Hello, and welcome to Universal Logistics Holdings Second 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 belief, 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 you to 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, Jason. Good morning. Thank you for joining the Universal Logistics Holdings second quarter 2019 earnings call. Team Universal continued to deliver great results in the second quarter in spite of a softer-than-expected freight environment.

Consolidated revenue was $383.2 million, an increase of $17.3 million or 4.7% and represented our largest second quarter in our history.Operating income of $30.7 million was up $4.5 million, an increase of 17%. Our operating margin of 8% was the highest since the third quarter of 2013.

Our EBITDA margin of 12.6% was the highest ever and our earnings per share of $0.70 is the highest ever reported for a quarter in Universal's history.I am very proud and pleased that how well Universal executed in the second quarter, especially in the face of what we can all describe as an unusual and difficult operating environment.Truckload services, which exclude brokerage, had total revenue of $64.8 million, a decrease of $17.8 million or 21.5%.

The decrease in revenue was a combination of a reduction in loads of 18% and revenue per load decrease of 4%, excluding fuel surcharge. Our truck count on the service line was down 14.9% year-over-year.

Bringing on new agents is our priority in the Truckload business and new agent revenue continues to grow and is projected to be over $24 million on a run rate basis.Brokerage services revenue increased $3.1 million or 3.4% to $89.4 million.

Load count grew 8.7%; however, this growth was offset by a decrease in revenue per load of 10.6%, as spot rates were down double-digits in the quarter.

Rates do appear to have bottomed out and in some cases are even firming up.Our standalone brokerage company has seen the largest load count ever so far in July, which tells me activity is still pretty good and hopefully in combination with our strategy of connecting assets to our brokerage cell should result in a stronger second half.Intermodal services revenue increased $39 million or 71% to $93.3 million, primarily due to the four acquisitions completed since second quarter last year.

We saw slower volumes and downward rate pressure throughout the quarter, especially from the steamship lines.

Although volumes to the LA Long Beach port so far in July are encouraging and appear to be strengthening, our acquisition strategy has proven to be effective and the results continue to meet our expectations.Dedicated services revenue was basically flat, increasing by 0.5% to $35.9 million.

We are very pleased with the recovery of this business and the continued strong margins we are seeing. For the quarter, dedicated margins exceeded our target of 10%.

Our growth will accelerate the second half of the year as several large implementations will be at run rate in the third quarter.Value-added services revenue decreased slightly, down $1 million to $99.2 million.

Again, as we saw in the first quarter, revenue coming from support for Class 8 truck production was up significantly, while our revenue from other areas was down, primarily due to lower production at several of the auto plants that we support.Overall, value-added services continue to deliver margins that meet our expectations and deliver great service and quality that delight our customers.

We feel very good about the pipeline and conversations we are having with our existing and new customers on value-added opportunities.Our overall sales pipeline remains robust at close to $700 million. We have secured new organic growth of over $100 million across all our service lines year-to-date.

Our plan to diversify our earnings stream through acquisition and greater focus on our higher margin businesses has proven effective.Our ability to deliver record earnings and strong margin in a soft freight environment confirms our strategy.

Due to the softness impacting our transportation services in the first half of the year, we are lowering our revenue target for the year from $1.6 billion to $1.7 billion to a range of $1.5 billion to $1.6 billion. Our margin guidance remains unchanged at 7% to 9%.Jude will now give you more color around our financials..

Thanks, Jeff. Good morning, everyone. Universal Logistics Holdings reported net income of $20 million or $0.70 per share on total operating revenues of $383.2 million in the second quarter of 2019.

This compares to net income of $17.7 million or $0.62 per share on total operating revenues of $365.9 million in the same period last year.Consolidated income from operations increased $4.5 million to $30.7 million compared to $26.3 million in the second quarter of 2018.

EBITDA increased $8.4 million to $48.2 million in the second quarter of 2019, which compares to $39.8 million one-year earlier. Our operating margin and EBITDA margin for the second quarter of 2019 are 8% and 12.6% of total operating revenues.

These metrics compared to 7.2% and 10.9%, respectively, in the second quarter of 2018.Looking at our segment performance for the second quarter of 2019 in our Transportation segment, which includes our Truckload, Intermodal, NVOCC and Freight Brokerage businesses, operating revenues for the quarter rose 7.5% to $251.8 million compared to $234.2 million in the same-quarter last year.

And income from operations increased $3 million to $13.3 million compared to $10.3 million in the second 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 15.5% to $17.3 million on a $131.2 million of total operating revenues, compared to $15 million of operating income on $131.4 million of total operating revenue in 2018.On our balance sheet, we held cash and cash equivalents totaling $6.5 million and $9.6 million of marketable securities.

Outstanding interest-bearing debt net of $2.4 million of debt issuance cost totaled $364.4 million at the end of the period. Excluding lease liabilities related to ASC 842, our net interest-bearing debt to our trailing 12-month EBITDA was 2.25x.Capital expenditures for the quarter totaled $40.3 million.

For 2019, we are still expecting capital expenditures in the $65 million and $75 million range and interest expense between $15 million and $17 million.Finally, on Wednesday, 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 August 5, 2019, and is expected to be paid on August 12, 2019.In addition, our Board of Directors declared Universal's $0.105 per share regular quarterly dividend for the third quarter as well.

The third quarter dividend is payable to shareholders of record at the close of business on September 2, 2019, and is expected to be paid on October 1, 2019.With that, Jason, we're ready to take some questions..

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

Hi, this is Liam on for Chris. Thank you for taking my questions..

Hey, Liam.

How are you man?.

Doing well. So we've heard from a few truckload companies for the second quarter that they've recently highlighted that the seasonal improvement that they were expecting failed to materialize. And I'm just wondering if you guys also saw that occur and how your activity levels in truckload and intermodal trended throughout the quarter and into July..

Yes, we saw similar things.

The second quarter, it just never really picked up like you would expect for June, although we did have what I would say is a pretty good June financially from a volume perspective in the transportation, it just never really showed the path that you would normally get in June.July, from an intermodal perspective is strengthening; I mentioned that in my comments.

We are starting to see volume firm up because intermodal peak really starts gets into that July, August, September time frame, so it's got a little bit different peak than, say, typical truckload. But we have not seen on the truckload side any build in volume as of yet..

Got it. And also just kind of following up on some of your commentary around the pricing dynamics in the intermodal and truckload. So I believe you highlighted that you're seeing signs of diminished demand in the spot market continuing in the second half of 2019. But also, you talked a little bit about seeing rates firm up a little bit more recently.

So when you're kind of looking at your recorded pricing metrics on either per load or per mile basis and thinking about the second half of 2019, should we expect them to be down year-over-year, getting elevated comps or how are you thinking about pricing in those reported metrics?.

Yes, I think what we're seeing – and again, it's going to be a little bit different depending on the segment. But right now, overall, I still think we're projecting to probably be down in that 5% to 6% range by the second half of the year.

The thing I was pointing out and everybody and I get it, the rates are down, but you're still comparing to a phenomenal year last year from a rate perspective.So as I'm looking at it, I'm always asking people, hey, tell me how we look compared to 2017 and 2016 and we look at those rates, even though we're projecting down 5% to 6%, we're still going to be higher than we were historically.

So the rates are down, there's no question. But I still think it's a decent rate environment. It's just below.Now what we're seeing the real decreases in the spot market, which I think everybody is seeing the same thing.

So the spot market has been down significantly, but that's what we are seeing starting to really firm up a little bit, maybe get a little more consistent, because once the spot market gets consistent, then I think the contractual side also follows.

Right now customers are staying in the spot because they can get a better rate than they could if they locked in a contract..

Got it. And your commentary, that's primarily around the truckload market, it sounds like for the back half down, 5% to 6%..

Yes, intermodal will see it. Intermodal a little bit different than truckload. It was weaker. Most of the weakness in the rate crusher are coming from the steamship lines as you might expect, because the steamship lines are looking at what they're going to have to deal with at the beginning of next year from the fuel changes.

So they are all trying to look at cost reduction everywhere they can.So we've had some rate pressure just from the steamship lines, but we'll see how capacity gets once we get into peak season and that may change as well. But I don't expect intermodal rates to be down as much in the second half as the truckload rates..

Got it. And I guess just one final quick question. So we also kind of saw that you guys were reporting or calling out the revenue you guys gained from acquired companies in the second quarter and intermodal. So it does seem like if you kind of exclude that, that organic growth was down in the mid single-digit range.

But I was just kind of getting it – if you could just provide a little bit of a sense on what's driving that? Is it more of our function of pricing or loads? And then, how do you guys kind of expect that organic revenue growth to unfold going forward? I know you talked a lot about pricing intermodal, just then, but just kind of I guess [indiscernible] as well..

Yes, I think it's more pricing driven than anything, especially on the intermodal side. Because the loads are there, just the pricing is a little weak. On the truckload side, we're down loads and rates. So I think it's a combination of both on the truckload side.

But I still think it's a decent environment, it's just not as strong as maybe what we expected. And so we'll have to see how the rest of the year plays out. There's so many – as everybody knows, there's so much noise going on right now in the geopolitical and everything else.So I think we just kind of have to wait and see how it plays out.

But I think, just from an organic perspective, we're not expecting significant growth by any means on the transportation side.

And I would exclude dedicated from that, because we are expecting growth in our dedicated segment because we've already secured some very large increases that will just kind of start to get to the run rate level in the third quarter. So we should definitely see growth on the dedicated side..

Great. Thank you very much for taking my questions..

You bet..

Thanks, Liam..

Your next question comes from the line of Jeff Kauffman from Loop Capital. Your line is open..

Thank you very much. Good morning, everybody..

What's going on, Jeff?.

So a couple of things. Number one, can you remind us when we anniversaried some of the big acquisitions in intermodal? And then, I'll switch gears to truckload..

Sure. So the first acquisition we have made was Fore and that was in February of 2018. And then, the next one we purchased was SCE, and that was in September..

In August..

August of 2018. And then you had SRS, which was right after that in October. And then Container Connection in December. And then we just picked up Michael in April of this year..

Okay. All right. And you had mention that the cost of acquisitions in your press release, it seemed like they were coming down and the market was getting more interesting.

Can you discuss what makes sense in an environment like this on the acquisition side?.

Well, I think our strategy is not going to change. We're looking at, like we've talked about before, does it give us a market that we're not in from a location perspective, a new customer acquisition and talent and does it fit within whether it be our intermodal strategy, which is what we've been targeting.

So I don't think in this environment that changes at all. Our strategy is going to stay the same.Now, whether it's a little bit softer, we get it a little lower price.

That may happen, but at the end of the day, we're more concerned with does it fit our strategy? Is it going to be accretive to our earnings immediately, which is always one of the boxes we check? So we'll just have to see how it plays out. But we still have plenty of opportunities to look at.

The pipeline of opportunities has not slowed down, so we'll just have to see. But our strategy is not changing, Jeff..

All right. And then let me switch to truckload. It's been interesting listening to a lot of the earnings calls, as I'm sure you do have. It still seems like people are treating the environment as an anomaly and giving a lot of excuses as to why there's weakness.

But I kind of look at it collectively at the end of the day, the industry's in an overcapacity situation, customers have inventories and everyone's got too much capacity in their fleets.We're starting to see some other companies cut out truck orders and kind of rethink capacity additions.

What are your thoughts? I mean, is this an anomaly? And we're just going to bounce right back to health or regardless of how we got here or are we in this situation where we have not enough loads too many trucks and how do you think about maybe second half in 2019 and even thinking out strategically as you have IMO and some of these other new truck rules coming in? How do you think about the truckload business as we head to 2020?.

Yes. Keep in mind, our replacement of equipment is really on that dedicated side. That's where we own equipment. Most of our truckload is owner operators. So we're obviously not replacing those tractors because those are owned by somebody else. So it's a little bit different.When I look at it, I still think the economy is decent.

I mean, what if GDP come out today, 2.1%. So I think there's still decent economic activity. The people get over rambunctious last year and ordered too many tractors potentially and I think a lot of those orders have since been canceled or they've slowed down on ordering.

So there could be an oversupply.I can tell, you we still struggle every day to hire drivers. So, I still think there is a driver shortage. It may be a supply issue right now.

But as I look out, I do think there is a lot of noise and uncertainty and that's what's making people feel hesitant to make decisions on what they're going to do going forward.But I don't know, Jeff. I still think it's a decent environment. It's just changed very rapidly that we weren't expecting, and I think it could bounce back.

But I think it's more to do with the economy going forward and what happens with that than anything else. So we'll see..

Okay. Well, congratulations on a very solid quarter. Thank you..

Thanks, Jeff..

[Operator Instructions] Your next question comes from the line of Bruce Chan from Stifel. Your line is open..

Jeff, Jude, Steve. Good morning. Hope all's well..

Yes, good..

Yes.

What's happening Bruce? How are you?.

Doing well, living the dream. Just want to focus in a little bit on the value-added services business. I mean, obviously Universal is a much different company now than it was 10 years ago.

But maybe you can help us think through how the logistics business in particular performed during a down cycle and what you guys can do to position yourself defensively.

And then maybe talk about some of those differences between now and before?.

Right. Well, again we put a different emphasis on what we're going to focus on, which is value add and really try to, one, get that business back to historical margins. We've been talking about that for several years because weren't making the margins that we wanted or what we had done in the past. So we're there and we've done that work.

We feel very, very good about where we are from a margin perspective. The growth is slowed, but a lot of the growth on the value-add right now for us is just because production is down from an automotive perspective.We do expect production on the Class 8 side to slowdown probably towards the end of this year and into next year.

But right now, the production for Class 8 is still strong, even though the sales have declined because they get such a backlog.The key thing to remember in our value-add, Bruce, is there is fixed and there is variable.

So even though production may go down a little bit, which we're seeing on the automotive side in cars, the SUVs and trucks are still going gangbusters and at some point maybe that slows down too.

But at the end of the day, we still get paid for all of our fixed costs, supervisors, equipment, facilities, even when production slows down.So you can still maintain your margins. It's just the revenue hit to you, which is what we saw. Obviously, the margins were phenomenal for value-add even though our revenue was flat for the most part.

So it is interesting.

Our goal continues to be to expand out of automotive and grow in aerospace, grow in other industrial segments on the value-add side, which we're seeing.We're getting new business, whether it be retail or aerospace, that helps offset a little bit of that automotive production glitch that we always see certain times of the year, and we're definitely in a little bit of a slowdown from an automotive perspective, but the way that business model works, the margins are pretty secured even in a downturn from a production standpoint.

So I think we feel pretty good about that..

Bruce, this is Jude. Just another comment on that. That's one of the reasons why we have been acquiring intermodal businesses as well, as it attempt to fill in those holes with the value-add when there is a production downturn.

So we kind of view intermodal more of as an annuity where there is consistent volumes coming into the country, at the course what we thought this year with a little bit of that trade war situation.But the acquisition strategy kind of dovetails with our value-add business where we're looking to keep those volume high on the intermodal side even if there is and of course, normalize the earning, even if there is a reduction in volumes in the automotive sector..

Okay, great. That's really helpful. And then, Jeff, you talked a little bit about this already.

But as far as the volumes that are coming in from LA Long Beach being up in July, do you have any sense for whether that's some restocking related to maybe some of the draw down from the pre-tariff shipping that we saw? Is that more pre-tariff shipping? Any idea what to make of that?.

That's hard to say, Bruce. I think it could be all of that, to be honest with you. I think that we definitely saw the pull forward, then we saw the inventory is too high and now I think inventory is the drawn down and kind of been flat.

So it could be of what you just said, but it's very, very difficult to kind of peel that onion and understand exactly what's creating the uptick. All I know is that definitely the volumes are higher in July year-over-year than they've been for the last couple of months coming through LA, Long Beach. So that's a good thing for us, so..

All right. Well, appreciate it. Great job in a tough environment here..

Thank you, Bruce..

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

All right. Thanks, Jason. Again, we sure appreciate everybody's support and dialing in, and we will talk to you all again next quarter. Take care..

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