Hello and welcome to Universal Logistics Holdings' First Quarter 2018 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's 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, Simon. Good morning. Thank you for joining the Universal Logistics Incorporated First quarter 2018 earnings call. The Universal team delivered another record revenue quarter, our third consecutive record.

This one is even more impressive considering it's the first quarter and we blew the top off with $335 million in revenue, an increase of $50.7 million or 17.8% over last year.

Our reported earnings of $0.37 per share was an increase of 146.7% from last year and represents our best first quarter since 2013, which at the time was our peak earnings year. Considering the impact of severe weather and the markdown on marketable securities booked through the P&L, we believe we would have exceeded our best ever first quarter.

Each service line delivered revenue growth year-over-year. Revenue for truckload services was up 8%, brokerage services revenue was up 34.8%. Intermodal revenue, which includes two months of Fore Transportation, which we acquired on February 1, was up 29.7%.

Our dedicated unit had revenue increases of 12.8% and our value-added businesses had 11.6% in additional revenue. Our sales pipeline continues to be very robust with well over $700 million of new opportunities, including significant opportunities in aerospace, defense and retail. In truckload services, which exclude brokerage, our revenue was up 8%.

The increase in revenue comes from 28.7% higher revenue per load, but an 8.3% reduction in total loads hauled. The legacy agent business, which is our largest business unit, had a small reduction in loads of 1.7%.

And our company facilities, which account for less than 20% of the truckload services revenue, had a load count reduction of 13.9%, as we have been working to rationalize our customer base and lanes served. We added 13 new agents year-to-date, and our revenue from all new agents is over $21 million on a run-rate basis.

Our most challenging issue continues to be the retention and hiring of qualified drivers. I do not see significant additional capacity coming into the truckload space anytime soon, which gives me great confidence that the elevated rate environment is here to stay for a while.

Brokerage services revenue increased 34.8% year-over-year driven by load count increases of 8.6% and revenue per load increases of 28.8%. While we are seeing incredible strength on the topline, we did experience margin compression in the first quarter as the cost to secure capacity became very expensive.

We do expect margins to improve as we move through the second quarter. Our intermodal team delivered a record quarter on the topline and their best first quarter margin percent in our history. Overall, revenue increased 29.7%, driven by 12.5% increase in loads and 13.1% increase in revenue per load.

Pricing accelerated through the first quarter, and the capacity crunch at railheads and ports is creating a significant opportunity for our intermodal business. The Fore acquisition, so far, is proving to be as good as expected and was accretive to our earnings in the first quarter. Dedicated services revenue increased 12.8% year-over-year.

During the quarter, we completed several new rate negotiations with customers that helped drive our revenue per mile up 12.5%. These negotiations are difficult, but ended well because of the great service our dedicated team provides.

Our dedicated unit turned unprofitable in Q1, primarily due to contractual business, where we had to secure outside transportation at higher then contracted rates. While this situation is still a drag on our earnings, we did make a profit in March and expect to return to profitability for second quarter.

Our value-added operation supporting heavy truck continues to accelerate as revenue grew almost 30%. Our daily production output basically doubled from January to March at our largest facility. Our labor costs were higher than normal as we had to increase staffing ahead of the production increase.

In spite of the challenge, our team delivered historically strong margins in March, and therefore, we are confident our second and third quarters are going to be very good for this segment of our business. Obviously, record Class A truck production forecast sure helped.

For our value-add business that supports our auto, aerospace, retail and industrial customers, revenue grew 6.6% year-over-year. The margins in our legacy logistics business moved much closer to the historical norms throughout the first quarter. Our focus for this business unit will continue to be margin improvement with intelligent growth.

Our customers continue to offer plenty of opportunity for growth, as Universal is clearly one of only a small handful of logistics companies capable of doing what Universal can do. We are not quite hitting on all cylinders in all our business units, but we are clearly moving in that direction.

The environment is as good as I've seen in my 34 years in transportation and logistics, and Universal is well positioned to take advantage of it. The lower tax rate and our improved results are also creating the opportunity for continued acquisitions, and since our purchase of Fore, we have been presented with additional opportunities.

We will maintain our disciplined approach of acquiring only what we know companies that can expand our markets, provide talent and capacity, and immediately improve our earnings and shareholder value. We are excited about what we see ahead for Universal Logistics. With that, I'll turn it over to Jude..

Thanks, Jeff. Good morning, everyone. Universal Logistics Holdings reported net income of $10.4 million or $0.37 per share on total operating revenues of $335.1 million in the first quarter of 2018. This compares to net income of $4.3 million or $0.15 per share on total operating revenues of $284.4 million in the first quarter of 2017.

Consolidated income from operations increased $7.9 million to $17.1 million compared to $9.2 million in the first quarter of 2017. EBITDA increased $9.4 million to $28.9 million in the first quarter of 2018, which compares to $19.6 million, one-year earlier.

Our operating margin and EBITDA margin for the first quarter of 2018 are 5.1% and 8.6% of total operating revenues. These metrics compare to 3.2% and 6.9% respectively, in the first quarter of 2017. Looking at our segment performance for the first quarter of 2018.

In our transportation segment, which includes our legacy truckload, intermodal and VOCC and freight brokerage businesses, operating revenues for the quarter rose 15.5% to $206.1 million compared to $178.4 million in the same quarter last year.

Income from operations increased $3.8 million or 59.2% to $10.1 million compared to $6.4 million in the first quarter of 2017.

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 increased 77.3% to $7.4 million on $128.6 million of total operating revenues, compared to $4.2 million on $105.7 million in total operating revenue in 2017.

On our balance sheet, we held cash and cash equivalents totaling $2.1 million, and marketable securities of $11.9 million. Outstanding debt net of $1.3 million of debt issuance costs totaled $271 million, including the $31.3 million borrowed in connection with our acquisition of Fore Transportation on February 1.

Capital expenditures for the quarter totaled $7.3 million. For 2018, we are expecting capital expenditures to be in the $65 million to $70 million range, and interest expense between $10 million and $10.5 million. On Thursday, our Board of Directors declared Universal's updated $0.105 per share regular quarterly dividend.

This quarter's dividend is payable to shareholders of record at the close of business on May 7, and is expected to be paid on May 17. Simon, we're ready to take some questions..

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

Hello. This is William on for Chris. Thank you for taking my question.

Do you think you can talk a little bit more about the Fore acquisition? And how is the process going in terms of integrating that business into your intermodal operations? And what new opportunities have been developed from this acquisition?.

Sure. I'll talk. I'm sure Jude can maybe add some comments to it. From an operational perspective, we're kind of letting it stand on its own because it was operating so well, but we're down the path as far as pulling in the back office, as expected. All of that is going well. We don't expect any hiccups there.

Even though, I mean, we're only 2.5 months into the process. But we fully expect to have the back office and that integrated on time and on schedule. We're not having any hiccups there. Operationally, some of the things that they did in Chicago with chassis is something that we've not done.

So we're trying to incorporate some of those things as far as having the slide - sliding and dual chassis. We've not used those before, but it is very effective in Chicago. So we've taken that. We are using that in some of our locations and other places. One of the great things we brought to Fore was the ability to acquire additional assets.

They had leased things, and we're typically not a lease purchaser. We would like to buy the equipment. So we've been able to buy equipment and replace Fore's equipment with owned, which is also going to help, from a P&L perspective, going forward. So there's a lot of good things going on in Fore.

What we're just impressed with is their operations and how well they performed in two months. So it's as good as we expected, and we're pretty pleased with it so far..

Thank you. Also, just on the dedicated segment. So you were talking about how the segment wasn't profitable in the first quarter.

I was just wondering if you could discuss a little bit more about what led to that segment not being profitable? And what's being done to improve profitability in the second quarter? And I just wanted to take that into the context of the revenue per load ex fuel surcharge increasing 14% in first quarter.

So I'm just wondering what kind of led on the cost side to that being unprofitable?.

one, we're hiring. Part of it is just tough to hire, but we're getting that done and we're hiring employees and to handle the workloads, so we don't have to go outside and hire.

And then the other issue is to get the customers to increase rates, which part of that's been accomplished and there's still more work to be done there, but we just move through it. Unfortunately, it's still going to be a little bit of a drag.

We do feel it's going to be profitable in the second quarter, but it's just a process of getting through and getting the customers to increase rates..

Got it. Thank you very much. And one additional follow-up question there. You were talking about your contractual business.

I was just wondering if you could discuss how those rate discussions are going with the customers? And what percentage of your business remains able to be renegotiated, both for dedicated, intermodal and any of the warehouse businesses as well?.

Right. I'll talk about it in sections, because it's all very different. The dedicated - that's all contractual business. So those - but it's not a lot of customers. Our dedicated business is probably five customers that make up all $100 million.

So even though those are difficult conversations, because those are very large customers, but it's not hard to get through them because there's only a few of them. So those are just process and you work through it and you are dealing with lots of folks at those very large customers.

And those rates really are anywhere from - we just secured 6% on one lane. We've asked for 15% on another. So it's just kind of depends. So those all - it really varies on the dedicated side, depending on where that lane is and what part of the country. If you flip to intermodal and truckload, both of those businesses are about 50% contract, 50% spot.

What we're seeing on the contractual renegotiations and contract business really is varied between - about the lowest we've seen is about 7% increase. The highest on a contract rate is about a 15% increase, with the vast majority of them in the 10% to 12%, which is very, very solid for a contract renewal rate, and we feel pretty good about that.

The rest of the spot rates, as everybody knows, are varying anywhere from 20%, in some cases even, 30% increases on the spot. So there's a lot of variation in it, but it's all very, very firm and very strong..

That's great color. Thank you very much, appreciated you answering my questions..

All right..

[Operator Instructions] Your next question comes from the line of Mike Vermut with Newland Capital. Your line is open..

Hey, guys.

How you're doing?.

Hey, Mike..

Great quarter there. Obviously, when you're looking over our sector here, everyone is trying to say, Oh, we've hit the peak and whatnot.

Trying to get your view on what inning we're in? And where you see the company over the next one, two, three years, where you can take it on a revenue side, on a margin side? And what your expectations are?.

it's replacement, because there are no drivers to increase capacity. So I think the best is yet to come there. And then I look at our legacy logistics business, which again we do support a lot of automotive, and there's some concerns of decreased automotive production on the automotive side.

But the beauty for us is we support all the light truck and SUVs, which, again, Ford even came out this week and said they are shifting more production to SUVs and trucks, which is our wheelhouse. That's what we do.

Our increase in aerospace and defense, and all of those things that we're trying to expand in, are going gangbusters as everybody saw how Boeing reported this year. Boeing is now in our top 15 customer list. So we have a lot of opportunities with Boeing going forward.

So again, I guess, Mike, what I'm saying is, I sure don't see a peak for us right now. I think the best is yet to come..

Excellent, excellent. When we're looking at historical performance of ULH versus what's coming, I feel like we've gotten the company into better shape.

Once - is there any feeling that you see on our margin performance? And really, once we're blowing past peak operating income, should we see significant growth on that over the next couple of years, if things stay healthy like this in the economy?.

Mike, this is Jude. The target we can kind of have internally is that $2 billion in sales by 2020 on the top line side, and Jeff has articulated that over the past couple of years.

And also, as far as internal benchmarking and when we look at our future performance, we're always going back to 2013 and saying, hey, that's really how we should be performing in this particular business. So we're looking back to those 8% margins, as kind of what we want to get back to.

And then as we grow, we can get additional leverage within our network to improve upon that..

Great, okay. That's fantastic. And then can you just - one last question here. It's on the acquisition. It seems like the last acquisition was a fantastic one.

Can you just give us a little look into what else you're looking that at? Is it the same magnitude, same types of accretion end markets?.

Sure, I think we talked about that before, and I mentioned it. I'd like to keep things simple. I like to focus on what we do and who we are. So we're not going to go acquire anything that we don't know. So obviously, we're very happy with Fore and the intermodal play there. That's one of our strengths.

I'm very pleased with the team and what they do there. So we're going to continue to look at acquisitions in that space, and a couple of opportunities we already have on, that we're looking at very deeply now or in that space doing the same thing or in the same level of accretion.

We're not going to go out and buy anything that doesn't actually either match or add to our existing margins. We're just not going to do it. It doesn't make any sense to do that. So it's in that same vein. So it's always going to be something that we think we will immediately accrete..

Excellent, okay congrats and excellent job here..

Thanks Mike..

Thanks Mike..

And there are no further questions at this time. I turn the call back over to our presenters..

Well, we sure appreciate everybody's interest. We appreciate your support of Universal. We look forward to talking to you next quarter and we look forward to good things ahead. Take care..

Ladies and gentlemen, this concludes today's conference call. You may now disconnect..