Jeff Rogers - CEO Jude Beres - CFO.

Chris Wetherbee - Citigroup Connor Cloetingh - KeyBanc Capital Markets John Larkin - Stifel.

Hello, and welcome to Universal Logistics Holdings First Quarter 2017 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 Candy. Good morning. Thank you for joining the Universal Logistics Holdings first quarter earnings call. We have many good things going on. Especially the top-line growth we are experiencing as several of our business units are beginning to see recovery.

Our challenge remains on the bottom-line where implementation cost and cost overruns continue to compress our margins in value-add. Over the past two-and-a-half years as you know, we have been restructuring Universal Logistics Holdings to lay the foundation for future opportunity and growth in both transportation and logistics.

The right people, plans, resources and structure to ensure Universal is poised to be the supplier of choice for our current and future customers across many key industries. There is no doubt we are seeing the fruits of our labor as customers continue to reward us with new business and our revenue growth confirms their trust in Universal.

Consolidated revenue for the first quarter was up 9.2% compared to first quarter last year, with double-digit growth in brokerage, value-add and dedicated transportation of 16.6%, 12.7% and 12.9% respectively.

Actually, we saw our revenue growth in every reported unit as truckload services finally turned the corner with 2.4% growth first quarter year-over-year and intermodal delivering 1.6% top-line growth on a year-over-year basis even as the pricing environment remained less than robust.

For truckload services which excludes brokerage, our overall load count was up 3.1% on a per day basis, driven by big increases in oil and gas loads and continued steady increases in overall flatbed loads. Revenue per mile excluding fuel was up nine tenths of one percent when fuel was added in, revenue per mile increased 3.6% year-over-year.

Revenue coming from new agents continues to grow and exceeds $12 million on an annual run rate basis. We have the team focused and ready to take advantage of the industrial recovery. Brokerage revenue increased 16.6% year-over-year being driven by load count increases of 11.3% and revenue per load increases of 6.7%.

Revenue per mile was actually down 1.1%, a combination of higher length of haul and excess capacity keeping spot rates muted. Overall, we are encouraged by what we see; capacity appears to be tightening for flatbed loads especially which should drive higher pricing as the year progresses. And our industrial end markets appear to be strengthening.

Our intermodal team continues to perform well in spite of the difficult environment. Overall, loads handled increased 4.3% on a per day year-over-year basis. Revenue per load was down eight tenths of one percent including fuel down 1.1% without fuel.

I'm very proud that our intermodal unit continues to drive margin expansion from improved asset utilization and increases in accessorial charges. Dedicated services grew 12.7% year-over-year and delivered strong operating income even with several significant reductions in plant productions, where we support the auto industry.

Obviously, asset utilization is the key in this model and the team performed well. Our revenue per truck per week increased 18.9% year-over-year. While, we have yet to increase revenue outside of automotive, I'm confident we have a model that works and our opportunity to grow is significant.

Our opportunity for immediate and long-term improved results continues to be our value added businesses. Revenue from heavy truck was down 11.5% year-over-year. But, keep in mind, our decline in revenue for heavy truck for the fourth quarter was 38% and our revenue improves sequentially 15.2% from fourth quarter to first quarter.

Clearly, trends are improving in each new production forecast increases. The drag on earnings year-over-year for the first quarter was less than $1 million and March ended up being slightly better compared to last year.

While we still see a little drag as we complete second quarter, we expect good things from our heavy truck operations in the second half of the year. Again, as with the last several quarters, our value add business that supports our auto, aerospace, retail and industrial customers saw margin compression due to excess cost in three large programs.

One of these large programs we feel has stabilized and we are starting to see expected margins. But, it took much longer than planned. The other two programs are still in implementation and we will not be at run rate until second quarter for one and third quarter for the other.

Annually the combined revenue for these three programs will account for more than $120 million and close to $80 million in new revenue once fully implemented. The drag on earnings from these three programs compared to our expectation was around $6 million in Q1. Our overall growth from this legacy value added grew in the first quarter was 20.3%.

As I have mentioned on previous quarters, our opportunity is executing better on project ramp-up and getting new projects to run rate cost at a much faster pace. The operation team is the best in the business and they have delivered great results over and over again.

So, I'm confident we will get our cost in line with expectations and deliver the bottom line results to go with the great top-line results. Our opportunity is right in front of us and in our control. So, based on what we see today, we still believe each of our business units will see growth in 2017 in the range we provided on the previous call.

Truckload services in the range of 4% to 6%, intermodal services 1% to 3%, brokerage 18% to 20%, dedicated 5% to 6% and our value added business in the 10% range. We have a lot to be excited about. I will turn it over to Jude, who will provide more details on our financial performance..

Thanks Jeff. Good morning everyone. As I'm sure, you all noticed in our first quarter release, we made a few changes to the presentation of our financial results. I would like to start-off by highlighting them for you know.

First, we expanded the presentation of our revenue categories to reflect Universal's current service offerings, those being truckload, brokerage, intermodal, dedicated and value added services. Truckload, brokerage and dedicated were formally grouped together and categorized as transportation services.

We have also aligned our operating data to include metrics for each one of the service lines we are presenting. We are excited about providing you the additional level of detail and expect these changes to provide greater visibility into our trucking operations.

We have also revised our income statement category, selling, general and administrative to now only reflect Universal's back office expenses and have relabeled the category just general and administrative expenses.

The primary driver behind this change was to realign the direct cost associated with selling activities and include those costs in either our direct personnel and related benefits line or in other operating expenses.

We believe these changes better align the cost associated with direct sales activities across each of our service lines and to isolate the overhead cost associated with the management company. None of these changes have impacted our total operating revenue or income.

However, we believe this will allow our shareholders, the investment community and other stakeholders to better understand our business and what drives Universal's results, which we believe is a positive change. Now, let's get into the highlights from our earnings release.

Universal Logistics Holdings reported first quarter 2017 net income of $4.3 million or $0.15 per share on total operating revenues of $284.4 million. This compares to net income of $7.5 million or $0.26 per share on total operating revenues of $260.4 million in the first quarter of 2016.

Consolidated income from operations decreased $4.7 million to $9.2 million compared to $13.9 million in the first quarter of 2016. EBITDA decreased $3 million to $19.6 million in the first quarter of 2017, which compares to $22.6 million one year earlier.

Our operating margin and EBITDA margin for the first quarter of 2017 are 3.2% and 6.9% of total operating revenues. These metrics compared to 5.3% and 8.7% respectively in the first quarter of 2016.

Looking at our segment performance for the first quarter of 2017, in our transportation segment, which includes our legacy intermodal, NVOCC and freight brokerage businesses, operating revenues for the quarter rose 13.2% to $178.4 million compared to $157.5 million in the same quarter last year.

And income from operations increased by 7.8% to $6.4 million from $5.9 million in the first quarter of 2016.

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 51% to $4.2 million and $105.7 million of total operating revenues compared to $8.5 million income from operations and $102.6 million in total operating revenue in 2016.

On our balance sheet, we held cash and cash equivalents totaling $3.4 million and marketable securities of $14.6 million.

Outstanding debt net of $1.5 million of debt issuance cost, totaled $256.3 million based on our expected future debt levels and current interest rate, we are projecting 2017 interest expense for the year to be between $8.5 million and $9 million. Capital expenditures for the quarter totaled $17.7 million.

For 2017, we are expecting capital expenditures to be in the $50 million to $60 million range. At the top end of this range, $45 million of our 2017 CapEx is for transportation, intermodal and material handling equipment, $12 million to support value add business and $3 million in real estate internal improvements.

And finally, our Board of Directors declared Universal's $0.07 per share regular quarterly dividend for the 16th consecutive quarter. This quarter's dividend is payable to shareholders of record at the close of business on May 8, 2017 and is expected to be paid on May 18, 2017.

Jeff?.

Before we take questions, I'm proud to mention that Universal Logistics has once again been named the top 50 logistics company for 2017 by Transport Topics. Obviously, I'm proud of our team for this recognition. Now, let's go ahead and take some questions..

[Operator Instructions] Your first question comes from the line of Chris from Citigroup. Your line is open..

Hey, guys. How are you doing? Good informal I guess, this morning, it's Chris Wetherbee here..

Hey, what's up?.

Hi, Jeff. Obviously, revenue results were solid in the first quarter and that doesn't seem to be the issue really anymore, and you nailed it. I mean this is really all about cost. And I think, maintaining cost discipline in the face of good business opportunities really will -- kind of we need to see here.

So, you struggled a little bit with that and so want to get an understanding maybe you have some specific things that you are doing to really kind of get a handle on this and sort of start to bend the cost driver a bit more favorably to take advantage of the revenue growth opportunities you have this year..

Yes, Chris. You are actually right. Couple of things that we have done that are focused on in and it really is the cost in that value add programs. We got a -- we have implemented what's called a lean team. I think something new to a lot of folks that are dealing with this.

But, we didn't have it place when we implement these large programs and we should have, I mean honestly in hindsight.

So, we have got a team that's focused on going in and leaning out the cost and making sure that the number of heads we have in this program is one, what was in the bid or in some cases the customer may change the scope on your midstream and say why don't you go ahead and do this for me as well. And therefore, we add folks to do that.

We just need to make sure, one, we are getting paid for and two, that we are using the appropriate labor for the work. So it's really about one area is bringing in this lean team that come in and look at every activity that we do in these big warehouses and make sure we have got the appropriate cost assigned to it.

The other thing that we are focused on is, getting more a management structure to increase our bandwidth that really is just day-to-day management, some of these things are massive. So you can imagine a $40 million piece of business that may have 700 employees under one roof that operates across three shifts.

So, it really is getting an handle from a leadership perspective and making sure that we have got the right people that could manage these programs. And honestly, where we've gotten behind the eight ball on these three that came all at one time.

So, in theory in hindsight but I look back and I think maybe we bit-off a little bit too much at one time, you want to see the growth and that obviously is not our issue now. But, the good thing is, if you don't have the revenue, you don't have the issue. But, if you got the revenue at least it's right in front of us and we can work on it and fix it.

So the opportunity clearly is there and I feel very confident that we will get cost under control. There is nothing, that's been done at these large programs that we had not done 100 times before. They are just bigger and a little bit more complex..

Okay. Okay. That's helpful.

And is that -- you call that $6 million in terms of the three big programs with cost I think you said above your expectation, so when we think about the -- I guess that the first quarter number, when you think about the first quarter financial or the profit performance of the business, is that the appropriate way to look at it.

Your profit could have been $6 million better, if you had been able to sort of manage that. Actually want to make sure I understand that that comment you made..

Yes. That's exactly right. And plus my expectation some of it, clearly is just expected cost that you have that you incur when you are ramping up something big. Now, some of it, it was just normal cost because at the beginning you have extra travel team, you have people from all over the country flying in and helping to implement.

You bring in extra labor because you can't make a mistake from the customers perspective because you can't shut the assembly plant down. So some of that is expected, but were created more than expectations was -- it's just taking too long -- it's taking longer than expected.

So, where we should have been done maybe before first quarter and some of these or further down the path of implementing, we are still implementing and we still have those excess cost.

So, the $6 million from our perspective is, once we get to run rate, we get the legitimate cost that should be there and all of the excess out, we would have seen $6 million of additional earnings..

Okay, okay. That makes sense. And so let's talk a little bit about timing.

In terms of managing that out, I think you talked about second half is some opportunities to ramp but can we say somewhat definitively that you feel good about the ability to kind of -- you may be have one or maybe two more quarters that could be challenging from a cost perspective before you are able to these costs under control?.

Well, clearly, one of them is further along the implementation than the other of the two -- the two big ones that I will say had not quite stabilized yet and are still in implementation. I feel pretty good that one will be completed in the second quarter we're probably another month to month-and-a-half away on that one.

The other one is clearly a third quarter issue before we really get it behind us. And that was part of the plan too, I mean, part of the assembly plant is, they are adding a couple of vehicles to one of the assembly plants that we support. And that doesn't actually happen until June.

So, it's going to be another several months beyond that that you actually get all of your excess cost and you get to the run rate stabilization. So, it's clearly, a third quarter phenomenon for both of them to be behind this. But, I mean, we will get one of them behind us in the second quarter..

Okay. And then, I have two quick questions here.

In terms of April, just a pace of overall activity obviously you guys look at a broad swath of transportation and so would love to get a sense of how you guys are thinking about the market broadly speaking that project specific in the month of April?.

When I look at -- and I will just say revenue is a barometer. When I look at our truckload group and our intermodal group, actually the revenue comparisons year-over-year actually stronger in April than they were in the first quarter.

Now, we are seeing volume increases as well but what is encouraging that I can see from a truckload perspective, so keep in mind we are industrial flatbed focused, we are seeing pricing starting to firm up in that space because our volume is up x, but our revenue is up quite a bit higher than what it was in the first quarter.

I haven't really dug in and see from a comparative perspective, how the comps look from April, year-over-year versus March year-over-year, but we are definitely seeing stronger revenue year-over-year in April..

Okay. That's helpful. And lastly, just thinking about the business pipeline, obviously putting the cost aside, your growth has been really solid, what you think about sort of the pipeline of opportunities out there, let's talk about maybe the second half of this year.

How does it look, how are you feeling and sort of, is there opportunity outside of some of your historically core segments?.

Well, the sales pipeline on the translation agent base is as strong as its ever been. I mean, we -- obviously, it's been a two year hiatus because of the industrial recession and all the things that happened with the truckload group.

But, from a new agent acquisition from what the agents are bringing on that pipeline is very robust, and we feel pretty good about what we are seeing for the next year in the truckload. Intermodal that's still I think going to be a little bit tough, the import, everybody is reading the same thing, the steam ships are still struggling.

So, that 1% to 3% in intermodal is kind of about what I'm going to say, I'm going to keep conservative there. And we are not seeing huge expectations on the intermodal side.

But, the sales pipeline with logistics, heavy truck is coming around which is somewhat surprising, you read every other day comes out with some new forecast and says heavy truck production is going up. I'm not exactly sure who is all buying all the trucks to be honest with you.

But, they are increasing the production at the plants, which is good for us. So that's encouraging. And then, on our legacy value add business, our pipeline is still extremely robust.

Our decision at this point is to maintain discipline, which you said in your opening comment, is to make sure we are bringing on the programs and projects one that we can implement good and it's priced appropriately. So there is no shortage of new business opportunities.

It's really going to be our decision is to what we bring on from a logistics perspective that makes sense to us..

Okay. That's very helpful. Jeff, thanks for your time this morning. Appreciate it..

Yes. You bet. Thank you, Chris..

[Operator Instructions] Your next question comes from the line of Connor from KeyBanc Capital Markets. Your line is open..

Hey, good morning, guys. It's Connor on for Todd this morning..

Hey, good morning, Connor..

Just real quick, I wanted a follow up on your comments specifically around the industrial market strength and flatbed strength that you saw during the quarter.

Is there any specific end markets in general or geographies in general, you really saw an useful pick up?.

Well, again, oil and gas, I think you have realized what's going on with oil and gas with the price of oil is going up. I think we saw a definite increase in activity once oil got about $50 a barrel. It's kind of being bouncing around that for quite a while.

So that seems to be a point where everybody is comfortable doing more and drilling and that creates a lot of activity. So, our oil and gas loads are up just immensely. Now, again, it's off of the smaller base. But, there is definitely a lot of activity there. But, general flatbed, steel hauling is just I think continued momentum.

There is not any one area that we are seeing just massive improvements. Now automotive steel is actually starting to slow down a little bit as everybody knows, the production in automotive probably peaked. We still see a lot of strength because we support pick up trucks and SUVs and those are still booming on the logistic side.

But, just the overall flatbed activity from hauling steel for automotive is definitely slowing down a little bit, but the broader industrial just feels better, but it's not really coming from any particular segment..

Okay. That's helpful.

Do you give any sense for maybe clients or customer discussions that you had if there maybe more optimist going forward or do you think kind of -- its kind of trend where things are right now?.

Now on the steel customers again outside of what I would say the automotive guys have all been very, very optimistic I think. We meet with them continuously because that's obviously our core customer base on the flatbed side. But, everybody that we meet with is pretty [indiscernible] optimistic part.

I think they are looking for some of the things that current President that has been talking about as far as import, terrorists and things like that, which help our domestic steel customers and they are all excited about that. So, some of its general excitement, some of it is optimism looking forward, but there is clearly more activity as well.

It's nothing that's just what I would call boom, but it's clearly momentum and it is moving in the right direction..

Okay. That's helpful. It's good to hear.

And my next question, historically from 1Q to 2Q, you guys have seen an up tick in earnings sequentially, now just wondering, if that's going to be the case this year, it makes pricing color around earnings going forward there?.

Our seasonal quarters would still remain the same. We would expect second quarter obviously to be stronger than first quarter. Second quarter is historically our best quarter when it comes to the logistic side of the business for sure. Third quarter is usually stronger on the transportation side.

But, we expect things to play out fairly normal from a seasonal perspective..

Okay. Thank you. That's all my questions..

You bet..

Your next question comes from the line of John from Stifel. Your line is open..

Yes. Hi, good morning. Thank you for your time on the call..

Congrats John.

How are you?.

Very well. Thank you.

And yourselves?.

Good..

It's good to hear. So, we heard through a variety of channel checks across the private flatbed space, flatbed open to add specialized step deck, whatever you guys want to call it? And also a handful of subsidiaries of both private operating companies and now public companies.

That freight is materially more interesting this year than it had been at the end of last year, we can also see that through a lot of different economic indicators and load boards and a variety of metrics, which also sort of fits within the commentary we have all been thinking about given the election and the commentary on the industrial environment and so on and so forth.

And you just mentioned a couple of things in steel and oil and that all makes sense. And that's great. We could certainly see it in your revenue figures, which is awesome. And Chris previously in this call did also call out a $6 million net income item which implies sort of further upside just to the numbers that were reported.

And my question pertains to given that you guys just reclassified and the fact that it looks like the environment could potentially be turning and I also want to be cautious to make sure we don't all get over our skis with forward-looking estimates.

And I'm wondering, if you could maybe help us think through, if there are any one time items on the top-line and 1Q that maybe we should sort of normalize out for. What sort of feels like a more realistic number forward, we just want to be too aggressive coming out of the gate..

We appreciate that. Can we shot out once you getting that, we don't anybody getting out of -- overhead of their skis. Keep in mind that the excess cost that we have been primarily talking about is really on the logistic side and it is not necessarily focused around an industrial resurgence or any of that.

That would really be more focused in our transportation and truckload group. So, kind of separate those a little bit. There is nothing in our top-line number that would be like a one-time pop from a specific customer. We see that trends -- those trends continuing, so top-line really is not our issue.

We think again the truckload is going to continue to grow and firm up as the year progresses. The biggest opportunity really is in the pricing because we still see in a lot of cases very muted price. It's starting to come around on the flatbed side for sure. But there is really not been any big resurgence on van pricing at all.

So there is huge opportunities on the pricing side of the house that really just helped everybody going forward from a margin perspective.

So, we definitely don't want anybody get over head of their skis because we still got a couple of very tough quarters on the Class A truck side for sure because we got another quarter to work through that when you look at comparisons and we clearly have quite a bit of work in front of us on the logistic side where our cost are just higher than they should be and we got to focus on that.

So, I guess did that help at all John?.

Yes. Now, that certainly helps.

And again, its just sort of trying to be conservatively cautious, but also optimistic, and you did bring up a good point which was pricing, I heard you say revenue per mile was up nine tenths of a percent, which I presume is a little bit behind your internal inflation, so that would imply some pretty good upside once if these are implemented and maybe some drivers exit out of the oil, construction jobs, I think that sort of…?.

Yes, absolutely..

The other question I wanted to ask you is, knowing that you guys are a little bit more cyclical than some other players in the space, when things do get good, they can tend to kind of get good pretty fast. And even if we just benchmarked you against let's say 2014, where you had an EBITDA around in terms of $115 million.

It makes all of your debt ratios look very different than you do if you look LTM 2016. I'm wondering what kind of metrics you guys use, whether its debt to EBITDA or debt to cap or whatever it maybe and sort of what target ratios you might be thinking about.

And if we do find ourselves in sort of a cyclical upswing and a lot of these things do start going right for us, for you guys.

How are you guys then start to think about uses of cash and capital?.

Hey, John. It's Jude here. Debt to EBITDA is the one that we focused on.

And we totally agree, I mean we don't necessarily have a debt problem, we have an earnings problem and the EBITDA problem, right? So, I mean, based on the comments that Jeff made earlier, I mean if you add $24 million of Op income that makes a huge difference to our EBITDA, makes those ratios a lot cleaner, obviously, we like our debt to EBITDA to be lower, I mean, we like between 2.25 and 2.5, I think that's a pretty comfortable level.

And we think we can get there as long as we continue to make those improvements on the value add side of our business as well as Class A truck..

Yes. I think that makes sense.

It's just -- it's interesting how quickly the -- all of the metrics change, it doesn't look function of some of those end markets?.

We agree..

Okay. So, that's interesting. So, the story really looks like you guys are already showing the materialization of revenue Op side, the revenue fig or the operating ratio figure is below that. There is some one time items pertaining to investment and I would also think, I would call economics of scale as revenues grow, would help pull that down a bit.

I think that was the only question I had, yes. Oh, sort of the last question I had actually, I'm sorry, I lost my train of thought. So, you guys reclassified to break out between truckload and logistics, which makes it a little bit easier for us from an analyst point of view to think about valuation on some of the parts point of view.

Would you anticipate if we think about the disparities between growth and truckload or logistics, knowing that logistics business now that we have a clean figure for OI sort of warranted a different multiple in the truckload business does? How do you guys think about sort of long run growth rates normalize on a top-line?.

The five different service lines that we now report, is that what you are looking at?.

I'm just looking at in terms of the segments of truckload and logistics, I realize there is a couple of other buckets that play in those? But, I understood think about this in terms of an asset and asset like basis?.

Yes. Well, again, with our truckload is, my old life, I would always say that LTO is kind of move the GDP. We are a little bit different there because we are so cyclical and we have tied that in markets. So that the long-term growth rate -- that's a hard one to say John.

I would say it probably changes on three year cycles to be honest with you versus the long-term view from a transportation and truckload perspective. But, the logistics, our target for the logistic side of the house is about 10% growth.

I mean we didn't see that for 2, 2.5 years, but everything I see going forward there is no reason why we can't grow that consistently, high single digits to 10%.

But, the transportation, I would always tell you, if the economy is going at 2, we should always be at a 2 and then have upswing in some of our end markets because we are so specific to areas of the economy. So….

Yes. That's interesting.

That could imply that after a couple of years, you could see yourself at a pretty close to a 50:50 split on the operating income line between logistics and truckload, which should also [indiscernible]?.

Yes..

Those are all the questions I have. Thank you all very much for your time..

You bet..

Thanks John..

[Operator Instructions] There are no further telephone questions at this time. I turn the call back over to the presenters..

Thanks Candy. We should appreciate everybody joining us. We appreciate your support and interest in Universal and we will talk to you next quarter. We will see you..

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