Jeff Rogers - Chief Executive Officer David Crittenden - Chief Financial Officer, Treasurer.

Weng Zhou - Wolfe Research Chris Wetherbee - Citi Todd Fowler - KeyBanc Capital Markets.

Hello and welcome to the Universal Truckload Services Inc.’s third quarter 2015 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. Statements that are forward-looking relate to Universal's 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 uncertainties and risks and actual results could differ materially from those expectations. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jeff Rogers, Chief Executive Officer and Mr. David Crittenden, Chief Financial Officer for Universal Truckload Services Inc.

Thank you. Mr. Rogers, you may begin..

Thank you, Amy. Good morning. Thank you for joining us today for Universal Truckload Services’ third quarter 2015 earnings conference call. We began this year with expectations for revenue growth, in transportation the range of 10% to 13%, value-added the range of 5% and intermodal 9% to 11%.

We talked about improving transportation margins, returning dedicated transportation to profitability and increasing our driver capacity. What we didn’t expect was the rapid economic changes impacting several of the key markets and industries we serve.

Third quarter overall revenue was down 5.9% or $17.9 million compared to third quarter last year, with fuel surcharges representing $12 million or 67% of that drop in revenue. With fuel prices expected to be fairly steady, we will continue to see the effect in our revenue comparisons until first quarter next year.

The global economic climate and in particular China’s slowdown has impacted our flatbed truckload business. We continue to see solid growth in brokerage, our value added business is picking up and intermodal continues growing to record levels albeit at a slightly reduced pace. Now let’s discuss our business units. Transportation services.

A few things have changed in the last 12 months. The price of fuel is down around 30% from this time last year, oil rig count is down 59%, domestic steel production is down 8% and although rates have stabilized, they are below the highs of 2014. Load availability is down 33% from a year ago based on the market demand index.

On a positive note, our automotive load count remained solid and wind energy transportation was up in third quarter. Based on the factors I just mentioned, transportation revenue was down 9.5% to $178.1 million. It now represents 62.7% of our overall revenue.

Continued low oil and gas production and weak domestic steel production follow the trends we experienced the first half of the year. Oil and gas load count is down by 79%. Steel related flatbed load count was down 14% compared to third quarter 2014.

Considering the oil price forecast and current steel inventory, we expect flatbed load count to remain weak for the remainder of 2015. Our van load count had been relatively stable for the first half but was down 6% third quarter versus third quarter last year. While in contrast, our wind related specialized hauling was up 7%.

Additionally, I believe we have turned the corner with our dedicated transportation and we have stemmed the losses. We're not done yet but we have made major strides and we will continue to improve this business until it is both profitable and sustainable. From a capacity standpoint, the owner operator count remains essentially flat.

Revenue per loaded mile, exclusive of fuel surcharge, was down 4.1% for the third quarter of 2015 versus third quarter 2014. But we’ve had some successes. In third quarter we brought on 7 new agents with $14.8 million in annualized revenue and we have managed our margins very carefully in this environment making modest headway.

Moving on, the value added business continues to gain momentum. Revenue for the third quarter was down just 1% below third quarter last year to $68.4 million and represents 24.1% of our overall revenue. Overall operations are on track. The large implementation we have spoken about is going well. Another large project kicks off next month.

I want to remind you that these two operations account for $45 million in new revenue on an annualized basis. Unfortunately, one heavy industrial customer has slowed a production facility to one shift from two while in another they cut production by 65%. It is certainly beneficial now to be a large player in the automotive industry.

This quarter we were awarded four new contracts for an additional $10 million in annual revenue, launching between fourth quarter this year and second-quarter 2016. In addition to our strategy to own the plant, Universal continues to identify business opportunities outside automotive.

We have a very solid pipeline of opportunities in our targeted industries, including heavy truck, industrial and aerospace. As we consider the industries impacting value-added, the automotive soar forecast remains solidly north of 17.2 million units of production for 2015 with big gains posted for September sales.

Heavy truck production broke records this year. So while the 2016 forecast will be relatively good, nobody expects it to be a stellar as 2015. Fortunately, our heavy truck customers continue to gain market share helping offset some of the weakening market. Intermodal continues to grow albeit at a slower pace in the first half of the year.

Revenue was up 4.2% to $37.7 million for the quarter. Steady import volumes resulted in good performance from our drayage business while exports were flat. We’ve added capacity to meet demand and our Intermodal truck count is up 16.8% over last year.

Recently, though, we have seen some softening in spot prices and have adjusted accordingly to keep our fleet busy. Even with the recent softening, intermodal is still on pace for a record year. Which leads to our fourth quarter outlook.

Third quarter did not meet my performance expectations and for the fourth quarter we see continued lower demand in our heavy haul business and even some weakness in our dry van. Our wind related transportation will be negatively impacted in the fourth quarter as several large projects were pushed into the first quarter of next year.

On the upside, value added growth will accelerate into 2016. Moreover value added growth will outweigh the seasonality of the automotive sector which typically sees a drop in the fourth quarter from holidays, shutdowns and new model changeovers.

Finally, intermodal will continue to benefit from tight capacity and infrastructure inefficiencies holding spot prices similar to third quarter. Intermodal will continue to grow the balance of the year. We expect 5% to 7% growth compared to fourth quarter last year.

As I said earlier, this year we set out with expectations for revenue growth in transportation of 10% to 13% combined with margin expansion. With the impact of fuel prices and economic conditions impacting our key industries, we now project to be down 10% to 12% for 2015.

We will continue our focus on margin improvement as we identify opportunities for growth in a difficult market. Dedicated transportation has turned the corner with more improvement to come. We also expected 5% revenue growth from value added business. We have been successful in securing new programs and in locking down existing programs.

Most of that growth won't be visible until fourth quarter this year and first quarter of next year. So this year we will end relatively flat. Intermodal clearly has delivered. We expected 9% to 11% and it should be right in the middle of that growth range for 2015 with strong margin gains.

From a corporate perspective, we also began the year intending to constrain capital expenditures which we did, pay down debt with excess cash. We chose to do a tender offer instead and we wanted to improve our customer relationships and develop a more robust and diversified sales pipeline which I believe we have done and will continue to do.

David will now provide more details on our financial performance.

David?.

first, a contractually agreed price reduction at one of our longstanding value added services operation, a 1.3 million increase in our auto liability reserve, start-up expenses at the major new operations Jeff mentioned and various other non-operating charges.

These items were partially offset by selected customer bonuses, tax credit and beneficial settlements that were recognized in the third quarter. Income from operations in Universal’s transportation segment expressed as a percentage of Q2 2015 revenues declined 4.3% from 5% in Q3 2014.

Universal’s logistics segment, which includes both value added services and about 25 million of revenue from dedicated transportation, generated a 10.4% margin, down from a 12% margin in the second quarter and 14.3% in Q3 2014.

Universal year-to-date capital investments through September have totaled $13.4 million which includes $4.2 million in Q3 purchases. Our free cash flow in the third quarter which we define as EBITDA less CapEx, was basically flat for the previous year at $21.3 million, compared to $21.5 million in the third quarter of 2014.

Although quarterly trends in free cash flow can be volatile due to the timing of investment which are impacted by delivery schedule, we do think that free cash flow is an important metric to calculate. It demonstrates the underlying strength and liquidity of the asset light model we deploy [ph] in Universal’s different operation.

Now I want to repeat something I mentioned on our last earnings call. The expenditures for transportation equipment will increase in the next few quarters and we will be making new investments in our Mexican value added services operation in connection with an important fixed year contract renewal and focused expansion.

As a result, our annualized run rate CapEx over the next few quarters should remain at about $40 million based on current assumptions about equipment delivery schedules.

Please take a look at the supplemental information in our earnings announcement which provides operating and capacity metrics for our businesses, presents our segment financial performance and which includes the methodology we use to calculate the EBITDA metric.

As of today, our general demand and pricing outlook has changed somewhat since the end of the second quarter when transit held relatively stable from later winter through the summer. More recently, truckload rates have been fairly stable for us but spot pricing which impacts our intermodal business has weakened as Jeff mentioned.

Demand and pricing in our contract based value added services operations is more predictable for the last nine weeks of 2015 and overall activity is increasing with the launch of the new operation. As a result, we anticipate fourth quarter revenues in the range from $265 million to $280 million.

For the full year 2015 operating income for our transportation segment businesses is expected to end up in a range from 4.3% to 4.6% of revenue. On a margin basis, this is not what we planned earlier this year. It is though a good foundation for the continuing improvement initiatives we are implementing inside the company.

Based on recent performance, we are paring back margins on our logistics segment to a target range from 10.6% to 10.8% with some upside potential. Our customer development efforts remain focused on securing long term contracts to generate 15% operating margin.

But we need to completely address the challenges confronting our dedicated business and achieve run rate performance at our newest value added operations before we can expect higher aggregate logistics margin in Q4.

Based on Universal’s actual third quarter financial performance and these potential Q4 revenue and profit outcomes, we now predict 2015 full year EPS in the range of $1.32 to $1.37 per share based on bookings Q4 earnings of $0.29 to $0.34 per share.

Looking further down the road, our management team here is currently evaluating our assumptions for 2016 which we used in our bottom to top forecasting and management reporting processes. Our current thinking assumes comparative stability in fuel and labor rates in 2016 at current levels barring unforeseen events.

Summarizing Jeff’s comments a few minutes ago, we expect our value added services revenues in 2016 to grow in the high single digit, for intermodal revenues to grow at about 5% and for our truckload revenues, excluding our fast growing Cavalry brokerage business to grow in the low single digit.

Margin improvement does remain a critical focus and we want to have more to say about that when we release in 2015 results early next year. We will file our Q3, 10-Q by next week. It will provide additional detail behind the financial performance through discussing right now.

With that, Jeff and I again want to thank you for staying retirement at this morning. We always appreciate our interest and now I want to invite Amy to open the call for your questions.

Amy?.

[Operator Instructions] Your first question comes from the line of Scott Group with Wolfe Research..

Hi, it’s actually Weng Zhou on for Scott. Yes, just a few questions from me. One, just wondering about – how you think about capital allocation going forward between further tendering of shares, dividend and paying down debt and acquisitions. .

I will start – this is Jeff, also David will probably add comments. I think we’re going to try to keep CapEx in that – what we talked about in that 40 million range which is where we’re going to end up this year, I think that’s kind of the right number from a CapEx perspective.

Our dividend policy is not going to change, we don’t plan to do anything different there than what we did this year.

From an acquisition perspective, I think we are looking at anything that makes really good sense, I have said before that I thought the multiples were just too high and we weren’t really interested in and plan a lot from an M&A perspective but I think things are becoming more reasonable.

So I think we’re going to continue to look for opportunistic acquisitions but there is nothing of any significant size that’s on the radar right now, so. .

I would just add, we are inside a couple years from our current credit facility expiration date.

So we are looking very carefully and making sure that we’ve got the capital structure in place to carry us through the next two years based on what we are seeing in some of the debt capital markets, so that’s something – we’ve given some thoughts, all those things that Jeff has described and also view on how we are going to actually finance that. .

And in terms of the wind energy, just any expectations going forward, is that something that’s going to continue in the fourth quarter and into 2016?.

What we are getting from our customer who we get the wind energy business from is that they don’t have really good visibility beyond the end of 2016.

We think it will still be very solid next year but beyond next year no one is really saying much because there’s just not much visibility based on the political climate what’s going to happen after next year but next year should still be a pretty strong year for us. .

And how have October truck trended I guess – in terms of both rate per load and load count?.

Pretty much the same way, they have been trending, there hasn’t been a significant change either way. Pricing has been stable and load count has been stable. So good and bad, it hasn’t picked up but it hasn’t declined. .

Just one final question here, just on direct personnel related benefits, it seems like there was uptick in this quarter relative to the prior quarters, just wondering what’s driving that?.

I would say that, number one, just the mix shift in relative terms between our value added businesses which are more labor intensive than the truckload businesses, on the one hand.

And number two, specifically, we are involved in a the ramp up launch of the large operation that Jeff described which is a value added business, so the labor costs are running a little bit ahead of the revenue which is also what’s impacting the margin in the logistics business. .

Gentlemen your next question comes from the line of Chris Wetherbee with Citi..

Wanted to ask a little bit about the seasonality of the business into the fourth quarter, just trying to take all of the guidance you guys gave and sort of incorporated there, typically I think fourth quarter seasonally from an earnings per share perspective has been a little bit lower than the third quarter, it sounded like maybe there are some things in value added business that might offset some of that.

I just want to make sure I am sort of thinking about the puts and takes right, and maybe something that within the third quarter that doesn’t repeat in the fourth quarter.

I just want to make sure I am thinking about sort of that cadence right?.

And I think you are typically right, fourth quarter is usually weaker, we do see some potential for improvement just because of these large operations we’ve got in play, that won’t be fully I guess baked in the fourth quarter but a lot of the implementation costs will be behind us, so we should start seeing some margin improvement that we would typically have in those sides of operations into the fourth quarter but not fully baked to the first quarter, so that’s part of it, I think Chris.

We expect to get some benefits there. .

Chris, we also – if you look at the last year’s third versus fourth quarter, there was clearly a drop off in earnings per share, fourth to third, we’re obviously not anticipating anything like that. And the fourth quarter holiday shutdowns, Jeff mentioned, are nothing like the ones we see in July and early August.

So it’s a little bit softer but it’s not the same phenomenon. So I always think of fourth quarter from the value added perspective is being a little lag in the third quarter – I am sorry – little bit stronger in comp in the third quarter and then make sure we’ve got kind of the impact of the new Texas operation. .

And then just what I am putting again the pieces together for 2016, Jeff, I think you mentioned a couple of business wins on the value added services side, I think you mentioned 45 plus I think about 10, I think all of that kind of goes into the vest but next year from a revenue perspective I think you are looking for high single digits, I am guessing sort of the offset to the growth of the new contracts comes from the industrial customers, are there any other sort of customer maybe rolling off contracts that we think about or maybe some of those repricing events that we should be thinking about for next year?.

No, we don’t have any visibility right now to any contracts that will be ending, everything has been renewed that we have in place, so there is nothing kind of falling off.

There definitely is weakness on some of our larger industrial customers, just because of slowdown in their production, so that’s going to offset some of those winds but high single digits maybe will be a better than that, maybe, but I think we are trying to be a little bit more conservative but there is nothing that should be dropping off is of significance other than just the slowdown in some of our existing customers.

.

And my final question would just be sort of sticking on the – logistics I guess incorporating some of the MO business that’s in there, when you think about the margin profile and into it, you will have more to say probably in a quarter on how you are thinking about 2016 but just conceptually the big business wins that you get do you feel like those come in initially at a margin that maybe a little bit better than what you realize this year or is the kind of thing that you would expect – need to see some seasoning of those contracts that where you start to see some real margin improve, but I am just kind of getting rough sense directionally how to think about those?.

There is no question – it kind of goes in phases. The very beginning when you implement you obviously have implementation costs that offset to margins to start with.

And then when you get into that, you are fully ramped up and you are in play from an annualized perspective, the margins are stronger at the beginning of a say, three year contracts or five year contract as we talked about before because that’s when your costs are the lowest and the kind of priced on average basis for the three or the five years whatever the contract term is.

So you do see strengthening in margins once the project gets fully implemented and past the ramp up stage. We expect that with these new projects that we’ve got coming on. So once we get into late fourth quarter and into the first quarter, we should see what I would say would be normalized margins from these size of projects. .

Chris, I might just add to that a little bit.

The very large one that we are doing right now has really started kind of mid way through the second quarter and – I am sorry – midway through the third quarter and will be kind of at that point by the end of the year and that’s a big project, so kind – two quarters on the outside of soft revenue depending on the size and complexity of the project.

So it doesn’t go on forever but we do have that kind of impact for maybe a few quarters and the bigger projects, the bigger the effect, I guess I will say.

But we don’t run those, importantly even that the contract business, we never run that, suffer the loss, we’re still making profit but we are very speculative to that, it has a pretty good record on that but it does take a few quarters particularly on the really big project to kind of get to the full momentum on it. .

Gentlemen, your next question comes from the line of Todd Fowler with KeyBanc Capital Markets..

Just to follow up I guess on – hey good morning, Jeff – just on the last question there.

So is the expectation or the view that the normalized margins in value added services still somewhere in the mid teen level and that’s something that you can get to maybe unrelated to what’s happening in the economy, I mean those contracts are structured to get you to a mid teen margin, but in any given quarter you could have start up costs, things that work against you, I am just trying to get a sense for what the margin profile for that business should be longer term?.

Yes. That’s still what we are shooting for.

I think I have stated in the past, historically the margins may have been even little bit stronger than that, and I am willing to maybe come back a little bit to get more growth and that’s what we were looking for from a value add perspective but I think the mid teens is right where we expect these to be once we get past the implementation phase. .

We had a board meeting earlier this week and we brought in one of our representative operations and spoke – hasn’t worked our board through that particular example which is an example of what just as the company, we describe is to kind of own the plant strategy and that particular example is outstanding example of opportunities to be solidly above 15%, when we are doing it right, so when Jeff is describing, we might walk a 16% or 17% desired on the 15% that’s to get capture all those opportunities.

But we have several examples in our company that because of the value of what we do for those customers and their supply chain, are above that, and there has been no change here in terms of our expectations, in terms of the value of our services to our customers and our ability to price accordingly. .

It helps, I mean the genesis of that question has been, you are almost two years now since [indiscernible] at that margin level, and I am just trying to get a sense of, is it something different with the way the contracts have been priced, is it something different with the mix or the economy but it sounds like that, that really the target still should be to get to that mid teen level irrespective of kind of what’s happening in the external environment?.

The blending margin that includes dedicated is clearly being impaired by the dedicated. .

And I know, Jeff, you made some comments about where your things are at with the dedicated progress, is that something that you should be fully worked through in the 2016 or maybe just a little bit of clarification where you are at with that?.

That’s the expectation. It’s sure taking a lot longer than I expected, there’re some very difficult conversations with some of our key customers.

I can tell you that, that for the first time in the last couple months we did actually turn the corner and made a little bit of money for the last two months but I don’t think if you are going into a tough time from a dedicated perspective with the winter and everything else coming up, we’re just trying to get towards sustainable from a profitability perspective.

So my comment was, I do believe we turned the corner, we still have a difficult conversation with one customer left, that’s still a drain, but that’s going to fix itself into the first quarter. So I will tell you that we are going to be in pretty good shape as we end this year but we will be finally where I think I want to be by mid first quarter. .

And how much is dedicated revenue on an annualized basis at this point?.

Today it’s the run rate of 100 million – 25 million in the third quarter which I mentioned in my comments. .

Just a couple of last quick ones, understanding that there is still time to go this year and the visibility into next year is always a little bit challenging but thinking about the revenue expectations that you have, I guess, maybe thinking more on the cost side, if we don’t see an environment where intermodal up mid single digits and transportation up low single digits, how much control do you have on the cost side maybe to adjust the cost structure to flex down if we continue to see a softer environment persist longer into ’16?.

Well, there is definitely levers we control, it is a very variable model and asset light, so a lot of the costs go away on their own, if we are just not hauling, because it’s a variable model.

But having said that, there are opportunities here at the corporate office and we’ve begun some of those already because we are not waiting for a turnaround, there is clearly opportunities for us because of our revenue decline and we are tightening the belts, we are looking at things from a cost structure and back office perspective because – and we talked about that all year as far as putting all these companies together and we’ve accomplished a lot of things to streamline back office but there is clearly from a technology perspective opportunities for us to continue that, that we haven’t really gotten to those opportunities yet.

So there is plenty to do there. So there is absolutely levers that we can pull and we are going to continue pulling, I am not waiting for it to not get better, we’ve got to do it now and that’s what we are doing. .

And then just my last one, the comment -- I think you had some comments on this in the prepared remarks as well, but it was in the release about the customer contract price change. I am not sure I completely understand what that’s in reference to, and maybe just a little bit more kind of color around that would be helpful..

Sure. We basically made the decision that actually was made quite some time ago, little over a year ago, actually before I got here, so it’s little longer than a year ago, to extend an agreement with a long term very valuable customer for three more years but they were looking for some cost reduction for them.

So we chose to do that but it is – it does have an impact on the margins for that business but we still have very solid margins with that existing customer. So it was just a business decision to give a price decrease but extend an agreement that was very valuable to us. .

So that wasn’t something that was unplanned or a surprise and that would have been incorporated back in the initial guidance, it wasn’t some of that came about because of a change in the environment or something?.

No, not, it’s been a long term – End of Q&A.

This concludes our question and answer session. I would now like to turn the call back over to Jeff Rogers and David Crittenden for closing remarks. .

Sure. Again we sure appreciate everybody’s time and everybody’s support of Universal and we look forward to talking to you in the future. Take care. .

This concludes today’s conference call. You may now disconnect..