Jeff Rogers - CEO Jude Beres - CFO.

Chris Wetherbee - Citigroup.

Hello, and welcome to Universal Logistics Holding's Fourth 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 risks and uncertainties 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 of Finance and Investor Relations. Thank you. Mr. Rogers, you may begin..

Thanks Rachel. Good morning. Thank you for joining the Universal Logistics Holdings Incorporated fourth quarter earnings call. As we kick off our first call of 2017, I think it's fitting to mention it's been unseasonably warm weather here in the normally frozen Tundra of Michigan, which had us all excited for spring and what we have to look forward to.

Similar to our current situation at Universal, we are very glad the 2016 is behind us and we have much to look forward to. The fourth quarter continued the trends we saw throughout 2016. Consolidated revenue was down 7.7% as compared to the fourth quarter last year, driven by weakness in our industrial end markets and low Class 8 truck production.

For the whole year, our consolidated revenue was down 5% compared to the previous year. 2016 proved to be a very difficult year for Universal, but I'm more excited about what is in front of us than I have ever been since joining Universal 2.5 years ago,.

All the changes we've made in these 2.5 years, changes in our leadership, organizational structure, improved safety processes, branding, improved use of analytics leading to better and faster day-to-day decision-making, building a culture driven by results has brought us to an inflection point in 2017 as now, all the pieces are in place for our future success.

It also is going to help that we are seeing an improving environment in some of our key markets and here's an example. In our truckload group, our daily volume changed on a year-over-year basis, starting in October from being down 3.9%, down again in November 2.9% and then up in December 5.1% and up again in January 5.6%.

With the increase in fuel surcharge and strengthening price, our revenue month to date in February is up 7% versus last year. Granted the comparisons are easier, but we're seeing big increases in oil and gas and heavy haul loads and steady increases in our flatbed loads.

In addition, in January, our new agent revenue increased 76%, again off of a small base, but does represent $9 million in new revenue on an annual basis. Our intermodal team delivered another record year of operating income in spite of softening volumes and weaker pricing as the fourth quarter slowed with reduced import volumes.

As I look at our intermodal volumes and revenue, so far in 2017 we are also encouraged by what we are seeing with volume and revenue. So far in February intermodal revenues were up 10% driven by increased volumes, which are up 8.6% even when compared to last year's very strong performance.

We know some of this is due to the timing of the Chinese New Year, but we are still very encouraged.

One of our brighter spots in 2016 was how our dedicated business went from a turnaround story in 2015 to a very stable, consistently delivering strong service and strong financial results in 2016 is getting us closer to our long-range goal of the 90 or more.

We are confident in our ability to get business that meets our expectations and the return we need going forward. We're in a very good spot with our dedicated model as customers will be increasing their search for capacity as 2017 plays out.

Our standalone brokerage business continue to see very solid growth in 2016, delivering a 23.4% increase over full-year 2015.

While we do not see the margins, we wanted in this segment due to weak spot markets and depressed contractual pricing, we do see pricing firming up and fully expect the spot market to be very robust in the second half of the year, another reason for optimism.

As I look at our value-added businesses and how they performed in 2016, it is clearly two stories. Where we support OEMs building Class 8 truck, it was all about significant revenue decline as production tank throughout the year.

This unit was the biggest drag on our earnings decline in the year and accounted for $13.8 million in lower operating income, obviously, a big hit, but this unit delivered great results in the year previous to the cratering of truck production and the business is still sound. So, we expect great results as truck production recovers.

The good news here is the latest heavy trucks for January was 221,000 units, a 17.8% increase from the previous forecast. What we thought was going to be an end of 2017 recovery, could very well be sooner.

The second story is our value-add business that support our auto, aerospace, retail and industrial customers, which was a story of significant growth, 20.1% for the full year of 2016 over the previous year. Our opportunity is executing better on project ramp-up and getting new projects to run rate cost at a much faster pace.

The good news is this opportunity is right in front of us and in our control. We have staff to deploy the new lien team that will focus their efforts on ramp-up speed and underperforming projects. We are increasing our project bandwidth every day and I'm confident we will get our cost in line and deliver acceptable margins.

Our pipeline remains very robust and we continue to win new business in aerospace, retail and auto. A huge reason for additional optimism is the new administration. We have been looking at how several key areas that the President has been talking about can impact Universal positively.

Reduced regulation in the area of miles per gallon and emissions can surely help our largest customer base, which is automotive and Class 8 trucks. The increased focus on domestic oil and gas production, which will have significant positive impact on our flatbed and heavy haul capabilities, as we specialize in oil field moves.

Fair trade deals for domestic steel production will have positive impacts for steel customers who we have had great long-term relationships with. Increased defense spending and advantages for domestic, industrial manufacturers, right in our wheelhouse.

Increased infrastructure spending can only be a positive for the domestic industrial base, again our wheelhouse. And of course, lower corporate taxes and how positive we believe that will be on overall investment in capital spending across the Board.

Based on what we see in our businesses now and going forward, we believe we will see growth in all our business units in 2017.

Our truck load growth should be in the 4% to 6% range, intermodal in the 1% to 3% range, brokerage in the 18% to 20% range, dedicated around 5% and our value-add business will grow around 10%, keeping in mind we're taking a conservative view of the heavy truck recovery. As I said in my opening comments, we are glad to get 2016 behind us.

Our results have been below our expectations and our investor's expectations for quite some time.

I firmly believe in our business model, whether it is our non-asset agent base truckload and brokerage, or asset like contract logistics or asset heaving dedicated unit, the model gives us the flexibility to solve varying, complex problems within our customer's supply chains.

Over the last 2.5 years, we have worked hard to get a team in place that can take full advantage of the opportunities that will present themselves in 2017. I'm confident we will. I'll turn it over now to Jude, who will provide more details on our financial performance.

Jude?.

Thanks Jeff. Good morning, everyone. Here are some highlights from our earnings release. Universal Logistics Holdings reported fourth quarter 2016 net income, up $2.7 million or $0.10 per share on total operating revenues of $264.1 million.

This compared to net income of $9.3 million or $0.33 per share on total operating revenues of $286 million in the fourth quarter of 2015. Consolidated income from operation decreased $12.7 million to $5.8 million compared to $18.5 million in the fourth quarter of 2015.

EBITDA decreased 39.3% to $16.3 million in the fourth quarter of 2016, which compared to $26.9 million one year earlier. Our operating margin and EBITDA margin for the fourth quarter of 2016 are 2.2% and 6.2% of total operating revenues. These metrics compare to 6.5% and 9.4% respectively in the fourth quarter of 2015.

Three large items in the fourth quarter impacted Universal's earnings performance. First Universal's legacy truckload business recorder a $1.2 million charge to bad debt related to the unexpected bankruptcy of a large refrigerated shipper in California.

Second, Universal experienced a $500,000 loss on the sale of revenue equipment where the market values were far lower than the expected residuals.

And third, as discussed in previous quarters, Universal's subsidiaries servicing the Class 8 truck markets, operating income was down $2.7 million or 70% year-over-year, reflecting the continued headwinds in this space. These items totaled $4.4 million.

Tax affected, the impact reduced Universal's earnings per share by approximately $0.095 per share in the fourth quarter of 2015.

Looking at our segment performance for the fourth quarter of 2016, in our transportation segment, which includes our legacy truckload, intermodal, NVOCC and freight brokerage businesses, operating revenue for the quarter fell 10.4% to $160 million compared to $178.6 million in the same quarter last year, while income from operations decreased slightly by 1.3% to $5 million from $5.1 million in the fourth quarter of 2015.

In our logistics segment, which includes our value-add logistics, including where we service the Class 8 heavy truck market and dedicated transportation business, income from operations decreased 74.3% to $3.1 million on $104.1 million of total operating revenues, compared to $12.2 million income from operations and $107.2 million of total operating revenue in 2015.

On our balance sheet, we held cash and cash equivalents totaling $1.8 million and marketable securities of $14.4 million. Outstanding debt, net of $1.6 million of debt issuance costs totaled $261.3 million. Based on current interest rates, we're projecting 2017 interest expense for the year to be between $8 and $8.5 million.

Capital expenditures for the quarter totaled $18.7 million for a total of $101 million for the year. For 2017, we're expecting capital expenditures to be between $50 million and $67 million.

At the top end of this range, $61 million of our projected 2017 CapEx will be for transportation, intermodal and material handling equipment and $6 million to support our value-add businesses. And finally, our Board of directors declared Universal's $0.07 per share regular quarterly dividend for the 14th consecutive quarter.

This quarter's dividend is payable to shareholders of record at the close of business on March 6, 2017 and is expected to be paid on March 17, 2017. Rachel, we're ready to take some questions..

[Operator instructions] And your first question comes from the line of Chris Wetherbee with Citi. Your line is open..

Hey, great. Thanks. Good morning, guys..

Hi Chris..

Hey, so wanted to touch base on the Class 8 customer and get a sense how to think about the headwinds that you still see and the duration of that, relative to some of the growth opportunities Jeff that you highlighted.

So, should we think about another couple of quarters EBIT headwind from them? I am just trying to get a sense of maybe how the timing of that might play out. It sounds like maybe you're a little more optimistic about how that cycle might play, but I just want to get a sense of the timing in '17..

That's a good question. If you look at first quarter, first quarter last year, they were still operating robustly, but not at the peak levels they were in '15. So, we still have for sure a first-quarter headwind year-over-year comparisons.

Second quarter the comparisons get obviously easier as the volume really cratered from second quarter on through last year. So, I think the comparisons will get easier definitely in the second quarter, but we still have a good full quarter of pretty tough comparisons there.

Now what we're seeing from our OEM and they changed a little bit about what they're forecasting to getting a little more optimistic and they increased production a little bit, but we still aren't seeing anything of a significant nature yet..

Okay. And when you think about and just and I apologize if you've given the numbers in previous quarters, but I think about $2.7 million of lower operating income from those operations in the fourth quarter.

It that roughly the same type of year-over-year decline that we should be thinking about in 2Q and 3Q of 2016? I am just trying to get a sense of the comps..

Yes, I think maybe Q1 for sure. Possibly, Q2 up to a lesser extent, but you'll definitely see something very similar in Q1 and definitely an impact in Q2, but maybe not to that extent..

Okay.

That's helpful and then when you think about the growth, it sounds like revenues are looking fairly solid here early on in 2017 and obviously, you have some timing of holidays and those kinds of things that contend with, but when you think about the optimism around the revenue side of the equation, how should we think about that translating into profitability? So, in terms of execution this year and how you guys are kind of handling that relative to the comparisons, can we also expect operating profit to show similar types of gains.

I am just trying to get a sense of maybe how we think about the leverage of this business as volumes come back..

Right, we sure expect -- now again keep in mind your truckload business because of that variability in the asset light model, we're going to see, when you get to 5% margins, no matter if you look at over 10 years, that's kind of where it's at.

So as that revenue recovers finding, we really start to revenue growth, you would expect that earnings to be the same kind of in that range, just more of it because of the revenue increase and the same thing with intermodal as that goes up, that margin has been actually has improved over the last year because of the work that that team is doing.

But we would expect those margins to stay in that 5% to 7% range for Intermodal as the revenue and cost increases. There's nothing that says it shouldn't.

So, the big question then is how much recovery do we get from the Class 8 truck because of that margin is significantly better and how fast can we get the cost under control on the non-heavy truck value-add because that business continues to grow.

We're seeing that similar growth that we saw last year already this year and so as we get better at managing those project cost and we will, we'll get our hands on those guys that are doing that and have been doing this a long time, it's just as I said before I think just the sheer amount of projects that we brought on last year and what we see was more than they've ever seen before.

So, we just didn't do as good a job as we should have. There's no question. We didn't execute as well, but I think the margins will improve Chris for sure as those costs get under control. I'm not going to say that we're going to get them back to what people are used to that historical margin from the legacy link side.

I don't think we're going to see that this year, but it's definitely going to be better than what we saw last year..

Okay.

And when you think about the pipeline in that business, so as you said, you brought on a lot of business in 2016 as you think about the 2017 pipeline, how should we be thinking about that from a revenue perspective? Are you going to take a bit of a pause here and let us digest some of this, try to drive that margin opportunity or is there just too much in the pipeline at this point to ignore and there's more shots on the goal you want to take?.

The pipeline and business that we've actually already won that is an implementation for 2017 will show similar growth in '17 just because it's already here and it's just in ramp-up.

I think when I look at the pipeline I see it just as robust as it was, but I can honestly tell you, we are going to maybe take a little bit I wouldn't say a pause, but we're going to approach it maybe a little more disciplined from a pricing perspective just because I think we should.

I think we should try to force a little bit heavier margin or a little bit stronger margins from the new business that we take on because growth is not the issue there. I've got plenty of growth there. I need better margins.

So, I don't think it will be necessarily a pause, but I think we're going to take a little bit more disciplined approach on pricing..

That's helpful and one final question before I turn it over, just what you think about you mentioned the legacy linked margin that we sort of knew several years ago in this business, not going to get there in '17 and then understand that when you think out a little bit longer term, is that something that you think you can replicate at some point in the future in a better operating environment or do you think that that's just the mix of business and the change of sort of the structure would prevent that from happening?.

Chris, when I look at the 40 or so different locations and projects and again these slightly have been long term and some of the news that we brought on last year, there clearly are numerous projects that are in that historical ranges and are performing exactly as we expect and even a lot of the businesses that we brought on last year are at those margins.

The issue is a couple of these big monsters that we brought on that are really -- that overweigh a lot of the other ones and right now those are kicking our butt to be honest with you and so I do believe we will get those under control, but I don't think those huge monster projects that we talked about will be at those historical margins just because from a competitive nature and how big they are, just the customer base we're just not going to see maybe the historical margins there.

But if we get the large ones to a reasonable acceptable margin, then that won't offset all the other ones that are operating at that historical margins.

So, it really is when I say it's right in front of us, it is, because it's only at two or three of these big monsters that we got to address and that's where our focus is and we will a have significant improvement in margins..

Okay. Okay. That's helpful. Thanks for the time this morning guys. Appreciate it..

You bet Chris. Take care..

[Operator instructions] And we have no further questions at this time..

Okay. Super. I sure appreciate everybody's support and the time that you spent with us this morning. We look forward to next quarter's call. Take care. Have a good weekend..

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