ULH - NASDAQ

Tim Phillips - Chief Executive Officer Jude Beres - Chief Financial Officer Steven Fitzpatrick - Vice President of Finance, Investor Relations

Hello, and welcome to Universal Logistics Holdings, Third Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions]. 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 business objectives or expectations and can be identified by the use of 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 today. It is now my pleasure to introduce your host Mr. Tim Phillips, Chief Executive Officer; Mr. Jude Beres, Chief Financial Officer and Mr. Steven Fitzpatrick, Vice President of Finance and Investor Relations. Mr. Phillips, you may begin.

Thank you, Joe 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, they are also a testament to the cohesive team of associates at 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 have slid rapidly over the course of the last six months and will put pressure on upcoming customer contract negotiations. While both automotive and Class 8 production remained steady at most plants operated or serviced by Universal, Part and ship shortages continue to keep the auto sector from obtaining increased production. Poor fluidity has continued to improve because of decreased import shipments, but chassis remained 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 of 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 $505.7 million. Our reported 2022 third quarter performance once again reflects record results. Universal posted its highest operating margin and earnings per share in company history. This marks the third quarter of meaningful margin expansion and operational 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. In our contract logistics segment, internal operation reviews, quality improvement initiatives and new business guided the group to an outstanding quarter. While the SAAR remained muted, the demand for vehicles remained strong. There were still bumps in the road, but production is tilted back to a somewhat normal state. Light Truck and Class 8 production forecasts are solid for the fourth quarter and into 2023. We remain well positioned to service our current customers and have room for immediate expansion as needed. The logistics group continued to evaluate and 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 operations servicing a highly publicized Detroit auto manufacturing facility. Our team worked 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 midsized opportunities we are close to signing, client contract logistics offers multi-year pricing stability based on contractual nature and will remain a key focus of our sales and growth efforts. 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 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 depended on in the United States. North of the border we have 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 did start to see volumes and rate step downs over the last half of the third quarter. Load volumes continue to be challenged in some markets by congestion, equipment constraints, 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 the demurrage, 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, accessorial 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 seamless service. Our intermodal segment continued to enjoy year-over-year revenue growth with 27.6% increase in revenue, but 14.8% decrease in load counts over Q3 of 2021. Load count will remain a top focus as we continue into the fourth quarter. We will use our sales pipeline which is expanded by about 24% compared to the same period in 2021 to build load count. Drivers and owner operators continue to build a pipeline at an elevated level, which includes full port press [ph] 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 1,840 drivers or 10% over the same period in 2021 and 4% sequentially. Part only units increased to 433 or 50% over the same period in 2021. Our trucking segment has continued to excel in both the flatbed and specialized sector. Their customer relationships, coupled with a high level of service has helped cement the agent group's success. While van spot rates have softened, specialized and flatbed rates have held firm. Revenues declined 7% year-over-year, which was a result of a 30.2% decrease in load volumes, as we rationalize underperforming operations in this segment. The decrease in volume was partially offset by 26.6% increase in revenue per loan. While we believe the flatbed rates will come off their current highs, 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 rate, the truckload group's 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. 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 model during the upcoming bid season and adjust accordingly. Operating revenue decreased 8.2% to 1,659 per load and the load count was down 31%. As previously mentioned, our focus has been on margin control, but the market continuing 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 rate at a fair price. 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 ILWU contracts 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 am 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. While economic downturn may cut into pricing, the operational foundation will continue to form at a high level. I’m 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 Jude. Jude.

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. This compares to net income of $10.3 million or $0.38 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 $51.3 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 are 13.8% and 16.7% of total operating revenues. These metrics compare to 3.8% and 7.4% respectively in the third quarter of 2021. Looking at our segment performance for the third quarter of 2022, in our contract logistics segment, which includes our value add and dedicated transportation businesses, income from operations increased $29.4 million to $35.4 million on $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 3.8% last year. As Tim mentioned in his comments, our third quarter of 2021 results included $7.1 million of operating losses incurred at a large contract logistics program here in Metro Detroit. We are pleased to report that that program is now profitable and meeting our expected return profile. On to 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 operations increased $26.2 million to $28.1 million. This compares to operating income of $1.9 million in the third quarter of 2022. Included in our third quarter of 2021 results were 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 1.6% last year. In 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 4.8% versus 6.4% last year. In 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 $700,000 to $1.1 million compared to operating income of $1.8 million in the third quarter of 2021. Operating margins for the quarter were 2.7% versus 3% last year. 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 1.33x. During 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 turnout for an additional five years, but also doubled the size of our revolving credit facility from $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 one of Universals 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 in a challenging credit environment. Capital expenditures for the quarter totaled $48.3 million, $85.8 million year-to-date. For the full year of 2022, we expect the capital expenditures to be in the $120 million range with interest expense between $15 million 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 $0.105 per share regular quarterly dividend. This quarter's dividend is payable to shareholders of record at the close of business on December 5, 2022 and is expected to be paid on January 3, 2022. With that Joe, we are ready to take some questions.

[Operator Instructions]. And our first question here will come from Chris Wetherbee with Citi. Please go ahead.

Hey! Thanks, good morning guys. This is [inaudible] for Chris. Maybe just starting broadly and going more granular, you're talking about some challenges and opportunities in ‘23. Maybe you could just help us break down the specific bogies and targets of those challenges and opportunities. And maybe if the challenges outweigh, what can that specifically do on a cost take outside that can help in the next year, thanks.

Sure, I’ll start with that Chris, and you know we think some of the challenges 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's going to challenge some of our truckload transportation negotiations that will be upcoming next year. That will also have an effect on some of our brokerage negotiations 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 in the value added and the dedicated sector, which is our Contract Logistics. We think that there's plenty of opportunity out there that we will remain relevant in the way we're rating and winning business. So I think going into 2023 and stretching our legs, there are some opportunities that are in front of us of various sizes, and we got a couple of basis that we think we're going to hit here in the next couple months, as well as a couple of large projects we hope to get feedback on. So if I had 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 contract logistics business, which we continue to find that we are winning business at rates that we find acceptable.

It makes sense. Specifically within that, you said there's a 40% revenue opportunity there within Contract Logistics. What specifically is that I guess and how are you getting that 40%?

Yeah, that figure just represents a measurement of what the pipeline looked like in the third quarter of ’21 compared to the third quarter of 2022. It’s a measurement and just the revenue opportunity of those sales pipeline opportunities. And what we found is that there's a spread of opportunities within that pipeline that canvas the different sectors and spaces. We have some aerospace in there, we have some agriculture in there, we have some automotive opportunities in there and we also have some heavy truck opportunities in there. So we're happy with where we have that pipeline pointed and now just becomes our execution and ability to show the customer what we can do, but we are confident in that.

Sure, that makes sense. I think one more, one more here and that's on Intermodal. You saw a sequential step down in loads, down significantly year-over-year. I guess two questions. If we think about what that business could look like in 4Q on the load side and then also specifically there if you have accessorial starting to roll off 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 4Q specifically?

Sure. I don't think you should expect any more deteriorated, serious deterioration in year-over-year of load count, but we are still facing the challenge in some marketplaces of congestion, which is hard to put a measurement on. We still have markets that haven't unwinded the chassis problem where the chassis are sitting loaded with containers on them at warehouses so we can keep them in the cycle for rotation. And you know a good portion of our Intermodal Groups transportation power is coming from owner operators, and they've had a pretty good stretch of run where they've been able to pick and choose what they want, and I think that we realize that, but I think that we'll have those continued conversations about the stepping down in the marketplace and maybe their reconsideration of how they point their business going into the latter half of this year and into 2023. So we're going to definitely have those conversations. And as far accessorial go, some of the accessorial noise that you've seen, both positively and negatively have come from congestion and the supply chain disruptions. We've done a lot of things with our customer supply solutions that maybe we wouldn't in a normal environment. You know 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 economic solution that provide value for them. So you know 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 you know unwind itself in going into next year, and then it's hard to say that Q1 what everything – is everything unwound in Q1? Is the imports at a level where we don't have port congestion and rail congestion, I guess we'll still have to see on that.

Makes sense. Thanks a lot, Tim. I appreciate it.

Thank you, Chris.

[Operator Instructions] Our next question here will come from Bruce Chan with Stifel. Please go ahead.

Hey gents! Good morning and 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 and the congestion situation easing a little bit. Do you feel like you're starting to top out there as far as the accessorials are concerned?

Yes, I would say, well 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'll probably see fuel remain elevated, but some of those accessorials that are part of that whole congestion and unwinding will see some softening and some of those we don't mind, right. We don't mind seeing less per diem because containers are sitting out for too long, you know although we have made good money on storage and metering of containers to fit the customers need. We also know that a fluid supply chain allows us to increase the number of turns we're doing with trucks right now, and our turn rate is down quite a bit from where it was pre-COVID. So we think a turn back to normalization will allow us to put supply or provide more turns per week for these drivers and contractors. So yes, I think that we'll see some step down in accessorials definitely, but I would hope the step down that we see in accessorials is made up for by the fluency we see in our drivers and contractors being able to turn more loads in and out of ports and rail.

Okay, got it. That makes sense. So just to be clear, you know any headwinds that you might be looking at on that yield accessorial size that can be offset, certainly with productivity, but potentially on the volume front as well a little bit.

Yes, that's one of our goals, is to ramp up volume, right. It’s a conservative effort between the driver, the contractor, our sales, our sales pipelines, in 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 rails that we’ll see our loads per driver jump and that should help offset some of the deceleration and accessorial revenue margin.

Got it, okay. And then just following on those thoughts on the intermodal side, specifically around the port array side. You know when you think about AB5 and some of the migration of volumes that we've seen from west to east, have you you know changed or has that changed any of your longer term strategies or thoughts around you know where you want to be positioned, especially you know once you start to think about M&A.

Yes, 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 provides strategic value to universal in the Intermodal Group, and no matter what coast that's on, we’ll do a deep dive into it. I do think that you know the past several years from a combination of organic growth and M&A work, we are well positioned in most, if not all major ports and rails around the United States. So having the view we do from 10,000 feet, allows us to set strategies and toggle. If we see a – more and more freight flowing through the east coast, then we have the ability to ramp up driver and contractor counts there to run into the port of New York or the port of Savannah. But I do think this, I think that customers made decisions based on many things in this last year or year and a half and some of the swing to the east coast 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 LA Long Beach port system and the connectivity to the rails is probably the best in the country, but there was some headwinds. We had uncertain labor markets that they took into consideration; we had severe congestion, which has alleviated itself now and kind of pushed a little bit of it over to the east coast, but I still think there's value there on the west coast and I still think there's – the last time I looked, there's a lot of people that live out in that area, an area of the United States. So I see that to be a continued, although it may take a short term you know hiccup, I think it's a long term value. But just to end that, I think Universal is set 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 schematic one. You know Tim you talked a bit about Mexican and Canadian cross-border. You know we've obviously heard a lot about you know near-shoring in the wake of COVID and tariffs. Given your experience with automotive, you know I think you've got some good perspective there. Can you share with us some thoughts about you know whether that's something 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, you know maybe just some color there.

Well, I probably can give you a little bit of color on Mexico than I can Canada. Although we operate there, our cross-border is nowhere, is very minimal. The same thing to be said in Mexico for us. We don't do – we don't do a ton of cross-border if any cross-border. Most of ours is within the walls of Mexico. So the new startup that we had there is delivering and 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 major automotive players. What I can tell you is the volumes have been have been good this year. Everything that we see that 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 near-shoring is real. I think labor down there is real and I think our opportunities as we set our pipeline up will be – there will be a lot of opportunities that reside in Mexico. It's just a matter whether Universal finds it to be a value of proposition as we gain some speed on this. But on the transportation side, we've already had several conversations. There are direct results of just the knowledge that we've started an inter-Mexico trucking company and there's much interest. So I think you know north of the border we've 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 a strategic business plan and showing them how we can move freight just as effectively if not more so than what they used to in Mexico. So we're excited about the opportunity. It’s in its infancy stages. It has some work and 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 and I/we look forward to telling the story about our continued progress at Universal when we meet next time. So until then, I appreciate it. Thank you. Have a great day!