Universal Logistics Holdings Inc (ULH) 2017 Q3 法說會逐字稿

Hello, and welcome to Universal Logistics Holdings Third 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's business objectives or expectations and can be identified by the use of the 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 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 and Investor Relations. Thank you.

Mr. Rogers, you may begin.

Thanks, Julie. Good morning. Thank you for joining the Universal Logistics Holdings, Inc. third quarter earnings call. The Universal team delivered record revenue in the third quarter of $313 million, the most in any quarter in our history and represents an increase of $41.5 million or 15.3% over last year.

As reported, we lost $0.12 per share, but this included $0.38 per share of charges for ongoing litigation. Excluding legal accruals, our earnings, up $0.26 per share, was 47.8% higher than last year.

Again, in the third quarter, we saw strong top line growth at every business unit, with the exception of our dedicated transportation group, which was negatively impacted by extended plant shutdowns at several auto assembly plants that we support. Several of our business units had incredible growth. Our brokerage services had 26.3% year-over-year growth, truckload services had 14.8% growth, and our value-add services, our largest service line, grew 19.9%. Helping to drive this growth in value-added is our business unit that supports Class 8 trucks, which had revenue growth of 34.9% year-over-year as Class 8 truck production continues to recover. And the exciting part, you know, is the recovery in several of our key markets has only just begun.

Beginning with truckload services, which excludes brokerage. As mentioned, our revenue was up 14.8%. FEMA activity accounted for $4.7 million in the quarter, and we expect additional revenue to flow into the fourth quarter as well from continuing hurricane recovery efforts.

Overall, load count was down 1.6%, while revenue per load was up 10.8%. Flatbed and heavy haul loads increased 2.3% year-over-year, as we see continued strength in the industrial segments that we serve.

Currently, flatbed represents 72% of our total loads. Revenue coming from new agents continues to grow and exceeds $21 million on an annual run-rate basis and represents 4.9% of total revenue for our-agency based truckload unit.

The largest challenge we face in our truckload services group is continued -- continuing difficulty to find and retain willing and qualified drivers. The pricing environment continues to improve as contractual customers are offering rate increases to secure capacity in the 5% to 20% range and the spot market continues to be on fire with double-digit increases the norm.

Brokerage revenue increased 26.3% year-over-year, being driven by load count increases of 14% and revenue per load increases of 12%. While there is clearly pressure to find capacity at the right price, our standalone brokerage business delivered its best ever financial performance in the third quarter. This performance was driven by continuous efforts to drive our cost per transaction through technology, and improved contractual pricing that has finally started to move upward, as shippers have started to see the light, so to speak, and now realize what it is going to take to secure capacity in this environment.

Our intermodal team continues to deliver very solid and consistent results. Overall, revenue increased 7.4% driven by 2.7% increase in loads and 3.7% increase in revenue per load.

Our team in truck increased the truck count to 929 trucks in the third quarter, which gives us significant advantage, as we see pricing finally starting to improve and container volumes ramping up. Dedicated services revenue decreased 12% year-over-year, but remained profitable for the quarter, which is a reflection on our dedicated team and their ability to adjust and still make money in our only asset-heavy operation.

We did just secure over $10 million in new business from an existing customer, which begins January 1st, so we fully expect to be back in growth mode soon.

We did also bring on a small piece of business recently outside the automotive space, which I was happy about, so we can prove ourselves in another vertical. As mentioned, our value-add operation supporting heavy truck showed revenue growth of 34.9% year-over-year, and our margins for that business have rebounded, as expected, and are now back to more historical norms, which will provide great support for increased earnings going forward.

For our value-add business that supports our auto, aerospace, retail and industrial customers, we continue to see strong topline growth, 15% year-over-year for third quarter. As I mentioned last quarter, we are focused on one last, very large logistics operation that continued to put a drag on third quarter earnings, but now with full implementation, we still believe strongly that this operation will become profitable in fourth quarter.

When I reflect back on the last 1.5 year in what we have accomplished by securing our leading position in several of the largest automotive logistics operations in North America, and how this position can lead to strong earnings and future growth in the future, this is invaluable.

Reviewing key metrics and data, such as the latest import, export volumes that reflect strong growth; the latest automotive SAAR of 18.4 million units, with reflects very robust activity, albeit hurricane-impacted; Class 8 ACT forecast that projects a 15% growth next year; the latest PMI and Industrial Production Indexes showing strength, all give us great confidence that we are entering a great environment for Universal Logistics Holdings.

And then, add on to all of this positive momentum, the upcoming ELD mandate and continued trucking capacity shortfall, we believe great things are ahead for ULH.

In closing my formal comments, I want to let you know that with a more stable environment going forward, and what we believe should lead to more consistent earnings, we will no longer provide pre-guidance before we publish final quarterly results.

With that, 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 a net loss of $3.3 million or $0.12 per share on total operating revenues of $313 million in the third quarter of 2017. This compares to net income of $5 million or $0.18 per share on total operating revenues of $271.5 million in the third quarter of 2016.

Included in the reported loss of $3.3 million was $17.4 million in pretax charges, or approximately $0.38 per share, for ongoing litigation. Consolidated income from operations decreased $13.5 million to an operating loss of $3.5 million compared to $10 million in the third quarter of 2016.

EBITDA decreased $10.3 million to $9 million in the third quarter of 2017, which compares to $19.3 million one year earlier.

Our operating margin and EBITDA margin for the third quarter of 2017 are a negative 1.1% and positive 2.9% of total operating revenues. These metrics compare to 3.7% and 7.1% respectively in the third quarter of 2016.

Looking at our logistics -- looking at our segment performance for the third quarter of 2017. In our Transportation segment, which includes our legacy truckload, intermodal, NVOCC and freight brokerage businesses, operating revenues for the quarter rose 17.3% to $199 million compared to $169.7 million in the same quarter last year. Income from operations decreased to an operating loss of $7.6 million compared to an operating profit of $4.6 million in the third quarter of 2016.

The entire pretax charge of $17.4 million from litigation was recorded against Universal's Transportation segment. Excluding litigation charges, our Transportation segment's operating income was $9.7 million, a 112% increase over the prior year.

In our logistics segment, which includes our value-added logistics, including where we service the Class 8 heavy truck market and dedicated transportation business, income from operations decreased 12.5% to $4.7 million on $113.7 million of total operating revenues compared to $5.4 million on $101.1 million in total operating revenue in 2016.

After adjusting for the $17.4 million charge for litigation, Universal Logistics Holdings would have recorded operating income of $13.9 million, up $3.8 million or 38.3% compared to the third quarter of 2016. Excluding the $0.38 per share for litigation related charges, EPS came in at $0.26 per share, up $0.08 per share compared to the third quarter of last year.

EBITDA, excluding pretax litigation charges of $17.4 million, increased $7.1 million or 36.9% to $26.4 million compared to $19.3 million in the third quarter of 2016. Adjusting for litigation charges, our operating margin and EBITDA margin for the third quarter of 2017 were 4.4% and 8.4% of total operating revenues. These metrics compare to 3.7% and 7.1% respectively in the third quarter of 2016.

On our balance sheet, we held cash and cash equivalents totaling $2.9 million and marketable securities of $14.6 million. Outstanding debt, net of $1.3 million of debt issuance cost, totaled $243.5 million. Based on current interest rates, we are projecting 2017 interest expense for the year to be in the range of $9.5 million to $9.7 million. Capital expenditures for the quarter totaled $13.4 million for a total of $46.7 million year-to-date.

For 2017, we are expecting capital expenditures to be in the $60 million range.

And finally, our Board of Directors declared Universal's $0.07 per share regular quarterly dividend for the 18th consecutive quarter. This quarter's dividend is payable to shareholders of record at the close of business on November 6, 2017, and is expected to be paid on November 16, 2017.

Julie, we're ready to take some questions.

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

I wanted to start out on the litigation charge. Just want to kind of get my arms around that and get a sense of, is this sort of it? Do we expect any sort of leakage beyond the third quarter, potentially 4Q or 2018? Or do you think this is sort of accrual that you have here is kind of got this contained from where we stand right now?

Chris, this is Jeff. We're not going to say a whole lot about that, since it's ongoing litigation. We feel very, very confidently that it's going to be reversed or reduced at this point for lots of reasons. So we're comfortable where we're at, and we don't expect there to be any more, and we'll see how it plays out. But we're confident that it's going to be reversed or reduced.

Okay. Okay, that's helpful. Now on to sort of more pressing topics in terms of, sort of, core operations here. I guess, I wanted to get a sense of how you're foreseeing trends with your customers? Obviously, a stronger quarter here in 3Q. As we move into the fourth quarter, if you could remind us of some of the seasonal factors we're seeing. But it sounds like you have some new business wins starting up in the fourth quarter. So relative to your historical patterns, 3Q to 4Q, how do you think the next quarter kind of plays out from a demand perspective?

It's interesting. You know, the fourth quarter, it kind of depends on the segment. Because intermodal, they'll be past their peak into the fourth quarter. Typical transportation, you know you're past the peak in the fourth quarter. What you're seeing in such strength, from a price perspective, that the volume may be off, but I think the price is going to be so strong -- and what we're seeing, that I'm not sure that you'll see such a huge, maybe, decline that you would normally see, seasonality, into the fourth quarter. So I feel pretty good about that. Logistics is only impacted because some of the plants shut down for a week around Christmas and New Year's and maybe a day on Thanksgiving. So that's going to normal. We don't see anything abnormal there. But -- so I think, it should be a fairly normal seasonal pattern, other than the fact that the pricing environment is so strong.

Okay. Okay, that's helpful. And speaking of that pricing environment, in terms of the sustainability of it, obviously, we're seeing what's going on in, in spot rates, but you have ELD's coming, and I think there's a general sense that the market's tightening up. How do you sort of think about your prospects? Maybe a more direct question is, how much of your book of business do you have a shot on goal in terms of getting better pricing, let's call it in fourth quarter, maybe the first half of 2018?

Yes. Always keep in mind, with our transportation and intermodal, we're 50% spot, 50% close contractual. So we're already taking advantage, and I don't see the spot market changing at all or being more robust than what it is now going forward. Because you may see -- and somebody brought up an interesting point, I don't remember who I was talking to this week, about, we're going into what's considered the seasonal heavy-for-package volume, which is the UPSs, FedExs, Amazons of the world, which also puts tremendous pressure on truckload capacity, because they then pull all of that -- a lot of truckload capacity out to feed their needs for line haul to support that. So I don't see anything changing on a capacity perspective going in for the rest of the year. And then you lead right into the ELDs next year first quarter, and the mandate and when they'll actually shut trucks down in April, if they're not compliant. So Chris, I don't see anything changing from a capacity, and there's no reason for price not to stay firm or continue to even get firmer in the foreseeable future.

Okay. Okay, that's helpful. Two more quick ones, and I'll turn it over. Just following up on FEMA. You mentioned you might have some of that business stick around in the fourth quarter. Any sense, order of magnitude? Is it going to be sort of the same, less or maybe more than what you did in 3Q?

Obviously, at this point it's probably going to be very similar. We're still, obviously, moving load. We still got of a lot of trailers tied up on detention, and we get paid for that. So I think there's still quite a bit of activity that will happen in the fourth quarter or so. We're staying kind of the same.

Okay. All right, that's helpful. Last question, the dedicated non-auto business. Can you give us a little bit more color? Any, sort of, more insight you can give us in terms of that opportunity, vertical or, sort of, order of magnitude? Just want to get a little sense of, sort of, this business. I mean it seems like it's an interesting one for you.

Yes. That's -- it's a small, like $1 million. We've got another one that just we kicked in, that I didn't talk about. One has been kind of an industrial vertical. The other is a pure retail vertical. So, we really actually have 2 wins. I just found out about the other one this morning. And they're both small, $1 million. The exciting thing for me is -- I've been talking about it for 1 year plus or even more than that, that we wanted dedicated outside of automotive, because sometimes the automotive guys are very, very difficult to deal with when it comes to purchasing a dedicated transportation. So I'm excited to just get our foot in the door, toe in the water, to just show that we can, in fact, be successful outside of automotive. So they're small. They're -- from a sizewise they're insignificant, but it's just the excitement of getting something new to try.

Yes. No, that makes sense. I guess, just one real quick. When you think about sort of the opportunity in front of you, you have a tailwind from the freight market. Do you have the right team in place to be able to execute? Take as much advantage of this opportunity as you can over the course of the next, sort of, 12 to 24 months, in your opinion?

I do, absolutely. You know, I've been talking about that for several years, too. That's what I've spent the vast majority of my time in the first couple of years is changing a lot of leadership positions, realigning people's focus. Bringing in different people at different spot. So I do feel like we've got the right leadership team. We're going to have to continue. And it's hard to find top talent people, no matter what area you're looking at. I don't care if it's logistics or engineering or technology. So that pressure's there, because the market is tough right now for talent. But I do feel we're going to continue to build bandwidth in the logistics side, which is what we've got to continue to do to sustain the growth that we're at. But I firmly believe we have the right team in place.

(Operator Instructions) Your next question comes from John Engstrom with Stifel.

I think, if I understand correctly, on an adjusted basis, this $0.26 is above Street consensus and also the first time seen year-over-year EPS growth since 3Q '13?

That is a correct statement.

So congratulations.

Yes. The core came in better than what we thought, obviously, when we preguided. And then once we preguided, then we got the litigation issue, which we surely did not expect. But it is coming a little bit stronger, and we have been working our tails off, even with quite a bit of headwinds for several years. So it is good to see very, very strong momentum, and we feel pretty good going forward.

Yes, that's absolutely outstanding. And we've been vocal, and published in our thesis that we think the market is really improving, has improved and is improving and will continue to improve. My question for you guys is, if you run along those lines, and I'm not asking you if you buy into that are not, but if you sort of take that as your initial set, you know, for the last 3 years or so -- maybe, 4 years, I guess, you guys have been working really hard to manage your cost structure, trying to remain as lean as possible and trying to be diligent with your cash flows. Based on the thesis that I just outlined, you could be doing a reverse for the next year or 2 or 3. Hopefully longer. But that's a big change in, sort of, not necessarily corporate strategy, but perhaps, tactical strategy. I'm wondering if you could discuss what your plan is for managing growth. How you guys are thinking about sales and marketing? How you guys are thinking about risk taking? In the thesis I outlined, and I'm not asking if you agree with it or not, but that would imply that you guys are also going to have significantly improved free cash flow. What are you guys thinking about for uses of cash? You've got some debt. You could do divvies, buybacks, deals. And I think, I heard correctly. I think I heard you say, that you guys were issuing a special dividend. Did I catch that correctly?

No. Just a normal dividend.

That's the normal dividend. $0.07 per share, John.

Got it. Okay. Yes, so it's a little bit of a broader question, and it's sort of based on some things we put out. I'm not asking you guys if you -- what's your future outlook is? But sort of, if you buy into our thinking that the market is really improving and we should be entering a growth period, how you would implement your tactical strategies within that sort of environment?

Well, we've been growing pretty well this last year. I mean growth has not been our issue. It's really been more of a margin issue we've been focused maniacally on trying to get our margins back to historical norms, which -- part of that is going to come from the natural environment improvement too. When it -- when you look at truckload and pricing, and Class 8 truck, and all those things that are really coming together nicely for us. So we've been growing, and I think part of the approach that we're going to look at going forward is, to make sure we're growing correctly, or smartly, as I like to say. So in some cases, I'm very, very pleased with what we've been able to do on some of these very, very large logistics operations. Because at the end of the day, there's only few of those out there. And if you get them, it's awesome. It's a nice quiver in the -- in your backpack. But they have been very challenging from a margin perspective. So as we look forward, we're constantly reevaluating what is the appropriate way to grow, is it small chunks at a time or is it big chunks? So we're constantly looking at that, and that's really tactical. A little bit, maybe strategic. But I don't see a whole lot of changes, but just kind of analyzing things. But we're going to constantly look at reducing debt, because I think that makes perfect sense. As free cash flow comes on, that's probably going to be priority #1, reduce our debt. Priority #2 is, what can we do from a shareholder value perspective? I mean that's obviously on the list of things. And then 3, I think it’s going to be time, very soon, to start looking at acquisitions. And we've always got things on the table, but they haven't -- we haven't found anything yet that makes sense, that moves the needle, and we haven't been in a position to really do it because we've been so focused internally trying to fix some of the issues, get the right leadership in place. And so I feel more comfortable now that we're in a better position. So I think, as things start to improve, more free cash flow, consistent earnings, all of the things that we're talking about here, just put us in a very good spot for lots of different options to be honest with you.

Yes, I think that's right. And now, I think the sequence of how you eat up new sale, and thank you for clarifying that the revenue has grown. You're absolutely right about that. That's a poorly phrased comment on my point. But nonetheless, I think the debt paydown makes a bit of sense. Have you guys -- how do you guys think about sort of what's your optimal or targeted debt to cap or debt-to-EBITDA or debt to whatever ratio you guys think makes the most sense based on the nature of your business? Do you guys have a target or a sort of a point for that, that you can comment on?

Yes. John, it's Jude. I would like to get it to 2 -- 2.5x EBITDA. I mean, that's what I think our goal is. And I think we feel pretty good on a go-forward basis with 2.5x as we grow. That would give us sufficient cash to bring on additional debt for acquisitions, sufficient cash to pay the dividend and to fund operations. And then if something larger comes along, we'd also have the ability to lever up to 3x. So I think 2.5x is a good number, and that's where we're headed.

Yes. That's helpful. And now Jude, given the sometimes cyclical nature of the business, when you say 2.5x EBITDA, you're talking TTM or some measure of over the cycle or...

Yes, TTM.

Yes. Okay. And now you talked about, if something interesting comes up, you could lever up to 3x, and Jeff also indicated that you know. He brought up acquisitions. Now -- would, and I'm speaking purely theoretically here, would an ideal acquisition perhaps be in sort of a new vertical or customer segment to open up exposure to new markets? Or maybe doubling down on something tangentially related to where you already are? Would it perhaps be geographically based? Sort of how do you guys think about what your ideal partner or target would be?

Yes. I think all of those is the right answer. We always talk, and are very interested in expanding our customer base. So that's always going to be an interest of ours. Because we're heavy automotive, everybody knows that. So we would always love to expand in other verticals. We've done it through organic growth pretty well in aerospace and defense, we're winning little small pieces of business there that I'm pretty excited about. So we know we can do those verticals very well. So I think expanding to different customer bases makes perfect sense to me. Geographically, we're pretty much everywhere already. So the geography thing -- I can tell you right now, I'm not really interested in doing a lot of expansion overseas. I like to get over US of A, North America type stuff. So we have no intention -- I don't think of growing internationally. But so...

Would you guys have a preference for asset-based or asset-light or a blended mix or...

I don't think there's any preference. I think it just has to make sense for who we are and what we do. I can tell you right now, we're not going to get into something that we don't know what the hell we're doing, to be honest with you. I mean, just to be frank, I mean, I like to keep things pretty simple, and we know who we are, and we know what we do well, and that's what we're going to do. And that's where the acquisition target would be, so.

Yes, that's helpful. And I guess, as a point of good housekeeping, given the fact that it's almost November of 2017, the ELD implementation deadline, although, nonenforcement deadline is December 18. Are guys fully ELD-implemented?

I don't know operator...

Operator -- operative...

Yes, the owner-operator. Again those are the guys that provide a little bit of an issue, because we can't force them per say. I mean we've been encouraging them every which way we can. But we're 45% right now. So we've still have a little ways to go. But we've got a plan. We're adding about 200-plus drivers every week. So we will hit the December 18th target without a problem. Unless we have a glitch. But we don't expect that to be an issue. So we will be fully compliant by the mandate.

You have no further questions at this time.

Okay, super. Well, we sure appreciate your continued support of Universal Logistics, and we look forward to talking to you again soon. Take care.

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