Universal Logistics Holdings, Inc. Q1 FY2023 Earnings Call

Hello, and welcome to Universal Logistics Holdings’ First Quarter 2023 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. Tim Phillips, Chief Executive Officer; Mr. Jude Beres, Chief Financial Officer and Mr. Steven Fitzpatrick, Vice President of Finance and Investor Relations. Thank you. Mr. Phillips, you may begin.

Thank you, Kyle. Good morning, and welcome to Universal Logistics Holdings 2023 first quarter earnings call. I'd like to start off by recognizing the incredible efforts of Universal's over 10,000 associates who worked so hard to make our organization the best-in-class provider of customized transportation and logistics solutions. Although it was a challenging comparison to 2022, the first quarter of 2023 was Universal's next best first quarter financial performance on record. Anchored by the results of our contract logistics segment, I'm pleased with our overall performance despite the significant headwinds we faced in our transactional transportation services. The transportation and logistics community saw a first quarter ramp in inventory destocking, excess truck capacity, and low demand for consumer goods. While we felt significant price and volume pressure on our transportation services, our teams did an excellent job managing our controllable costs while delivering excellent customer service and capitalizing on continuous improvement initiatives across the organization. Each segment is focused on operational excellence, increasing the productivity of our assets, and rationalizing headcount. The start of 2023 confirmed that we have built a solid foundation for sustainable success in a variety of market conditions. The model has proven to be resilient, and we continue to look for additional opportunities to scale. The pipeline has continued to blossom in our contract logistics space. I feel our talent, technology, and customer-centric business approach make us a front runner in several of our large bid opportunities across many different verticals. Our transportation pipeline also remains full of opportunity, but the scale of business wins is influenced by the current market conditions and price reduction exercises by our customers. Market share will continue to be our drumbeat. As long as the margin profile is conducive to our overall business goals, we still remain optimistic on the autos and Class 8 truck space and have had very positive conversations on the order books for agriculture, heavy machinery, and aerospace. While the retail market and its overall inventory levels remain concerning, we continue to rationalize our pricing to remain competitive while earning a fair return in exchange for our services. Now for the quarter. In yesterday's release, Universal reported 2023 first quarter earnings of $0.95 per share on total operating revenue of $437.4 million. While we fell short of last year's record-setting performance, the first quarter of 2023 represents Universal's next best Q1 financial performance on record. Demand for our contract logistics segment held firm throughout the quarter, and our diversification strategy is paying dividends in a depressed transportation environment. Now for some color on each of the service lines. In our Contract Logistics segment, the number of active programs grew to 65, which was a 3.2% increase over active programs in Q1 of 2022. There continues to be strong demand for outsourced logistics services in a variety of spaces. We feel there's real opportunity to showcase our existing operations to potential customers, which offer a combination of experienced human assets, efficient processes, and our proprietary technology. Auto production sustained a relatively consistent work cadence during the quarter associated with a more normalized supply chain fluency. Although periodic six-day production was reserved for plants with high-demand vehicles, the SAAR was elevated over 2022 while tracking near 15 million units as demand for vehicles remains strong. We are very pleased with the performance of our auto sector platforms and expect continued consistency for the remainder of the year. 2023 Class A production picked up from where 2022 left off. Estimates are for another year that looks very similar to 2022, with North American production forecasted to be in excess of 300,000 units. While production is still elevated, we have heard of some supplier issues that may challenge these projections and levels of production over the next several quarters. We are extremely excited about 8 new programs that are launching or beginning to launch in Q2. The medium-sized programs in various verticals are expected to add $17 million in annual revenue at full run rate. Our launch teams continue to execute in a timely and effective manner, delivering seamless transitional business continuity to our customers. As mentioned, we have encountered a number of new outsourcing opportunities not only from our sales efforts but also from the effect of delivering logistics solutions in the marketplace. Our value-added service pipeline continues to grow, reaching the largest dollar value of potential projects ever, approaching $600 million. We approach each opportunity with a collaborative and highly engineered solution. We are eager for our current and potential customers to see a real working study of our execution and believe we remain in the hunt well into the later innings of the procurement process on most opportunities. The Dedicated Transportation group continues to experience opportunity and growth. Our high-velocity model allows us to move large amounts of freight with an incredible accuracy rate for customers who demand a high level of execution. Our success in these environments continues to be on display, which is a great lead into additional opportunities for existing customers and a great case study for new customers looking for the next level of execution and service. Revenue for the quarter was up 12.9%, driven by increased volumes and solid pricing with our strategic partners. We continue to secure and allocate new equipment for our dedicated fleet, both for replacement and growth. We are committed to keeping the average age of our truck fleet around three years, which helps elevate our uptime to deliver velocity service. Newer equipment also enhances the driver experience and safety profile, which has proven positive with our recruiting and retention efforts. We exited the quarter launching a new large automotive account in the Southeast, which requires 80 drivers, over two shifts, and five to six days a week. We expect the run rate on this account to be over $13 million annually. As mentioned before, this launch accompanies other smaller launches and new wins with a combined run rate of over $24 million in revenue annually. We continue to see quality dedicated opportunities in the pipeline and feel extremely strong about the talented bench of employees with industry experience to support our long-term growth objectives to bring velocity to multiple service sectors. Our intermodal drayage group continues to experience both volume and pricing headwinds. Import volumes at North American ports were down nearly 30%, influenced by continued inventory destocking and low consumer demand for products. The average revenue per load excluding fuel was down 18.7% to $567 per load as customers continue to evaluate their pricing models and capitalize on very loose capacity. The lack of import volumes had a direct effect on the number of loads hauled in the quarter, which fell 20.7% and contributed to a 29.6% decline in top-line revenue over the same period of 2022. Receiving accessorial charges also remained a theme and were proportional to the supply chain disruption in 2022. In particular, a reduction in port and rail congestion resulted in a more fluid supply chain, which reduced per diem, storage, and demurrage billings over 25% or $10.2 million. Our Southern California operations continue to have a strong influence on intermodal numbers, driven by import volumes declining over 30% over Q1 2022. Reduced volumes, coupled with callbacks and pricing eroded top-line revenue, which was down 56% over Q1 2022 due to our heavy retail-focused customer base. We have had great success recruiting company drivers since moving to an employee driver model in California, but lower volumes have negatively impacted our ability to optimize and ultimately scale our company truck operation. But I'm very happy with how quickly we were able to find assets and recruit drivers, which puts us in a compliant position for our customers when volumes normalize in the market. We've experienced several nice customer wins in recent months, and our pipeline remains robust with opportunity. Our sales team has been extremely aggressive in mining new customer opportunities, and we continue to demonstrate our ability to create value for our customers by supplying company-owned, long-term lease chassis, which now number over 3,500 units and storage solutions around the vast national terminal network. Volume headwinds were also the storyline in the Trucking segment. Overall, load count was down 11.8%, coupled with an 8.8% decrease in revenue per load. Our open deck load count was down 10%, but steel and metal volumes were relatively flat year-over-year and pricing is still in positive territory. On the van side, load count was down 15%, with retail and consumer goods up over 30%. Top-line revenue of $79.7 million was down 18.2% for the quarter, while operating income of $3.8 million was a decrease of $3.6 million over the prior year period. Our agent-based truckload model is well-positioned to ride out a freight downturn with its variable cost structure while continuing to produce consistent margins. Interest in our agent model continues to grow. Our pipeline shows the results of our business development efforts. In fact, we added 12 new agent representatives in Q1 of 2023. I believe our agent model, anchored by a team of experienced employees, coupled with a more competitive environment, makes UACL a quality decision to assist in carrier conversions and agents demanding additional support. Company-managed brokerage saw top-line revenue drop 47.9% for the quarter to $34 million as inflation and consumer spending created competitive pricing and fewer tender opportunities. We continued our disciplined approach regarding operating margin, which put additional strain on spot market opportunities as our contractual freight remains over 80% of our top-line revenue. As mentioned in our release, earnings in this segment were negatively impacted by a $1.2 million pre-tax settlement for auto liability claims in excess of policy limits, which equated to a 350-basis point reduction. Operating revenue per load decreased 22.1% to $1,696 per load, and load count was down 18.9%. Gross margins were better than Q1 2022 margins as we experienced a continued reduction in purchase transportation while remaining disciplined on rates. There's been no shortage of bid opportunities, but pricing has been hyper-competitive. We will remain disciplined on pricing and look for returns that fall within our expectations given the current environment. We continue to remain cautious on the economic environment entering Q2 of 2023; inflation, customer destocking, and the general mood of the consumer continues to evolve. We believe transportation will remain under pressure with an abundance of available capacity and leading indicators like imports showing no near-term signs of improvement. We look for optimization opportunities to reduce costs in our intermodal and brokerage segments while adding density to our variable cost structure agent truckload segment. We remain extremely optimistic about the continued growth of our high-margin contract logistics segment and are encouraged by the optimistic conversations we are having with autos, Class 8, agriculture, heavy equipment, and aerospace customers. Finally, as I have mentioned in our earnings release, I'm impressed with the performance of the Universal team in this challenging environment. While it appears we continue to face inventory destocking, inflation, and rising interest rates, I'm convinced that our diversification of services continues to provide opportunities and stability in the current environment. We continue to focus on quality service for our customers and continued value for our shareholders. With that, I would now like to turn the call over to Jude for a detailed view of our financial performance.

Great. Thanks, Tim. Good morning, everybody. Yesterday, Universal Logistics Holdings reported consolidated net income of $24.9 million or $0.95 per share on total operating revenues of $437.4 million in the first quarter of 2023. This compares to net income of $42 million or $1.56 per share on total operating revenues of $523.9 million during the same period last year. Consolidated income from operations was $38.2 million for the quarter compared to $57.8 million one year earlier. EBITDA decreased $18.3 million to $56.7 million, which compares to $75 million during the same period last year. Our operating margin and EBITDA margin for the first quarter of 2023 are 8.7% and 13% of total operating revenues. These metrics compare to 11% and 14.3%, respectively, in the first quarter of 2022. Additionally, during the first quarter, we recorded a settlement charge in our company-managed brokerage segment of $1.2 million. This charge impacted our EPS by $0.03 in the quarter. Looking at our segment performance for the first quarter of 2023 in our contract logistics segment, which includes our value-add and dedicated transportation business, income from operations increased $4.3 million to $27.8 million on $211.3 million of total operating revenues. This compares to operating income of $23.5 million on $201.6 million of total operating revenue in the first quarter of 2022. Operating margins for the quarter were 13.1% versus 11.6% last year. In our Intermodal segment, operating revenues decreased $46.6 million to $111 million compared to $157.6 million in the same period last year. Income from operations decreased $16.2 million to $6.8 million. This compares to operating income of $23 million in the first quarter of 2022. Operating margins for the quarter were 6.1% versus 14.6% last year. In our Trucking segment, operating revenues for the quarter decreased $17.8 million to $79.7 million compared to $97.5 million in the same quarter last year. Income from operations decreased to $3.8 million compared to an operating income of $7.4 million in the first quarter of 2022. Operating margins for the quarter were 4.8% versus 7.6% last year. In our company-managed brokerage segment, operating revenues for the quarter decreased $31.2 million to $34 million compared to $65.2 million in the same quarter last year, while income from operations decreased $4.3 million to an operating loss of $400,000. This compared to operating income of $3.9 million in the first quarter of 2022. Operating margins for the quarter were a negative 1.1% versus 5.9% last year. Excluding the previously mentioned legal settlement in the quarter, our company-managed brokerage segment's operating margin would have been 2.4%. On our balance sheet, we held cash and cash equivalents totaling $76.8 million and $10 million of marketable securities. Outstanding interest-bearing debt net of $4.2 million of debt issuance costs totaled $377.7 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 1.25 times. Capital expenditures for the quarter were $31.3 million. For the full year of 2023, we expect capital expenditures to be in the $160 million range, excluding the acquisition of any strategic real estate. Interest expense for the year is expected to come in between $20 million and $25 million. Based on the current operating environment, for the second quarter of 2023, we are expecting top line revenues between $420 million and $440 million and operating margins in the 8% to 10% range. We expect continued softness in both volumes and rates across our transactional transportation businesses, but a stable operating environment for our contract logistics business. Finally, Wednesday, our Board of Directors declared Universal's $0.105 per share regular quarterly dividend. This quarter's dividend is payable to shareholders of record at the close of business on June 5, 2023, and is expected to be paid on July 3, 2023. With that, Kyle, we're ready to take some questions.

Okay. Thank you, Mr. Beres. We'll now begin the question-and-answer session. Our first question comes from Chris Wetherbee with Citi. Please go ahead.

Hey, good morning, guys. This is Matt, on for Chris. Appreciate the detail on the quarter. Wanted to just touch a little bit more on intermodal here. Obviously, the space has been under some pretty serious pressure, which has been a theme this earnings season. We were just wondering if there's any additional color you might be able to provide as we think about, the second quarter and into the back half of the year, this also sort of intertwines with your guide, the guide details that you guys just put out. And are customers giving you feedback as to when volumes could begin rebounding? I mean, how exactly are you thinking about the situation? What do you see we're at at this point in time working through the bloated inventories. I know during the last call, Tim mentioned some rebound after the Chinese New Year. I just didn't know if there's any update in general, sort of drilling a little bit deeper into the intermodal side of things on that front. Any detail on that front would be great. Thanks.

I appreciate the question, Matt. From our analysis of the first quarter, import volumes have decreased significantly almost everywhere, except for a slight increase in the Gulf region. We are present at all major ports across the country, particularly with significant operations in Southern California, the Southeast, and the Northeast. Our customers, especially in retail, are mostly adopting a wait-and-see strategy. They anticipate some normal seasonal trends in the near future but are hesitant to predict a strong rebound in the second half of the year. Currently, no one has firmly committed to the idea that the back-to-school and holiday seasons will see a notable increase. Expectations remain somewhat subdued, with some customers expressing skepticism about a projected rebound in the latter half of the year. Our engagement extends beyond retail to sectors such as chemicals and office furniture, and no one has indicated a sizable increase in imports. Conversations with ocean liners reveal a lack of expectations for a rapid recovery. While there is some optimism regarding a more normal second half of the year, the peak season is expected to be muted. We had hoped for a rebound post-Chinese New Year, but so far, that has not materialized. As we moved past the first quarter, I would say that April volumes are slightly below those in March, indicating that the market remains soft.

I appreciate the additional detail. I have a quick follow-up. You mentioned the differences between retail and industrial. Are you noticing any specific trends in those areas? Is there any further information you could share regarding your retail versus industrial business, particularly any themes or trends you're observing?

Yes. I would say definitely on the retail, at least what we service, there is no real indication of any quick rebound. Like I said, they're down as we had said in the California conversation, double-digits. As it comes to more of the raw material or chemicals, chemicals the customers who deal with seem to be flat to down, the raw materials on the customers we deal with are definitely down. So it's telling me that they're bringing in less and probably going to be producing less. As far as any other color on consumer goods, it's just kind of a wait and see. Nobody has given us any real clear indication. The one thing that's a resounding theme, as I said, from the overall customer sentiment is that volumes would increase but very slightly based on seasonality and nobody expects a huge uptick or peak season at this particular point.

Awesome. Really, really appreciate the detail. Thanks so much, guys.

Thank you.

Thanks, Matt.

Our next question comes from Bruce Chan with Stifel. Please go ahead.

Good morning, team. Thank you for the insights shared so far. This is Andrew stepping in for Bruce. I wanted to explore the topic of manufacturing inventories a bit more. According to the government and IS data, it appears there are significant excess inventories. However, we aren't hearing much about destocking in that sector. I'm curious to know what your conversations with customers have been like regarding industrial inventory. Are they anticipating that the destocking trend will influence a shift similar to that seen in consumer focus? Are they expecting a comparable pattern, even though it seems to be pushed out for now?

Well, from what we deal with from an import standpoint that leads into manufacturing, the companies we're dealing with, there really has been no prediction of a climb out of the trough that they're in right now. Now I will tell you this, from a manufacturing side or an agricultural, heavy equipment, or aerospace, we feel really good about that in our conversations with customers. Not only does there seem to be a good demand for the product, but there's also a backlog; it seems like the order books are still full. So we expect to be able to stretch our legs, hopefully, for the remainder of the year. I mean, it's hard to predict third and fourth quarters. We're pretty bullish on that segment, continuing to support active growth in our portfolio.

That's helpful. It leads me to my next question about how aggressive the sales team is being in sourcing new customer opportunities, especially in intermodal. I'd like to understand more about whether you are targeting new end markets, given the retail exposure and the current retail weakness, or if you could elaborate on where you're finding success and the challenges involved. Are you experiencing success in the verticals you mentioned?

In the intermodal marketplace, we have a strong presence in retail and plan to handle a significant amount of freight due to the import structure in the state. We are actively seeking to diversify our customer base, a focus driven by our sales team through effective collaboration. We are connecting customers across various service lines and exploring different verticals that may be less familiar to us in intermodal. Overall, I'm optimistic about the bid volumes we are seeing. Currently, customers are very focused on pricing as they aim to recover losses from the past couple of years, so we need to remain highly competitive in all verticals to capture market share from others. It has indeed become very competitive, but we will persist in our efforts to diversify not only within intermodal but also across multiple operating segments.

Great. That's helpful as well. If I can just squeeze in one more question. Regarding pricing, you mentioned that accessorials inbound are rolling off at a rate of 25% faster than expected. I wanted to know how this compares to your expectations. How quickly were you anticipating accessorials to roll off, or rather, how quickly did you reach that point? When do you expect accessorials to reach this point?

Well, that's a loaded question to unpack because it's hard to forecast, but some of your accessorials run in conjunction with just your general load volume. We're billing certain accessorials that accompany the movement of a piece of intermodal freight. So number one, the volumes are lighter. And number two, just like on the base dray pricing, the customer is expecting some reductions in some of the accessorial bases. Now, how did we get to the point last year where accessorials were so elevated, was a direct result of the supply chain and the supply chain congestion. So we offered our customers distinct solutions, whether it would be storage solutions or helping them manage what they had at the ports and rails. There was a lot of flow of funds, but it was because of the congestion and the environment. So we expected some of that to peel off as fluency found itself. And for the most part, if you read anything in the news, fluency has found itself at most port operations, which doesn't mean they're fluent within the port in all cases, but the number of imports coming into the country has definitely normalized. So we expected that there would be some falloff in some of those accessorials. If you go back, and I think Jude would agree with it, that's why we took a deep look at an honest look in the fourth quarter, because we saw some of these leading indicators that say, wait a minute, you have to pay attention because this supply chain starting to become a little more affluent and things are slowing down. So that's one of the reasons we guided the way we guided in the fourth quarter because of what we saw. So that's a long extended answer, but that's what we're seeing.

No, that's extremely helpful. I appreciate that. If I can promise this will be the last question, I wanted to ask where your optimism is coming from regarding the expectations for the auto industry to continue performing well. It has been a bright spot in the economy so far. Could you share any anecdotes from customers, particularly in the consumer auto sector? We've looked at the Class 8 data, but I'd like a little more information on the consumer side.

You probably have listened to some of the reports regarding autos and Class 8 trucks, as some of those figures have already been released. We're basing our outlook on the production data we are seeing. I acknowledge the presence of inflation and the rising interest rates, but there remains a sense of optimism within the auto and Class 8 sectors that sales will continue steadily throughout the year. We are maintaining a positive view on Class 8 trucks due to significant pent-up demand. Last year and in 2021, it was challenging to acquire new Class 8 trucks, and those order books are still active. Some orders may drop off as the economy shifts, but all indicators suggest a hopeful outlook for the remainder of the year. In the auto sector, there is a belief that they can still sell the vehicles available, particularly those from our network, which focuses on high-demand vehicles. Therefore, we are confidently optimistic that this positive trend will persist over the next several quarters.

Well, good to hear. Thanks so much for the time and information this morning.

Yes. Thanks, Andrew.

There being no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Tim Phillips for any closing remarks.

Thank you, Kyle and thank you for spending time with us this morning to cover our Q1 performance. As mentioned, I'm extremely pleased with our contract logistics roadmap moving forward this year. While the transactional transportation segment may be experiencing some headwinds, we will remain committed to productivity improvements and rationalizing our human assets in the various segments. We continue to look for opportunities to diversify our portfolio by cross-pollinating our customer base among our various service segments. With that said, I look forward to continued conversation on our Q2 earnings call slated for July 28. Have a great day. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.