Universal Logistics Holdings Inc (ULH) 2017 Q2 法說會逐字稿

Hello, and welcome to the Universal Logistics Holdings Second Quarter 2017 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 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, Michelle. Good morning. Thank you for joining the Universal Logistics Holdings, Inc. Second Quarter Earnings Call.

We continue to see strong revenue growth with consolidated revenue increasing 10% to $305.2 million in second quarter. Our challenge remains on the earnings line. But in second quarter, those challenges were really limited to 2 value-added operations and I'll provide more color on those in a minute.

As we saw in first quarter, each of our business lines delivered top line growth in the second quarter. Intermodal, our value-added business supporting Class A truck, truckload, and brokerage, all matched or beat last year's operating income performance. Our dedicated unit performed well, but had a tough comp, as last year's second quarter was their best performance. Our legacy value-add business was again our primary headwind from an earnings standpoint. For truckload services, which excludes brokerage, revenue was up 9.2%. Our overall load count was down 3.5%, but did improve slightly on a sequential basis quarter-over-quarter.

Flatbed and oil and gas loads increased 2.9% year-over-year with weakness coming from van loads.

Revenue per load, excluding fuel surcharge, was up 8.9%; and revenue per mile, excluding fuel surcharge, increased 1.9%. We are encouraged by affirming pricing environment, especially in the spot market. Revenue coming from new agents continues to grow and exceeds $18 million on an annual run-rate basis. We believe we are seeing a recovery in our industrial base. And the largest challenge we face in our truckload services group is finding willing and qualified drivers. Right now, if you have a driver, you have freight.

Brokerage revenue increased 21.5% year-over-year, being driven by load count increases of 18.2% and revenue per load increases of 2.8%. Revenue per mile was also up 7.9%. We continue to be encouraged by what we see in the transportation space. Capacity is tightening and prices are rebounding. We are extremely pleased with the continued outstanding performance of our intermodal team. Overall revenue increased 6.5%, driven by 4.2% increase in loads and 2.4% increase in revenue per mile.

Continued margin expansion has led to best ever operating results. Even with a stubborn pricing environment and less-than-stellar international container activity, we see good things ahead for our intermodal business.

Dedicated services revenue grew 2.4% year-over-year. While operating results were below last year, dedicated was still solidly profitable. Our challenge in dedicated is our reliance on auto, which has been so strong for so long, but clearly, in several plants that produce cars, we are experiencing the expected downturn. As I have said before, dedicated is about asset utilization. So we are working hard to reallocate assets to other plants and also expand our presence into other verticals.

For the first time in 6 quarters, our value-add operation supporting heavy truck showed revenue growth, 2.9% year-over-year. Each new production forecast increases in our pipeline of new projects is encouraging. We fully expect this business unit to get back to historical margins in the next few quarters.

For our value-add business that supports our auto, aerospace, retail, and industrial customers, we saw continued revenue strength as our growth year-over-year was 20.3%.

We have 2 remaining operations that created our earnings drag in second quarter. One, as discussed in previous quarters, will be a full implementation by the end of the third quarter. We know where our cost overruns are and are taking aggressive actions to reduce cost. So as the full revenue comes online, we are confident this operation can be profitable in the fourth quarter. Unfortunately, the remaining operation has a different outcome. After very difficult discussions and a tremendous amount of work trying to bring our Mexican operation under control, we have mutually agreed with our customer to exit a very large portion of this business. The decision was based on our ability to meet the customers' expectation of service performance and to be fairly compensated for that performance. Because of the size and scale of this operation, which had over 2,000 employees, as mentioned in our release, the second quarter operating income hit was $8 million.

When we look at the remaining legacy value-add operations still in our portfolio, I see strong performance and tremendous opportunities for continued growth. Based on what we see today, we still believe each of our business units will see growth for the full year 2017. Our range for truckload services is in the 4% to 6%, intermodal services in the 1% to 3%, brokerage in the 18% to 20% range, dedicated 3% to 5%, and our value-add business in the 10% range. We see continued strengthening in the transportation sector. Many of the headwinds we have experienced for quite some time are dissipating. We have a lot to look forward to.

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

Thanks, Jeff. Good morning, everyone. Universal Logistics Holdings reported second quarter 2017 net income of $2.7 million or $0.10 per share on total operating revenues of $305.2 million. This compares to net income of $9 million or $0.32 per share on total operating revenues at $276.8 million in the second quarter of 2016.

Consolidated income from operations decreased $10.4 million to $6.4 million compared to $16.8 million in the second quarter of 2016.

EBITDA decreased $7.6 million to $18.4 million in the second quarter of 2017, which compares to $26 million 1 year earlier.

Our operating margin and EBITDA margin for the second quarter of 2017 are 2.1% and 6% of total operating revenues. These metrics compared to 6.1% and 9.4%, respectively, in the second quarter of 2016.

Looking at our segment performance for the second quarter of 2017, in our transportation segment, which includes our legacy truckload, intermodal, NVOCC and freight brokerage businesses, operating revenues for the quarter rose 3.4% to $175 million compared to $169.3 million in the same quarter last year. And the income from operations increased by 22.8% to $8.5 million compared to $6.9 million in the second quarter of 2016.

In our logistics segment, which includes our value-added logistics, including where we service the Class A heavy truck market and dedicated transportation business, income from operations decreased 123.8%, reporting an operating loss of $2.5 million on $129.9 million of total operating revenues compared to an operating profit of $10.6 million on $107.2 million in total operating revenue in 2016. On our balance sheet, we held cash and cash equivalents totaling $2 million and marketable securities of $14.1 million. Outstanding debt net of $1.4 million of debt issuance cost totaled $250.2 million.

Based on current interest rates, we are projecting 2017 interest expense for the year to be between $9 million and $9.5 million. Capital expenditures for the quarter totaled $15.6 million for a total of $33.3 million year-to-date. For 2017, we're expecting capital expenditures to be in the $50 million to $58 million range. At the top end of this range, $45 million of our projected 2017 CapEx will be for transportation, intermodal and material handling equipment; $10 million to support our value-add businesses; and $3 million in real estate and terminal improvements. And finally, our Board of Directors declared Universal's $0.07 per share regular quarterly dividend for the 17th consecutive quarter. This quarter's dividend is payable to shareholders of record at the close of business on August 7, 2017, and is expected to be paid on August 17, 2017.

Michelle, we are ready to take some questions.

(Operator Instructions) Your first question comes from Chris Wetherbee from Citigroup.

This is Prashant on for Chris. So I guess, been a lot of positives on the top line here. So I wanted to kind of dig into that a little bit. Brokerage revenue is up 25%. Looks like the margins in the transportation business, as a whole, are going in the right direction. Brokerage, we've heard from some of the larger competitors that there is some compression on margins. There are some headwinds just sort of cyclically as we move to next couple of quarters. You guys are moving from a different point. So I just kind of want to get a sense of the puts and takes in terms of how you see margin cadence working out in the back half of the year and into 2018? And how much are macro headwinds maybe a factor there? And what can you do to maybe alleviate those?

Yes, I'll start with that. We're seeing, what I would call, normal improvement in our margins on the pure truckload space and we would expect that to continue. The brokerage is an interesting deal because you think about it, as the spot market improves, the expectation would be that the margins also improve for brokerage because therefore you'd have the ability to actually just get more of the -- the full spend. But what we've experienced and what we're seeing, and we'll see how it continues is, it's becoming more and more difficult to find capacity. So you're, therefore, having to maybe give up the margins or not, expand your margins because you just having to pay that much more for purchased trans. So why I expect the margins to improve as the spot market gets better and continues to strengthen, it's just becoming more and more difficult to find PT. So the expectation is, I do expect it to get better, but it's just becoming very, very difficult.

Understood. That makes a lot of sense. I wanted to talk a little bit too about the Mexican business. I guess, that's one of the big items you exited there. If we could just get a little more color on what that operation was, and maybe get a sense of how much that was dragging the previous quarters before this one, so to get a sense of what maybe the underlying run rate at Mexico was if we were looking at our models?

That business, we've been involved down in Mexico with that OEM for about 9 years. And it is a -- it was one of our more complex and full logistics operations that did everything from warehousing, inventory management to subassembly, kitting. So it was really a pretty complex fulsome logistics operation for us. The issue became -- the expectation on the customer to basically almost triple the size of it over a pretty short period of time, and we struggled. It's a very difficult labor market in that particular city, almost, probably one of the toughest labor markets in Mexico. And therefore, we just could not come to, what we believe, is a reasonable outcome from a compensation perspective, as well as I don't think we executed initially well. I think we came around pretty well, but the customer and us mutually agreed to exit it. So you saw the $8 million in this quarter. It was a drag in the first quarter as well. Not nearly to that extent, but it has been a drag, honest, for probably 2 to 3 quarters. And I don't -- in front of me, I don't have the exact numbers of what that drag's been, but -- yes.

Yes, it was about $0.5 million in Q1, Prashant. So $8 million in Q2 and $8.5 million for the year.

Yes. So keep in mind that $8 million is made up by quite a few different things. Not small amount would be severance, and all the things you have to do down in Mexico, when you are exiting 2,000 or moving 2,000 employees to another supplier. So there is a lot of things that we do feel are behind us from that operation. So...

Sure. Okay. That makes sense. That makes -- it accelerated, it sounds like, sequentially, as the year went on, that make sense. It kind of turns me to the next question on the expense line items. One of the things that we've talked about over the previous quarters, is there -- as you have these starts in some of your operations and specifically related to Mexico, with -- there are some higher costs on the Direct personnel or benefits line, we've seen that elevated for a few quarters now. So I guess, a 2-parter, you exit in Mexico is that can give you some relief on that line? And then maybe turning to like the remaining part of the business, where you had some cost overruns that you're getting in the handle on now that you mentioned in your prepared remarks. How much of that is also represented there in those -- in that expense line? So if net-net, should we see some, maybe, a little bit of margin improving based upon improvement in those expense items going forward or we still going to see this kind of level going into the back half of the year?

Well, I think, clearly, with the Mexico issue behind us or at least that large, large portion of employees that will definitely have an impact on that line in the third quarter. That other operation that I've talked about, that we're still getting to full run rate in the third quarter. Will still be a drag from a headcount. That's the big issue, when you have these large, and this particular one is at the peak of headcount on that and we had over 700 people that we had added to run this operation. And so you always have extra heads to try to get it up to an implementation point. And then you start weaning the heads back as you get there. So we're in that process of weaning the heads and reducing the heads, even as more and more revenue comes on because of the training and the learning curve and all of those things in a huge operation like that. So there will be a reduction, even from that operation, I think, in the third quarter, but we're still going to have excess cost. That's why I said, I think, it's going to be fourth quarter before we see profitability in that operation. But I think overall, that line of employee benefits will start coming back and show an improvement in the third, and then, definitely into the fourth.

Okay. Makes sense. And then just one last one, and then I'll turn it over and I appreciate all the time this morning. You talked about the dedicated sensitivity to the auto cycle. And across transportation, we're seeing sort of expectations coming down and sort of understanding that the auto cycle is plateaued, and now we're seeing a bit of deceleration. I think you called out a bit of that impact, but also wanted to get a sense of your agility in being able to continue to find other ways to service those OEMs or maybe rededicate some of the resources internally that you have towards that into maybe other revenue segments. Just sense and so, how can you reallocate -- I guess, resource reallocation? And also what can you do on that type to sort of maybe soften the blow from the auto cycle starting to unwind a little bit here?

Yes, that's a really good question. We still have quite a bit of dedicated transportation, even here in Southeast Michigan that supports, whether it be heavy -- not heavy truck, but the SUV and light truck, which are still those SAARs and those production forecast actually increased this last month, believe it or not, for that segment of the automotive group, but -- and we do support that. So obviously, we have the ability to shift our idle tractors because they happen to bring down a plant that supports cars, and we can shift those tractors to another dedicated operation here in Southeast Michigan that also supports non-cars or SUVs and trucks and light trucks and things like that. So we do have the ability because we have so many operations and so much going on here in Southeast Michigan, so it's easy for us to allocate those assets. What I'm really trying to do and where we've got a lot of effort is to find dedicated transportation pieces of business outside of automotive altogether, which then kind of alleviates that issue in the cyclicality of automotive. But we've not been successful. We had a real small project come on that we got into, but it's very few trucks and it's kind of our first foothold into something nonautomotive. But that's our big push, is really try to grow that dedicated model because we think, we know how to do it pretty well. We've done a lot of things. We've got a good operations team, but we've just not been able to break into a large chunk of business outside of auto. But at the end of the day, you can -- we can reallocate because we do support the OEMs and a lot of things. SUV and trucks, which does give us the ability to kind of reallocate assets that way.

(Operator Instructions) We have John Larkin from Stifel.

It's nice to see the top line beginning to grow again, that's terrific.

It is.

And it also looks like a lot of the drags on margin are behind you. Congratulations on getting that all ironed out. So we look forward to better numbers in the future here. But as you continue to see virtually all the businesses growing organically, is that going to be the primary growth driver as you go forward, but continue to work on margin, continue to work on organic growth within each of the business units? Or are we getting close to the point where you might consider some kind of strategic acquisition, perhaps to fill in a hole so that you have another arrow in your quiver to serve your customers? Where do you stand as for as timing on getting back to perhaps a little bit more of an M&A-driven strategy?

John, that's a good question. As we talked several times off-line, my whole focus, since I've been here in the 2.5 years, is really to kind of, one, understand our capabilities and strengths. Get the right team in place in lot of different areas, and we've made a lot of those changes over the 2.5 years. And we've had a lot of focus internally because we've had a lot of issues and headwinds to battle. So M&A or acquisitions just has not been on the radar. But you bring up a good point, and we're always looking for something that makes sense. Nothing has made sense yet. But I can tell you that we're probably at a point, we've got some technology enhancements that are coming online later this year, that will allow us the platform to roll things in, I think, very easily and quickly. So I'm not going to say that things are imminent, but I think we're at least open to it because I think we're in a much better place now from a team and the ability to roll things in perspective.

Could you expand a little bit on that technology comment in terms of what the functionality of that new technology is and what its capabilities are, relative to say what you have now? And then maybe question for Jude. On the availability that you would have on your balance sheet, given the current structure to fund organic growth and/or to fund accretive acquisitions?

Sure, yes. I mean, the -- first of all, the technology that we have now is basically old, mainframe-based technology, where all the inputs require human intervention. So what we're rolling out at the end of this year in conjunction with our ELVs are our first handheld tablet, which will be in all of our drivers' hands. So we're going to go from a complete paper and manual process to an electronic and digital process for all of our tendering, all of our documents and imaging and all of the -- and the delivering of the loads in our system. So we're going to have a lot of efficiencies in our dispatch offices and in our back-office. And that's just Phase I of the project. Phase II of the project over the next 18 months is actually to eliminate all of our legacy systems. So we won't -- within 18 months, our goal is to be off of our legacy TMWSuite system, our legacy AS/400 system. So the impact that we see is enormous. That'll give us the ability to not have to hire additional people every time we grow. So the goal is to have a fixed back-office and then have that technology allow us to scale as we grow our load comps. So that's -- those -- that's the big project that we're working on right now. And on the balance sheet, we have about, what is it -- about $30-some million worth of availability, right now. So -- I mean, really -- the combination, we'd do something with, I know, maybe the securities portfolio to help. We have some kind of deck arrangement, but really the availability that we have right now is just funding current operations. And if we did something large, obviously, we'd have some kind of financing that would have to go along with that.

Will the new system be completely disengaged from sort of the mothership, CenTra? I know early on, at least, there was some kind of a sharing of technology platforms?

Yes, the only real technology platform that we share is the general ledger and payroll system. The operating systems for the companies outside of CenTra are all unique to the businesses.

Okay. But there is no plan to develop your own payroll and general ledger?

No, absolutely not. Those are always cheaper to buy. And they're always cheaper to maintain by getting them from somebody else. Those systems aren't internally developed either. Those are -- both are off-the-shelf packages.

Got it. Got it. Any comments on the Energy Business, which has been looking pretty strong in some regions of the country? I know that was an area of strength a couple of years ago. Has that come back for you at all?

Yes, we're clearly seeing strength in oil and gas. The Texas, obviously, Louisiana, even in Pennsylvania, some of those fracking operations, which have been relatively strong, even though the price of oil per barrel has kind of been bouncing all over the place. But we definitely see a lot of strength there, a lot of that capacity is back in the market. Again, it all kind of went away 2 years ago because of what it needed. But now we are definitely moving a lot of oil field loads and pipe and things like that.

But that's mostly limited to open deck flatbed-type business, you haven't really gotten into water or sand or oil transportation or anything like that?

No, we have not. We've looked at a few opportunities there, but we've not really expanded yet into, they call it bulk, whether it's fracking sand or in came some cases, the water, but we've not done a lot of that, John.

Okay. And all these growth rates that you quoted for each of the lines of business. Those all take into account, the winding down of the Mexican operation and any natural winding down that may take place across the auto industry as well, as things slowdown there a bit?

Yes, they do. And the only one that are really changed from the last quarter, we lowered the dedicated a little bit just because of that slowdown that we're seeing in some of the production plants, but the 10% on the value-add, we think, is doable for sure since we're seeing over 20% year-to-date. So it does take into consideration the fact that we won't ramp up. And that Mexican operation, you won't see a huge decline in our revenue because of that. We just won't see the massive ramp up we'd expected because we had about $20 million in revenue last year in that operation, we're going to have about $20 million in revenue this year. But we won't get to $40 million, which is what we expected, $40 million to $50 million next year. Because we just aren't going to ramp up.

Got it. That's very helpful. Nice to see the movement in the positive direction here.

(Operator Instructions) I have no further questions at this time. I'll turn the call back over to the presenters for closing remarks.

Thanks, Michelle. We sure appreciate everybody joining us and your continued support. We look forward to talking to you all next quarter. Take care.

Thank you, everyone. This will conclude today's conference call. You may now disconnect.