Universal Logistics Holdings, Inc.
Q2 2017 Earnings Call Transcript

Published: 29 Jul 2017

[Operator:]

Hello, and welcome to Universal Logistics Holdings Second Quarter 2017 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 believe, 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. 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.

[Jeff Rogers:]

Thanks, Michelle. Good morning. Thank you for joining the Universal Logistics Holdings Inc second quarter earnings call. We continue to see strong revenue growth with consolidated revenue increase 10% to 305.2 million in second quarter. Our challenge remains on the earnings line but in second quarter those challenges were really limited to two value added operations and I’ll provide more color on those in a minute. As we saw in first quarter, each of our business lines delivered top line growth in the second quarter, intermodal our value-added business supporting Class A truck, truckload and brokerage all matched or beat last year's operating income performance. Our dedicated unit performed well but has a tough comp as last year second quarter was very best performance. Our legacy value adds business was again our primary headwind from an earnings standpoint. Our truckload service which excludes brokerage, revenue was up 9.2%. Our overall load account was down 3.5, but did improve slightly on a sequential basis quarter-over-quarter. Flatbed and oil and gas loads increased 2.9% year-over-year with weakness coming from van loads. Revenue per load excluding fuel surcharge was up 8.9% and revenue per mile excluding fuel surcharge increased 1.9%. We're encouraged by affirming pricing environment especially in the spot market. Revenue coming from new agents continues to grow and exceeds 18 million on manual run rate basis. We believe we're seeing a recovery in our industrial base and the largest challenge we face in our truckload service group is finding willing and qualify drivers. Right now, if you have a driver you have freight. Brokerage revenue increased 21.5% year-over-year being driven by load count increases of 18.2% and revenue per load increases of 2.8%. Revenue per mile is also up 7.9%. We continue to be encouraged by what we see in the transportation space, capacity is tightening and prices are rebounding. We're extremely pleased with the continued outstanding performance of our model team. Overall, revenue increase 6.5% driven by 4.2% increase in loads and 2.4% increase in revenue per mile, continued margin expansion has lead to best ever operating results. Even with the several pricing environment and less than seller international container activity, we see good things ahead for our intermodal business. Dedicated services revenue grew 2.4% year-over-year, while operating results were below last year dedicated with still solidly profitable. Our challenge in dedicated is our reliance on auto which has been so strong or so long, but clearly in several plants that produce cars we are experiencing the expected downturn. As I've said before, dedicated is about asset utilization, so we are working hard to reallocate assets to other plants and also expand our presence into other verticals. For the first time in six quarters, our value-add operations supporting heavy truck show revenue growth, 2.9% at year-over-year. Each new production forecast increases and our pipeline of new projects is encouraging. We fully expect this business unit to get back at historical margins in the next few quarters. For our value-add business that supports our auto, aerospace, retail and our industrial customers, we saw a continued revenue strength as our growth year-over-year was 20.3%. We have two remaining operations that created our earnings drag in second quarter. One is discussed in previous quarters will be a whole implementation by the end of the third quarter. We know where our cost overruns are and are taking aggressive actions to reduce cost, so as the full revenue comes on line we are confident this operation can be profitable in the fourth quarter. Unfortunately, the remaining operation has a different outcome. After very difficult discussions and a tremendous amount of work trying to bring our Mexican operations under control, we have mutually agreed with our customers to exist a very large portion of this business. The decision was based on our ability to meet the customers' expectation of service performance and to be fairly compensated for that performance. Because of the size and scale of this operation which had over 2,000 employees, as mentioned in our release, the second quarter operating income hit was $8 million. When we look at the remaining legacy value-add operations still in our portfolio, I see strong performance and tremendous opportunities for continued growth. Based on what we see today, we still believe each of our business units will see growth for the full-year in 2017. Our range for truck-load services is in the 4% to 6%, intermodal services is in the 1% to 3%, brokerage in 18% to 20% range, dedicated 3% to 5% and our value-add business in the 10% range. We see continued strengthening in the transportations sector. Many of the headwinds we have experience for quite some time are anticipating. We have a lot to look forward to. I will turn it over to Jude, who will provide more details on our financial performance.

[Jude Beres:]

Thanks, Jeff. Good morning everyone. Universal Logistics Holdings reported second quarter 2017 net income of $2.7 million or $0.10 per share on total operating revenues of $305.2 million. This compares to net income of $9 million or $0.32 per share on total operating revenues of $276.8 million in the second quarter of 2016. Consolidated income from operations decreased $10.4 million to $6.4 million compared to $16.8 million in the second quarter of 2016. EBITDA decreased $7.6 million to $18.4 million in the second quarter of 2017, which compares to $26 million one year earlier. Our operating margin and EBITDA margin for the second quarter of 2017 are 2.1% and 6% of total operating revenue. These metrics compared to 6.1% and 9.4% respectively in the second quarter of 2016. Looking at our segment performance for the second quarter of 2017, in our transportation segment which includes our legacy truckload, intermodal, NVOCC and freight brokerage businesses, operating revenues for the quarter rose 3.4% to $175 million compared to $169.3 million in the same quarter last year. And income from operations increased by 22.8% to 8.5 million compared to $6.9 million in the second quarter of 2016. In our logistics segment, which includes our value-added logistics including where we service the Class 8 heavy truck market and dedicated transportation business, income from operations decreased 123.8% reporting an operating loss of $2.5 million and 129.9 million of total operating revenues, compared to an operating profit of $10.6 million on $107.2 million in total operating revenue in 2016. On our balance sheet, we held cash and cash equivalents totaling $2 million and marketable securities of 14.1 million. Outstanding debt net of $1.4 million of debt issuance cost, totaled $250.2 million. Based on current interest rate, we are projecting 2017 interest expense for the year to be between $9 million and $9.5 million. Capital expenditures for the quarter totaled $15.6 million for a total of $33.3 million year-to-date. For 2017, we are expecting capital expenditures to be in the $50 million to $58 million range. At the top end of this range, $45 million of our projected 2017 CapEx will be for transportation, intermodal and material handling equipment, $10 million to support our value -add business and $3 million in real estate internal improvements. And finally, our Board of Directors declared Universal's $0.07 per share regular quarterly dividend for the 17th consecutive quarter. This quarter's dividend is payable to shareholders of record at the close of business on August 7, 2017 and is expected to be paid on August 17, 2017. Michelle, we're ready to take some questions.

[Operator:]

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

[Unidentified Analyst:]

Good morning gentlemen. This is Chris Shaw on for Chris. So, I guess a lot of positives on the top line here, so wanted to kind of dig into that a little bit. Brokerage revenues up 25% looks like the margins and transportation business as a whole are going in the right direction. Brokerage referred some of the larger competitors, if there's some compression on margins there is some headwinds, just sort of cyclically as you move through the next couple of quarters. You guys are moving from a different point. So I just kind of want get a sense of the puts and takes in terms of how you see margin cadence working out in the back half of the year and into 2018? How much are macro headwinds maybe a factor there working [indiscernible] those?

[Jeff Rogers:]

I'll start with it. We're seeing what I would call normal improvement in our margins on the pure truckload space and we would expect that to continue. The brokerage is an interesting deal because if you think about as the spot market improves, the expectation would be that the margins also improve for brokerage because therefore you have the ability to actually just get more of the full spend. But what we've experienced and what we're seeing and we'll see how it continues as, is becoming more and more difficult to find capacity. So, you therefore having to maybe given up the margins or not expand margins because you just have to pay that much more for purchase trends. So, why I expect the margins to improve as the spot market gets better and continues to strengthen, it's just becoming more and more difficult for find PT. So, the expectation is I do expect it to get better, but it's just becoming very, very difficult.

[Chris Shaw:]

Understood, that makes a lot of sense. I wanted to talk a little bit too about the Mexican business. I guess that’s one of the big items we exit there. If you just give a little more color on what that operation was? And maybe give a sense of how much that was dragging the previous quarter before this one? So sort of give us sense of what may be underlying when they'd expect to go was if we were looking at their models?

[Jeff Rogers:]

That business we've been involved down in Mexico without OEM for about nine years. And it is a -- it was one of more complex and full logistics operations that everything from warehousing, inventory management to subassembly, kitting. So, there is really a pretty complex post on logistics operations for us. The issue became -- the expectation on the customer to basically almost triple the size of it over a pretty short period of time and we struggled. It’s a very difficult labor market in that particular city almost probably one of the toughest labor markets in Mexico. And therefore, we just could not come to what we believe is a reasonable outcome from a compensation prospective as well as -- I don’t think we've executed initially well, I think we came around pretty well, but the customer and us mutually agreed to exit it. So, installed the $8 million in this quarter, it was a drag in the first quarter as well -- not nearly to that extent. But it has been a drag on us for probably two to three quarters and currently I don’t have the exact numbers of what the drags being, but, yes…

[Jude Beres:]

It was about 0.5 million in Q1.

[Chris Shaw:]

Okay.

[Jude Beres:]

So, 8 million in Q2 and 8.5 million for the year.

[Jeff Rogers:]

Yes, so keep in mind that 8 million is made up by quite of few different things, not small amount would be severance all the things you have to do down the Mexico when you're exiting 2,000 or moving 2,000 employees to another supplier. So, there is a lot of things that we do feel are behind us from that operation.

[Chris Shaw:]

Okay, that makes sense expect made it sounds like sequentially as the year went on, that makes sense. If I turn to the next question on the expense line items, you know one of the things that, and that was talked about in previous quarters, as you have the start in some of your operations and specifically over the Mexico with. There was always some higher cost some to direct personnel there benefit line and we've seen that elevated for few quarters now. So I guess it's two parts, the exit Mexico that can give you some relief on that line and then may be turning to like the remaining part of the business where you had some cost over and that you getting in that hand alone now, that you mentioned in your prepared remarks. How much is that, is also represented there in those, in that expense line? So just net-net, should we see some maybe a little bit of margin improvement based on improvement in those expense items going forward? Or are we still going to see this kind of level of going at the back half of the year?

[Jeff Rogers:]

So, I think clearly with the Mexico issue behind us certainly is that large, large portion of employees. That will definitely have an impact on that line in the third quarter. That other operations that I talked about that we're still getting twofold run rate in the third quarter will still be a drag from a headcount. That's the big issue when you have these large and this particular one is at the peak of headcount on that when we had over 700 people that we had added to run this operation. And so, you always that extra heads to try to give it up to an implementation point and then start winning the heads back, as you get there. So were into that process of winning the heads and reducing the heads even as more and more revenue comes on because of the training and the learning curve and all of those things and a huge operation like that. So, there will be a reduction even from bad operation I think in the third quarter, but we're still going to have excess cost, that's what I said. I think it's going to be fourth quarter obviously profitability in that operation. But I think overall that line of employee benefits will start coming back and shown an important in the third and then definitely into fourth.

[Chris Shaw:]

Okay, make sense. And then just one last one and then I'll turn it over it and I appreciate all the time this morning. Can you just talk about the dedicated sensitivity to the auto cycle and across transportation receiving sort of expectations coming down? And sort of understanding that the other cycle is plateaued and now we're seeing a bit of deceleration. I think you called out a bit of that impact, but I also wanted to get a sense of your agility and being able to continue to find other ways to services OEMs or maybe rededicate some of the resources internally that you have to and so maybe other revenues segments. Just sense of so, how can you reallocate, I guess, resources reallocation and also what can you do on that side to sort of maybe soften the blow from the auto cycles taken on wind a little bit here?

[Jeff Rogers:]

Yes, it's a really good question. We still have a quite a bit of dedicated transportation even here in Southeast Michigan that supports whether it would be heavy -- not heavy truck, but the SUV and light truck, which are still those stars and those production forecast actually increase this last month believe it or not for that segment of the automotive grew. But -- and we do some important that, so obviously we have the ability to shift our idol tractors because they have happen to bring down a plant that supports cars. And we can ship those tractors to another dedicated operations here in Southeast Michigan that also supports non-cars or SUVs and trucks and light trucks and things like that, so we do have the ability because we have so many operations and so much going on here in Southeast Michigan. So it's for us to allocate those assets. What I'm really trying to do and while we've got a lot of effort, is to find dedicated transportation pieces of business outside of automotive altogether which then kind of elevates that issue in the cyclicality of automotive. But we've not been success we had a real small project come on that we got into there but it's very few trucks and it's kind of our first triple than the something non-automotive. But that's our big push is really to try to grow that dedicated model because we think we know how to do it pretty well. We've done a lot of things who get a good operations stream, but we've just not been able to break into a large chunk of business outside of auto. But at the end of the day you can -- we can reallocate because we do support the OEMs and a lot of things, SUV and trucks which does give us the ability to kind of reallocate assets that way.

[Operator:]

[Operator Instructions] We'll go to John Larkin from Stifel. Your line is open.

[John Larkin:]

Sure, it's nice to see the top line beginning to grow again, that's terrific. And it also looks like a lot of the drags on margin are behind you. Congratulations on getting that ironed out, so we look forward to better numbers in future here. But as you continue to see virtually all the businesses growing organically, is that going to be a primary growth driver as you go forward, continue to work on margin, continue to work on organic growth within each of the business units? Or are we getting close to the point where you might consider some kind of strategic acquisition perhaps the fill in a hole, so that you've another arrow and you quivered it to serve your customers? What do you understand as far as timing on getting back to perhaps a little bit more of an M&A driven strategy?

[Jeff Rogers:]

John, that's good question. As we talk several times offline, my whole focus since I've been here in the two and a half years is really the kind of. One, understand our capabilities and strengths, get the right team in place in a lot of different areas, and we've made a lot of those changes over the 2.5 years, and we've had a lot of focus internally because we've had a lot of issues and headwinds to battle. So M&A or acquisitions just have not been on the radar, but you bring up a good point and we're always looking for something that makes sense, nothing has made sense yet. But I can tell you we're probably at a point we've got some technology enhancements that are coming online later this year that will allow us the platform to roll the things in I think very easily and quickly. So I'm not going to say that things are eminent but I think we're at least open to it because I think we're in a much better place now from a team and the ability to roll things in perspective.

[John Larkin:]

Could you expand a little bit on that technology comment in terms of what the functionality of that new technology is and what the capabilities are relative to say what you have now? And then maybe a question for Jude on the availability that you would have on your balance sheet given the current structure to fund organic growth and/or to fund accretive acquisitions?

[Jeff Rogers:]

Sure, yes. I mean first of all the technology that we've now is basically old mainframe-based technology where all of the inputs require human intervention. So what we're rolling out at the end of this year in conjunction with our ELVs, are our first handheld tablet which will be in all of our drivers hand. So we're going to go from a complete paper and manual process to an electronic and digital process for all of our tendering all of our documents and imaging, and all of the -- and the delivering of the loads in our systems. So we're going to have a lot of efficiencies in our dispatch offices and in our back office and that's just phase one of the project, phase two of the project over the next 18 months is actually to eliminate all of our legacy systems so we'll -- within 18 months our goal is to be off of our legacy GMW suite system, our legacy AS400 system. So, the impact that we see is enormous, it gives up the ability to not have to hire additional people every time we grow, so the goal is just to have a fix back log and then have that technology allowed us to scale as we grow our low cost. So, that’s the big project that we’re working on it right now. And on the balance sheet we have about 30 million worth of availability right now. So I mean really -- it would be a combination we will do something, the security portfolio to help. We have sometime of that arrangement but really the availability that we right now. We're just funding current operations and if we did something large obviously we will have some kind of financing that we have to go along with that.

[John Larkin:]

Will the new system be completely disengaged from sort of the mother ship Centra? I know early on at least there was some kind of sharing of technology platforms.

[Jeff Rogers:]

Yes, the only real technology platform that we share is the general luxury payroll system. The operating systems for the Company’s outside of Centra are all unique to the businesses.

[John Larkin:]

Okay but there is no plan to develop your own payroll in general leisure?

[Jeff Rogers:]

No absolutely not, those are only cheaper device and they are always cheaper to maintain by hiding them from somebody else. Those systems are internally developed either. Those are off-the-shelf packages.

[John Larkin:]

Any comments on the energy business which has been looking pretty strong in some regions of the country, I know that was an area of strength a couple of years ago. Has that come back for you at all?

[Jude Beres:]

We’re clearly seeing strength oil and gas. The Texas obviously the Louisiana even in Pennsylvania some of those tracking operations, which had been relatively strong even though the price of oil per barrel is bouncing all over that place. But we defiantly see a lot of strength there a lot of that capacity is back in the market, again you know all kind of win a way two years ago what needed. But now we're definitely moving a lot of oil field loads and pipes and things like that.

[John Larkin:]

But that’s mostly limited to open deck flatbed type business you haven’t really got into water or sand or oil transportations or anything like that.

[Jude Beres:]

No we've not, we've looked to the few opportunities there but we've not really expanded yet they call it bulk whether it's tracking sand or in some cases the water, but we've not done a lot of that, John.

[John Larkin:]

Okay and all these growth rates that you quoted which of the lines of business, those all take into account, the winding down of the Mexican operation and any natural winding down that may take place across the auto industry as well as things slow down there a bit.

[Jude Beres:]

Yes, they do. And the only one that I really changed from the last quarter with lower the dedicated that little bit just because of that slow down that we’re seeing in some of the production plans. But the 10% on the value add we think is durable for sure, over 20% year to date, so it does take into consideration effect that we won't ramp up, that Mexican operation, you won't see a huge decline in our revenue because of that, we just won't see the massive ramp up but we would expect it because we have about 20 million in revenue last year and then operationally we're going to have about 20 million in revenue this year, but we won't get to 40 which is what we expect 40 to 50 next year because we're not just going to ramp up.

[Operator:]

[Operator Instructions] I have no further questions at this time. I turn the call back over to the presenters for closing remarks.

[Jeff Rogers:]

Thanks, Mitchell. We should appreciate everybody joining us and your continued support. We look forward to talking to you all next quarter. Take care.

[Operator:]

Thank you everyone. This will conclude today's conference call. You may now disconnect.