Universal Logistics Holdings, Inc. Q1 FY2022 Earnings Call

Thank you, Erika. Good morning and thank you for joining Universal Logistics Holdings First Quarter Earnings Call. Before we jump into the details, I want to take a moment to recognize Universal's over 12,000 associates who have worked so hard to get us to where we are today. We have believed for quite some time the earnings power of Universal was much greater than reflected in past results, and it has been a Herculean effort of these incredible team members who have gotten us to this point. While Universal continues to experience headwinds associated with the supply chain disruptions, automotive production, and talent acquisition, I remain impressed with our employees' continued ability to adapt while providing an elevated level of service to our valued customer base. You are beginning to see the next level of execution that will expand our service levels and provide value to our customers and shareholders alike. Make no mistake, adding new team members to address the demands of new and existing project remains a challenge. We will focus on evaluating the expectations of our employee base and continue to shape the company to be an employer of choice in logistics and transportation. As we will outline in our remarks, performance in the first quarter of 2022 was just a glimpse of Universal hitting its stride with newly shaped contractual rates and a high level of execution. Now, for the quarter. In yesterday's release, Universal reported first quarter earnings of $1.56 per share on total operating revenues of $523.9 million. Our reported first quarter performance reflects not only record results for the first quarter, they represent Universal's highest quarterly revenues, operating margin, and earnings per share in our company's history. While the first quarter was a financial win for our company, it has also brought into light the hard work and success of onboarding and positioning talent to expand oversight and increase efficiencies. I firmly believe yesterday's release reflects Universal's capabilities when we operate in a somewhat stable productive environment and we are paid a fair rate to deliver quality services. Now, for some color on each of our service lines. In the Contract Logistics segment, we continue to chase consistent production cadence at the auto plants that we serve. While there has been some minor disruption in early Q2, mainly driven by the available supply of parts, our continued training and talent acquisition leaves us well positioned to take advantage of any production uptick. I believe our recent rate increases will allow us to continue to onboard talented employees and provide a newer fleet of material handling and transportation equipment. All indications show continued demand for autos, light utilities, and Class 8 trucks. Universal is well positioned to capitalize on this demand, supporting customer plans that produce the most sought-after trucks and SUVs in North America. Continued cost rationalization and our variable cost model have allowed us to hit many of our financial targets with a relatively low rate and some inconsistencies in production. The past few quarters, we have also been discussing the production issues at a large automotive plant in Detroit, Michigan and the losses associated with it. Although it's still not hitting our performance targets, we have recently seen progress in working through some of the production shortfalls and wage inflation issues with our customer and expect to receive a price increase sometime in the second quarter. While we will continue to rationalize our relationships, I believe the teamwork and customer recognition of increased wages and operating costs will align favorably for our Contract Logistics group moving forward. While locating and onboarding talent continues to be a challenge in this space, we continue to work hard at training and shaping our workforce to take advantage of current and future opportunities. We were delighted to have a successful launch of the previously mentioned shuttle operation with 150-plus drivers for an automotive customer in March and expect the opportunity to reach full run rate of $2.5 million a month in April. Demand for our customer-centric Contract Logistics product remains strong. Our pipeline remains full of opportunity and we will continue to rationalize each opportunity to ensure it fits not only for the customer, but it is also a sound financial decision for Universal Logistics Holdings. While our Intermodal Drayage Group continues to navigate a less than fluent port and rail network. The fruits of many months of collaborative customer discussions are visible in our first quarter rate levels. We are confident that these new rate levels will help us recruit and retain the very sought-after drivers and owner operators. We continue to see heightened accessorial charges such as detention, storage, and per diem, which totaled $36.2 million in the first quarter of 2022. While there is some concern about the lockdowns in China and how it affects the flow of goods over the next several months, the information we have been hearing from our customers has been reassuring for a solid second half of 2022. Even while published spot rates have softened, our contract customers have remained committed to holding capacity by maintaining not only our rates but also various congestion fees. In addition to solid rate increases, the internal evaluations of operational efficiencies and the rationalization of length-of-haul led to a 52% year-over-year revenue increase and 11.6% improvement sequentially. Our overall load count remained somewhat constrained because of turn times, which were the lowest in our history. We also experienced a reduced number of contractors and we did stretch our legs by increasing length of haul and markets afflicted by low turn times to keep our trucks loaded. We were extremely pleased with our 51.2% increase in revenue per load in the first quarter, and I'm cautiously optimistic about recent trends in our contractor and driver recruiting pipeline. As this truckload spot market normalizes, I believe the cadence of owner-operators migrating back towards our best-in-class intermodal business platform will accelerate. In our trucking segment, you're going to see some noise and load counts over the next few quarters. We took a hard look at some of our underperforming trucking operations and redeployed these assets into our better performing ones. In our agent base business, we continue to see the entrepreneurial spirit of our agents shine. The group has continued to capitalize on strong pricing of premium flatbed specialized in advance rate. Overall, revenue remained elevated and was up 2.7%, which was a 41.4% increase in revenue per load. However, as I mentioned, load counts were down due to moving assets, drivers, and contractors into our dedicated and intermodal operations to bolster capacity and capitalize on a better margin profile. Although the spot market has softened, our contractual van, flatbed, and wind business remained steady to strong. We believe our profile within the truckload market will remain steady over the near term and favorable for the second half of 2022. As mentioned, we see our opportunities in the flatbed and wind sector remaining stable. With 63% of our capacity pulling a flatbed, we like our positioning in the market. Although owner-operator capacity remains tight, we think there will be opportunity to capture owners who may have transitioned to their own authority and may be getting nervous about the softening spot market. We are equally optimistic about transitioning opportunities for small trucking companies into our turnkey agent model. We were very pleased with our new agent partnerships in the first quarter, and I'm extremely excited about the agent transition opportunities that are currently in the pipeline and the prospecting opportunities developing in the second quarter. Our company-managed brokerage operations saw margin opportunities accelerate in the latter part of Q1. We took a careful look at our rate profiles during contract renewal and collaborated with our customers to establish pricing that will cover the freight on a consistent basis. Operating revenue per load increased 25.3%, reaching $2,176 per load. Although the number of loads hauled was down 25.2%, we remain pleased with our pricing discipline and capacity utilization in a broker market that softened in the latter part of the quarter, which led to our best quarter in the history of offerings, maximizing our operating income. We remain focused on continuing to diversify our portfolio of blue-chip customers while keeping an eye on fiscal responsibility. While we faced some headwinds concerning labor, equipment, supply chain, and auto production cadence, we remain poised to evaluate market swings, look for solutions, and expand our footprint. We are closely watching indicators of potential market slowdown, but remain optimistic about the continued path of heightened profitability driven by strong customer relationships and operational execution. Finally, the whole Universal team has worked very hard onboarding and training many new associates that will help us expand our business, both in new and existing locations. We will continue to focus on elevating the expectations of our associates and customers to provide the next level of service. While Q1 results yielded the best performance in the history of our company, I'm extremely optimistic that we will continue to find execution opportunities that align with our goals. I value and crave additional momentum. I would now like to turn the call over to Jude.

Thanks, Tim. Good morning, everyone. Universal Logistics Holdings reported consolidated net income of $42 million or $1.56 per share on total operating revenues of $523.9 million. This compared to net income of $21.7 million or $0.80 per share on total operating revenues of $415.2 million in the first quarter of 2021. Consolidated income from operations was $57.8 million for the quarter compared to $31.2 million one year earlier. EBITDA increased by $23.8 million to $75 million, which compares to $51.2 million during the same period last year. Our operating margin and EBITDA margin for Q1 2022 are 11% and 14% of total operating revenues. This compares to 7.5% and 12.3% respectively in Q1 2021. Looking at our segment performance for the first quarter of 2022 in our Contract Logistics segment, which includes our value-added and dedicated transportation businesses, income from operations increased by $6.7 million to $23.5 million on $201.6 million of total operating revenues. This compares to operating income of $16.8 million on $154.9 million of total operating revenue in Q1 2021. Operating margins for the quarter were 11.6% versus 10.9% last year. As Tim mentioned in his comments, we're still experiencing some headwinds at our Detroit-based contract logistics business that we launched last year, but a relatively stable auto production environment was a favorable contributor to our contract logistics results. In our Intermodal segment, operating revenues increased by $53.9 million to $157.6 million compared to $103.7 million in the same period last year. And income from operations increased by $14.5 million to $23 million, compared to operating income of $8.5 million in Q1 2021. Operating margins for the quarter were 14.6% versus 8.2% last year. A large contributor to the segment's strong performance was our ability to charge market rates on chassis usage, as well as accessorial services customary in this business. In our trucking segment, operating revenues for the quarter increased 2.7% to $97.5 million compared to $94.9 million in the same quarter last year, while income from operations increased by $2.2 million to $7.4 million, compared to operating income of $5.2 million in Q1 2021. Operating margins for the quarter were 7.6% versus 5.5% last year. In our company-managed brokerage segment, operating revenues for the quarter increased by $4.1 million to $65.2 million compared to $61.1 million in the same quarter last year, while income from operations increased by $3.4 million to $3.9 million. This compares to operating income of $400,000 in Q1 2021. Operating margins for the quarter were 5.9% versus 0.7% last year. Favorable contract rates with our customers propelled our company-managed brokerage to report their best operating results ever. On our balance sheet, we hold cash and cash equivalents totaling $14.9 million and $9 million of marketable securities. Outstanding interest-bearing debt, net of $1 million of debt issuance costs, totaled $401.7 million at the end of the period. Excluding lease liabilities related to ASC 842, our net interest-bearing debt to reported trailing 12-month EBITDA was 1.99 times. Capital expenditures in the quarter totaled $6 million. For the full year of 2022, we are expecting capital expenditures to be in the $90 million to $110 million range with interest expense between $15 million and $18 million based on the current operating environment. For Q2 2022, we are expecting top line revenues between $525 million and $550 million and operating margins in the 8% to 10% range. For the full year of 2022, we are updating our guidance. We now expect total operating revenues to come in between $1.9 billion and $2.1 billion with operating margins in the 8% to 10% range as well. As mentioned in the release, through the end of Q1, Universal acquired 257,261 shares of its common stock out of 1 million shares authorized. We acquired the shares at an average price of $20.42 per share. Finally, on Wednesday, our Board of Directors declared Universal's $0.10 per share regular quarterly dividend. This quarter's dividend is payable to shareholders of record at the close of business on June 6, 2022 and is expected to be paid on July 5, 2022. With that, Erika, we're ready to take some questions.

Hey, thanks. Good morning, guys. This is Eli Winski for Chris. That we could just start broad, I'm just curious about what your outlook is for overall demand in 2023? You have many moving parts here in your business segments, but just curious as to your take in the outlook there.

Well, I think I can give you a high-level view. This is no different than what you hear on the news, it is very, very hard to predict that far out in the future. The one thing we're comfortable with, because of the heavy lifting we've done over the last six months, is that we really locked down a lot of our major contracts that will run over the next two to three years, allowing us to have some pricing security with some of the major operations that we are involved in. I can't give you as clear of a picture on some of the Intermodal landscape because there is a lot of uncertainty. Our customers on that side of it continue to give us a good read into the near future. None of them have really put anything on the table to talk about 2023 yet, but there are still positive forecasts in the second half of 2022. Some of the guidance we're giving we feel pretty comfortable with, but I would say it's quite hard to shape 2023 yet; the only thing I can tell you is we've had a favorable six months of some contract negotiation.

Sure. That makes sense. And then maybe getting a little bit more specific here. You mentioned that loads on the intermodal side were down because of some business shifts that you guys did during the quarter. What are you seeing on supply chain for intermodal containers? What should we expect the cadence to be for the rest of the year here?

Well, we're a little cautious, as everybody is, understanding the China COVID lockdowns and how that's going to affect the next couple months. We haven't seen any drastic pullback in freight to this point with the customer base that we're doing business with. We still see congestion on the East Coast a little bit more than there is on the West Coast. Our biggest obstacle right now at some of the locations is just the equipment, both our trucks being able to turn a certain number of loads per day, which I've mentioned is down to the lowest level. And then customers holding on to the equipment at warehouses means we don't have a chassis to take back in and get that next import load. I think that you'll see a natural flow when China lifts the COVID lockdown, where you'll see a rush of freight that will hit our way. We're positioned well. I think we're positioned as well as we can be with our own chassis availability. The only trump card is what's going to be available in the marketplace from an outside provider standpoint, and do our customers and warehouses have labor in place to unload it in an expeditious fashion and push the freight through. So I'm cautious in the next two months, but I expect the second half of the year on the Intermodal drayage side to have some consistent volumes with the customer base that we're dealing with.

Sure. Got it. One more for me, and that's just on purchased transportation expense. So normal seasonality looks like it goes up more than 1Q, but how should we be thinking about the purchased transportation here throughout into Q2 and then throughout the rest of the year?

Well, I think from a dollar amount perspective, maybe Jude can probably speak a little more on that, but I think, let's look at this from what we've done over the last year. We've taken a look at all of our driver bases around the country, we've performed the market analysis, we've raised rates accordingly to make sure that we can attract the drivers that we're looking for. Equally so on the contractor side, we've elevated point-to-point rates or, if it's a contract around a percentage rate agreement, our customers have experienced the new rates that we've been able to charge. So I feel pretty comfortable that from a purchased transportation standpoint, you what you're seeing now is what you're going to get going forward into Q2 and beyond.

Got it. Thanks a lot, guys. Appreciate it.

Hey. Good morning, and appreciate the question as always. I guess, first Tim, you spoke a lot about the benefits that you're seeing on the top line in terms of surcharges and then some of these assessorials. Wonder if you can maybe speak to the resilience of those as we move later into the year and move into next year. Maybe when you think about the various segments, where are you in terms of how much of the book is priced at current market levels and how long do you think they can stay that way?

Well, let's unpack Intermodal because I think you had actually posed the question a couple of quarters ago about where we were from an accessorial charge to our customers. We rationalized that over the latter part of the year, and we may have been a little late to the dance on a few of them, but we've really focused on it. We see the customer response on the Intermodal side; they haven't pulled back on any rate, and they continue to pay accessorials such as congestion fees. Even more so on some of the, I wouldn't say host fee situations, but when the equipment gets pent up at warehouse, we've even seen an appetite for escalating accessorial charges to compensate for that asset being held. I think customers are cautious knowing we have a bit of a wall now, and we know that we have a potential glut as China opens up and pushes freight our way. I am cautiously optimistic that these intermodal accessorials will hold going forward. On the truckload and brokerage side, our rate levels with our contractual customers have held well; the accessorials we have are traditional accessorials that have moved with the market. I've heard no noise and I don't foresee in the foreseeable future those accessorials coming back down. I think we're reasonably priced, and I think the word from customers so far is they understand there could be constraints to capacity and equipment as this year progresses.

Okay. That's great color and point taken on the China COVID lockdowns. So maybe just to follow-up on that point and the potential for a glut as you called it, when you think about the guidance for the rest of the year, does that factor in that China COVID freight surge potential or maybe the potential for more slowdowns related to the ILWU negotiations?

Yeah. I think a little bit of it. I mean, first of all, we just raised our guidance by $200 million for the year. I think we're taking into account that there is still a robust rate environment out there for our service lines, and there's still some opportunity for price if this freight surge actually occurs. That's reflected in the updated guidance. We're not really sure yet if this is going to be a permanent thing where we can execute above our target margins, which were in that 8% to 10% range. But obviously, there are some quarters that we're going to be able to exceed that based on the market conditions, and of course, based on if we can continue to attract and retain drivers to drive some additional volume into the business. We took that into consideration, but we provide a peek into the next quarter, and every quarter on these calls, and for our Q2 calls will definitely update that guidance again, if need be, to reflect the conditions at that time.

Okay. That's great. That's really helpful. And then maybe just to finish off, Tim, wondering if you can give us some broad color on how the Universal Logistics Holdings model works in a more normal cyclical downturn. Because I think when investors look at the past couple of years, we saw some pretty unique maybe once in a generation type events unfold, with facility lockdowns in logistics, for example. But I would think that that's pretty atypical when it comes to business cycle changes. So maybe if you can just give us a sense in terms of how the business fairs over a more normal type of freight pullback.

Yes. I think if you look at Universal Logistics Holdings as a whole and consider the different service lines, we know we have about 30% of our business that involves price sensitivity and possibilities of swings in the brokerage and truckload group. Although we haven't seen it now, we know that there is some exposure there. I'll go back to where we started. We still have 40% of our business that is through the contract logistics model, which is exactly what it says, contracted long-term rates with our customers. What we've done over the past two years is we have really leveraged our sales on the intermodal side to go after beneficial cargo owners, ensuring we’re going after high volume stable accounts that can weather market fluctuations or economic changes. That's one thing that I think has been advantageous for us. We also locked out some of the spot market on the intermodal side intentionally to take into account regular business cycles so we can perform consistently.

Okay, great. Thanks for the color. Appreciate the time.

Thank you, Erika. I appreciate everybody dialing in. I'm excited about where we've driven through, and equally excited about what we're driving into, and I look forward to another positive call for Q2. Thank you and take care.

This concludes today's conference call. Thank you all for joining. You may now disconnect.