Hello. And welcome to the Universal Logistics Holdings’ Fourth 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 your host, Mr. Tim Phillips, Chief Executive Officer; Mr. Jude Beres, Chief Financial Officer; and Mr. Steve Fitzpatrick, Vice President of Finance and Investor Relations.Thank you. Mr. Phillips, you may begin..

Thank you, Regina. Good morning. Thank you for joining Universal Logistics fourth quarter 2019 earnings call. Yesterday afternoon Universal released its financial results, rounding out 2019 with $375.9 million in fourth quarter topline revenue and a reported $0.32 per share in earnings.

Our fourth quarter results were fairly solid given the current operating environment and I believe that treatment to the resilience of the Universal Business model.During the quarter, we present -- persevered through challenges of the spot rate environment, the effects of strikes at both General Motors and Mack truck [ph], and also settled the 2013 legal matter, which impacted earnings by approximately $0.08 a share in the fourth quarter.

Despite these challenges, we were happy with how we finished the year and have a lot of momentum coming into 2020.Our optimism is founded on the fact that we continue on-boarding new business.

Our fourth quarter wins we are expect into account for over $50 million in the annualized revenue, while our consolidated pipeline remains over $500 million in opportunities, setting the table for a great 2020 and beyond.Next I am going to step through the performance of each of our service lines starting with the truckload group.

Truckload services, revenue decreased $15.3 million or 20.8% to $58.4 million. This reflects an 18% decrease in the number of load called and a 2.3% decrease in revenue per load excluding fuel surcharges.Although, the truckload business experience softness both in terms of volumes and rates. There were some bright spots.

We were thrilled to onboard 16 new agents in the fourth quarter of 2019 and continue to have a robust agent pipeline. As we kick off 2020, I am very optimistic about the future of our agent-based truckload business.We were also extremely excited to have made our sixth intermodal acquisitions in the past two years.

In November 2019 we announced the acquisition of Roadrunner Intermodal Services, which brought with it 23 operating terminals and over 700 drivers to the Universal team.

We were went right to work on this acquisition and we were well on our way to successful integration of people, process and property.In our Intermodal Services group a revenue increased $28.4 million or 33.8% to a $112.3 million. Load count was up 29.8% and revenue per load excluding fuel surcharges was also up 3.9%.

While our Legacy Intermodal group performed well in the quarter the majority of the revenue growth came from acquisitions.We are extremely pleased with where we are with our acquisitions and the integration into the Universal network.

Our selective and strategic acquisition strategy has provided Universal a tenured and talented employee base along with exceptional blue chip customers.

Overall, our Intermodal group outperformed in a quarter that saw both import and domestic container volumes decelerate in comparison to 2018.Brokerage Services revenue decreased $12.9 million or 13.1% to $85.3 million, while load count grew 4.4%. The average revenue per load was down 12.2%, which was a result of a very competitive rate environment.

We also saw compression on our gross margin as purchase transportation declined at a slower rate than the rates from our customers.Beginning in January 1, 2020, we integrated our eight regional truckload company terminals with our company brokerage operation in Nashville, Tennessee, forming our capacity solutions fee.

The asset backed pro-brokerage concept will provide our customers with one-stop shop for all their truckload needs. We are very excited about this new offering and we will keep you posted on our progress over the next few quarters.Our dedicated services revenue was down 11.7% to $33 million. We moved 21.4% less loads in the quarter compared to 2018.

Our dedicated services revenue was greatly affected by the GM strike in the first month of the quarter and margins were compressed because of our decision to keep the Universal drivers pool until the strike was over.We have worked very hard over the past year in recruiting top drivers in a very competitive market.

Our decision to keep the talent proved to be a solid one as the GM network came back up with a head of steam and continues to run an accelerated clip.Value-added Services revenue decreased $6.2 million to $86.9 million.

Revenue was dampened by the GM and Mack truck strike, as well as a ramping down of services as a result of a major customer plant closure.We are also experiencing slower -- slowing Class 8 truck production in comparison to the record levels in 2018.

I am extremely excited about leadership and the degree of talent that has been built at all levels in our Value-added Services line.We are extremely well-positioned to take advantage of new opportunities, many of which we already have in our pipeline, the Value-added group has continued to review each operation for efficiencies and cost containment.

We are well positioned entering 2020.Understand a couple of the challenges we face in the fourth quarter. Each service line continued to launch and integrate new customers, optimize assets and provide extreme value to our customer base.

Although, soft freight volumes may continue in the first half of 2020, we are well-positioned to explore and win new market share with our focus on operational excellence for our customers.We will continue to evaluate acquisition opportunities from a very disciplined and strategic standpoint.

We are committed to grow our core businesses units both organically and through acquisition as we have done over the past few years.Universal will continue to be very conscious of operating safely, as the transportation industry continues to experience increased insurance premiums, pressured as a result of nuclear verdicts [ph].

We will continue to allocate time, resources and talent to continue to elevate driver, contractor and workplace safety.I am looking forward to a prosperous 2020 and we would like to thank Universal’s over 12,000 professionals for what they do each and every day.Jude, will now give you more color around our financials.

Jude?.

Thanks, Tim. Good morning, everyone. Universal Logistics Holdings reported net income of $8.7 million or $0.32 per share on total operating revenues of $375.9 million in the third quarter of 2019.

This compares to net income of $9 million or $0.32 per share on total operating revenues of $386.4 million in the fourth quarter of 2018.Included in our 2019 operating income was a pretax charge of $2.9 million or $0.08 per share for a previously disclosed legal matter.

Consolidated income from operations decreased to $2.4 million to $15.5 million, compared to operating income of $17.9 million in the fourth quarter of 2018.EBITDA increased $6.3 million to $37.7 million in the fourth quarter 2019, which compares to $31.4 million one year earlier.

Our operating margin and EBITDA margin for the fourth quarter of 2019 are 4.1% and 10% of operating revenues. These metrics compared to 4.6% and 8.1%, respectively, in the fourth quarter of 2018.Looking at our segment performance for the fourth quarter of 2019.

In our Transportation segment, which includes our truckload, intermodal and freight brokerage businesses, operating revenues for the quarter rose two-tenths of 1% to $260.9 million, compared to $260.5 million in the same quarter last year and the income from operations decreased $7.7 million to $11.6 million, compared to $19.4 million in the fourth 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 $8.6 million to $6.7 million on the $114.8 million of the total operating revenues, compared to an operating loss of $1.8 million and $125.5 million of the total operating revenue in 2018.On our balance sheet, we held cash and cash equivalents totaling $7.7 million and $9.4 million of marketable securities.

Our interest bearing debt net of $2.1 million of debt issuance cost totaled $457.6 million at the end of the period. Excluding lease liabilities related to ASC 842 our net interest bearing debt to reported EBITDA was 3.2 times.Capital expenditures were $19 million for the quarter and totaled $79.8 million for the full year.

For 2020 we are expecting capital expenditures to be in the $70 million to $80 million range and the interest expense between $16 million and $18 million.Finally, on Wednesday our Board of Directors declared Universal’s $10.5 per share regular quarterly dividend.

This quarter’s dividend is payable to shareholders of record at the close of business on the March 2, 2020 and is expected to be paid on April 6, 2020.With that, Regina, we are ready to take some questions..

[Operator Instructions] Our first question will come from the line is Chris Wetherbee with Citi..

Hey. Thanks. Good morning, guys..

Good morning, Chris..

Good morning..

Yeah.

I guess I want to start on the truckload market, can you guys give us a sense of how things developed as you went through the fourth quarter understanding that there is probably some disruption from customer issues early in the quarter, but here in the broader market, how that progressed through December then maybe what you are seeing so far in the first quarter..

Yeah. Chris, this is Jude. So, I think, the -- as many of our other public peers have reported it was kind of a slow crawl to the bottom on the gross margins from Q1 all the way through Q4.

We did see a little bit of light in the second week, the last two weeks of the end of the year where the gross margins in the brokerage operation got a little bit better incrementally, but really it was, it was really soft in the second half all the way through Q4..

Okay.

Any comments on sort of how you seeing things develop or is it too early to tell from 1Q?.

Yeah. I think gross margins have been a little bit better early in January or late in January early into February. But once again I mean it kind of remains to be seen..

Okay. That makes sense. And two more questions, if I could. First on the Intermodal side, obviously, you have been busy on that front.

Can you talk a little bit about kind of conceptually how you see 2020 shaking -- shaping out for the Intermodal business?.

Yeah. This is Tim. Yeah. I think that, we came out of 2019 with a very nice fed as seen, we continue to integrate the acquisitions. From the business front, we see in our pipeline some really good things.

So we are optimistic about pushing forward on Intermodal front.Yes, there is some uncertainties with the virus and things that are going on out there right now. But we feel because of our pipeline, the density we build in various market places that we are positioned very well to have a very successful year on the Intermodal front..

Okay. And so just we understand like load growth, how should we be thinking about, and obviously, there is organic and inorganic growth.

But any sort of help you can give us in terms of thinking about load growth in Intermodal?.

Yeah. Load growth organically is just positioning our self from an acquisition standpoint. We will continue to look on that side. It is very strategic and very right for the organization. But organically speaking, we feel our footprint, the customer base, the pipeline give us the ability to grow organically this year on the intermodal front.

So, yes, I would think that we would expect organic growth from where we are positioned in the marketplace right now..

Okay. Great. And I mean my last question, Jude, is on the Class 8 side. So, some conflicting numbers kind of around the market. Obviously, it’s going to be a weaker year for production in 2020.

I guess, when you think about the outlook for 2020, is there a certain number on the Class 8 side that’s sort of embedded in your expectations and how do you sort of adopt to variability particularly if it ends up falling to the lower end?.

Yeah. Chris, this is Jude. Yeah. We forecast at the lower end based on the most recent ACT numbers that came out. So I mean we are expecting a 40% decline in roughly 50% of our Class 8 business. So like half of it relates to the Class 8 production. The other half relates to this machining business that we also own as a part of that group.

So we are forecasting at the low end of that business with expectations that 40% year-over-year decline in the ACT will continue to rollout 2020..

Okay. Okay. That’s fair. Thanks very much for the time and I really appreciate it..

Thanks, Chris..

Thank you..

Your next question comes from the line of Jeff Kauffman with Loop Capital Markets..

Hey. Good morning and congratulations..

Thank you..

Thank you, Jeff..

A couple questions. Post some of the new business wins and the Roadrunner acquisition. Can you help me understand the geographical footprint on the Intermodal side? How exposes around the word but if I take the 80-20 rule and where Intermodal strength and density, and where your commitment is in the network.

How big is California relative to the whole and kind of what are the key markets that I should think about from an Intermodal growth standpoint?.

Sure. Jeff, it’s Tim. Yeah. California is a key market for us. It probably is attributable about 20% of the overall gross revenue.

We have aligned our self with what we see as other key markets service in the United States and those would be geographically size wise Chicago, of course, being the biggest inland port in the United States.We have also through acquisition and organic density are large in the southeast, the Savannah, Charleston, we find ourselves with a great deal of density and we think that is a key play on the east coast as Intermodal volumes continue to build and grow over the year.We are also very condensed in the Texas market.

The Dallas and Houston market. We think those have long-term growth potential. And we continue to look around the United States for places that we would need additional density. Now we have a whole another tier of secondary please. But I would say that those are the main markets that we are playing in a very large revenue dance fashion..

Okay. Thank you.

So can you give us an update on what’s going on with AB5 in California? I know it potentially can affect your intermodal dray, but a couple other businesses out there and what the strategy is depending on how this progresses with the court?.

Yeah. Well, obviously, there’s a stay in place and so we feel pretty good about the federal preemption as the number of courts of rules over the past couple of months.

So our expectation is that, this current version of 85 will die either -- most likely a slow death because of California.But there’s always going to be labor-related drama and legal challenges operating in California. We are doing all of the things in that market to protect ourselves to the extent that we can.

However, our business model in California is independent contractor and we will continue to operate as long as it is legal an independent contractor model in that in stay..

Okay. Thank you. Can I switch gears for a second to cash flow? Taking your guidance and depreciation and your CapEx guidance, it looks like you are going to have the quality problem of trying to figure out what to do with about $70 million-ish of free cash..

Yeah..

Can you talk about your cash priorities acquisition versus debt pay down versus share repo and kind of where your head is right now?.

Yeah. So I would label them. Those are obviously great choices. Number one is debt pay down, absolutely, I am loving it. All the free cash that we have will go down to reduce our debt loan.Second will be M&A, with just acquiring six businesses, I mean, Tim and his ops team are going through and integrating all of those.

So if it’s magical we will jump all over it. If it’s not we will pass.And then third would be share repo. We just took advantage of the market last year. If you remember, we were trading at EBIT to EBITDA or like 5x or below. So it was prudent for us to take about 1.1 million shares off the table.

But our real focus is to reduce our leverage this year with all excess free cash..

And do you have a target leverage range where in a perfect world you say, okay, this is the right level of leverage for us, now we change cash priorities when we get to this leverage level?.

Yeah. So I would say that, I think, in a perfect world we would be levered at 1 time EBITDA, but we are very comfortable levering up to 3.5 times EBITDA if the acquisition makes sense for us. So we are -- on a run rate basis adjusted our EBITDA is around $180 million a yearat our current business volume.

So I mean we have a lot of flexibility with our debt because it’s, in quotes, as all things being equal we are going to have $180 million to playing with on an annual basis.So we are not afraid of that. Universal has been acquisitive over it’s since 1981 when the business was founded in Dearborn.

We have done about a little less than 50 acquisitions over that period of time and we will continue to lever up the business and then paid down as appropriate..

Okay. Well, congratulations in the challenging quarter and thank you..

Thanks, Jeff..

Thank you..

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

Hey, guys. Good morning and thanks for taking the questions..

Thanks. Good morning..

Just want to start off here on the margin guidance, obviously, we won’t have some of the big headwinds like the GM strike. But as you are looking at what’s probably going to be a pretty tough backdrop still in the first half and as we are looking at the truck and the auto production that’s still under pressure.

You have still got this 7% to 9% margin outlook, which is a pretty healthy step up from last year.

Can you just help us the bridge those two numbers and maybe help me understand where we are going to see the bulk of that improvement and maybe the cadence or the pace of the improvement over the year?.

Yeah.

So, we don’t, obviously, provide quarterly guidance, we try to give a range of where we see the business over the next 12 months that those --the performance outlook that we provided in the earnings release is the exact same performance outlook that we provided in 2018 with the assumption that we weren’t going to have a truckload rate collapse in March that we experienced.So we are looking at the business as we always have.

We stepped through each one of our service lines and we have a low-end margin guidance and a high-end margin guidance that we published in our investor presentations.

So if you go through the some of the parts and you look at the high to low margin expectations of each one of the service lines that we report and that’s how you get the 7% to 9%.It’s bridging the gap, if you take the -- the $63 million or $65.3 million of operating income that you always reported for the year, I mean, there’s $39 million of legal and strike headwinds that no matter what the environment is in 2020, knock on wood, won’t be there -- won’t be there in 2020 from 2019.So on an adjusted basis that you are taking that $65.3 million, you are adding $39 million of op income related to legal and strike, and you are at a $104.3 million, which is about 6.8% of operating income.

So we are ending the year on an adjusted basis basically at 7%..

Okay. All right. That’s fair enough. And then -- and maybe just a broader question. Tim, I mean, obviously, you are fairly new to the business here.

But as you have kind of gotten accumulated, is there anything that you feel is going to change or needs to change about the strategy in the direction that the company headed?.

No. I think that some of the ground strategy that’s already been set up is sound.

I think that my job and job one will be to get into some of the different business units and making sure that we are executing the strategies that we put forth before, both from a revenue standpoint and from a cost containment standpoint.I think that as I stepped out of my prior position into this I looked across the enterprise and what we have in place from a leadership standpoint and a support standpoint we are situated in excellent base.Now we had -- we just have to execute what we have put forth in front of the leaders to hit the points we want to hit.

So I am very comfortable with where we sit going into February with our strategic approach to 2020..

Okay. Great. Well appreciate the time and nicely done in a tough market..

Thanks, Bruce..

Appreciate it..

[Operator Instructions] Your next question comes from the line of Michael Marmot with Leland Capital..

Hi, guys.

How are you doing?.

Good morning, Mike.

How are you?.

Good morning..

Good morning. First, I have -- in the amount of time, obviously, I have, I don’t think I have ever seen a company of this quality and size trade at this valuation along with the top 22.5% dividend yield to boot. So one of these days that will fix itself.

You have done a rough estimate of your of the guidance you put in there for 2020 I am getting anywhere between to $2.60 and $3.70 with the midpoint around $3.16, I don’t know, I believe that’s correct. And the translation is roughly $100 million of free cash flow or over $3, $3 to $3.50 of free cash flow per share at the midpoint.

Is that correct? And I am trying to think about modeling this out 2020, 2021 that we could pay down roughly $200 million of debt over those next two years..

Yeah. I mean I think....

Or there’s something I am missing here?.

No..

Ex-acquisitions or whatnot?.

Yeah. So, I think, the debt pay down would be only impacted by additional CapEx from new business wins. So, obviously, we believe that between that $70 million and $100 million a year is the number that would be available to us to pay down debt.

But obviously if we continue to grow the business, if we continue to win a customer award that require investment we are going to make those investments in the business for the future. So that would be the only limiting factor Mike..

Excellent. And then when we look at buy -- it’s hard not to buy, when we are trading at 6 times earnings and 4.5 times EBITDA.

It’s hard not to buy back stock, but that would be the next use of capital after the debt pay down I assume?.

So it’s debt -- yeah. So it’s just debt pay down M&A and then we would look at any type of shareholder issue with this redistribution or this acquiring shares or dividend.

So we need to lighten up the debt load a little bit, so we can continue the M&A strategy and we only going to do that if you have more available and so that’s what we are going to focus on over the next couple of years..

Excellent. Okay. These valuations here are absurd, but finishing.

Two more quick questions for you, the synergy -- when we are looking at, you have done, I guess, three acquisitions over the past year?.

We have done six in the past two. We did two acquisitions last year. Michael Cartage….

Right..

…we closed in April and then Roadrunner we closed in November..

Excellent.

Now when we are looking at the integration, the synergies, are they better than originally planned and how are they going if you give a little more detail on those?.

So I would say that, we are probably in of a five phase plan. We are probably in about Phase 2. We are still working through a number of the back office and technology synergies.

So we are still -- there’s still a lot of low hanging fruit out there for us to get, especially as we combine some of these larger market operations together.So if we done what we can do over the past couple of years, but this year with some of the changes that we are making with our technology platforms, we should realize more in the later half of this year, and of course, into 2021..

Excellent. Okay. And then, just a suggestion here is, most companies gives us an adjusted EPS number. I know you give us all the charges out there.

But to consider down the road giving us an adjusted number, so we don’t have to kind of go through press release to find out what’s add back or not to make it apples for apples with all the other companies in the group to report?.

Okay, Mike. We will take it under consideration. We appreciate the….

Yeah..

We appreciate the idea..

Sure. All right. Great job, guys..

Thanks, Mike..

Thanks, Mike..

And we have no further questions at this time. I will turn the conference back over to management..

Well, I appreciate it. Thanks for dialing in. We are extremely pleased and look forward to positioning our self and pushing forward. Look forward to speaking to you all in a couple of months. Have a great day. Thank you..

Ladies and gentlemen, this concludes today’s call. Thank you all for joining. You may now disconnect..