Q3 2019 Earnings Call

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Hello, and welcome to the Universal Logistics Holdings third quarter 2019 earnings Conference call.

At this time, all participants ARNA listen only mode.

A brief question answer session will follow the formal presentation.

During the course of the call management May make forward looking statements based on their best view of the business I've seen today.

Statements that are forward looking relate to universal business objectives, our 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 my pleasure to introduce your host Mr., Jeff Rogers Chief Executive Officer.

Mr to be eyes, Chief Financial Officer, and Mr., Steve Fitzpatrick, Vice President Finance and Investor relation.

Thank you Mr. address you may begin.

Thanks, Nicole good morning, [laughter]. Thank you for joining the Universal Logistics Holdings third quarter 2019 earnings call.

I want to start by saying, how very proud I am all team Universal's execution in the third quarter and given what crude to be one of the most difficult environments for universal in quite some time, we delivered pretty good results.

Continued break softness throughout the quarter was made even more difficult by striking GM or largest customer.

The strike had significant impact on or value add and dedicated business units. We are pleased that the you wait W.G.M. have reached a tentative agreement and from the information we have the vote is going well and we anticipate our operations to be back online next week.

Also in the third quarter, we reached a legal settlement on a previously reported personal injury claims stemming from a 2011 accident.

While we were disappointed with the decision from the Appeals court, our focus has not changed.

Universal will always strive to be one of the safest carriers on the road.

Operating safely on the road in our facilities for work ever our employees conduct business. It is our number one priority always has been always will be.

Despite the impact to the strike Universal reported consolidated revenue of 375.5 million, our largest third quarter ever.

As described in our earnings release yesterday, the third quarter 2019 included 27 million of legal charges.

Universal also estimated the impact of the strike reduced operating income by an additional 4 million.

Operating income excluding these legal charges and the estimated strike impact was 23.7 million an increase of 5.2% with earnings per share of 52 cents.

Excluding the impact of these items universal delivered a solid performance considering the soft freight environment today.

Our EBITDA margin, excluding those items previously mentioned was 11.4% our highest third quarter EBITDA margin on record.

Our consolidated sales pipeline is close to 700 million and our new business wins year to date or over 135 million, including 22 million in value add 34 million and dedicated 49 million, a new business and intermodal and 30 million in truckload brokerage.

Truckload services, which exclude brokerage had total revenue of 62.6 million a decrease of 17.6 million or 21.9%.

The decrease in revenue as a combination of a reduction in loads of 22.7 offset by an increase in revenue per load of 1.6%.

The increase in revenue per load is being driven by significant increases in wind business as the revenue per load is much higher.

Excluding wind or revenue per load was down 9.2%, which is consistent with the broader market.

Our truck count continued to decline for the quarter in was down 17%.

We have seen truck count stabilize in September and October primarily from new agent acquisitions, New agent revenue stands at 29.7 million on a run rate basis and is the highest we have seen in many years.

Brokerage services revenue decreased 4.4 million or 4.4% to 94.4 million.

Load count grew 5%, but was offset by reduction in revenue per load of 9.1%.

Spot rates appear to have bottomed out in our gross margin so far in October have been improving.

Intermodal services revenue increased 27.3 million or 41.6% to 93 million.

Load count was up 29.5% revenue per load was also up 7.3%.

All of the volume and revenue growth came from acquisitions. This quarter. We're very pleased with all five of our acquisitions and they continued to perform as or better than expected.

While volume was soft throughout the quarter. We are encouraged as volume month to date in October is slightly higher year over year on I'm very difficult comparison.

Strike adjusted our dedicated services revenue was down 3.1% to 35.1 million.

The strike at GM impacted several of our key dedicated locations and our margin was impacted significantly as we made the decision to continue to pay drivers during the strike to ensure we had the needed capacity to service our largest customer once the strike ends.

Strike adjusted value added services revenue increased 2 million to 95.4 million.

I'm extremely pleased with how well our value added a dedicated teams are dealing with the strike our performance before the strike was phenomenal as far as service quality and profitability. So once the strike ends I expect nothing less.

While the strike is unfortunate I do believe it creates an opportunity for universal to once again show our customer just how good we are.

The new contract also creates new opportunities for universal.

As direct wage cost goes higher for our customers Universal's lower cost support services could become a more attractive alternative to support production.

While third quarter had some unusual headwinds any persistently soft freight environment I am confident in our strategy to build out our intermodal drayage footprint through acquisition and our acquisition pipeline continues to be robust.

While the freight market is still soft clearly capacity is coming out of the market.

The increasing cost of insurance due to catastrophic nuclear jury awards in trucking accidents is a real issue and many small trucking companies are finding an insurmountable to continue to operate.

I'm pleased with how our value added and dedicated business has shown significant improvements this year and profitability in service and I know once the strike is over we will be right back on track.

We feel really good about what we see in the future for Universal.

Jude will now give you some more color around our financials Jude. Thanks, Jeff Good morning, everybody Universal Logistics Holdings reported a net loss of 8.4 million or 30 cents per share on total operating revenues of 375.5 million in the third quarter 2019.

This compares to net income of 15.1 million or 53 cents per share on total operating revenues of 374.3 million and the third quarter of 2018.

Included in the reported loss were pre tax charges of 27 million related to a legal settlement as well as ongoing unrelated litigation.

Consolidated income from operations decreased 29.8 million to a loss of 7.4 million compared to operating income up 22.5 million in the third quarter 2018, EBIT da decreased 26.6 million to 11.6 million in the third quarter 2019, which compares to 38.

3 million one year earlier.

Our operating margin and EBITDA margin for the third quarter 2019 are a negative 2% any positive 3.1% of total operating revenues.

These metrics compared to 6% and 10.2% respectively in the third quarter of 2018.

Looking at our segment performance for the third quarter of 2019 in our transportation segment, which includes our truckload intermodal Envios DC and freight brokerage businesses operating revenues for the quarter rose, 2.3% to 254.1 million compared to 248.5 million and the same quarter last year.

Income from operations decreased 29 million to a loss of 17.2 million compared to an operating profit of 11.9 million and the third quarter 2018.

As previously mentioned included in the reported loss were pre tax charges of 27 million for legal settlements and ongoing litigation.

And our logistic segment, which is comprised of our value added services, including where we service the class eight heavy truck market and our dedicated transportation business income from operations decreased 6.7% to 9.8 million on a 121 million of total operating revenues compared to 10.5 million of operating income on.

$125.4 million total operating revenue in 2018.

As detailed in our earnings release, and Jeffs comments earlier, we estimate our logistics segments operating income was impacted by $4 million or 2 million per week due to the UAE W. strike as we decided to continue to pay our drivers during the strike period.

On our balance sheet, we held cash and cash equivalents totaling 6.5 million and 9.1 million marketable securities.

Outstanding interest bearing debt net of 2.3 million of debt issuance costs totaled 386.6 million at the end of the period, excluding lease liabilities related to our ASV 842 adjustments, our net interest bearing that to reported TTM EBITDA was 2.8 times.

Capital expenditures for the quarter totaled 35.6 million for 2019, we are expecting capital expenditures to continue to be into $65 million to $75 million range and interest expense between 15 and $70 million.

Finally on Wednesday, our board of directors declared universal tend to have sent per share regular quarterly dividend. This quarter's dividend is payable to shareholders of record at the close of business on December 2nd 2019, and is expected to be paid on January 2nd 2020.

With that Nicole we're ready to take some questions.

As a reminder, in order to ask an audio question you may do so by pressing star in the number one on your telephone keypad again Navistar one.

One moment for the first question.

First we have Chris Wetherbee with Citi.

Hey, Thanks, good morning, guys.

Good morning, everyone on Chris.

So I guess I had a couple of questions about the strike first just to make sure I understood. It. So its 2 million to weaken EBIT that was the last two weeks of the third quarter. We've seen I think you guys talked about it hopefully we're getting I think this week at the end of potentially the strike should we assume 2 million a week is a good number for Fourq you and are there any incremental expenses of get.

<unk> up and running again.

Once the strike is over.

That's good question, Chris Yes, we're kind of assume in about a 2 million a week. So it's it's almost a five week period that we're going to Miss in October So we're kind of guests and at this 0.9 ish.

Impact from the fourth quarter, we don't see any incremental cost to get up and running.

As far as a strike and actually or potentially may be some upside because there's a whole lot of freight sitting in trailers and a lot of our yard theres a whole lot of activity, that's and saw that could create some extra opportunities, but we just we just don't know how that's going to play out just yet.

Okay. No. That's super helpful. Appreciate that and then when you think about sort of the fourth quarter and generally wanted to get your take on what you think about peak season, how do you see it shaping up most people kind of looking for you to peak on that I'm curious kind of what youre seeing in your end markets.

Yes, muted would be probably a pretty good them, especially on the truckload side, we're really not seeing much what I would call increased volume for peak at all we are seeing increase intermodal volumes, but that's.

That's very specific to certain areas of the country.

So I would call Pete muted, that's probably a pretty good word.

Okay. That's helpful and then I guess.

In terms of fundamentals within I guess transportation in general the probably trucking truckload specifically.

How do you see the market kind of right now it feels like there is beginning to see some capacity coming out spot rates look a little better than they were a couple of months ago, but maybe not great yet.

Where are we in the process since bottoming out the truckload market to a point, where maybe we can start to see sort of an uplift in rates.

Yes, I think you really hit I would agree with everything said spot rates, especially in our brokerage area, where we're seeing spot rates have definitely bottom in are getting a little better nothing dramatic.

But the overall contractual rates, whether it be truckload intermodal, we're still muted we're not seeing a lot of obviously, we're not seeing any increase per se in rates, but they're not getting any worse.

What I can say from a capacity perspective is we're seeing everything the same thing there be else's were part of the reason why we're doing well on agent acquisition. As these guys can't renew their insurance. These small fleets and small trucking companies just are unable to get insurance because of some of the issues that have impacted us greatly and our EMS.

Packaging other people as far as insurance costs. So I know for a fat capacity is coming out of the market how fast that does how much is that how much is that going to impact as we get because obviously we're going into.

December and January which are always relatively slow and then what that does to us when we're coming into the first quarter peak of March and then into the spring season could be very interesting, but clearly capacities coming out.

Okay. Okay last question for me just along those lines you kind of led me to it was sort of the M&A question as you move into 2020.

Absolutely there is a little bit in this flokser churn in the capacity side are there new opportunities that are cropping up how do you feel about sort of the M&A market and maybe what your thoughts and plans.

All very strong pipeline of opportunities. We're we're taking a hard look at the things we still feel very very good about the intermodal opportunities and thats kind of our focus and continued strategy there, but I can tell you there has been.

Increase in truckload type activities of these small firms that I, just talked about which we've kind of been passed and all we don't see that as a real opportunity for us just yet so we're going to stay focused on intermodal, but theres plenty of opportunities and absolutely nothing that has happened to us in the third quarter is going to change our direction there.

We see plenty of opportunities and what we're going to do going forward.

Okay. That's great. Thanks, very much for the time I appreciate it.

Take care Chris.

The next question comes from the line of Bruce Chan with Stifel.

John Good morning, although we don't goes.

Not a whole lot thats going to say I think pretty decent results.

In light of some tough unfortunate one offs and then a tough environments, but.

Just wanted to get your take on what you're seeing from some of your customers out there with regard to the cycle and how you think that's shaping up is there anything.

Cost of typically on the auto side ex GM and then also in the heavy truck side.

Yes, I mean, I think everybody is well aware the automotive cycle from a car production is down so we're seeing that across all of the Oems that we support.

And we do support all of a large Oems.

We're still seeing strong production and again set the GM strike aside but pickup trucks are still booming and obviously one of the other large Oems here in Detroit is making a huge investment in the Detroit area on a couple of new plans to support their products that are selling like hot cakes, and we obviously expect.

Play in that additional business that is here in the Detroit area, because that's right here in our backyard and we've got a great relationship with that OEM. So I would say generally the automotive exposure for us looks really pretty darn good going forward, even though the Saar is coming down but it still into a high 16 million number which is still.

A lot of cars and a lot of auto so we're not negatively impacted I don't think we don't look poorly on the automotive sector going forward, we still think it's a pretty good opportunity for us and as far as general customers were still seeing a lot of strength in the retail sector. We have some huge exposure there which is good and the team.

Tonnage on the retail side, which also I scratch my head when you look and I think everybody those even though we know it's a soft freight environment. We're in the middle of so called freight recession, but yet retail is booming. So I don't know where the freight is but because there theres a whole lot of things being bought and sold and we're moving a ton of freight across our cross docks, but.

It is kind of interesting how.

Some parts of the economy just seem so good and in other parts just this really aren't right now.

That's fair as good commentary and what about on the heavy truck side as we.

Here about some of the.

Big Oems start to think about.

Lower production how are you guys thinking about that.

Clearly the forecast in the production forecast for next year dropped significantly that's kind of that cycle that we go through with the heavy trucks, we have not seen a reduction in production for this point, they've actually been going gang Busters and.

And still expect to go gang busters through the end of the year, but we do expect that to drop.

I don't have Ivan the visibility into 2020 is a pretty steep reduction, but I'm not sure if that holds true depending on how the rest of the year plays out.

Okay. That's fair and then just on the GM contracts.

Just because I'm not that familiar with it is there anything in there that that concerns you about.

The I guess ability for the company to use outside labor outside contract is there anything that might cap your business with GM.

No actually the cruncher and I made that point in my commentary, but at the end of the day Thats something we were.

Eagerly looking for in the contract than there was nothing in there that said that they cannot continue to outsource to threepl such as.

Universal and when you look at what they did give up they had the lower or they had to raise the wages of that second tier group. So therefore, there wage cost is going up significantly over the life this contract, which should create more opportunities for companies like universal.

Okay, Great that's super helpful.

And Jeff you also talked about capacity and insurance a little bit.

You know any thoughts on what you see from the yield the final phase and drug and alcohol clear houses that can be anything meaningful in the back half of next year you. Thank.

It could be.

I'm not convinced that the whole.

Clearing house is going to have a huge impact it very well could but I think what it's going to do is take away that 30 day period, where somebody can jump ship and go and not get caught because they can move around from place to place I think that clearinghouse may eliminate that capacity, because they're not going to build do that anymore, but I'm not sure how much that's.

Going to impact the overall capacity, what's going to impact it for sure is what I talked about as the insurance costs, because I'm, telling you people don't realize how much insurance is going up for trucking companies. It is unbelievable and that is going to hurt the small and medium sized carriers.

Okay, and then final question here on the brokerage side a couple of your peers in the space have commented on.

Fairly competitive environments.

You know anything that you think is worth calling out there.

Well, we've seen the same thing I mean, thats, where our margins got compressed and have been compress this year for our brokerage business.

We like what we what we see there I think thats going to turn I mean, we're starting to see spot rates from up a little bit.

We're focused on improving our technology and getting the cost out in kind to integrate and I've talked about I think last call, where I talked about we're trying to really integrate that brokerage and asset sale for the first time and we're having some success there and I think that will continue to play out. So that we can go in front of a customer and just say led to solve your transportation needs into.

Total when we can do it whichever way works best for Us and the customers. So I think theres some opportunities for us there, but it's been extremely difficult in the brokerage market. This year.

Awesome well appreciate the time as always I've got one.

See Bruce.

Your next question is from the line of Jeff Kauffman with loop capital market.

Jeff. Your line is open you may be muted on your end.

Hey, guys, sorry, I was noted.

Right.

Thank you and congratulations I think despite the headwinds pretty solid underlying showing as you mentioned.

A lot of questions have been asked but nothing yet on a be five so I was wondering if you could give us an update because it will impact some of the intermodal and brokerage operations out there kind of what are your thoughts on what you're seeing so far.

Our people reacting to it and what do you think the strategy is going to be for you all age.

Well, we have had lot of conversations about that we're well aware baby five I mean think about it theres 14000 contractors that hit the ports in long Beach every day. So obviously all 14000 of those are impacted by 85.

All of our competitors as well as universal really are taking a wait and see approach no one of any size or scale in California is changing their business model just yet even though we know that 85 will impact.

Point I think we've got to wait to see how the legalities play out because there's a lot of lawsuits ending and I think it's in front of the ninth circuit to be heard in December . So we'll see what happens there are enough on the whole preemption under the federal the federal Diodati rules, which is what we're banking on are hoping.

For the preemption stays in place and that were excluded the little bit for maybe five but well have to see how plays out Jeff because at the end of the day. Our take is if everybody has to apply havey five and I mean, everybody then the level the playing field becomes level and at the end of the day rates go up for everybody and Thats all the customers get impact.

And therefore, we're still right, where we are why no one's making that change yet its nobody wants to be the first one to jump out there and make any changes because we know it's going to increase the cost structure without the associated rate increases and you can't get rate increases yet because you don't want to be the first one out there because no customers going to give you a rate increase if you're the only.

Making a change so we're going to wait and and take a wait and see approach and see what happens and then at some point everybody's going to have to make a change or not we'll have to wait and see what happens with a nice circuits. Because ultimately we think it's going to go to the Supreme Court, We hope that may take multiple years, obviously so.

We're not sure what's going to happen.

Thank you very much.

As we step back and kind of look at the bigger levers I mean, there's just so many oddities happening we've got the big insurance increases we've got legislative changes we've got.

Industry changes on hair testing and.

Warehouse.

What are you seeing any behavior changes on your customers in terms of how they're approaching negotiations I know there's been some customers that have been out trying to rebid.

Contracts, because they feel the market's turning and rates are down.

But just bigger picture.

You are in a lot of businesses I mean, you're into value added service year year in brokerage and intermodal are the customers changing their approach at all to negotiations.

No Joe we haven't seen any change from that perspective, clearly customers are rebidding, but I think so we actually I think thats kind of the normal cycle. This time that you are you always get a lot of review.

But I am seeing I've not seen anything that I would call a significant change on the customers perspective, because of what potentially could happen next year.

Okay, well congratulations and thank you.

Alright, Thanks, Joe.

Okay Danskin audio question. Please press star one.

We show no further audio questions at this time.

Alright, Thanks, Nicole and I sure appreciate everybody joining us we will talk again in February take care and.

Have a good weekend.

This does conclude today's conference call. We thank you for your participation and ask that you. Please disconnect your line.