in drayage with an overall -- with a year-over-year increase of 9.4%. Our container yard services are down as steamship lines improve repair requirements and improve the efficiency by street-turning containers. Both of these issues impact the amount of equipment entering our container yards.

The first half of the year, we saw depot revenues slip 5% and maintenance repair revenue drop 11% compared to the first half of 2013.

On a positive note, depot revenue has increased year over year by 10% for the month of May and June, and maintenance and repair revenue was up over 8% in the month of June.

On the domestic side, our revenue was down as the volume customer changed models and shifted from rail to truck, which Universal Truckload Services picked up part of. June was a positive month for our spot market, and domestic moves were up another 100%. Because of the severe decline in domestic revenue, intermodal was down 4.3% for the first half of the year over the same period.

The outcome of the second half of 2014 will be greatly influenced by our ability to add contractors and inject additional Company assets. We will get some assistance from tighter capacity, which will allow us to take advantage of price increases in the second half. We should see increases reach beyond just the spot market with pricing discussions underway with several steamship lines and global logistics companies.

We continue to look at expansion opportunities for our Company facilities. Acquisitions remain a key part of our growth strategy in larger open-market locations. We are considering working on acquisitions in the Western states and in the Midwest.

Universal's Intermodal footprint has been well received by our customer base as they continue to centralize offices and engage with larger partners on a national level. We continue to build revenue with our largest customers, and we quoted several large opportunities with existing customers and expect the volumes to increase in the second half of the year.

The second half of the year, we'll see year-over-year comparisons in positive figures. Our domestic comparisons become easier in the second part of the year, and drayage is expected to continue to grow in the low double-digit range.

Container yard services should see an upward movement as steamship communities prepare equipment for the coming shipping season.

With that I'll turn the conversation over to David.

Thank you, Don, and good morning, everyone. As highlighted in our second-quarter earnings announcement, Universal's second-quarter financial performance reflected extension of favorable first quarter trends in the truckload transportation operations and a solid rebound and profitability in the continuing logistics segment, which includes revenues from value-added services and dedicated transportation.

As Scott and Don described, the overall operating environment was markedly improved compared to the previous quarter, and we do anticipate continued stability in the next few quarters.

We earned $13.6 million, or $0.45 per share, on consolidated operating revenues of $307.5 million. On a year-to-date basis we have booked earnings of $0.72 on total operating revenues of $587 million.

Our reported revenues exceeded the estimated range we communicated in late June by about 2.5% primarily due to strong demand in most of our truckload categories in the week preceding the shortened Fourth of July week.

Our earnings per share fell at the midpoint of our prior guidance, including some corporate costs that were not directly related to our operating segments.

Revenue from transportation services, as Scott said, increased 10.1%, or $18.1 million, from Q2 2013 and 9.8% compared to the prior quarter driven by the demand of pricing trends that Don just commented on.

Revenues from value-added services, including Westport revenues totaling $26.3 million, were up $24.8 million compared to Q2 2013. A more meaningful comparison, though, may be the 9.4% increase from $69.5 million of value-added revenue in the first quarter.

The quarter-over-quarter comparison is of interest, as it better reflects our ongoing operations as well as the traditional strong second-quarter demand for value-added services due to our automotive customers' production schedules.

Revenues from intermodal services were basically flat on a year-over-year basis but up 13.2% from the preceding quarter. In total, our consolidated second-quarter revenues compared to the first quarter were up 10.1% or $28.2 million.

In terms of operating income, we reported income from operations totaling $24.4 million in the quarter ended June 28, up slightly from $23.7 million one year earlier and $14.6 million in the first quarter. As a percentage of consolidated operating revenue, our operating margin was 7.9% compared to 9% in Q2 last year but 5.2% in the first quarter of this year.

Compared to one year ago, about 70 basis points of the adverse change in consolidated margin can be attributed to intangible amortization in connection with Westport, which is not reflected in last year's result.

Of greater note, Universal's second-quarter consolidated operating margin of 7.9% reflects the anticipated rebound we experienced from 5.2% in the first quarter when Universal's cost of services increased due to weather, resulting in a historic compression of margins particularly in our value-added services and dedicated transportation operations.

If you take a look at the EBITDA margins that we reported in the item captured non-GAAP financial measures, you will see that we report a Q2 2014 EBITDA margin of 10.5% compared to 10.8% last year and 8% in the first quarter. We believe the slight decline between the recent quarter one year ago has more to do with the shifting mix of our various businesses, which have different margin characteristics, than anything else.

More recently, we think the pricing dynamic is favorable for margins in Universal's truckload business, and we continue to implement strategies across our operations that should over time permit incremental improvements in our aggregates margins whether based on operating income, EBITDA or net income.

A comparative analysis of Universal's consolidated income statement shows that, when calculated as a percentage of revenue, our Q2 costs of purchase transportation and commission expense together was 54.2%, up just slightly from 53.8% in the first quarter.

In contrast, the line's direct personal and related benefits were 17.9% in the second quarter, down from 19% in the preceding quarter. Similarly, other operating expenses declined to 10% of revenues in Q2 compared to 10.9% in Q1. Improvements in these cost items relate to the restoration and the respective productivity levels.

Page 6 of the press release dissects the performance of Universal's two reportable segments, transportation and logistics. And I'll comment on each of those briefly.

In our transportation segment, which includes our agent-based transactional truckload transportation, along with Intermodal services, brokerage and specialized services, revenue in the quarter ended June 28 increased to $195.4 million, a $17.1 million or 9.6% increase from $169.5 million, and an 11.4% increase over the first quarter.

Expressed as a percentage, income from operations in Universal's transportation segment increased to 5% of revenues in Q2 compared to 4.2% last year and just 3% in the first quarter.

As Don described, favorable pricing has emerged as the response to tight capacity, which we think will continue to benefit large carriers with more flexible fleets like Universal.

Westport Axle was not integrated into our value-added services organization and enterprise sales activities. Its financial performance is consolidated in our logistics segment.

As I mentioned in April, in the first quarter Westport earned income from operations totaling $3 million, including about $2 million of intangible amortization on operating revenues totaling $25.3 million. With strong industrial demand from key heavy truck customers continuing, our newest subsidiary continued its profit performance in the recent quarter, earning $4.1 million of operating income on $26.3 million of sales.

Although our detailed commentary on these operations will diminish going forward, I should mention here that we recently finalized certain post-closing matters with Westport's previous owner pursuant to the acquisition agreement and with modest overall impact.

Excluding Westport's performance, though, revenues from our logistics segment were basically flat at $85.8 million compared to second quarter of 2013, but up over 9% compared to first-quarter logistics segment revenue of $78.6 million. The quarter-over-quarter increase largely reflects a typical seasonal impact in daily production activities. The new managed service operation Scott mentioned only had a modest impact on revenues beginning in June.

Income from operations without Westport was about $12 million, or 14% of Q2 logistics revenue, which compares to 19.7% one year ago.

Overall, operations reported in Universal's logistic segment booked $112.1 million in revenue Q2, resulting in income from operations totaling $16.1 million. Compared to the immediately preceding quarter, Q2 operating revenues increased 7.8% largely due to the anticipated seasonal production volume changes that I just mentioned.

Operating margins for our logistics segment, which includes both value-added services and dedicated transportation, were 14.4% for the full quarter. This compares to just 9.3% in the immediately prior quarter and also to 19.7% last year.

Second-quarter 2014 logistics segment margins began rebounding from compressed Q1 levels early in the quarter but not immediately. Across the 13 weeks ended June 28, the overall segment margins also reflect approximately $500,000 of costs not directly related to ongoing production as well as launch costs incurred in June in connection with our new transportation management operation.

Our target profitability for businesses in Universal's logistics segment over the long horizon is 15%. However, the ramp-up of the managed service business and related timing makes near-term estimates a little tricky.

I would point you to the supplemental information on the earnings announcement, which includes among other key operational data our calculation of earnings before interest, taxes, depreciation and amortization. This information may be of interest to those in our audience today who are interested to evaluate Universal's free cash flow, which is a distinguishing feature for our Company and one of the benefits that we think is attributed to our asset-light business model.

Turning now to the balance sheet, Universal held $8.1 million of cash, $12.4 million of marketable securities at June 28. [Borrowings] totaled $242.4 million, a $4.9 million increase since the beginning of this year.

Universal's capital expenditures totaled $19.4 million in the second quarter. Although our recent investments relative to period revenues is somewhat higher than our long-term target, it reflects both catch-up purchases from late 2013 deferrals and additional equipment acquired to support dedicated transportation services in connection with our new transportation management and dedicated services contract.

We will file our quarterly 10-Q in about 10 days, 10 business days from today, and it will provide additional detail behind the financial performance we are discussing today. This will include some details on share buyback we executed in the second quarter under an existing program at an average cost per share of $24.32 and a total cost of $4.1 million.

Looking ahead, Don and Scott discussed trends that will drive our financial performance for the next several quarters including, first, good demand fundamentals in our key markets, [important] pricing for our truckload transportation services, and encouraging pipeline of new value-added business prospects including a new automotive OEM customer. Balanced by ongoing capacity constraints and regulatory challenges, particularly in the specialized markets we serve, as well as revenue comparisons in Q3 and Q4 for our logistics operations to the extent that new business opportunities are different or do not completely offset a few of the operations we closed beginning late last year.

As I described in our late April conference call, we expect consolidated 2014 revenues to increase about 10% to 12% over 2013. This is comprised of average full-year growth, or aggregate full-year growth I should say, at about 7% to 8% across our truckload, intermodal and specialized services platforms, and 20% to 25% growth in our value-added and dedicated transportation services including Westport.

Of course, we also hope we can convert several of the opportunities Scott mentioned still this year. But the negotiation and launch phase for our large logistics opportunities can extend from several months to several quarters.

From an operating margin perspective, we do anticipate relatively stable profitability expressed as a percentage of revenue through the end of 2014, following our move back towards longer-term trends after Q1, with opportunities for incremental improvement in future quarters based on strategic initiatives and cost reduction actions.

To us, this means about 95 OR for our transportation segment business through the end of 2014 and about 85 OR in our logistics segment with modest changes up or down depending on our efforts in connection with our new managed service business and any other significant new value-added services launches.

We also expect corporate costs that are not allocated to operating segments to moderate somewhat in the second half following Q2. Although, as you know, the timing of our cost of acquisition initiatives and other corporate investments are not always easy to predict. I will point out, though, that we are involved in a critical review of our overall organization and administrative systems which have expanded in recent years with each successive acquisition.

The management team believes we have an opportunity here to simplify our structure in ways that will enhance our customer service, productivity and profitability in 2015 and beyond.

In concluding the formal comments this morning, let me pick up on Don's last comment. The management team here likes how Universal is positioned. We are working hard to take advantage of a good market for transportation logistics services.

Of course, the business is not without regulatory and competitive challenges, and the closing of a few of our logistics operations has dampened Universal's near-term profitability. While we do believe Universal's broad capabilities, balanced customer relationships across several industries, and asset-light business model are distinct.

We are also getting to know Jeff. He is showing valuable insights in his experience. From my vantage point, he also seems to appreciate joining a Company with modest leverage, excellent cash flow, high ROI, good employee relations and a trajectory of organic growth.

With that, we want to thank you for your time and interest. Sally, we would like to invite -- open up the telephone lines for questions.

(Operator Instructions) Chris Wetherbee, Citigroup.

Maybe I can start on the margin side. I guess I just wanted to understand a little bit how we should think about the cadence of margin in the various segments. I think you said 95 OR in the transport side and 85 in value-added for logistics.

So I guess that sort of implies a bit of a pickup here into the back half of the year. But maybe my question is more about the longer-term when you think about 2015 and you get past some of the incremental headwinds on the value-added side. Is this still a business that can operate sort of in that mid-to-upper teens type of range? I guess I just want to make sure I understand that first.

This is Scott Wolfe, Chris. We certainly believe that from on the logistics side of the business that we will be able to operate and present a margin rate in that mid-to-high teen range for 2015.

Okay, so that's what you think. So obviously there is a bit of a step up here coming in the back half of the year. I think that's consistent with your comments.

When I think about some of the normal seasonality from 2Q to 3Q, typically you have some of those interruptions from a maintenance perspective on some of the customers. You mentioned in the commentary that maybe some of that would flow into August. Should we expect a little bit -- how should we expect seasonality to trend 2Q to 3Q? Is it a little bit more pronounced than normal, or is it basically aligned with what we've seen in previous years?

I believe it will be in line. The extension into August, typically what we would see is in the late June, July time frame, the OEM customers particularly would shut down for model changeover.

This year because of new product launches and those kind of things, there's an extended time frame. It's no more than normal; it's just falling outside of the normal cycle.

I might add Chris, year-over-year trends are what we commented on. But if you look three versus two, transportation segment is basically flat driven by number of days more than anything and seasonality and things like that. The logistics segment, again, primarily driven by the automotive piece of it, is basically down kind of mid-teens over the second quarter.

Growth from third quarter of last year, but that seasonal effect -- the second quarter is always the strongest quarter for that business. Third quarter is always the softest.

Okay, no, that's helpful. And then I guess when I'm thinking about the pipeline of new business, it sounds like things are continuing to go well with -- I think, Scott, you mentioned quite a few potential opportunities both for new and maybe existing customers as well. As you are thinking about sort of the conversion of that pipeline, do you feel like things are sort of building and so the pipeline is getting a little bit more robust? So maybe we can expect a little bit higher rate of conversion going forward? Or am I reading a little bit too much into the comments that you made earlier in the call?

We -- again, when we formed the enterprise sales team as Universal purchased LINC and we put the sales activities together, at that point in time we were in a transitional phase. And in what it took for us in the logistic side, there is a significant longer lead time.

The items that I discussed with you are ones that we see coming to fruition, if we are successful, predominantly in the first half of 2015. But we are working on projects and pricing projects right now that will not launch until 2017 and 2019. I didn't talk about those at all. So we are seeing a more robust pipeline than we have seen basically in the last 18 months.

Okay, that's very helpful. And I guess my last question would just be around the potential for acquisition targets. I think Don talked about potential opportunities on the intermodal side. How should we think about your positioning toward potential acquisitions? Is everything on the table as a possibility for one to happen maybe this year or the next 12 months as you think out? And into that target most likely going to be on the intermodal side, or are you sort of all options still open here?

I'll answer at least the part on the intermodal side, Chris. This is Don. We have looked at both big and small. What is important to us, though, is that it is a good fit with our strategy. We are not the same as some of the domestic Intermodal companies. We rely heavily on the international trade and international steamship marketplace. So we will continue to look at at least on the smaller side on some of those.

We're always interested in something that would be transformational, and we are looking. But, again, more than likely if it's strategic it's going to be a little bit smaller, and it will be leaning more towards the international trade.

Okay, that's very helpful. Thanks for your time. And Jeff, welcome aboard. Thanks.

Okay, good to see -- talk to you, Chris.

Todd, KeyBanc Capital Markets.

Great, thanks. Good morning, everybody. And Scott, congratulations. And yes, Jeff, welcome aboard. I guess I wanted to follow-up with Chris's line of question kind of on the second half and the expectations. Is the full-year revenue guidance still 10% to 12%? And if that's the case, to me it seems like it implies a pretty significant step down in the growth rates in the third and fourth quarter. And I just want to make sure that, number one, I've got that right. And number two, what would be the pieces that are driving the decelerating revenue growth in the back half?

Hi, Todd, let me take a swing at that. Yes, 10% to 12%. I think that was in my comments as well. The thing that most impacts the third and fourth quarter year over year on the logistic side is the trend that I commented on in responding to Chris. Second quarter is a strong quarter, so comparisons to previous quarters have to be taken into consideration.

And the rest of that, I think we think in terms of compared to prior year, we're still kind of in the low teens, high single-digit numbers with respect to transportation, which is, I think, very consistent with what we said in terms of both pricing and loads.

I think what we are trying to suggest is the economy seems to be growing consistently at a low but consistent rate in the markets that we're in. We're getting good pricing because of capacity, so we can look back from the numbers. But those are the two major things that are driving the segment revenues.

Okay, and then -- so just on the value-added services side, it's mostly the seasonality. But are there any contracts that are transitioning off in the back half of the year, or have you pretty much worked through the contract transitions over the past couple of quarters?

Well, we've worked through them. The cost associated with them has kind of run through. But if you go back to second quarter or third quarter a year ago, it represents $8 million to $9 million worth of quarterly revenue that won't be in our third quarter in connection with those old businesses.

Okay, that helps. And in the comment on the margin expectations for value-added services, does that include the step-up in amortization related to Westport? And I guess what I'm trying to get a sense of is right now the segment is kind of at a mid-teen margin level. A year ago it was kind of in the high teens. Is the biggest business there the amortization related to Westport, or does it have something more to do with the mix shift and some of the contracts that have transitioned off?

I'm going to let Scott respond to that question because he was responding that to me in my office earlier today. (laughter) Go ahead, Scott.

I'm just glad I'm asking the same question, I guess. (laughter)

What we're really seeing, we talked just a couple of moments ago about getting the enterprise sales group and those kinds of things, the activity in those going, and the amount of lead time that it takes to bring that business in.

What we are seeing is that our business model, the way that it's costed and priced, to get the higher-teen margin rate requires an influx of new business on the front end. That has been slow to develop. Typically that business comes in at a higher rate. So that's why we're working diligently on improving the revenue line.

Westport has performed very well. We're reluctant to say exceeding expectations, but it's doing what you'd hope a new acquisition does, and it's also kind of got the wind at its back with respect industrial demand for heavy tractors. So I think it's taking the additional couple million dollars of amortization in stride. And so I would say -- first part of your question was how does Westport affect that. We don't think it's being hampered by the amortization of Westport's intangible.

No. And Scott, the answer really helps because I think that was something I knew and maybe just I'd forgotten or put it in the back of my mind that the margin profile is typically higher. So if I understand that correctly, once we see the value-added services revenue growth start to reaccelerate organically, that's going to help the margin profile.

That's correct.

Okay, good. Last two ones I had. David, I think you had mentioned that there were some corporate costs, or I wasn't sure how you actually termed them, in the SG&A line this quarter. I was curious if you could quantify what those were for and how much they were. And then my last question is what we should be thinking about for interest expense. Thanks.

Sure. They were corporate costs and interest expense. If you look at the segment reporting details in the second quarter versus first quarter, you can kind of get a sense of the order of magnitude in the second quarter. But it's a variety things; it's no one thing. But we did do some things in -- of an exploratory basis in the capital market in the second quarter that is the primary driver of the quarter-over-quarter change in interest expense. And we had some additional reserve items primarily in connection with value-added services business. Kind of close-out costs associated with the close-down of some operations, as well as some reserve items in connection with some service claims that were directly hitting the operating margin primarily for the logistics business. So I would say maybe it's about $0.5 million of excess interest cost and maybe $800,000 to $1 million of costs that hit the operating line that would be not specifically associated with the ongoing operations.

Okay, that's helpful. Thanks for the time this morning.

Kelly with Macquarie.

Just one quick clarification. The margin ranges you are referring to are EBIT margins, not EBITDA, right?

Yes.

Okay. Thanks. Just wanted to talk a little bit about this dedicated business that you have. Should we think about them as kind of cost-plus businesses where maybe you pay a little bit more for purchase transportation or things like that in a given quarter, but then you're able to recoup that. There's just a timing lag? Or are they contracts that have a set price and then the margin has to move if there was any upward pressure on costs?

Dedicated transportation as we handle it today is contract-based transportation. Therefore, it is a fixed scenario for a given period of time. So fixed scenario meaning a fixed cost-in model for a specified period of time.

And how long are they (multiple speakers) -- I'm sorry. I'm just wondering how long that is specified. Is it renewed every year or --?

Transportation generally, transportation contracts are reviewed and renegotiated on an annualized basis.

Okay. And now, did you sign -- I guess what I'm trying to get at is if some of these relatively recent upward pressure on trucking costs have already been captured in the pricing or if maybe there's some more leeway for margins once you go back and kind of make up for those higher costs. How do these things get signed? On a calendar basis year basis, kind of rolling throughout the year. How can we think about that?

Each contract certainly has a -- not everything expires on April 1. The contracts are varied by customer throughout the year. But your question is very appropriate today. Based on the issues that we faced in the dedicated transportation in the first quarter has required us to reevaluate our costing relative to that business. So we are aggressively pursuing interim contract price increases with two or three of our accounts in that dedicated segment.

So it is a TBD. We will basically specify what we need to be able to do the business. That, then we'll end up in a pure negotiating strategy, and the conclusion to be determined.

Okay. Is there any kind of move to change the way the contracts are structured? So maybe it's not necessarily a fixed price given all the moving parts now, where maybe it's more of a cost plus or a fixed margin?

Kelly, this is David. I know from some of our past conversations and reading some of your analysis on other of our peers that you are kind of focused on the margin, the consistency of the margin. We actually generally believe that the dedicated business allows us to lock in the economics of a contract for a longer period of time than just a spot buy. So we're not -- that portion of the business is not transactional, and it has the opposite of the effect that you're talking about.

What Scott is referring to, certainly in the first quarter where productivity was affected, it kind of laid open some exposure that we had with respect to the economics of dedicated business. And one of the great things about those dedicated lanes and those dedicated contracts of those relationships is it allows us to say, hey, it's not working the way it needs to be for us. We need to renegotiate the conversation. So it's not a question of margin compression over time. It's when you become aware of different economics you have the ability to change them. And that's what we do in the dedicated business as opposed to the opposite of that would be like a brokerage type of an arrangement. Does that provide (multiple speakers)?

What I was basically talking about when you think about other companies that have dedicated arrangements, it's a cost-plus business. Right? So that it's not spot at all. It's kind of multiyear, but it's, here's the margin that I need to get. And I was just kind of wondering how yours are. But it seems like this is a fixed-price contract until your price or your costs move higher, and then you go back and renegotiate that fixed price. Is that how to think about it?

Yes, it is.

Okay. Are you finding that customers are looking to do more of that as capacity gets tighter, and maybe they're worried about being exposed on the capacity side? So people are more interested in these kind of dedicated arrangements?

In our dedicated environment, it's one that's more historical. So it's not related to recent trends. What we are seeing, our customers are positioning carriers. Positioning from the perspective of what can we do to help you to where they're trying to protect current capacity and soliciting investment for future capacity. All of which, again, is to be determined.

Okay. Thanks. Just switching gears then. I know you guys are very focused on the international side of things in the Intermodal business. Just wondering if you could help us think about what kind of impact if any there was from shipping companies being concerned about the strike situation on the West Coast? Has that boosted how you think about your operations in the second quarter? And maybe if so, does some of that 3Q, what would've been in 3Q, got pulled into the second quarter?

This is Don, Kelly. Yes, we've been watching it very closely. The negotiation at least seems to be moving along amicably. We have seen some shifting of ships from one market to another, but it hasn't been a real impact yet. As the real shipping market winds up here in the next few weeks, we are watching it a little bit more closely. But, again, that's where we see our best opportunities.

Our national footprint with those steamship lines has given us has given us lots of opportunities where we are seeing some price flexibility going forward. And we're getting that because we serve not only the ports but the rails. So we're pretty optimistic about that. We are in Savannah and Charleston and we are also in LA, Long Beach. So we do see them reading those tea leaves, and we are trying to react to them, too.

In addition to that, Kelly, I would tell you that we are confident personally in the West Coast capacity. In other words, we are looking at investing potentially making an acquisition because we need and feel we need a greater penetration in a very large market that can't be easily replaced.

That's helpful. Just wondering if you saw -- because we know of companies who have kind of shipped earlier than maybe they would have otherwise -- concerns about the strike happening. Did you see that benefit in the second quarter in those numbers? Or really that's just kind of the overall environment and hard to pull that out?

Yes, Kelly, that is part of our drayage business. When we look at the first quarter, we also suffered from the difficulty in our intermodal business. But demand for drayage services is pretty strong right now, and we see it going forward the next two quarters.

Kelly, are you -- is your question though specifically in connection with LA and Long Beach that somehow people are pulled into the second quarter from the third quarter?

Yes. I mean, we've heard of people who are shipping things earlier ahead (multiple speakers) because they were worried about the strike deadlines. So I wasn't sure if some of the benefit maybe you saw in the second quarter would have been taken a little bit from what you're expecting to see in the third quarter. But that doesn't seem --

Intermodal pulled-forward demand.

It very well could be. We are hearing, again, a bifurcated response from most of our steamship lines. But yes, we do think some of it is pull-forward.

Okay, great. Thanks very much.

John, Stifel.

Just wanted to -- and maybe if this is too blunt a question, we could handle it off-line. With Scott transitioning to the Board at the end of the year, Jeff will be taking over. Fortunately has a chance to sort of integrate himself into the operation to get to know everyone and so forth. But I was a little surprised, and I know many of our clients were surprised, that Scott's replacement came with a preponderance of less than truckload experience, given that Universal is not a big player in the LTL market. I don't know who wants to address that, but either Jeff address it directly; or perhaps Scott, you could address it.

Well, we both may take a shot at it. First, I would tell you that Universal doesn't have any plans to get into the LTL market. With Jeff, what we saw was an experienced transportation person that isn't new to the industry and has a very strong background both from a managerial, from a finance perspective. Those are strengths. He's proven his capabilities. What does Jeff have to concentrate on learning certainly is the value-added business. That is something that he would be able to learn very quickly. My goal and part of my reason for being on the Board is to continue to help in that arena. So from that perspective we think it can be a very smooth transition. So, Jeff?

Yes, I would agree with that. This is a unique opportunity to spend this much time in a transition. I think we could all say most of the times in our career you don't get six or seven months to learn in a transition. So I appreciate the fact that we're able to do that. And to Scott's point, yes, I don't consider myself an LTL guy either just because I'm more of a finance guy that was in LTL, but I've also got a lot of experience with UPS and operations. So I don't consider myself to be very specific, but more of a broad business person that I think can understand what levers to pull and will bring that experience.

So, John, I think it's a great opportunity for me. I'm loving what I seeing and just looking forward to it. Scott will be there, and I'll get as much out of his brain as I can in the next five months, and he'll be around to help. But I sure think it's going to be great opportunity, and we've got lots of good things to do going forward.

Those are good answers. I appreciate that. Is it fair to say that there's a fair amount of customer overlap between your Holland customers and the Universal customers?

Well, I think there's definitely some. Holland, you know, was huge from an automotive perspective. Tier 1 suppliers as well as the direct OEMs. So there's definitely some customer overlap. There's customer overlap on the retail side. In the value-add business, there's no question. So I'm having some good conversations with some customers and look forward to spending more time converting with the customers. But there's definitely some overlap.

Thank you for taking the time to answer that question. Secondly, shifting gears a little bit towards the acquisition area. There are a number of folks out there that have become quite a bit more what I would call proactive in the acquisition space. We just saw this morning that TransForce is buying Contrans, which is one of the biggest trucking roll-ups up in Canada itself. Lots of combinations occurring out there. Are you finding the acquisition world a little more cluttered with buyers out there looking for opportunities? Or are what you are looking for is sort of unique enough that you're not seeing a lot of competition?

There are a myriad of opportunities that exist. The acquisitions of LINC and Westport demonstrate from a logistics perspective what we are looking at. There's some very large companies that are currently on the market. Would you evaluate those to make a certainly huge change in your business model? Yes. We don't believe that that is an area in which we can compete right now. And the reason is private equity is playing a huge role in many of the acquisitions that we're seeing right now. And the multiple is potentially getting too far away.

From a transport -- so from a logistics perspective, with the opportunities we have, John, we are hopeful certainly to be successful and would like to focus on the organic side of growth when it comes to the logistics business.

In the transportation segment, we will again look at smaller tuck-in type that help us either from a service perspective or geographic perspective to help us in penetration and get us additional capacity. We do not envision at this juncture a huge transaction to buy competition.

I guess those transportation tuck-ins are almost by definition less risky, less expensive, and enable you to build out your geographic footprint and build out your capabilities and so forth. So those make a whole bunch of sense to me.

We have not had any of those, John, that have really let us down. They don't make the big impact, but they have helped us with our strategy and helped us reformulate the Company. So it still makes a lot of sense for us.

Not to beat a dead horse over the head on dedicated, there was quite a line of questioning earlier on that topic. But there are some companies out there that are involved in fairly big dedicated contracts. I guess with truckload capacity being so tight going forward primarily due to the worsening driver shortage, a lot of customers are thinking about the dedicated alternative as a solution to the problem long-term. But it seems like these startup expenses tend to drag on for multiple quarters. How confident are you that the start-up expenses associated with this new relatively large contract, I presume, that you started up here in the second quarter will be completely behind you by the end of the third quarter? Is there any risk those swap over into the fourth quarter, the first quarter of next year?

We're certainly currently in our second month. What we have been able to do is to stabilize the operation, which is critical in the dedicated side of it, John. Our focus in going forward for August, September will be to gain control of the launch costs that we put in place. We are already starting, as an example, to -- in a launch like this, the workforce from an administration -- excuse me, administrative perspective, we have about 2.5 times as many people involved in the launch as we would on the run rate. So we'll be drawing down those individuals, and there is a timeframe to get that accomplished. And a lot faster than in the fourth quarter.

From an equipment perspective, we did a lot of leasing and made a lot of purchases to ensure that we could give the customer the service that we basically promised in execution. We have already started to turn back equipment, or reallocate, in some instances, equipment to other operations. So I'm reasonably comfortable in saying that we think the fourth quarter would be at operational level and start-up done.

Got it. Thanks very much for taking my questions.

There are no further questions at this time. Mr. Wolfe, I'll turn the call back over to you.

Well, thank you. I appreciate it. Thanks, everybody. As always, we appreciate your interest, your participation in today's call. Certainly, we look forward to speaking with you in the near future. We've got a lot of good things going on for ourselves. We wish you to have a really great day and certainly a very enjoyable weekend. With that, thank you all again.

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