Hello, and welcome to Universal Logistics Holdings First Quarter 2019 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 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, Zatenia. Good morning. Thank you for joining the Universal Logistics Holdings first quarter 2019 earnings call. I'm excited to announce we started off 2019 with some solid results.

As you saw from our earnings release yesterday, Universal reported double-digit growth in revenues, operating income and earnings per share, making the first quarter 2019 our very best first quarter ever.

Despite some operating challenges, including severe winter weather impacting some of our largest markets in the Upper Midwest, we executed well and delivered a 7% operating margin in Q1. I believe this sets us up for a very strong year.

Our EBITDA margin of 11.8% was the best of any quarter in our history and demonstrates what Team Universal is capable of in the future. Consolidated revenue increased over last year $42.3 million or 12.6% to $377.4 million. Operating income increased $9.4 million to $26.5 million, an increase of 55%.

Earnings per share of $0.61 increased over last by 64.9%. All three of these measures are the highest ever for a first quarter. Truckload services, which excludes brokerage, had total revenue of $65.7 million, a decrease of $11.5 million, or 14.9%.

The decrease in revenue was due to reduction in loads of 16.3%, offset slightly by an increase in revenue per load of 1.1%. Overall, in truckload, unit pricing for contractual business is being secured in the low single digits and spot rates are clearly down low double digits.

The number one issue for our irregular agent-based truckload business continues to be hiring and retaining drivers. Our truck count in this segment was down 10.8%. We have seen the decline stabilized in April, and we're very encouraged by the new agents that have come onboard year-to-date.

New agent revenue is projected to be over $24 million on a run rate basis. Brokerage services revenue increased $7.7 million or 9.8% to $85.9 million. Load count grew 16.5%, and our revenue per load was down 7.1% reflecting the decrease in spot rates.

One of the strategies I've laid out earlier this year, which we have just begun to execute, is incorporating Cavalry, which, in the past, has been our standalone, technology-driven truckload brokerage company, into our asset side of the business.

Going to our customers as a single solution providing total coverage for their transportation capacity needs will be a powerful tool going forward. Intermodal services revenue increased $44.6 million, or 95.6%, to $85.9 million. Mainly due to the four acquisitions completed last year.

Excluding the acquisitions, our legacy intermodal business still grew at a robust 14.9%. Earlier this week, we announced our fifth intermodal acquisition, Michael's Cartage, which is also expected to be immediately accretive. I'm excited to have Michael and his team aboard, and we all look forward to working with them.

With this acquisition, we have now incorporated over $200 million of new revenue that we fully expect to operate at or above our targeted intermodal margin of 10% to 12%. Dedicated services revenue grew by 5.7% to $37 million.

For the quarter, our dedicated business delivered very close to our target margin and exceeded our target in the month of March. The turnaround in this business that we have been talking about and working on for many quarters will be a positive pickup in our earnings and a key part of our – of meeting our overall margin goal this year.

Value-added services revenue decreased slightly, down $0.5 million to $97.7 million. The revenue coming from support for Class 8 truck production was up significantly, while our revenue from other areas was down primarily due to one of our largest auto plants being down for an extended period as they retooled for a new model year.

This plant is back up and running full production. Overall, value-added services continue to deliver margins that meet our expectations and deliver great service and quality that delight our customers. The first quarter had its share of challenges. The weather without a doubt caused problems for us.

Equipment and people tend not to work real well when it's 50 below zero. The calendar was also unusual in the sense Easter came so late and the Chinese New Year had a significant impact on our new acquisitions in the Port of L.A., long Beach. Yet, in spite of the challenges, Universal executed well and delivered another record quarter.

Our sales pipeline remains robust. We have secured new organic growth of $75 million across all our service lines year-to-date, including over $8 million in value-add, $33 million in new dedicated business, $27 million in new intermodal business and over $5.5 million in truckload business.

We have been working hard to stabilize and deliver consistent earnings. For the full year of 2019, over 70% of our expected operating income will come from our high-margin intermodal value-added and dedicated service lines.

We plan to continue to execute our M&A strategy, our value-add businesses are operating extremely well, and now with our dedicated business in good shape. Based on what I'm seeing so far, I would like to reaffirm our previously issued guidance for 2019 of 7% to 9% operating margin and revenue in the $1.6 billion to $1.7 billion range.

Jude will now give us a little more color around the financials..

Thanks, Jeff. Good morning, everyone. Universal Logistics Holdings reported net income of $17.3 million or $0.61 per share on total operating revenues of $377.4 million in the first quarter of 2019. This compares to 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.

Consolidated income from operations increased $9.4 million to $26.5 million compared to $17.1 million in the first quarter of 2018. EBITDA increased $15.5 million to $44.4 million in the first quarter of 2019, which compares to $28.9 million one year earlier.

Our operating margin and EBITDA margin for the first quarter of 2019 are 7% and 11.8% of total operating revenues. These metrics compare to 5.1% and 8.6% respectively in the first quarter of 2018.

Looking at our segment performance for the first quarter of 2019, in our transportation segment, which includes our truckload, intermodal, NVOCC and freight brokerage businesses, operating revenues for the quarter rose 19.7% to $246.7 million compared to $206.1 million in the same quarter last year, and income from operations increased $2.4 million to $12.5 million compared to $10.1 million in the first quarter of 2018.

In our logistics segment, which is comprised of our value-added services, including where we service the Class 8 heavy truck market and our dedicated transportation business, income from operations increased 85.9% to $13.8 million on $130.4 million of total operating revenues compared to $7.4 million of operating income and $128.6 of total operating revenue in 2018.

On our balance sheet, we held cash and cash equivalents totaling $6.3 million and $10.2 million of marketable securities. Outstanding interest-bearing debt net of $2.6 million of debt issuance costs totaled $369.6 million at the end of the period.

In the first quarter of 2019, Universal adopted ASC 842 which changed the accounting treatment for leases. The new standard required Universal to gross up its balance sheet for its lease liability and right-of-use assets.

In connection with the new standard, at the end of the first quarter 2019, Universal has recorded $95.7 million in right-of-use asset and lease liabilities, $27.9 million of which are considered current liabilities on our balance sheet. Excluding lease liabilities, our net interest-bearing debt to reported EBITDA was 2.4 times.

Capital expenditures for the quarter totaled $10.3 million. For 2019, we are expecting capital expenditures to be in the $65 million to $75 million range and interest expense between $15 million and $17 million. Finally, on Thursday, our Board of Directors declared Universal's $0.105 per share regular quarterly dividend.

This quarter's dividend is payable to shareholders of record at the close of business on May 6, 2019, and is expected to be paid May 16, 2019. With that, Zatenia, we are ready to take some questions..

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

Hi, thanks. Good morning, guys..

Hey, good morning, Chris. .

I wanted to kind of just talk a little bit about big picture on margins, right, so obviously first quarter solid 7% margin. You had the guidance for the full year out there, but there's been a lot of changes to the business over the course of the last 12 months in terms of adding new parts to it.

So just wanted to get a sense how do we think about typical seasonality of operating margins as we progress through the year, just given the current structure of the business as it stands today..

Yeah, I would still say first quarter is going to be historically our weakest quarter. Even though we've added – when you look at some of the things – pieces we've added with intermodal, we're hoping to level things out. But I still think first quarter is going to be the weakest.

When you look forward in the second, third quarter, those will historically still be our strongest quarters, Chris. I think the intermodal will offset some of the automotive downturns in that second, third quarter that you see, which has been awesome, which is part of the plan of what we did.

But – so we're looking for what I would say still some normal seasonality from first to second to third and then the fourth.

We hope to level that out toward, always still maintains at a pretty high level, but I still think you're going to see a little bit of increase going from first, second, and then third will till probably – second, third will still be our strongest quarters, and then fourth will be stronger than first.

So that historically – I think that's going to still be the same. But hopefully it stays just up at a much higher level than it historically has been, at least that's the plan..

Okay, okay, that certainly makes sense. In terms of the first quarter, anything from – I don't know if you can quantify what you thought sort of the challenges of winter weather operations were.

Maybe just generally speaking what the performance of the business might have looked like if you hadn't had that – just trying to get a sense of where the disruptions were, maybe how much they cost you..

Yeah, if you look at Chicago, which, again, we made a nice acquisition there. We've got some other things going on from a transportation perspective. We lost really three days there.

Fort Wayne, which is one of our largest value-add operations, was shut down for a day or two, which is really kind of unusual, but they had some really, really severe cold weather there. So it might be kind of hard to quantify. I think everybody knows once you lose a couple days of revenue, it never seems to come back.

So from an EPS perspective, it's probably not super significant, but it could be anywhere from $0.01 to $0.02 I'm guessing..

Okay, all right, that’s helpful. And then I want to talk a little bit about pricing dynamics in the truckload as well as the intermodal business. So we've seen obviously some pressure from a deceleration in activities certainly in the first quarter, looks like rate growth is decelerating as we're moving forward.

What are your expectations for, let's call it, truckload intermodal as the rest of the year plays out? How should we see those rates playing out?.

Yes. I still think intermodal is going to be stronger than truckload, and we're seeing that now. So I would expect that to continue.

But I do think – probably at the end of last year, I was thinking it would probably be more mid-single digits for truckload and then maybe another point higher intermodal, but I'm probably going to say now what we're saying is like I stated we're seeing 1%, 2%, 3% on truckload and 2% to 4%, maybe 5% on some of the intermodal rate increases we're seeing.

And I don't know how that will play out through the rest of the year because who knows. But I think with GDP coming out, what they just announced at 3.2%, very solid. The consumer is strong. So I still think there is tremendous economic strength out there. So I don't see rates bottoming out much worse than they are, but we'll see how it plays out..

Okay, that’s helpful. And then the last question, you have done a lot on the M&A side.

Anything left to do here? Would it still be on the intermodal side? Are there still things to do there? What's sort of the outlook for the rest of 2019?.

Absolutely. We’re going to continue to focus on intermodal as long as we find nice targets that meet what our expectations are, and we do still have some opportunities there. We're going to keep moving down that path. It's been – so far, we've just been extremely pleased with the acquisitions we've made and how they are performing.

And so we're going to just keep that plan in place and keep executing on it..

Perfect. Thanks very much for the time. I really appreciate it..

You bet..

Your next question comes from the line of Bruce Chan [Stifel]..

Yes, good morning, gentlemen. Congrats on keeping the momentum going here in 2019..

Thanks….

I don't have too much for you, but I just want to get your take on the capacity environment right now. Obviously, we've seen a little bit of loosening or at least we've heard that we're seeing some loosening from some of the other providers out there.

And I just see how that's affecting your business on the one hand from the dedicated side and whether that's affecting your ability to keep moving the needle up on pricing with some of the large auto OEMs, if there is not as much of a squeeze on their business.

And then also with regard to the truckload business, I guess, I'm still a little bit surprised that you're still having so much trouble finding and retaining drivers given that some of the other carriers out there that do rely on that independent contractor pool seem to have kind of turned the corner on that effort.

So maybe just some commentary there..

Sure, I will answer that question first. Just – so, when I talk about the fact that we've lost the drivers, that's really that very specific irregular over-the-road guys that are going to have to spend significant time in their tractor. That's where we see the decline in drivers, and it's so hard to recruit them.

But if you look at dedicated, you look at my intermodal, you look at all the rest of my areas, we're adding drivers there as well. So it really is just a whole different thing. I think if you look at some of the competition, they have had some of the same things, and everybody is going to more of a dedicated type model.

And we're growing – we're adding drivers there as well. So it's really just a little difference in our very specific model on the agent, owner-operator side. So going to dedicated and what we're seeing on dedicated, I don't see any issues there from what we've done with – obviously right now our dedicated is the big automotive guys.

They had such a rough 2018 in how they had to try to secure capacity that we feel very, very confident that what we've done with them and how we've turned that business around, repriced and I think I mentioned last quarter how one of those folks have switched to a fixed variable model for dedicated, which is something new, and I think that's going to continue.

So we feel pretty good that, that business will continue, and there's not going to be a whole lot of rate pressure from those guys for the next year for sure because we just locked in those contracts. And most of them are one year, some of them are two-year.

But I don't see real pressure from those guys because once they lock in a contract, it's pretty much set. You don't see them doing what some customers might do where they go out into the spot market and try to get a little bit better rate. They just can't do that with these projects because they're so big.

And our – not very many trucking companies can provide 150 drivers in one market that has to support every inbound piece of freight coming into a car plant. So I think – and I feel pretty good going forward for the next year that we'll be able to secure what we've got and keep what we have as far as rates for the dedicated guys..

Great, that’s – that’s super helpful. And then maybe just one more question. I know you talked about the outlook for 2019 a bit and what's going on with the rate environment. But we've heard some people talk about perhaps some surprising, persistent softness into April.

And I'm just curious month-to-date or quarter-to-date what your experience has been across the businesses, but especially in TL and brokerage and whether you're seeing some of that softness as well..

Yeah, interesting thing. And I mentioned that the calendar this year was just very unusual. So obviously, first quarter, we didn't get any of the spring pickup because Easter didn't happen until just this last week. But I am a little surprised that we have not seen much of a real uptick yet.

Now based on the consumer price and the strength of the economy and the consumer at some point, it will be spring, and at some point I do expect things to pick up. I don't see any reason why it wouldn't. I mean it's still cold here in Michigan, which is unbelievable, and here we are almost May.

So I think part of it is just – it's just a very odd calendar, Bruce. So we'll see, but it's clearly a little bit softer in April than I would have expected. But I can't remember the last time Easter was actually the 22nd of April. So we'll see what happens over the next couple weeks..

Got it, so still expecting a pretty normal peak season?.

Yeah, I would say May, June, I still fully expect it to be a good seasonal uptick. I don't see any reason why it wouldn't..

All right, well, [indiscernible] today, so we’re doing that hard, but I appreciate the time and hope you guys have a good weekend….

Thanks, Bruce. Thanks for letting us know..

[Operator Instructions] And your next question from the line of Mike Vermut [Newland Capital Management]..

Hey, guys. Great job here. It’s a different company than we were two, three, four years ago for sure..

Thanks, Mike..

Can you just go through – I guess two questions for you. One is how that come – how that business mix has evolved? And where you see it going? And then I got a second question for you on, we've had all these acquisitions. They look fantastic.

If you can – I don't know if you can go and discuss what we've been paying for them whether they have been competitive bids? And then what else is out there? And if we don't have a huge pipeline for acquisitions, we’re going to have – doing the math, a huge free cash flow number over the next couple of years.

Where that gets deployed and how are you thinking about that?.

Yeah, cool. Thanks Mike. So if I look at the business mix, and again I think I've stated this before, I don't have a percent in my head of what I'm going to – what we're trying to shoot for as far as a mix. What we're focused on is we're growing the areas that we feel provide the best margin and the best opportunity for growth.

And so far for us that's been the intermodal. That's been value-add. Brokerage continues to grow. And I think with some of the changes that we're going to incorporate, with how we're going to tie that brokerage in because they have such a tremendous technology and how many customers they're touching every day.

And if we can tie that up with our assets going forward, I think that just continues to grow and provides opportunity for better margin. The truckload area is – they have had their best year from a margin perspective last year. We're still seeing good margins.

But again, the growth in that area because of what I talked about with the irregular driver is just difficult.

So how the mix ends up changing? I don't know exactly other than the fact that we're going to stay focused on our strategy and continue to grow our areas where we have the best opportunity to increase our margin based on the commitments that we've made. When I flip to the other side into the last question you talked about the acquisitions.

We don't want to talk much about the multiples and what we paid for these businesses. We feel very, very good about what we ultimately end up paying. Keep in mind we will not get involved in an auction. So therefore, we're working directly with the business owner and their investment banker.

So that, in our mind, keeps things a little bit more grounded from our perspective, and we're going to continue with that strategy. We don't feel the need to get involved in that at all. We've had plenty of opportunities, and we see plenty of opportunities going forward, Mike.

That our pipeline now is still full, and we're getting – every time we end up closing an acquisition, it just seems to create all kinds of new opportunities for us. So we don't feel there is any shortage of good opportunities for us..

Excellent. Excellent. Should we – when we look at the businesses, should we see the cyclicality coming down? I think that's been one of the issues with the company in the past.

So is that getting smooth out now as we're growing the other pieces?.

Well, absolutely. I mean, keep in mind, I think, everybody realizes truckload is probably the most cyclical part of our business, which go back four, five, six years. That was a much bigger piece of what we do. It's not anymore. Our bigger pieces come from whether it would be intermodal, whether it would be the value-add side of the business.

And those – even though they have their moment of the year such as the automotive guys in July and the Class 8 truck guys in August. So there is some periods where the plants may shutdown. But from just a normal cyclicality, the purpose of what we're doing is trying to level that out. And I think we're doing a pretty good job.

There will still be – my point with Chris earlier was there's still going to be – first quarter is going to be weaker just because the activity of – just general economic activity is different first and fourth quarter. But we're really trying to take out the impact of a cyclical industry such as truckload and level that out..

Excellent. And then last question just going back with the capital allocation. You look at this year we're trading at what 7x earnings. It's getting to be absurd, 8x, something in that range.

When you look at the capital allocation, how do you go back and forth between putting it into stock buyback versus acquisition?.

You know, we have looked at everything and we’re going to continue to always talk about the different options for how we want to allocate our capital. But at this point we feel pretty good about our dividend policy and what we did last year from a special dividend. So there is always going to be that opportunity to give back to shareholders.

But right now, with the opportunities we're getting from an acquisition perspective, we feel that that's still the best use of our capital other than reinvestment in the business from a capital perspective on equipment and in facilities and things like that..

Excellent. Okay, well, fantastic job guys. Great quarter..

Thanks, Mike..

Your next question comes from the line of Bruce Chan [Stifel]..

Yeah, thanks. Just a couple quick follow ups, if you don't mind. Just on that Cavalry integration into the truckload business.

Have you seen any pushback from the agent community as far as tying those two together?.

Well, keep in mind, the Cavalry stand-alone business is going to be – we're going to integrate that with the other portions of the business. We're keeping the agent business separate. My expectation is the agents will control their business and grow and have the customer contact in that portion of the business.

And what I'm going to do with the brokerage really involves the other areas of my business such as intermodal, the company truckload businesses and the dedicated. So it's not going to really be interacting with the agents..

Got it, so no real change there then?.

No..

And then just one more. I think last quarter you talked a little bit about sales pipeline being somewhere in the neighborhood of $0.75 billion.

And just want to know if there is any settlement? Is that fairly consistent? Has that grown? How is that trending so far here in the first quarter, second quarter?.

Yeah, I would say it’s right there if not a little bit stronger. We're seeing more opportunities from the brokerage side, just as everybody would expect. I mean customers are turning more and more to brokerage where they can. So there is plenty of opportunities there. So I would say, it's still $0.75 billion plus.

The exciting thing was that I talked about the $75 million of business that we've actually secured year-to-date, which I can honestly say looking back over – since this is coming up on my fifth year here that is strong of actual new business obtained year-to-date that I've seen. So we feel really good about that, so..

Great. All right, well, I appreciate the follow up..

You bet..

[Operator Instructions] And there are no further questions at this time..

Zatenia, thank you so much. I appreciate everybody dialing in and appreciate your support of Universal. We'll talk to you again soon. Take care..

Thank you for your participation in today’s conference call. You may now disconnect..