Hello, and welcome to Universal Logistics Holdings Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

During the course of this call, management may make forward-looking statements based on their best view of the business as seen today. Statements that are forward-looking relate to Universal's business objectives or expectations and can be identified by the use of the words such as 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.

Steven Fitzpatrick, Vice President of Finance and Investor Relations. Thank you. Mr. Phillips, you may begin..

Good morning. Thank you for joining Universal Logistics Holdings second quarter earnings call. Before we begin, I would like to acknowledge the passing of Universal's Founder and former Chairman, Matti Moroun. Matti was not only a great innovator in transportation and logistics space, but also a teacher and friend to many of us over the years.

His legacy continues to hover over Universal and we'll live on through all of us who had the great pleasure of working for him throughout the years.

Now for the quarter, Universal -- yesterday afternoon, Universal released its first quarter financial results, reporting $258 million in topline revenues and earnings of $0.23 a share which included $0.02 per share for non-cash holding gain in a marketable securities portfolio.

Considering the extremely tough operating environment that saw much of the automotive and retail idle for the better part of two months, we were very pleased with our operating results. We entered the second quarter with substantial portion of the business influx or shutdown because of the COVID-19 pandemic.

We made some tough staffing and operational cost management decisions early in the quarter, which proved beneficial as the business volumes constricted. We instituted a COVID-19 preparedness and response plan at the onset of the quarter and continue to update based on CDC, state and local requirements.

We are extremely pleased with the focus, execution and performance of our leadership team across all of our service lines. Overall, our preparation and cooperation from all of our associates has allowed the company to operate safely and effectively over the past few months.

Despite the difficult sales environment we secured new business in multiple verticals. Our truckload group experienced several good wins in food and beverage and consumer goods. Our logistics pipeline remains filled with opportunities, building on our substantial first quarter wins.

Our value-added and Dedicated Transportation service lines have been awarded over $140 million in new business over the past six months. If production schedules stay on track in Q3, we are expecting $15 million in incremental revenue then ramping up to $25 million in Q4 and Q1 of 2021.

At full run rate, the new business will provide $40 million per quarter by the second quarter of 2021. We continue to shape our sales strategy. We've been hard at work collaborating across our various lines to identify existing customers with multimodal and value-added needs.

We're extremely pleased with our portfolio of customers, both organic and through acquisition and believe that there is many opportunities within our customer list to identify and expand our supply chain solutions across multiple platforms.

The decline in freight volumes during the second quarter did allow us to accelerate our integration of six intermodal acquisitions we've made over the past two years. During the quarter, we fully integrated three of six intermodal acquisitions and combined the operations of our two Southern California acquisitions.

We anticipate both lower cost and increased productivity per truck as a result of these changes. While we proceed into the third quarter with realistic level of caution given the uncertainty caused by the COVID-19 pandemic, there are signs to give us reason to be optimistic.

We believe the automotive space we serve is prime to accelerate due to depleted inventory levels and strong demand for pickup trucks and SUVs. Our retail relationships see positive trends on the horizon as orders increase and imports rise to meet the upcoming seasonal demand.

Truckload rates are strong and we are optimistic the sequential improvement in industrial production will carry over into our growing flatbed activity throughout the back half of the year.

Universal's only real headwind is the upside down brokerage market that industry has currently experienced, we were actively rationalizing customers and lanes to ensure profitability return to that service line. I would like to thank all Universal associates for their hard work and dedication they displayed over the past few months.

Their tireless dedication to get the jobs done for our customers, safely and on-time, during these challenging times shows a resilience and professionalism. We are grateful for all you've done and will continue to do for Universal. I will now turn the call over to Jude..

Thanks Tim. Good morning everyone. Universal Logistics Holdings reported consolidated net income of $6.2 million or $0.23 per share on total operating revenues of $258 million in the second quarter of 2020. This compares to net income of $20 million or $0.70 per share on total operating revenues of $383.2 million in the second quarter of 2019.

Consolidated income from operations decreased $19.9 million to $10.8 million compared to operating income of $30.7 million in the second quarter of 2019. EBITDA decreased $18 million to $30.2 million in the second quarter of 2020, which compares to $48.2 million one year earlier.

Our operating margin and EBITDA margin for the second quarter of 2020 are 4.2% and 11.7% of total operating revenues. These metrics compare to 8% and 12.6% respectively in the second quarter of 2019. Looking at our segment performance for the second quarter of 2020.

In our Transportation segment, which includes our truckload, intermodal and freight brokerage businesses operating revenues for the quarter declined 26.2% to $185.8 million, compared to $251.8 million in the same quarter last year, while income from operations decreased $3.3 million to $10 million, compared to $13.3 million in the second quarter of 2019.

In our Logistics segment, which is comprised of our value-added services, including where we service the Class 8 heavy truck markets and our dedicated transportation business income from operations decreased $16.6 million to $800,000 on $71.8 million of total operating revenues, compared to operating income of $17.3 million on $131.2 million of total operating revenue in the second quarter of 2019.

On our balance sheet, we held cash and cash equivalents totaling $8 million and $7.2 million of marketable securities. Outstanding interest-bearing debt net of $1.9 million of debt issuance costs totaled $403.7 million at the end of the period.

Excluding lease liabilities related to ASC 842, our net interest-bearing debt to reported TTM EBITDA was 3.38 times. Universal's short-term target total leverage ratio stands at two times to 2.5 times EBITDA. Capital expenditures for the quarter totaled $9.6 million.

For the full year, Universal has revised its capital expenditures' forecast and is now expecting capital expenditures to be in the $100 million to $110 million range, as we complete two of our supercenter project and invest in the equipment to service approximately $140 million in annual new business wins in our value-added and dedicated transportation service lines.

Interest expense for the year is expected to come in between $14 million and $16 million. For the quarter -- for the third quarter, if the current operating environment remains as it is today, we expect top line revenues to come in between $325 million and $350 million and operating margins to be in the 6% to 7% range.

We expect to face a couple of headwinds during the third quarter. Margins in our contract brokerage business are currently under pressure due to an upside down market as well as the planned shutdown for three weeks in August of one of our Class 8 customers for retooling.

Universal remains committed to returning capital to shareholders, while balancing the near-term cash flow requirements for the company.

With limited visibility as to the strength of the general economic recovery, our Board of Directors has decided not to declare a dividend during the quarter, but we'll revisit the topic at its next regularly scheduled meeting in October. With that, Tia, we're ready to take some questions..

[Operator Instructions] The first question will come from Chris Wetherbee with Citi. Please go ahead..

This is William on for Chris..

Thanks, William..

So first I just wanted to start with revenue trends in your value-added services and dedicated operations. I know you discussed a little bit about business wins, but I'm just kind of wondering about the revenue that specifically ties just call it the legacy revenue tied to automotive and heavy-duty truck operations.

And I'm wondering when you're thinking markets will start to recover? And do you think that revenue get back to pre-pandemic levels?.

Yes. This is Tim. And as far as the dedicated and value-added services go wrapped around the automotive and truck industry, we've been -- we're very optimistic at how we've come out of this pandemic per se. We've been back at it through June pretty full bore.

And all indications from our customer base is that, as I had mentioned in my prepared statement, that there's the need for the product out there inventories are low. So we expect there to be third quarter and fourth quarter a real nice run based on -- and I'll use this for comparison.

Where we were in our first quarter we expect to exceed those run rates going into the third quarter or in the third quarter..

Got it. And one other question about your margins here. So if we're just comparing year-over-year changes in operating incomes, year-over-year changes in revenue. It looks like you guys produced roughly a 16% decremental margin despite the plant shutdowns and a costs related to COVID.

So I'm just wondering how we should kind of think about the margins like you guys provided some context on the third quarter.

But if we're kind of looking forward to the fourth quarter if you guys can just provide some additional context there about what some of the puts and takes would be?.

William, this is Jude. So yes, I mean, we have between 70% and 80% variable costs in our in most of our service lines. Our agent business is about a 15% variable or 85% of variable cost model. So we just expect that to continue. I mean, we came out of the COVID pretty strong, did some cost-cutting and rightsizing of our operations.

So we would at least expect those incremental margins to be at their historical rates if not just a little bit better..

Got it. And just a final question here. So can you just talk a little bit -- you mentioned a little bit about the truck market starting to -- truckload market start to show some improvement.

But I'm just wondering how we should kind of think about load growth and revenue per load growth in the second half given the numbers you saw in the second quarter where loads were down about 40%?.

Yes. And this is Tim. And related to the truck market, yes, if you look at what the predictions were this year for production it was definitely negative year-over-year. Some of the customer conversations we have had in the service lines and customers we deal with have given favorable outlooks to third quarter and fourth quarter.

So we're fairly optimistic that we will see a good second half of the year in the truck market..

All right. Thank you for taking my questions..

Thanks, William..

The next question will come from Bruce Chan with Stifel. Please go ahead..

Yes. Good morning, gents. Appreciate the time. Just want to start out here maybe on the truckload side. I know that managing the fleet has been somewhat of a headwind for the past couple of years.

Just want to see what your experience has been like recently? What you're doing to bolster the fleets? And what maybe capacity trends look like as we come out of 2Q and then move into the back half of the year?.

Sure. This is Tim. And what we're looking at on the truckload market, of course in the second quarter, we saw a lot of our core competencies heavily extended in the flatbed arena. Our industrial products are steel and metals that had taken a pretty good hit once manufacturing and automotive shutdown.

From a capacity standpoint, yeah, we had some loss in capacity. But overall, we had a pretty good -- we kept most of our owner operators and company drivers intact. So, we're confident coming out of this. But yeah, we'll have some work to do from a recruiting standpoint because we see things picking up.

Now the one thing that seems to have trailed a little bit in coming out of the second quarter has still been steel and metals on our flatbed side. It's been a slow rise. Although, we've seen recently some of the industrial products start to pick up. So, the focus will be, yes, we'll have to recruit some capacity from a recruiting standpoint.

And once we see some additional steel and metals volumes come through, we feel that those that are off and not all capacity loss was lost because they went somewhere else. There's been -- from some of the government subsidies, we've had some of our small businesses park their trucks and wait for some of the freight to rebound.

So, we feel that we'll be back on -- and exiting out of the third quarter, we'll be back on a fairly good plan from a run rate standpoint..

Okay. So that makes a lot of sense. And then, just to pick up on that last point a little bit. I know that a lot of people are expecting some changes in the capacity environment given the expiration of the subsidies.

But, have you seen any evidence of that so far as we kind of -- well, I guess as we're at the end of July?.

On the owner operator side, overall, yes, I think that because the work is coming back, because we continue to bring some new work on that they've jumped back in their trucks. So, I'm happy with where that's going. On the company driver side, we lost far less company drivers than we did owner operators. So, we were pretty cool coming out of it.

We did some things to help through the second quarter. We're pretty cool coming out of with the company drivers. I think that space right there will be very challenging to grow because of, just the market as a whole the demand for company drivers as well as those that are laid off right now do they continue to get supplemented unemployment.

So, we're still waiting to see that. So, my answer to that is yes, it's a little bit of wait and see, but I think yes, it will be not difficult, but you'll have to work to get your new drivers..

Okay, great. Appreciate that. And then just on the brokerage side, Jude, you'd mentioned that the market was a bit upside down right now. Certainly that's something we've seen from others out there in the business.

Just want to get your take on where you think we are in that pricing cycle whether you're seeing customers being receptive to increases? And then, if I could just ask how much of the business gets repriced in the back half of the year versus in the first half of the year next year?.

Right. Well, if you -- this is Tim. If you listen to some of the other earnings calls, it's been a difficult environment. It was a rocket coming out of April and May into the number of loads that worked their way back into the market. We've evaluated our basically top 25 customers. And yes, there's some difficulties there.

And of course, we're in this business to service and we're also in this business to make money. And long-term sustainability that some of the current rate structures is very difficult.

So, what we'll see and kind of how we've rationalized it is we're going to go back to our customer partners and kind of give them a real visibility to what the market showing us.

So, we'll give them the data that we're getting from a capacity procurement standpoint and show that the rates that were put in place at some point last year, just aren't sustainable anymore. So we're going to have those conversations. And yes, I do think others in the marketplace have gone back to their customers.

But no, I don't think it's a full-on plight yet to the customer that says that these rates aren't sustainable. But we know our top 25 that we're going to have to go back and rationalize rates. And we're prepared to do that even if it's a difficult conversation.

Because I think that capacity will continue to tighten up and we want to make sure that we're in the right spot to be successful with that.

And yes, we will have the opportunity to -- once we get into the latter part of the third quarter and the fourth quarter some of our contracts will come due for rebid and we'll be able to work our way through some of those difficulties.

But, it is definitely a challenging time right now that I don't know any of us first off, especially sitting in April that it would become this difficult of an environment to source capacity at the rates that we thought were pretty decent at the time. So, kind of where we stand on that platform..

Okay, great. And then, just a final question here. Obviously a lot is still up in the air and uncertain.

But, I think about your mid-term margin targets in each of the various segments, and looking at what's happened between last quarter, and then where we've come now, how are you thinking about those targets? Have we lost much ground in terms of getting to where we need to be? Yes, just want to get your thoughts there on how you're thinking about that?.

Hey, Bruce, it's Jude. No. I mean I think we're going to come out in Q3. It's really -- I mean because we're so heavily variable cost. We're very volume sensitive. So, as volumes continue to rise, we will have that incremental margin that we've been building towards over the last few years.

So, in Q3, we're -- just because we're not really sure about what the volume environment is going to be in the back half, that's why we're guiding that 6% to 7% operating margin target. But long-term, as we've said many times in our investor presentations, we think with a normal environment, with growing volumes we're at 7% to 9% operating margins.

And of course our long-term target margin for Universal is still 10%. So we're just going to keep working hard and marching to get to those levels. And if the economy gets frothy and the market continues to grow Universal will do just fine..

Perfect. Very helpful. Again, thanks for the time and nice job in a really tough quarter..

Thanks Bruce..

[Operator Instructions] We do have a response from Jeff Kauffman with Loop Capital. Please go ahead..

Here we go.

Hey guys how are you?.

Good morning, Jeff..

So I wanted to get a little clarity on what you're seeing on the intermodal side? And I apologize if you hit this. It took me a couple of extra minutes to get on the call, so I missed the first three, four minutes.

What trends are you seeing because your intermodal division outperformed the general intermodal industry in a very tough quarter? What does July look like? And you gave us thoughts on what dedicated value-added would be you gave us thoughts on brokerage and truckload.

Can you talk a little bit about intermodal?.

Sure Jeff. This is Tim. Yes we experienced what we would consider a difficult second quarter, but I thought we were pretty resilient in how we approached it. And I think all signs looking at what we've seen so far in July are very positive. And I believe they'll remain positive.

So if we look at some of the things that we're in deep trough in the second quarter which was some of our retail clients, we see really good signs over the next month or two of that really picking up. And some of it's cyclical. Sure it's going to happen every year, but we see a nice runway into the fourth quarter on that.

We also had some -- what I would call a decent intermodal sales wins in a very difficult sales environment. So we're pretty happy with where the portfolio is positioned. And a good billed weather is Southern California. And we're definitely seeing our low count over the last couple of weeks ramp-up in Southern California.

So I would expect us to pick up speed. I would expect July to be up year-over-year on a load count basis and it will definitely be up on a sequential basis if you take the second quarter average. So I think on that end of it from a gross revenue standpoint that we'll see intermodal perform well in the third quarter..

Okay. And are you seeing any - I know some of the truckload markets are talking about strength. I know your brokerage services division is going to struggle near-term with kind of what the cost of purchase transportation is.

Are you seeing any improvement on the intermodal rate side?.

Well no there hasn't been any drastic change on the intermodal rate side. Our customer base is still batten down the hatches and we're holding true to that. We've had to over the first part of the year even take some rate reductions to make sure that we kept the volumes because it's a volume play for us in the intermodal space.

So there's been no -- what I would call incremental rate increases in the intermodal space..

Okay.

Then I switch to Jude, how big an increase was your revised CapEx spend? And just looking at some of the projects that you're going to be spending on now in the second half of the year where is that going to take depreciation in the second half and maybe as we look to 2021?.

So we started the year with $96 million of CapEx. We then revised during COVID that number down to about $76 million. And then we're up to the $110 million basically due to the fact that we won $140 million of business related to value-add and dedicated.

So we have to buy the material handling equipment and the tractors and the trailers and all the stuff associated with that. So not all of this depreciation will be hitting this year, some of the projects on the real estate side, will be either complete late in the fourth quarter or early in the quarter -- early in the first quarter of next year.

So from a -- so I would just use an incremental increase in CapEx maybe an additional $500,000 to $750,000 a quarter in Q3. And then we'll revise that in Q4 as we have more runway on when those real estate projects will come to completion..

All right.

And most of this CapEx is going to be spent this year? Is there going to be some drag on some of these projects into next year?.

So the only drag really will be on -- about $15 million of real estate that's for our new Detroit supercenter project some of that could bleed into 2021 Q1. But I would say at most it will be about -- at the top end it would be $2.5 million to $3 million box..

All right. So I'm going to go out on the limb here for you. So given your revised margin forecast, given depreciation given the revised CapEx forecast it seems like you're kind of on target to throw off somewhere between $40 million and $50 million of free cash for the full fiscal year.

Why still the trepidation with the dividend?.

I think it's just because of especially where we live in Michigan, Jeff I mean they just shut everyone out of bars again last week. I mean our -- I think we just don't really have a good feeling about what the governor is going to do and we're really nervous about that. So it's not that we don't want to reinstate the dividend.

Obviously we paid $143 million in dividends to shareholders over the years and we bought back $82 million worth of stock. So returning capital to shareholders is extremely important to us, but they didn't really feel that there was a lot of risk in delaying that one more quarter until we get a little bit more runway on the economy..

All right. Final question. You mentioned you're at 3.38% on the adjusted debt leverage ratio your target 2% to 2.5%.

What time frame would you look to be back at your target range?.

I think within the next probably 12 to 18 months that would be I think we feel good about that. We just -- the problem is when you keep winning business and the way the value-add business works is that those contracts are three, five, seven and 10 years.

So I mean you're investing, so the $140 million or the $100 million that we're spending on the value-add stuff we're going to get that back over a decade.

And so once again you're going to have years, you will have a lot of CapEx because you win a lot of dedicated value-add and then it will be more normalized in the $60 million range if we're just talking about replacement cycle of equipment that we already have..

Alright. Well, thank you very much and congratulations..

Thanks, Jeff..

The next question will come from Mike Vermut with Newland Capital. Please go ahead..

Hi, guys. How are you doing? Great execution in this environment here..

Thank you, Mike..

Can you just go through on the new business wins that will be I guess fully up and running you said by Q2 of '21 or close to it?.

That is correct..

Okay.

And then how should we look at the margin profile on those new wins?.

So we don't normally guide margins on a quarterly call but I would just look at our investor presentations and look at what we guide those businesses to operate on a long-term basis and I'd say we're in the range of those margins. So that would be 10% on dedicated and 10% to 12% on value-add..

Perfect. Okay. And then I know you're thinking about coming in with the dividend which I strongly recommend but we're also the one transportation company sitting here trading at eight times normalized earnings and far off on everything.

When do the discussion switch to buyback versus dividend versus additional CapEx? There's really -- there's nothing that stands out like we do right now, in our black sheep out there at this valuation everything else is trading 25 to 30 times and we're done it eight times.

So how does that discussion go at the Board?.

Yes. I mean we did buy back stock in Q1. After we released our Q4 earnings like we saw the valuation which was like the EBITDA was less than 5x. So we started buying back and where we bought back about $5 million worth of shares. So we were going to continue doing that actually Mike until COVID hit.

But during -- as Tim mentioned in his comments and I -- during the first six months we at $140 million worth of business. So we're going to think about doing some additional capital allocation to buybacks in the latter half of the year, but we're probably going to have to postpone that as a result of the business wins that we currently have.

But the stock has been a very attractive price right now..

For sure. Okay. All right. It will get to keep on executing here. So that was a great quarter for the circumstances. And I'm sure the next few will look good too. Thanks, guys..

Thank you, Mike..

Thanks, Mike..

And at this time there are no further questions..

Okay. Thank you all for calling in today. We appreciate it and we'll talk to you soon. Thank you..

Ladies and gentlemen thank you for participating in today's conference call. You may now disconnect..