Jeff Rogers - CEO Jude Beres - CFO Steven Fitzpatrick - VP, Finance & IR.

Chris Wetherbee - Citigroup John Larkin - Stifel.

Hello, and welcome to Universal Logistics Holdings Third 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, Julie. Good morning. Thank you for joining the Universal Logistics Holdings Incorporated third quarter earnings call. The Universal team delivered record revenue in the third quarter of $313 million, the most in any quarter in our history and represents an increase of $41.5 million or 15.3% over last year.

As reported, we lost $0.12 per share but this included $0.38 per share of charges for ongoing litigation. Excluding legal accruals, our earnings of $0.26 per share was 47.8% higher than last year.

Again in the third quarter, we saw strong topline growth at every business unit with the exception of our dedicated transportation group which was negatively impacted by extended plant shutdowns at several auto assembly plants that we support. Several of our business units had incredible growth.

Our brokerage services had 26.3% year-over-year growth, truckload services had 14.8% growth, and our value add services our largest service line grew 19.9%.

Helping to drive this growth in value added is our business unit that supports Class 8 trucks which had revenue growth of 34.9% year-over-year as Class 8 truck production continues to recover, and the exciting part you know is the recovery in several of our key markets has only just begun.

Beginning with truckload services which excludes brokerage, as mentioned our revenue is up 14.8%, FEMA activity accounted for $4.7 million in the quarter and we expect additional revenue to flow into the fourth quarter as well from continuing hurricane recovery efforts. Overall load count was down 1.6% while revenue per load was up 10.8%.

Flatbed and heavy haul loads increased 2.3% year-over-year as we see continued strength in the industrial segments that we serve. Currently flatbed represents 72% of our total loans.

Revenue coming from new agents continues to grow and exceeds $21 million on an annual run rate basis and represents 4.9% of total revenue for our agency based truckload unit. The largest challenge we face in our truckload service group is continuing difficulty to find and retain willing and qualified drivers.

The pricing environment continues to improve as contractual customers are offering rate increases to secure capacity in the 5% to 20% range and the spot market continues to be on fire with double-digit increases the norm.

Brokerage revenue increased 26.3% year-over-year being driven by load count increases of 14% and revenue per load increases of 12%. While there is clearly pressure to find capacity at the right price, our standalone brokerage business delivered its best ever financial performance in the third quarter.

This performance was driven by continuous efforts to drive our cost per transaction through technology and improved contractual pricing that has finally started to move upward as shippers have started to see the light so to speak, and now realize what it is going to take to secure capacity in this environment.

Our intermodal team continues to deliver very solid and consistent results. Overall revenue increased 7.4% driven by 2.7% increase in loads and 3.7% increase in revenue per load.

Our team increased the truck count to 929 trucks in the third quarter which gives us significant advantage as we see pricing finally starting to improve and container volumes ramping up.

Dedicated services revenue decreased 12% year-over-year but remained profitable for the quarter which is a reflection on our dedicated team and their ability to adjust and still make money in our only asset-heavy operation.

We did just secure over 10 million in new business from an existing customer which begins January 1, so we fully expect to be back in growth mode soon. We did also bring on a small piece of business recently outside the automotive space which I was happy about so we can prove ourselves in another vertical.

As mentioned, our value add operation supporting heavy truck showed revenue growth of 34.9% year-over-year and our margins for that business have rebounded as expected and are now back to more historical norms which will provide great support for increased earnings going forward.

For our value add business that supports our auto, aerospace, retail and industrial customers we continue to see strong topline growth 15% year-over-year for the third quarter.

As I mentioned last quarter, we are focused on one last very large logistics operation that continued to put a drag on third quarter earnings but now with all implementation, we still believe strongly that this operation will become profitable in fourth quarter.

When I reflect back on the last year and a half and what we have accomplished by securing our leading position in several of the largest automotive logistics operations in North America and how this position can lead to strong earnings and future growth in the future, this is invaluable.

Reviewing key metrics and data such as the latest import, export volumes that reflects strong growth, the latest automotive SAAR of 18.4 million units, which reflects very robust activity albeit hurricane impacted.

Class 8 ACT forecast that project a 15% growth next year, the latest PMI and industrial production indexes showing strength all give us great confidence that we are entering a great environment for Universal Logistics Holdings, and then add on to all of this positive momentum the upcoming ELD mandate and continued trucking capacity shortfall, we believe great things are ahead for ULH.

In closing my formal comments, I want to let you know that with a more stable environment going forward and what we believe should lead to more consistent earnings we will no longer provide pre-guidance before we publish final quarterly results. With that, 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 a net loss of $3.3 million or $0.12 per share on total operating revenues of $313 million in the third quarter of 2017. This compares to net income of $5 million or $0.18 per share on total operating revenues of $271.5 million in the third quarter of 2016.

Included in the reported loss of $3.3 million was $17.4 million in pretax charges or approximately $0.38 per share for ongoing litigation. Consolidated income from operations decreased $13.5 million to an operating loss of $3.5 million compared to $10 million in the third quarter of 2016.

EBITDA decreased $10.3 million to $9 million in the third quarter of 2017 which compares to $19 million [ph] one year earlier. Our operating margin and EBITDA margin for the third quarter of 2017 are a negative 1.1% and positive 2.9% of total operating revenues. These metrics compare to 3.7% and 7.1% respectively in the third quarter of 2016.

Looking at our segment performance for the third quarter 2017 and our transportation segment which includes our legacy truckload, intermodal, NVOCC and freight brokerage businesses, operating revenues for the quarter rose 17.3% to $199 million compared to $169.7 million in the same quarter last year.

Income from operations decreased to an operating loss of $7.6 million compared to an operating profit of $4.6 million in the third quarter of 2016. The entire pretax charge of $17.4 million from litigation was recorded against Universal's transportation segment.

Excluding litigation charges, our transportation segment operating income was $9.7 million, a 112% increase over the prior-year.

In our logistics segment which includes our value-added logistics including where we service the Class 8 heavy truck market and dedicated transportation business, income from operations decreased 12.5% to $4.7 million on $113.7 million of total operating revenues compared to $5.4 million on $101.1 million in total operating revenue in 2016.

After adjusting for the $17.4 million charge for litigation, Universal Logistics Holdings would have reported operating income of $13.9 million up $3.8 million or 38.3% compared to third quarter of 2016 excluding the $0.38 per share for litigation related charges EPS came in a at $0.26 per share up $0.08 per share compared to the third quarter of last year.

EBITDA excluding pretax litigation charges of $17.4 million increased $7.1 million or 36.9% to $26.4 million compared to $19.3 million in the third quarter of 2016. Adjusted for litigation charges our operating margin and EBITDA margin for the third quarter of 2017 were 4.4% and 8.4% of total operating revenues.

These metrics compare to 3.7% and 7.1% respectively in the third quarter of 2016. On our balance sheet we held cash and cash equivalents totaling $2.9 million and marketable securities of $14.6 million. Outstanding debt net of $1.3 million of debt issuance costs totaled $243.5 million.

Based on current interest rates, we're projecting 2017 interest expense for the year to be in the range of $9.5 million to $9.7 million. Capital expenditures for the quarter totaled $13.4 million for a total of $46.7 million year-to-date. For 2017, we are expecting capital expenditures to be in the $60 million range.

And finally our Board of Directors declared Universal's $0.07 per share regular quarterly dividend from the 18th consecutive quarter. This quarter's dividend is payable to shareholders of record at the close of business on November 6, 2017 and is expected to be paid on November 16, 2017. Julie, we’re ready to take some questions..

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

I wanted to start out on the litigation charge, just want to kind of get my arms around that and get a sense of, is this sort of -- do we expect any sort of leakage beyond the third quarter potentially for Q or 2018, or do you think this sort of accrual that you have here has kind of got this contained from where we stand right now?.

We’re not going to say a whole lot about that since it’s ongoing litigation.

We feel very, very confidently that it's going to be reversed or reduced at this point for lots of reasons, so we’re comfortable where we’re at and we don’t expect there to be any more and we’ll see how it plays out, but we’re confident that it's going to be reversed or reduced..

Okay. That’s helpful. Now on to sort of more pressing topics in terms of sort of core operations here, I guess I wanted to get a sense of how you're seeing trends with your customers, obviously a stronger quarter here in 3Q.

As we move into the fourth quarter, if you could remind us of some of the seasonal factors we're seeing, but it sounds like you have some new business wins starting up in the fourth quarter.

So relative to your historical patterns 3Q to 4Q, how do you think the next quarter kind of plays out from a demand perspective?.

It’s interesting, the fourth quarter it kind of depends on the segment, because intermodal they will be past their peak into the fourth quarter, typical transportation you know you are past the peak in the fourth quarter.

What you’re seeing in such strength from a price perspective that the volume may be off, but I think the price is going to be so strong and what we're seeing that I'm not sure that you'll see such a huge maybe decline that you would normally see seasonality into the fourth quarter. So I feel pretty good about that.

Logistics is only impacted because some of the plant shutdown for a week around Christmas and New Year's and maybe a day on Thanksgiving, so that’s going to be normal. We don't see anything abnormal there -- but so I think it should be a fairly normal seasonal pattern other than the fact that the pricing environment is so strong..

And speaking of that pricing environment in terms of the sustainability of it, obviously we’re seeing what's going on in spot rates, but you have ELDs coming and I think there is a general sense that the market is tightening up, how do you sort of think about your prospects, maybe a more direct question is how much of your book of business do you have a shot on goal in terms of getting better pricing, let’s call it in fourth quarter, maybe the first half of 2018?.

We’ll keep in mind with our transportation and intermodal, we’re 50% spot, 50% close contractual.

So we’re already taking advantage and I don't see the spot market changing at all or being more robust than what it is now going forward, because you may see -- and somebody brought up an interesting point, I don’t remember who I was talking to this week about we’re going into what’s considered the seasonal heavy for package volume which is the UPS’, FedExs, Amazons of the world which also puts tremendous pressure on truckload capacity, because they then pull all of that -- a lot of truckload capacity out to feed their needs for line-haul to support that.

So I don’t see anything changing on a capacity perspective going in for the rest of the year and then you’ll lead right into the ELDs next year first quarter and the mandate and when they’ll actually shut trucks down in April if they’re not compliant.

So Chris, I don't see anything changing from a capacity and there's no reason for price not to stay firm or continue to even get firmer in the foreseeable future..

Two more quick ones and I'll turn it over just following up on FEMA you mentioned you might have some of that business stick around in the fourth quarter, any sense order of magnitude is it going to be sort of the same, less, or maybe more than what you did in 3Q?.

Obviously at this point, it’s probably going to be very similar, we’re still obviously moving loads, we still got a lot of trailers tied up on detention, we get paid for that. So, I think there's a still quite a bit of activity that will happen in the fourth quarter. So we’re seeing kind of the same..

Last question, the dedicated non-auto business, can you give us a little bit more color, any sort of more insight that you can give us in terms of that opportunity vertical or sort of order of magnitude, just wanted to get a little sense of sort of this business, it seems like an interesting one for you?.

It's a small – it’s like a $1 million, we’ve got another one that just we kicked in that I didn't talk about. One has been kind of an industrial vertical, the other is a pure retail vertical, so we really actually have two wins, I just found out about the other one this morning, and they’re both small million dollars.

The exciting thing for me as I have been talking about it for a year plus or even more than that, we want to get dedicated outside of automotive because sometimes the automotive guys are very, very difficult to deal with when it comes to [indiscernible] dedicated transportation, so I am excited to just get our foot in the door, toe in the water to just show that we can in fact be successful outside of automotive.

So they’re small, they’re -- from a size wise they’re insignificant, but it is just the excitement of getting something new to try..

No, that make sense.

And I guess one real quick when you think about sort of the opportunity in front of you have a tailwind from the freight market, do you have the right team in place to be able to execute take as much advantage of this opportunity as you can over the course of the next sort of 12 to 24 months in your opinion?.

I do absolutely..

I have been talking about that for several years to that what I spend the vast majority of my time in the first couple of years is changing a lot of leadership position, realigning people's focus, bringing in different people at different spots. So I do feel like we got the right leadership team.

We’re going to have to continue its hard to find top talent people no matter what area you’re looking at, I don’t care if its logistics or engineering or technology so that pressures is there because the market is top right now for talent.

But I do feel we’re going to continue to build bandwidth in the logistic side which is what we got to continue to do to sustain the growth that we’re at but I firmly believe we have the right team in place..

[Operator Instructions] Your next question comes from John Larkin with Stifel. Please go ahead your line is open..

I think if I understand correctly on an adjusted basis this $0.26 is above street consensus and also the first time seeing year-over-year EPS growth since 3Q 2013?.

That is a correct statement..

So congratulations..

The quarter came in better than what we thought obviously when we pre-guided and once we pre-guided then we got the litigation issue which we surely did not expect but it did come in a little bit stronger and we have been working on sales all dealing with quite a bit of headwinds for several years.

So it is good to see very, very strong momentum and we feel pretty good going forward..

Yes, that’s absolutely outstanding and we've been vocal and published in our thesis that we think the market is really improving, has improved and is improving and will continue to improve.

My question for you guys is, if you run along those lines, I'm not asking you if buy into that are not but if you sort take that as your initial set you know for the last three years or so may be four years I guess you guys have been working really hard to manage your cost structure, trying to remain as lean as possible and trying to be diligent with your cash flows based on the thesis that I just outlined you could be doing a reverse for the next year or two or three hopefully longer.

But that's a big change in sort of not necessarily corporate strategy but perhaps tactical strategy. I am wondering if you could discuss what’s your plan is for managing growth, how you guys are thinking about sales and marketing, how you guys are thinking about risk-taking.

In the thesis I outlined I am not asking you if you agree with it or not but that would imply that you guys are also going to have significantly improved free cash flow.

What do you guys thinking about for uses of cash you got some debt you could do JVs, buybacks, deals and I think I heard correctly I think I heard Jude say you guys we’re issuing a special dividend did catch that correctly?.

Just the normal dividend $0.07 per share John..

So, a little bit of broader question it sort of based on some things we put out, I'm not asking you guys if what's your future outlook is but sort of if you buy into our thinking that the market is really improving and we should be entering a growth period.

How you would implement your tactical strategies within that sort of environment?.

We've been growing pretty well this last year, I mean growth has not been our issue, it’s really been more of a margin issue and we’ve been focused maniacally on trying to get our margins back to historical norms which part of that is going to come from the natural environment an improvement to when you look at truckload and pricing and Class 8 truck and all those things that are really coming together nicely for us.

So we've been rolling and I think part of the approach that we’re going to look at going forward is to make sure we’re growing correctly or smartly as I like to say.

So in some cases I'm very, very pleased with what we been able to do on some of these very, very large logistics operations because at the end of the day there is only few of those out there and if you get them it's awesome, it’s a nice quiver in your backpack but they have been very challenging from a margin perspective.

So as we look forward we’re constantly reevaluating what is the appropriate way to grow is it small chunks at the time or is it big chunks. So we're confident looking at that and that’s really tactical, a little bit maybe strategic but I don't see a whole lot of changes but just kind of analyzing things.

But we’re going to constantly look at reducing debt because I think that makes perfect sense as free cash flow comes on that’s probably going to be priority number one reduce our debt priority number two is what can we do from a shareholder value perspective I mean that’s obviously on the list of things.

And then three, I think it's going to be time very soon to start looking at acquisitions and we've always got things on the table but we haven't found anything yet that makes sense that moves the needle and we have been in a position to really do because we’ve been so focused internally trying to fix some of the issues get the right leadership in place.

And so I will feel more comfortable now that we’re in a better position. So I think as things start to improve more free cash flow, consistent earnings all the things that we’re talking about here just put us in a very good spot for a lot of different options to be honest with you..

Yes, I think that's right and now I think the sequence of how you eat up new sale - and thank you for clarifying that the revenue has growing you absolutely right about that that’s a poorly phrased comment on my point but nonetheless I think the debt paydown makes a bit of sense.

How do you guys think about sort of what’s your optimal or targeted debt to cap or debt to EBITDA or debt to whatever ratio you guys think make more sense based on the nature of your business.

Do you guys have a target or sort of point for that that you think comment on?.

I would like to get it to 2.5 times EBITDA that’s what I think our goal is and I think we feel pretty good on a go forward basis with 2.5 as we grow that will give us sufficient cash to break on additional debt for acquisitions, sufficient cash to pay the dividend and to fund operation.

And then of something larger comes a long, we'll also have the ability to love around three so I think I think 2.5 is good number and that’s where we headed..

And then now Jude given the sometimes cyclical nature of the business when you say 2.5 times you bet are you talking TTM or some measure of over the cycle?.

Yes TTM..

And now you talked about something interesting comes up we could lever up the three times and Jeff also indicated that he brought up acquisitions now.

Would, I’m speaking purely theoretically here what an ideal acquisition perhaps be in sort of a new vertical or customer segments to open up exposure to new markets, or maybe doubling down on something tangentially related to where you already are would it perhaps be geographically based.

So how do you guys think about what's your ideal partner target would be?.

Yes, I think all of those is the right answer right, if always talk and are very interested in expanding our customer base so that always going to be an interest of ours - because we’re heavy automotive everybody knows that. So we would always love to expand in other verticals.

We've done it through organic growth pretty well and aerospace and defense we’re winning little small pieces of business there and I am pretty excited about so we know we can do those verticals very well.

So I think expanding to different customer bases makes perfect sense to me geographically we’re pretty much everywhere already so the geography thing. I can tell right now I’m not really interested in doing a lot of expansion oversees I like to get over U.S. debate North America type stuff.

So we have no intention, I don’t think of growing internationally but so..

Would you guys have a preference for asset base or asset light or a blended mix or?.

I don’t think really preference I think it just has to make sense for who we are and what we do.

I can tell you right now we’re not going to get something that we don’t know what the hell we’re doing to be honest with you just to be frank, I like to keep things pretty simple and we know who we are and we know what we do well and that's what we’re going to do and that’s where the acquisition target would be so..

And I guess as a point of good housekeeping given the fact that it's almost November 2017 the ELD implementation deadline although not enforcement deadline is December 18, are you guys fully ELD implemented?.

No we’re not really are. Beyond our operator, that again those are the guys that provide a little bit of an issue because we can’t force them per se, I mean we’ve been encouraging them every which we can but we’re at 45% right now.

So we still have little ways to go but we've got a plan for adding about 200 plus drivers every week so we will hit the December 18 target without a problem unless we have a glitch but we don’t expect that to be an issue. So we will be fully compliant by the mandate..

You have no further questions at this time..

Well we sure appreciate your continued support of Universal Logistics and we look forward to talking to again soon. Take care..

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