Universal Logistics Holdings Inc (ULH) 2022 Q1 法說會逐字稿

Hello, and welcome to the Universal Logistics Holdings First Quarter 2022 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker for today, Mr. Tim Phillips, Universal Chief Executive Officer. Please go ahead, sir.

Thank you, Erica. Good morning, and thank you for joining Universal Logistics Holdings' first quarter earnings call. Before we jump into the details, I want to take a moment to recognize Universal's over 12,000 associates who have worked so hard to get us to where we are today. We have believed for quite some time the earnings power of Universal is much greater than reflected in past results. And it has been the herculean effort of these incredible team members who have gotten us to this point.

While Universal continues to experience headwinds associated with the supply chain disruptions, automotive production and talent acquisition, I remain impressed with our employees' continued ability to adapt while providing an elevated level of service to our valued customer base. You are beginning to see the next level of execution that will expand our service levels and provide value to our customers and shareholders alike.

Make no mistake, adding new team members to address the demands of new and existing projects remains a challenge. We will focus on evaluating the expectations of our employee base and continue to shape the company to be an employer of choice in logistics and transportation. As we will outline in our remarks, performance in the first quarter of 2022 was just a glimpse of Universal hitting its stride with newly shaped contractual rates and a high level of execution.

Now for the quarter. In yesterday's release, Universal reported first quarter earnings of $1.56 per share on total operating revenues of $523.9 million. Our reported first quarter performance reflects not only record results for the first quarter, they represent Universal's highest quarterly revenues, operating margin and earnings per share in our company's history.

While first quarter was a financial win for our company, it has also brought into light the hard work and success of onboarding and positioning talent to expand oversight and increase efficiencies. I firmly believe yesterday's release reflects Universal's capabilities when we operate in a somewhat stable, productive environment, and we are paid fair rate to deliver quality services.

Now for some color on each of our service lines. In contract logistics segment, we continue to chase consistent production cadence at the auto plants that we serve. While there has been some minor disruption in early Q2, mainly driven by available supply of parts, our continued training and talent acquisition leaves us well positioned to take advantage of any production uptick. I believe our recent rate increases will allow us to continue to onboard talented employees, provide a newer fleet of material handling and transportation equipment.

All indications show continued demand for autos, light utilities and Class 8 trucks. Universal is well positioned to capitalize on this demand, supporting customer plants that produce the most sought-after trucks and SUVs in North America. Continued cost rationalization and our variable cost model have allowed us to hit many of our financial targets with a relatively low SAAR and some inconsistencies in production.

The past few quarters, we have also been discussing the production issues at large automotive plants in Detroit, Michigan and the losses associated with it. Although still not hitting our performance targets, we have recently seen progress in working through some of the production shortfalls and wage inflation issues with our customer and expect to receive a price increase sometime in the second quarter. While we will continue to rationalize our relationships, I believe the teamwork and customer recognition of increased wages and operating costs will align favorably for our contract logistics group moving forward.

While locating and onboarding talent continues to be a challenge in this space, we continue to work hard at training and shaping our workforce to take advantage of current and future opportunities. We were delighted to have a successful launch of a previously mentioned shuttle operation of 150-plus drivers for an automotive customer in March, and expect the opportunity to reach full run rate of $2.5 million a month in April. Demand for our customer-centric contract logistics product remains strong. Our pipeline remains full of opportunity, and we'll continue to rationalize each opportunity to make sure it is a fit not only for the customer, but a sound financial decision for ULH.

While our intermodal trade group continued to navigate a less than fluent port and rail network, the fruits of many months of collaborative customer discussions is visible in our first quarter rate levels. We are confident that these new rate levels will help us recruit and retain the very sought-after drivers and owner operators.

We continue to see heightened assessorial charges such as demurrage, storage and per diem, which totaled $36.2 million in the first quarter of 2022. While there is some concern about the lockdowns in China and how it affects the flow of goods over the next several months, the end point we have been hearing from our customers has been reassuring for a solid second half of 2022. Even while published spot rates have softened, our contract customers have remained committed to holding capacity by maintaining not only our rates, but also various congestion fees.

In addition to solid rate increases, our internal evaluations of operational efficiencies and rationalization of length of haul led to a 52% year-over-year revenue increase and 11.6% improvement sequentially. Our overall low count remains somewhat constrained because of turn times, which were the lowest in our history. We also experienced reduced number of contractors, and we did stretch our legs by increasing length of haul in markets afflicted by low turn times in order to keep our trucks loaded.

We were extremely pleased with our 51.2% increase in revenue per load in the first quarter, and I'm cautiously optimistic about recent trends in our contractor and driver recruiting pipeline. As this truckload spot market normalizes, I believe the cadence of owner-operators migrating back towards our best-in-class intermodal business platform will accelerate.

In our trucking segment, you're going to see some noise in load counts over the next few quarters. We took a hard look at some of our underperforming trucking operations and redeployed these assets into our better-performing ones.

In our agent-based business, we continue to see the entrepreneurial spirit of our agents shine. The group has continued to capitalize on strong pricing of premium flatbed, specialized and band freight. Overall, revenue remained elevated and was up 2.7%, which was a 41.4% increase in revenue per load. However, as I mentioned, low counts were down due to moving assets, drivers and contractors into our dedicated and intermodal operation to bolster capacity and capitalize on a better margin profile. Although the spot market had softened, our contractual band, flatbed and wind business remained steady to strong. We believe our profile within the truckload market will remain steady over the near term and favorable for the second half of 2022.

As mentioned, we see our opportunities in the flatbed and wind sector remaining stable, and with 63% of our capacity pulling a flatbed, we like our positioning in the market. Although owner-operator capacity remains tight, we think there will be opportunity to capture owners who may have transitioned to their own authority and may be getting nervous about the softening spot market. We are equally as optimistic about transitioning opportunities of small trucking companies into our turnkey agent model. We were very pleased with our new agent partnerships in the first quarter, and I'm extremely excited about the agent transition opportunities that are currently in the pipeline and the prospecting opportunities developing in the second quarter.

Our company-managed brokerage operations saw margin opportunities accelerate in the latter part of Q1. We took a careful look at our rate profile during contract renewals and collaborated with our customers to establish pricing that would cover the freight on a consistent basis.

Operating revenue per load increased 25.3% to $2,176 per load. Although the number of loads hauled was down 25.2%, we remain pleased with our pricing discipline and capacity utilization in a broker market that softened the latter part of the quarter, which led to our best quarter in the history of core operating income.

We remain focused on continuing to diversify the portfolio of blue-chip customers, while keeping an eye on the scope, responsibility. While we faced some headwinds concerning labor, equipment, supply chain and auto production cadence, we remain on point to evaluate market swings, look for solutions, and expand our footprint. We are closely watching indicators of potential market slowdown but remain optimistic of the continued path of heightened profitability, driven by strong customer relationships and operational execution.

Finally, the whole Universal team has worked very hard onboarding and training the many new associates that will help us expand our business, both in new and existing locations. We will continue to focus on elevating the expectation of our associates and customers to provide the next level of service. While Q1 results yielded the best performance in the history of our company, I am extremely optimistic that we will continue to find execution opportunities that will add value and create additional momentum.

I would now like to turn the call over to Jude. Jude?

Thanks, Tim. Good morning, everyone. Universal Logistics Holdings reported consolidated net income of $42 million or $1.56 per share on total operating revenues of $523.9 million. This compared to net income of $21.7 million or $0.80 per share on total operating revenues of $415.2 million in the first quarter of 2021. Consolidated income from operations was $57.8 million for the quarter compared to $31.2 million 1 year earlier.

EBITDA increased $23.8 million to $75 million, which compares to $51.2 million during the same period last year. Our operating margin and EBITDA margin for the first quarter of 2022 are 11% and 14.3% of total operating revenues. These metrics compare to 7.5% and 12.3%, respectively, in the first quarter of 2021.

Looking at our segment performance for the first quarter of 2022. In our contract logistics segment, which includes our value-add and dedicated transportation businesses, income from operations increased $6.7 million to $23.5 million on $201.6 million of total operating revenues. This compares to operating income of $16.8 million on $154.9 million of total operating revenue in the first quarter of 2021. Operating margins for the quarter were 11.6% versus 10.9% last year. As Tim mentioned in his comments, we are still experiencing some headwinds at our Detroit-based contract logistics business that we launched last year, but a relatively stable auto production environment was favorable -- was a favorable contributor to our contract logistics results.

In our intermodal segment, operating revenues increased $53.9 million to $157.6 million compared to $103.7 million in the same period last year, and income from operations increased $14.5 million to $23 million. This compares to operating income of $8.5 million in the first quarter of 2021. Operating margins for the quarter were 14.6% versus 8.2% last year. A large contributor to the segment's strong performance was our ability to charge market rates on chassis usage as well as assessorial services customary in this business.

In our trucking segment, operating revenues for the quarter increased 2.7% to $97.5 million compared to $94.9 million in the same quarter last year, while income from operations increased $2.2 million to $7.4 million. This compares to operating income of $5.2 million in the first quarter of 2021. Operating margins for the quarter were 7.6% versus 5.5% last year.

In our company-managed brokerage segment, operating revenues for the quarter increased $4.1 million to $65.2 million compared to $61.1 million in the same quarter last year, while income from operations increased $3.4 million to $3.9 million. This compares to operating income of $400,000 in the first quarter of 2021. Operating margins for the quarter were 5.9% versus 0.7% last year. Favorable contract rates with our customers propelled our company-managed brokerage to report their best operating results ever.

On our balance sheet, we held cash and cash equivalents totaling $14.9 million and $9 million of marketable securities. Outstanding interest-bearing debt net of $1 million of debt issuance costs totaled $401.7 million at the end of the period. Excluding lease liabilities related to ASC 842, our net interest-bearing debt-to-reported trailing 12-month EBITDA was 1.99x.

Capital expenditures for the quarter totaled $6 million. For the full year of 2022, we are expecting capital expenditures to be in the $90 million to $110 million range, with interest expense between $15 million and $18 million. Based on the current operating environment for the second quarter of 2022, we are expecting top line revenues between $525 million and $550 million, and operating margins in the 8% to 10% range.

For the full year of 2022, we are updating our guidance. We now expect the total operating revenues to come in between $1.9 billion and $2.1 billion, with operating margins in the 8% to 10% range as well.

As mentioned in the release, through the end of the first quarter, Universal acquired 257,261 shares of its common stock out of 1 million shares authorized. We acquired these shares at an average price of $20.42 per share.

And finally, on Wednesday, our Board of Directors declared Universal's $0.105 per share regular quarterly dividend. This quarter's dividend is payable to shareholders of record at the close of business on June 6, 2022, and is expected to be paid on July 5, 2022.

With that, Erica, we're ready to take some questions.

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

This is Eli Winski on for Chris. Maybe we could just start broad. I'm just curious about what your outlook is for overall demand in 2023. So you have many moving parts here in your business segments, but just curious as to your take in the out-year there.

Well, I can give you a high level view. As you listen -- and this news is no different than what you hear on the news, it's very, very hard to predict that far out in the future. The one thing we are comfortable with, because of the heavy lifting we've done over the last 6 months, is that we've really locked down a lot of our major contracts that will run over the next 2 to 3 years, allowing us to have some pricing security with some of the major operations that we are involved in.

I can't give you as clear of a picture on some of the intermodal landscape because there is a lot of uncertainty. You know what's in the news right now. But our customers on that side of it continue to give us a good read into the near future. None of them have really put anything on the table to talk about 2023 yet, but there's still positive forecast in the second half of 2022, thus, some of the guidance we're giving, we feel pretty comfortable. But I would feel it's pretty hard to shape 2023 yet. The only thing I can tell you is we've had a favorable 6 months of some contract negotiations.

Sure. That makes sense. And then maybe getting a little bit more specific here, you mentioned that loads on the intermodal side were down because of some business shifts that you guys did during the quarter. And I'm sorry if I missed this on the call here, but what are you seeing on the supply chain for intermodal containers? What should we expect the cadence to be for the rest of the year here?

Well, we're a little cautious as everybody is, understanding the China COVID lockdowns and how that's going to affect the next couple of months. We haven't seen any drastic pullback in freight to this point with the customer base that we're doing business with. We still see congestion on the East Coast, a little bit more than there is on the West Coast.

Our biggest, I would say, obstacle right now on some of the locations is just the equipment, both our trucks being able to turn X amount of loads per day, which I had mentioned that is down to the lowest level. And then customers holding on to the equipment at warehouses, which means we don't have a chassis to take back in and get that next in-port load.

And I think that you'll see a -- of course, when China lifts the COVID lockdowns, you'll see a rush of freight that's going to head our way. Where I think we're positioned well, number one, on the intermodal side, we're in all major ports around the United States. So we'll be able to capture that. Whether they take the freight bound for the United States and push it through the West Coast or try to evaluate maybe an East Coast unloading, we're positioned well.

I think we're positioned as well as we can be with our own chassis availability. The only trump card is what's going to be available in the marketplace from an outside provider standpoint. And does our customers and warehouses have labor in the right frame that they can unload in an expeditious fashion to be able to push the freight through. So I'm expecting -- I'm cautious, right, in the next 2 months. But I expect the second half of the year on the intermodal drayage side to have some consistent volumes with the customer base that we're dealing with.

Sure. Got it. One more for me, and that's just on purchase transportation expense. So normal seasonality looks like it goes up more than 1Q, but how should we be thinking about PT here throughout -- into 2Q and then throughout the rest of the year, I guess.

Well, I think from a -- not from a decimal point in dollar amount, I mean, Jude can probably speak a little more to that. But I think let's look at this -- let's level set and look at what we've done over the last year. We've taken and looked at all of our driver base around the country. We performed the market analysis. We've raised rates accordingly to make sure that we can attract the drivers that we're looking for.

And equally so on the contractor side, we have elevated point-to-point rates or if it's a contractor on a percentage trade agreement, he or she's experienced the new rates that we've been able to charge the customer. So I feel pretty comfortable that from a purchase transportation standpoint that what you're seeing now is what you're going to get going forward into the second quarter and beyond.

Your next question comes from the line of Bruce Chan from Stifel.

I guess, first, Tim, you spoke a lot about the benefits that you're seeing on the top line in terms of surcharges, and then some of these assessorials. Wonder if you can maybe speak to the resilience of those as we kind of move later into the year and move into next year?

Maybe when you think about the various segments, where are you in terms of how much of the book is priced at current market levels? And how long do you think they can stay that way?

Yes. Well, let's unpack intermodal because I think you had actually posed the question a couple of quarters ago about where we were from an assessorial charge to our customers. We rationalized that over the latter part of the year. And yes, maybe we were a little bit late to the dance on a few of them, really buckled down. And I think what we've really done is take a look at it, and I think they're fair assessorial charges for what's going on in the marketplace.

We see the customer -- the customer has given us this read on the intermodal side. They haven't pulled back on any rate and they continue to pay assessorials such as congestion fees. Even more so on some of the -- I wouldn't say hot-speech-type situations, but when the equipment gets pent up at warehouse, we've even seen the appetite even for escalating assessorial charge to remunerate for that asset fitting.

So I think the customers are really cautious knowing the fact that we've got a little bit of a lull now. And we know that we have this big glut of freight that when China does open up, that should probably push our way. So I'm saying that I'm cautious, we're going to be stable over the next couple of months. But I feel that these types of intermodal assessorial will hold going forward.

On the truckload and brokerage side, our rate levels with -- our contractual rate levels with our customers have held well. The assessorials are traditional assessorials. We've moved with the market, and I have heard no noise, and I don't foresee in the foreseeable future, those assessorials coming back down. I think we're priced favorably and fair. And I think the word from the customers so far is they understand that there could be constraints to capacity and equipment as this year progresses and we finish '22 and going into 2023.

Okay. That's great color and point taken on the China COVID lockdown. So maybe just to follow up on that point and the potential for a glut, as you called it or maybe a freight embolism, if I could switch it over to you, Jude, when you think about the guidance for the rest of the year, does that factor in any of that China COVID freight surge potential? Or maybe the potential for more slowdowns related to the ILWU negotiations?

Yes. I mean I think a little bit of it. I mean if you just look at -- I mean, first of all, we just raised our guidance by $200 million for the year. So I think we're taking into account the fact that not only is there still a robust rate environment out there for our service lines. And also, there's still some opportunity for price if the freight-mageddon or freight embolism, as you just mentioned, actually occurs. So that's kind of reflected in the updated guidance.

We're not really sure yet if the -- if this is going to be a permanent thing where we can execute above our target margins, which were in that 8% to 10% range. But obviously, there's going to be some quarters that we're going to be able to exceed that based on the market conditions and, of course, based on if we can continue to attract and retain drivers to drive some additional volume into the business. So I think we took that into consideration, but obviously, we provide kind of a peek into the next quarter, every quarter on these calls. And so for our Q2 call, we'll definitely update that guidance again if need be to reflect the conditions at that time.

Okay. That's great. That's really helpful. And then maybe just to finish off, Tim, wondering if you can give us some broad color on how the ULH model works in a more normal cyclical downturn? Because I think when investors look at the past couple of years, we saw some pretty unique, maybe once-in-a-generation type events unfold as far as facility lockdowns and logistics, for example. But I would think that that's pretty atypical when it comes to business cycle changes. So maybe if you can just give us a sense in terms of how the business fares over a more normal type of freight pullback?

Yes. I think that if you look at ULH as a whole and you unpack some of the different service lines, we know we have about 30% of our biggest price sensitivity and possibilities of swings in the brokerage and truckload group. Although we haven't seen it now, we know that there's some exposure there.

But I'd go back to where we started, we still have -- 40% of our business is still through the contract logistics model, which is just what it says. It's contracted, long-term rates with our customers. And what we've done over the past 2 years is we've really leveraged our sales on the intermodal side to equally go after BCOs, the beneficial cargo owner, making sure that we are looking at high-volume, stable accounts that will go with market fluctuations or the economy. That's one thing that I think that, the good and the bad of that, we focused on it.

We also lucked out maybe a little bit on the spot market on the intermodal side because we had. But we've done that intentionally to take into account regular business cycle so we can perform at a consistent nature on the intermodal side.

(Operator Instructions) There are no further questions at this time, I would like to turn the call over back to Mr. Phillips for closing remarks.

Thank you, Erica. I appreciate everybody dialing in. Super excited about what we just drove through and equally excited about what we're driving into. And I look forward to another positive call for quarter 2. Thank you, and take care.

This concludes today's conference call. Thank you all for joining. You may now disconnect.