Universal Logistics Holdings, Inc. Q4 FY2021 Earnings Call

Hello. And welcome to Universal Logistics Holding Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-the answer session will follow the formal presentation. During the course of this call management may make forward-looking statements based on their view of the business as seen today. Statements that are forward-looking relate to Universal 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. 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 and thank you for joining Universal Logistics Holdings fourth quarter earnings call. Although the quarter saw headwinds on several fronts, I was extremely pleased with the resilience of all our Universal associates. Universal's talented base of employees throughout all levels of the organization were key to executing our business strategy through continued supply chain disruption. While our quarterly and yearly results do not fully reflect what our team is capable of, we continue to advance the corporation's footprint by adding new facilities, customers, and talents to the organization. We ended 2021 recording record revenue, operating income, and earnings per share, which leaves me extremely optimistic entering the new year. Now for the quarter, in yesterday's release, Universal reported fourth quarter earnings of $0.60 per share on total operating revenues of $67.4 million. As detailed in the release, fourth quarter earnings included $0.31 per share of litigation-related charges and operational losses incurred in a recent contract logistics launch in Detroit. Fourth quarter operating revenues reflect Universal's highest quarterly revenue ever. However, as previously mentioned, we fell short of our earnings expectations. Now for some color on our service lines. In our Contract Logistics segment, we continue to experience headwinds, highlighted by production downtime due to chip and part shortages at several of our key locations. We have been successful in obtaining contractual price increases with many of our business partners to help offset the continued inflation. While demand remains high for Autos and Class 8 trucks, parts and chip supply will remain on the radar moving through the first quarter of 2022. Our auto and truck customers continue to navigate supply chain problems that have challenged their production schedules. Production and operation fluency remain a challenge servicing our new automotive customer in Detroit. Once again, our Contract Logistics group saw another $5 million of losses associated with the operation for the quarter and totaling nearly $20 million for the year. As with most in the transportation and logistics space, we continue to invest in onboarding new talent in an extremely tight labor market. Although labor has been a challenge in this space, we successfully launched over 250 people in a large logistics center supporting a heavy equipment provider in the Midwest. In late December, we were awarded a large piece of dedicated business from an existing automotive partner. Our dedicated team is prepping the launch of over 150 drivers in the latter part of the first quarter to support this operation. We expect a rapid launch with a full run rate revenue of over $30 million a year. In addition, our Contract Logistics group will begin launching a previously mentioned logistics center supporting a large aerospace customer at the beginning of the second quarter. Demand and opportunity remain strong for our contract logistics services. Our pipeline of opportunity remains robust with several mid-sized opportunities reaching the latter stages of the procurement process. Our Intermodal Drayage Group experienced many of the same headwinds in the fourth quarter as throughout 2021; congestion and equipment availability remain at the top of the list. While our driver and contractor numbers remain flat, our Intermodal segments face recruiting competition as a result of a hot truckload market and contractors getting their own authority. Accessorial charges remained elevated in the quarter as demurrage, storage or diem, and chassis charges totaled $35.7 million. Accessorial billings are expected to remain high because of the congestion experienced in North America. We have worked closely with our customers to increase rates to better position our margin profile. The Intermodal group did realize a 33.8% year-over-year revenue increase and a 17.1% improvement sequentially. Our year-over-year load count was down 14.2% because of increased length of haul, congestion, and a stagnant driver count. We worked extremely closely with our customers over the quarter to rationalize the congestion, labor shortage, and inflation. Through a combination of price increases, accessorial billings, and increased length of haul, we realized a 31.9% increase in our revenue per load in the fourth quarter. In our Trucking segment, our agent base capitalized on tight capacity with strong pricing. Revenue was up over 25%, which was the result of moving more loads at a 19.3% increase in revenue per load. We exited the year with a strong quarter in our Wind business and expect the momentum to continue into the strong first half of 2022. The truckload market remains very favorable for the near future with plenty of freight spurred by strong demand and pricing. Our quest for continued growth will be measured by our ability to recruit contractors and new agents into our network. 2021 represented one of our best years in agent growth with 21 new agents onboarded and I am equally excited about the pipeline of new agents that the Group continues to compile. Our company-managed brokerage operation continues to perform well in the quarter. Operating revenue per load increased by 10.1% to $1,976 per load. Although the number of loads hauled was down 19.4%, we were pleased with our pricing discipline and capacity utilization in a very tight broker market. Although this capped our top-line revenue, our discipline allowed the Group to obtain a 4% operating margin. As we move through the first quarter of 2022, we expect brokerage capacity to remain tight, with mid-record high rates as small carriers and single brokers assess the number of moves they need to complete in a week. We expect a strong spot market to extend opportunities to capitalize on. As mentioned before, we will continue to rationalize margins in front of high revenue growth. Finally, our greatest resource will continue to be the people of Universal Logistics Holdings. We were able to onboard nearly 2,000 talented associates in 2021, which helped launch, service, and grow new and existing business opportunities. Outside of some launch and labor headwinds, our 2021 fundamentals were strong. I truly believe we are entering 2022 with a strong cadence to return value to our shareholders and our associates. I would now like to turn the call over to 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 $467.4 million in the fourth quarter of 2021. This compares to net income of $16.2 million or $0.60 per share on total operating revenues of $386 million in the fourth quarter of 2020. Included in the fourth quarter of 2021’s operating results were pre-tax charges of $6 million for auto liability claims expected to settle over policy limits, as well as $5 million in operating losses incurred to a recently launched contract logistics program in Detroit. For the quarter, these items adversely impacted our operating ratio by 230 basis points and were a drag on our earnings of approximately $0.31 per share. Consolidated income from operations was $23.8 million for the quarter compared to $23.5 million one year earlier. EBITDA decreased by $4.5 million to $39.7 million, which compares to $44.2 million during the same period last year. Our operating margin and EBITDA margin for the fourth quarter of 2021 are 5.1% and 8.5% of total operating revenues. These metrics compared to 6.1% and 11.4% respectively in the fourth quarter of 2020. Looking at our segment performance for the fourth quarter of 2021, in our Contract Logistics segment, which includes our value-added and dedicated transportation businesses, income from operations decreased $5.9 million to $6.1 million on $160.7 million of total operating revenues. This compares to operating income of $12 million on $133.2 million of total operating revenue in the fourth quarter of 2020. Operating margins for the quarter were 3.8% versus 9% last year. As mentioned in Tim's comments and in our release, our Contract Logistics business incurred a $5 million loss in the third quarter, and one of our launches supporting an automotive OEM in Detroit. For the full year, launch losses and downtime settlements with customers impacted Contract Logistics operating income by $23.7 million. This affected segment operating margins by 380 basis points for 2021. In our Intermodal segment, operating revenues increased $35.8 million to $141.7 million compared to $105.9 million in the same period last year, and income from operations increased $6 million to $13.8 million. This compares to operating income of $7.8 million in the fourth quarter of 2020. In our Trucking segment, which includes both our agent-based and company-managed truckload operations, operating revenues for the quarter increased 25.5% to $101.5 million compared to $80.9 million in the same quarter last year, while income from operations decreased $2.4 million to $1.1 million. This compares to operating income of $3.5 million in the fourth quarter of 2020. The Trucking segment recorded a $6 million charge for auto liability claims expected to settle over policy limits. These charges adversely impacted the trucking segment's operating margin by 590 basis points for the quarter. In our company-managed brokerage segment, operating revenues for the quarter declined $3.8 million to $62 million compared to $65.8 million in the same quarter last year, while income from operations increased $2.3 million to $2.5 million. This compares to operating income of $200,000 in the fourth quarter of 2020. Operating margins for the quarter were 4% versus 0.03% last year. On our balance sheet, we held cash and cash equivalents totaling $13.9 million and $8 million of marketable securities. Outstanding debt net of $1.1 million of debt issuance costs totaled $427.3 million at the end of the period, excluding lease liabilities. Our net interest-bearing debt to reported EBITDA was 2.4 times. Due to the availability of transportation equipment in 2021, our capital expenditures have been somewhat lower than our customary range. Capital expenditures for the quarter totaled $12.6 million and $38.8 million for the full year. As a result, we expect our capital expenditures in 2022 to be higher than the current year. For 2022, we are expecting capital expenditures to be in the $80 million to $90 million range and interest expense to come in between $15 million and $18 million. Based on the current operating environment for the first quarter of 2022, we are expecting top-line revenues between $430 million and $450 million and operating margins in the 7.5% to 8.5% range. For the full year of 2022, we are expecting total operating revenues between $1.8 billion and $1.9 billion and operating margins in the 8% to 9% range. And finally, our Board of Directors declared Universal's $10.5 per share quarterly dividends. This quarter's dividend is payable to shareholders of record at the close of business on March 7, 2022 and is expected to be paid on April 4, 2022.

And thank you. And our first question comes from Chris Wetherbee from Citigroup. Your line is now open. Chris, your line is now open, if your phone is on mute, could you please unmute it? And our next question is going to come from Bruce Chan from Stifel. Your line is now open.

Hey. Good morning, everybody, and thanks for taking the questions here. Maybe just want to start with what's going on around the border, obviously, some shutdowns on the Ambassador Bridge and we've heard about some OEMs closing plants as a result. So I just want to see whether that's having a material impact on your operations. And what do you sort of expect there as far as the first quarter is concerned?

Yeah, Bruce. This is Tim. Thanks for the question. Yeah, we have seen a little bit of disturbance as a result of the border blockade. There has been no complete shutdown, but there has been some short-shifting at a couple of facilities that we service. We hope that there is some resolution to that in the near future. The automakers have communicated that they're going to continue to push production and have had to come up with various means of getting parts across the border, but I view this as just a brief blip on the radar and we'll continue to move forward with what I expect to be a very good first quarter.

Okay. Great. I appreciate that color. And just maybe sticking with contract logistics here. I was hoping to get a little more color on the $5 million charge. Is that a new facility or is that the same kind of facility or contract that was kind of causing the headache for the majority of 2021?

Yeah. That is the same facility that was causing some of the headaches for 2021. From an operating standpoint, we have seen some progress on the facility itself, but there were some other associated charges included in that $5 million in the fourth quarter. We have been working with the customer to rationalize processes, operations, and wage inflation. Talks are ongoing, as recent as just a couple of days ago. Our hope as we push through this is to get some pricing in place that allows us to move to the next step. We aim to return value and not just spin our wheels.

Okay. Got it. And I imagine visibility is tough on the whole chip shortage issue, but is there any feedback that you've gotten from your customers regarding their expectations for a return to normalcy? Once that happens, can you remind us what variable costs come back or will we just see essentially pure leverage on top here when volumes come back?

Yeah. I would say there is some leverage on top in the first quarter when we see some of this come back. The problem is, we receive bits and pieces of what's going on with the chip shortage. I don't know if sometimes they have the full picture of what’s holding up some of their chips for production. What I learned is chips go into a lot of different pieces and parts. Some of the associated components that we see inbound for the plant could have a chip holding it up or could be a raw material issue. But there definitely have been disruptions on that level. The lucky aspect for us is that the plants we service produce products of high demand, so they are funneling parts and chips into those plants. Consequently, we see a relatively regular overall production schedule. However, we have had some disturbances, especially in Detroit, and they are still struggling to reach their desired production level. Some of that is likely due to internal factors, but the other piece is simply the flow of parts. I expect to continue to see the chip shortage affect us in the first quarter. That said, as the year progresses, I hope to see better fluency in production schedules.

Got it. And then maybe just two more quick ones here. It's good to see the new customers coming in on the contract logistics side, diversifying the portfolio a little bit. As you think about launching those facilities, can you give us some insight on what the expected margin headwind is as you ramp up and when you predict that to normalize?

Yeah. On the first point that I mentioned, which is in our dedicated Contract Logistics Group, I believe we rationalized the agreement along with market conditions in regard to wage inflation. I think we'll enter that in a good position. I expect that for this particular service transition, we will hit the ground running hard in the latter part of Q1. By the time we get through the middle of Q2, I believe we will be up and running smoothly, as we have for the last 10 years. That's my hope, and that has been the communication and collaboration with our customer. Regarding the aerospace customer launch in the contract logistics space, we anticipate a slightly softer launch, but we are currently comfortable with what we've priced in from a labor standpoint. We're working towards that launch at the beginning of Q2. I expect it will take a bit longer to reach full run rate. However, I do not foresee hiccups similar to what we experienced in Detroit.

Got it. That makes sense. And then just for the last one here, on the brokerage and maybe also the Trucking segments, good to see you're making some progress there. Can you broadly speak about what you're observing in terms of customer activity, shipper activity, or are we getting back to a normal bid cycle and starting to see people lock in contracts for normal durations?

Well, in our largest customer sector, yes. We just completed a couple rounds of contract negotiations and pricing. They are locking rates in for the year with our larger customers, and yes, there is a lot of wage inflation and pricing inflation that we have been working through. I would say there are still customers out there that are going for short-term bids or pricing things out quarterly, which will continue to persist in the marketplace into the near future. Thanks, Bruce.

Thank you.

And thank you. And our next question comes from Chris Wetherbee from Citigroup. Chris, your line is now open.

Hey, thanks. Good morning, guys. This is Chris on for Chris. Thanks for your patience with the technical difficulties earlier. Maybe we can start with Intermodal. So I’m curious what you guys are expecting from the CapEx side of that and taking delivery. I know it's hard to judge with the congestion right now. And then perhaps you could also discuss the box side of that? Additionally, what do you think a normalized revenue per load in intermodal could look like throughout the year?

Well, some of your first question broke up; I did hear the last part about normalized load revenue. I think revenue per load will hold strong as it stands now. We haven't seen any deterioration in that. In fact, our pricing initiatives are just the opposite. We're still pushing for premium pricing because of the congestion levels we're experiencing across the country. The fluency challenges really hurt driver and contractor productivity, not to mention the options we have available in various transportation spaces. I anticipate that we'll maintain similar revenue per load figures this year, if not slightly better. Once it comes down to earth as you put it, we may see some reductions, but I think some of this pricing, aside from some spot accessorial charges, is here to stay for at least the near-term.

On the CapEx side, for 2022, we don’t buy the 53-foot boxes, since our focus is primarily in the international box market. We are currently planning to purchase somewhere between 250 to 500 chassis, depending on availability, which would represent a cost of around $8 million to $15 million. If we can get the higher number, that's what it would be, but based on what we're currently hearing, it is most likely going to be on the lower end of that, approximately half of that, or about 250, which would again amount to around $8 million.

Yeah, that makes sense. Thank you. Maybe we can turn to the dedicated side, you guys said you're going to bring on 150 new drivers. Can you talk about what that process looks like so far and just what the hiring environment looks like for you right now?

Yes, definitely. You would think as we entered this, we were very upfront with ourselves about what we would be able to achieve from a hiring perspective. Remember, bringing on 150 plus drivers in a short period is a challenging task, but I am very optimistic with where we are in that process right now. We priced this service appropriately to be successful and have even set some of the wage rates in the market to attract drivers. As of now, I am very optimistic about our cadence of bringing on new talent. I don't see anything currently that is disturbing our launch cadence. The launch will begin in March, and we have enough drivers to get through the initial phases of the launch. I'm confident that by the time we reach the end of that process, which spans three to four weeks, we will have all drivers and equipment ready to go. We have significant experience with similar services at other major facilities, so our expertise and launch teams are well-prepared. I feel good about it; labor market dynamics are also favorable for us.

Yeah. Thank you.

Thank you. And I'm showing no further questions. I would now like to turn the call back to Tim Phillips for closing remarks.

Well, thanks for calling in. I can assure you Universal is going to focus on our people, continue pricing, uniformity of processes, technology, and last but not least, safety as we go through 2022. I appreciate you calling in and look forward to speaking to you very soon. Thank you.

This concludes today's conference call. Thank you for participating and you may now disconnect. Speakers, please standby.