Hello, and welcome to Universal Logistics Holdings Third 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, Nicole. Good morning. Thank you for joining the Universal Logistics Holdings third quarter 2019 earnings call.

I want to start by saying how very proud I am of Team Universal's execution in the third quarter, and given what proved to be one of the most difficult environments for Universal in quite some time, We delivered pretty good results.Continued great softness throughout the quarter was made even more difficult by a strike at GM, our largest customer.

The strike had significant impact on our value add and dedicated business units.

We are pleased that the UAW and GM have reached a tentative agreement and from the information we have the vote is going well and we anticipate our operations to be back on line next week.Also in the third quarter, we reached a legal settlement on a previously reported personal injury claims stemming from a 2011 accident.

While we were disappointed with the decision from the appeals court, our focus has not changed. Universal will always strive to be one of the safest carriers on the road, operating safely on the road, in our facilities or whatever our employees conduct business, it is our number one priority.

“Always has been, always will be.”Despite the impact of the strike, Universal reported consolidated revenue of $375.5 million, our largest third quarter ever. As described in our earnings release yesterday, the third quarter of 2019 included $27 million of legal charges.

Universal also estimated the impact of the strike, reduced operating income by an additional $4 million.Operating income excluding these legal charges and the estimated strike impact was $23.7 million, an increase of 5.2% with earnings per share of $0.52.

Excluding the impact of these items, Universal delivered a solid performance considering the soft rate environment today.Our EBITDA margin excluding those items previously mentioned, was 11.4% our highest third quarter EBITDA margin on record.

Our consolidated sales pipeline is close to $700 million and our new business wins year-to-date are over 135 million, including $22 million in value add, $34 million and dedicated $49 million in new business and intermodal and $30 million in truckload and brokerage.Truckload services, which exclude brokerage, had total revenue of $62.6 million, a decrease of $17.6 million or 21.9%.

The decrease in revenue was a combination of a reduction in loads of 22.7 % offset by an increase in revenue per load of 1.6%.The increase in revenue per load is being driven by significant increases in wind business, as the revenue per load is much higher.

Excluding wind, our revenue per load was down 9.2% which is consistent with the broader market.Our truck count continued to decline for the quarter, and was down 17%. We have seen truck count stabilize in September and October, primarily from new agent acquisitions.

New agent revenue stands at $29.7 million on a run rate basis, and is the highest we have seen in many years.Brokerage Services revenue decreased $4.4 million or 4.4% to $94.4 million. Loan count grew 5% but was offset by reduction in revenue per load of 9.1%.

Spot rates appear to have bottomed out, and our gross margins so far in October have been improving.Intermodal services revenue increased $27.3 million or 41.6% to $93 million. Load count was up 29.5% revenue per load was also up 7.3%. All of the volume and revenue growth came from acquisitions this quarter.

We are very pleased with all five of our acquisitions, and they continued to perform as/or better than expected.

While volume was soft throughout the quarter, we are encouraged as volume month today in October is slightly higher year-over-year on a very difficult comparison.Strike adjusted; our dedicated services revenue was down 3.1% to $35.1 million.

The strike at GM impacted several of our key dedicated locations, and our margin was impacted significantly as we made the decision to continue to pay drivers, during the strike to ensure we had the needed capacity to service our largest customer once the strike ends.Strike adjusted value added services revenue increased $2 million to $95.4 million.

I'm extremely pleased with how well our value added and dedicated teams are dealing with the strike. Our performance before the strike was phenomenal as far as service quality and profitability.

So once the strike ends, I expect nothing less.While the strike is unfortunate, I do believe, it creates an opportunity for Universal to once again show our customer just how good we are.

The new contract also creates new opportunities for Universal, as direct wage costs goes higher for our customers, Universal’s lower cost support services could become a more attractive alternative to support production.While third quarter had some unusual headwinds and a persistently soft freight environment, I am confident in our strategy to build out our intermodal drayage footprint through acquisition and our acquisition pipeline continues to be robust.While the freight market is still soft, clearly capacity is coming out of the market.

The increasing cost of insurance due to catastrophic nuclear jury awards in trucking accidents is a real issue and many small trucking companies are finding it insurmountable to continue to operate.I am pleased with how our value-added and dedicated business has shown significant improvements this year in profitability and service.

And I know once the strike is over, we will be right back on track. We feel really good about what we see in the future for Universal.Jude will now give you some more color around our financials.

Jude?.

Thanks, Jeff. Good morning, everybody. Universal Logistics Holdings reported a net loss of $8.4 million or $0.30 per share on total operating revenues of $375.5 million in the third quarter of 2019. This compares to net income of $15.1 million or $0.53 per share on total operating revenues of $374.3 million in the third quarter of 2018.

Included in the reported loss were pre-tax charges of $27 million related to a legal settlement, as well as on-going unrelated litigation.Consolidated income from operations decreased $29.8 million to a loss of $7.4 million, compared to operating income, up $22.5 million in the third quarter of 2018.

EBITDA decreased $26.6 million to $11.6 million in the third quarter of 2019, which compares to $38.3 million one year earlier.Our operating margin and EBITDA margin for the third quarter of 2019 are negative 2% and a positive 3.1% of total operating revenues.

These metrics compared to 6% and 10.2% respectively in the third quarter of 2018.Looking at our segment performance for the third quarter of 2019, in our transportation segment, which includes our truckload intermodal, NVOCC and freight brokerage businesses, operating revenues for the quarter rose 2.3% to $254.1 million, compared to $248.5 million in the same quarter last year.And income from operations decreased $29 million to a loss of $17.2 million, compared to an operating profit of $11.9 million in the third quarter of 2018.

As previously mentioned, included in the reported loss were pre-tax charges of $27 million for legal settlements and on-going litigation.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 decreased 6.7% to $9.8 million, a $121 million of total operating revenues, compared to $10.5 million of operating income and $5.4 [ph] million of total operating revenue in 2018.

As detailed in our earnings release and Jeff comments earlier, we estimate our Logistics segments operating income was impacted by $4 million or $2 million per week, due to the UAW strike as we decided to continue to pay our drivers during the strike period.On our balance sheet, we held cash and cash equivalents totaling $6.5 million and $9.1 million of marketable securities.

Outstanding interest-bearing debt net of $2.3 million of debt issuance costs, totaled $386.6 million at the end of the period, excluding lease liabilities related to our ASC 842 adjustments, our net interest bearing debt to reported TTM EBITDA was 2.8 times.Capital expenditures for the quarter totaled $35.6 million.

For 2019, we are expecting capital expenditures to continue to be in the $65 million to $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 of regular quarterly dividend.

This quarter's dividend is payable to shareholders of record at the close of business on December 2nd, 2019 and is expected to be paid on January 2nd, 2020.With that on the call, we're ready to take some questions..

[Operator Instructions] First, we have Chris Wetherbee with Citi..

Hey, thanks, good morning guys..

Good morning, Chris..

Good morning, Chris..

All right. So I guess, I had a couple of questions about the strike first just to make sure I understood it. So it's $2 million a week in EBITDA. That was the last two weeks of the third quarter. We've seen, I think you guys talked about and hopefully, we're getting, I think, this week at the end of potentially the strike.

Should we assume $2 million a week is a good number for 4Q? And are there any incremental expenses of getting up and running again once the strike is over?.

That's a good question, Chris. Yes, we're kind of assuming about a $2 million a week, so it's almost a five-week period that we're going to miss in October. So we're kind of guessing at this point 9-ish impact on the fourth quarter. We don't see any incremental cost to get up and running, as far as the strike.

And actually, their potentially may be some upside, because there is a whole lot of freight sitting in trailers and a lot of our yards, there is a whole lot of activity that's pent up that could create some extra opportunities, but we just don't know how that's going to play out just yet..

Okay. That's super helpful. I appreciate that.

And then when you think about, sort of, the fourth quarter in generally, wanted to get your take on what you think about peak season? How do you see it shaping up, most people are, kind of, looking for a muted peak and I'm curious kind of what you're seeing in your end markets?.

Yes, muted would be a -- probably a pretty good and especially on the truckload side, we're really not seeing much what I would call it increased volume for peak at all. We are seeing increase intermodal volumes, but that's very specific to certain areas of the country, so I would call peak muted, that's probably a pretty good word..

Okay. That's helpful. And then I guess in terms of fundamentals within -- I guess transportation in general, but probably trucking -- truckload specifically.

How do you see the market, kind of, right now? It feels like there is beginning to see some capacity coming out, spot rates look a little better than they were a couple of months ago, but maybe not great yet.

Where are we in the process and sort of bottoming out the truckload market to a point where maybe we can start to see sort of an uplift in its rates?.

Yes, I think you really hit it. I would agree with everything you said. Spot rates, especially in our brokerage area we're seeing spot rates have definitely bottomed and are getting a little better, nothing dramatic. The overall contractual rates whether it would be truckload or intermodal are still muted.

We're not seeing a lot of -- obviously we're not seeing any increase per se in rates, but they're not getting any worse. What I can say from a capacity perspective is we're seeing everything -- the same thing everybody else is.We're -- part of the reason why we're doing well on agent acquisition is these guys can't renew their insurance.

These small fleets and small trucking companies just are unable to get insurance, because of some of the issues that have impacted us greatly and are impacting other people as far as insurance costs. So I know for a fact capacity is coming out of the market.

How fast it does? How much is it? How much is that going to impact us, as we get, because obviously we're going into the December and January, which are always relatively slow and then what that does to us when we're coming into the first quarter peak of March and then into the spring season, it could be very interesting, but clearly capacities coming out..

Okay, okay. Last question from me just along those lines, you kind of let me through it, was sort of the M&A question.

As you move into 2020, obviously there is a little bit of a flux or churn again in the capacity side? Are there new opportunities that are cropping up? How do you feel about, sort of, the M&A market and maybe what are your thoughts and plans?.

Very strong pipeline of opportunities, we're taking a hard look at the things. We still feel very, very good about the intermodal opportunities and that's kind of our focus and continued strategy there.

But I can tell you, there has been an increase in truckload type activities of these small firms that I just talked about, which we've kind of been passed on. We don't see that as a real opportunity for us just yet.

So we're going to stay focused on intermodal, but there's plenty of opportunities and absolutely nothing that has happened to us and the third quarter is going to change our direction there. We see plenty of opportunities and what we're going to do going forward..

Okay, that's great. Thanks very much for the time. I appreciate it..

All right. Take care, Chris..

The next question comes from the line of Bruce Chan with Stifel..

Gents, good morning..

Good morning, Bruce..

Not a whole lot, I was going to say, I think, a pretty decent result, might have some tough unfortunate one-offs and then the tough environments, but just wanted to get your take on what you're seeing from some of your customers out there with regard to the cycle, and how you think that's shaping up? Is there anything that you can call it specifically on the auto side, ex-GM and then also on the heavy truck side?.

Yes. I mean, I think everybody is well aware of the automotive cycle from a car production is down. So we're seeing that across all of the OEMs that we support and we do support all of the large OEMs.

We're still seeing strong production and again set the GM strike aside, but pickup trucks are still booming and obviously one of the other large OEMs here in Detroit is making a huge investment in the Detroit area on a couple of new plants to support their products that are selling like hot cakes, and we obviously expect to play in that additional business that's here in the Detroit area that's right here in our backyard and we've got a great relationship with that OEM.So I would say generally the automotive exposure for us looks really pretty darn good going forward, even though the SAAR is coming down, but it's still at a high $16 million number, which is still a lot of cars, and a lot of auto.

So, we're not negatively impacted, I don't think, we don't look poorly on the automotive sector going forward. We still think it's a pretty good opportunity for us. And as far as general customers, we're still seeing a lot of strength in the retail sector.We have some huge exposure there, which is good.

And the tonnage on the retail side, which also I scratch my head when you look, and I think everybody does, even though we know it's a soft freight environment we're in the middle of so-called freight recession, but yes, retail is booming.

So I don't know where the freight, but because there is a whole lot of things being bought and sold and we're moving a ton of freight across our cross-docks. But it is kind of interesting how some parts of the economy, just seeing so good and then other parts just really aren't right now..

Okay, that's a good commentary.

And then what about on the heavy truck side as we hear about some of the big OEMs start to think about lower production? How are you guys thinking about that?.

Yes. Clearly the forecast and the production forecast for next year dropped significantly. That's kind of that cycle that we go through with the heavy trucks. We have not seen a reduction in production and for this point, it's actually been going gangbusters and still expect to go gangbusters through the end of the year, but we do expect that to drop.

I don't have -- I haven't -- the visibility into 2020 is a pretty steep reduction, but I'm not sure if that holds true depending on how the rest of the year plays out..

Okay, that's fair. And then just on the GM contracts just because I'm not that familiar with it.

Is there anything in there that concerns you about the -- I guess ability for the company to use outside labor or outside contracts? Is there anything that might cap your business with GM?.

No, actually the contrary, and I made that point in my commentary, but at the end of the day, that's something we were eagerly looking for in the contract and there was nothing in there that said that they cannot continue to outsource to 3PLs such as Universal.

And when you look at what they did give up, they had the lower or they had to raise the wages of that second Tier group. So therefore their wage cost is going up significantly over the life of this contract, which should create more opportunities for companies like Universal..

Okay, great. That's super helpful. And Jeff, you also talked about capacity and insurance a little bit. Any thoughts on what you see from the ELD final phase in Drug and Alcohol Clearinghouse.

Is that going to be anything meaningful in the back half of next year you think?.

It could be, I'm not convinced that the whole Clearinghouse is going to have a huge impact, it very well could, but I think what is going to do is take away that 30-day period where somebody can jump, ship and go and not get caught, because they can move around from place to place.

I think that Clearinghouse may eliminate that capacity, because they're not going to be able do that anymore, but I'm not sure how much that's going to impact the overall capacity.

What's going to impact it for sure is what I talked about is the insurance costs, because I'm telling you, people don't realize how much insurance is going up for trucking companies. It is unbelievable and that is going to hurt the small and medium sized carriers..

Okay. And then final question here on the brokerage side.

A couple of your peers in the space have commented on fairly competitive environments anything that -- do you think is worth calling out there?.

Well, we've seen the same thing, I mean that's what our margins got compressed and have been compressed this year for our brokerage business. We like what we see there. I think that's going to turn, I mean, we're starting to see spot rates firm up a little bit.

We're focused on improving our technology and getting the cost out and kind of integrate and I talked about I think last call, where I talked about, we're trying to really integrate that brokerage and asset sale for the first time, and we're having some success there and I think that will continue to play out.So that we can go in front of a customer and just say, hey, let us solve your transportation needs in total, and we can do it whichever way works best for us and the customers.

So I think there's some opportunities for us there, but it's been extremely difficult in the brokerage market this year..

Awesome. Well, appreciate the time as always. Have a good one..

All right. See you, Bruce..

Your next question is from the line of Jeff Kauffman with Loop Capital Markets. Jeff, your line is open; you may be muted on your end..

Hey guys, sorry I was muted. Thank you and congratulations. I think despite the headwinds, a pretty solid underlying showing as you mentioned. A lot of questions has asked, but nothing yet on AB5.

So I was wondering, if you could give us an update, because it will impact some of the intermodal and brokerage operations out there, kind of, what are your thoughts and what you're seeing so far? How are people reacting to it? And what do you think the strategy is going to be for ULH?.

Well, we've had a lot of conversation about that we're well aware of AB5, I mean think about it, if there is 14,000 contractors that hit the ports in LA Long Beach every day. So obviously all 14,000 of those are impacted by AB5. All of our competitors, as well as Universal really are taking a wait and see approach.

No one of any size or scale in California is changing their business model just yet.Even though we know that AB5 will impact at some point. I think we've got to wait and see how the legalities play out, because there's a lot of lawsuits pending. And I think it's in front of the ninth circuit to be heard in December.

So we'll see what happens there on the whole pre-emption under the federal -- the federal BOT rules, which is what we're banking on or hoping for that the pre-emption stays in place and that were excluded a little bit from AB5.But we'll have to see how it plays out Jeff.

Because at the end of the day, our take is if everybody has to apply AB5 and I mean everybody, in the level, the playing built becomes level and at the end of the day rates go up for everybody. And that's all the customers get impacted and therefore we're still right where we are.

Why no one is making that change yet is nobody wants to be the first one to jump out there and make any changes, because we know it's going to increase the cost structure without the associated rate increases.And you can't give rate increases yet, because you don't want to be the first one out there, because no customer is going to give you a rate increase if you're the only guy making a change.

So we're going to wait and take a wait and see approach and see what happens. And then at some point, everybody is going to have to make a change or not. We'll have to wait and see what happens with the ninth circuit, because ultimately, we think it's going to go to the Supreme Court. We hope that may take multiple years.

Obviously, so we're not sure what's going to happen?.

Thank you very much. As we step back and kind of look at the bigger levers, I mean, there's just so many oddities happening. We've got the big insurance increases, we've got legislative changes, we've got industry changes on air testing and warehouse.

What -- are you seeing any behavior changes on your customers in terms of how they're approaching negotiations?I know there's been some customers that have been out trying to rebid contracts, because they feel the market is turning and the rates are down.

But just bigger picture, because you are in a lot of businesses, I mean, you're in the value-added service, you're in brokerage, you're in intermodal.

Are the customers changing their approach at all to negotiations?.

No, Jeff, we haven't seen any change from that perspective. Clearly customers are rebidding. But I think -- to be honest, I think that's kind of the normal cycle this time of the year you always get a lot of rebids.

But I'm not seen anything that I would call a significant change on the customers' perspective, because of what potentially could happen next year..

Okay. Well, congratulations and thank you..

All right. Thanks, Jeff..

[Operator Instructions] We show no further audio questions at this time..

All right, thanks for the call. And I sure appreciated by joining us. We will talk again in February. Take care and have a good weekend..

This does conclude today's conference call. We thank you for your participation and ask that you please disconnect your line..