Universal Logistics Holdings Inc (ULH) 2015 Q3 法說會逐字稿

Hello, and welcome to the Universal Truckload Services, Inc.'s third-quarter 2015 earnings conference call. (Operator Instructions).

During the course of this call, management may make forward-looking statements based on their best view of the business as seen today. Statements that are forward-looking relate to Universal's business objectives or expectations, and can be identified by use of the words such as belief, expect, anticipate, and project. Such statements are subject to uncertainties and risks, and actual results could differ materially from those expectations.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Jeff Rogers, Chief Executive Officer; and Mr. David Crittenden, Chief Financial Officer, for Universal Truckload Services, Inc. Thank you.

Mr. Rogers, you may begin.

Thanks, Amy. Good morning. Thank you for joining us today for Universal Truckload Services' third-quarter 2015 earnings conference call. We began this year with expectations for revenue growth: in transportation, the range of 10% to 13%; value-added, the range of 5%; and intermodal, 9% to 11%. We talked about improving transportation margins, returning dedicated transportation to profitability, and increasing our driver capacity. What we didn't expect was the rapid economic changes impacting several of the key markets and industries we serve.

Third-quarter overall revenue was down 5.9% or $17.9 million compared to third quarter last year, with fuel surcharges representing $12 million or 67% of that drop in revenue. With fuel prices expected to be fairly steady, we will continue to see the effect in our revenue comparisons until first-quarter next year. The global economic climate, and in particular China's slowdown, has impacted our flatbed truck load business. We continue to see solid growth in brokerage; our value-added business is picking up; and intermodal continues growing to record levels, albeit at a slightly reduced pace.

Now let's discuss our business units. Transportation services: a few things have changed in the last 12 months. The price of fuel is down around 30% from this time last year; oil rig count is down 59%; domestic steel production is down 8%; and although rates have stabilized, they are below the highs of 2014. Load availability is down 33% from a year ago, based on the Market Demand Index. On a positive note, our automotive load count remains solid, and wind energy transportation was up in third quarter.

Based on the factors I just mentioned, transportation revenue was down 9.5% to $178.1 million. It now represents 62.7% of our overall revenue. Continued low oil and gas production and weak domestic steel production follow the trends we experienced the first half of the year. Oil and gas load count is down by 79%. Steel-related flatbed load count was down 14% compared to third-quarter 2014. Considering the oil price forecast and current steel inventory, we expect flatbed load count to remain weak for the remainder of 2015.

Our van load count had been relatively stable for the first half, but was down 6% third-quarter, versus third quarter last year. While in contrast, our wind-related specialized hauling was up 7%. Additionally, I believe we have turned the corner with our dedicated transportation, and we have stemmed the losses. We are not done yet, but we have made major strides, and we will continue to improve this business until it is both profitable and sustainable.

From a capacity standpoint, the owner-operator count remains essentially flat. Revenue per loaded mile, exclusive of fuel surcharge, was down 4.1% for the third quarter of 2015 versus third-quarter 2014. But we've had some successes. In third quarter, we brought on seven new agents with $14.8 million in annualized revenue, and we have managed our margins very carefully in this environment, making modest headway.

Moving on. The value-added business continues to gain momentum. Revenue for the third quarter was down just 1% below third-quarter last year to $68.4 million, and represents 24.1% of our overall revenue. Overall operations are on track. The large implementation we have spoken about is going well. Another large project kicks off next month. I went to remind you that these two operations account for $45 million in new revenue on an annualized basis. Unfortunately, one heavy industrial customer has slowed a production facility to one shift from two; while, in another, they cut production by 65%.

It is certainly beneficial now to be a large player in the automotive industry. This quarter, we were awarded four new contracts for an additional $10 million in annual revenue, lunching between fourth-quarter this year and second-quarter 2016. In addition to our strategy to own the plant, Universal continues to identify business opportunities outside automotive. We have a very solid pipeline of opportunities in our targeted industries, including heavy truck, industrial, and aerospace.

As we consider the industries impacting value-added, the automotive SAR forecast remains solidly north of 17.2 million units of production for 2015, with big gains posted for September sales. Heavy truck production broke records this year. So while the 2016 forecast will be relatively good, nobody expects it to be as stellar as 2015. Fortunately, our heavy truck customers continue to gain market share, helping offset some of the weakening market.

Intermodal continues to grow, albeit at a slower pace than the first half of the year. Revenue was up 4.2% to $37.7 million for the quarter. Steady import volumes resulted in good performance from our drayage business, while exports were flat. We have added capacity to meet demand, and our intermodal truck count is up 16.8% over last year. Recently, though, we've seen some softening in spot prices, and have adjusted accordingly to keep our fleet busy. Even with the recent softening, intermodal is still on pace for a record year.

Which leads to our fourth-quarter outlook: third quarter did not meet my performance expectations. And for the fourth quarter, we see continued lower demand in our heavy haul business and even some weakness in our dry van. Our wind-related transportation will be negatively impacted in the fourth quarter as several large projects were pushed into the first quarter of next year. On the upside, value-added growth will accelerate into 2016. Moreover, value-added growth will outweigh the seasonality of the automotive sector, which typically sees a drop in the fourth quarter from holidays, shutdowns, and new model changeovers.

Finally, intermodal will continue to benefit from tight capacity and infrastructure inefficiencies, holding spot prices similar to third quarter. Intermodal will continue to grow the balance of the year. We expect 5% to 7% growth compared to fourth-quarter last year. As I said earlier, this year we set out with expectations for revenue growth in transportation of 10% to 13%, combined with margin expansion. With the impact of fuel prices and economic conditions impacting our key industries, we now project to be down 10% to 12% for 2015.

We will continue our focus on margin improvement as we identify opportunities for growth in a difficult market. Dedicated transportation has turned the corner, with more improvements to come. We also expected 5% revenue growth from value-added business. We have been successful in securing new programs and in locking down existing programs. Most of that growth won't be visible until fourth-quarter this year and first-quarter of next year; so this year will end relatively flat. Intermodal clearly has delivered. We expected 9% to 11%, and it should be right in the middle of that growth range for 2015, with strong margin gains.

From a corporate perspective, we also began the year intending to constrain capital expenditures, which we did. Pay down debt with excess cash -- we chose to do a tender offer instead. And we wanted to improve our customer relationships and develop a more robust and diversified sales pipeline, which I believe we have done, and will continue to do.

David will now provide more details on our financial performance.

David?

Thank you, Jeff. Good morning, everyone. Universal did report third-quarter 2015 net income of $9.3 million on consolidated revenue of $284.2 million. Earnings per share was $0.32. Revenue fell within the range we anticipated three weeks ago in our September 29 press release. Earnings per share were $0.01 above the range we anticipated, in part due to some one-time credits that added to operating income.

Consolidated third-quarter operating revenues were 5.9% or $17.9 million lower than in the third quarter of 2014. 4.2% growth in our intermodal services was offset by a 9.5% decline in revenues from transportation services, and slightly lower revenues from value-added service operations. When compared to the second quarter of 2015, Q3 revenues from our transportation services declined a modest 1.1%. Although we moved 5,200 fewer loads in Q3, a 3.3% decline over the second quarter, our average length of haul quarter-over-quarter was up 0.8%. Average revenue per load, excluding fuel surcharges, was also up slightly, a 0.4% increase.

Although overall demand from our flatbed and heavy haul customers was certainly lower than this time last year, it has been comparatively stable in the recent quarters, with wind energy-related shipments something of a bright spot due to our unique shipping capabilities.

Value-added services' third-quarter 2015 revenues decreased 8.9% compared to the second quarter. The quarter-over-quarter decline this year generally reflects seasonal production trends. Our automotive, industrial, and heavy truck customers generally schedule fewer production days due to shutdowns and holidays over the summer. This year, light truck and SUV demand is strong; passenger car assembly is stable; our heavy truck customers are gaining market share. And as Jeff indicated, two of our largest industrial customers are facing international headwinds due to the strong US dollar and anemic international demand.

While up 4.2% from last year, intermodal revenues were down 5.2% from the preceding quarter. Intermodal load count declined a modest 0.6% compared to the second quarter. But average revenue per load, excluding fuel surcharges, declined 3.6%. Initial indications are that strong pricing dynamics seen in previous quarters have a lost some momentum, driven we think by looser capacity in the regions we serve.

Consolidated income from operations declined $6.1 million in the third quarter to $16.9 million, compared to $23 million in the third quarter of 2014, on $17.9 million lower aggregate revenue. Specifically, consolidated third-quarter 2015 EBITDA margins are 9% compared to 10.8% in the second quarter and 10.4% achieved in Q3 2014. Identifiable fuel surcharges totaled about $18 million in Q3 2015 compared to about $30 million in 2014.

This represents an approximate $12 million decline on the top line. Excluding fuel surcharge revenues and related costs, highlights an adverse profit impact of about $2.7 million. And adjusted third-quarter EBITDA margin, on actual operating activity unrelated to fuel, is 7.9% for Q3 2015 compared to 9% last year.

The 110 basis point decline in income from operations, expressed as a percentage of revenue, excluding fuel surcharge and related activity, while still disappointing to us, is less than the 140 basis point decline indicated by our consolidated statements of income alone.

Factors that triggered the margin decline, both in absolute and relative terms, include, first, a contractually agreed price reduction at one of our long-standing value-added services operations; a $1.3 million increase in our auto liability reserve; startup expenses at the major new operation Jeff mentioned; and various other nonoperating charges. These items were partially offset by selected customer bonuses, tax credits, and beneficial settlements that were recognized in the third quarter.

Income from operations in Universal's transportation segment, expressed as a percentage of Q3 2015 revenues, declined to 4.3% from 5% in Q3 2014. Universal's logistics segment, which includes both value-added services and about $25 million of revenue from dedicated transportation, generated a 10.4% margin, down from a 12% margin in the second quarter and 14.3% in Q3 2014.

Universal's year-to-date capital investments through September have totaled $13.4 million, which includes $4.2 million in Q3 purchases. Our free cash flow in the third quarter, which we define as EBITDA less CapEx, was basically flat to the previous year at $21.3 million compared to $21.5 million in the third quarter of 2014.

Although quarterly trends in free cash flow can be volatile due to the timing of investments, which are impacted by delivery schedules, we do think this free cash flow is an important metric to calculate. It demonstrates the underlying strength and liquidity of the asset-light model we deploy in Universal's different operations.

Now I want to repeat something I mentioned on our last earnings call. The expenditures for transportation equipment will increase in the next few quarters. And we will be making new investments in our Mexican value-added services operation in connection with an important, six-year contract renewal and scope expansion. As a result, our annualized run rate CapEx over the next few quarters should remain at about $40 million, based on current assumptions about equipment delivery schedules.

Please take a look at the supplemental information in our earnings announcement, which provides operating and capacity metrics for our businesses, presents our segment financial performance, and which includes the methodology we use to calculate the EBITDA metric.

As of today, our general demand and pricing outlook has changed somewhat since the end of the second quarter, where trends have held relatively stable from late winter through the summer. More recently, truck load rates have been fairly stable for us. But spot pricing, which impacts our intermodal business, has weakened, as Jeff mentioned. Demand in pricing in our contract-based value-added services operations is more predictable for the last nine weeks of 2015. And overall activity is increasing, with the launch of the new operations. As a result, we anticipate fourth-quarter revenues in the range from $265 million to $280 million.

For the full year, 2015 operating income for our transportation segment businesses is expected to end up in a range from 4.3% to 4.6% of revenues. On a margin basis, this is not what we planned earlier this year. It is, though, a good foundation for the continuing improvement initiatives we are implementing inside the Company.

Based on recent performance, we are paring back margins on our logistics segment to a target range from 10.6% to 10.8%, with some upside potential. Our customer development efforts remain focused on securing long-term contracts that generate 15% operating margins. But we need to completely address the challenges confronting our dedicated business, and achieve run rate performance at our newest value-added operations before we can expect higher aggregate logistics margins in Q4.

Based on Universal's actual third-quarter financial performance and these potential Q4 revenue and profit outcomes, we now predict 2015 full-year EPS in the range of $1.32 to $1.37 per share, based on booking Q4 earnings of $0.29 to $0.34 per share.

Looking further down the road, our management team here is currently evaluating assumptions for 2016, which we use in our bottom-to-top forecasting and management reporting processes. Our current thinking assumes comparative stability in fuel and labor rates in 2016 at current levels, barring unforeseen events.

Summarizing Jeff's comments a few minutes ago, we expect our value-added services revenues in 2016 to grow in the high-single-digits; for intermodal revenues to grow at about 5%; and for our truckload revenues, excluding our fast-growing Cavalry brokerage business, to grow in the low-single-digits. Margin improvement does remain a critical focus, and we will have more to say about that when we release our 2015 results, early next year. We will file our Q3 10-Q late next week. It will provide additional detail behind the financial performance we are discussing right now.

With that, Jeff and I again want to thank you for spending your time with us this morning. We always appreciate your interest, and now want to invite Amy to open the call for your questions.

Amy?

(Operator Instructions). Scott Group, Wolfe Research.

It's actually Wang Zhu on for Scott. Yes, just a few questions from me. One, just wondering about how you were thinking about capital allocation going forward, between tendering of shares, the dividend, and paying down debt and acquisitions.

This is Jeff. I'll start, and David will probably add comments. I think we're going to try to keep CapEx in that, what we talked about, in that $40 million range, which is where we're going to end up this year. I think that's the right number from a CapEx perspective. Our dividend policy is not going to change. We don't plan on doing anything different there than what we did this year.

From an acquisition perspective, I think we're looking at anything that makes really good sense. I've said before that I thought the multiples were just too high, and we weren't really interested in playing a lot from an M&A perspective. But I think things are becoming more reasonable. So I think we're going to continue to look for opportunistic acquisitions. But there's nothing of any significant size that's on the radar right now.

I would just add, we're inside a couple years of from our current credit facility expiration date. So we are looking very carefully at making sure that we've got the capital structure in place to carry us through the next few years, based on what we're seeing in some of the debt capital markets. So that's something -- we've given some thought to all those things that Jeff just described, and also a view on how we're going to actually finance that.

Okay, great. And in terms of the wind energy, just any expectations going forward? Is that something that's going to continue in fourth quarter and into 2016?

What we're getting from our customer who we get the wind energy business from is that they don't have really good visibility beyond the end of 2016. We think it will still be very solid next year. But beyond next year, no one is really saying much because there's just not much visibility, based on the political climate, what's going to happen after next year. But next year should still be a pretty strong year for us.

Okay. And how have October truck trends trended, between -- in terms of both rev per load and load count?

Pretty much the same way they have been trending. There hasn't been a significant change either way. Pricing has been stable, and load count has been stable. So, good and bad; it hasn't picked up, but it hasn't declined.

Okay, got it. And just one final question here. On direct personnel related benefits, it seems like there was uptick in this quarter relative to prior quarters. Just wondering what's driving that.

I would say that, number one, there's just the mix shift in relative terms between our value added business, which are more labor intensive than that truckload businesses, on the one hand. And number two, specifically, we are involved in the ramp-up launch of the large operation that Jeff described, which is a value-added business. So the labor costs there are running a little bit ahead of the revenue, which is also what is impacting the margin in the logistics business.

Okay, great. Thanks so much for your time, guys.

Chris Wetherbee, Citi.

I wanted to ask a little bit about the seasonality of the business into the fourth quarter. Just trying to take all of the guidance you guys gave and incorporate it there. Typically I think fourth quarter, seasonally from an earnings per share perspective, has been a little lower than the third quarter. It sounded like maybe there were some things in the value-added business that might offset some of that. But I guess I just want to make sure I'm thinking about the puts and takes right. Maybe something that was in the third quarter that doesn't repeat in the fourth quarter. Just want to make sure I'm thinking about that cadence right.

Right. And I think you are typically right. Fourth quarter is usually weaker. We do see some potential for improvement just because of these large operations we've got in play. That won't be fully baked in the fourth quarter, but a lot of the implementation costs will be behind us. So we should start seeing some margin improvement that we would typically have in those size of operations, into the fourth quarter, but not fully baked until the first quarter. So that's part of it, I think, Chris. We expect to get some benefit there.

Chris, we also -- if you looked at the last year's third versus fourth quarter, there was clearly a drop-off in earnings per share, fourth to third. We are obviously not anticipating anything like that. In the fourth quarter, holiday shutdowns that Jeff mentioned are nothing like the ones we see in July and early August. So it's a little bit softer, but it's not the same phenomenon. So I always think of fourth quarter from the value-added perspective as being a little lighter than the third quarter. Or, I'm sorry, a little bit stronger in tone than the third quarter, and then this year we've got this added impact of the new Texas operation.

Okay. Okay, that's helpful. And then just what I'm putting again the pieces together for 2016, Jeff, I think you mentioned a couple of business wins on the value-added services side. I think you mentioned 45 plus I think about 10. I think all of that kind of goes into the [bath]. But next year, from a revenue perspective, I think you're looking for high-single-digits. I'm guessing the offset to the growth of the new contract comes from the industrial customers. Are there any other customer maybe rolling off of contracts that we think about, or maybe some of those repricing events that we should be thinking about for next year?

No. We don't have any visibility right now to any contracts that will be ending. Everything has been a renewed that we have in place, so there's nothing falling off. There definitely is weakness on some of our larger industrial customers, just because of slowdown in their production, so that's going to offset some of those wins. High single digits? Maybe we'll be a little better than that, maybe, but I think we're trying to be a little bit more conservative. But there's nothing that should be dropping off that's of significance, other than just a slowdown in some of our existing customers.

Okay. That makes sense. And my final question would just be sticking on value-added or logistics, incorporating some of the intermodal business in there, when you think about the margin profile -- and I know you'll have more to say, probably in a quarter, on how you think about 2016 -- but just conceptually, the big business wins that you get, do you feel like of those come in initially at a margin that may be a little bit better than what you realized this year? Or is it the kind of thing that you would expect need to see some seasoning of those contracts before you start to see some real margin improvement? I'm just getting a rough sense, directionally, how to think about this.

Right. There's no question -- it kind of goes in phases. The very beginning when you implement, you obviously have implementation costs that offset your margins to start with. And then when you get into that and you are fully ramped up and you are in play from an annualized perspective, the margins are stronger at the beginning of, say, a three-year contract or a five-year contract, as we've talked about before. Because that's when your costs are the lowest, and they are priced on an average basis for the three years or five years, or whatever the contract term is.

So you do see strengthening in margins once the project gets fully implemented and past the ramp-up stage. We expect that with these new projects that we've got coming on. So, once we get into late fourth quarter into the first quarter, we should see what I would say would be normalized margins from these size of projects.

Chris, I might just add to that a little bit. The very large one that we're doing right now has really started midway through the second quarter, and -- I'm sorry, midway through the third quarter -- and would be at that point by the end of the year. And that's a big project. So kind of two quarters on the outside of soft revenue, depending on the size and complexity of the project. So it doesn't go on forever, but we do have that kind of impact for maybe a few quarters. And the bigger the project, the bigger the effect, I guess I'll say.

But we don't run those -- importantly, even though that's a contract business, we never run that stuff at a loss where we are still making profits, and we're very sensitive to that. We have a pretty good track record on that. But it does take a few quarters, particularly on a really big project, to get to full momentum on it.

Okay. Yes, that makes sense. That's good color. Thanks for the time, guys. Appreciate it.

(Operator Instructions). Todd Fowler, KeyBanc Capital Markets.

Just to follow up on the last question there. So, is the expectation or the view that the normalized margins in value-added services is still somewhere in the mid-teen level, and that is something that you can get to, maybe unrelated to what's happening in the economy, that those contracts are structured to get you to a mid-teen margin? But in any given quarter, you could have startup costs and some other things that work against you. I'm just trying to get a sense for what the margin profile for that business should be, longer-term.

Yes. That's still what we're shooting for. And I think I've stated in the past, historically the margins may have been even a little bit stronger than that. And I'm willing to maybe come back a little bit to get more growth. And that's what we were looking for from a value-add perspective. But I think the mid-teens is right where we expect these to be, once we get past the implementation phase.

We had a Board meeting earlier this week. And we brought in one of our representative operations and spoke -- had them walk our Board through that particular example, which is an example of what [Jeff] and the Company -- we described as our own-the-plant strategy. And that particular example is an outstanding example of opportunities to be solidly above 15%, when we're doing it right.

So, when Jeff is describing, we might walk a 16% or 17%, and now you're down to 15%. That's to capture more of those opportunities. But we have several examples in our Company that, because of the value of what we do for those customers in their supply chain, are above that. And so there's been no change here in terms of our expectation, in terms of the value of our servicers to our customers, and our ability to price accordingly.

Okay. Yes, that helps. The genesis of that question is, it's been almost 2 years now since we've been at that margin level. And I'm just trying to get a sense of, is it something different with the way the contracts have been priced? Is something different with the mix or the economy? But it sounds like that really the target still should be to get to that mid-teen level, irrespective of what's happening in the external environment.

The blended margin that includes dedicated is clearly being impaired by the dedicated.

Yes. Dedicated is having a bigger impact.

Okay. And I know, Jeff, you made some comments about where you think you're at with the dedicated progress. Is that something that you should be fully worked through into 2016? Or maybe just a little bit of clarification, where you are at with that.

That's the expectation. It's sure taking a lot longer than I expected. There's been some very difficult conversations with some of our key customers. I can tell you that, for the first time in the last couple of months, we did actually turn the corner and made a little bit of money for the last two months. But I don't think -- if you are going into a tough time from a dedicated perspective, with winter and everything else coming up, we're just trying to get it to where it's sustainable from a profitability perspective.

So, my comment was, I do believe we've turned the corner. We still have a difficult conversation with one customer left that's still a drain, but that's going to fix itself into the first quarter. So I'll tell you that we're going to be in pretty good shape as we end this year, but we'll be finally where I think I want to be by mid-first-quarter.

And how much is dedicated revenue on an annualized basis, at this point?

Today it's a run rate of $100 million. It was $25 million in the third quarter, which I had mentioned in my comments.

Okay. I might have missed that, David. Thank you. Just a couple of last quick ones. Understanding that there's still time to go this year, and of the visibility into next year is always a little bit challenging -- but thinking about the revenue expectations that you have, I guess maybe thinking more on the cost side. If we don't see an environment where intermodal is up mid-single-digits and transportation is up low-single-digits, how much control do you have on the cost side, maybe to adjust the cost structure to flex down if we continue to see a softer environment persist longer into 2016?

Well, there's definitely levers we control. It is a very variable model, and asset-light. So a lot of the costs go away on their own if we're just not hauling them, because it's a variable model. But, having said that, there are opportunities here at the corporate office. And we've begun some of those already, because we're not waiting for it to turn around. There's clearly opportunities for us because of our revenue decline. And we're tightening the belts. We're looking at things from a cost structure and back-office perspective.

And we talked about that all year, as far is putting all these companies together, and we've accomplished a lot of things to streamline back-office. But there's clearly, from a technology perspective, opportunities for us to continue that, that we haven't really gotten to those opportunities yet. So there's plenty to do there. There is absolutely levers that we can pull, and we're going to continue to pull. I'm not waiting for it to not get better. We've got to do it now, and that's what we're doing.

Okay. That helps, Jeff. And then just my last one. The comment -- I think you had some comments on this in the prepared remarks as well -- but it was in the release, about the customer contract price change. I'm not sure I completely understand what that is in reference to; and maybe just a little bit more color on around that would be helpful. Thanks.

Sure. We basically made the decision that actually was made quite some time ago, a little over a year ago -- actually, before I got here, so it was a little longer than a year ago -- to extend an agreement with a long-term, very valuable customer for three more years, but they were looking for some cost reduction for them. So we chose to do that. But it does have an impact on the margins for that business, but we still have very solid margins with that existing customer. So it was just a business decision to give a price decrease, but extend an agreement that was very valuable to us.

Okay, that helps. So that wasn't something that was unplanned or a surprise, and that would've been incorporated back in the initial guidance. It wasn't something that came about because of a change in the environment or something?

Nope, nope. It's been a long-term --.

Got it, okay. Well, go Royals, I guess. We'll see what happens.

(laughter) You bet. Go Royals!

Some positive news on that front. Okay, thanks a lot, guys.

Absolutely, absolutely. Thanks, Todd.

This concludes our question-and-answer session.

I would now like to turn the call back over to Jeff Rogers and David Crittenden for closing remarks.

Sure. Again, we sure appreciate everybody's time and everybody's support of Universal, and we look forward to talking to you in the future. Take care.

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