Q3 2022 Universal Logistics Holdings Inc Earnings Call
Hello, and welcome to Universal Logistics Holdings' third quarter 2022 earnings conference call.
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A brief question and answer session will follow the formal presentation.
And during the course of this call management May make forward looking statements based on their best view of the business as seen today.
Statements that are forward looking relate to universal's business objectives or expectations and can be identified by the use of words, such as believe expect anticipate and project.
<unk> are subject to risks and uncertainties and actual results could differ materially from those expectations.
As a reminder, this conference is being recorded today.
It is now my pleasure to introduce your host Mr. Tim Phillips, Chief Executive Officer, Mr. Jude Beres, Chief Financial Officer, and Mr. Stephen It's Patrick.
Vice President of Finance and Investor Relations. Mr. Phillips you may begin.
Thank you Jill and good morning, Thank you for joining Universal Logistics Holdings' 2022 third quarter earnings call.
Our Q3 2022 numbers are not only a reflection of our continued commitment to expanding shareholder value.
There are also a testament to the cohesive team of associates, Universal who share the same goal of being the best.
I'm extremely satisfied with our progress over the first three quarters of 2022.
Our focus on operations and customer service are at the center of our commitment to continuous improvement across all of our operating groups.
We continue to keep the pulse of the economy close as we are transitioning into the last quarter of the year with particular attention on our transportation portfolio.
Spot market rates and slid rapidly over the course of the last six months and will put pressure on upcoming customer contract negotiation.
While both automotive and class a production remained steady at most plants operated or serviced by universal cart and chip shortages continued to keep the auto sector from obtaining increased production.
Port Fluidity has continued to improve because of decreased import shipments, but chassis remains tight in many markets.
We are pleased with our progress in California, we successfully entered into an agreement with the Teamsters, which has helped bolster our port drayage fleet with quality drivers.
While the equipment market has remained tight our planning has secured hundreds of company trucks and chassis to support the growth in this market.
We are very excited to be able to offer our valued customers a consistent and seamless service a compliant drivers and trucks.
Now for the quarter.
In yesterday's release, Universal reported 2022 third quarter earnings of $1 84 per share on total operating revenues of five $505 7 million or.
Our reported 2022 third quarter performance once again reflects record result.
Universal posted its highest operating margin and earnings per share in company history.
This marks the third quarter, a meaningful margin expansion and operational efficiency efficiency progress.
While we will likely see a normalization of transportation rates over the next few quarters, our contract logistics business is well positioned to grow exiting 2022 and into 2023.
Now for some color on each of our service lines.
And our contract logistics segment inter internal operation reviews quality improvement initiatives and new business guided the group's an outstanding quarter.
While the Saar remained muted the demand for vehicles remains strong.
There were still bumps in the road, but production is tilted back to somewhat normal state.
Light trucking class eight production forecast are solid for the fourth quarter and into 2023.
We were ready we remain well positioned to service our current customers and have room for immediate expansion as needed.
The logistics group continued to evaluate it.
Execute operational improvement opportunities in the third quarter.
Third quarter 2022 was the first full quarter, we were able to achieve monthly profitability on a restricted production schedule for our operation servicing a highly publicized Detroit auto manufacturing facility.
Our team worked intensive intensively on operational execution and pricing to make this possible.
We continue to see solid opportunity in the contract logistics space. Our sales pipeline continues to build with over a 40% increase in revenue opportunities compared to the same period last year.
We have a handful of mid size opportunities, we are close to signing.
Client contract logistics offers multi year pricing stability based on contractual nature and will remain a key focus.
But our sales and growth effort.
Yeah.
Our dedicated transportation group continued to show upward momentum in the third quarter I'm very excited about the launch and immediate execution of our dedicated Transportation Division Division in Mexico.
We are very optimistic about the additional growth opportunities in the near future as we bring the same execution and service to Mexico that our customers have dependent on in the United States.
North of the border we've continued to build density at new and existing operations.
Increasing our driver count by almost 400 or 23, 5% over the same period in 2021.
New equipment predictable schedules and high driver pay are hallmarks of our dedicated brand and are the primary reasons why we continue to be able to attract and retain qualified drivers.
Our intermodal Drayage group continued to perform well, but it did start to see volumes and rates stepped down or.
For the last half of the third quarter.
Load volumes continue to be challenged in some markets by congestion.
Equipment constrained.
And we now have blank sailings back in the news.
The group continued to rationalize customer rates and volumes in many of the markets around the U S steering our capacity to customers that best suit our operational needs.
As with the general rate environment, our accessorial charges, such as demurrage and storage and per diem fell slightly from $33 6 million in the second quarter of 2022 to $31 3 million in the third quarter of 2022.
Although sequentially down as the social charges remain elevated over prior years as congestion networks continue to unwind and equipment availability works towards normalization.
We intend to continue to purchase new chassis.
And remanufacture, our own as we work our way through persistent equipment shortages. Our goal remains consistent build our own fleet of chassis to provide our customers with chemotherapy.
Our intermodal segment continue to enjoy year over year revenue growth with 27, 6% increase in revenue.
But at 14, 8% decrease in load count over Q3 of 2021.
Low count will remain a top focus as we continue into the fourth quarter, we will use our sales pipeline, which has expanded by about 24% compared to the same period in 2021 to build low count.
Drivers and owner operators continue to build a pipeline at an elevated level, which includes full court press in California.
We are pleased with the pipeline of New California company driver applicants and the additional assets, we have moved into the market.
Our 2022 third quarter driver count increased to 800, 1800, 40 drivers or 10% over the same period in 2021.
And 4% sequentially.
Only units increased to 433 or 50% over the same period in 2021.
Our trucking segment segment has continued to excel in both the flatbed.
Special life sector.
Their customer relationships, coupled with a high level of service has helped to cement the agent groups success.
<unk> van spot rates have softened specialize in flat rate rates have held firm.
Revenue declined 7% year over year, which was a result of a 32% decrease in load volumes as we rationalize underperforming operations in this segment the.
The decrease in volume was partially offset by 26, 6% increase in revenue per load.
While we believe the flatbed rates will come off their current high the group is well positioned to finish the year strong.
With roughly 63% of the loads generated from flatbed equipment.
Our work in the wind sector has remained consistent and we expect to finish the year with stronger numbers than we saw in 2021.
As a result of the declining market rates the truckload groups agent pipeline is robust with plenty of conversion opportunities.
We remain confident in our asset light variable cost structured agent model and their ability to navigate choppy waters.
The company managed brokerage.
Experienced another good quarter of operating margin while rates remained under pressure. We have continued to rationalize our margin profile in relation to the revenue opportunities.
But understand the competitive nature of the current market, we will evaluate our pricing models during the upcoming bid season and adjust accordingly.
Operating revenue decreased eight 2% to <unk> hundred $59 per load and the load count was down 31%.
As previously mentioned our focus has been on margin control, but the market continues to soften we will listen to our customers' needs.
We have begun operating several small drop trailer pools and have additional assets on our capex to continue this strategy.
Broker carrier expectations have started to level set and we will continue to collaborate with our carrier base to bring them the best freight at a fair price.
Yeah.
There will be plenty of economic headwinds over the next several quarters inflation remains extremely high labor costs continue to increase.
And inventory levels are on the rise.
Ongoing challenges to final ratification on the rail workers and I L. W. You contract also remain a concern.
While I'm very encouraged by the transition of contractors to company drivers in the state of California, the long term cost impact will need to be evaluated.
The supply of some equipment is improving.
And we are confident we will have deliveries to fill our growth and replacement needs.
Many of these market challenges should mean opportunity for universal.
Finally.
I'm extremely happy with the progress the Universal team has displayed over the past three quarters.
Their efforts have laid the foundation for long term shareholder and customer value.
Well economic downturn may cut into pricing the.
The operational foundation will continue to fall at a high level.
I am extremely optimistic as we March to the end of the year and look forward to taking on the challenge and opportunities 2023 will present.
I would now like to turn the call over to Julie Kim. Thanks, Tim Good morning, everyone yesterday, Universal Logistics Holdings reported consolidated net income of $48 5 million or $1 84 per share on total operating revenues of $505 7 million in the third quarter of 2022.
Compares to net income of $10 3 million or <unk> 38 cents per share on total operating revenues of $445 6 million. During the same period last year consolidated income from operations was $69 8 million for the quarter compared to $16 7 million one year earlier EBITDA increased 50.
One 3 million to $84 4 million, which compares to $33 1 million. During the same period last year, our operating margin and EBITDA margin for the third quarter of 2022, or 13, 8% and 16, 7% of total operating revenues.
These metrics compare to three 8% and seven 4% respectively in the third quarter of 2021.
Looking at our segment performance for the third quarter of 2022, and our contract logistics segment, which includes our value add and dedicated transportation businesses.
Come from operations increased $29 4 million to $35 4 million and $209 5 million of total operating revenues. This compares to operating income of $6 million on $156 9 million of total operating revenue in the third quarter of 2021.
Operating margins for the quarter were 16, 9% versus three 8% last year.
As Tim mentioned in his comments, our third quarter of 2021 results included a $7 1 million of operating losses incurred at a large contract logistics for a ramp here in Metro Detroit. We are pleased to report that that program is now profitable and meeting our expected return profile.
Onto our intermodal segment operating revenues increased $33 4 million to $154 4 million compared to 121 million in the same period last year and income from the income from operations increased $26 2 million to $28 1 million. This compares to operating income of $1 9 million in the third quarter.
Of 2022.
<unk> in our third quarter of 2021 results or an additional $5 8 million of legal expenses related to the settlement of previously disclosed legal matters.
Operating margins for the quarter were 18, 2% versus one 6% last year.
Our trucking segment operating revenues for the quarter decreased $7 6 million to $99 6 million compared to $107 2 million in the same quarter last year and income from operations decreased $2 million to $4 8 million.
This compares to operating income of $6 8 million in the third quarter of 2021 operating margins for the quarter were four 8% versus six 4% last year.
And our company managed brokerage segment operating revenues for the quarter decreased $18 6 million to $40 6 million compared to $59 2 million in the same quarter last year, while income from operations decreased 700000 to $1 1 million compared to operating income of $1 8 million in the third quarter of 2021.
Operating margins for the quarter were two 7% versus 3% last year on.
On our balance sheet, we held cash and cash equivalents totaling $14 6 million and $8 6 million of marketable securities.
Outstanding interest bearing debt net of $4 6 million of debt issuance costs totaled $389 2 million at the end of the period, excluding lease liabilities related to ASC 842, our net interest bearing debt to reported TTM EBITDA was 133 times.
The third quarter of 2022, we also successfully closed on two syndicated borrowing facilities raising a significant amount of capital for the company, we amended and restated our primary credit facility not only extending the term out for an additional five years, but also doubled the size of our revolving credit facility from <unk>.
$200 million to $400 million.
We also raised an additional $90 million in the form of an $80 million term loan and $10 million revolver for wanting to Universal's wholly owned subsidiaries that closed concurrent with our primary facility.
A special thank you for all those involved in getting these deals done on time and a challenging credit environment.
Capital expenditures for the quarter were $48 3 million $85 8 million year to date for the full year of 2022, we expect capital expenditures to be in the $120 million range with interest expense between 15 and $18 million.
Based on the current operating environment for the fourth quarter of 2022, we are expecting top line revenues between $450 million to $475 million and operating margins in the 10% to 12% range.
And finally Wednesday, 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 5th of 2022 and is expected to be paid on January three 2023.
With that Joe we are ready to take some questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Yeah.
And our first question here will come from Chris Wetherbee with Citi. Please go ahead.
Hey, Thanks, Good morning, guys just rely on for Chris.
Good morning, maybe just starting broadly and going more granular you were talking about some challenges and opportunities in 'twenty. Three maybe you could just help us break down the specific bogies and targets of those challenges opportunities and maybe if the challenges that way what can you guys specifically do on cost take outside that getting that they can help them in the next year. Thanks.
Sure I'll start with that Chris and we think some of the challenges is that universal will face in 2023 may mirror some of the others. When it comes to the transportation sector. We know we've seen a decline in the spot rate market and it has leveled a little bit, but we know that.
Going to challenge some of our trucks.
Truckload transportation negotiations that will be upcoming next year that will also have an effect on some of our brokerage.
Negotiations are going into next year and next year.
But equally as much we're equally excited about the stability that we've seen in the auto and truck sector and our pipeline of opportunity and the value added and dedicated a sector, which is our contract logistics, we think that there's plenty of opportunity out there.
That we will remain.
You know relevant in the way, where we're rating and winning business. So I think going into 2023 and stretching our legs. There are some there are some opportunities that are in front of us up various sizes. We've got a couple of base hits that we think we're going to hit here in the next couple of months as well as a couple of large projects, we hope to get feedback on it so.
If I had to two to lay it out on the table I would say the challenges will definitely be in the transportation sector and then our upside will be our our contract logistics business, which we continue to find that we are winning winning business at rates that we find acceptable.
That makes sense. It was supposed to be within that you said there was a 40% revenue opportunity there.
Yeah in fact logistics, what specifically is that I guess how.
How are you getting to that 40%.
Yeah.
That figure just represents a measurement of what the pipeline look like in the third quarter 'twenty, one compared to the third quarter of 2022, it's a measure of mint and just the revenue opportunity of those sales pipeline opportunities and what we've found is that there's this there's a there's a spread.
[noise] of opportunities within that pipeline that that canvas the different sectors in spaces. We have some aerospace in there we had some agriculture and there we have some automotive opportunities in there and we also have some heavy truck opportunities in there so well.
We're happy with where we have that pipeline pointed now just becomes our execution and the ability to show the customer what we can do but we're confident in that.
Sure that makes sense.
I think one more one more here and that's on the intermodal you saw.
Sequential step down in and loads down significantly year over year, I guess two questions or if you think about what that what that business could look like and for Q1 on the loan side and then also specifically there if you have accessorial starting to roll off and and you just have fuel surcharge rolling off as well what are the dynamics that we should be thinking about for intermodal as we go into <unk>.
Specifically.
Sure I don't think you should expect any more deteriorated serious deterioration in year over year load counts, but we are still facing the challenge in some marketplaces of congestion, which it's hard to put a measurement on we still have markets that have an unwinding the chassis problem, where the chassis are sitting low.
<unk> with containers on them at warehouses. So we can keep them in this cycle for rotation.
And you know a good portion of our intermodal.
Oh intermodal groups transportation powers coming from owner operators and they've had a pretty good stretch of run where they have been able to pick and choose what they want and I think that we we realize that but I think that will have those continued conversations about the stepping down in the marketplace and maybe their reconsideration of holiday.
Eight point, there business going into the latter half of this year and into 2023. So we're going to we're going to definitely have those conversations and as far as that's the soils go some of the accessorial.
The noise that <unk> seen both positively or negatively if come from congestion and the supply chain disruptions. We've done a lot of things with our customers supply solutions that maybe we wouldn't in a normal environment.
Some of the negatives that come from congestion is per diem. Some of the positives that come from that for us is giving our customers a solution to meter containers into their facilities to hold them to store them to give them an economic solution.
That provides value for them so.
It's been a pretty stressed supply chain that has presented opportunities for us.
I still see those opportunities in the fourth quarter, maybe not to the level, we saw at the height over the summer and it will unwind itself and.
And going into next year, and then it's hard to say that Q1, what what everything is everything unwound. In Q1 is the is the imports at a level, where we don't have port congestion and rail congestion I guess, we will still have to see on that.
Makes sense. Thanks, a lot Tim I appreciate it thank you Chris.
Again, if you have a question you May press Star then want to join the queue.
Our next question here will come from Bruce Chan with Stifel. Please go ahead.
Hi, Gents, good morning, and a nice result here.
I hope I didn't just miss it but on the intermodal front you know another great experience there with yield.
And you know when we think about some of those comments around more fluidity in the congestion situation.
Situation easing a little bit.
Do you feel like you're starting to top out there as far as the accessorial are concerned.
Yeah, I would say well what would the one unknown accessorial as fuel I mean fuel diesel fuel has been very volatile don't have a crystal ball going into the first quarter. So I think we will probably see fuel remain elevated but some of those assets soils that are part of that whole congestion and unwinding.
We'll see some softening in some of those we don't mind right. We don't mind seeing less per diem, because containers are sitting out for too long.
Although we have made good money on storage and metering of containers to fit our customers' needs. We also know that a fluid supply chain allows us to to increase the number of turns we're doing with trucks right now and our churn rates down quite a bit from where it was pre COVID-19. So we think it turn back.
To normalization will allow us to supply or provide more turns per week.
These drivers and contractors. So yeah, I think that we will see some step down in accessorial definitely but I would hope the step down that lead CNS. Historically has made up for by the fluency, we see in our drivers and contractors being able to turn more loads in and out of the ports and rail.
Okay got it that makes sense, so just to be clear.
Headwinds that you might be looking at on that yield accessorial size can be offsets.
With productivity, but potentially on the volume front as well a little bit.
Yeah. That's that's one of our goals is to ramp up volume writes a concerted effort between the driver of the contractor our sales our sales pipeline and making sure that we have the opportunities there to make sure. We can feed the drivers and contractors with steady work, but I do believe that once we get back to a little bit.
More normal.
Flow in and out of ports and rail that will see our loads per per driver jump and that should help offset some of the deceleration in accessorial revenue margin.
Got it Okay and then just following on on those thoughts on the intermodal side, specifically around the portray side you know when you think about you know.
Five and in some of the migration of volumes that we've seen from from West to East have you you know.
Or has that changed any of your longer term strategies or thoughts around.
Where you want to be positioned, especially you know once you start to think about M&A.
Yeah, I would think you know, let's just start with the M&A piece, we will take a very close look at any M&A opportunity that provide strategic value.
The universal in the intermodal group and no matter, what Kos that dawn will do a deep dive into it I do think that you know the past several years from the from a combination of organic growth.
And M&A, where we are well positioned in most if not all major ports in rails around the United States. So having the view we do from 10000 feet allowed us to set set strategies and toggle if we see a.
More more freight flowing through the east coast, and we have the ability to ramp up driver and contractor count there to run into the Port in New York or the port of Savannah, but I do think that I think that customers made decisions based on many things in this last year year, and a half and some of the swing to the east coast.
It could be just that they thought about what was the easiest way to push their goods into the United States and we all know that the L. A long beach port system in the connectivity to the rails is probably the best in the country, but there was some there was some headwinds we had uncertain labor market that they took into consideration we had severe.
<unk>, which has alleviated itself now been kind of pushed a little bit over to the east coast, but I still think theres value there on the west coast and I still think Theres last time, I look theres a lot of people that live out in that area and area of the United States. So I see that to be a continued although it may take a short term.
Hiccup I think it's a it's a long term value, but just to end that I think universal is set in in the 48 states to be a value provider for any customer no matter, what port that freight flows through.
Okay Fair enough and then you know.
Final question here, maybe just a longer term thematic one you know Tim you talked a bit about Mexican and Canadian Cross border. We've obviously heard a lot about.
You know near shoring in the wake of Covid and tariffs.
Given your experience with automotive I think you've got some good perspective, there can you share with us some thoughts about whether that's something where we're seeing concretely and what the trends look like going forward as far as you know manufacturing shift.
You know to North America to other places.
Maybe just some color there.
Well I, probably can give you a little better color on Mexico, then it can Canada, although although we operate there are cross border is nowhere is no. There's very minimal same thing to be set in and Mexico. Bruce We don't do we don't do a ton of cross border or if any cross border. Most of ours is within the walls of.
So the new startup that we had there is delivering and in pulling in milk runs and such from the Automotives within Mexico as well as the traditional value added service offerings. We've had there with inside the four walls with a major automotive players what I can tell you is the volumes.
Have been they have been good this year, they everything that we see that where we're able to get our eyes on look good for next year and I think that the opportunity still presents itself I think the north near shoring is real I think labor down there is real and I think our opportunities as we set our pipeline up with.
I'll be there there'll be a lot of opportunities that reside in Mexico, just it's just a matter whether universal finds it to be a value proposition as we gained speed on this but on the transportation side. We've already had several conversations there are a direct result of just the knowledge that we've started and inter Mexico property.
Company and Theres much interest so I think north of the border. We supplied a lot of solutions to the automotive and others I think they realize that they have some comfort with us. So it's just a matter of working through its strategic business plan and showing them. How we can move freight just as effectively if not more so than what they're used to it.
Mexico. So we're excited about the opportunity it's in its infancy stages has some some work done in a way to go but.
We're positive we'll get it there.
Okay perfect. Thank you very much take care.
Thank you.
And with no remaining questions, we will conclude our question and answer session.
I'd like to turn the conference back over to Tim Phillips for any closing remarks.
Well first of all I appreciate everyone calling in.
I, we look forward to telling the story about our continued progress at Universal when we meet Exxon. So until then I. Appreciate it. Thank you have a great day.
Yeah.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.