Q3 2021 Universal Logistics Holdings Inc Earnings Call
Hello, and welcome to Universal Logistics Holdings' third quarter 2021 earnings conference call.
At this time all participants are in a 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 state.
Statements that are forward looking relate to universal's business objectives or expectations and can be identified but he used the words, such as believe 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.
Yeah.
It is now my pleasure to introduce your host Mr. Tim Phillips, Chief Executive Officer, Mr. Jude various chief Financial Officer, and Mr. Steven Fitzpatrick, Vice President of Finance and Investor Relations. Thank you. Mr. Phillips you may begin.
Thank you Benjamin and good morning, and thank you for joining Universal logistics Holdings' third quarter earnings call.
Before we get to the quarter I would like to thank all of our Universal associates for their continued efforts in supply crucial services to our customers and they have kids, who have come to depend on it our team continues to adapt to a supply chain environment that can change daily.
Continued to collaborate with our valued customers to customized supply chain solutions that allow them to optimize to execute their business strategy in a very challenging environment.
We have worked tremendously hard to navigate a tight labor market and staff, our new business wins, attracting and retaining talented employees will remain a priority.
With all the great work that has been done there is still much to do to further shape each of our service lines. So they meet their operating goals.
Now for the quarter.
Yesterday's release, Universal reported third quarter earnings of 38 per share on total operating revenue of $445 6 million.
As detailed in the release third quarter earnings included <unk> 36 per share of litigation related charges and operational losses incurred at a recent contract logistics launch here in Detroit.
Third quarter operating revenues reflect universal's highest quarterly revenue ever however, we fell short on our earnings expectations.
Now for some color on each of our service lines and.
In our contract logistics service lines, we experienced headwinds highlighted by production downtime due to chip in parts shortages at several of our key value added operations.
We continue to remain bullish on autos and class eight truck demand in 'twenty 2022, but there is no end in sight to the current headwinds in the industry is facing.
These macro headwinds are exacerbated by the operating challenges with our recent launch as mentioned in quarter two here.
Here's the contract logistics group saw another $7 1 million of losses associated with the operation for the quarter and now totaling $13 9 million for the year.
We've also experienced a tremendous amount of wage inflation, while staffing these operations in conjunction with continued production schedule challenges.
We are working with our customers to review the impact of wages and all of our major operations.
Suppliers continue to hamper steady state production, which we expect to carry through fourth quarter and well into 2022.
We are pleased with the recent launch of business, serving a major manufacturer in the Midwest and we expect to operate at full pace in short order.
Our contract logistics pipeline remains healthy and we continue to review and positioned for intelligent growth.
We continue to see many opportunities in our dedicated transportation space, which has allowed us to optimize our assets, but further growth in new markets is predicated on the delivery of new equipment, which has remained a challenge.
For intermodal, we've experienced operational friction due to congestion equipment availability and stagnant driver numbers.
Intermodal segment results had additional drag on earnings due to recent litigation charges incurred in the third quarter.
Intermodal segment revenue includes $23 3 million in other asset sorial charges, such as rail and port <unk> as well as per deal, which has historically operated at low to no margin further impacting the segment's profitability.
The intermodal group did realized 28% year over year revenue increases and $13 five improvements sequentially.
This was not enough to achieve the results. We expect out of this group. We have worked very diligently with our customers evaluating our pricing to combat wage inflation and assist in our ability to recruit additional drivers. In addition to drivers and contracts. The contractor supply. We are also adding additional chassis to our fleet as quickly as equipment becomes a <unk>.
<unk>, we expect to see additional benefits from recent rate increases moving through the fourth quarter, which will present ample load opportunities at higher prices.
In our truckload segment revenue growth was strong due to increased volumes and strong pricing, we experienced both top and bottomline growth highlighted by rate increases and better utilization.
<unk> was up over 29%, which was the result of moving 12, 4% additional load in an average of $13, 6% higher revenue per load.
We were very pleased to see our wind business pick back up in the quarter and expect to see tailwind in this sector to finish 2021.
We anticipate sustained tightness in the truckload market with favorable pricing the remainder of the year as capacity will remain tight with customer spending and favorable spot with plenty of inventory to restock.
<unk> group has positioned themselves well, while taking advantage of that entrepreneurial spirit.
Our company managed brokerage operation continued to evaluate and reprice their book of business in the third quarter, while successfully managing the balance between spot and contractual business.
Capacity has remained tight most of the third quarter and we foresee remaining that way the rest of the year.
Take capacity has continued to support premium pricing in the spot market.
The average operating revenue per load was up 18, 9% year over year, the number of loads being handled decreased by 17, 4% as mentioned in Q2, we continue to focus on rationalizing our lanes to ensure acceptable levels of profitability. We were very pleased with our gross margin of 12 one.
Percent in Q3 and aimed to keep within that range to finish the year, we've experienced many customers going to many bids as the year has progressed and expect to reprice roughly 40% of our business in Q4.
Finally, the human asset will remain on the forefront of all of our internal conversations going forward.
We're committed to providing a work environment that allows new and existing associates to excel and take their careers in the company to new Heights.
People are job, one and a very demanding environment.
Thanks, again to all of our hard working associates at Universal.
I'd like to now turn the call over to Jude Jude. Thanks, Tim Good morning, everyone. Universal Logistics Holdings reported consolidated net income of $10 3 million or <unk> 38 per share on total operating revenues of $445 6 million in the third quarter of 2021. This compares to net income of $13.
$6 million or <unk> 50 per share on total operating revenues of $365 million in the third quarter of 2020.
Included in the third quarter of 2021 operating results were pre tax charges of $4 million for a previously disclosed legal matter and an additional $1 8 million charge for an unrelated legal settlement. Additionally.
Additionally, in the third quarter of 2021 operating results included $7 1 million of operating losses incurred at a recently launched contract logistics program.
These items adversely impacted our operating ratio by nearly 300 basis points and were a drag on our earnings of approximately 36 per share consolidated.
Consolidated income from operations was $16 7 million for the quarter compared to $22 1 million one year earlier EBITDA decreased $5 4 million to $33 1 million, which compares to $38 5 million during the same period last year.
Our operating margin and EBITDA margin for the third quarter of 2021, or three 8% and seven 4% of operating revenues these metrics compared to 6% and 10, 5% respectively in the third quarter of 2020.
Looking at our segment performance for the third quarter of 2021, and our contract logistics segment, which includes our value add and dedicated transportation businesses income from operations decreased $5 6 million to $6 million on $156 9 million of total operating revenues. This compares to operating income of $11.
$6 million on $127 7 million of total operating revenue in the third quarter of 2020.
Operating margins for the quarter were three 8% versus nine 1% last year, our contract logistics business incurred a $7 $1 million loss in the third quarter at one of our launches supporting an automotive OEM here in Detroit.
Based on that program's current operating performance, we expect a similar loss in the fourth quarter year.
Year to date. This operation has generated a loss of $13 9 million impacting segment margins by 3%.
In our intermodal segment operating revenues increased 28% to $121 million compared to $94 5 million in the same period last year, while income from operations decreased $6 9 million to $1 9 million. This compares to operating income of $8 8 million in the third quarter of 2020.
Yes.
Our intermodal business incurred $5 8 million of legal charges and settlements in the quarter. These charges adversely impacted our intermodal segment operating margin by 480 basis points.
Including these charges operating margins for the quarter fell to one 6% in the third quarter of 2021 compared to nine 4%. During the same period last year, both driver and equipment shortages as well as a lack of important rail fluidity continue to hamper as a result of the segment.
Our trucking segment, which includes both our agent base and company managed trucking operation operating revenues for the quarter increased to 29, 2% to $107 2 million compared to $82 9 million in the same quarter last year and income from operations increased to 43, 1% to $6 8 million. This compares to operating income of four.
$4 8 million in the third quarter of 2020.
And our company managed brokerage segment operating revenues for the quarter declined six tenths of 1% to $59 2 million compared to $59 6 million in the same quarter last year and income from operations increased $5 million to $1 8 million. This compares to an operating loss of $3 2 million in the third quarter of 2000.
Operating margins for the quarter were 3% versus a loss of five 4% last year.
On our balance sheet, we held cash and cash equivalents totaling $13 million and $7 8 million of marketable securities outstanding interest bearing debt net of $1 2 million of debt issuance cost totaled $443 6 million at the end of the period.
Excluding lease liabilities related to ASC 842, our net interest bearing debt to reported TTM EBITDA was two four times.
<unk> target total leverage ratio is between two and two five times EBITDA capital expenditures for the quarter totaled $9 3 million due to the limited availability of new equipment.
We are expecting capital expenditures to now be in the 30% to $35 million range interest expense for the year is expected to come in between 12 and $14 million based on the current operating environment for the fourth quarter of 2021, we are expecting top line revenues between 400 $425 million and operating margins in the 4% to six.
Percent range.
For 2022, we are expecting total operating revenues between one eight to $1 9 billion and operating margin in the 7% to 9% range capital expenditures for 'twenty. Two are expected to come in at approximately 95 million and interest expense in the $15 million to $18 million range, we anticipate our capital expenditures in 2022.
To be somewhat higher than normal due to the limited availability of new equipment for most of 2021.
Finally yesterday, our board of directors declared Universal's 10, and a half cent per share regular quarterly dividend. This quarter's dividend is payable to shareholders of record at the close of business on December six 2021 and is expected to be paid on January four 2022 with that Benjamin we're ready to take some questions.
Thank you, ladies and gentlemen to ask a question you will need to press star one on your telephone.
John Your question for Us to pound key.
Please standby, while we compile the Q&A roster.
Okay.
Your first question comes from the line of Chris Wetherbee from Citi.
Yeah, Hey, thanks, good morning, guys.
Wanted to touch base on contract logistics and make sure I understood sort of the dynamic going on there is obviously the one contract as being somewhat challenging can you.
Maybe unpack the loss from that specific contract and give us a sense of how much is due to labor and then maybe what are the other factors that are kind of coming in there and impacting the profitability of that I guess, it's been maybe two quarters, but it doesn't look like it's necessarily going to get better next quarter either.
Yeah correct. Chris This is Jude itself. The labor component was about five a combination there is the plant is not running at full production. So we have a revenue shortfall in that operation because the plant is only running at about 60% of what their build rate should be so we have a combination of adaptive.
Set of revenue and then we are at full run rate for labor. So we're paying at a full run rate of labor with a plant that's operating 40% less than it should.
And thats about $5 million of the loss in the quarter.
$2 million loss in the quarter was due to charges that were pushed down on us for downtime associated with the launch. So we have 7 million altogether 5 million, which is a combination of labor and the plant not running at capacity and then $2 million for what we call debits.
<unk> related to various errors that are operation made.
From.
Launch to the end of the Q on Q3.
Let me.
Go ahead.
Tim Chris Let me piggyback on that labor labor was.
It remains an issue, but we're pretty optimistic and happy with where we have the labor pool. There we're to the point now where we've identified and you can imagine we went from zero to 100 miles an hour in a matter of matter of a couple of months, we staff almost a thousand people with inside those walls and in the <unk>.
Trucks. So we were really happy with that with that in combination with this current environment wage inflation really took a grip. So we had to do we had to do to successfully launch it we're in the process.
Metering back what we need exactly for labor to make sure. We're right on spot and then we're also and continued conversation with the customer.
Ponant of wage inflation, and how we approach that mutually to get us up to where we need to be as well as any potential scope changes because the best laid plans.
Move as Youre launching not only a new warehouse that we're operating but a new plant that our customers are operating so we are in continued conversations with them and were optimistic that through our partnership and collaboration we will put this thing on the right course, the only thing we can get a full <unk>.
I don't know if anybody can right now is the flow of parts and shifts in how it's Jude had mentioned it affects the production rate because.
It's hard to get a good glass on that one a good set of glasses, but we know it will continue to affect us in quarter four and into the beginning of 2022 with the availability of chips and how that affects production.
Okay, and so it's still an issue in 'twenty, two but maybe not negative seven is that the right way to think about it just to make sure I understand yeah that is the right way to think about it.
Okay. Okay. That's helpful.
And I'm guessing, there's not really a <unk>.
Maybe taking a step back for a second and thinking about broadly your auto and sort of heavy equipment manufacturing end market business.
Can you give us a sense of roughly how much of the portfolio within contract logistics is running at or close to full production versus how much of that might be running kind of below full production because the various supply chain shortages and ship issues.
Yeah.
This is Tim I don't think we have a gauge on the percentage, but I will tell you. This.
The launch isn't the only plant that's been affected of course any of you can read the news in any of the major production facilities have had some course of <unk>.
Slowdown or even some downtime as a result of chip in part shortages. The one thing and I think we talked about this in the last quarter. The one thing that we do have going from us from an automotive spaces that we just so happens that we supply.
Goods and labor to the plants that are the <unk>.
Vehicles that are in the most demand so from that standpoint, we are somewhat confident that those plants get the preferential service when it comes to parts.
Hitting the United States and going getting divvied up between the plants, but I can I can assure you that the other automotive operations had some did.
Disruption as well as some of the class eight production there was some disruption I just don't have a set percentage for you.
Okay. No. That's helpful. And then last question just on intermodal wanted to get a sense of maybe how you guys think about fluidity in the fourth quarter box turns those kinds of things.
And then maybe commensurate rate to help kind of offset some of the pressures that we're seeing there I guess I'm just kind of getting a sense of is that something.
The contract logistics issues do we do we think that intermodal profit can accelerate as we move forward or there's still some challenges that we need to phase <unk>.
Yes, I think that intermodal is faced with some Q4 challenges as you read in the news I don't know if some of the congestion alleviate itself before the end of the year I'm going to say no. But this is this is the way we're approaching it we understand that the turn times for trucks. Some of the efficiencies that we're used to seeing that kind of deteriorated.
Both on the Port and rail side, but also on the customer side with throughput now people are customers are importing a great deal of commodity so they're filling up the warehouse. The droplets are full and you can listen to a ton of others talk about this the turn time on equipment has risen significantly.
So for us to be efficient, we have to be able to.
Use that iron that chassis to go back in and get the next.
Load and if we don't have that chassis in the rotation so equipment fluidity has really.
Created some inefficient actions within the group and then of course when you have poor congestion you have containers sitting in customer lots for extended period of time now we become.
Exposed to per diem, and Demerged that we have to handle with our customer sometimes on behalf of them with the port the rail and also dealing with the per diem, which is the amount of time the containers out. So there's a lot more for the operational people to keep their eye on.
Other than just turned in a truck in and out of the quarter rail to customer and back. So we think that those situations will continue I think what we've done or will to continue to do is repricing. Our book of business. So we are rating it to meet some of those congestion so we align itself price.
But what we're able to do from an efficiency standpoint, with our customers and we will continue to look at that on a week by week basis, and we need to get our arms around on some of those around those assets soils to make sure that we are in a proper position either a to accommodate the request for the customer or be pushed back.
And look for another solution. Besides us trying to carry some of the burden of these large accounts and that's one thing I will tell you on the intermodal side, we've worked really hard to position ourselves in front of some great customers, but with great customers becomes great volumes and when these things hit the shores in large large numbers.
It's just not easy to get in there and pick up those at a pace that you need to to get them out before some of these at the soil charges start to add up.
Okay, Yeah, no that does.
So I guess wondering if I could squeeze one last quick one in here just about margins as we think about next year or so 7% to 9% I think keeps the guidance for next year and presumably you're going to start maybe with some continued pressure lingering in a couple of the segments because of what's going on from the market. So it implies a pretty solid back half or at least maybe last three quarters.
Next year I.
I guess I just want to make sure I understand sort of the confidence you have.
Getting that and what kind of line of sight, you have that or do you need a few things to kind of break your way to kind of get into that full year Salmon Tonight I just want to make sure I understand sort of the dynamics of the puts and takes within that thank you.
Yes, I mean, the two the two real headwinds or just the intermodal business and then getting past. This Georgia. This lawsuit we have at the contract logistics business launch I mean, once we once we get that.
Past us, which should be by Q1, Q2, and Q3 are historically universal strongest.
Quarters, So we feel real confident that by March of next year. Most of this stuff should be behind us.
And then we have a pretty clear runway.
All things being equal to really hit the hit our stride and get those margins in house, but.
As you mentioned and as Tim just mentioned in his comments the contract logistics headwind is one location all the rest of our locations are operating very very well and the intermodal is really specific to southern California, and Chicago, and if theres a little bit of alleviation of the pressure there we should perform very very well in that segment as well.
Okay. That's great color. Thanks for the time. This morning, guys. Appreciate it thanks guys.
Once again, if you wish to ask a question Thats star one on your telephone keypad.
Yeah.
Your next question comes from the line of Bruce Chan from Stifel.
Yes, thanks, and good morning Gents.
You mentioned the pricing alignment on that story.
Intermodal.
I'm just kind of wondering where you are right now in terms of recruitment or excuse me recruitment or you pay.
Pay levels now given the crisis.
You still have a lot more work that you need to do is we look at next quarter and next year.
Yes, I think I think there is still some work to be done in the nuts and bolts out in the field I don't think that what has happened in the phenomenon is that as I explained before there is such a push or a rush coming in of imports and some of the customers that we service have just huge chunks of business coming in so what we're doing.
It's worth stepping back and talking one by one of how we can rationalize and support them, while theyre, helping support us on how we get these things out of our port system. That's backed up how we get the container of work with the containers out of the customer's facility coming back into alleviate some of that.
<unk>. So I would say we didn't just start this exercise. This exercise has been going ongoing we're just taking a more acute look at it in the fourth quarter and if we have to push back on some of the services that we offer at the sorely, but we're going to ask our customers to please help us out with this.
Till we can get and it's almost like it's an act of God with some of that is just lingered.
Since last year and the congestion that continues to play so we're asking for their help in collaboration as we service. Some of these large accounts. So the level that we've been working on it very hard to third quarter, but we're going to put some some definite conversations in place at the beginning of this quarter to what we can lift.
Our head above water and make sure that it's not as I had mentioned in the comments are breakeven or a small profit. So so that there is some margin there that we can we can we could enjoy the customer can enjoy the freight being moved.
Okay, that's very helpful.
Speaking about back with God.
Cost that you have to bear that maybe aren't your fault or necessarily responsibility on that contract logistics facility obviously.
That's been a pretty meaningful impact in terms of the production shortfall.
Maybe you wanted to get your thoughts on.
Central to exit that contract penalties to doing that or do you have enough line of sight into when things normalize next year that you are comfortable sticking with it and maybe.
Is that all for another quarter or two before it normalizes.
Yeah, Great question, because it because it is the biggest impact to the corporation right now and I would I would I would say this that conversations are ongoing about how we approach. This business. We're so crucial to this particular customer's plant that.
That we have had open discussions about what we both need to do to be successful, but I will tell you. This that if we were to have the transition we've had that conversation, but I feel at this particular point in time that there is ongoing conversation going on between us and the customers about how we both how we both work.
Our way out of it.
As I said earlier, we spent a tremendous amount of time putting.
Just nearest thousand people with inside those four walls and in the trucks that provide the shuttle services to the plant. So we've done that heavy heavy lift and we just have to come to some agreement on the wage inflation, which is which is real and the scope change.
Some of the job functions, which is real and I think we can get there, but I will say that we won't let this particular opportunity way the organization down for an extended period of time, we want to get this done expeditiously and if we can't then we need to figure out a way that we can both as partners find a.
<unk> strategy for the business.
Okay. That's great and then maybe just a final question here on brokerage.
You've done a lot of good work there in terms of rationalizing the business. We had another kind of 17, 4% load volume, calling this quarter.
Assuming that the spot market continues to stabilize here, albeit at a high level when do we sort of expect that load volume count and flat.
Well that's a good question.
The low load volume count right now is we're metering in rationalizing everything everything all indications I would say right now indicate that there's going to be a continued heaviness in the spot market through the fourth quarter.
We are as we rationalized our lanes and percentage between spot and contract. We also know that there will be a reset point within the industry that spot market won't become.
It's something that everybody eats up you have to add some contracted business. It pushes you for it. So we've kept a real open line of communication with our customers.
To make sure that we're in front of them and we'll be looking ahead to make sure as the market starts to shift that we continue or maybe even increase our contractual.
Content of the business, but at this point, we're still we've still tried to say pretty healthy in a split of contract and spot market freight, but we do know the day will come that contract business will start to swing and we want to make sure that we're in the ring to enjoy it that when it happens.
Great and then I don't know if I missed it but did you give that contract with <unk> earlier in the call.
Uh huh.
What was that Bruce the country.
Just wondering if you have that handy between contract and spot right now.
The majority of the time, we're operating about a 50 50 split we've seen it swing as high as 60 40 over the over the period over the quarter, so 60% spot versus 40% contract we're back down to probably closer to a 50 50 split right now.
Okay awesome. Thanks Hassan.
Thank you.
And I'm showing no further questions at this time I would now like to turn the conference back to Mr. Phillips.
Thank you Benjamin and thank you all for dialing in and I look forward to our next call and to highlight our progress that we've made throughout the fourth quarter. Thanks again.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
Yeah.
Sure.
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