Q2 2020 Universal Logistics Holdings Inc Earnings Call
Hello, and welcome to Universal Logistics Holdings second quarter Twentytwenty earnings Conference call.
This time all participants are in listen only mode. A brief question and answer session will follow the formal presentation.
During the course of this call management May make forward looking statements based on their best view of the business as seen today.
Treatments that are forward looking relate to universal 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 my pleasure to introduce your host Mr., Tim Phillips, Chief Executive Officer, Mr., Jude Bears chief.
Financial Officer, Mr., Stephen Fitzpatrick, Vice President Finance and Investor Relations. Thank you Mr. Phillips you may begin.
Good morning, Thank you for joining Universal Logistics Holdings second quarter earnings call.
Before we begin I would like to acknowledge the passing of Universal founder and former Chairman Maddie Moran.
That he was not only a great innovator in transportation logistics space.
But also a teacher in friend to many of us over the years.
His legacy continues to hover over universal and live on through all about.
The great pleasure working for him throughout the years.
Now for the quarter.
Universal yesterday afternoon, Universal released its first quarter financial results reporting 258 million in top line revenues.
In earnings of 23 cents, a share which included two cents per share for non cash holding gain inter marketable securities portfolio.
Considering the extremely tough operating environment that so much of the automotive in retail idle for the better part of too much. We were very pleased with our operating result.
We entered the second quarter was substantial portion of the business in flux or shut down because of the cobot 19 pandemic.
We made it was tough staffing and operational cost management decision early in the quarter, which proved beneficial as the business volumes constricted.
We instituted a co. They 19 preparedness and response plan at the onset of the quarter and continue to update based on PTC state and local requirements.
We're extremely pleased with the focused execution and performance of our leadership team across all of our service line.
Overall, our preparation and cooperation all of our associates has allowed the company to operate safely and effectively over the past few months.
Despite a difficult sales environment, we secured new business in multiple verticals are tough our truckload group experienced several good wins in food and beverage when consumer good.
Our logistics pipeline remain build the opportunity building on our substantial first quarter win.
Our value added dedicated transportation service lines.
And then award over $140 million in new business over the past six month.
If production schedule stay on track in Q3, we are expecting 15 man in incremental revenue then ramping up 25 million in Q4 in Q1 2021.
At full run rate, the new business will provide $40 million per quarter, but second quarter of 20 to 21.
We continue to shape our sales strategy.
We've been hard at work collaborating across our various lines to identify existing customers with multi modal and value added neat.
We're extremely pleased with our portfolio of customers, both organically and through acquisition I believe that there is many opportunities within our customer list would benefit I and expand our supply chain solutions across multiple platforms.
The decline in freight volumes during the second quarter did allow us to accelerate our integration six intermodal acquisitions, we've made over the past two years.
During the quarter, we fully integrated three of six intermodal acquisition and combine the operation of our to southern California acquisitions.
We anticipate both lower costs and increased productivity per truck as a result these changes.
While we proceed into the third quarter with realistic level of caution given the uncertainty caused by the co that 19 pandemic, there's times to give us reason to be optimistic.
We believe the automotive space, we serve its prime to accelerate due to depleted inventory levels and strong demand for pickup trucks and SPV.
Our retail relationships see positive trends on the horizon as orders increased imports rise to meet the upcoming seasonal demand.
Truckload rates are strong and we are optimistic this sequential improvement in industrial production will carry over into our growing flatbed activity throughout the back half of the year.
Reversal owning real headwinds upside down brokerage market that Institute is currently experience, we were actively rationalizing customers and lanes to ensure profitability return to that service line.
I would like to thank all universal associates for their hard work and dedication they displayed over the past few months.
Their tireless dedication to get the jot down for our customers safely and on time. During these challenging time showed the resilience and professionalism. We are grateful all you have done and we'll continue to do for universal.
I will now turn the call over did you.
Thanks, Kim Good morning, everyone Universal Logistics Holdings reported consolidated net income of 6.2 million or 23 cents per share on total operating revenues of 258 million in the second quarter 20 Twond.
This compares to net income of 20 million or 70 cents per share on total operating revenues of 383.2 million I'm a second quarter of 29 team consolidated income from operations decreased 19.9 million to 10.8 million compared to operating income of 30.7 million and the second quarter 29.
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EBITDA decreased 18 million to 30.2 million on the second quarter 2020, which compares to 48.2 million one year earlier, our operating margin and EBITDA margin for the second quarter of 2020 are 4.2% and 11.7% of total operating revenues these metrics compared to.
8% and 12.6%, respectively, and the second quarter of 2019.
Looking at our segment performance for the second quarter 2020, and our transportation segment, which includes our truckload intermodal and freight brokerage businesses operating revenues for the quarter declined 26.2% to 185.8 million compared to 251.8 million and the same quarter last year.
While income from operations decreased 3.3 million to 10 million compared to 13.3 million and the second quarter of 29 team and our logistics 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 decrease.
<unk> 16.6 million to 800000 on 71.8 million of total operating revenues.
Compared to operating income of 17.3 million on 131.2 million of total operating revenue and the second quarter of 2019.
On our balance sheet, we held cash and cash equivalents totaling 8 million and 7.2 million of marketable securities.
Outstanding interest bearing debt net of 1.9 million of debt issuance costs totaled 403.7 million at the end of the period.
Excluding lease liabilities related to I guess, the 842, our net interest bearing debt to reported TTM EBITDA was 3.38 times.
Personal short term target total leverage ratio stands at two to two and a half times EBITDA.
Capital expenditures for the quarter totaled 9.6 million.
For the full year Universal has revised its capital expenditures forecast and is now expected capital expenditures to be on the 102 110 million dollar range as we completed two of our supercenter projects and invest in the equipment to service approximately 140 million, an annual new business wins and our value added.
And dedicated transportation service lines.
Interest expense for the year is expected to come in between 14 and $16 million.
For the quarter for the third quarter, if the current operating environment remains as it is today, we expect topline revenues to come in between 325, and 350 million and operating margins to be and the 6% to 7% range.
We expect to face a couple of headwinds during the third quarter.
Margins in our contract brokerage business are currently under pressure due to an upside down market as well at the plant shutdown for three weeks in August of one of our class eight customers for retooling.
Universal remains committed to returning capital to shareholders, while balancing the near term cash flow requirements for the company.
Limited visibility as to the strength of the general economic recovery. Our board of directors has decided not to declare a dividend during the quarter, but we'll revisit the topic at its neck regularly scheduled meeting in October.
That's the yet we're ready to take some question.
At this time I would like to remind everyone that if he would like to ask a question to press star one on your telephone keypad now again that star one for any questions over the phone line well pause for just a moment to compiled acuity roster.
The first question will come from Chris Wetherbee with Citi. Please go ahead.
Hi, This is William on for Chris Thanks for taking my questions.
Thanks, Tim so.
So first just wanted to start with revenue trends in your value added services and dedicated operations I know you discuss a little bit about offices friends, but I'm just kind of wondering about the revenue that specifically tied was just talking legacy revenue tied to automotive heavy duty truck operations.
Wondering what you're thinking.
I will start to recover and you can get revenue this back to pre pandemic levels.
Yes. This is this is Tim and it's far as the dedicated and value added services go wrapped around the automotive and truck industry. We've been a we're very optimistic at at how we've come out of this a pandemic per se we've been back at it through through June Chris.
Full bore and all indications from our customer base is that as I had mentioned in my prepared statement you know that theres the need for the product out their inventories are low so we expect there to be.
Third quarter and fourth quarter, a a real nice run based on and I'll use. This for comparison, where we were in our first quarter, we expect to exceed a those run rates are going into the third quarter or in the third quarter.
Got it adds one other question about your margins here. So if we just comparing year over year changes in operating income for the year over year changes revenue. It looks like you guys to these roughly 16% detrimental margin. Despite the plant shutdowns in a cost went to college. So I'm just wondering how.
She kind of think about.
The margins like I'd like you guys provides context in the third quarter, but you know if we're kind of looking forward to the fourth quarter. If you guys can provide some additional contracts there about whats.
Okay.
I'll leave this is June so, yes, I mean, we have between 70 and 80% variable costs.
And our.
Most of our service lines, our agent business is about a 15% variable or 85% variable cost model. So we'd expect that to continue I mean, we came out of the cobot pretty strong did some.
Cost cutting and Rightsizing of our operations. So we would at least expect those incremental margins to be at their historical rate, if not just a little bit better.
Got it and.
Final question here so.
Can you talk a little but you mentioned a little bit about the truck market started just truckload market starting to show some improvement if I'm just wondering how we should kind of think about low gross AD revenue for loan growth in the second half given the numbers, we saw second quarter, where loans were down about 40%.
Yeah, it's Tim in related to the truck market yet if you look at what the predictions where this year for production it was definitely negative year over year.
Some of the customer conversations we have had and in the service lines and customers. We deal with have given favorable outlook to third quarter and fourth quarter. So we're fairly optimistic that we will see a.
Good second half of the year in the truck market.
Hi, Thanks for taking my questions.
Thanks Lam.
The next question will come from Bruce Chan with Stifel. Please go ahead.
Yes, good morning, Gents I appreciate the time just want to start out here, maybe on the truckload side I know that.
Managing the fleet has been somewhat of a headwind for the past couple of years just want to see what your experience has been like recently, what you're doing to bolster the fleet and what may be capacity trends look like as we come out of two Q and move into the back half of the year.
Sure. This is Tim and what we're looking at on the truckload market of course in the second quarter, we saw a lot of our core competencies.
Heavily accented in the flatbed arena, our industrial products are still in metals had had taken a pretty good hit a once manufacturing and automotive shut down from a from a capacity standpoint, yes, we had some lost in capacity, but overall, we had a pretty good.
We kept most of our owner operators and company drivers intact. So we're confident coming out of it but yeah. We'll have some work to do from a recruiting standpoint, because we see things picking up now the one thing that seems to have trailed a little bit in coming out of the second quarter has still been feel in metals.
On on their flatbed side, it's been it's low rise, although we've seen recently or some of the industrial products start to pick up so the focus will be yes, we'll have to recruit some capacity at from a recruiting standpoint, and once we see some additional steel in metals volumes come through with Wi Fi.
Deal that those that.
Our off and not all capacity loss was lost because they went somewhere else theres been some some of the government subsidies. We've had some of our small businesses part their trucks.
And wait for some of the freight to rebound. So we feel that we'll be back on exiting out of the third quarter I will be back on a fairly good planes from a from a run rate standpoint.
Okay that makes a lot of sense and then just to pick up on that last point a little bit.
I know that a lot of people are expecting some changes in the capacity environment, given the expiration of the subsidies but.
Are you seeing any evidence of that so far as we kind of well I guess as we're at the end of July.
On the on the owner operator side overall, yes, I think that that because the work is coming back because we continue to bring some new work on that Dave Dave or jump back in their trucks, So I'm happy with where thats going on the company driver side, we lost far less.
Company drivers than we did owner operators.
So we were pretty whole coming out of it.
We did some things that help through through the second quarter were pretty whole coming out of what the company drivers I think that's based right there will be very.
Very challenging to grow because of just the just the market as a whole the demand for company drivers as well as those that are that are laid off right now do they continue to get a supplement that unemployment. So we're still waiting to see that so my answer.
That is yes, it's a little bit a wait and see but I think it'll be it'll be eight not difficult, but you'll have to work to get your drivers.
Okay, Great appreciate that and then just on the brokerage side.
Hey, Jude you'd mentioned that the market was a bit upside down right now certainly that's something we've seen from others out there in the business just want to get your take on where you think we are in that pricing cycle, whether you're seeing customers being receptive to increases and then if I could just ask.
How much of the business gets repriced in the back half of the year versus.
In the first half of your next year.
Right well if you. This is Tim if you listen to some of the other earnings calls it's been a difficult environment.
You know it was a rocket coming out of April and May.
Into that number of loads that worked their way back into the market. We've evaluated you know are basically top 25 customers and yet theres. Some difficulties there and of course, we're in this business to service and we're also in this business to make money and long term sustainability that some of the current rate structures is very dip.
Nicole So what we'll see in kind of how we've rationalized. It is we're going to go back to our customer partners in kind of give them a real visibility to what the market showing a so we'll give them the data that we're getting from a capacity procurement standpoint and show that the rates that were put in.
Placed at some point last year.
Just aren't sustainable anymore. So we're gonna have those conversations and yes, I do think others in the marketplace have gone back to their customers, but no I don't think it it's a full onslaught yet to the customer that that says that these rates aren't sustainable, but we know.
Our top 25 that we're gonna have to go back and rationalize rates and we're prepared to do that even if it's a difficult conversation because I think that.
Capacity will continue to tighten up and we want to make sure that were in the right spot.
Be successful with that and yes, we will have the opportunity to once we get into the latter part of the third quarter in the fourth quarter. Some of our contracts will come due for rebid and we'll be able to to work our way through some of the difficulties, but it is definitely a challenging time right now.
I don't know any of US first saw especially sitting in April that it we become this difficult.
I have an environment to source capacity at the rates, we thought for pretty pretty decent at the time, so kind of where we stand on that and that platform.
Okay, Great and then just final question here obviously.
A lot is still up in the air and uncertain, but.
I want to think about your midterm margin targets and each of the various segments and looking at what's happened between last quarter, and then where we've come now.
How are you thinking about those targets.
Have we lost much ground in terms of getting to where we need to be.
Just just want to get your thoughts there on how you're thinking about that.
Eight operations Jude no I mean, I think we're going to come out in Q3, it's really I mean, because we're so heavily variable cost were very volume sensitive. So as volumes continue to rise we will have that incremental margin.
That we that we've been building towards over the last few years. So you know in Q3, we're just because we're not really sure about what the volume environment going to be in the back half. That's why we're guiding that 6% to 7% operating margin target, but long term as we've said many times that's in our investor presentations, we think.
With a normal environment with a growing volumes were at 7% to 9%.
Operating margins and of course, our long term target margin for Universal is still 10%. So we're going to keep our working hard and marching.
To get to those those level then if the economy.
Gifts frothy and the market continues to grow our universal do just fine.
Perfect very helpful. Gents, Thanks for the time and nice job and I really tough quarter.
Thanks, Bruce you.
Once again, ladies and gentlemen, if he would like to ask a question. Please press star one on your telephone keypad again that star one for any questions, we'll pause for just a moment.
We do have a response from Jeff Kauffman with loop capital. Please go ahead.
We go Hey, guys how are you.
Good morning, good morning, So I wanted to give a little clarity on what you're seeing on the intermodal side and I apologize. If you hit. This I took me a couple extra minutes to get on the call sorry, I missed the first three four minutes.
Trends are you, saying because your intermodal division outperform the general intermodal industry in in a very tough quarter.
What is July look like and you gave us thoughts on what dedicated value added would be a gave his thoughts on brokerage and truckload can you talk a little bit about intermodal.
Sure. Jeff. This is Tim yes, we experienced what we would consider a difficult second quarter, but I thought we were pretty resilient and how we approached it and I think you know all side looking at what we've seen so far in July are very positive and no and I believe will remain positive so.
You know if we look at some of the things that were in winter and deep trough in the second quarter, which was some of our retail clients. We see really good sign up over the next month or two of that really picking up in some of it cyclical sure it's going to happen every year, but we see a nice a a nice nice run rate runway into.
Into the fourth quarter on that we also had some you know what I would call a decent intermodal sales wins in a very difficult sales environment. So we're pretty happy with where the portfolio is positioned and you know a good bellwether is southern California, and we're definitely seeing.
Load count over the last couple of weeks ramp up in Southern California is so I would expect that you know to pick up speed I would expect July.
To be up year over year on a load count basis, and it'll definitely be up on a sequential basis. If you take the second quarter average.
So I think I think on that end of it from a from a gross revenue standpoint that we will see intermodal perform well in the third quarter.
Okay and.
Are you seeing any I know some of the truckload markets are talking about strength I know your brokerage services division is going to struggle near term with kind of what the cost of purchase transportation is are you seeing any improvement on the intermodal rate side.
Well you know there hasn't been any any drastic change on the intermodal rate side, our customer base is still holds batten down the hedges and we're holding true to that we've had to over the first part of the year, even take some rate reductions to make sure that we kept the volumes because it's a ball.
In play for us on in the intermodal space. So there's been no theres been no what I would call incremental rate increases in intermodal space.
I'm going to switch to Jude.
How big an increase was your revised capex spend and I'm just looking at some of the projects that you're going to be spending on now in the second half for the year, where is that going to take depreciation in the second half and maybe as we look to 2021.
So the so we started the year with 96 million of Capex. We then revised during cold with that number down to about 76 million and then we're up to the 110 basically due to the fact that we want $140 million of.
Business related to value add and dedicated so we have to buys a material handling equipment and the tractors and trailers and all the stuff associated with that so.
Not all of this depreciation will be hitting this year some of the projects on the our real estate side will be either complete late in the fourth quarter or early in the court or early in the first quarter of next year. So from a so I would just use an incremental increase in capex maybe.
An additional 500000, the 750000 a quarter in Q3, and then we'll revise that in Q4 as we have more runway on when those real estate projects will comment completion.
All right and.
Most of this capex going to be spent this year is they're gonna be some drag on some of these projects in the next year. So the only drag really will be on.
About.
15 million of real estate, that's for our new Detroit Supercenter projects some of that could bleed into 2021, Q1, but I would say at most it'll be about at the top end to be two and a half to 3 million box.
All right so on a I'm going to go out on the limb here for you.
So given your revised margin forecast given depreciation given the revised capex forecast it seems like you're kind of on target to throw off somewhere between 40, and 50 million a free cash for the full fiscal year why still the trepidation with the dividends.
I think it's just because of you know, especially where we live in Michigan our job I mean, they just shot everyone out of bars began last week. I mean are I think we just don't really have a good feeling about what the governor is going to do and we're really nervous about that so it's not that we don't want to reinstate the dividend obviously, we paid off.
Hundred $43 million in dividends to shareholders over the years, when we bought back $82 million stock. So you know returning capital to shareholders is extremely important to us.
But they didn't really feel that there was a lot of risk and delaying bad for one more quarter until we get a little bit more runway on the economy.
Alright final question you mentioned your 3.38 on the adjusted debt.
Leverage ratio your targets two to two and a half what timeframe would you look to be back at your target range I think within the next probably 12 to 18 months that would be I think we feel good about that we just got the problem is is when you keep winning business.
And then the way the value add business works is that those contracts are 357 in 10 years. So I mean, you're investing so this $140 million or the 100 million that we're spending on the value add stops were to get that back over a decade and so once again, if you're going to half years, where you would have a lot of capex because your when a lot of dedicated at value.
Add and then it will be more normalized in the $60 million range. If we're just talking about replacement cycle of equipment that we already have <unk>.
<unk> alright, well, thank you very much and congratulations.
Thanks, John.
The next question will come from Mike from you with Newland capital. Please go ahead.
Guys, how you doing great execution in this environment here.
Thanks, Mike.
You just go through on the new business wins.
That will be I guess fully up and running you said by Q2 of 21 or close to it.
That is correct, Okay, and then how should we look at the margin profile on those new wins.
So we don't normally guide margins on a quarterly call, but I would just look at our investor presentations and look at what we guide those businesses to operate.
On a long term basis and I'd say, we're in the range of those margins so that would be.
10% on dedicated and 10 to 12 on value at.
Perfect. Okay, and then I know you're thinking about coming in with the dividend, which I you know strongly recommend but yes. We're also the one the one transportation companies sitting here trading at you know an eight times normalized earnings and you know for off for everything.
One of the discussion switch to buyback versus dividends versus additional.
Got back Yeah, there's there's really there's nothing that stands out like we do right now.
For a black sheep out there at this valuation everything else is trading 25 30 times in were down to eight times. So have that discussion go at the board.
Yeah, I mean, we did buy back stock in Q1 after we release, our Q4 earnings.
We are we saw the valuation which was like you know the easy to EBITDA with less than five x.. So we started buying back in when we bought back about $5 million worth the shares. So we were going to get it continue doing that actually Mike until culprit hit.
During the you know as Tim mentioned in his comments then I in mine during the first six months, we also want $140 million worth a business. So we're going to think about doing some additional capital allocation to buybacks and all the latter half of the year, Bob we're probably going to have to postpone that as result of the business wins that we currently have.
Well, we would use docket that a very attractive price right now.
For sure Okay, Hi, it'll it'll.
It'll get there as you keep on executing here. So that was it because there was a great quarter for the circumstances and I'm sure. The next you will look to too. Thanks.
Thanks, Mike.
And at this time there no further questions.
Okay. Thank you all for calling in today, we appreciate it and we'll talk too soon thank you.
Ladies and gentlemen, thank you for participating in today's conference call you may now disconnect.
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