Jeff Rogers - CEO Jude Beres - CFO.

Analysts:.

Hello and welcome to the Universal Logistics Holding Inc.'s Second Quarter 2016 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; Mr. Jude Beres, Chief Financial Officer; and Mr.

Steven Fitzpatrick, Vice President, Finance and Investor Relations for Universal Logistics Holding Inc. Thank you. Mr. Rogers, you may begin..

Thanks Susanne. Good morning. Thank you for joining our second quarter earnings call. I'll give some opening comments, Jude will add some financial color commentary, and Steve will assist with our Q&A. In general, we see mixed results from our portfolio of businesses. Clearly, the challenging freight environment continued in the second quarter.

Significant reduction in Class A truck production has been a drag on vast portion of our value add business, while other areas of our value add business are showing significant growth like never before.

Brokerage continues to be a strong growth vehicle and we see better opportunities to connect the dots with other segments of our business, to bring even more value to our customers. Our dedicated transportation unit has recovered well and is and will be a positive impact to earnings going forward.

Consolidated, our second quarter revenue was down 6.2% or $18.2 million compared to second quarter last year with $8.2 million of VAT [ph] decline attributable to lower fuel surcharges. So, let's start with our transportation segment.

Transportation services revenue was down 9.7% or $17.5 million to $162.7 million over second quarter last year, with lower fuel surcharge representing $5.9 million of the decline. Weakness in energy and domestic steel production continue to impact our flat-bed operations, but overall, our load count was up slightly.

A softer pricing market was the primary factor weighing transportation revenue last quarter as our rate per load within Universal Truckload was down 12.7% when including fuel surcharge, 9.9% down if FSE is excluded. Fortunately, our bearable cost business model insulates our margins, while we focus on maintaining and even growing market share.

We continue to add new agents and throughout last quarter, we added 12 agents with eight producing revenue in second quarter. Of course, transportation's lower relative growth rate compared to our other businesses is slowly lessening the impact of transportation and now represents 58.8% of Universal Logistics Holding's overall revenue.

The dedicated business which is largely tied to the automotive industry is delivering significant improvement in both profitability and service. We feel confident we can now go to market to further penetrate automotive or other verticals validated by the recent successful launch of new lanes valued at $10.7 million for two major automotive customers.

We're encouraged by what the future holds for our dedicated unit. Value added, our value added business continues to build. Revenue for the second quarter grew 4.1% over second quarter last year to $78.2 million and value added now represents 28.3% of our overall revenue.

Keep in mind, our heavy truck value added operations have seen volume declines of mid-20%. Our non-heavy truck business is up 26% for the quarter. Automotive production forecast are still solid and we expect them to remain so through 2017. Our sales pipeline for value add remains solid and we're having tremendous success winning new business.

We will have two more launches beginning in September that we were awarded in early 2016. As I mentioned before, the annual revenue run rate for these two projects will exceed $50 million once fully implemented. This quarter we were awarded three new contracts with existing customers adding another $9.8 million in annualized revenue.

The largest of these contracts will launch in third quarter as well. We are dealing with significant start-up cost and higher than normal labor cost since we are launching more projects than ever in our history. We're focusing our operations and engineering teams on execution excellence.

So, we are experiencing short-term pain for significant long-term gain. But we do not see an [Indiscernible] sight to new launches and it is very exciting.

Intermodal, reflecting back to second quarter 2015, our intermodal business delivered its best quarter in Universal's history with very favorable rates and strong pent-up demand from the West Coast labor dispute.

This quarter comparison while still up $1 million to $35.9 million or 2.9% sequentially is down 9.6% or $3.8 million compared to that stellar second quarter last year. Truck count continues to grow though, up 12.5%. Actual load count even with the difficult comparison was up 0.5%.

Intermodal as in truckload is experiencing a difficult pricing environment as the rate per load has dropped 8.7% when including fuel surcharge, 3% if fuel surcharge is excluded.

In summary, while I'm not pleased with our current results, I do believe we're weathering a very difficult environment and we're creating a solid foundation for future success. Looking forward, we expect transportation services lower pricing to continue for the remainder of the year.

We will continue to focus on improving load count, providing great service and growing market share. Our value added business revenue will accelerate as each project launches and margins will improve as production rises and excess costs are reduced.

Lastly, our focus for intermodal will be capturing market share where we expect flat volumes and continued competitive pricing. Jude will now provide more details on our financial performance.

Jude?.

Thanks Jeff. Good morning, everyone. Here are some highlights from our earnings release. Universal Logistics Holdings recorded second quarter 2016 net income of $9 million or $0.32 per share on total operating revenues of $276.8 million.

This compares to net income of $13.3 million or $0.44 per share on total operating revenues of $295 million in the second quarter of 2015. Consolidated income from operations decreased $6.1 million to $16.8 million compared to $22.9 million in the second quarter of 2015.

EBITDA decreased 18.6% to $25.5 million in the second quarter of 2016, which compares to $31.8 million one year earlier. Our operating margin and EBITDA margin for the second quarter of 2016 are 6.1% and 9.4% of total operating revenues. These metrics compare to 7.8% and 10.8% respectively in the second quarter of 2015.

On a sequential basis, consolidated income from operations increased $2.8 million or 20.4%, EPS increased $0.06 per share or 23.1%, EBITDA increased $3.4 million or 15.3%, and Universal's EBITDA margin increased to 9.4% of consolidated revenue compared to 8.6% in the first quarter of 2016.

Looking at our segment performance for the second quarter, in our transportation segment, which includes our legacy truckload, intermodal, NVOCC and freight brokerage businesses, income from operations decreased 25% to $6.9 million from $9.2 million in the second quarter of 2015.

Operating revenues for the quarter totaled $169.3 million, down 10.3% from $188.7 million in the same quarter last year.

In our logistics segment, which includes our value add logistics business, dedicated transportation, as well as Westport Axle, income from operations decreased 16.5% to $10.6 million on $107.2 million of total operating revenues compared to $12.7 million income from operations on $106.2 million in total operating revenue in 2015.

On our balance sheet, we held cash and cash equivalents totaling $4 million and marketable securities of $14.3 million. Outstanding debt net of 1.6 million of debt issuance cost totaled $228.8 million.

Updating our interest forecast, we're projecting interest expense for the year to be between $8.5 million to $9 million depending on the timing of some capital expenditures. Capital expenditures during the quarter, totaled $10 million for total of $46 million for the year.

Updating our CapEx guidance, we’re expecting this year's capital expenditures to be in the $100 million range, $60 million for transportation, intermodal and material handling equipment and $40 million to support our value add businesses. And finally, our Board of Directors declared Universal's $0.07 per share regular quarterly dividend.

This quarter's dividend is payable to shareholders of record at the close of business on August 8th, 2016 and is expected to be paid on August 18th, 2016. Susanne, we're ready to take some questions..

Great. [Operator Instructions] Your first question comes from the line of Kelly Dougherty of Macquarie. Your line is open..

Good morning everyone. This is actually Chris on the line for Kelly. Thank you for taking the question..

Sure..

I wanted to see if you could give us some color on what your overall revenue is -- exposure is for the industrial manufacturing sector? And then if you have any exposure to the e-commerce segments? And if not if there is any way that you can kind of pivot the business to pursue some of that e-commerce growth and offset your industrial exposure?.

I'll start with the -- this is Jeff. I'll start -- from an e-commerce perspective, on the value add side, we do have significant large customer deployed in the e-commerce space and we provide cross-stock and operations for them.

So, we are seeing e-commerce activity, but really upfront, on the front end of the e-commerce spectrum side, but that’s really about the only exposure that we would have in e-commerce, we really don’t play.

Truckload as, in fact, [ph] of course there is probably e-commerce shipments in the bands that were hauling down the road or the intermodal, the containers that we're bringing in. But we can -- we'd like to say that we’ve got very limited direct exposure to e-commerce other than where we support a very large retail customer on the value add side.

But I can say right now, my thoughts are not really to shift our business unit to that.

We're a flat-bed, heavy haul, niche truckload carrier, we're an intermodal -- international import-grade carrier and we do value add for intermodal or for automotive, aerospace, industrial, customers and definitely we’ve been impacted negatively on the industrial side, but we're pretty darn good at that.

So, I don’t have any plans to shift that focus to more of an e-commerce direction at this point..

Okay. Thank you very much for the color.

And then, maybe just a second question on your value add segment, if you could give us some color on what percent is kind of is linked to that heavy truck market that seems to be kind of remained challenge right now?.

It’s extremely challenged and that’s definitely a huge drag on our earnings for the quarter from where we were with the legacy Westport, I would say within our value add, it's probably enough. Steve can maybe follow-up with an exact percent. But it's probably about 40% of the revenue for value add..

Perfect. Thank you very much for that color. And those are my questions for today. Thank you guys very much..

Thanks Chris..

[Operator Instructions] Your next question comes from the line of Chris Wetherbee of Citibank. Your line is open..

Hey guys, this is Alex calling in for Chris. So, like macro headwinds and freight environment being challenged, I'm wondering if you had any visibility into transportation margins going forward.

And how that -- if you can give us any color on how it's trending in July? And if you have a full year run rate in line?.

Yeah. The beauty in what the comment I made and what is kind of cool about our model is because of the variability in the owner-operator agent base within the truckload group and the owner-operator within the intermodal in the transportation space.

It clearly is very variable, so as pricing -- as the pricing environment is extremely difficult, it just means we all get a smaller piece of the total pie, but from a margin perspective, the margins tend to hold pretty solid. It's just a smaller dollar amount of a big -- of a less base.

In the transportation space, I think we're still experiencing in that 4% to 5% margin range. I don't expect it to change significantly, more than a couple tens of a point here and there, but we're still going to be -- and expect to be in the 4% to 5% range for the rest of the year..

Okay. Thanks. And you mentioned on the call that you had a bunch of new contract and [Indiscernible] coming into second half.

With the new contracts, do you expect some market growth [ph] there throughout the rest of the year?.

Yeah. Well, I fully expect our margins to improve on the value add side absolutely. As I said, we're experiencing -- we actually had all of the operations folks in here in the corporate office this week going through a lot of just normal discussions, but also a lot of conversations around executing better with all of the projects we have.

But this -- we've got more new business and new launches going on than ever. So, that does put a strain on your folks and puts a strain on engineering resources or whatever that really focus on making sure that the operations are as efficient as they can be. So, I do expect to get better because we're going to get better at.

We're just launching a lot of projects which is really, really good, but there's always upfront cost with any launch. You have a lot of cost upfront, you have a lot of excess labor to begin with when you’re launching and then those things get pulled out and you become more efficient as you get fully implemented with the project.

So, as the year progresses, we’re getting some launches behind us. We're starting new wins, but I do expect the margins to get better in the non-heavy truck. Keep in mind that heavy truck margins are still actually pretty good, it's just a significant revenue decline because of the Class A truck production being so low.

But in the non-heavy truck, I do expect the margins to get better the rest of the year..

Okay, that’s helpful. And one more on can you give us a sense of the competitive landscape within intermodal? I think that pricing has been a bit pressured and load growth doesn’t really follow typical seasonal uptick sequentially.

We're just wondering what the main levers were there?.

Yeah, and I've read Chris' report this morning, so keep in mind our intermodal business is over 80% inbound, international dredge. So, we are in the whole different space versus the hubs and the J B hunts of the world.

But we did not see the pricing pressure through last year like rest of the truck -- like Truckload guys did, we really started to pricing pressure just in the last couple of quarters on the intermodal side and it's really coming from our main customers who are the steam ship lines.

So, obviously, everybody reads all that the same information that we read, the steam ship lines are getting killed and they are price per container that they are getting moving containers around are extremely low, so therefore they are coming to us and warning us to share the pain, which we are willing to do to maintain market share and keep the customer relationships, because again, our margins can hold pretty firm because of the model and the variability of it.

But the pressure is coming from the large steam ship lines as far as price for us specifically..

Okay. That was very helpful. I'll turn it over. Thank you..

There are no further questions in the queue at this time. I turn the call back to the presenter..

Well, actually appreciate everybody's interest in Universal Logistics Holdings and have a great Friday. Take care..

And this concludes today's conference call. You may now disconnect..