Hello, and welcome to the Universal Logistics Holdings Fourth 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..

Thank you and good morning and thank you for joining Universal Logistics Holdings fourth quarter earnings call. As that reflect on 2020, I'm continuously impressed by our team's ability to adapt and execute at such a high level in a year that presented so many challenges.

The robust start to the year was quickly upended by much of our automotive and import work, which came to a standstill as the COVID-19 pandemic gripped the nation.

The second quarter was truly a challenging one, and as we implemented a necessary cost savings measures and safety protocols to protect our people and our business during uncertain times, the end result was a stronger Universal well positioned to support our customers when the business came racing back in the second half of the year.

COVID still presents many challenges today, and I expect it will be with us in the foreseeable future. At the same time, I'm confident in our team's ability to navigate these challenges and to continue to provide best-in-class service to our customers.

I'm extremely pleased to be surrounded with the strong men and women that make up the Universal team. I'm filled with admiration and respect for the hard work and resilience of our associates that was displayed over the last half of the year. The Universal is truly a people-driven company. Thank you for your continued efforts. Now for the quarter.

In yesterday's earning release, Universal reported fourth quarter earnings of $0.60 per share on operating revenue of $386 million, beating estimates on both the top and bottom line. Fourth quarter earnings also represented Universal's best fourth quarter earnings on record. The results were a reflect of continued focus on operational excellence.

We continue to work on improving execution at all levels and are excited about the progress we've made. The sequential increase in top line level can be attributed to solid growth on the dedicated, value-added and brokerage service lines.

While our intermodal and truckload service lines saw a slight reduction, we are pleased to report that operating margin was similar sequentially to Q3, which countered the normal Q4 drop while beating fourth quarter 2000 operating income by 52%. Backlog demand kept auto production humming even through the traditional holiday slowdown.

The higher than normal production volumes led to increasing revenues in our contract logistics business, which includes our dedicated transportation and value-added services. We are also successful in securing additional business wins locking in $10 million of incremental revenue on annualized basis.

We expect the new award to be in full run rate by Q2 of 2021. It was a mixed bag in our trucking group, which includes agent-based and company-managed trucking. Our biggest inhibitor to growth in the quarter was securing the necessary drivers to move the freight in an extremely competitive market.

We did experienced climbing rates for both agents and company terminals that supported dry van however lower volumes continue to be a drag on operating performance during the quarter.

Our flatbed business supporting metals and industrial goods was also laggard on a year-over-year basis, but we saw a modest uptick in loads sequentially, but have yet to see a full recovery of our customers in shipping these products. Despite the setbacks and recent performance, I maintained a very optimistic view on wrapping up the year.

Low inventory and tight capacity should provide a positive backdrop for strong pricing and increased freight volumes as we move into half of 2021. Our company brokerage operation was able to regain their footing in the quarter and returned to profitability. Banks do increase rates and a slight loosening of capacity.

Our company managed brokerage operation was able to make some gross margin headway through disciplined customer pricing and calculated capacity procurement. Gross margins for the quarter finished in the high single digits, leading to an operating ratio that was 720 basis points better than third quarter of 2020.

We successfully repriced about 61% of our contracted business in quarter four. We expect this to be tailwind into 2021. For an intermodal drayage import volumes were exceptionally high in the fourth quarter, however, congestion and slower than anticipated rate of trucks returning to work would provide an anchor to momentum for the intermodal group.

This also means we also have a ton of opportunity to improve our operating performance in this group. We are doubling down on our recruiting efforts, reviewing compensation packages at all of our major markets and have renewed initiatives to entice drivers back to work.

As we look forward, we are bullish on the momentum coming out of 2020 and believe we will see solid volumes at all of our service lines.

Based on what we're hearing from our customers, our intermodal drayage operation should remain strong through the Chinese New Year, we remain very bullish on our drayage franchise and the reengineered network that melded the acquisition companies into one focus unit with real upsides for scale and growth, which will allow us to continue to expand our national footprint.

Any increase in rates and volume will drive operating leverage in this business and to further drive profitability. With truckload sentiments for manufacturing are improving and we are cautiously optimistic for flatbed prospects.

We will continue to overhaul our company run facilities, focusing on local and regional freight and strategic markets that allow us to share resources and facilities, while allowing for the asset optimization.

With our company managed brokerage, we believe we have some pricing win at our backs and are pleased with our customers' contract negotiations. We will place additional focus on carrier services and our relationship with third-party carriers to form additional partnerships to move our customers' freight in 2021.

We remain extremely optimistic on auto and Class 8 truck production with light trucks and SUVs continuing to sell well and Class 8 predicting a significant production increase. We do expect a little chop in the first part of the year associated with the lack of semiconductors in the automotive space.

We continue to layer business wins into our existing dedicated operations that has allowed us to improve optimization of our dedicated assets and increased margin profile. We're extremely pleased with the turnaround in the group over the past year.

We also continue customer diversification to expand into new verticals, which should allow – which should also alleviate some of the peaks and valleys that we traditionally experienced in the automotive space. We have high expectations for our dedicated transportation group and expect this to be a growth engine far into the future.

As we discussed on previous calls, we are launching several major contract logistic awards in the first quarter. The customers we service with our value-added and dedicated transportation expertise have some of the most complicated and demanding supply chains in the world.

I have every confidence in our team’s ability to execute these launches and continue to provide world-class service to uniquely complex customers. As I’ve stated before, the Universal’s ultimate success depends on the health and the safety of our 10,000-plus associates, delivering essential goods and services to the frontline.

With safety as our backdrop to everything we do, I believe we are extremely well positioned to capitalize on a solid freight and auto manufacturing environment in 2021. I would now like to turn the call over to Jude.

Jude?.

Thanks, Tim. Good morning, everyone. Universal Logistics Holdings reported consolidated net income of $16.2 million or $0.60 per share on total operating revenues of $386 million in the fourth quarter of 2020. This compares to net income of $8.7 million or $0.32 per share on total operating revenues of $375.9 million in the fourth quarter of 2019.

Consolidated income from operations was $23.5 million for the quarter compared to operating income of $15.5 million, one year earlier. EBITDA increased $6.4 million to $44.2 million, which compares to $37.7 million, one year earlier. Our operating margin and EBITDA margin for the fourth quarter of 2020 are 6.1% and 11.4% of total operating revenues.

These metrics compared to 4.1% and 10% respectively, in the fourth quarter of 2019. As mentioned in our release, Universal also expanded its segment reporting to offer our investors further insights into the operating performance of our business.

Beginning this quarter, Universal will report four segments instead of the two segments previously reported. The new segment reporting structure just aggregates both intermodal and company-managed brokerage from our Legacy Transportation segment. Both of these segments are now reported discreetly.

The four reportable segments are company-managed brokerage, intermodal, trucking and contract logistics, which still includes the results of our value-add, heavy duty truck and dedicated transportation business. We updated the name of this segment to better reflect the nature of the service offering.

Now looking at our segment performance for the fourth quarter of 2020. In our Contract Logistics segment income from operations increased $4.8 million to $12 million on $133.2 million of total operating revenues. This compares to operating income of $7.2 million on $120 million of total operating revenue in the fourth quarter of 2019.

If you recall, the fourth quarter of 2019 included a UAW labor strike early in the quarter, which disrupted normal operations. Operating margins for the quarter were 9% versus 6% on a robust auto production. In our Intermodal segment, operating revenues declined 5.7% to $105.9 million compared to $112 million in the same period last year.

While income from operations also decreased $5.7 million to $7.8 million. This compares to operating income of $13.4 million in the fourth quarter of 2019. Operating margins for the quarter were 7.3% versus 12% last year.

The primary factors for the decline in operating income was a 17.2% decrease in our average revenue per load, and a 15% decrease in our average truck count. We were able though to increase our truck productivity by 17.4%, which mitigated the decline in number of intermodal loads hauled.

Additionally, operating margin was squeezed by approximately 100 basis points due to $12.6 million of pass-through demurrage charges included in both intermodal top line revenue and operating expenses. Excluding demurrage, the Intermodal segments operating ratio was 91.7% for the fourth quarter of 2020.

In our Trucking segment, which includes both our agent-based and company-managed trucking operations, operating revenues for the quarter declined 10.1% to $80.9 million compared to $90 million in the same quarter last year.

While income from operations increased to $3.5 million compared to an operating loss of $2.9 million in the fourth quarter of 2019. As mentioned in the release, the Trucking segment experienced litigation charges of $2.9 million in the fourth quarter of 2019. Truck count was down 13.3% year-over-year, while revenue per load was up 3.3%.

Operating margins for the quarter were 4.3% versus an operating loss of 3.2% last year.

In our Company-Managed Brokerage segment operating revenues for quarter rose 23% to $65.8 million compared to $53.5 million in the same quarter last year, while income from operations decreased $403,000 to $227,000 compared to $630,000 in the fourth quarter of 2019. Operating margins for the quarter were 3x and 1% versus 1.2% last year.

Company-managed brokerage loads were down 9.2% compared to the fourth quarter of 2019. However, revenue per load was up 31%. Gross margin for the quarter was 8.7% versus 9.2% for the same period last year. On our balance sheet, we held cash and cash equivalents totaling $8.8 million and $6.5 million of marketable securities.

Outstanding interest bearing debt net of $1.6 million of debt issuance costs totaled $460.1 million at the end of the period. Excluding lease liabilities related to ASC 842, our net interest bearing debt to EBITDA was 3x. Universal’s 12 month target total leverage ratio is between 2x and 2.5x EBITDA.

Capital expenditures for the quarter totaled $17.9 million and were $90.7 million for the year. Our forecasted capital expenditures for the full year 2021 are expected to be in the $65 million to $75 million range before any additional business wins in our Contract Logistics segment or strategic real estate purchases.

Our interest expense for 2021 is expected to come in between $14 million and $16 million. If the business environment remained stable for the first quarter of 2021, we are expecting top line revenues between $380 million and $400 million and operating margins in the 7% to 8% range.

And finally, our Board of Directors declared Universal’s $0.105 per share regular quarterly dividend. This quarters’ dividend is payable to shareholders of record at the close of business on March 1, 2021, and is expected to be paid on April 5, 2021. With that Thea, we’re ready to take some questions..

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

Thanks. Good morning, guys. I guess, I maybe wanted to start on the new business wins. I think, you aligned a couple of new business wins.

Can you go into a little bit more detail there? And then maybe some broader comments about the pipeline sort of where that stands today and how you might think about executing on that as 2021 progresses?.

Yes. This is Tim, Chris. The new business wins that we see going into 2021, if you remember over the last couple of calls, we've had a significant amount of wins in the last half of 2020, those business wins should equate somewhere between $160 million and $170 million annual business for 2021.

In the quarter four, I did reference some additional business that we had, one that we'll launch in run full rate sometime in the second quarter.

The one thing that I didn't elaborate on in the prepared remarks was that, once we entered into some of this new business, either through scope changes or some additional dedicated transportation lanes, we're seeing a fair amount of opportunity from our customers on adding in new lanes or at least getting the ability to quote on it.

So we think there's also some runway on that. That we'll see some additional dedicated business that comes out of some of these projects with new lanes. Now, if I reflect back on the pipeline as a whole and in specific for some of those larger wins, the pipeline remains relatively full.

Now I wouldn't say that we have $170 million, we're closing on tomorrow is to talk about on our next quarterly call, but we're cautiously optimistic on the pipeline and where it leaves us.

And I think the biggest thing I've taken from the pipeline and looking at it with the sales team, it seems like our operational execution has definitely driven some of the closing ability on these projects as they come to bear, so extremely excited about that.

On the transportation side of things, there's a fair amount of opportunity that you probably have not only heard here, but you've probably heard on other calls. It's just a matter of us making sure we have the drivers in the seat to be able to move and to bid that type of work. So as a whole, the pipeline remains robust.

Things that might be consideration to hitting, the optimization of that is going to be making sure we can either put people in seats or making sure we can just bring people into the logistics place and the supply chain place. So people is our – one of our number one concerns for 2021..

Yes. Okay. And then, my next question was going to be about sort of the margin opportunities in 2021. And I think that goes – kind of goes hand-in-hand with what you just mentioned around getting capacity, getting drivers.

So can you talk a little bit about sort of your confidence level on the margin guidance, sort of what gets you to the higher end versus the lower end? And how do we think about wage inflation or driver acquisition or capacity acquisition costs included in that?.

Chris, I'll start. Yes, I think we feel really confident about the margin guidance both for the full year and for the quarter. Scale and operating leverage do amazing things in trucking businesses as you're very well aware.

So any additional incremental capacity that we can bring in, particularly to the intermodal space is really going to drive those margins to the higher end. So I think in the trucking businesses, as we've shown a lot of that rates inflation has already happened, but where we haven't seen that rate inflation happen is in our drayage business.

So with the rates still suppress year-over-year and the robust outlook, we think that could be a real big driver of profitability. In addition to the initiative that Tim mentioned of trying to get more drivers in seats. So I say, we feel very confident about the forecast. We feel very confident about our ability to hit these margin targets.

But people and drivers obviously are going to be the biggest headwinds for us to get there..

Yes. And this is Tim; I echo everything Jude has said. And if we look at the intermodal space in the franchise there, we're really optimistic on that. Remember we went through a consolidation of six acquisitions and the most recent one only a year old, we vetted the customer base, we vetted the driver base. We knew we had to give some pay increases.

So the lagger on that one, of course, was the rate to the customer, but we're optimistic that and we're seeing it start to come back because things are so tight. And remember, from your prior question, we're talking about a runway of $160 million plus in wins that are going into full execution on the value-added side.

All that's going to continue to do is setup for a make-up of a higher margin business to be more percentage of our overall revenue. So I think Jude had said, I'm very optimistic on the margin goal..

Okay. No. That's helpful. And then, yes, maybe one more on the intermodal side, I guess a couple of parts to this. So first, I just want to make sure I understand the demurrage, obviously, quite elevated, but it sounds like that's largely a pass through for you guys.

So I just want to make sure I understand that dynamic and how that might play in 2021 and whether that impacts the margin outlook at all? And then number two, and it probably goes hand-in-hand, what's the update in terms of just how congested things are from an intermodal perspective.

Do we have the ability to start to unlock that as maybe the first half progresses? Do you need Chinese New Year sort of deceleration and blank sailings to kind of get you to that point? Just kind of curious about the intermodal story?.

I'll just quickly talk about the demurrage. So yes, it was passed through basically dollar for dollar in Q4, and that's directly related to the inability to get containers out of the port in a timely basis. In 2019, for example, we only had about $600,000 in Q4 related to these types of charges. So Q4 2020 was definitely a unique phenomenon.

The team is going back to the customers and either trying to get some margin on that business, or trying to get them to pay it directly themselves, because obviously, the delta and the operating ratio with that end versus not is pretty substantial..

And to answer your question on the congestion, yes, the fourth quarter saw congestion in some of the major markets. And just what Jude alluded to, the congestion in LA was a major driver of that. The supply chain and the efficiencies there, there's a lot of things and complexities that go into it and it just didn't hit correctly.

So we're still seeing some of that same congestion on the West Coast, specifically LA, Long Beach. But we feel that as we step into Chinese New Year next week, that hopefully even if some of the factories do produce, which is unusual through Chinese New Year, we think it will help alleviate some of the backlog there.

Because remember the backlog and the efficiencies of your major port systems also feeds your inland ports like Chicago. So having some fluency there, having a regularity to freights it's moving inland only supports us internally. And we did see a little bit of congestion at times in some of the inland locations from intermodal standpoint.

The one thing we're really happy about it, it's like a balloon, so, if the customer made a decision with the steamship line to push break into another port or area of the country, we're very well positioned not only now, but into the future and taking advantage of that displacement or replacement of volume into a different port city.

So I'm optimistic. Yes, it'll be a little bit of a short-term headwind, but I think as the year progresses, I think, I'm expecting more fluency to it..

Okay. Okay. That's really helpful color guys. Appreciate it, Tim and Jude, thank you..

Thanks, Chris..

Thanks, Chris..

[Operator Instructions] We do have a response from Bruce Chan with Stifel. Please go ahead. .

Gents, good morning. And congrats on a very nice print. Just a few here from my side left. I guess Tim, it sounds from your comments like the outlook is going to be very good for the balance of the year.

But if you kind of put on my glass-half-full half-empty, are there any big sources of risk that are complicated in your forecast, and then maybe it's a good opportunity to remind us how your model responds in the, maybe call it more normal cyclical softening where facilities aren't completely shut down?.

Yes. I think, is there always potential hurdles as you go through your plan for 2021? Yes, there is, and I would say the near term, if we look at getting out of congestion on intermodal, I don't expect there to be a whole lot of roadblocks there.

there is on that – there is a little bit of noise, right on the automotive space that we're feeling around the semiconductor shortage. So those plants and locations that you see listed over the last week, we are a player in some of those plants and locations in various degrees.

So the length and time that, that lasts that there's this shortage of those types of components that could throw a little bit of a wrinkle into our first half of 2021.

But I just think there's so much pent up demand for the product that it would, that disruption would just push into the latter half of the year, where we would see production pickup and volumes increase, and we would make-up potentially what might've been watched in the first half of the year.

The other thing that I'd mentioned earlier, and this doesn't – it doesn't play for any individual, one of our units, but all of them, is making sure we keep a keen eye on the people.

Because I think that, if you're looking at something that could be disruptive is as we launch new business on the trucking side, and we definitely have a couple of key launches in the first quarter on our contract logistics side that we make sure we keep cadence with the need for that human asset.

And we've got a pretty darn good job with that in getting in front of it. And, we're sourcing labor even far before we wouldn't a normal scenario because we know the market's tight, but I'm going to sit here and say, yes, I'm optimistic that we've got – we've got a game plan put together.

And that we foresee these launches and these new wins on the transportation side going off without it, without a major hitch..

Okay. That's great color; and maybe just to follow-up on some of those comments, particularly around auto and Class 8 production.

How much visibility do you get from your customers and maybe what's your best sense of – what kind of inning we're in as far as that recovery cycle?.

Bruce, are you talking about Class 8?.

Yes.

Maybe on Class 8 as well as Auto, on the passenger side as well?.

So I would just say, yes. We actually, because we're connected to the auto on a win-by-win basis for the JIT to the plant, I mean, they give us their production schedule. So we know for every plant that we service, what units are going to be built every week. So we have dialed in visibility to any automotive production.

On the Class 8 side, I think we're just seeing the same things that everyone else is looking at the star for 2021. And it's going to be up 30% from where it was last year. So, of course Class 8 can be a little bit temperamental as, you know. It could be worse than 30%, or it could be better than 30%, but that's just what the star is saying.

And we follow almost identical on that business to what the star is said, as far as our revenue. If the star is up 30%, our revenue is up 30%, it's that simple..

Okay. Fair enough. And then just a final question here on the brokerage side, nice recovery there from third quarter, and I know Jude, you'd talked passionately in the past about aggressive and potentially not compensatory pricing from some of the competitors.

What's your sense on how that competitive environment is right now? Some of those disciplined competitors found religion is a temporary, is it permanent?.

I don't know if they found religion, their ideology may be a little bit different. We still look at the brokerage space in the market as a whole. It's a large transportation spend in the marketplace. One person being able to put their arms around all of it and hold it hostage; I don't think that happens.

I think the way we've looked at it from how we approach not only the customer, because this is forward facing to the customer. We took a deep dive in the fourth quarter and like I said, we went through about 61% of our overall business was rebid in the first quarter – I'm sorry, fourth quarter.

Not all of the results are back in yet from that because they're still playing some of it, but it's been positive in what we are seeing. Now, I don't know how the competitors treating it, but I do know on a couple of bids, we've saw some volumes that have come back to us at a larger amount, a larger volume amount than we would expected.

So, which tells me that there's some people out there making some decisions in a more concerning fashion than maybe they had in the past. So from a competitive landscape, yes, there's going to be those out there that want to do it to gain volume.

We're more in it from a strategic standpoint and one of our main focuses for 2021, on the other facing side is the capacity side is making sure we shore up how we do business with our other business units, which is the carriers and making sure we're in front of that and have a good feel for the supplies. So we can match them with the demand..

Great. Terrific. That's helpful. Thank you..

Thanks Bruce..

[Operator Instructions] And at this time I'm showing no further responses..

Well, excellent. I appreciate everyone dialing into the fourth quarter call and we truly look forward to next quarter and sitting in front of you again. Thank you and have a great day..

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