Universal Logistics Holdings Inc (ULH) 2017 Q1 法說會逐字稿

Hello, and welcome to Universal Logistics Holdings First Quarter 2017 Earnings Conference Call. (Operator Instructions)

During the course of this call, management may make forward-looking statements based on their best views of the business as seen today. Statements that are forward-looking relate to Universal business objectives or expectations and can be identified by the use of words such as belief, expect, anticipate and project. Such statements are subject to risks and uncertainties 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; Mr. Jude Beres, Chief Financial Officer; and Mr. Steven Fitzpatrick, Vice President of Finance, Investor Relations. Thank you.

Mr. Rogers, you may begin.

Thanks, Candy. Good morning. Thank you for joining the Universal Logistics Holdings first quarter earnings call. We have many good things going on, especially the top line growth we're experiencing as several of our business units are beginning to see recovery. Our challenge remains on the bottom line, where implementation cost and cost overruns continue to compress our margins in value-add.

Over the past 2.5 years, as you know, we have been restructuring Universal Logistics Holdings to lay the foundation for future opportunity and growth in both transportation and logistics, the right people, plans, resources and structure to ensure Universal is poised to be the supplier of choice for our current and future customers across many key industries. There is no doubt we are seeing the fruits of our labor as customers continue to reward us with new business and our revenue growth confirms their trust in Universal.

Consolidated revenue for the first quarter was up 9.2% compared to first quarter last year with double-digit growth in brokerage, value-added and dedicated transportation of 16.6%, 12.7% and 12.9%, respectively. Actually, we saw revenue growth in every reported unit as truckload services finally turned the corner with 2.4% growth first quarter year-over-year and intermodal delivering 1.6% top line growth on a year-over-year basis even as the pricing environment remained less than robust. For truckload services, which excludes brokerage, our overall load count was up 3.1% on a per day basis, driven by big increases in oil and gas loads and continued steady increases in overall flatbed loads.

Revenue per mile excluding fuel was up 0.9%, when fuel was added in, revenue per mile increased 3.6% year-over-year. Revenue coming from new agents continues to grow and exceeds $12 million on an annual run-rate basis. We had the team focused and ready to take advantage of the industrial recovery. Brokerage revenue increased 16.6% year-over-year, being driven by load count increases of 11.3% and revenue per load increases of 6.7%. Revenue per mile was actually down 1.1%, a combination of higher length of haul and excess capacity keeping spot rates muted. Overall, we are encouraged by what we see.

Capacity appears to be tightening for flatbed loads, especially, which should drive higher pricing as the year progresses. And our industrial end markets appear to be strengthening. Our intermodal team continues to perform well in spite of a difficult environment. Overall loads handled increased 4.3% on a per day year-over-year basis. Revenue per load was down 0.8% including fuel; down 1.1% without fuel. I'm very proud that our intermodal unit continues to drive margin expansion through improved asset utilization and increases in accessorial charges. Dedicated services grew 12.7% year-over-year and delivered strong operating income even with several significant reductions in plant productions where we support the auto industry. Obviously, asset utilization is the key in this model and the team performed well. Our revenue per truck per week increased 18.9% year-over-year. While we have yet to increase revenue outside of automotive, I'm confident we have a model that works and our opportunity to grow is significant. Our opportunity for immediate and long term improved results continues to be our value-added businesses. Revenue from heavy truck was down 11.5% year-over-year.

But keep in mind, our decline in revenue for heavy truck for the fourth quarter was 38%. And our revenue improved sequentially 15.2% from fourth quarter to first quarter. Clearly, trends are improving and each new production forecast increases. The drag on earnings year-over-year for the first quarter was less than $1 million and March ended up being slightly better compared to last year. While we still see a little drag as we complete second quarter, we expect good things from our heavy truck operations in the second half of the year. Again, as with the last several quarters, our value add business that supports our auto, aerospace, retail and industrial customers saw margin compression due to excess cost in 3 large programs.

One of these large programs we feel has stabilized and we're starting to see expected margins, but it took much longer than planned. The other 2 programs are still in implementation and we will not be at a run rate until second quarter for one and third quarter for the other. Annually, the combined revenue for these 3 programs will account for more than $120 million and close to $80 million in new revenue once fully implemented. The drag on earnings from these 3 programs compared to our expectation was around $6 million in Q1. Our overall growth from this legacy value-added group in the first quarter was 20.3%.

As I have mentioned on previous quarters, our opportunity is executing better on project ramp-up and getting new projects to run rate cost at a much faster pace. The operation team is the best in the business and they have delivered great results over and over again, so I'm confidence we will get our cost in line with expectations and deliver the bottom line results to go with the great top line results. Our opportunity is right in front of us and in our control.

So based on what we see today, we still believe each of our business units will see growth in 2017 in the range we provided on the previous call. Truckload services in the range of 4% to 6%, intermodal services 1% to 3%, brokerage 18% to 20%, dedicated 5% to 6% and our value-added business in the 10% range. We have a lot to be excited about.

I will turn it over to Jude, who will provide more details on our financial performance.

Thanks, Jeff. Good morning, everyone. As I'm sure you all noticed in our first quarter release, we made a few changes to the presentation of our financial results. I'd like to start off by highlighting them for you now. First, we expanded the presentation of our revenue categories to reflect Universal's current service offerings, those being truckload, brokerage, intermodal, dedicated and value-added services. Truckload, brokerage and dedicated were formerly grouped together and categorized as transportation services. We've also aligned our operating data to include metrics for each one of the service lines we are presenting.

We are excited about providing you the additional level of detail and expect these changes to provide greater visibility into our trucking operations. We have also revised our income statement category, selling, general and administrative to now only reflect Universal's back-office expenses and have relabeled the category just general and administrative expenses. The primary driver behind this change was to realign the direct cost associated with selling activities and include those costs in either our Direct personnel and related benefits line or in Other operating expenses. We believe these changes better align the cost associated with direct sales activities across each of our service line -- lines and to isolate the overhead cost associated with the management company.

None of these changes have impacted our total operating revenue or income; however, we believe this will allow our shareholders, the investment community and other stakeholders to better understand our business and what drives Universal's results, which we believe is a positive change. Now let's get into the highlights from our earnings release. Universal Logistics Holdings reported first quarter 2017 net income of $4.3 million or $0.15 per share on total operating revenues of $284.4 million. This compares to net income of $7.5 million or $0.26 per share on total operating revenues of $260.4 million in the first quarter of 2016.

Consolidated income from operations decreased $4.7 million to $9.2 million compared to $13.9 million in the first quarter of 2016. EBITDA decreased $3 million to $19.6 million in the first quarter of 2017, which compares to $22.6 million, 1 year earlier. Our operating margin and EBITDA margin for the first quarter of 2017 are 3.2% and 6.9% of total operating revenues. These metrics compare to 5.3% and 8.7%, respectively, in the first quarter of 2016. Looking at our segment performance for the first quarter of 2017, in our transportation segment, which includes our legacy intermodal, NVOCC and freight brokerage businesses, operating revenues for the quarter rose 13.2% to $178.4 million compared to $157.5 million in the same quarter last year, and income from operations increased by 7.8% to $6.4 million from $5.9 million in the first quarter of 2016.

In our logistics segment, which includes our value-add logistics, including where we service the Class A heavy truck market and dedicated transportation business, income from operations decreased 51% to $4.2 million on $105.7 million of total operating revenues compared to $8.5 million income from operation on $102.6 million in total operating revenue in 2016. On our balance sheet, we held cash and cash equivalent totaling $3.4 million and marketable securities of $14.6 million. Outstanding debt net of $1.5 million of debt issuance cost totaled $256.3 million.

Based on our expected future debt levels and current interest rates, we are projecting 2017 interest expense for the year to be between $8.5 million and $9 million. Capital expenditures for the quarter totaled $17.7 million. For 2017, we're expecting capital expenditures to be in the $50 million to $60 million range. At the top end of this range, $45 million of our 2017 CapEx is for transportation, intermodal and material handling equipment; $12 million to support value add business and $3 million in real estate internal improvements. And finally, our Board of Directors declared Universal's $0.07 per share regular quarterly dividend for the 16th consecutive quarter. This quarter's dividend is payable to shareholders of record at the close of business on May 8, 2017, and is expected to be paid on May 18, 2017.

Jeff?

Before we take questions, I'm proud to mention that Universal Logistics has once again been named a top 50 logistics company for 2017 by Transport Topics. Obviously, I am proud of our team for this recognition. Now let's go ahead and take some questions.

(Operator Instructions) Your first question comes from the line of Chris from Citigroup.

All right, Jeff, obviously, revenue results were solid in the first quarter, and that doesn't seem to be the issue really anymore. And I think you nailed it. I mean, this is really all about costs. And I think, maintaining cost discipline in the face of good business opportunities really kind of what we need to see here. So -- you struggled a little bit with that, and so want to get an understanding maybe of some specific things that you're doing to really kind of get a handle on this and sort of start to bend that cost curve a bit more favorably to take advantage of the revenue growth opportunities you have this year?

Yes, Chris, you're absolutely right. Couple of things that we've done that are focused on, and really is the cost in that -- the value-add programs. We've got -- we've implemented what's called a lean team. It's nothing new to a lot of folks that are dealing with this. But we didn't have it in place when we implemented these large programs, and we should have; I mean, honestly, on hindsight. So we've got a team that's focused on going in and leaning out the cost and making sure that the number of heads that we have in this program is one, what was in the bid, or in some cases, the customer may change the scope on you midstream, and say, "hey, why don't you go ahead and do this for me as well." And therefore, we add folks to do that. We just need to make sure, one, we're getting paid for; and two, that we're using the appropriate labor for the work. So it's really about one area is bringing in this lean team that can come in and look at every activity that we do in these big warehouses and make sure we've got the appropriate cost assigned to it. The other thing that we're focused on is getting more a management structure to increase our bandwidth that really is just day-to-day management. Some of these things are massive. So you can imagine a $40 million piece of business that may have 700 employees under 1 roof that operates across 3 shifts. So it really is getting a handle from a leadership perspective, making sure that we've got the right people that can manage these programs. And honestly, we're -- we've gotten behind the eight ball on these 3 that came all at one time. So in theory, in hindsight -- when I look back, I think, maybe we bit off a little bit too much at one time. You want to see the growth and that obviously is not our issue now. But the good thing is if you don't have the revenue, you don't have the issue. But if you got the revenue, at least it's right in front of us and we can work on it and fix it. So the opportunity clearly is there and I feel very confident that we'll get the cost under control. It's -- there's nothing that's being done at these large programs that we have not done a 100 times before. They're just bigger and a little bit more complex.

Okay. Okay, that's helpful. And is that 6 -- you called out $6 million in terms of those 3 big programs, with cost, I think, you said above your expectation. So when we think about the -- I'm guessing it's the first quarter number, when we think about the first quarter finance -- the profit performance of the business, is that the appropriate way to look at it? Your profit could have been $6 million better if you'd been able to sort of manage that. Just want to make sure I understand that comment that you made.

Yes, that's -- really that's exactly right. And above my expectations, some of it clearly is just expected cost that you have -- that you incur when you're ramping up something big. Now some of it was just normal cost because at the beginning you have extra travel team, you've people from all over the country flying in and helping to implement. You bring in extra labor because your -- you can't make a mistake from the customer's perspective because you can't shut the assembly plant down. So some of that is expected. But where it created more than expectations was, it's just taking too long, it's taking longer than expected. So where we should have been done, maybe before first quarter in some of these, are further down the path of implementing. We're still implementing and we still have those excess costs. So the $6 million from our perspective is, once we get to run rate, we get the legitimate cost that should be there and all the excess out, we'd have seen $6 million of additional earnings.

Okay. Okay, yes, that makes sense. And so let's talk a little bit about timing, in terms of managing that out. I think you talked about second half is an opportunity to ramp. But can we say somewhat definitely that you feel good about the ability to kind of -- you maybe have 1 or maybe 2 more quarters that could be challenging from a cost perspective before you're able to get these costs under control?

Well, clearly, one of them is further along in implementation than the other. Of the 2 -- the 2 big ones that I will say have not quite stabilized yet and are still in implementation. I feel pretty good that one will be completed in the second quarter. We're probably another month to 1.5 months away on that one. The other one is clearly a third quarter issue before we really get it behind this. And that was part of the plan, too. I mean, it -- part of the assembly plan is, they're adding a couple of vehicles to one of the assembly plants that we support, and that doesn't actually happen until June. So it's going to be another several months beyond that, that you actually get all of your excess cost and you get to a run rate stabilization. So it's clearly a third quarter phenomenon for both of them to be behind this. But -- I mean, we'll get one of them behind us in the second quarter.

Okay. And then I have 2 quick questions here. In terms of April, just the pace of overall activity. Obviously, you guys look at a broad swath of transportation and so would love to get a sense of how you guys are thinking about the market broadly speaking, not project specific, in the month of April?

And when I look at -- and I'll just say, revenue is the barometer. When I look at our truckload group and our intermodal group, actually, the revenue comparisons year-over-year are actually stronger in April than they were in the first quarter. Now we're seeing volume increases as well. But what is encouraging that I can see from a truckload perspective, so keep in mind, we're industrial flatbed focused, we're seeing pricing starting to firm up in that space because our volume is up X, but our revenue is up quite a bit higher than what it was in the first quarter. I haven't really dug in to see from a comparative perspective how the comps look from April year-over-year versus March year-over-year. But we're definitely seeing stronger revenue year-over-year in April.

Okay. Okay, that's helpful. And last one, just thinking about sort of the business pipeline. Obviously, putting the cost aside, your growth has been really solid. What do you think about sort of the pipeline of opportunities out there? Or let's talk about maybe the second half of this year. How does it look, how you're feeling and sort of is there opportunity out of some upside of some of your historically core segments?

Well, the sales pipeline on the transportation agent base is as strong as it's ever been. Obviously, it's been a 2-year hiatus because of the industrial recession and all the things that have happened in the truckload group. But from a new agent acquisition, from what the agents are bringing on, that pipeline is very robust. And we feel pretty good about what we're seeing for the next year in truckload. Intermodal, that's still, I think, going to be little bit tough. The import, everybody is reading the same thing. The steamships are still struggling. So that 1% to 3% in intermodal is kind of about what I'm going to say. I'm going to keep conservative there and we're not seeing huge expectations on the intermodal side. But the sales pipeline with logistics, heavy truck is coming around, which is somewhat surprising. You read every other day, it comes up with some new forecast and says heavy truck production is going up. I'm not exactly sure who's buying all the trucks to be honest with you. But they're increasing the production at the plants, which is good for us. So that's encouraging. And then on the value -- our legacy value-add business, our pipeline is still extremely robust. Our decision at this point is to maintain discipline, which you said in your opening comments, is to make sure we're bringing on the programs and projects, one, that we can implement good and that it's priced appropriately. So there's no shortage of new business opportunities. It's really going to be our decision as to what we bring on from a logistics perspective that makes sense to us.

(Operator Instructions) Your next question comes from the line of Conor from KeyBanc Capital Markets.

This is Conor on for Todd this morning. Just real quick. I want to follow up on your comments, specifically around the industrial market strengthening and flatbed strength that you saw during the quarter. Is there any specific end market in general or geographies in general that you really saw noticeable pickup?

Well, again, oil and gas. I think everybody realizes what's going on with oil and gas with the price of oil going up. I think we saw a definite increase in activity once oil got above $50 a barrel. And -- it's kind of been bouncing around that for quite a while. So that seems to be a point where everybody is comfortable, doing more and drilling and that creates a lot of activity. So our oil and gas loads are up just immensely. Now, again, it's off of a smaller base, but there's definitely a lot of activity there. The general flatbed steel hauling is just, I think, continued momentum. There's not any 1 area that we're seeing just massive improvements. Automotive steel is actually starting to slow down a little bit. As everybody knows, the production in automotive probably peaked. We still see a lot of strength because we support pickup trucks and SUVs and those are still booming on the logistics side, but just the overall flatbed activity from hauling steel for automotive is definitely slowing down a little bit. But the broader industrial just feels better, but it's not really coming from any particular segment.

Okay, that's helpful. Do you've any sense from maybe clients or customers discussions that you've had that they're -- they may be more optimistic going forward or do you think kind of -- it's going to trend worse things are right now?

No, I think the steel customers, again, outside of what I would say the automotive guys have all been very, very optimistic lately. We meet with them continuously because that's obviously our core customer base on the flatbed side. But everybody that we meet with is pretty doggone optimistic. Part of it, I think, they're looking for some of the things that the current President has been talking about as far as import tariffs and things like that, which help our domestic steel customers and they're all excited about that. So some of it's general excitement, some of it is optimism looking forward, but there's clearly more activity as well. It's nothing that's just, what I would call boom, but it's clearly momentum and it's moving in the right direction.

Okay, that's helpful. It's good to hear. And my next question. Historically, from 1Q to 2Q, you guys have seen an uptick in earnings sequentially. And I was just wondering if that's going to be the case this year, can you spread some color around earnings going forward there?

Yes, I mean, our seasonal quarters would still remain the same. We would expect second quarter obviously to be stronger than the first quarter. Second quarter is historically our best quarter when it comes to the logistics side of the business for sure. Third quarter is usually stronger on the transportation side. But we expect things to play out fairly normal from a seasonal perspective.

Your next question comes from the line of John from Stifel.

So we've heard through a variety of channel checks across the private flatbed space, flatbed open deck, specialized, step deck, whatever you guys want to call it, and also a handful of subsidiaries of both private operating companies and now public companies, that freight is materially more interesting this year than it had been at the end of last year. We can also see that through a lot of different economic indicators and load boards and a variety of metrics, which all sort of fits in with the commentary we'd all been thinking about given the election and the commentary on the industrial environment and so on and so forth. And you just mentioned a couple things in steel and oil, and that all makes sense and that's great. And we could certainly see it in your revenue figures, which is awesome. And Chris previously in his call did also call out a $6 million net income item, which implies sort of further upside just of the numbers that were reported. And my question pertains to, given that you guys just reclassified and the fact that it looks like the environment could potentially be turning, I also want to be cautious to make sure we don't all get over our skis with forward-looking estimates. And I'm wondering if you could maybe help us think through if there are any onetime items on the top line in 1Q that maybe we should sort of normalize out for. What sort of feels like a more realistic number looking forward? We just don't want to be too aggressive coming out of the gate.

No, we appreciate that. Because we sure don't want you get in that -- we don't want anybody getting out of -- over head of their skis. Keep in mind that the excess cost that we've been primarily talking about is really on the logistics side, and is not necessarily focused around an industrial resurgence or any of that. That would really be more focused in our transportation and truckload group. So kind of separate those a little bit. There's nothing in our top line number that would be like a onetime pop from a specific customer. We see that trends -- those trends continuing. So top line really is not our issue. And we think, again, the truckload is going to continue to grow and firm up as the year progresses. The biggest opportunity really is in the pricing. Because we still see, in a lot of cases, very muted price. It's starting to come around on the flatbed side for sure, but there's really not been any big resurgence on band pricing at all. So there's huge opportunities on the pricing side of the house that really just helps everybody going forward from a margin perspective. So we definitely don't want anybody get out over -- ahead of their skis because we still have a couple of very tough quarters. On the Class A truck side, for sure, because we've got another quarter to work through that when you look at comparisons and we clearly have quite a bit of work in front of us on the logistics side, where our costs are just higher than they should be and we've got to focus on that. So, I guess -- does that help some?

No, that certainly helps. And again, it's just sort of trying to be conservatively cautious, but also optimistic. And you did bring up a good point, which was pricing. I heard you say revenue per mile was up 0.9%, which I presume is a little bit behind your internal inflation, so that would imply some pretty good upside once all these are implemented and maybe some drivers exit out for the oil patch or construction jobs or things of that sort?

Yes, absolutely.

The other question I wanted to ask you is, knowing that you guys are a little bit more cyclical than some other players in the space. When things do get good, they can tend to kind of get good pretty fast and even if we just benchmark you against, we'll say, 2014, where you had an EBITDA of, in rounded terms, $115 million. It makes all of your debt ratios look very different than they do if you look LTM 2016. I'm wondering what kind of metrics you guys use, whether it's NTM EBITDA or debt-to-cap or whatever it may be and sort of what target ratios you might be thinking about? And if we do find ourselves in sort of a cyclical upswing and a lot of these things do start going right for us -- or for you guys. How you guys then start to think about uses of cash and capital?

John, it's Jude. Yes, debt-to-EBITDA is the one that we focus on, and we totally agree. We don't necessarily have a debt problem, we have an earnings problem and an EBITDA problem, right? So I mean, based on the comments that Jeff made earlier, I mean, if you add $24 million of op income, that makes a huge difference to our EBITDA. It makes those ratios a lot cleaner. Obviously, we'd like our debt-to-EBITDA to be lower. I mean, we'd like between [22 5 and 25]. I think that's a pretty comfortable level. And we think we can get there as long as we continue to make those improvements on the value-add side of our business as well as Class A truck.

Yes, I think that makes sense. It's just -- it's interesting how quickly the -- all the metrics change adjusting the function of some of those end markets.

We agree.

Okay, so that's interesting. So the story really looks like you guys are already showing the materialization of revenue upside. The revenue -- the operating ratio figures below that. There's some onetime items pertaining to investment and I would also think -- I'll call it, economies of scale as revenues grow would help pull that down a bit. The -- I think that was only question I had. So the last question I had actually, I'm sorry lost my train of thought. So you guys reclassified to break up between truckload and logistics, which makes it a little bit easier for us from an analyst point of view to think about valuation on some of the parts point of view. Would you anticipate -- if we think about the disparities between growth and truckload versus logistics, knowing that the logistics business, now that we have a clean figure for OI, sort of warrants a different multiple than the truckload business does. How do you guys think about sort of long run growth rates normalized on the top line?

(inaudible) the 5 different service lines that we now report, is that what you're looking at?

I'm just looking at in terms of the segments of truckload and logistics. I realize there's a couple of other buckets that play into those. But I'm just sort of thinking about this in terms of an asset and asset-like basis.

Yes, again, the interesting thing with our truckload is -- in my old life, I'd always say that an LTL carrier is going to kind of move with GDP. We're a little bit different than that, because we're so cyclical and we're tied to end market, so the long-term growth rate -- that's a hard one to say, John. I would say it probably changes on 3-year cycles to be honest with you, versus the long-term view from a transportation and truckload perspective. But the logistics, our target for the logistics side of the house is about 10% growth. I mean, we hadn't -- didn't see that for 2, 2.5 years. But everything I see going forward, there's no reason why we can't grow that consistently high single digits to 10%. But the transportation, I'd always tell you, if the economy is going at 2, we should always be at a 2. And then have upswing in some of our end markets because we're so sick -- no, so specific to areas of the economy.

Yes, that's interesting. That could imply that after a couple of years, you could see yourself at a pretty close to a 50-50 split on the operating income line between logistics and truckload, which should also inflate the multiple of it.

Yes.

(Operator Instructions) There are no further telephone questions at this time. I turn the call back over to the presenters.

Thanks, Candy. Hey, we sure appreciate everybody joining us. We appreciate your support and interest in Universal. And we'll talk to you next quarter. We'll see you.

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