Universal Logistics Holdings, Inc. Q1 FY2020 Earnings Call

Hello. And welcome to the Universal Logistics Holdings’ First 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 related to Universal’s business objectives or expectations 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. Steve Fitzpatrick, Vice President of Finance and Investor Relations. Thank you. Mr. Phillips, you may begin.

Thank you. Good morning. Thank you for joining Universal Logistics Holdings' first quarter 2020 earnings call. We started this year under a drastically different operating environment compared to how we exited the first quarter. We created a plan to meet the high expectations for the year if we can even revise plans as needed. We were looking to employees and associates; we found an amazing path through the conditions and challenges posed by the COVID-19 pandemic. Over the last six weeks, I have witnessed the true resilience of our associates as the company adjusts to the rapidly changing operating environment. First off, I'd like to recognize the sacrifices of our drivers and contractors who answered the call and kept critical operations moving in an extremely tough environment. Our warehouse workers and dock personnel have remained committed to the cause, standing on the front line supporting the flow of goods. Behind the scenes, our office personnel continued to perform at a high level, delivering solutions to our value-added customers and supporting our associates on the front line. I am extremely proud of the entire Universal team. Before moving into the details of the quarter, I want to provide an overview of our ability to respond to the COVID-19 outbreak. With operations located in the United States, Mexico, Canada, and Colombia, we realized early on that one of the key demands during this crisis would be timely communication with our employees, contractors, customers, and vendors. I am in constant communication with our senior leadership to evaluate welfare, safety, volume trends, and customer needs to quickly react to the changing landscape. We provide real-time updates about the latest guidelines from the Centers for Disease Control, World Health Organization, and local state governments, as well as targeted local information to ensure our people are up-to-date on the latest information and best practices for keeping them safe both at work and in the local communities. We continue to follow best practices for social distancing, personal protection, and cleanliness procedures as our workforce progresses. The overall environment began to change rapidly at the end of the first quarter. The biggest shock to the system came from March 8th when North American auto and truck production were halted, representing over 25% of our implied revenues. Leadership reacted quickly to balance the workforce with the demands. In addition to the suspension of the auto and truck production, state and local governments began issuing expanded shelter-in-place orders that limited various operations. We began to brace for a larger impact on our business volumes. We made the decision in late March to further reduce approximately 70% of the direct workforce and 30% on administrative personnel. These are really typical positions but necessary to preserve the integrity of the business model. We accelerated our cost containment and reduction strategy, evaluated our list of essential operating expenses, and adjusted our capital expenditure deployment while taking all necessary steps to preserve liquidity. We are actively managing the situation and will continue to navigate the business to ensure success when we can return to normal. I would like to provide some highlights from the first quarter. Yesterday afternoon, Universal released its first quarter financial results, reporting $382.2 million in topline revenues, a new record high for first-quarter operating revenues, leading to earnings of $0.45 per share, which included a $0.09 per share charge for non-cash holding losses on our marketable securities portfolio. Even with the rapidly deteriorating business climate we experienced in late March, I am pleased with the results of the quarter and feel proud of the way our Universal team jumped into action to adapt as the coronavirus pandemic unfolded. While the auto and truck production shutdown had a souring effect at the end of the month, others stood steady despite the headwinds. The Chinese New Year came early in 2020 with the factories closing and operations changing, which typically lasts 14 weeks at our terminals, extending longer due to the coronavirus outbreak. Turning to imports, they never rebounded in the first quarter as demand in the U.S. also contracted because of the virus. Although volume was down 40% in our Southern California operation, we also continued to experience some rate fractures on truckwork for much of the first quarter. Excluding the effects of the auto and truck shutdown and the impact of COVID-19, normalized first-quarter results would have represented Universal's highest revenue for any quarter on record. Our estimates of COVID-related revenue losses in Southern California operations amount to $8.2 million in topline revenue and lowered our operating income by $2.7 million. The impact of topline revenues from the auto and truck manufacturing shutdown was $8.3 million and reduced our operating income by $2.6 million. We believe the cumulative effect of these losses likely decreased our EPS by $0.15 per share. Now, for some color on each service driver. Truckload finished the quarter with $58.9 million in topline revenue, which was an increase of 10.3% compared to 2019. The decrease in load count was primarily driven by a 7.2% decline compared with the same period in 2019. Open GAAP to the metric accounted for roughly two-thirds of the truckload, which was new. And while the quarter progressed, we experienced a sharp drop-off in the number of moves but could potentially relate to fueling constraints. On local and regional operating networks, both in food and beverage and consumer goods, we mitigated the decline. Brokerage services faced vastly different operating environments entering and exiting the quarter. Although revenue was flat at $85.9 million, load counts were up 13.9%. The numbers show a very aggressive rate-driven environment coupled with very slim growth margins at the beginning of the quarter. Our company brokerage folks were heavily involved in food and beverage and experienced extreme fluctuations in the last few weeks of March. Stockpiling of consumer products and groceries spiked due to the pandemic, and towards the end of this quarter, we saw an increase in our gross margin as the industry began to experience loosening in truckload capacity along with lower transportation rates. Intermodal services revenue increased by $19.2 million, or 21%, to $110.3 million. Load count was up 19.7%, and revenue per load was relatively consistent. Legacy operations performed well under the conditions with the biggest boon attributed to acquisitions made in 2019, offsetting the momentum with a drag from our Southern California operation. In this market, we experienced a significant drop in load count with our customers heavily weighted towards retail. We are very pleased with our acquisition integration in the intermodal space, and we look forward to completing integration of our most recent acquisition by the end of the second quarter this year. I am extremely happy with the performance of the intermodal team in conjunction with various entities, employees, contractors, and drivers. We are experiencing a significant increase in load counts and effective restructuring as a result of the acquisition. Our dedicated services revenue was down 14.7% to $31.6 million. Load count was up slightly for the quarter to 139,000 loads due to additional shop owners compared to the same quarter of 2019. In closing, our North American auto operations similarly planned a severe effect on revenue in the last few weeks of March. By comparison, our dedicated fleet handled 21.1% more moves during January and February 2020 compared to the same period in 2019. However, due to the ongoing shutdown at the end of the quarter, we ended up only up 3.8%. Value-added services revenue increased by $2.2 million to $95.5 million. The auto and truck plant shutdown negatively impacted our revenue in late March. Our value-added group was operating at peak capacity before the plants began shutting down at the end of the first quarter, and we were on track to have a record quarter. Universal's certified service line and auto make up a significant portion of our business at 29%, followed by retail and consumer goods at 22%, industrial trucking at 12%, and aerospace accounting for about 2%. Universal continues to support a robust pipeline, and while the impact of COVID-19 is expected to have some influence on the timing of implementations, we are confident that we will realize the results from customer partnerships in the second half of 2020 and into 2021. To provide some additional insight, our value-added services group grew by $60 million in that segment this year, and our dedicated transportation group added another $40 million. We are also very optimistic about our growth, evidenced by the fact that we acquired 23 new agents in the first 13 weeks of 2020. Our combined pipeline still stands at approximately $500 million in opportunities. Times seem challenging now, but we are excited about what the future will bring, and we remain very bullish on the long-term outlook of our business. To give a sense of what we are seeing for April, our revenues for the month were down approximately 30% compared to last April. In response to these declines, we've undertaken a thorough review of our operating expenses and have continued to adjust these appropriately. We also evaluated our capital expenditures and are able to defer a number of purchases to later this year or next. We anticipate realizing cost savings from completing the integration of our acquisition by the end of the second quarter. Understanding that one of our large responses will involve direct personnel-related benefits, we are continuing to look for ways to identify costs. We are doing that across the board, including with the executive management team, as we ask both to take a month off without pay throughout the second quarter. Before handing it over to Jude, I wanted to reiterate my appreciation and gratitude to the entire Universal family for their dedication to operating safely and effectively through various shutdowns and local government restrictions across the United States.

Thanks, Tim. Good morning, everyone. Universal Logistics Holdings reported consolidated net income of $12.2 million or $0.45 per share and total operating revenues of $382.2 million in the first quarter of 2020. This compares to net income of $17.3 million or $0.61 per share on total operating revenues of $377.4 million in the first quarter of 2019. Consolidated income from operations decreased $2.6 million to $23.9 million compared to operating income of $26.5 million in the first quarter of 2019. EBITDA decreased by $4.6 million, to $39.8 million in the first quarter of 2020, which compares to $44.4 million one year earlier. Our operating margin and EBITDA margin for the first quarter of 2020 are 6.3% and 10.4% of total operating revenues. These metrics compare to 7% and 11.8% respectively in the first quarter of 2019. Universal's financial results were negatively impacted by a 40% reduction in Intermodal loads in Southern California, a loss of automotive production during the last two weeks of the quarter, and lastly, pre-tax losses related to the mark-to-market reevaluation of our securities portfolio. Combined, we estimate these events to have impacted our topline revenues by $16.5 million for the quarter and operating income by $5.3 million or $0.15 per share. Below the line, the loss on securities accounted for a pre-tax charge of $3.4 million or $0.09 per share. On a pro forma basis, the combination of these factors reduced Universal's operating margin by 100 basis points and earnings per share by $0.24. Looking at our segment performance for the first quarter of 2020, in our transportation segment, which includes our truckload intermodal and freight brokerage businesses, operating revenues for the quarter rose 3.2% to $254.7 million compared to $246 million in the same quarter last year. While income from operations decreased by $400,000 to $12.1 million from $12.5 million in the first quarter of 2019. In our logistics segment, which comprises our value-added services, including our Class A heavy truck market and our dedicated transportation business, income from operations decreased $2.1 million to $11.7 million on $127 million of total operating revenues compared to operating income of $13.8 million on $130.4 million of total operating revenue in the first quarter of 2019. On our balance sheet, we have cash and cash equivalents totaling $8 million and $6.3 million of marketable securities. Outstanding interest-bearing debt, net of $2 million of debt issuance costs totals $478.8 million at the end of the period. At the end of the first quarter, we had $41.7 million available under our existing revolving credit facility. Excluding lease liabilities related to ASC 842, our net interest-bearing debt reported against EBITDA was at 3.48 times. Capital expenditures for the quarter totaled $32.8 million. For the remainder of the year, we expect capital expenditures to be in the $35 million to $45 million range and interest expense between $14 million and $16 million. As mentioned in our other release, to further preserve our liquidity during these unprecedented events, we've decided to temporarily suspend our quarterly dividend in addition to the cost-cutting measures Tim discussed earlier in his comments. Our goal is to preserve cash in the short term until there is more clarity on automotive production as well as future import and trucking volumes. As a reminder, Universal's dividend policy allows the company to pay out up to 40% of our net income each year with the target dividend yield of 2% on the stock. The quarterly dividend is an important part of our long-term capital allocation strategy as Universal had paid out over $143 million in dividends since the inception of this policy. We expect to review the considerations for reinstating our dividend in the back half of the year. With that, Amy, we're ready to take some questions.

Your first question today comes from Chris Wetherbee of Citi. Your line is open.

Yes, great. Thanks, Tim. Good morning, guys.

Good morning, Chris.

I guess it was helpful to get the update on April as well as some of the vertical concentrations within the revenue for you guys as well. Given that you have a decent amount of customer exposure to end markets that are currently sort of shut down, can you give us a sense of maybe how to think about the restart? Does that happen in 2Q? Is it sort of a May and June type of event? Any color you can give to give us a sense of maybe what that negative 30% for April kind of cadence might be as we move throughout the quarter?

Well Chris, this is Tim. I can tell you that there is a ton of uncertainty. In talking with many of our equity clients, they are feeling similar uncertainty based on government influences regarding the pandemic. However, what we can say is that in conversations in the auto sector, we are hopeful that we will see some operations start to ramp back up in late May. We're constantly trying to get confirmation on this, but we really need to see actions taken behind these plans. Additionally, we mentioned some of the headwinds in Southern California, particularly on the intermodal side, which is heavily impacted by retail fluctuations. We have had mixed conversations here as many of those retailers are navigating their own shelter-in-place decisions. However, from what we've seen on the consumer side, they are projecting reduced expectations for Q2 but nothing drastic. We are still seeing positive projections for our beverage customers who remain aligned with their forecasts, keeping within 5% to 10% of their regional projections, and consumer goods also hovering within that range. One area of concern is the drop-off in demand for open deck products like steel and metal, which may take some time to recover as industrial activities pick up.

And your next question comes from the line of Bruce Chan with Stifel. Your line is open.

Yes, good morning, gentlemen. And thanks for the question. Tim, my apologies if I had missed this amidst the echo or line interference. But you were talking about the $40 million and $60 million wins and dedicated and value-added respectively. And maybe just want to understand a little bit better, how much of that is bankable and what the effect is of the current situation on those numbers? And then also, where those wins are coming from as far as end market and customer type?

Yeah, thank you for the question, Bruce. The end markets that those wins are coming from primarily in the automotive sector. We expect there to be some delays with the initial launches of those projects based on the uncertainty surrounding when automotive production will resume. What we anticipate is that we will see revenues realized and some of those projects later in the second half of the year and into 2021. Through ongoing conversations, we remain optimistic that these launches will occur, though I've mentioned that they will likely be pushed back several months. That's all contingent on how the state and local governments lift their restrictions, so we can ensure our customers return to work safely.

Okay, that's great color. That makes sense. And then maybe just a follow-up on your comments about the agent additions in the first few weeks of the year. How have those trended now, given what's been going on in late March and into April? Are those decelerating, or are they accelerating as perhaps joining a larger system looks more attractive than going independent?

Yes and yes. We've seen some different phenomena emerging here early in the second quarter because of decisions made by other companies. Our pipeline remains very robust, and the agents we are engaging with have a high level of interest in transitioning, but they are also carefully considering their customer bases. So they are taking their time to ensure the transition is smooth for their customers. I believe we can move quickly when they are ready, despite the shift to remote conversations hampering some face-to-face interactions.

Okay, that's helpful. And then maybe just one last one here. On the fleet capacity side, what are you seeing in terms of retention and what's happening with the capacity pool, both within Universal and also externally? What measures are you employing to protect those numbers and some of that retention?

Yes, from a capacity perspective, we are observing a couple of distinct trends. We know that due to the business slowdown, the active drivers and contractors being utilized are less than they would typically be in a normal environment. Nonetheless, we are doing our best to keep a large group of them engaged. Over the last eight weeks, our turnover rates of contractors and drivers have remained minimal, and we are in constant communication with them, ensuring that they remain informed and engaged. As things begin to ramp up, we will strategically bring these drivers and contractors back into the active pool as needed.

Great. Well, I'll turn it over; I appreciate the time as always.

Thank you, Bruce.

And we have Mr. Wetherbee's line open again; we did have some interference there. So, I'll turn it over to Mr. Wetherbee so he can continue with his question.

Great. Hey, thanks guys; can you hear me?

Yes, we can.

We can.

Great, thanks for letting me back in. My follow-up question was going to focus on the variable cost structure you've mentioned. Can you elaborate on how you're positioning against the downside on costs as you think about this decline in revenue?

Hey Chris, it's Jude. When we analyze Q2, given the ramp-up in automotive, we anticipate a delta in our topline revenue between $250 million and $300 million based on when automotive companies can restart and commit to the production schedules laid out to us in recent weeks. When you look at our costs, the variable nature of costs across most service lines is about 70% to 80% relative to our total revenues, significantly impacting our business's flexibility. This structure informs our ability to manage our cash flow effectively during this period of uncertainty.

Yes, okay. That’s incredibly helpful. The first quarter performance was quite strong, especially considering the dynamics you highlighted. But from a bigger-picture perspective, how do you envision your positioning relative to upside opportunities as we move past this?

Yes, I'd like to provide a response here. Our long-term view suggests we believe our business volumes pre-COVID-19 should be able to operate between 7% and 9% operating margins, and we stand firm in that belief. As we continue to address previous challenges in the market, our focus will be to scale by leveraging investments in additional real estate properties and pursuing our M&A strategy. Over time, we are confident that we can scale to reach our long-term operating margin target of 10%. The margin expansion will largely depend on our primary service lines, which comprise our intermodal, value-added, and dedicated segments, as they gradually grow in each's respective ranges.

Yes, I'll add to that. Our customer-facing pipeline remains strong, and we have noticed some opportunities due to changes made by other companies during this time. We are optimistic about our chances for further wins in logistics; we've been working diligently on other pipelined opportunities that we feel confident about executing. The key will be to observe the pricing points for these as we move forward. We're excited about the dealer engagement we have now and the new strategies we're developing for local and regional services. Our immediate focus will be on projections related to local food, beverage, and consumer goods.

Okay, that’s really helpful. I appreciate the time. Thanks, guys.

Thank you, Chris.

Your next question comes from Jeff Kauffman of Loop Capital Markets. Your line is open.

Thank you very much. Good morning, everyone.

Good morning, Jeff.

Good morning.

I just want to go back and ensure I interpreted some of your commentary correctly. Did you say on CapEx you've spent about $33 million year-to-date, and I'm assuming this is gross, not net, and that the remainder of the year was going to be somewhere between $35 million and $45 million? So, it could total something in the $69 million to $75 million range?

Yes. Overall, it will likely end up being more in the $70 million to $80 million range. But yes, you're in the ballpark.

Got you. And regarding the decision to postpone the dividend, your guidance has suggested that your aim is around a 2% yield. Would I be correct to think that we won't focus on what was previously paid, and that the goal remains about a 2% yield, with the option to utilize up to 40% of net income?

Yes. We want to maintain a steady quarterly dividend, right? We’ve increased the dividends to $10.50 per share and plan to continue that once we exit the current situation. The drastic nature of what transpired in March prompted us to make some tough choices, especially considering the number of layoffs we've had. After discussions with the Board, we decided it was prudent to do so out of caution as we navigate uncertainties ahead.

So I guess my question is, by eliminating the dividend for an unknown period, you're potentially pushing away investors who favor yield. Why not reduce the dividend to align more closely with a 2% yield and show confidence in cash flows and stability?

Look, I think it’s a valid concern, Jeff. However, we need to ensure we're able to preserve our balance sheet's integrity and act as a responsible steward of cash flow. If we cannot pay our bills, this poses a greater threat than losing yield-driven investors. We will assess reinstatement in the back half of the year once we have clearer visibility.

Okay, I understand. Thank you. Regarding the mark-to-market adjustment for the quarter, considering the market's decline, are we likely to see an upward adjustment based on the market rebounds, as of now? Just want to clarify on that.

Absolutely, Jeff. Historically, our portfolio has not created this much drama. We typically hold assets heavily weighted towards banks and oil firms that pay dividends. Given recent circumstances, we've observed significant impacts on portfolios from interest rates dropping and the oil market issues—but we've already seen some rebounds in Q2. Our expectation is that we will see some gains starting to materialize back to the near $9.3 million level we held at the end of last year.

Okay. Regarding guidance on interest expenses, I believe you mentioned $14 million to $16 million for the full year; is that correct?

Yes, that’s correct. That’s for the full year.

Okay, understood. Given the unusual environment, many companies are conserving cash. You're known for being in acquisition mode, and there seem to be plentiful opportunities among distressed assets. Are you essentially pausing your strategic decisions due to the dividend and cash outflow indications?

No, not at all. Our focus remains the same: we’re looking at significant acquisition opportunities as potential strategic maneuvers. It may take some time to execute these changes due to the inability to meet face-to-face. However, we continue our oversight of the M&A landscape and will revert once conditions improve and we can open discussions more sustainably.

Alright. Well, I appreciate the answers. It’s terrific results given the difficult environment, and good luck to you.

Thank you.

Thank you.

At this time, there are no further questions in queue. I will turn the call back to the presenters for any closing remarks.

Yes, thank you. I apologize for any of the technical interference we've experienced. That offers a good summary of what we're dealing with in the second quarter. There remains considerable uncertainty, but I hope we provided you with answers and insights to the best of our abilities. We appreciate everyone dialing in, and we’ll connect with you soon.

And ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.