Jeff Rogers – CEO Jude Beres – CFO.

Unidentified Analyst – Citigroup Todd Fowler – KeyBanc Capital Markets John Larkin – Stifel Nicolaus.

Hello and welcome to the Universal Logistics Holding's Second 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, Finance and Investor Relations. Thank you Mr. Rogers, you may begin..

Thanks, Michelle. Good morning. Thank you for joining the Universal Logistics Holdings Incorporated second quarter earnings call. We continue to see strong revenue growth with consolidated revenue increasing 10% to 305.2 million in second quarter. Our challenge remains on the earnings line.

But in second quarter those challenges were really limited to two value added operations and I'll provide more color on those in a minute. As we saw in the first quarter each of our business lines delivered top line growth in the second quarter.

Intermodal, our value added business supporting Class A truck, truckload and brokerage all matched or beat last year's operating income performance. Our dedicated unit performed well but had a tough comp as last year’s second quarter was their best performance. Our legacy value add business was again our primary headwind from an earnings standpoint.

For truckload services which excludes brokerage, revenue was up 9.2%. Our overall load count was down 3.5 but did improve slightly on a sequential basis quarter-over-quarter. Flatbed and oil and gas loads increased 2.9% year-over-year with weakness coming from van loads.

Revenue per load excluding fuel surcharge was up 8.9% and revenue per mile excluding fuel surcharge increased 1.9%. We are encouraged by affirming pricing environment especially in the spot market. Revenue coming from new agents continues to grow and exceeds 18 million on an annual run rate basis.

We believe we are seeing a recovery in our industrial base and the largest challenge we face in our truckload services group is finding willing and qualified drivers. Right now if you have a driver you are free. Brokerage revenue increased 21.5% year-over-year being driven by load count increases of 18.2% and revenue per load increases up 2.8%.

Revenue per mile was also up 7.9%. We continue to be encouraged by what we see in the transportation space, capacity is tightening and prices are rebounding. We are extremely pleased with the continued outstanding performance of our intermodal team. Overall revenue increased 6.5% driven by 4.2% increase in loads and 2.4% increase in revenue per mile.

Continued margin expansion has led to best ever operating results. Even with a stubborn pricing environment and less than stellar international container activity we see good things ahead for our intermodal business. Dedicated services revenue grew 2.4% year-over-year. While operating results were below last year dedicated was still solidly profitable.

Our challenge in dedicated is our reliance on auto which has been so strong for so long but clearly in several plants that produce cars we are experiencing the expected downturn. As I've said before dedicated is about asset utilization. So we are working hard to reallocate assets to other plants and also expand our presence into other verticals.

For the first time in six quarters our value add operation supporting heavy truck showed revenue growth, 2.9% year-over-year. Each new production forecast increases and our pipeline of new projects is encouraging. We fully expect this business unit to get back to historical margins in the next few quarters.

For our value added business that supports our auto, aerospace, retail, and industrial customers we saw continued revenue strength as our growth year-over-year was 20.3%. We had two remaining operations that created our earnings drag in second quarter. One is discussed in previous quarters will be full implementation by the end of the third quarter.

We know where our cost overruns are and are taking aggressive actions to reduce costs so as the full revenue comes online we are confident this operation can be profitable in the fourth quarter. Unfortunately the remaining operation has a different outcome.

After very difficult discussions and a tremendous amount of work trying to bring our Mexican operation under control, we have mutually agreed with our customer to exit a very large portion of this business.

The decision was based on our ability to meet the customer's expectation of service performance and to be fairly compensated for that performance. Because of the size and scale of this operation which had over 2000 employees as mentioned in our release, the second quarter operating income hit was $8 million.

When we look at the remaining legacy value add operation still in our portfolio I see strong performance and tremendous opportunities for continued growth. Based on what we see today we still believe each of our business units will see growth for the full year 2017.

Our range for truckload services is in the 4% to 6%, intermodal services in the 1% to 3%, brokerage in the 18% to 20% range, dedicated 3% to 5%, and our value add business in the 10% range. We see continued strengthening in the transportation sector. Many of the headwinds we have experienced for quite some time are dissipating.

We have a lot to look forward to. I will turn it over to Jude who will provide more details on our financial performance.

Jude?.

Thanks Jeff. Good morning everyone. Universal Logistics Holdings reported second quarter 2017 net income up 2.7 million or $0.10 per share on total operating revenues of 305.2 million. This compares to net income of 9 million or $0.32 per share on total operating revenues up 276.8 million in the second quarter of 2016.

Consolidated income from operations decreased 10.4 million to 6.4 million compared to 16.8 million in the second quarter of 2016. EBITDA decreased 7.6 million to 18.4 million in the second quarter of 2017 which compares to 26 million one year earlier.

Our operating margin and EBITDA margin for the second quarter of 2017 are 2.1% and 6% of total operating revenues. These metrics compared to 6.1% and 9.4% respectively in the second quarter of 2016.

Looking at our segment performance for the second quarter of 2017, in our transportation segment which includes our legacy truckload, Intermodal, NVOCC, and freight brokerage businesses operating revenues for the quarter rose 3.4% to 175 million compared to 169.3 million in the same quarter last year.

And the income from operations increased by 22.8% to 8.5 million compared to 6.9 million in the second quarter of 2016.

In our logistics segment which includes our value added logistics including where we service the Class A heavy truck market and dedicated transportation business, income from operations decreased 123.8% reporting an operating loss of 2.5 million on 129.9 million of total operating revenues.

Compared to an operating profit of 10.6 million, on 107.2 million in total operating revenue in 2016. On our balance sheet we held cash and cash equivalents totaling 2 million and marketable securities of 14.1 million. Outstanding debt net of 1.4 million of debt issuance cost totaled 250.2 million.

Based on current interest rates we are projecting 2017 interest expense for the year to be between $9 million and $9.5 million. Capital expenditures for the quarter totaled 15.6 million for a total of 33.3 million year-to-date. For 2017 we are expecting capital expenditures to be in the $50 million to $58 million range.

At the top end of this range $45 million of our projected 2017 CAPEX will be for transportation, Intermodal, and material handling equipment, 10 million to support our value add businesses, and 3 million in real estate and terminal improvements.

And finally our Board of Directors declared Universal $0.07 per share regular quarterly dividend for the 17th consecutive quarter. This quarter’s dividend is payable to shareholders of record at the close of business on August 7, 2017 and is expected to be paid on August 17, 2017. Michelle we are ready to take some questions..

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

Good morning gentlemen, this is Prashant on for Chris.

How are you doing?.

Hey Prashant, how are you?.

Good, thanks. So I guess a lot of positives on the top line here so I wanted to kind of dig into that a little bit. Brokerage revenue is up 25%, looks like the margins in the transportation business as a whole are going in the right direction.

Brokerage we've heard from some of the larger competitors if there's some compression on margins or some headwinds just sort of cyclically as we move through the next couple of quarters you guys are moving from a different point, so I just kind of want to get a sense of the puts and takes in terms of how you see margin cadence working out in the back half of the year and into 2018 and how much are macro headwinds, maybe a factor there looking if can maybe alleviate those?.

I'll start with that. We're seeing what I would call normal improvement in our margins on the pure truck load space and we would expect that to continue.

The brokerage is an interesting deal because if you think about it, as the spot market improves, the expectation would be that the margins also improve for brokerage because therefore you have the ability to actually just get more of the full spend.

But what we've experienced and what we're seeing and we'll see how it continues as it's becoming more and more difficult to find capacity. So you're therefore having to maybe give up the margins or not expand your margins because you're just having to pay that much more for purchase trends.

So, while I expect the margins to improve as the spot market gets better and continues to strengthen, it's just becoming more and more difficult to find PT. So, the expectation is I do expect it to get better but it's just becoming very, very difficult..

Understood, that makes a lot of sense. I wanted to talk a little bit too about the Mexican business, I guess that's one of the big items you exit there.

If you just give me a little more color on what that operation was and maybe give a sense of how much that was dragging the previous quarters before this one to sort of get a sense of what maybe the underlying run rate ex Mexico was if we were looking at our models?.

That business we've been involved down in Mexico with that OEM for about nine years. And it was one of our more complex and full logistics operations that did everything from warehousing inventory management to subassembly kitting. So it was really a pretty complex fulsome logistics operation for us.

The issue became the expectation on the customer to basically almost triple the size of it over a pretty short period of time and we struggled. It's a very difficult labor market in that particular city, almost probably one of the toughest labor markets in Mexico.

And therefore we just could not come to what we believe is a reasonable outcome from a compensation perspective. As well as I don't think we executed initially well. I think we came around pretty well but, the customer and us mutually agreed to exit it.

So you saw the 8 million in this quarter, it was a drag in the first quarter as well, not nearly to that extent but, it has been a drag on us for probably two to three quarters and I don't have the exact numbers of what that drag has been..

Yeah it was about half million in Q1 Prashant. .

Okay. .

So 8 million in Q2, 8.5 million for the year. .

Yes, so keep in mind that 8 million was made up by quite a few different things. Not small amount would be severance and all the things you have to do down in Mexico when you are exiting 2000 or moving 2000 employees to another supplier. And so there's a lot of things that we do feel are behind us from that operation, so sure..

Okay, that makes sense. [Indiscernible] sounds like sequentially as the year went on that makes sense.

If I turn to the next question on the expense line items, one of the things that I always talked about with the previous quarters is there's -- as you have the starts in some of your operations and it is not specifically related to Mexico but there are some higher costs on the direct personnel or benefit to line and we've seen that elevated for a few quarters now.

So I guess a two part, as you exited Mexico is that going to give you some relief on that line and maybe turning to like the remaining part of the business where you had some cost overruns that you're getting in the handle on how that you mentioned in your prepared remarks, how much of that is also represented there in those and that expense line, so if net-net should we see some maybe a little bit of margin improvement based upon improvement in those expense items going forward or are we still going to see this kind of level in the back half of the year?.

Well, I think clearly with the Mexico issue behind us so at least that large portion of employees that will definitely have an impact on that line in the third quarter. That other operation that I talked about we're still getting to full run rate in the third quarter, will still be a drag from a headcount.

That’s the big issue when you have these large and this particular one is at the peak of headcount on that when we had over 700 people that we had added to run this operation. And so you always have extra heads to try to get it up to an implementation point and then you start weaning the head back as you get there.

So we're in that process of weaning heads and reducing the heads even as more and more revenue comes on because of the training and the learning curve and all those things in a huge operation like that. So there will be a reduction even from bad operation I think in the third quarter but we're still going to have excess cost.

That's why I said I think it's going to be fourth quarter before we see profitability in that operation. But I think overall that line of employee benefits will start coming back and showing improvement in the third and then definitely into the fourth. .

Okay, makes sense and then just one last one and then I'll turn it over and I appreciate all the time this morning.

You talked about the dedicated sensitivity to the auto cycle and across transportation we're seeing sort of expectations coming down and sort of understanding that your auto cycle has plateaued and now we are seeing a bit of a deceleration.

I think you called out a bit of that impact but, also wanted to get a sense of your agility in being able to continue to find other ways to service those OEMs or maybe rededicate some of the resources internally that you have towards that into maybe other revenue segments.

Just sense of how can you reallocate, I guess resource reallocation and also what can you do on that side to sort of maybe soften the blow from the auto cycle starting to unwind a little bit here?.

Yes, that’s a really good question.

We still have quite a bit of dedicated transportation even here in Southeast Michigan that supports whether it be heavy, not heavy truck but the SUV and light truck which are still both stars [ph] and those production forecast actually increased this last month believe it or not for that segment of the automotive group. But -- and we do support that.

So, obviously we have the ability to shift our idle tractors because they happen to bring down a plant that supports cars and we can ship those tractors to another dedicated operation here in Southeast Michigan that also supports non cars or SUVs and trucks and light trucks and things like that.

So we do have the ability, because we have so many operations and so much going on here in Southeast Michigan. So it's easy for us allocate those assets.

What I'm really trying to do and what we've got a lot of effort is to find dedicated transportation pieces of business outside of automotive altogether which then kind of alleviates that issue and the cyclicality of automotive. But we've not been successful.

We had a real small project come on that we got into that but, it's very few trucks and it's kind of our first foothold into something non automotive. But that’s our big push is really to try to grow that dedicated model because we think we know how to do it pretty well. We've done a lot of things, we've got a good operations team.

But we've just not been able to break into a large chunk of business outside of auto. But at the end of the day you can -- we can reallocate because we do support the OEMs in a lot of things, you know SUV in trucks which does give us the ability to kind of reallocate assets that way..

Okay, it makes perfect sense. Gentlemen, thank you very much for your time. I’ll turn it over..

Thanks Prashant..

[Operator Instructions]. We have John Larkin from Stifel. Your line is open..

Hey, good morning gentlemen. Sure is nice to see the top line beginning to grow again, that's terrific. .

It is..

And it also looks like a lot of the drags on margin are behind you, congratulations on getting that all ironed out.

So we look forward to better numbers in the future here but, as you continue to see virtually all the businesses growing organically, is that going to be the primary growth driver as you go forward, continue to work on margin, continue to work on organic growth within each of the business units or are we getting close to the point where you might consider some kind of a strategic acquisition perhaps to fill in a hole so that you have another arrow in your quiver to serve your customers, where do you stand as far as timing on getting back to perhaps a little bit more of an M&A driven strategy?.

Hey John, it's a good question. As we talked several times offline my whole focus since I've been here in the two and half years is really to kind of want to understand our capabilities and strengths, get the right team in place in a lot of different areas, and we've made a lot of those changes over the two and half years.

And we've had a lot of focus internally because we've got a lot of issues and headwinds to battle. So M&A or acquisitions just had not been on the radar. But you bring up a good point and we're always looking for something that makes sense. Nothing has made sense yet.

But I can tell you that we're probably at a point we've got some technology enhancements that are coming online later this year that will allow us the platform to roll things in I think very easily and quickly.

So, I'm not going to say that things are imminent but I think we're at least open to it because I think we're in a much better place now from a team and the ability to roll things in perspective. .

Could you expand a little bit on that technology comment in terms of what the functionality of that new technology is and what its capabilities are relative to say what you have now? And then maybe a question for Jude on the availability that you would have on your balance sheet given the current structure of to fund organic growth and or to fund accretive acquisitions?.

Sure, yeah, I mean first of all the technology that we have now is basically old mainframe based technology where all the inputs require human intervention. So what we're rolling out at the end of this year in conjunction with our ELVs are our first handheld tablet which will be in all of our drivers hands.

So we're going to go from a complete paper and manual process to an electronic and digital process for all our tendering, all of our documents and imaging, and the delivering of the loads in our systems. So we're going to have a lot of efficiencies in our dispatch offices and in our back office and that's just Phase 1 of the project.

Phase 2 of the project over the next 18 months is actually to eliminate all of our legacy systems. So we will be -- within 18 months our goal is to be off of our legacy TMW Suite system, our legacy AS400 system. So, the impact that we see is in enormous. It will give us the ability to not have to hire additional people every time we grow.

So the goal is just to have a fixed back office and then have that technology allows us to scale as we grow our locales. So that's the big project that we're working on right now. And on the balance sheet we have about a little bit above $30 some million worth of availability right now.

So I mean really with the combination we do something with I know that maybe the securities portfolio is a help, we have some kind of deck arrangements but really the availability that we have right now is just funding current operations and if we did something large obviously we would have some kind of financing that have to go along with that..

Will the new system be completely disengaged from sort of the mother ship CenTra.

I know early on at least there was some kind of a sharing of technology platforms?.

Yeah, the only real technology platform that we share is the general ledger and payroll system. The operating systems for the companies outside of CenTra are all unique to the businesses..

Okay, but there's no plan to develop your own payroll in general ledger?.

No, absolutely not. Those are always cheaper to buy and they're always cheaper to maintain by getting them from somebody else. .

Got it..

Some systems aren’t internally developed either, those are off the shelf packages..

Got it, any comments on the energy business which has been looking pretty strong in some regions of the country.

I know that was an area of strength a couple of years ago, has that come back for you at all?.

Yes, we're clearly seeing strength in oil and gas. The Texas obviously, Louisiana, even in Pennsylvania some of those fracking operations which have been relatively strong even though the price of oil per barrel has kind of been bouncing all over the place.

But, we definitely see a lot of strength there, a lot of that capacity is back in the market again. It all kind of went away two years ago because of what was needed but now we're definitely moving a lot of oilfield loads and pipe and things like that..

But that's mostly limited to open deck flatbed type business you haven't really gotten into water or sand or oil transportation or anything like that?.

No, we have not. We've looked at a few opportunities there but we've not really expanded yet into they call it bulk orders, fracking sand, or in some cases the water but we've not done a lot of that John. .

Okay and then all these growth rates that you quoted for each of the lines of business, those all take into account the winding down of the Mexican operation and any natural winding down that may take place across the auto industry as well as things slow down there a bit?.

Yes, they do and the only one that I would really change from the last quarter, we lowered the dedicated a little bit just because of that slowdown that we're seeing in some of the production plants.

But the 10% on the value add we think is doable for sure since we're seeing -- we’re over 20% year-to-date so it does take into consideration the fact that we won't ramp up. And that Mexican operation you won't see a huge decline in our revenue because of that.

We just won't see the massive ramp up that we've expected because we had about 20 million in revenue last year in that operation. We're going to have about 20 million in revenue this year. But we won't get to 40 which is what we expected 40 to 50 next year because we just aren’t going to ramp up..

Got it, that's very helpful, nice to see the movement in a positive direction here. Thanks very much..

You bet John, take care. .

[Operator Instructions]. I have no further questions at this time. I’ll turn the call back over to the presenters for any closing remarks..

Thanks Michelle. We sure appreciate everybody joining us and your continued support. We look forward to talking to you all next quarter. Take care..

Thank you everyone. This will conclude today’s conference call. You may now disconnect..